China Focus: China makes challenging transition, RMB not undervalued: IMF

The International Monetary Fund (IMF) is closely following steps taken by China to promote the free use of its currency as the country undergoes a "challenging and necessary" economic transformation, a senior IMF official has said.

QUALITY GROWTH

Commenting on the country's economic development over the past year, IMF first deputy managing director David Lipton said Chinese policymakers are pursuing a "quality-growth" strategy.

"They are not trying to achieve the fastest possible growth, but rather the fastest sustainable growth," he said in an exclusive interview with Xinhua during a visit to Beijing.

"That means allowing the economy to slow, if that's necessary, to work through some financial vulnerabilities that have built in areas like the property sector and excessive lending to state-owned enterprises."

"Growth in China is moderating -- a slowdown that is not a goal unto itself but a by-product of moving the economy away from the unsustainable growth pattern of the past decade."

The Chinese economy grew 7.4 percent in 2014, the weakest annual expansion in 24 years. The government further lowered this year's growth target to approximately 7 percent, stressing quality and innovation-driven growth.

On Tuesday, the IMF projected the Chinese economy would grow 6.8 percent this year, consistent with its April prediction in the flagship World Economic Outlook (WEO) report.

The world's second largest economy is transitioning to a new normal, aimed at "safer and higher-quality" growth, and other economic reforms are underway including a new budget law, deposit interest rate liberalization, the creation of a deposit insurance scheme and a whole agenda for capital account liberalization, Lipton said.

"These are all items put in the 'Third Plenum Blueprint' and they are all being put into motion. Those measures will further help promote high-quality growth," he said.

The Chinese labor market has remained resilient despite slower growth, which, in turn, has supported household consumption. Inflation is expected to end the year at around 1.5 percent, according to a statement issued after the IMF's 2015 Article IV Consultation with China.

The Article IV Consultation is an annual economic and financial check-up between the IMF and its member countries. A mission from the IMF visited China from May 14 to 27 to conduct discussions on the annual review of the Chinese economy, and Lipton joined the mission's final policy discussions.

If the Chinese economy slows a lot more, fiscal policy should be used to bolster growth and boost household income and spending, so China can simultaneously reduce financial vulnerabilities and tap the potential of the "untapped growth engine"-- household consumption, said Lipton, adding that rebalancing is the biggest challenge facing the Chinese economy.

The global economic recovery is "weak and uneven" and the economic slowdown is affecting developing countries in general as countries like China, to some extent, depend on advanced economies for exports, said Lipton, a former senior official at the White House.

RMB NOT UNDERVALUED

"While undervaluation of the renminbi (RMB) 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 after meeting with high-ranking Chinese officials.

This signaled a change of tone in the IMF's judgment on this issue after maintaining for a long time that RMB was "moderately undervalued". Many experts believed that the value of RMB has reached equilibrium.

The value of RMB has been a source of tension between China and some trading partners, as they accuse China of keeping it artificially low to gain an unfair competitive advantage, which Beijing refuted.

Lipton stressed that it is a judgment "about this moment" and may change in the future.

"However, the still-too-strong external position highlights the need for other policy reforms--which are indeed part of the authorities' agenda--to reduce excess savings and achieve sustained external balance," Lipton said at a Tuesday press conference.

"We believe that China should aim to achieve an effectively floating exchange rate within 2-3 years," he added.

China has adopted a steady pace in raising the yuan's daily trading limit against the U.S. dollar, from 0.3 percent in 1994 to 0.5 percent in 2007 and 1 percent in 2012 to the latest 2 percent, in an effort to enhance the floating flexibility of the RMB exchange rate.

RMB'S SDR INCLUSION

Lipton said Chinese authorities have stated publicly their interest in including the renminbi in the IMF's Special Drawing Rights (SDR) basket, a move that has been highly anticipated.

"We welcome and share this objective and will work closely with the Chinese authorities in this regard," he said.

The IMF has launched its five-year review of the SDR basket, an international reserve asset that currently includes the U.S. dollar, Japanese yen, British pound and the euro. Whether to add the yuan to the basket is a major issue for this year's assessment.

The review process will take a majority of this year, and "we are looking at the progress that's been made in internationalization of renminbi and we are following very closely the steps that the People's Bank of China (PBOC) is making and plans to make in order to promote the free use of renminbi internationally," he told Xinhua.

"We hope that when we have done all that analysis and when the PBOC has undertaken these reforms, we will get to a proper conclusion," Lipton added.

RMB has overtaken the Canadian and Australian dollars since November 2014 to enter the top five world payment currencies, trailing only the Japanese yen, British pound, euro and U.S. dollar, according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT).

"As the Managing Director of the IMF has said, RMB inclusion is not a matter of 'if' but 'when'," Lipton stressed. Endi