IMF's yuan yarn is a work of pure fiction

It also lowered growth expectations for emerging markets and developing economies where activity has been slowed by their policy tightening in response to capacity constraints and weaker demand from advanced economies.

The Outlook has as usual drawn a high degree of attention.

For Beijing, what is particularly eye-catching is the forecast data contained in the report about China’s gross domestic product measured in yuan and US dollars, measurements that can be used to directly calculate the exchange rate of the yuan against the dollar. According to the two measurements, the yuan will decline in value against the dollar over the next five years, from this year’s 6.3251 yuan to $1 to 6.6793 yuan to $1 in 2017, a total depreciation of about 5.3 per cent.

But, bewilderingly, the report also says that the yuan, along with some other currencies, is still undervalued.

However, the Chinese government’s view is the yuan’s exchange rate is already near equilibrium.

As an important international financial agency, the IMF is tasked with the responsibility of monitoring the currency exchange rates of all member states. Regrettably, the latest IMF assessment of the yuan’s exchange rate does not make sense.

If the yuan is moderately undervalued, as the IMF report claims, then why does it still forecast the Chinese currency will depreciate in the coming years? Or to put it the other way, if the yuan is expected to face continuing depreciation in coming years, why is it still believed moderately undervalued? Is there something wrong with the methods for estimation employed by the IMF, or has its forecasting gone awry?

The IMF usually bases its forecasts on the assumption that the currency’s real effective exchange rate, which is largely decided by its nominal exchange rate and the country’s price level, will remain stable. Using this method of calculation, the yuan’s nominal exchange rate will surely decline if the IMF assumes its real effective exchange rate will maintain stability, given the IMF’s prediction that the rise of China’s consumer prices will remain higher than other main currency-issuing countries over the next five years.

Such reasoning may partly explain why the IMF has made mutually conflicting arguments about the yuan’s exchange rate. The problem is the IMF’s conclusion that the yuan’s real effective exchange rate will remain stable is in obvious contradiction with its appreciating tendency over the past few years.

In its previous world economic outlook reports, the IMF has always forecast that the ratio of China’s current account surplus to its gross domestic product will rise, but such a prediction has always proved wrong.

Worse, the IMF’s erroneous forecasts about the yuan have been utilised by some US think-tanks as the basis to accuse China of causing US job losses. Such “negative effects” have been widely popularised by Western media, misleading the public in the US and elsewhere.

The IMF’s assessment of the yuan’s exchange rate as underestimated and its forecasts about the rising ratio of China’s current account surplus to its GDP have been used by some countries seeking to pressure China to appreciate the yuan. As the IMF is considered by many ordinary people to be an authoritative international financial institution, such a practice makes it easy to mislead them. China should forcibly refute the IMF’s argument to prevent people around the world from being misled.

 

Zhang Yongjun is a researcher with the China Centre for International Economic Exchanges.