The International Monetary Fund turned up the heat on China yesterday, using its toughest language to date to urge the Asian tiger to open up its currency to the foreign exchange markets.
The warning came days before a key meeting of world financial ministers in Asia for the annual meetings of the IMF, where China's runaway growth is set to top the agenda.
It also came as China posted a record trade surplus, according to figures that will feed growing protectionist sentiment among US politicians worried about the collapse of American manufacturing.
In its annual assessment of the world's fourth largest economy, the financial watchdog said China would post GDP growth of 10 per cent this year, in line with last year and the strongest for any major country. It said China should relax its control on the yuan at the same time as it was seeking to use separate measures to control both growth in private sector lending and excess investment.
"Greater exchange-rate flexibility is needed to enable [China] to use its monetary policy instruments more effectively," the IMF said in its so-called Article IV assessment.
Figures from Beijing showed China's trade surplus hit another record high in August. The monthly surplus rose to $18.8bn (£10.1bn), well above the previous record of $14.6bn in July, and beat the $10.6bn surplus in the same month of 2005.
Analysts said the figures would be seized on by US Congress members supporting a bill to impose a 27 per cent tariff on Chinese imports to offset what they see is an artificially low exchange rate for the yuan.
Julian Jessop, at Capital Economics, said that the scale of the surplus was exaggerated by the fact that the figures were reported in the local currency, but said it would fuel political unrest in Washington.
The figures will also remind ministers about the scale of the imbalance between the record trade and current account surplus in China and other Asian and oil-rich states and the deficits in the US. Plans to tackle this phenomenon will be debated at the IMF's meetings in Singapore. The IMF has organised multilateral talks on the issue that began in June.Reuse content