IMF backs stronger Chinese currency

THE International Monetary Fund has added its voice to a growing chorus urging China to allow its currency to appreciate.

At a meeting of the 10 European and 14 Asian countries in Indonesia's resort island of Bali, the IMF said greater foreign exchange flexibility was warranted in several Asian countries given the region's huge pool of foreign exchange reserves.

'China is encouraged to move toward greater foreign exchange rate flexibility, together with efforts to improve the functioning of the foreign exchange market,' the IMF said. 'This could be done initially in a controlled way.'

China, the world's sixth-largest economy, has fixed the yuan's exchange rate at about 8.3 to the dollar since 1995.

However, with Chinese exports booming, and a falling dollar compounding its advantage, critics say a realignment is overdue.

The dollar's drop against the euro and the yen has led to calls from South Korea, Japan and manufacturing lobbies in the US for China to allow the yuan to rise.

'China can't ignore the demands of its trading partners,' said Fred Hu, China strategist at Goldman Sachs. He said the yuan could be undervalued by as much as 15%.

The Bank for International Settlements also last week criticised unnamed Asian countries for opposing a rise in their currencies.

Speculation has swirled in financial markets that China, under President Hu Jintao, will relax its yuan policy to allow it to rise against the dollar.

Analysts say there are compelling domestic reasons for such a move, with inflation emerging as a problem due to strong money supply growth.

Many say such an appreciation of the currency is merely a matter of time. 'China knows it will have to do it eventually, but perhaps not in the next two or three months,' said Kazuhiro Takeuchi, senior manager of the trading group in Hong Kong at Mizuho Corporate Bank.

'For now, China wants to keep the peg because a weaker currency is helping exports and strengthening its competitiveness.'

China joined the World Trade Organisation in 2001 and has attracted about $308bn (£185bn) in foreign direct investment since the currency peg began. The country's trade surplus amounted to $2.2bn in May.

Goldman's Hu is also director of the National Centre for Economic Research in Beijing, where the chief executive officers of State-owned companies are trained. His is the latest influential voice to call for a rethink of China's exchange rate.