[BEIJING] The International Monetary Fund officially dropped its long-held view that the yuan is undervalued, strengthening China's case for the currency to win reserve status at the lender.
"The substantial real effective appreciation over the past year has brought the exchange rate to a level that is no longer undervalued," said the IMF mission to China, which is led by its deputy director of Asia and Pacific Markus Rodlauer. "We believe that China should aim to achieve an effectively floating exchange rate within two to three years." The yuan climbed 33 per cent in the five years through March 2015 in real effective exchange rate terms, according to data from the Bank for International Settlements. Chinese officials including central bank Governor Zhou Xiaochuan have called for the IMF to include the yuan in its Special Drawing Rights basket of currencies at a review later this year.
China should allow greater flexibility in its exchange rate, with intervention limited to avoiding disorderly market conditions or excessive volatility, Rodlauer said.
The IMF will work closely with the Chinese authorities on adding the yuan to the SDR basket, Rodlauer said. The inclusion is not a matter of "if" but "when," he said. The SDR basket is reviewed every five years and currently comprises the dollar, euro, yen and British pound.