IMF, World Bank Economists Ambivalent On Yuan Conundrum

Dubai, Sept 21: | Updated: Sep 22 2003, 05:30am hrs
Like the tab on rebuilding Iraq, the Fund-Bank meetings at Dubai have maintained an enigmatic stance also on the Chinese yuan. Questions are raised at every single press conference, but the responses by heads of the IMF and World Bank, including their chief economists, are ambivalent at best.

Chinas undervalued exchange rate is a source of concern not just to developed countries like the US, but also countries like India whose currency has appreciated, eroding its bilateral competitiveness vis--vis the dragon.

The concerns of the US are largely due to the burgeoning bilateral trade surpluses that China is registering with it. As in a replay of the 1980s when America asked Japan to trim its surpluses by letting the yen rise, it is now asking the Chinese to shift from the dollar peg to a free-float.

As in the case of Japan, there are US politicians who are raising the bogey of the Chinese stealing their jobs, with some even advocating slapping across-the board tariffs until that Asian country agrees to free up its exchange rate.

Given such pressures exerted by the US, the timeframe for the yuans free-float was expected to figure in a big way in Dubai. But all that IMFs managing director Horst Kohler, for instance, in a interview let out was that while steps towards more flexibility in the exchange rate by China was appropriate, he didnt think that the Fund should be part of a scenario where there was coordinated pressure on the country to take decisions when they themselves were not convinced it was in their own interests.

Even the World Bank president James Wolfensohn wasnt spared for his take on the yuan and his public response is worth quoting in full: Well, fortunately I dont have a comment on it because it is not something in my mandate. In the meantime, what we are concerned with in China is the issue of several hundred people who are living in poverty. So our focus is development and not the exchange rate. But I suggest you ask that question to Mr Kohler, and I am sure that he will give you a highly intelligent answer to that question.

Well, there has been nothing more intelligent from the chief economist of the Fund either. The subtext of what Kenneth Rogoff has been publicly stating is that with respect to exchange rates, there is the need to talk about exchange rates across the world. Similarly for the current account as well China imports significantly from the rest of Asia as well. That its growing surpluses has more to do with factors like its cost advantage than the yuans exchange rate as such. That it was indeed difficult to isolate the effects of the exchange rate per se on the trade account. Like in the case of putting a number on Iraqs reconstruction, these answers on the yuan front have been similarly evasive.