The International Monetary Fund (IMF) said on Tuesday that there was no clear evidence that China's yuan was substantially undervalued, countering claims by US exporters that the currency has been kept artificially low to give Chinese exports an advantage.

In a review of the Chinese economy, the IMF said a currency revaluation would not by itself have a major impact on global current account imbalances, particularly given China's relatively small share in world trade.

It said more flexibility of the yuan, also known as the renminbi, would be in China's own interest. It would allow China more room to pursue an independent monetary policy, help cushion the economy against external shocks and help with adjustments to the structure of the economy, the IMF added.

"Directors considered that China could, in a phased manner, introduce more flexibility to its exchange rate without causing major disruptions to its economy,'' the IMF said.

The timing of such a move should, however, be left to Beijing and its assessment of the market, said Steven Dunaway, senior advisor in the IMF's Asia-Pacific Department.

"We're not advocating a floating of the currency. What we're talking about is some increased movement in the exchange rate,'' Dunaway said during a conference call.

Such movement could take place by widening the band in which the yuan trades, or changing the peg from a single currency to a basket of different currencies, he said.

The fund said loosening the grip of the yuan peg to the US dollar should be carefully planned and sequenced with key changes in the economy.

It said some members of its executive board felt China should take advantage of its strong external position, particularly the current account surplus, to begin initial steps toward greater exchange rate flexibility.

Dunaway said a small first adjustment in the yuan might cause the currency to rise initially before investors began to speculate on the next move. A more significant move should be accompanied by a firm government statement of its intentions, he added.

Dunaway said indicators did not point to a general overheating of the Chinese economy, which grew 9.1 per cent in the third quarter, but more to a chance of overinvestment in some pockets of the economy.

"If it were to continue, we would expect that overinvestment would in time lead to more generalized overheating in the economy,'' he added.

In the review, the IMF said China should beware of imbalances in its economy as the country rapidly becomes a global manufacturing hub with a large money supply and credit growth.

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