By Aki Ito
April 22 (Bloomberg) — The International Monetary Fund said China should let the yuan gain to cool growth, while Japan must be prepared to widen its stimulus measures as Asia’s two biggest economies diverge.
Japan, with its “tentative” economic recovery, is an exception in a region that’s leading the global rebound, the IMF’s semiannual World Economic Outlook, released yesterday, showed. The Washington-based lender that offered rescue packages to countries from Iceland to Ukraine during the crisis raised its projections for growth in Asia’s economies for 2010 and 2011.
Asia’s strengthening expansion, fueled by consumer spending and investment in China and India, means policy makers in several countries should embrace stronger exchange rates, the fund said. The Group of 20 emerging and developed nations, whose finance chiefs meet tomorrow in Washington, should discuss coordinating policies to strengthen the global recovery, the IMF said.
“Currencies of a number of emerging Asian economies remain undervalued, substantially in the case of the renminbi,” the IMF said in the report. Renminbi is a name for China’s currency, a denomination of which is the yuan. It’s “essential” for China to address excess demand pressures by “reining in credit growth and allowing exchange-rate appreciation,” it said.
The IMF’s comments reinforce calls from economic leaders from the U.S. to India, Brazil and Europe for China to allow the yuan to rise. U.S. lawmakers have proposed restrictions on Chinese imports to counter what they call the unfair export subsidy of an undervalued yuan.
Premier Wen Jiabao’s government has kept the Chinese currency at about 6.83 against the dollar since July 2008, after allowing it to rise 21 percent in the previous three years. China’s growth will accelerate to 10 percent this year from 8.7 percent in 2009, according to the IMF, which raised its 2011 projection to 9.9 percent from 9.7 percent previously. India will expand 8.8 percent this year and 8.4 percent next, compared with estimates from January of 7.7 percent and 7.8 percent.
Japan, which is projected to be surpassed by China as the world’s second-biggest economy this year, will expand 1.9 percent in 2010 and 2 percent in 2011 after a 5.2 percent contraction in 2009, the report shows. While Prime Minister Yukio Hatoyama’s government has urged the central bank to help whip deflation this year, the IMF sees consumer prices falling through 2011.
“For Japan, with the reemergence of deflation, the current accommodative monetary policy stance remains appropriate, but additional easing measures may be necessary if deflation persists,” the IMF said. The Bank of Japan in March doubled the size of a special three-month program providing loans to banks, to 20 trillion yen ($214 billion).
By contrast, central banks in India, Malaysia and Vietnam have started raising interest rates. India’s central bank on April 20 raised borrowing costs for the second time in a month and ordered lenders to set aside more cash as reserves. While China’s central bank has yet to increase rates, the government has stepped up measures to damp property prices in 70 cities that jumped a record 11.7 percent last month.
“Given the region’s strong recovery, planning the speed and sequencing of the exit from stimulative macroeconomic policies must become a policy priority,” the IMF said. “In China, the withdrawal of the exceptional monetary stimulus introduced in 2009 will also minimize the risks from excessively easy credit conditions.”
Other priorities for officials in Asia include preventing the development of “speculative booms” as the region’s growth outperformance attracts a surge of capital from abroad, the IMF said. Finance Ministers from the Association of Southeast Asian Nations said this month they are “cognizant” of the risks that foreign funds bring and the need to strengthen their “monitoring system” of such trends.
Last Updated: April 21, 2010 11:00 EDT
Comment: Everyone is expecting China to revalue the Yuan, and Asian currencies to appreciate in tandem with the renminbi, spurred by the rapid economic recovery in the region.
Exchange rate appreciation is, however, a double-edged sword that can cut both ways, and its ultimate effects are by no means certain. While it may help to correct trade imbalances by making the country’s exports more expensive and imports relatively cheaper, it may also attract capital inflow giving rise to asset bubbles and inflationay pressure. To some extent, the lowering of import prices resulting from currency appreciation may help control domestic price levels, but this depends on the country’s propensity to import. On the other hand, there could be other forces driving the country’s export growth (eg. input prices, productivity…) which may not be stemmed by exchange rate revaluation. So, revaluation is no magic pill for correcting trade imbalance.