IMF China Expert Goes Beyond Bosses on Yuan

A bank teller counts a stack of US and Chinese currency.

The International Monetary Fund's top China expert says China's currency is "substantially" undervalued, weighing in on a sensitive question that has divided the directors of the Washington-based institution.

Nigel Chalk, the IMF China mission chief, Wednesday said China's currency "remains substantially below the level that's consistent with current fundamentals."

In their first public review of China's economy in three years, the IMF's 24-member board of directors called Tuesday for greater flexibility in the Chinese currency. But while some directors agreed with IMF staff that the value of the yuan is too low, others felt there is not enough evidence to say that.

The value of the yuan has been a source of friction between China and several of its trading partners. The United States and other countries feel a higher yuan would help correct a huge trade imbalance favoring China.

China in recent months has allowed some loosening of the yuan, easing a two-year-old policy of keeping it firmly pegged at 6.8 to the dollar. But it has risen only 0.7 percent, when reports say IMF economists believe it must rise by 5 percent, to 27 percent to bring Chinese trade into balance.

Nevertheless, the IMF directors' report Tuesday welcomed the increased flexibility, saying a continued loosening would help to shift China's growth toward more private consumption. It also praised China's handling of the global economic crisis, while calling for it to begin phasing out stimulus measures.

The tougher staff report has not been made public and will not be unless China agrees.

Directors on the IMF board are appointed by the member governments and are more vulnerable to political pressure than the permanent staff.

China has been increasing its influence at the IMF after blocking the past two annual reviews. It recently named central bank official Min Zhu to serve as a special adviser to the IMF's managing director, Dominique Strauss-Kahn.

Some information for this report was provided by AFP, Reuters, Dow Jones and Bloomberg