A New IMF Report Says Chinese Currency Reform Is Working

The U.S. has long accused China of manipulating its currency and many American policymakers have used the getting-tough-on-China rhetoric to win political favour.

But all that may soon come to an end.

A new report from the IMF says the renminbi is only “moderately undervalued” and points to a decline in its current account surplus and an appreciation in its real effective exchange rate.

What’s more, the People’s Bank of China’s decision to widened the renminbi’s trading band against the U.S. dollar to 1 per cent back in April has allowed market forces to have a bigger influence on the exchange rate. This wider band allows daily fluctuations that are up to twice what was previously allowed and allows for more independent monetary policy. 

The IMF points out though that currency appreciation will continue to be an important part of the reforms needed to develop the Chinese economy.

“A stronger renminbi would increase household purchasing power, help expand the service and other nontradable sectors, boost the labour share of income, and facilitate financial sector reform.”

This chart shows that the renminbi has appreciated 30 per cent against the U.S. dollar since 2005. 25 per cent in nominal terms:

IMF renminbi chart

Photo: IMF

That in turn has caused an appreciation in the real exchange rate:

IMF renminbi chart

Photo: IMF

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