China is not yet allowing market forces to freely determine the value of its currency following the revaluation of the yuan currency last year, International Monetary Fund Managing Director Rodrigo Rato said on Thursday.
"It should move in that direction and cannot be done one day to the next," Rato said in an interview with Reuters. "It should probably increase that movement," it added.
He said the revaluation of the yuan was a good step for China and would help to buffer its economy from external shocks.
Beijing's exchange rate policy has been the focus of pressure by the United States, which charges that the yuan is unfairly undervalued by as much as 40 percent.
China has kept the yuan on a tight leash since ending its peg with dollar in July and letting it float within managed bands against a basket of currencies.
IMF chief economist Raghuram Rajan told Reuters on Wednesday that Beijing's concern about allowing the yuan to rise faster against the dollar was partly because the currency had gained some 8 to 9 percent over other currencies.
Even though the gains against the dollar were more modest, at about 3 percent, the dollar had also strengthened against currencies of China's other trading partners, Rajan said. Rato said the implementation of China's exchange rate policy "has not completely evolved."
"We see the need for that implementation and for letting that system work," he said. "To do that we have to recognise the Chinese are making important changes in the foreign exchange system and allowing market forces to determine prices and play a stronger role in financial and monetary markets, but that needs to be continued and increased," he added.
Rato said increasing domestic consumption is the biggest challenge facing Chinese policy-makers, who also need to transform the banking system, make state-owned companies more efficient and create more comprehensive safety nets.
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