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August 12, 2019

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RMB rate ‘in line with fundamentals’

THE International Monetary Fund has affirmed its view that China’s exchange rate is broadly in line with economic fundamentals.

Experts said IMF’s new report provides further evidence that US designation of China as a “currency manipulator” is groundless and irresponsible.

China’s real effective exchange rate in 2018 is estimated to be at the same level as warranted by fundamentals and desirable policies, the IMF reiterated on Friday in a staff report after concluding the annual Article IV consultation to review the Chinese economy. It noted that the average REER in 2018 appreciated by about 1.4 percent relative to 2017, driven by the appreciation in the nominal effective exchange rate (1.5 percent).

“The external position in 2018 was assessed to be broadly in line with the level consistent with medium-term fundamentals and desirable policies,” the IMF said, consistent with its earlier conclusion in its annual External Sector Report released in July.

“The IMF report makes clear that there has been absolutely no currency manipulation and that China’s external balance has been appropriate,” Jeffrey Sachs, a senior United Nations advisor and renowned economics professor at Columbia University, told Xinhua in an e-mail.

In response to the IMF estimates through May 2019 which show the REER has depreciated by about 0.2 percent relative to the 2018 average, Sachs said the unilateral tariff action by the United States “surely has caused some depreciation” of the equilibrium REER.

“The US Treasury action declaring China a currency manipulator was blatantly arbitrary, capricious and political, based on Trump’s tweets rather than on objective analysis,” Sachs said, while noting that US trade and financial behavior towards China is “utterly irresponsible.”

The IMF report showed that China’s current account surplus fell by around 1 percentage point to 0.4 percent of gross domestic product in 2018 and it is projected to remain contained at 0.5 percent of GDP this year.

Noting that China’s current account surplus is “small,” Mark Sobel, non-resident senior adviser at the Center for Strategic and International Studies, and US chairman of the Official Monetary and Financial Institutions Forum, told Xinhua “that estimates suggest China has not been intervening in the foreign exchange market.”

“As such, the Article IV clearly rebuffs the recent US assertion that China is ‘manipulating’ its currency to gain unfair competitive trade advantage or prevent effective balance of payments adjustment,” said Sobel.

The IMF report came only a few days after the United States unilaterally labeled China as a “currency manipulator,” which prompted criticism from experts worldwide.

Former US Treasury Secretary Lawrence Summers criticized the US administration for naming China a “currency manipulator,” saying such a move has damaged the US credibility.

“Without some mercantile advantage, and with ongoing efforts to prop up the exchange rate and so raise export prices and reduce import prices, there is no credible manipulation claim here,” Summers argued in an opinion piece published on The Washington Post.

“It will be harder now in the next difficult financial moment for Treasury Department pronouncements to be credited by market participants,” said Summers, emphasizing that “the move down in the yuan on Monday was not artificial — it was an entirely natural market response to newly imposed US tariffs.”

Scott Kennedy, senior adviser of the Freeman Chair in China Studies and director of Project on Chinese Business and Political Economy at CSIS, said on Twitter that seven is not a “magic number,” noting that yuan’s fall below seven should not cause competitive devaluations and “isn’t proof of manipulation deserving of US retaliation.”


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