Corrupted IMF External Policies and Exchange Rate Mechanisms
The International Monetary Fund (IMF) has released its 2025 External Sector Report, which focuses on the role of major economies, including China, in driving global imbalances. The report identifies China's current account surplus as a key issue, with the analysis of China being the most glaring weakness in the report.
According to the report, China does not need further competitiveness, as monetary easing tends to depreciate the currency. However, the IMF suggests that a broad depreciation of the renminbi (yuan) risks widening China's current account surpluses, which would exacerbate global imbalances. Therefore, the IMF implicitly suggests that exchange rate policies should avoid excessive depreciation to prevent enlarging surpluses, and that domestic policy adjustments are the more effective tool in rebalancing external accounts.
The report points to China's substantial decrease in its current account surplus partly due to a lowered saving rate, but notes the risk of surpluses widening again if the yuan depreciates further. The IMF emphasizes that global imbalances primarily stem from domestic macroeconomic policies, with rebalancing towards more consumption-led growth being crucial for China. Increased fiscal support and public investment can help in this regard.
The Fund also downplays the effectiveness of trade measures like tariffs in correcting imbalances, underscoring that exchange rate adjustments and fiscal policies are more important tools. The IMF warns that delays in adjusting domestic imbalances in China and other major economies can perpetuate current account divergences and produce cross-border spillovers.
Moreover, using customs and modified income balance data, the renminbi's undervaluation could have been far higher. Using the Fund's balance of payments based on a 2.3% current account surplus, the renminbi is undervalued by 8.5%. China's income balance data don't add up, as observed by the IMF, US Treasury, and analysts. Such enormous differences in data could substantially alter estimates about current account norms and exchange rate valuations, not only for China but also for others.
In summary, the IMF advocates tackling China's current account surplus through structural domestic reforms to reduce saving and boost consumption, while managing the renminbi's exchange rate to avoid excessive depreciation that could worsen external imbalances. The emphasis remains on internal policy adjustment rather than relying heavily on exchange rate movements alone. The report also highlights Germany's fiscal U-turn as a potentially positive development for reducing global imbalances.
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