China should allow a more flexible exchange rate for its currency to help cool off an investment boom, the head of the International Monetary Fund said Friday.
After meetings with China's premier and the central bank and finance ministry chiefs, IMF Managing Director Rodrigo de Rato said that they agreed that China needs to reduce its reliance on investment and exports to drive the economy and instead boost consumer demand.
"We believe a more flexible exchange rate will allow fuller play of monetary policy and will help this rebalancing of demand," de Rato said at a news conference.
De Rato said that Beijing should move ahead with plans to give market forces a greater role in setting the exchange rate.
China pegged its currency, the yuan, to the U.S. dollar for over a decade, and since controls were loosened 18 months ago, the yuan has slowly risen 6 percent against the dollar. China is grappling with a surge in investment, a soaring trade surplus and swollen foreign exchange reserves.
With so much money sloshing through the economy, the government is worried the investment binge could turn sour, spawning a wave of bad debts. Another potential ill-effect, inflation, is already ticking up, with the government reporting Thursday that consumer prices rose 2.8 percent last month, compared with a year ago.
De Rato sees no risk of a sharp increase in prices this year. However, he said "the high levels of credit and high levels of investment could cause a risk in China."