Thanks to a number of measures aimed at globalizing its currency, China appears to be moving closer to its aim of having the yuan or renminbi (RMB) be a part of the International Monetary Fund’s currency reserves.
In its latest assessment of the Chinese economy, IMF First Deputy Managing Director David Lipton declared the days of an undervalued yuan are over.
“While undervaluation of the Renminbi was a major factor causing the large imbalances in the past, 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,” Lipton said in a statement posted on the IMF’s website.
Lipton was a member of an IMF team that visited Beijing, Shanghai and Taiyuan from May 14-27 as part of its annual review of the economy.
Having said that, Lipton urged the government to allow the exchange rate to adjust according to the changes in fundamentals.
“On the exchange rate system, we urge the authorities to make rapid progress toward greater exchange rate flexibility, a key requirement for a large economy like China’s that strives for market-based pricing and is integrating rapidly in global financial markets,” Lipton said.
“Greater flexibility, with intervention limited to avoiding disorderly market conditions or excessive volatility, will also be key to prevent the exchange rate from moving away from equilibrium in the future. We believe that China should aim to achieve an effectively floating exchange rate within two–three years.”
China is determined to liberalise the yuan to make it freely convertible as part of its campaign for the currency to be included in the IMF’s basket of currencies now composed of the dollar, yen, euro and pound sterling.
In an interview with the Financial Times last month, Chinese Premier Li Kequiang has brushed aside concerns that China might resort to devaluating the RMB to fix the economy.
“We don’t want to see further devaluation of the Chinese currency because we can’t rely on devaluing our currency to boost exports. We don’t want to see a scenario in which major economies trip over each other to devalue their currencies. That would lead to a currency war,” Li told the FT.
The IMF welcomes China’s bid to be part of the Bretton Woods institution’s currency reserve.
“We welcome and share this objective and will work closely with the Chinese authorities in this regard. As the Managing Director of the IMF has said, RMB inclusion is not a matter of ‘if’ but ‘when’,” Lipton said.
In a research note, Standard Chartered Bank said there is a 60% chance that the yuan will be included in the IMF’s currency reserves this year.
The IMF will review the composition of its basket of currencies later this year.
Photo credit: Jason Wesley Upton via Flickr