Bloomberg News

China Will Participate in Europe Rescue Plan, IMF’s Syed Says

February 22, 2012

Feb. 22 (Bloomberg) -- Murtaza Syed, the International Monetary Fund’s resident representative in Beijing, comments on China’s participation in solving Europe’s sovereign-debt crisis, the value of the yuan and the increasing global use of the Chinese currency. He spoke to reporters in Beijing today.

On China’s participation in solving Europe’s debt crisis:

“I think the Chinese have been very clear that they want to help, but they want to help through the IMF and they want to be seen to be helping if other countries also step up. They don’t want to be the only ones. That’s a pretty sensible approach.

“There is a lot going on behind the scenes, there’s a lot of negotiations happening and I think the Chinese do share the view that we have that a big shock in Europe would have meaningful implications for China’s growth and they would have to respond. And therefore they want to try to avoid that scenario.

“Obviously if the IMF resources are to be bolstered, one of the main sources of that financing could be China because China has a lot of reserves, China has the kind of space that we would need to make a meaningful contribution.

“There’s a lot happening and I think it’s just a matter now of getting countries to agree, getting this core set of countries to agree. I don’t think any country wants to take the first step and to be the only one.

“You also have to put this against the domestic backdrop in China. There’s still a lot of poor people in China and explaining it to your domestic constituency is always difficult in any environment for a politician to say we are helping others while there are so many poor people in China. So the domestic messaging also has to be thought about and I think that’s part of what is causing this seeming delay or this long time in agreeing what needs to be done.

“In terms of addressing the European debt problem, the Chinese position has been quite clear from day one - which is that they will do it through the IMF and they will do it as long as other countries also contribute.

“China has been quite adamant that the bulk of the resources that it could provide would have to come through the IMF because it wants the IMF involved, it wants the IMF conditionalities, it wants to be able to demonstrate to its population that this is a good idea.”

On whether the yuan is undervalued:

“Taking the last six to eight months, appreciation has been quite dramatic. The current account has come down very sharply as a percent of GDP. If that continues, if that happens for another two or three years, once the global economy recovers and China’s current account is still in the region of 3 to 4 percent of GDP, it becomes much harder to argue that the exchange rate is substantially undervalued.

“Our view at the IMF has always been that the exchange rate is one part of China’s rebalancing but it’s not the only part. There are a whole host of other issues China can deal with that would help bring the current account down and rebalance its economy. The international community also is increasingly coming to that view. It’s an election year in the U.S., things could happen, the discussion could become again very volatile, very excitable, but I think cooler heads will prevail.”

On the yuan, also known as the renminbi, becoming a global currency:

The government is “quite keen now on pushing the RMB as a global currency. In order to do that you need domestic financial reform, it can’t be done without it. If you don’t allow the RMB that’s accumulating abroad to flow back into China, to be able to invest in assets here, you will never fulfill the potential of the RMB as a global currency. To do that with confidence, you need to reform the domestic financial system, make it much more market oriented.

“Unless you allow RMB that’s accumulating abroad to flow back into China, the only reason why people would want to hold it is if they think the RMB is going to appreciate. To the extent that RMB appreciation is no longer the prime motivation for holding the RMB at some point in the future, people will no longer want to hold the RMB unless they can use it to invest in assets on the mainland.

“To be able to do that you need to free up the capital account a lot more, there are a lot of capital controls particularly on inflows. They are now broadening out those channels, they are trying to get more portfolio investment into China through ETFs and things like that.

“Once you start playing this game, once you start punching holes in your capital account to allow more RMB to come in, it’s not hard to imagine that you would reach a situation where it’s very hard for you to control it. You really need to make sure your domestic financial system is able to absorb those kind of flows without creating asset bubbles, a credit splurge.”

--Nerys Avery in Beijing. Editors: Rina Chandran

To contact Bloomberg news staff for this story: Nerys Avery in Beijing at navery2@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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