IMF's Faulty Outsourced Policies and Exchange Rate Strategy
The International Monetary Fund (IMF) has recently released its 2025 External Sector Report (ESR), which emphasises the need for China to rebalance its economy towards more consumption and away from export-driven growth to address its current account surplus and reduce macroeconomic imbalances.
According to the ESR, China's expanding surplus and the large US deficit are mirrors of domestic policy divergences, with Europe urged to invest more in public infrastructure, the US to pursue fiscal consolidation, and China to focus on consumption-led growth. The report also warns that recent broad depreciation of the Chinese yuan, along with the US dollar, risks further widening China's current account surplus.
However, some external analysts argue that the IMF’s measurement of China's surplus and external imbalances understates the severity of imbalances due to methodological flaws in the IMF’s external balance benchmarks. These critiques suggest that the IMF's framework may encourage persistent imbalances by mischaracterizing China's actual surplus and risk encouraging policies that undermine financial stability and global demand.
For instance, using 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+%. On the other hand, using the Fund's balance of payments based on a 2.3% current account surplus, the renminbi is estimated to be undervalued by 8.5%. Such enormous differences in data could substantially alter estimates about current account norms and exchange rate valuations for China and others.
The IMF's policy recommendations on China's monetary policy warrant scrutiny, with some arguing that the Fund needs to tread more cautiously. The report is criticised for not taking a stance on the statistical complexities and providing alternative current account gap and exchange rate valuation estimates based on these data points.
The ESR focuses on the US, China, and some European Union countries as main drivers of global imbalances. The report also includes a chapter on the dollar and emerging trends in the international monetary system, but the IMF should take a clear stance on whether the dollar conveys an exorbitant privilege.
Meanwhile, massive US dissaving, reflected in America's reckless fiscal policies, is a main culprit for global imbalances. Germany's fiscal U-turn is potentially a positive development for reducing global imbalances.
Mark Sobel, the US Chair of OMFIF, is among those who have raised concerns about the IMF's approach to external policy and exchange rate analytics. The IMF, created in the 1940s to render crisp and tough judgments on these matters, continues to shy away from doing so.
In summary, the IMF's 2025 External Sector Report highlights the need for China to rebalance its economy towards more consumption and away from export-driven growth. However, external critiques argue that the IMF may underestimate the actual extent of the surplus and suggest its benchmarks have limitations that affect policy guidance. The report's recommendations on China's monetary policy warrant scrutiny, and the IMF should take a clear stance on the dollar's exorbitant privilege and provide more detailed analysis of the statistical complexities.
- The IMF's 2025 External Sector Report suggests that Europe should invest more in public infrastructure.
- Some analysts argue that the IMF's measurement of China's surplus may underestimate the severity of the imbalances due to methodological flaws.
- The report urges China to focus on consumption-led growth as a means to rebalance its economy and address macroeconomic imbalances.
- The US is criticized for its reckless fiscal policies, with massive US dissaving being a main culprit for global imbalances.
- The IMF needs to tread more cautiously in its policy recommendations on China's monetary policy, according to some external analysts.
- The IMF should take a clear stance on whether the dollar conveys an exorbitant privilege, as the report includes a chapter on the dollar and emerging trends in the international monetary system.
