China's yuan remains undervalued, but increased currency flexibility is just part of a range of policies needed for rebalancing in Asia, the International Monetary Fund (IMF) said on Thursday.
China is under increasing pressure to let its currency, also known as the renminbi, start to strengthen again after being virtually pegged to the dollar since mid-2008 as the world's third-largest economy has sought to weather the global downturn.
Although significant uncertainty surrounds any particular point estimate, a range of indicators suggests that the renminbi remains undervalued, the IMF said in a regional economic outlook report, released in Shanghai.
For Asia as a whole, private domestic demand appears sustainable in the near term even as some governments withdraw policy stimulus, but rebalancing will be important over the medium term in order to make domestic demand a greater driver of growth, it said.
Simultaneous implementation across the region of a package of measures, including a combination of reforms in product and labor markets, fiscal and exchange rate policies, has the potential to bring about a successful shift in the pattern of growth, the IMF said in the report.
When implemented on a standalone basis by individual economies, including China, rebalancing efforts will help increase growth in Asia but will not be sufficient to fill the void created by weaker external demand from advanced economies, it said.
Faster-than-expected appreciation of the yuan would only have limited additional positive spillover effects for China's trading partners, including the United States, it said.
The IMF echoed its World Economic Outlook released last week in saying that withdrawing accommodative policy stances was becoming an option in several economies, but that the fragility of recovery in advanced economies suggested there were risks from moving too quickly in that direction.
It also repeated its warning that countries that tighten policy should weigh the risks of higher interest rates attracting more capital inflows, potentially leading to undesired increases in asset prices and vulnerability to rapid reversals.
(Reporting by Jason Subler; Editing by Ken Wills)