In the latest Article IV Consultation Mission to China, IMF revised its assessment of the valuation of CNY to “no longer undervalued” from “undervalued by 5-10%” in 2013. According to IMF’s CNY REER index, it has appreciated nearly 64% since end-2004. Commerzbank estimates the CNY NEER has appreciated by 43% since end-2004. Analysts see three points of note from the press release, including
- 1) IMF sees China’s external position as “still-too-strong” despite the change in currency valuation. It urged policymakers to push ahead with reforms to “reduce excess savings and achieve sustained external balance”
- 2) China should adopt a flexible exchange rate over the next 2-3 years to prevent the CNY from deviating away from its equilibrium position
- 3) a reiteration of IMF MD Christine Lagarde’s comments earlier that CNY’s inclusion in the SDR basket is only a matter of time, without giving any specific time frame.
The SDR basket is reviewed in five-year intervals, with the upcoming review expected to be completed in October. IMF has noted earlier that one criterion for CNY’s inclusion in the SDR basket is it to be “free useable” which is defined as
- 1) widely used;
- 2) widely traded, which CNY has probably achieved.
On the economic outlook, IMF sees 6.8% growth this year, within the 6.5-7% range deemed to be appropriate for this year. It noted resilience in the labour market to the economic slowdown so far which should deter any major stimulus. Either side of the 6.5-7% growth range, it expects the appropriate policy responses ie for fiscal stimulus to step up if growth slows below 6.5% and to moderate if above 7%. As long as growth remains within this range, it seemingly prefers policymakers to focus on reducing the vulnerabilities and imbalances, particularly pertaining to the local government debt. For USD-CNY, continued to hold steady yesterday around 6.2040 despite the firmer USD backdrop.
The material has been provided by InstaForex Company – www.instaforex.com