IMF issues rare public report on Chinese economy
By Howard Schneider
The International Monetary Fund released its first detailed assessment of the Chinese economy in four years, a document less interesting in its details than for the fact that it was made public at all.
There were the expected broad conclusions - that the country's currency is undervalued, growth is vigorous, property values may be rising too fast - and some new insights. The Chinese were, it turns out, spooked by the recent crisis in Europe, concerned the developed world is drowning in debt, and as a result have become even more cautious than usual in their own policies.
But this is the first IMF staff assessment of the country to be released in four years, a breakthrough of sorts not just for the IMF, but also for the Obama administration's efforts to make China a more active player in the G20 group of nations.
Staff assessments of China have been performed, as they are for other countries, on an annual basis, but Chinese officials since 2006 had not authorized their release - a rarely exercised prerogative that reflected disagreement with authorities in Beijing over the IMF staff's portrayal of its currency and other policies.
Since then, however, China witnessed the collapse of its exports during the recent recession, and perhaps realized its future would not be as bright with U.S. and Europe in the dumps. The country has been given wide credit for responding quickly to the crisis by opening the purse of both its central government and its banks. Lending, for example, spiked by an estimated 30 percent of gross domestic product, a fact that helped during the downturn but which the IMF says raises more than a few questions about the quality of the loans and what that might mean for Chinese banks. The country is now approaching double-digit growth again, and is helping Asia lead the world recovery.
The IMF and the U.S., meanwhile, have opened discussions on giving China a larger formal voice in the fund's affairs, and more notably have tempered criticism of the country's currency policy.
The staff assessment was open in its conclusion on that issue, saying the renminbi was "substantially" undervalued, and that China needed to lets its currency appreciate as a way to become less dependent on exports and encourage more local spending. A rising currency makes foreign goods cheaper while raising the price of the products the country sends abroad.
But the paper avoided getting too specific. According to press reports in the Wall Street Journal and elsewhere, the staff deleted a footnote estimating the undervaluation at as much as 25 percent, though IMF China mission chief Nigel Chalk said as a rule he "doesn't like" point estimates for the currency of an economy changing as quickly as China's.
"Any of these quantitative estimates don't do a good job and are not reliable," Chalk said in a conference call this morning, and added that the staff looked at broader and simpler indicators. The fact that China has accumulated $2.5 trillion in foreign currency reserves - expected to hit $3 trillion next year -- is not consistent with a properly valued renminbi, or a well-balanced economy.
But he said the Chinese authorities gave the IMF credit in deciding to release the report, for better capturing a debate that is politically charged in the U.S., but from their perspective needs more nuance. Along with dropping specific estimates for the value of the currency, an accompanying statement from the fund's executive board excluded the word "substantially."
China, of course, as well as other countries that closely manage their currencies, has representatives on the fund's executive board, so the fact that there is disagreement at that level is not surprising, and has been reflected in past board statements.
What was interesting, however, was this comment in the staff document: that if the Chinese forecasts "prove accurate, the resulting undervaluation (as measured by standard methodologies) would be negligible."
In essence, the IMF projects that China's current account surplus - the overall inflow of money from around the world, driven by the country's export juggernaut - is rising now that recovery is underway, and will soon approach the same unhealthy levels it did in 2007, when it topped 10 percent of gross domestic product.
Chinese officials, however, say they are taking other measures that amount to a "structural break" with the past that will reduce the current account surplus to about 4 percent of GDP - a more sustainable number and perhaps a proxy for where central authorities in Beijing feel the surplus should be.
Yes, they say, the currency will appreciate. But changes in their domestic economy -- the buildup of social safety nets, wage increases, urbanization,and other steps -- will create a society that naturally spends more, regardless of how the yuan relates to the dollar.
Chalk said there is reasonable debate on this point.
"We see the currency not in isolation but as part of a broader package of reform. When you are dealing with macro-engineering, you have to use all the tools."
It's an argument not likely to convince many on Capitol Hill, where midterm elections and still high unemployment mean pressure will build again for a legislative response if the value of the renminbi does not change in some substantial way. China announced a month ago that it was dropping its peg to the dollar and would once again allow the renminbi to float, albeit in a controlled way.
The first weeks suggest just how controlled: The currency has appreciated less than 1 percent since the announcement.
By Howard Schneider | July 29, 2010; 9:28 AM ET