IMF: Chinese economy overheating

The Chinese economy appears to be overheating, and it is unclear whether the authorities have it under control or whether a flexible yuan would help immediately, the IMF has said.

China's spectacular growth shows no sign of slowing down

“There are some signs of overheating,” International Monetary Fund chief economist Raghuram Rajan said on Wednesday.

“There is a tremendous amount of investment that is going on, credit has expanded tremendously and the Chinese authorities are trying to control this,” he told reporters by telephone.

“The jury is still out on whether they have brought it under control.”

The Chinese economy is estimated to have grown 9.5% in the first quarter of 2004 and may pick up further in the second to 10%, a Chinese official said in Beijing this week.

It was uncertain whether exchange rate flexibility would help to chill the economy, Rajan said.

The Chinese authorities faced a major obstacle reining in credit allocations by banks and bank branches.

“Whether more limited exchange intervention will help solve that problem I think is an open question.”

In the long run, a flexible yuan would be important for China, however, enriching the country by letting prices reflect reality, fuelling Chinese consumption and lowering the cost of imports.

“In the shorter run, there are a number of concerns that the Chinese have that have to be taken into account. That said, I think the Fund policy is that any move towards exchange rate flexibility would be a good thing,” Rajan said.

Yuan undervalued

China’s foreign reserves soared by a record 40.7% last year to $403 billion as it snapped up mostly US treasury bonds to protect a peg tying the yuan at 8.28 to the dollar.

American exporters complain the yuan is undervalued, pricing US goods out of the Chinese market and depressing the cost of China-made goods sold in the United States.

But Rajan said too much blame was put on China for the US current account deficit.

The US current account deficit exploded to a record $541.8 billion in 2003, stoked by a voracious US appetite for foreign-made goods.

Latest US figures Wednesday showed the US trade deficit with China alone narrowed by 27.8% to $8.3 billion in February, well below the monthly record of $13.6 billion set last October.

In fact, many goods imported from China had been diverted from other Asian countries only to be finished in China, Rajan said.

“I think there is excessive blame put on China. That said, I think if the Chinese show some flexibility [on exchange rates] it will lead the way for other Asian economies to show some flexibility and will have some overall impact on the US current account deficit.”

Source: AFP

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