China aims to allow greater exchange rate flexibility over time: IMF chief

Updated: 2007-01-27 16:01

The head of the International Monetary Fund (IMF) met with senior Chinese economic officials to put the case for a more flexible currency exchange rate on Friday.

IMF managing director Rodrigo de Rato Figaredo said after the meetings that the officials had reiterated their objective of advancing the exchange reform and allowing greater flexibility over time to reflect market conditions.

De Rato, who is in Beijing on his fourth visit to China as chief of the IMF, argued that faster movement of the reminbi (RMB) would give the authorities much needed room to rely more on monetary policy to manage the economy, particularly to contain the rapid credit and investment growth.

China registered a 10.7 percent economic growth rate for 2006, considered too high by some Chinese economists despite government moves to curb excessive investment in some sectors in the past two years.

De Rato, who met with Premier Wen Jiabao on Friday, said, "Greater flexibility in the exchange rate and interest rates is also important for rebalancing the economy."

In addition to providing better price signals for investors, the likely higher interest rates and higher RMB value in the near term would also help to boost household consumption by increasing household income and wealth, he explained.

The IMF chief also held what he called fruitful discussions with Finance Minister Jin Renqing and People's Bank of China governor Zhou Xiaochuan.

China implemented a managed floating RMB exchange rate mechanism on July 21, 2005, which is based on market supply and demand and is adjusted in relation to a basket of major foreign currencies.

The RMB has appreciated 5.9 percent against the U.S.dollar since the exchange rate reform.

Fan Gang, a Chinese economist and member of the Monetary Policy Panel of China's central bank, said faster appreciation of the currency in the short term would be bad for China.

He said the RMB should appreciate by a maximum of five percent a year in coming years to avoid damaging the economy.

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