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Updated Tuesday, November 17, 2009 10:59 am TWN, By Jason Subler and Aileen Wang, Reuters

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China cool to stronger yuan as IMF joins calls for a rise

IMF Managing Director Dominique Strauss-Kahn said on Monday that exchange rate appreciation is part of the reforms that Beijing needs to implement to increase domestic consumption.

“A stronger currency is part of the package of necessary reforms,” he said. “Allowing the renminbi (yuan) and other Asian currencies to rise would help increase the purchasing power of households, raise the labor share of income, and provide the right incentives to reorient investment.”

Market expectations of yuan appreciation picked up a touch after China's central bank said last Wednesday that it would consider major currencies, not just the dollar, in guiding the exchange rate.

In the same report, the People's Bank of China dropped its customary wording about keeping the yuan “basically stable.”

Nevertheless, investors are still betting on only moderate yuan appreciation.

The offshore non-deliverable forward market is pricing in a roughly 3.5 percent rise versus the dollar over the next 12 months, down from close to 3.8 percent implied appreciation on Friday.

To be sure, that would represent a departure from the virtual peg around 6.83 yuan per dollar that Beijing has kept in place since the financial crisis worsened in July last year.

But it would be a limited rise by even China's own standards, compared with the the yuan's roughly 20 percent gain in the three years following its removal from a formal dollar peg in 2005.

Yao of the commerce ministry said that the yuan's exchange rate had only a small impact on China's trade surplus and, moreover, that it was unfair to blame global imbalances on Chinese exports.

“If we only demand that one country appreciate its currency, but the dollars' value keeps going down, it is not conducive to the global economic recovery and it is also unfair,” Yao said.

Many economists see China's trade surplus as a function of its cheap capital and over-investment, which generate excess production that is cleared through exports.

The implication is that deeper reforms to China's economy such as investing in public medical insurance, and not just yuan appreciation, are necessary to stimulate domestic demand and rein in its yawning trade surplus.

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