Reuters: Yuan Reform Could Brind Yuan Close to Floating Rate

Reuters runs this article which quotes a top IMF official as saying that the recent moves by China on the yuan may be the first steps in a process that  would allow it to float in value. There has been much speculation as to why China recently devalued the yuan, This article suggests that it may just be an effort to meet the IMF's desire to see the yuan trade more freely. Below are some quotes from the article.

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"Recent changes to how China manages its currency could bring the country "quite close to a float" in its exchange rate, a top International Monetary Fund official said on Friday in a review of the country's economy.

The new system in theory could allow the currency value to move as much as 10 percent a week and be close to a rate that markets might set on their own, Markus Rodlauer, the IMF's mission chief for China, said.

Authorities are still likely to intervene in currency markets for now, Rodlauer said, but "this lays the basis for greater flexibility. ... We don't expect a free-floating system tomorrow. We expect some continued management. But we hope it will gradually lead to more flexibility and a float within two to three years."

"Rodlauer said that even with the decline of the yuan's value that followed introduction of the new system, the IMF feels the Chinese currency is no longer undervalued - an important acknowledgement on an issue that has roiled trade and political relations between China and the United States."

. . . . . 

"The fund's annual report gave Chinese authorities positive marks for managing the recent slowdown of their economy, beginning to liberalize the financial system, and starting to curb some of the over-investment in real estate and other assets that are considered a risk to financial stability.

"China is transitioning to a new normal, with slower yet safer and more sustainable growth," the IMF said, noting that the country had slowed credit growth by more strictly regulating shadow banks, managed through a stock market downturn, and is gradually moving to more consumption-based growth as the IMF and others have recommended."

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My added comments:

A couple of points to note here. It is pretty clear from this IMF report that they are telling China "we have your back" on the recent move to devalue the yuan. The report mostly praises China for slowly adopting a number of IMF proposals. We can probably read into this that the IMF wants to signal to China that they are moving in the direction the IMF wants to see for yuan inclusion in the SDR basket, but not there yet. 

The other point is to note how long these things take. The IMF report says China is moving in the right direction on the yuan and might get closer to where the IMF wants them to be "within two or three years." 

This once again illustrates that change comes very slowly for the most part.

Added note: Yesterday we ran this article which talks about China and the US preparing for possible coming changes.