IMF gives ground on yuan exchange rate debate

RELATED NEWS China yuan undervalued by between 5 to 27% US Treasury's Brainard: China yuan still undervalued IMF says yuan substantially undervalued

The International Monetary Fund has chosen not to call the yuan "substantially" undervalued, a move that recognises China's efforts to free up its exchange rate and avoids friction with an increasingly influential shareholder.

The summary of an annual review of China's policies omitted the contentious word, used by IMF Managing Director Dominique Strauss-Kahn as recently as June, which has long riled Beijing.

Several members of the IMF's 24-member executive board believed the Chinese currency was too cheap, the fund said.

But others said a structural reduction in the balance of payments surplus was already unfolding thanks to past steps to boost consumption, while others took issue with an assessment by IMF staffers that the yuan was substantially undervalued.

"This does reflect a softening in the board's position about the degree of adjustment that is needed in the Chinese exchange rate regime," said Eswar Prasad, a senior fellow at the Washington-based Brookings Institution and a former IMF official.

He said this was reflected in statements to the IMF board, which met on Monday, that China had already made a big move towards greater currency flexibility and progress in rebalancing demand.

Beijing dropped the yuan's 23-month-old peg to the dollar and reverted to a managed float on June 19. China's trade surplus has also shrunk considerably as government efforts to pump up the economy have sucked in imports of commodities and capital goods.

"On both counts this conciliatory tone is a little premature, because despite the announcement there hasn't been that much movement of the Chinese currency. Any notion that they have in fact successfully started rebalancing their economy is also quite premature," Prasad said.