from Follow the Money

The IMF can do better

September 12, 2006

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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It is pretty clear by now that China’s trade surplus is going to be in the $150b range, and its current account surplus is going to be well above $200b  The IMF does itself no favors by releasing a forecast that puts China’s 2006 current account surplus at around $180b.  The World Bank now forecasts $220b.  Some at the IIE are thinking $250b.   Remember, a trillion in reserves generates a decent income stream …

The IMF isn’t going to be at the forefront of addressing first-world imbalances -- actually first-world deficits financed by massive capital outflows from the emerging world -- unless it is willing to tell a country like China that its efforts to “rebalance” its domestic growth away from exports rather clearly aren’t working.   

And following the dollar down (apart from days like today) isn’t helping.

The IMF board bears some of the blame.  The portion of the IMF’s statement that reflects the board discussion on China’s exchange rate was rather wishy-washy.   Many executive directors need to get a bit more courage.

But the IMF staff can raise their game a bit too.   The portion of the statement that comes straight from the staff wasn’t a work of high art. 

The dated current account forecast is one example.  Dated forecasts stemming from long lag between the original forecast, the board discussion and publication don’t increase the IMF’s credibility.

Another example: the IMF rather clearly didn’t adjust China’s reserve data for valuation changes.  That is why they report that “hot money” flowed out of China in 2005. 

“Reserves increased by $208 billion in 2005, broadly in line with reserves accumulation in 2004, and by a further $76 billion in 2006, bringing the level at end-April to about $895 billion. Net FDI inflows reached $68 billion in 2005 compared to $53 billion in 2004. Over the period, non-FDI capital flows sharply reversed to an outflow of $22 billion in 2005 (including errors and omissions), compared to an inflow of $85 billion in 2004.”

It actually rather clear that valuation changes (large gains in 2004, large losses in 2005) explain the big swing in non-FDI capital flows.   

Why do I say it is rather clear?  Look at Eswar Prasad and Shang-Jin Wei’s paper.  They explain that valuation gains account for a large share of the hot money inflows in 2004.  And those valuation gains turned into valuation losses in 2005.  I would think that the Asia-Pacific Division of IMF would start using the Prasad/ Wei methodology – Prasad is a former mission chief, and Prasad and Wei now work in the IMF’s research department -- to provide an accurate gauge of capital flows in and out of China. 

OK, the IMF would need a disclaimer indicating that its estimates for valuation changes were based on estimates of the currency composition of China’s reserves.  But finding a decent estimate in the public domain isn’t all that hard any more.

 Update: Via Market News International,I see that the Chinese themselves now recognize that their 2006 current account surplus will be much larger than its 2005 surplus ...

"China's monthly trade surpluses could top 20 bln usd by the end of the year said the Ministry of Commerce. Ministry spokesman Chong Quansaid the surplus was a "major problem" for China's economy and that ithad intensified trade frictions with other countries."

The IMF should take note.  Unless Chinese policies really change, it is hard to forecast China's rising current account surplus away.   Lower oil prices will only increase China's surplus. 

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