A new IMF proposal for a more formalized surveillance of global
exchange rate policies could undermine the institutions
credibility, analysts have warned, as China yesterday rejected
the move. Just days after IMF managing director Rodrigo de Rato
announced plans for a new currency framework, Beijing warned
that the IMF must not lend its weight to US demands for a
faster appreciation of the renminbi. </ br>In a
statement, Chinas central bank said that the IMF
should carry out its duties based on mutual understanding
and respect, especially for the views of developing
countries. It added that the multilateral should step up
supervision of members issuing major reserve currencies
that play a pivotal role on the global systemic
stability. (For details of the IMF proposals,
Analysts have expressed concern that IMF could undermine its
authority by lurching into a politically fraught dispute.
Moreover, there is unease over whether the IMF will be able to
secure any consensus on its new plans.
The IMF has to be very cautious, as strong pressure
would lead to a very negative reaction from Asian states. This
is unlikely to be effective as the body has no enforcement
powers, said Oliver Stoenner-Venkatarama, emerging
markets strategist at fund manager Cominvest in Frankfurt.
Plans for survelliance reform announced last Friday will
expand its coverage of currencies to all major emerging
market currencies. The IMF proposal has been widely
interpreted as a response to pressure from US policymakers, who
have complained that China is maintaining an artificially cheap
exchange rate, giving Chinese exporters an unfair
The Funds new rules state that member countries, as
well as avoiding currency manipulation and intervention, should
avoid policies that result in external instability.
Any indication that member states are failing in this duty
would lead to special consultations.While
Stoenner-Venkatarama anticipated further upward revaluations in
the yuan, not least to combat inflationary pressures in China,
he warned that US expectations are unrealistic.
A gradual appreciation of 3%-5% is manageable and is
what the market has in mind, but the US is clearly pressurizing
for a lot more. But China will take a very gradual approach and
will try to stop upward pressure on the yuan in the run up to
the communist party congress in October, he told Emerging
This view was echoed by Gavin Redknap, international
economist at Standard Chartered in London, who noted that wider
Chinese economic policy considerations, rather than
international urging, were the most likely source for a more
flexible exchange rate policy.
A reduction in capital controls to allow the
development of local markets is gradually being implemented;
this will inevitably cause the currency to appreciate... IMF
pressure by itself at this time wont change anything, but
pressure may build over time and force Chinas hand,
he told Emerging Markets.
By contrast, Yusuke Horiguchi, Chief Economist at global
banking association the Institute of International Finance,
believes that the IMF could be the right vehicle for tackling a
truly global challenge.
Measures to address global imbalances must be done
through the multilaterals to ensure meaningful and credible
change, Horiguchi told Emerging Markets.
But Redknap at Standard Chartered warned that the IMF
must beware not to pressurize too far as they need to remember
that Chinas economic policy is all about jobs, and they
will not do anything to endanger this. Moreover, one
currency strategist and former IMF economist pointed to
previous failed attempts in the G8 to address global
imbalances. He saw these as a sign that the multilateral is
unlikely to fair any better.
Whenever the US asks China about its exchange rate,
the Chinese will ask about US efforts to rein in fiscal
deficits and external debt. If you cannot get agreement between
the big players, then there is not much the IMF can do,
he told Emerging Markets.