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August 13, 2019

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IMF report reveals the real status of exchange rate

Since China launched a market-oriented renminbi exchange rate reform four years ago the progress has been widely recognized by the global community, except, sadly, the United States.

On August 11, 2015, the People’s Bank of China announced a major improvement to the formation of the renminbi’s central parity rate against the US dollar. It makes the central parity rate more consistent with the needs of market development.

It was a continuation of the previous rounds of such reforms, also an implementation of Chinese central authority’s pledge to steadily advance the exchange rate market reform and accelerate the renminbi convertibility under the capital account.

Four years on, the renminbi’s exchange rate has been able to rise and fall, while the central bank has withdrawn from intervening in the foreign exchange market.

China’s headway has been recognized by the International Monetary Fund, which concluded in its latest report that China’s exchange rate is broadly in line with fundamentals.

But a few days before the IMF released the report, the US government unilaterally named China as a currency manipulator. The IMF does not endorse the US label of currency manipulation. Its report makes clear that there has been absolutely no currency manipulation, and that China’s external balance has been appropriate.

According to the data published by the Bank for International Settlements, from the beginning of 2005 to June 2019, the nominal effective exchange rate of the renminbi appreciated by 38 percent and the real effective exchange rate by 47 percent, making it the strongest currency among the G20 economies and one of the currencies with the largest appreciation in the world.

According to international law, it is up to the IMF to monitor the exchange rate policies of member countries to avoid manipulating their exchange rates to gain unfair trade competitive advantages. As a global agency seeking facts from investigations, the IMF, not the US government, holds the legitimacy and credibility to make an assessment on China’s exchange rate regime.

The IMF released the report after concluding the Article IV consultation to review the Chinese economy. During an Article IV consultation, an IMF team of economists visits a country to assess economic and financial developments to gain a deep perception of the country’s economic and financial policies. Therefore the IMF’s conclusions about the renminbi are based on investigations and facts.

By contrast, the US assertion was arbitrary, capricious and a mixture of financial issues and political assessment. The US claim is merely a self-conceited farce which deserves no respect.

China has the foundation, confidence and ability to maintain the stable operation of the foreign exchange market and the basic stability of the renminbi exchange rate at a reasonable and balanced level, keep debt under control, and safeguard its financial security.

The country will continue to deliver its promise to let the market play a bigger role in the exchange rate regime to maintain stability and continuity of foreign exchange policies, further promote the liberalization and facilitation of cross-border trade and investment and keep a prudent monetary policy.

It will be normal for the renminbi exchange rate to fluctuate flexibly in the short term in response to changes in market supply and demand. Expectations of the long-term stability of the renminbi’s exchange rate will remain unchanged through a series of two-way fluctuations, as China’s economic fundamentals remain stable.

The renminbi exchange rate system is not perfect. But that should not be an excuse to write off China’s remarkable progress in exchange rate reform, let alone smearing the mechanism.


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