Washington - China should take steps to rein in runaway economic growth or
face the possibility of a "boom-bust cycle," the International Monetary Fund
said.
In its annual assessment of the Chinese economy, the IMF also said that many
of its analysts consider it "appropriate" for Beijing to stick with a policy of
promoting "gradual and controlled" exchange rate movements.
The IMF report said that despite some calls for an acceleration of exchange
rate flexibility, many IMF officials share Beijing's concern that such a move
could have "an adverse impact on macroeconomic stability."
IMF directors "commended the authorities for sustaining high economic growth
and noted that China's prospects for the future remain favorable, provided that
the risks and challenges faced by the country are addressed," the report said.
The report also "endorsed the governments medium-term economic reform
strategy, particularly the need to rebalance the economy away from heavy
dependence on investment and exports for growth towards consumption."
IMF staff are projecting economic growth in China to remain "around 10
percent" in 2006, but only if authorities take steps to check investment.
"Unless these policy actions are taken, GDP growth could easily exceed the 10
percent forecast," the report said.
"In the near term, a significant risk remains that macroeconomic policies
will not be sufficiently tight to contain investment growth. In particular,
there is a need for monetary policy to prevent a surge in credit growth from
tipping off a boom-bust cycle and an associated rise in banks' nonperforming
loans."
The Chinese economy grew at a blistering 10.9 percent pace in the first six
months of 2006, well above the government's full-year target of about eight
percent.
Chinese vice premier Zeng Peiyan said Sunday the government would continue to
improve its macroeconomic controls but would focus on "economic and legal
measures," to restrain growth.
In the currency area, since China de-linked its currency from a decade-long
peg to the dollar in favor of a basket of currencies, the yuan
has strengthened by about two percent.
Washington, who put blames of its soaring trade deficit
on Beijing's Yuan policy, has pressed China for more Yuan
reforms and threatened to impose punitive duties.
China meanwhile promised a gradual reform and argued that the
country's fragile financial system cannot yet handle the volatility of a
freely floating exchange rate.
"Many (IMF) directors found it appropriate for China to continue to allow
greater flexibility in its exchange rate in a gradual and controlled manner,"
the report said.
"They shared the authorities' concern that accelerating exchange rate
flexibility could have an adverse impact on macroeconomic stability. Some of
these directors also viewed that exchange rate adjustment alone would have a
limited impact on external balances.
"A number of other directors, however, stressed that the flexibility afforded
by the current exchange rate system should be used more extensively."
The IMF officials "noted that greater exchange rate flexibility, along with
other policy changes and reforms in China, will aid in rebalancing the economy
over the medium term, and will contribute to the orderly resolution of the
global current account imbalance."
The issue has become tied up with debate about reform of the IMF, which holds
its annual meeting with the World Bank in Singapore on September 19-20.
With US support, IMF members are expected to adopt an interim voting reform
to give a greater say to four countries, including China.
The IMF report appeared to back Beijing's position on this, although there
was some internal debate about the role of the yuan in global trade
imbalances.
