World Bank head sees stronger yuan as no panacea

A stronger yuan would be appropriate but is no substitute for the structural reforms that China needs to boost domestic demand and wean itself off export-led growth, the head of the World Bank said on Wednesday. Speaking at the end of a week-long visit to China, World Bank President Robert Zoellick said the authorities recognised the deep-seated policy shifts required to reduce high savings and spur consumption.
"Appreciation of the renminbi would send a price signal that would reinforce the direction of these structural changes. "So I share the view that the IMF has expressed that it would be appropriate to have an appreciation of the currency. But it's not a panacea. The structural issues are the fundamental issues that have to be addressed," Zoellick told a news conference.
The People's Bank of China keeps a tight grip on the exchange rate of the yuan, also known as the renminbi. The central bank has permitted the yuan to rise more quickly this week against the dollar, but many economists believe it would be worth a lot more if left to market forces. Staff at the International Monetary Fund have estimated the degree of undervaluation at between 5 percent and 27 percent.
Zoellick said he senses from his discussions in Beijing that a critical mass was building in favour of policies that would water down some of the privileges of powerful state-owned groups and do more to help private enterprise, especially small firms. He acknowledged that the changes, such as requiring public-sector firms to pay more dividends to the central government, would not be easy to push through.
"If you've got an advantageous position, people don't like to give it up. But the debate is actively engaged and it certainly hasn't moved in the direction of just maintaining state control," he said. Turning to the world economy, Zoellick described the global recovery as very uncertain. "I suspect that the US economy will have a relatively slow-growth recovery. Unfortunately, unemployment will likely remain relatively high and, while the prospects in Europe have gotten slightly better over the past few weeks, again I think that's a slow-growth picture," he said.