IMF reiterates China's exchange rate broadly in line with fundamentals

WASHINGTON - China's real effective exchange rate (REER) in 2018 is estimated to be at the same level as warranted by fundamentals and desirable policies, the International Monetary Fund (IMF) reiterated on Friday in a newly released report.

The average REER in 2018 appreciated by about 1.4 percent relative to 2017, driven by the appreciation in the nominal effective exchange rate (NEER) (1.5 percent), the IMF said in a staff report after concluding the annual Article IV consultation to review the Chinese economy.

China's current account surplus fell by around 1 percentage point to 0.4 percent of gross domestic product (GDP) in 2018 and it is projected to remain contained at 0.5 percent of GDP in 2019, the report noted.

"The external position in 2018 was assessed to be broadly in line with the level consistent with medium-term fundamentals and desirable policies," the IMF said, consistent with its earlier conclusion in its annual External Sector Report released in July.

"The IMF report makes clear that there has been absolutely no currency manipulation and that China's external balance has been appropriate," Jeffrey Sachs, a senior United Nations advisor and renowned economics professor at Columbia University, told Xinhua via email.

In response to the IMF estimates through May 2019 which show the REER has depreciated by about 0.2 percent relative to the 2018 average, Sachs said the unilateral tariff action by the United States "surely has caused some depreciation" of the equilibrium REER.

"The US Treasury action declaring China a currency manipulator was blatantly arbitrary, capricious and political, based on Trump's tweets rather than on objective analysis," Sachs said.

Mark Sobel, non-resident senior adviser at the Center for Strategic and International Studies, and US chairman of the Official Monetary and Financial Institutions Forum, told Xinhua that the Article IV report also notes that China's current account surplus is "small," around half of a percent of GDP, and "that estimates suggest China has not been intervening in the foreign exchange market."

"As such, the Article IV clearly rebuffs the recent US assertion that China is 'manipulating' its currency to gain unfair competitive trade advantage or prevent effective balance of payments adjustment," said Sobel, who was the U.S. representative at the IMF, and once served as deputy assistant secretary for international monetary and financial policy at the US Department of the Treasury.

Gary Hufbauer, non-resident senior fellow at the Peterson Institute for International Economics, told Xinhua that "there's no chance" that the IMF will change its assessment (on currency manipulation) unless the United States threatens to withhold support from the European Union's nominee for the managing director, conditioned on a "fresh evaluation" of the IMF's criteria for assessing exchange rates.

The IMF executive board has initiated the selection process for the next managing director, aiming to reach a decision in early October, after Christine Lagarde formally submitted her resignation in July. The position of IMF chief has always been held by Europeans while the head of the World Bank has traditionally been American, an informal arrangement that has stayed in place for over seven decades.

In the newly released IMF report, the IMF executive directors also commended the Chinese authorities' recent reform progress, in particular, in reducing financial sector fragilities and continuing opening-up of the economy, while underscoring the importance of structural fiscal reforms that can enhance medium-term growth.

Welcoming the country's commitment to multilateralism and a rules-based trading system, the executive directors agreed that trade tensions between China and the United States should be quickly resolved through a comprehensive agreement that avoids undermining the international system.

The directors also concurred that greater exchange rate flexibility and deeper and better functioning foreign exchange markets would help the financial system prepare for greater capital flow volatility.