International Monetary Fund Weighs in on China’s Yuan

International Monetary Fund

China has been under scrutiny for a while over its currency, as well as the fact that the yuan has been considered to be undervalued. The International Monetary Fund, which is also known as the IMF, has weighed in on China’s currency and stated that the yuan should no longer be considered undervalued. China had been accused in the past of not allowing the yuan to have the chance of keeping up with the U.S. dollar.

The yuan, which is also known as the renminbi, has gone up about 0.5 percent as compared against the United States dollar, particularly in the past year. CNN Money said that the International Monetary Fund’s comments have brought about an important shift. Beijing, China has been recently promoting the yuan as an alternative to the U.S. dollar as a global reserve currency. China is generally known, according to CNN Money, for keeping tight control over its currency, but lately the country has been receiving flack from the United States for undervaluing their currency.

The Wall Street Journal did say that the International Monetary Fund stated that the Chinese government should pick up the pace in terms of loosening its control on the exchange rate. The IMF added that China needs to address imbalances in the economy, the promotion of consumption, as well as the reliance on investment-fueled growth and how it should be reduced. A reformation of the exchange rate should be the top priority though according to David Lipton, who is the Deputy Managing Director for the IMF. Lipton has been encouraging China to work towards an exchange rate that is more flexible. He feels that a reform of the exchange rate is necessary in order to prevent the yuan from being undervalued once again. International Monetary Fund

Lipton said in the article that the currency, the yuan specifically, had done well against most other currencies especially in recent months. This has aided China in reducing its current account surplus, which has been very large,  as well as slow the accumulation of foreign reserves. This information has shown the International Monetary Fund that the yuan is no longer undervalued. The IMF had previously reported that it was going to make a statement in support of China and the yuan. This came after the IMF saw the criticism China was receiving due to the management of the currency. The IMF has also taken notice of the comments made from the U.S. about how China undervalues the yuan, which makes the exports cheaper than those from other countries. This prompted the International Monetary Fund to weigh in on the situation.

The International Monetary Fund stated that China is in the right direction, but some changes still need to be made to the exchange rate within the next two to three years and that the rate should be floating. The IMF added that this would help the government to better manage the economy. The support of the IMF seems to only strengthen the case of China for its currency to win reserve status, according to Bloomberg Business.

China’s yuan rose as compared with the other 31 major currencies in the last year. The exchange rate remains resilient, while the United States is preparing to raise interest rates. China is attempting, with the support of the International Monetary Fund, to boost worldwide use of the yuan prior to the Special Drawing Rights or SDR. During the SDR, the IMF will be reviewing all of the reserve currencies later in 2015, so China is making it a priority to promote the yuan as an alternative to the U.S. dollar. The argument is that the yuan will dominate global trade and finance. International Monetary Fund

Bloomberg Business did say that even though the yuan has matured enough to be a reserve currency, that does not mean that it will threaten the United States dollar in global trade. The yuan is gaining strength and could be an alternative, but it will take a while for it to be widely adopted. The International Monetary Fund weighed in on China’s currency and its support appears to be leading China in the right direction in terms of making necessary changes and better managing the economy.
By Heather Granruth
Sources:
CNN Money: China’s yuan ‘no longer undervalued’: IMF
Bloomberg Business: IMF Says Yuan No Longer Undervalued Amid Reserve-Status Push
The Wall Street Journal: IMF Official Says Chinese Yuan No Longer Undervalued
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