JULY 23, 2009
IMF's Completed China Report Urges Continued Stimulus
By BOB DAVIS
The International Monetary Fund's governing board urged China to continue to use fiscal stimulus to boost growth and to let its currency appreciate even if that contributes to short-term unemployment.
The completion of the IMF review of China's economic policies was as significant as the message. For the past several years, China has blocked the IMF from finishing reviews of its economy -- which are supposed to be done annually for every member country -- because it objected to public criticism of its tightly controlled exchange rate.
During the Bush administration, the U.S. tried to use IMF reviews as another tool to press China to revalue the renminbi, also known as the yuan.
In the past year, the IMF has looked to end the exchange-rate fight, especially after the global recession made China -- one of the few large fast-growing economies -- more significant internationally. According to an IMF summary of the 24-member board discussion on July 8, "many directors" urged further strengthening of the yuan.
The term used by some directors to describe the currency was "substantially undervalued." In the past, the IMF sought to label China's exchange rate as "fundamentally misaligned," a designation that Beijing found so unpalatable that it blocked the reports.
The current review praised "China's stability-oriented economic policies as a bedrock of regional stability," and urged additional fiscal stimulus, through 2010, aimed at boosting private consumption. That is largely Beijing's intention. China's four trillion yuan ($585 billion) plan, announced in the fall, was designed to be spent through the end of next year.
On the currency question, directors argued that strengthening the yuan would increase the purchasing power of households and shift investment away from the export sector, a longtime goal of the U.S. and Europe, some of whose manufacturing industries have withered under Chinese competition.
However there was disagreement within the board about how rapidly China should revalue. Some directors said revaluation "should be pursued in a gradual manner, as and when conditions permit." The IMF didn't identify which countries urged what policies. The U.S. and Europe have generally hammered at Beijing to revalue while China and other countries that tie their currency to the U.S. dollar have argued for a go-slow approach.
The IMF said directors recognized that in the near term, shifting the Chinese economy away from exports could boost unemployment. They urged retraining and other programs for laid-off workers. But "over a longer horizon," directors said, there would be "employment gains" from making the transition. Chinese consumption would become "a key factor in driving global growth," the IMF directors said, as imports and investment increased in China.
The U.S. and China also are weighing how eventually to unwind stimulus programs.
China said it will discuss the matter in Washington at next week's Sino-U.S. Strategic and Economic Dialogue, as both sides seek to manage inflation concerns while the crisis abates.
—Jason Dean and Terence Poon contributed to this article.
Write to Bob Davis at bob.davis@wsj.com
IMF's Completed China Report Urges Continued Stimulus
By BOB DAVIS
The International Monetary Fund's governing board urged China to continue to use fiscal stimulus to boost growth and to let its currency appreciate even if that contributes to short-term unemployment.
The completion of the IMF review of China's economic policies was as significant as the message. For the past several years, China has blocked the IMF from finishing reviews of its economy -- which are supposed to be done annually for every member country -- because it objected to public criticism of its tightly controlled exchange rate.
During the Bush administration, the U.S. tried to use IMF reviews as another tool to press China to revalue the renminbi, also known as the yuan.
In the past year, the IMF has looked to end the exchange-rate fight, especially after the global recession made China -- one of the few large fast-growing economies -- more significant internationally. According to an IMF summary of the 24-member board discussion on July 8, "many directors" urged further strengthening of the yuan.
The term used by some directors to describe the currency was "substantially undervalued." In the past, the IMF sought to label China's exchange rate as "fundamentally misaligned," a designation that Beijing found so unpalatable that it blocked the reports.
The current review praised "China's stability-oriented economic policies as a bedrock of regional stability," and urged additional fiscal stimulus, through 2010, aimed at boosting private consumption. That is largely Beijing's intention. China's four trillion yuan ($585 billion) plan, announced in the fall, was designed to be spent through the end of next year.
On the currency question, directors argued that strengthening the yuan would increase the purchasing power of households and shift investment away from the export sector, a longtime goal of the U.S. and Europe, some of whose manufacturing industries have withered under Chinese competition.
However there was disagreement within the board about how rapidly China should revalue. Some directors said revaluation "should be pursued in a gradual manner, as and when conditions permit." The IMF didn't identify which countries urged what policies. The U.S. and Europe have generally hammered at Beijing to revalue while China and other countries that tie their currency to the U.S. dollar have argued for a go-slow approach.
The IMF said directors recognized that in the near term, shifting the Chinese economy away from exports could boost unemployment. They urged retraining and other programs for laid-off workers. But "over a longer horizon," directors said, there would be "employment gains" from making the transition. Chinese consumption would become "a key factor in driving global growth," the IMF directors said, as imports and investment increased in China.
The U.S. and China also are weighing how eventually to unwind stimulus programs.
China said it will discuss the matter in Washington at next week's Sino-U.S. Strategic and Economic Dialogue, as both sides seek to manage inflation concerns while the crisis abates.
—Jason Dean and Terence Poon contributed to this article.
Write to Bob Davis at bob.davis@wsj.com