Problems with IMF's external policy and exchange rate mechanism
The International Monetary Fund (IMF) has called for a more significant appreciation of the renminbi (RMB) to address concerns over its undervaluation and global economic imbalances. According to the IMF's 2025 External Sector Report, China's currency has been substantially undervalued, with estimates suggesting an undervaluation of about 8.5% in 2024, but possibly over 20% according to other analysts.
The IMF's policy recommendation aligns with calls for China to reform its exchange rate regime more transparently and reduce tight management that constrains the RMB largely to trading against the US dollar within a narrow band. The People's Bank of China (PBOC) and state banks continue to intervene actively to control exchange rate moves, limiting appreciation despite external pressures.
Allowing the RMB to appreciate would help China reduce excessive reliance on net exports for growth and contribute to rebalancing global economic imbalances. The IMF forecasts upgrades China’s growth to 4.8% in 2025, partly reflecting moderated trade tensions and a shift in currency competitiveness due to the RMB’s relative real depreciation against major currencies.
More broadly, the IMF sees these currency adjustments and more market-oriented reforms as key for mitigating persistent global imbalances, given China’s significant trade surplus and income balances that are currently subject to controversial data discrepancies.
However, the IMF's call for monetary easing warrants scrutiny due to China's excess investment and state-owned enterprises. The Fund acknowledges that monetary easing will tend to depreciate the currency, but this could exacerbate external imbalances due to China's overcapacity.
The IMF's policy advice stresses currency reform and monetary policy adjustments in China as important steps toward a more balanced and stable global economy. However, the report is criticized for not taking a stance on the statistical complexities and not providing alternative current account gap and exchange rate valuation estimates based on these data points.
Meanwhile, Germany's fiscal U-turn is potentially a positive development for reducing global imbalances. The report focuses on the US, China, and some European Union countries as main drivers of global imbalances, with massive US dissaving, reflected in America's reckless fiscal policies, being a main culprit.
In conclusion, the IMF's recommendations for China's monetary policy are questioned, but its call for greater RMB appreciation and more market-oriented reforms is seen as a step towards addressing global economic imbalances. The report serves as a reminder of the need for transparency and clearer data in addressing these complex issues.
- The IMF's call for a more significant appreciation of the renminbi (RMB) is aimed at addressing concerns over its undervaluation and global economic imbalances, as outlined in the IMF's 2025 External Sector Report.
- The IMF suggests that allowing the RMB to appreciate could help China reduce excessive reliance on net exports for growth, contributing to rebalancing global economic imbalances.
- The IMF's policy advice emphasizes currency reform and monetary policy adjustments in China as important steps toward a more balanced and stable global economy.
- The IMF's recommendations for China's monetary policy are questioned, particularly regarding its call for monetary easing, due to concerns about China's excess investment and state-owned enterprises.
- The IMF report highlights the need for transparency and clearer data in addressing the complex issues of global economic imbalances, especially in relation to China's significant trade surplus and income balances, which are currently subject to controversial data discrepancies.
- The IMF's analysis of the finance industry, particularly China's monetary policy, suggests that emerging insights from AI research and public data are crucial for informed investment decisions and maintaining financial stability in the industry.
