China faces risks from inflation and a possible boom and bust in real estate prices and should allow its tightly controlled currency to rise to promote economic stability, the International Monetary Fund said Thursday.
In an annual review, the IMF recommended changes it said would raise China's living standards and promote a transition to more sustainable growth with less reliance on exports and investment. It said Beijing should allow interest rates to be set by the market and ease controls on investment flows into China.
China's main domestic risks are higher inflation, a bubble in real estate prices or a decline in credit quality due to the upsurge in lending as part of Beijing's response to the global crisis, the report said.
A stronger yuan is "a key ingredient to accelerate the transformation of China's economic growth model," it said.
China's inflation rose to a three-year high of 6.4 percent in June, driven by a 14.4 percent jump in food costs. A stronger yuan might help to cool prices by making oil, food and other imports cheaper in local currency terms.
The Washington-based IMF said China's yuan is undervalued by 3 to 23 percent _ depending on which method is used to measure the gap _ and currency controls are holding back reforms that could make its state-dominated financial system more flexible and efficient.
The report could provide ammunition to critics in Washington and elsewhere who say an undervalued yuan gives China's exporters an unfair advantage, swelling its trade surplus and hurting efforts to create jobs after the global crisis.
China's central bank controls the yuan's exchange rate by purchasing most of the dollars and other foreign currency that flow into the country and then stockpiling them in U.S. Treasury securities and other foreign currency-denominated assets.
In April, the IMF cited Beijing's currency controls as a possible factor that might hamper a global recovery. Some American lawmakers say they want punitive tariffs on Chinese if Beijing fails to ease its exchange rate controls.
China's central bank and some other regulators have recommended easing controls on the yuan. But they face opposition from factions that worry a stronger yuan could hurt exporters and cost jobs, possibly fueling unrest.
Beijing's member of the IMF board disagreed with its conclusions on the currency and money flows.
In a statement attached to the report, He Jianxiong said the yuan has risen in value by 21 percent mid-2005. He said Beijing's $3 trillion in foreign reserves have swelled because unusually low interest rates in the United States and Europe sent capital flooding into developing economies.
International Monetary Fund: http://www.imf.org