Corrupted IMF External Policies and Dysfunctional Currency Exchange Rates
The International Monetary Fund (IMF) has released its 2025 External Sector Report, offering policy recommendations for China to address its current account surplus and promote a more balanced growth path.
Focus on Boosting Domestic Consumption
The IMF's recommendations for China revolve around reducing the current account surplus by strengthening domestic consumption and reforming social safety nets. This approach aims to support a more balanced growth path, addressing structural issues such as weak domestic consumption and an investment- and export-led growth model.
Gradual Exchange Rate Policy Reforms
Regarding exchange rate policy, the IMF advises gradual reforms aimed at increasing transparency and selectively liberalizing capital flows to improve market confidence. The goal is to restore market confidence, with cautious expectations for only limited reform in the near term.
Data Reliability Concerns
There are concerns about the reliability and interpretation of China’s economic data in IMF assessments. Analyses indicate possible discrepancies in China's balance of payments data, and some criticisms argue that the IMF’s methodological approach may underestimate the severity of China's imbalances, affecting policy conclusions and benchmarks.
Monetary Policy and Global Imbalances
The report highlights massive US dissaving, reflected in America's reckless fiscal policies, as a main culprit for global imbalances. Using the Fund's balance of payments based on a 2.3% current account surplus, the ESR estimates that the renminbi is undervalued by 8.5%.
However, the IMF acknowledges that monetary easing in China will tend to depreciate the currency, and that China doesn't need further competitiveness. The Fund also suggests monetary easing alongside both fiscal and structural policies in China, but warns against 'unduly' relying on the exchange rate when depreciation could exacerbate external imbalances.
Other Key Findings
The ESR includes an interesting chapter on the dollar and emerging trends in the international monetary system, but the IMF continues to shy away from rendering crisp and tough judgments on these issues. The chapter on the dollar and international monetary system in this ESR is well-written, though not ground-breaking.
The report also focuses on the US, China, and some European Union countries as main drivers of global imbalances. Notably, Germany's fiscal U-turn could potentially reduce global imbalances.
China's 2024 current account surplus, using customs data, was above 5% of GDP. However, the IMF's income balance data don't add up, as observed by the IMF, US Treasury, and analysts. Using the customs-based current account surplus and assuming an income balance closer to zero, China's 2024 current account surplus could have been on the order of 4+%, not the 2.2% figure the IMF uses.
Subscribing to OMFIF's newsletter may provide more information on this topic. Mark Sobel, the US Chair of OMFIF, has been a key figure in these discussions. The IMF should take a clear stance on whether the dollar conveys an 'exorbitant privilege', as the debate about its impact continues.
The ESR's analysis of China is a glaring weakness. If the IMF had taken a stance on these statistical complexities and provided alternative current account gap and exchange rate valuation estimates based on these data points, the report could have been substantially stronger. The net foreign asset variable, while it may improve the model's fit, could become self-reinforcing in higher norms, contrary to tackling global imbalances.
- The IMF's 2025 External Sector Report suggests that China can address its current account surplus by boosting domestic consumption and reforming social safety nets, aiming for a more balanced growth path.
- The IMF advises gradual reforms in China's exchange rate policy, aimed at increasing transparency and selectively liberalizing capital flows to improve market confidence.
- Data reliability and interpretation concerns have been raised in relation to China’s economic data in IMF assessments, with analyses indicating possible discrepancies in China's balance of payments data.
- The report identifies massive US dissaving, reflected in America's reckless fiscal policies, as a main contributor to global imbalances.
- The report suggests that monetary easing in China should be accompanied by both fiscal and structural policies, but warns against relying too heavily on the exchange rate as a means to depreciate the currency.
- The ESR's analysis of China is considered a weakness, as it could have been substantially stronger if the IMF had taken a stance on statistical complexities and provided alternative current account gap and exchange rate valuation estimates based on current data points.
