Keep reform plans on track, China told

IMF, in its report, said the yuan is no longer undervalued despite Beijing ordering last week's steep fall against the US dollar, noting that it was still well up over the year.
IMF, in its report, said the yuan is no longer undervalued despite Beijing ordering last week's steep fall against the US dollar, noting that it was still well up over the year.PHOTO: EUROPEAN PRESSPHOTO AGENCY

IMF warns China of risks if it does not stay the course to a more market-oriented economy

WASHINGTON • The International Monetary Fund (IMF) has warned that China could face a "disorderly correction" followed by slower growth if its reform programme slows down.

Presenting its annual assessment of the world's second-largest economy last Friday, the IMF expressed satisfaction with its transition to a more market-oriented economy. But it also warned Beijing to stay the course despite recent warning signs.

"The faster the progress, the sooner the benefits will materialise," said Mr Markus Rodlauer, head of the IMF mission to China and one of the authors of the review.

The IMF urged China to make "bold" structural reforms, such as moving to a more market-based financial system, improving the management of government finances and levelling the playing field between state-owned enterprises and the private sector.

The report forecasts 6.8 per cent growth for this year, relatively low by recent Chinese standards but was expected as Beijing transitions to a more sustainable model.

It also said the yuan is no longer undervalued despite Beijing ordering last week's steep fall against the US dollar, noting that it was still well up over the year.

The IMF was also sanguine about the recent turmoil in Chinese stock markets, which it said does not threaten the wider economy.

But it urged Beijing to quickly unwind its massive state intervention to support falling share prices.

"Insufficient progress in containing vulnerabilities and advancing structural reforms continues to pose the biggest risk to the outlook," Mr Rodlauer warned.

"If there was, going ahead, insufficient progress, that would be the biggest risk that - if realised - could result over the medium term in a disorderly correction and a protracted period of slower growth."

Markets and some world governments have been alarmed by last week's decision by China to devalue the yuan, but the IMF said it should be seen as a step towards a more market-oriented exchange rate approach.

The IMF considered China's recent move to improve its exchange rate formation system as "a welcome step" to allow market forces to have a greater role in determining the exchange rate.

"The exact impact will depend on how the new mechanism is implemented going forward," Mr Rodlauer told reporters. "China can and should aim to achieve a full floating exchange rate system within two or three years."

Asked whether the yuan's fall would help China in its quest to see the yuan become one of the reserve currencies in the IMF's special drawing rights (SDR) basket, Mr Rodlauer was cautious.

"The announced change has no direct impact on the criteria used in determining the composition of the basket," he said, calling for a "more market-oriented" rate.

China sees gaining SDR status for the yuan as a recognition of its role in the world financial system as a reserve currency on a par with the US dollar or the euro.

AGENCE FRANCE-PRESSE, XINHUA

A version of this article appeared in the print edition of The Sunday Times on August 16, 2015, with the headline 'Keep reform plans on track, China told'. Print Edition | Subscribe