May 26, 2015 / 8:49 AM / 3 years ago

IMF declares yuan no longer undervalued, urges reforms

BEIJING (Reuters) - China’s yuan currency is no longer undervalued after its recent gains, but the government should quicken reforms to get to having “a floating exchange rate”, the International Monetary Fund said on Tuesday.

The International Monetary Fund (IMF) logo is seen at the IMF headquarters building during the 2013 Spring Meeting of the International Monetary Fund and World Bank in Washington, April 18, 2013. REUTERS/Yuri Gripas

The IMF has previously labelled the yuan CNY=CFXS as "modestly undervalued", despite the currency's gradual appreciation since a landmark 2005 revaluation. The yuan has risen sharply against many currencies apart from the dollar in recent months.

“Our assessment now is that the substantial real effective appreciation over the past year has brought the exchange rate to a level that is no longer undervalued,” the IMF said.

In a reference to how China still has a large trade surplus, despite a stronger yuan, the IMF said Beijing’s “still-too-strong external position” highlights the need for other reforms.

Noting that China still faced risks from unsustainable credit and investment growth, the IMF urged the government to quicken reforms, especially among struggling state firms shielded from bankruptcy.

“Progress with state-owned enterprise reform ... has been too slow,” the IMF said.

It also called for a more flexible yuan.

“We believe that China should aim to achieve an effectively floating exchange rate within 2–3 years,” the IMF said in a statement after completing an annual consultation with Chinese officials.

SUPPORT FOR GDP GROWTH?

China should step up fiscal support for its economy if growth dips below 6.5 percent this year, or prepare to take steps to rein in credit and investment if growth surprises on the upper side, the fund said.

The IMF expects China’s annual economic growth to be 6.8 percent this year, before slowing further to 6.25 percent in 2016, it said in a report.

“If incoming data suggest that growth is likely to exceed 7 percent, the authorities should take advantage of the opportunity to reduce vulnerabilities faster,” the IMF said.

“If instead growth looks set to dip below 6.5 percent, then fiscal policy should be eased.”

It said that fiscal stimulus, if needed, should be on-budget and rely on measures that protect the vulnerable, support rebalancing, and are consistent with the reform agenda.

China’s economy grew 7.4 percent in 2014.

It had annual growth of 7 percent in the first quarter and recent data showed growth has lost further momentum into the second quarter, increasing the risk that full-year growth may dip below the government’s targeted 7 percent.

Writing by Kevin Yao; Editing by Richard Borsuk

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