BEIJING - The yuan needs to be more freely convertible and widely used in global trade in order to be included in the special drawing rights (SDR) basket of the International Monetary Fund (IMF), John Lipsky, acting managing director of the IMF, said on Thursday.

"It is agreed that the renminbi is likely to become a candidate for inclusion in the SDR basket," Lipsky said at a news briefing in Beijing. "But it needs to become more freely and widely used in international transactions."

Lipsky called for a stronger yuan to tilt the Chinese economy toward domestic consumption and help stabilize the global economy. He said China needs to further liberalize its financial system to eventually move toward an open capital account with the yuan as a fully convertible currency.

In its latest assessment of China's economy, the IMF expects China to continue to be a "bright spot" for global growth, although the country still confronts the near-term risks of the recent credit expansion and off-balance sheet exposures.

The People's Bank of China (PBOC) has urged customers to pay attention to the risk of loans made through local government financing vehicles. Chinese banks may be saddled with a large amount of bad loans after the borrowing spree of local governments following the financial crisis in 2008.

Nigel Chalk, the IMF's mission chief to China, said the Chinese government fully recognizes the risks associated with local government debt and the measures it has adopted to manage those risks are sufficient to handle the problem.

For China's monetary policy, Chalk said that the PBOC is likely to adopt more balanced monetary tools, including more reliance on interest rates and the exchange rate, and less reliance on reserve requirement ratios and other administrative controls on bank lending.

The IMF forecast that China's economy will grow at 9.5 percent this year and next and inflation will slow to around 4 percent by the end of the year.

China's economic data for May is due to be released on Tuesday. It has been speculated by some economists that the consumer price index (CPI), a main gauge of inflation, is likely to hit a 34-month high of 5.5 percent in May because of the severe droughts in southern provinces that pushed up the price of agricultural products.

Lipsky noted that uncertainties about higher global commodity prices and weather-related shocks to food prices will remain, although many of the key drivers of inflation will soon start to dissipate.

Lispsky said the country is still faced with the risk of rapid rises in property prices, driven by high savings, cheap financing and the lack of alternative investment instruments.

China Daily

(China Daily 06/10/2011 page13)