IMF: China currency undervalued but policy sound

International Monetary Fund directors split over whether the yuan is undervalued, reflecting similar differences between U.S. and Chinese officials over the nation’s exchange-rate regime. 

Some IMF board members said the assumption that the exchange rate is undervalued is based on “uncertain forecasts” for China’s current account surplus, the Washington-based lender said in a statement dated Tuesday after concluding a July 26 meeting. In its annual assessment of the country’s economy discussed by the board, the IMF said growth is expected to remain robust and the outlook for inflation is benign. 

China indicated on June 19 it was scrapping the yuan’s two-year-old peg to the dollar, deflecting criticism from trading partners and curbing inflation while protecting a recovery in its exports. Asia’s second-largest economy has faced pressure to allow the yuan to rise from U.S. lawmakers, who claim an undervalued currency gives its exporters an unfair advantage. 

“Directors welcomed the recent decision to return to the managed floating exchange rate regime,” according to the statement. “This decision will increase the central bank’s flexibility to tighten monetary conditions.” 

China’s current-account surplus will shrink for a second year in 2010 as domestic demand plays a greater role in driving the nation’s economic growth, according to the State Administration of Foreign Exchange on July 8. The gap, the broadest measure of trade, amounted to 6.1 percent of China’s gross domestic product last year, down from 9.6 percent in 2008, the currency regulator said.