China needs to raise interest rates and let the yuan rise to help rein in rapid credit and investment growth, the International Monetary Fund (IMF) said today.
Charles Collyns, deputy director of the IMF's research department, said China needed to rely more on monetary policy 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," Mr Collyns said. His comments amounted to a restatement of the fund's long-standing policy advice to China.
The yuan has risen 5 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 that if it did not have to worry about holding down the yuan, the central bank would be able to lift interest rates to a level more appropriate for an economy that has grown by 10 per cent or more in real terms for the past four years.
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.