Yuan’s Real Exchange Rate Undervalued 5%-10%, IMF Report Says

Photographer: Natalie Behring/Bloomberg

A shop keeper checks the authenticity of a 100 yuan note in Beijing. Close

A shop keeper checks the authenticity of a 100 yuan note in Beijing.

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Photographer: Natalie Behring/Bloomberg

A shop keeper checks the authenticity of a 100 yuan note in Beijing.

China’s exchange rate is undervalued by 5 percent to 10 percent on an inflation-adjusted basis given the fundamentals of the country’s economy, International Monetary Fund staff said in a report released yesterday.

China’s “external position appears moderately stronger and the currency moderately undervalued compared with the level consistent with medium-term fundamentals and desirable policy settings,” the staff said in the report, which assessed the real effective exchange rates of 28 countries and the euro area. The report, dated June 20, said China’s foreign-exchange reserves are “somewhat above” a standard IMF measure and “further accumulation would be undesirable.”

The fund’s staff said in the report that the yuan appreciated by about 5 percent from the end of 2011 through April 2013 and “some 35 percent since the mid-2005 exchange-rate reform.” Before that, “the real effective exchange rate had been depreciating, so it is only 14 percent above the level reached a decade ago, which appears somewhat below the significant increases in China’s productivity relative to trading partners over the past 10 years.”

“On China, where rebalancing has clearly taken place, it’s really a question of continuing the shift from domestic investment to domestic consumption,” IMF Managing Director Christine Lagarde told reporters in Washington yesterday. “We have seen it already in action for the last couple of years, but we need to see a continuation of that.”

The Washington-based fund also said that relative to medium-term fundamentals, the depreciation of Japan’s currency since 2012 implies “moderate undervaluation, with estimates ranging from ranging from a 20 percent undervaluation to a 10 percent overvaluation.”

The yen “is expected to move in line with fundamentals over the medium-term assuming the implementation of comprehensive and credible fiscal and structural reforms,” the IMF said in the report.

To contact the reporter on this story: Brendan Murray in Washington at brmurray@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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