China to gain from yuan appreciation-IMF economist

BANGKOK, May 8 (Reuters) China's economy will benefit from a government decision to allow greater exchange rate flexibility for its yuan currency as it moves to tackle domestic imbalances, an economist at the International Monetary Fund said on Monday.

Joshua Felman, IMF economist for Asia and Pacific, said a stronger yuan, also known as the renminbi, could reduce China's huge trade surplus, make its imports cheaper, and boost domestic consumption.

''Greater exchange rate flexibility, which would likely lead to an appreciation in the near term, could raise consumption by cutting the cost of imports and boosting households' purchasing power,'' he told a seminar.

China revalued the yuan by 2.1 percent last July when it scrapped a decade-old peg to the dollar. But the currency is still tightly managed and since then it has risen only another 1.2 percent against the U.S. currency.

China has been under intense pressure from the U.S. government to let the yuan, which has lagged gains in other Asian currencies against the dollar, rise more against the U.S. currency.

''For the United States to cut its huge current account deficit, the U.S. dollar needs to depreciate against other currencies,'' Felman later told Reuters.

China's Vice Finance Minister Li Yong said last week he was quite concerned about global imbalances but criticised major developed countries for not taking more responsibility.

Li said Beijing could not move too fast on currency reform because it needed to create jobs and bolster the fragile banking sector.

Felman said China could choose to let the yuan appreciate against the dollar, ''which would make its imports cheaper and boost consumption.'' In its Asian economic outlook, the IMF said increasing attention has been focused on how to rebalance China's economy away from a heavy dependence on exports in favour of domestic demand as an engine of growth.

China's domestic consumption, as a percentage of gross domestic product, had declined more than 10 percentage points since 1980 to around 40 percent, low in comparison with 57 percent in Japan and 67 percent in India, it said.

''To rebalance growth in China toward greater reliance on consumption will require a combination of macroeconomic policy changes and structural reforms,'' the report said.

The IMF said Chinese officials were aware that reliance on investment and exports as main engines of growth were unsustainable.

''Higher rates of investment run the risk of creating overcapacity, leading to deflationary pressures and non-performing loans in the coming years,'' it said.

REUTERS PV SSC1526