China and the IMF

Chinese People's Liberation Army (PLA) personnel parade during the open day of Stonecutter Island Navy Base in Hong Kong Saturday, March 6, 2010.
Originally uploaded by Pan-African News Wire File Photos

August 8, 2010

China and the I.M.F.

New York Times

A growing list of countries — from the United States to the European Union to Brazil — have complained that China has been cheapening its currency. So it is positive news — of a sort — that China agreed to submit this year to the International Monetary Fund’s annual review of exchange rate and economic policies.

But nobody should interpret this as a major shift in policy. Indeed, the fund’s economists reported last week that “the renminbi remains substantially below the level that is consistent with medium-term fundamentals.”

The new openness means China is more comfortable that it can get away with the manipulation. It agreed to the review only after the fund softened its standards for determining whether countries are manipulating their exchange rate to boost exports, in violation of I.M.F. rules, and to give countries like China “the benefit of any reasonable doubt” when evaluating their policies.

True, China has relied less on exports to fuel growth since the financial crisis started. This defused some criticism of its currency policy. Its trade surplus fell by half in the last two years as recession forced many countries to slash their imports while China’s fast recovery boosted its own imports, aiding growth overseas. And in June it said it would allow the renminbi to gradually inch upward against the dollar.

Unfortunately, some of that will be short-lived. Even through the global downturn, China’s share of world exports grew to nearly 10 percent. China’s exports are now rebounding, and its trade surplus is expected to bottom out this year. Since the announced policy change, its currency has risen little against the dollar and has actually lost value against the euro and the Japanese yen.

The I.M.F. seems to view the outlook as a glass half full. Its executive board welcomed the change in China’s currency policy, and “a number” of its directors — which in fund-speak means 6 to 9 out of 24 — disagreed with the staff’s view that the renminbi is undervalued.

This tolerant attitude is probably wise. Retaliating against China with punitive trade barriers, as urged by some in Congress, would spark a tit-for-tat confrontation that would endanger economic recovery. China also is doing other things — increasing pension payments and unemployment checks, and providing subsidies for college education and purchases of homes and durable goods — in order to increase domestic consumption and reduce reliance on exports.

Yet China cannot be left off the hook. The I.M.F. must monitor China’s trade surplus to assess its drag on global demand. If the fund’s economists are proved right, its executive board should reassess its conclusions, call a manipulator a manipulator, and persuade the international community to make China stop.