IMF Calls China’s Currency Undervalued

The International Monetary Fund says China’s currency is “substantially undervalued” and should be allowed to appreciate more rapidly.

The IMF said Monday that increasing the value of the currency would ease inflationary pressures in China and help correct global trade and fiscal imbalances.

The IMF’s 2011 World Economic Outlook forecast 5 percent inflation in China and gross domestic product growth of 9.6 percent this year.

China’s latest trade data, released Sunday, showed it had booked its first quarterly trade deficit in seven years. Some international economists say Beijing may try to use the data to quiet calls for it to revalue its currency, the yuan, which Western nations say is artificially low and gives Chinese companies a trade advantage.

The government says China’s trade trade deficit for the first three months of the year is slightly more than $1 billion. China normally runs large trade surpluses with the world, particularly with its Western trading partners, including the United States and the European Union.

Several economists say China’s trade deficit will be temporary, because it is the result of rising international commodity prices, including for oil, iron and soybeans. The economists note that January and February normally are a slow period for Chinese exports, largely because of the country’s two-week Lunar New holiday period. In addition, with Christmas over and summer products not yet heading to shops, demand for Chinese goods in North America and Europe tends to fall.

Li Wei, an economist at Standard Chartered bank in Hong Kong, is among those who say the trade surplus will return in the coming months, and the pressure on China to revalue its currency will remain strong. His bank expects the yuan will rise at least five percent this year, following about a 4 percent gain last year.

Indeed, the balance seems to have already shifted, with China reporting a trade surplus of $140 million in March.

China’s government has long focused on expanding exports rapidly to expand the economy and create jobs. But with its trade partners increasingly frustrated with the country’s annual trade surpluses, Beijing has been trying to spark domestic demand and reduce the role of exports in the economy. However, while China promises to eventually allow the yuan to trade freely on world markets, it says it must ease exchange rate controls gradually, to avoid hurting export industries, causing job losses and unsettling world markets.

From VOA