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IMF urges yuan rise to rebalance China’s growth

China’s economy is likely to grow around 10% this year despite a global slowdown stemming from the US sub-prime mortgage crisis, International Monetary Fund chief Dominique Strauss-Kahn said on Friday.

But Strauss-Kahn, managing director of the Washington-based fund, said Beijing needed to let the yuan rise faster and rely more on domestic demand rather than exports to drive growth, which has been in double digits for the past five years. “What I’m working at is trying to explain to the Chinese authorities that it’s in their own interest to have a more flexible exchange rate, and that’s why I encourage a faster pace of appreciating the currency. It will address both China’s economic challenges and contribute to preserving global economic stability,” Strauss-Kahn told reporters during a two-day visit to Beijing, his first since he took the helm of the fund in November. Ties between the International Monetary Fund and China have been strained since the fund introduced new currency surveillance rules last June that make it easier for it to determine whether a country is keeping its exchange rate fundamentally misaligned to boost exports.

Beijing objected to the rulebook, regarding it as a ploy by the United States to enlist the fund in its campaign for a stronger yuan. The dispute has delayed completion of the IMF’s 2007 report on its economic consultations with China. Strauss-Kahn, who held talks with Premier Wen Jiabao and central bank governor Zhou Xiaochuan, sidestepped a question on whether the yuan was fundamentally misaligned. He said the judgment was one for the IMF’s board. But he noted approvingly that the inflation-adjusted exchange rate of the yuan, measured against the currencies of China’s main trading partners, had been moving in the right direction in recent months.

The People’s Bank of China, which keeps the currency on a tight leash, let the yuan rise on Friday to 7.1760 per dollar, the highest since it was revalued by 2.1% in July 2005 and cut free from a dollar peg to float within narrow bands. The yuan has now appreciated by 13% against the dollar in total. However, it has gained much less against a basket of currencies and, to the ire of European policy makers, is actually worth less against the euro than in July 2005.

Growth concerns
Strauss-Kahn said concerns about the impact of slower world growth were at the heart of his discussions with Wen and Zhou. He dismissed the idea that any country can be immune from global economic weakness. Indeed, linkages were very strong -- not only through the traditional channel of trade but also through financial markets and capital flows, he said. “The current financial crisis, which began in the US housing market, is spreading to affect the real economy in the United States and elsewhere. There will be some impact on China, but we still expect the economy to expand by 10% this year,” he said. In 2007, the economy grew 11.4%. Strong growth in China was more important than ever now that developed economies were slowing, Strauss-Kahn said. To that end, he said China and the IMF were in agreement that Beijing needed to keep running a tight monetary policy to contain investment growth and inflation.

Adjusting budget priorities to improve social services was also important to reduce income disparities and rebalance growth. Turning to the long-running issue of redistributing voting power in the IMF, Strauss-Kahn said he was reasonably hopeful of reaching a solution by the time the fund’s members meet in Washington in April. Ensuring developing countries have more say in the running of the fund was essential for the IMF’s legitimacy, he said. (Reuters)