China struggles to apply its own unique version of internal revaluation

Dropped into today’s IMF press releases is a brief account of the IMF board discussion of China’s annual economic surveillance report by the IMF staff.  The trick word here is “annual”.  Unlike most countries where there is indeed an annual report that gets discussed by the board, China’s last discussion was all the way back in 2006.  Apparently the holdup was the renminbi and in particular the US view that it was massively undervalued versus the reluctance of the Chinese government to have any such statement in print. 

An earlier Fund innovation for working around this problem — the “multilateral consultations” — fell by the wayside, even though the analysis that was done for the consultations now looks extremely prescient, as IMF Chief Economist Olivier Blanchard hasn’t been shy about pointing out.  But anyway, the new wheeze for moving the process forward is to group a range of recommended policies for China under the rubric of “rebalancing”, with exchange rate revaluation being somewhere down the list where it won’t attract too much attention.  But the general idea of increasing domestic consumption by providing more of a domestic safety net and shifting activity towards imports and non-tradeables is apparently accepted by the government, with the tools used and the speed of their application being left open to debate.  Thus what could be done at a stoke by revaluation will instead be achieved by a mix of structural reforms and fiscal policies, with perhaps some exchange rate creep in there too.  To be fair to the government, isn’t it reasonable to be nervous when told that your economy needs lower saving, more flexible capital markets, and a market-determined exchange rate?

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