A stronger Chinese yuan is part of the reforms that Beijing needs to implement to increase domestic consumption and help ease global imbalances, the head of the International Monetary Fund said on Monday.
IMF managing director Dominique Strauss-Kahn said the countries at the heart of global imbalances needed to take various measures to ease them.
In the case of China, that means an increasing emphasis on domestic demand, especially private consumption, Strauss-Kahn said in remarks prepared for a financial conference in Beijing.
A stronger currency is part of the package of necessary reforms, he said. Allowing the renminbi (yuan) and other Asian currencies to rise would help increase the purchasing power of households, raise the labor share of income, and provide the right incentives to reorient investment.
His remarks come as U.S. President Barack Obama is in Shanghai on the first leg of a four-day visit that will grapple with economic imbalances and the future of the yuan.
Strauss-Kahn noted that Chinese authorities were already taking steps to boost household consumption, including health care reforms.
But more can be done to secure a lasting, structural shift toward consumption, by expanding the scope of social policies, moving ahead on financial sector reform, and undertaking corporate governance reforms, he said.
Conversely, countries with large current account deficits need to increase savings, and for many of them, including the United States, fiscal consolidation must take priority for them, he said.
Overall, the global economy appears to have turned a corner, Strauss-Kahn said, but the biggest risk to the outlook is a premature withdrawal of policy stimulus.
While it is prudent to plan for so-called 'exit strategies,' policy makers should keep supportive measures in place until a recovery is firmly established, and particularly until conditions are in place for unemployment to decline, he said.
Despite problems with the current international monetary system, it is still working reasonably well, he said, adding that he still expects the dollar to remain the principle reserve currency for some time.
...Near-term concerns about the dollar can be eased with appropriate policy actions from the U.S. authorities, he said.
The IMF still needs considerably greater resources to serve as a dependable global lender of last resort, Strauss-Kahn added.
Regional reserve pools such as the Chiang Mai Initiative in Asia hold considerable promise to help complement IMF financing, he said, adding that authorities should explore more ways to increase global liquidity more generally.
(Reporting by Jason Subler; Editing by Jacqueline Wong)