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Last Updated: Monday, 12 September 2005, 23:00 GMT 00:00 UK
IMF urges China currency reform
Young girl checks her yuan note against a bigger version in Beijing
China's currency needs to be more flexible internationally
The International Monetary Fund has said that China's economy needs more currency flexibility for strong growth.

China allowed its currency to float for the first time in July, but has since allowed only a limited movement.

However, IMF directors disagreed as to how fast China should allow the currency to fluctuate with the consensus calling for measured change.

The IMF said that China's economy would grow by 9% this year, higher than the 8.5% it had previously forecast.

China's remarkable economic growth faces several risks, the IMF said in its annual assessment of the Chinese economy.

Investment risk

"The overall economy looks very strong. But there's a few potential risks there, the key one being with regard to investment," said the IMF's mission chief for China, Steven Dunaway.

Chinese men on bicycles
China's strong growth could lead to difficulties

He said that investment decisions were being made "willy-nilly," with a booming property market not supported by investment in transport and electricity generation.

China also needs to implement more structural reform, particularly in the financial sector, government finances and the labour market, to underpin its solid prospects, the IMF report said.

The IMF has long been worried about the stability of the Chinese banking system, its high level of bad debts, and the lack of transparency.

Trade fears

China's rapid growth and huge export surpluses have also stirred protectionist pressures in the US and Europe, particularly in regard to textile imports.

The IMF warned that unless currency adjustments curb the rate of export growth, China could be vulnerable to further restrictions. . "The risks to Chinese growth going forward of some of these protectionist safeguards might eat into growth and the rate of export growth," Mr Dunaway said.

China revalued its currency by 2.1% in July, but only allowed a small daily fluctuation in the exchange rate since then.

Strong growth

Recent estimates show that China's economy has grown more quickly than expected in the first six months of 2005 despite efforts by the government to put the brakes on.

The National Bureau of Statistics said the economy grew 9.5% from a year earlier in the first half, more than the 9.3% figure expected by analysts.

Exports and investment in construction and factory equipment drove growth.

In the six months through June, investment in fixed assets climbed by 25% to 3.29 trillion yuan. The statistical office called the rebound in investment "unreasonable".

China has tried to rein in its economy amid fears that it will overheat, and has introduced measures such as imposing stricter lending requirements on banks and capping construction projects by regional governments.

According to the Bureau of Statistics, China's average annual GDP growth rate over the past 27 years has been about 9.4%.

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