China lets in a little more light

China, having surprised the world 10 days ago with its first interest rate rise in nine years, took another unusual step last week by publishing for the first time the annual report on its economy by the International Monetary Fund.

This appears to be another small step in China's integration into the world economy and a welcome improvement in its transparency.

Although discussions between the Chinese authorities and the IMF were concluded in May and written up in July, any illumination of the thinking at the highest levels in China is bound to attract interest.

There were several points of interest in the report, not least of which was the conclusion that the Chinese authorities were reluctant to revalue the renminbi, which is artificially pegged at 8.28 to the dollar to boost exports.

The IMF said China, while agreeing in principle with the IMF that exchange rate liberalisation was desirable, was concerned that a small initial move of the currency could exacerbate capital flows and drive up unemployment.

The documents also revealed that the IMF may, in part at least, be responsible for the rate rise, which took the country's official deposit and lending rates up 0.27% to 5.53%. The IMF had been concerned that other measures taken by the Chinese to cool their sizzling economy had not been effective enough.

"To ensure that economic growth slows to a more sustainable pace, a further tightening of monetary policy would appear to be needed," it said .

The Chinese government estimates that its economy grew at an annual rate of about 9% in the third quarter of the year, down marginally from the 10% seen in the first quarter but still far more rapid than any economy in the developed world.

China is likely to overtake Britain in 2005 to become the world's fourth largest economy. Its massive purchasing of raw materials has pushed the prices of many commodities, including oil, to record highs this year.

Both the IMF and China were clearly agreed that measures were needed, and had been taken, to prevent the economy overheating. The IMF concluded that China "has favourable medium-term prospects for maintaining strong growth and continuing its integration into the global economy".

The IMF also urged China to reform its troubled banking sector, use more fiscal measures to calm the economy and liberalise its capital account. The fact that China agreed to the report's publication showed it probably does not disagree with the policy recommendations.