China growing more confident in yuan debate

Many had thought China will again hold back the report written by staff of the Washington-based International Monetary Fund after annual consultations with Beijing.

But the Asian giant turned the tables on them.

The 37-page report released Thursday charged that China's yuan was “substantially” undervalued despite Beijing's decision more than a month ago to let the currency be traded more freely.

The yuan “undervaluation is counterproductive and acts as a headwind to increasing private consumption,” a key component of China's strategy to wean away from its traditional dependence on exports, the report said.

But the Chinese authorities argued in the report that they “are prepared to allow the exchange rate to respond more to the forces of demand and supply” under a “market-determined” managed floating regime announced on June 19.

Aside from their difference in views on the yuan, which the United States and other nations think has been kept low by Beijing for a trade advantage, the IMF staff and China also crossed swords on China's current account surplus — the broadest measure of its trade with the world.

Beijing argued that China's current account surplus would remain about four percent of gross domestic product in a few years whereas the IMF staff projected that it will revert back to eight percent of GDP.

China's current account surplus levels are critical, particularly to Washington, because they also reflect the extent of trade deficit the United States suffers with the Asian power.

Often blaming the burgeoning trade deficit with China on the undervalued yuan, U.S. lawmakers have been pushing Beijing to allow its currency to rise, saying it could reduce the flood of red ink.

Last year, the deficit rose to a whopping US$227 billion.

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