The International Monetary Fund's former chief economist says China is violating its rules by keeping its currency artificially undervalued. VOA's Barry Wood reports Michael Mussa says Beijing must revalue its currency for the sake of global economic stability.

Michael Mussa

Last month in presenting its semi-annual World Economic Outlook, IMF chief economist Simon Johnson said China's currency is undervalued. One of his recent predecessors, Michael Mussa, goes further. He says by intervening in markets to hold down the value of the renminbi, and because its trade surplus is large and growing, China is in direct violation of IMF rules. Mussa spoke at an IMF seminar earlier this month.

"In China, the current account surplus which used to run at one to two percent of GDP [gross domestic product] in the high growth period of the 1990s has gone from two, to four, to seven, to nine and a half, and this year, to 12 percent of GDP," said Michael Mussa. "This is the direct consequence of a Chinese policy that unreasonably and unwisely seeks to resist warranted, substantial nominal appreciation of the Chinese exchange rate."

During the 1990s when China emerged as a major exporter it held its currency fixed to the U.S. dollar. Since 2005 it has allowed the renminbi to gradually appreciate, but it has only risen about five percent against the dollar. Many economists say the Chinese currency is undervalued by up to 50 percent.

In its most recent World Economic Outlook, the IMF identified large financial imbalances as a principal risk to global stability. The economies most out of balance are those of the United States and China. The US trade deficit equals five and a half percent of GDP. But the two-year-long decline of the dollar against currencies other than the renminbi has brought about a shift in financial flows and the US deficit is narrowing. By contrast, China's surplus is still growing with some experts predicting it will reach 13 percent of GDP in 2008. Michael Mussa says China must stop manipulating its exchange rate.

"That policy of massive, persistent, sterilized intervention has the direct effect of preventing effective balance of payments adjustment," he said. "It needs to be the central focus of IMF surveillance [oversight] activities."

Mussa was the IMF chief economist from 1991 to 2001. He is now a senior fellow at the Peterson Institute, a Washington economic research agency.

At the IMF seminar, Deutsche Bank economist Peter Garber agreed that the renminbi is significantly undervalued. He said because the common European currency, the euro, has risen so steadily against the dollar and renminbi, he expects the European Union will soon be calling for restrictions on imports from China.

"I do think the protectionist pressure is much more likely to come first from Europe rather than the United States, given what has happened to the euro recently," said Peter Garber.

The IMF has this month come under new leadership of managing director, French politician Dominique Strauss-Kahn. Some observers say they expect Strauss-Kahn will increase the pressure on China over exchange rates.