IMF: China’s Currency ‘Substantially Undervalued'; Asian Growth to Slow

The IMF has called on China to allow for greater exchange rate flexibility. From AFP:

In its half-yearly World Economic Outlook report, the IMF said a more flexible yuan, or renminbi, would help China shift growth momentum towards domestic sources and make its monetary policy more effective.

“In the IMF staff’s view, the renminbi remains substantially undervalued relative to medium-term fundamentals,” the report said.

The IMF further predicted 9.7 percent economic growth for China in 2008 and 9.3 percent in 2009, down significantly from 11.9 percent in 2007, saying this was “partly because of slowing exports”.

Even so, it argued China’s heavily export-dependent economy would be better off if it allowed its currency to rise further.

At the same time, the IMF has warned that Asian economies in general will face slowing growth in response to the ongoing financial crisis in Western countries. From Forbes:

‘The main concern is that a buildup of stress in the global financial system and a sharper-than-anticipated global slowdown could further weigh on activity,’ it said.

Regional locomotives China and India will also experience slower growth on weaker exports, but should continue to be supported by solid private consumption, it said.

For more on this topic, see “On The Alert: Will China’s Financial Market’s Follow The US?” via CDT.