WASHINGTON, Oct 17: The International Monetary Fund said on Wednesday that further “upward flexibility” of the Chinese currency and other exchange rate reforms were needed to help unwind global financial imbalances.

“Further upward flexibility of the renminbi, along with measures to reform the exchange rate regime and boost consumption, would also contribute to a necessary rebalancing of demand and to an orderly unwinding of global imbalances,” the IMF said in its World Economic Outlook.

“Together with reduced incentives for investment in the export sector, this would contribute to a narrowing of the very large current account surplus,” it said.

A more flexible exchange rate policy in China would boost purchasing power, stimulate consumption and give monetary authorities more room to focus on slowing lending and investment growth, the IMF said.

“In China, the large increase in reserves has been only partially sterilised and has added to already substantial liquidity in the banking system, threatening to underpin a further surge in lending and investment growth,” it said.

The Chinese renminbi has gained a further 7.8 per cent against the dollar since it was re-valued by 2.1 per cent in July 2005 and cut free from a dollar peg to float within tightly managed bands.

But the United States and other trade partners say the currency remains far too cheap, given China’s record $1.434 trillion stockpile of foreign exchange reserves.

Asian countries could turn to fiscal expenditure restraint to help manage large capital inflows, the IMF said.

“This is particularly the case in countries such as India and Pakistan, where further consolidation is still needed despite recent progress in reducing government deficits and debt levels,” it said.

IMF growth projections have been revised slightly downward since the July World Economic Outlook, with the regional economy now expected to expand by 9.2 per cent this year and 8.3 per cent in 2008.

Growth in China is forecast to be 11.5 per cent in 2007, and 10 per cent next year, while Indian growth is likely to be 8.9 per cent this year and 8.4 per cent in 2008, the IMF said.

“Slower demand for Asian exports, and electronic goods in particular, and the possibility of further global financial market turbulence are particular downside concerns,” it said.

The IMF warned that following a liberalisation of controls, “corporates in some countries have increased their foreign currency borrowing, raising their exposure to any future exchange rate correction.” —Reuters