China needs to raise interest rates and let the yuan rise to help rein in rapid credit and investment growth, the International Monetary Fund said yesterday.
Charles Collyns, deputy director of the IMF's research department, said China needed to rely more on monetary policy in order to rebalance its economy and sustain the rapid growth rates recorded in recent years.
"Allowing the exchange rate to appreciate more quickly would provide more room for monetary policy to operate in a timely fashion," noted Mr Collyns.
His comments amounted to a restatement of the fund's longstanding policy advice to China.
The yuan has risen five per cent since it was revalued by 2.1 per cent against the dollar in July 2005 and untethered from a dollar peg to float within managed bands.
But the IMF says the central bank, if it did not have to worry about holding down the yuan, would be able to lift interest rates to a level more appropriate for an economy that has grown by ten per cent or more in real terms for the past four years.
"Exchange policy has become more flexible over the past year, but further scope for appreciation of the currency would provide more room for increasing interest rates," Mr Collyns.
China has raised official rates three times in the past 12 months to keep the world's fourth-largest economy from spinning out of control, but the rate for one-year deposits is still only 2.79 per cent, while banks charge 6.39 per cent for one-year loans.
"Further increases in interest rates are needed," Mr Collyns.
Economists expect at least two more increases this year after data last week showed gross domestic product in the first quarter grew a surprisingly strong 11.1 per cent from a year earlier.
Vivek Arora, the fund's senior resident representative in Beijing, said the first-quarter pace of growth was somewhat stronger than what could be sustained.
"The main near-term challenge is to contain the very rapid pace of credit and investment growth because there is a history in China of cycles where you have credit and investment growth running at very rapid rates leading to problems in the financial sector," he said.