MercoPress. South Atlantic News Agency

IMF suggests flexible exchange rate for China.

In its latest report on the Chinese booming economy the International Monetary Fund warns that a “soft landing is not yet assured” and recommends the quick introduction of a more flexible exchange rate. The Yuan is pegged to the US Dollar and has been criticized for unfairly cheapening Chinese exports.

IMF praised China's efforts in curbing foreign investment and in lowering inflation but recommends that "in view of the present favourable circumstances, it would be advantageous for China to make a move towards initial exchange rate flexibility without delay".

Inflation in China has been pushed by billions of foreign investment, bank lending and shortages of farm produce.

IMF forecasts China will expand 9% in 2004 and begin cooling in 2005 with 7, 5%.

Beijing has imposed severe restrictions on the reckless expansion of the banking system which have helped contain credit growth particularly in saturated sectors such as steel and real estate that could result in a damaging upsurge of inflation.

But IMF warns that "if administrative controls become less effective, credit growth could take off again".

Many economists believe that Chinese financial institutions need sweeping reforms to make credit checking more effective and have a framework of fluid market driven controls.

In spite of the fact that Chinese banks are stuffed with bad loans to government owned companies there seems to be no shortage of "excess liquidity" to keep lending. Apparently the Chinese are thrifty savers with one of highest household savings rate in the world.

IMF warns that banking reform is of particular importance to ensure future financial stability and sound competitive banks".