Yuan at Fair Value, No Undervaluation to Promote Exports

The Chinese Renminbi is “no longer undervalued,” officials from the International Monetary Fund (IMF) said, following its latest review of the Asian economic giant.

The announcement marks a notable shift for the international finance institution, which has long argued that Beijing has held too tight a control on its currency. Many of China’s trading partners, especially the US, have argued that the Chinese currency is too weak, making the country’s exports artificially more attractive than those of foreign competitors.

“While undervaluation of the Renminbi was a major factor causing the large imbalance in the past, our assessment now is that the substantial real effective appreciation over the past year has brought the exchange rate to a level that is no longer undervalued,” said the IMF’s mission to China in a statement.

Despite these advances, however, the IMF urged Beijing officials to continue working toward greater exchange rate flexibility, suggesting that China move to “an effectively floating exchange rate” within the next two to three years.

US Treasury officials have told reporters that their latest assessment still found the Renminbi to be undervalued, urging Beijing to continue efforts toward liberalisation, according to remarks reported across various media outlets in the wake of the news.

Yuan in SDR

The IMF’s statement comes as China continues to push for inclusion in the Fund’s international reserve asset, known as the “Special Drawing Rights” (SDR) Basket. Beijing has already been working to loosen capital controls and take other relevant steps in an effort to achieve this goal.

The SDR basket determines its value based on a basket of four major currencies: the US dollar, the euro, the Japanese yen, and the pound sterling. IMF member economies can exchange SDRs for one of these “freely usable” currencies, a requirement that the Renminbi would need to meet for inclusion.

Should China’s currency indeed be included in the SDR, analysts expect the use of the Renminbi to increase substantially, while potentially serving as a step forward to its internationalisation. The subject of the Renminbi’s potential inclusion in the SDR is reportedly expected to be raised during a meeting of finance ministers from the G-7 countries in Germany this week.

Reviews of the SDR are held every five years, with the last one completed in November 2010. A review of the SDR is currently ongoing, with results expected later this year.