IMF's Says China Yuan Isn't Undervalued, Despite Decline

By Mark Magnier 

        BEIJING--China's currency isn't undervalued despite this week's decline against the U.S. dollar, but the world's second-largest economy still needs to adopt a fully market-based exchange-rate system within three years, the International Monetary Fund said Friday.
        This week, China introduced changes to make trading in the yuan more market-driven. Economists and currency traders said it is an improvement over the previous system since opening rates are more explicitly linked to the prior day's closing level.
        But the system still leaves authorities with significant discretion in setting rates, they added. The yuan fell 2.9% against the U.S. dollar, its largest drop in years, during the week.
        The IMF said it welcomed the new approach, which follows the yuan's recent double-digit appreciation against the dollar, but added that China needs to do more. Officials said the new trading system would have no direct effect on China's bid to have its currency included in the IMF's special drawing rights basket of currencies but said that, in general, a more market-based approach would help.
        "As China integrates more and more into the global financial system, it will be increasingly important for China to have a freely floating exchange rate," Markus Rodlauer, the IMF's mission chief for China, told reporters in a briefing.
        On Friday, the multilateral bank also called on Beijing to reverse in a "timely manner" recent interventionist steps taken after China's stock market fell sharply, while working to maintain liquidity and improve crisis management and oversight of equity markets.
        Chinese authorities suspended initial public offerings, pushed state institutions to buy shares and blocked large shareholders from selling after the Shanghai Composite Index fell sharply from a high of 5166.35 on June 12.
        "Our view is that [the moves] should be unwound as soon as possible," Mr. Rodlauer said.
        Economists criticized as heavy-handed Beijing's efforts to intervene in the stock market, given that the index was still up for the year and the declines appeared to have a limited spillover effect on the real economy.
        On Friday, China's stock regulator said on its website that government entities would hold shares for years if needed to stabilize the market.
        The multilateral bank also called on China to reduce its financial vulnerabilities by paring real-estate investment and debt levels, fully liberalizing interest rates, reforming the state-owned sector and strengthening the fiscal system. The recommendations are part of a periodic review the IMF conducts with member countries known as the Article IV consultation.
        While China reduced its current account surplus to 2.1% of gross domestic product in 2014, down from the 10% level in 2007 at its peak, it still needs to pare excess savings, the IMF said. Credit has risen to excessive levels and deleveraging could unearth more problems with credit quality, particularly among state-owned companies, it added.
        It said China also needs to implement reforms that will boost longer-term growth, including cuts in government and corporate debt and better investment efficiency, without letting its economy slow down too quickly.
        China's economy grew by 7% in the second quarter and momentum has continued to slow into the second half of 2015. China has set an annual target of about 7% growth while the IMF projects annual growth of 6.8%
        On Wednesday, China said growth in industrial production, fixed asset investment and retail sales all fell a few days after reporting that exports dropped sharply.
        Write to Mark Magnier at mark.magnier@wsj.com
        (END) Dow Jones Newswires

        August 14, 2015 20:02 ET (00:02 GMT)