Several directors of the International Monetary Fund's Executive Board believe the yuan is undervalued, but an annual report on China made no mention of the exchange rate being substantially below value.

Beijing has bridled at the fund's long-standing description of the yuan as being substantially undervalued.

That was the phrase used in the annual report released in July 2009, and IMF staffers who prepared this year's health check came to the same view, according to people who saw a draft of their conclusions.

However, the Article 4 review approved by the board on Monday reveals a difference of opinion, with some directors judging that a structural shift in China's balance of payments is already under way thanks to past steps to boost consumption.

Several Directors agreed that the exchange rate is undervalued. However, a number of others disagreed with the staff's assessment of the level of the exchange rate, noting that it is based on uncertain forecasts of the current account surplus, the report said.

The board commended China for dropping the yuan's 23-month-old peg to the dollar and reverting to a managed float on June 19 -- three days after IMF Managing Director Dominique Strauss-Kahn publicly called the yuan substantially undervalued.

The yuan has risen a further 0.7 percent against the dollar since it was depegged. Many U.S. lawmakers argue that China is unfairly holding down the exchange rate to favor its exporters and are threatening legislative action unless Beijing lets it rise more swiftly.


The IMF said the scrapping of the dollar peg would increase the central bank's flexibility to tighten monetary conditions.

While measuring its words, the IMF said a stronger yuan, also known as the renminbi (RMB), would also be good for the rebalancing of China's economy -- and hence of the global economy.

Directors stressed that, over time, a stronger renminbi would help facilitate a shift from exports and investment to private consumption as the principal driver of economic growth, the report said.

The board said it supported a gradual phase-out of China's massive fiscal stimulus in 2011, provided the current trajectory for the economy -- the IMF expects continued robust growth with benign inflation -- is maintained.

The policy challenge now is to calibrate the pace and sequencing of exit from the fiscal stimulus and credit expansion, while making further progress in reorienting the economy toward private consumption, the report said.

Directors also backed China's monetary stance. The reduction in broad money growth that the central bank is targeting strikes a good balance between the need to provide continued support to the economy with the desire to safeguard the health of bank balance sheets.

They encouraged the authorities to rely more on market-based instruments to achieve this goal, including via open market operations, higher interest rates, and reserve requirements, the report said.

China has raised the proportion of deposits that banks must hold in reserve three times this year. But, unlike many other Asian countries, including India on Tuesday, China has not raised interest rates.

(Reporting by Alan Wheatley)