China official voices objections to new IMF forex framework

Updated: 2007-10-23 10:46

The Chinese government Monday said it objected to an overhaul of International Monetary Fund (IMF) guidelines for foreign exchange surveillance adopted earlier this year.

Li Yong, China's vice finance minister and the government's representative at the IMF and World Bank's annual meetings, told fellow ministers the IMF should strictly adhere to its tradition of consensus-based decision-making.

"We regret the IMF adopted in June its policy on foreign exchange surveillance, in the absence of consensus among its members," Li said in a speech. "We believe the IMF should focus on whether a member's exchange rate regime is compatible with medium-term macroeconomic policies, not the level of its exchange rate."

The IMF also needs to strengthen its oversight of policies of countries responsible for major reserve currencies, the dollar, the euro and the Japanese yen, Li said.

This year IMF members agreed to update the Fund's framework for currency policy surveillance, which had stood unchanged since 1977. The new guidelines urge governments to avoid currency regimes that foment financial market turbulence for neighbors, regardless of domestic reasons for the policies.

China is under pressure from the IMF, the US and Europe to allow its currency to appreciate faster to help reduce its massive trade surpluses. 

Chinese officials argue the gradual pace of appreciation is needed to prevent instability in China's banking system.

The new IMF guidelines reaffirmed IMF members' obligation to refrain from manipulating currencies to gain an export advantage. The guidelines included recommendations urging members to resort to foreign exchange market intervention only for smoothing short-term disruption, and for countries to take other countries' interests into consideration when they intervene.

The IMF also clarified its meaning of the phrase "currency manipulation." Members would only be in violation of the Fund's charter if they are carrying out policies that are "targeted at - and actually affect - the level of an exchange rate," it said.

A violator would engage in those policies "for the purpose of securing fundamental exchange rate misalignment in the form of an undervalued exchange rate and the purpose of securing such misalignment is to increase net exports," the IMF said.

Since then, the IMF has become more plain-spoken with its views on currency trends. For years, the IMF has used models to estimate whether currency values are misaligned. This year the IMF made those views public in its World Economic Outlook.

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