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IMF Head Sees China Economy Up 10%, Urges Yuan Rise

Reuters
Thursday, 14 Feb 2008 | 11:27 PM ET

China's economy is likely to grow around 10 percent this year despite a global slowdown stemming from the U.S. subprime mortgage crisis, Dominique Strauss-Kahn, managing director of the International Monetary Fund, said on Friday.

Strauss-Kahn said he had agreed with Premier Wen Jiabao and central bank governor Zhou Xiaochuan on the need for China to run a continued tight monetary policy to contain investment growth and inflation.

The inflation-adjusted exchange rate of the yuan, measured against the currencies of China's main trading partners, has been moving in the right direction recently, Strauss-Kahn told a news conference during a two-day visit to Beijing.

"However, we encourage a faster pace of appreciation that would be helpful for addressing China's key economic challenges and would also contribute to preserving global economic stability," he said in a prepared statement.

The central bank, which keeps the currency on a tight leash, let the yuan rise on Friday to 7.1760 per dollar, the highest since it was revalued by 2.1 percent in July 2005 and cut free from a dollar peg to float within narrow bands.

The yuan has now appreciated by 13 percent against the dollar since then. But it has gained much less when measured against a basket of currencies and, to the ire of European policy makers, is actually worth less against the euro than it was in July 2005.

Strained Relations

Relations between the IMF and China have been strained since the fund introduced new currency surveillance rules last June.

Beijing objected to the rulebook, which will make it easier for the fund to determine whether a country is pursuing policies that lead to a fundamentally misaligned exchange rate in order to boost exports.

China regards the new framework as a ploy by the United States to enlist the fund in its campaign for a stronger yuan.

The dispute has delayed the completion of the fund's 2007 report on China detailing economic consultations between the two sides.

Strauss-Kahn sidestepped a question on whether the yuan was fundamentally misaligned, saying the decision was one for the IMF's board.

But he said he had sought to make the case to Chinese policy makers that a more flexible exchange rate would contribute both to a better-balanced Chinese economy -- with growth powered by domestic demand rather than net exports -- and to global stability.

Strong growth in China was more important than ever now that developed economies were slowing, the managing director said.

China has logged double-digit growth for the past five years. In 2007, the economy expanded 11.4 percent.

He said concerns about the impact of slower world growth were at the heart of his discussions with Wen and Zhou.

"The current financial crisis, which began in the U.S. housing market, is spreading to affect the real economy in the United States and elsewhere. There will be some impact on China, but we still expect the economy to expand by 10 percent this year," he said.