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IMF pressures China on flexible yuan
Updated: 2004-10-21 15:10

The International Monetary Fund has once again pressured Beijing to revalue its currency, the Renminbi yuan.

An official said in Washington on Wednesday said that the cost of maintaining yuan’s fixed regime to the U. S. dollar was mounting, and argued for a widening of the trading band on the yuan by 10 percent to 15 percent.

"I think the cost of maintaining the exchange rate regime is going to be large and will grow over time -- which is why I think there is an argument for a quick move," IMF's China division chief Eswar Prasad told reporters.

The United States, Japan and some European countries have complained that the yuan, currently pegged at 8.27 to the US dollar, is “grossly undervalued “, which has helped the export of Chinese products.

Though IMF has been prodding China for sometime to adopt a flexible currency regime -- like widening the band in which it allows the currency to trade against the dollar, Beijing says the time is not ripe. The yuan is currently anchored in a narrow band to the dollar enforced by the Peoples Bank of China.

Prasad warned that China had to literally “pay the price” for not heeding IMF advice to it about a year and half ago to widen the band by some 3-5 percent.

"I think under present circumstances that could be disastrous because the market might see that as clearly inappropriate. But I think the price of having waited this long -- the initial move is going to have to be much larger," he said.

Now, because of greater pressures to its economy, if China wanted to widen the band, it should do so by, say, 10 to 15 percent, he said.

The White House said that US President George W. Bush telephoned Chinese President Hu Jintao this month to speak out his concerns, and Hu replied to "move forward firmly and steadily to a market-based, flexible exchange rate."

China's top finance and central bank officials were invited for the first time to attend this month's meeting of finance chiefs from the G-7 industrial countries in Washington. G7 members again pressed for a free yuan regime but the Chinese officials again offered no timetable, saying they would act "when conditions permit."

Some U. S. economists have suggested that the yuan be first revalued upwards by 25 percent and then traded on a wider band.

But Prasad said it might not be appropriate.

He argued that just a 10 to 15 percent widening of the trading band would not lead to excessive market pressure on the currency.

"As far as possible, the market will think that once this amount of widening is permitted, that there really is going to be nothing more," he said. "After all, if the Chinese can hold the exchange rate where it is right now when the presumption that it is undervalued by 25 percent or more, they can very easily hold it at 15 percent," he said.

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