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Economy

IMF urges greater transparency in China's capital curbs

Annual report calls for additional reforms in yuan, fiscal policies

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The yuan has not been in sync with market movements even though it was added to the International Monetary Fund's Special Drawing Rights currency basket.   © Reuters

BEIJING -- The International Monetary Fund pressed China to improve consistency and transparency in its capital flow restrictions rolled out last summer, in light of mounting complaints from Japanese, U.S. and European companies.

The organization highlighted the matter in its annual report on China, released Tuesday. Since last year, the country has restricted international remittances and currency exchanges in large amounts, in order to check yuan devaluation and prevent capital flight.

The IMF did not object to the nation's capital flow management measures per se, but pointed out problems in implementation. The restrictions vary from city to city, and authorities have not formally recognized the curbs, nor do they publicize modifications to the rules. Such measures "should be implemented consistently over time and across locations, and clearly communicated to market participants" and they "should be implemented transparently, preferably through written rules," the IMF report said.

The IMF executive board "stressed the importance of carefully sequenced reforms to support the ongoing capital account liberalization," according to a summary of the report.

On the yuan, the board underlined "the importance of continued progress toward greater exchange rate flexibility," adding that executive directors "welcomed the authorities' commitment to deepen reforms and rely more on market forces to determine the exchange rate."

In November 2015, the IMF decided to add the yuan to the basket of currencies underpinning Special Drawing Rights, its currencylike reserve asset, officially recognizing the yuan as an international currency. This came in exchange for China's promise to reform its policies on the currency. But the yuan has since desynchronized noticeably from the market.

In June, China's central bank changed the calculation method of the dollar-yuan reference rate, giving itself more control over how the exchange rate is set. The authorities said that the measure was meant to prevent the yuan from weakening, but many have voiced criticism of the change. A diplomatic source living in Beijing lamented that the yuan has reverted to a state where it can be arbitrarily controlled by authorities.

The IMF also argued that an immediate priority for China's fiscal policy should be to "adjust the composition of the budget to support faster rebalancing [of the economy] and ease the costs of transition from an investment- and credit-led model." It recommended that the country improve social security, which would lead to stronger consumer spending.

"Directors commended the authorities' increased focus on reducing financial stability risks and urged them to continue to strengthen regulatory and supervisory efforts," according to the report summary. The IMF also said that it supports monetary tightening, as long as prices -- excluding prices for fresh foods -- keep rising.

On the reform of state-owned enterprises, the IMF urged Beijing to further advance efforts, "including hardening budget constraints and accelerating restructuring or underperforming debt, and allowing the exit of non-viable firms."

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