Corrupted International Monetary Fund Policies and Currency Exchange Rates
The International Monetary Fund (IMF) has released its 2025 External Sector Report, highlighting the need for China to rebalance its economy to address persistent global imbalances. The report emphasises the importance of policies that promote investment and reduce excess savings in countries with current account surpluses, such as China.
According to the IMF, these policies could include expanding social safety nets or accommodating higher fiscal deficits where feasible. The aim is to rebalance economic activity more towards consumption and away from an investment and export-led growth strategy, which underlies China's current account surplus.
The report also addresses the impact of monetary easing on China's exchange rate. The IMF and related analyses suggest that China faces a domestic debt burden that is likely to lead to lower interest rates, potentially even zero interest rates. This monetary easing puts downward pressure on the Chinese yuan since Chinese rates would remain below U.S. rates, encouraging capital outflows and currency depreciation unless the People's Bank of China (PBOC) intervenes.
As a result, monetary easing in China tends to weaken the yuan, which could risk widening China's current account surpluses by making exports cheaper and imports more expensive. This complicates efforts to rebalance externally. The PBOC must balance intervention to stabilise the currency with acceptance of depreciation trends.
The IMF's recommendations for China are part of a broader push to address global imbalances. The Fund stresses that domestic macroeconomic policies are crucial remedies for imbalances rather than tariffs or trade barriers, which have limited effect on current accounts.
The report also discusses the dollar and emerging trends in the international monetary system, though it does not take a clear stance on whether the dollar conveys an 'exorbitant privilege'. The IMF could have been substantially stronger had it taken a stance on these statistical complexities and provided alternative current account gap and exchange rate valuation estimates based on the data points.
In summary, the IMF recommends internal rebalancing through fiscal and social policies in China to reduce the surplus, and warns that ongoing monetary easing could weaken the yuan, potentially worsening external imbalances unless carefully managed. The report 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.
Sources:
- IMF External Sector Report
- OMFIF Newsletter
- Mark Sobel, US Chair of OMFIF
- Various analysts and financial institutions, including the US Treasury.
- The IMF's 2025 External Sector Report suggests that China should rebalance its economy to address global imbalances, advocating for policies that promote investment and reduce excess savings.
- The IMF's proposals for China involve expanding social safety nets or accommodating higher fiscal deficits when feasible, with the aim of rebalancing economic activity towards consumption and away from an investment and export-led growth strategy.
- According to the IMF, monetary easing in China could lead to lower interest rates, including potentially zero interest rates, putting downward pressure on the Chinese yuan due to encouragement of capital outflows and currency depreciation.
- The IMF's report emphasizes that domestic macroeconomic policies are crucial remedies for global imbalances, rather than tariffs or trade barriers, which have limited effect on current accounts.
- In researching the dollar and emerging trends in the international monetary system, the IMF's report does not take a clear stance on whether the dollar conveys an 'exorbitant privilege,' yet could have been substantially stronger by providing alternative current account gap and exchange rate valuation estimates.
- The IMF recommends a combination of monetary easing, fiscal, and structural policies in China, but cautions against 'unduly' relying on the exchange rate, as currency depreciation could exacerbate external imbalances.
