G7 Wants Faster Yuan Rise, Pledges To Stay Open To Trade

WASHINGTON -(Dow Jones)- Group of Seven nation finance ministers and central bankers Friday expressed their dissatisfaction with the pace of currency appreciation in China, but said remaining open to foreign trade and investment is essential to supporting economic growth. G7 ministers, meeting ahead of the International Monetary Fund and World Bank annual meetings, said recent financial market turbulence, high oil prices and weakness in the U.S. housing sector would probably moderate global economic growth. Ministers pledged to resist protectionism, keep inflation under control, and as in years past, promised to pursue economic reforms and budget discipline to make global economic growth more sustainable. "We welcome China's decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we stress its need to allow an accelerated appreciation of its effective exchange rate," the G7 ministers said in a statement following their meeting. The G7 also reiterated its standard position that currency values should reflect economic fundamentals and that excess volatility is undesirable. "We continue to monitor exchange markets closely, and cooperate as appropriate," the G7 said, a repeat from its statement in April. Since the fall of 2003, G7 finance ministers have called on China, with increasingly sharper language, to allow market forces greater influence on the value of its currency, the yuan. Friday's statement marks a shift from calls for more yuan flexibility, to a plainer demand for more appreciation. The yuan has been appreciating steadily. It is up a little over 10% against the dollar since China abandoned its currency peg in July 2005. But China's trade surpluses have continued to mount while foreign exchange reserves, accumulated through foreign exchange market intervention, are soaring. Frustration with the slow pace of reform is growing in the U.S. and in Europe, where euro appreciation is making exporters less competitive. Canada, too, is feeling the pinch from a stronger currency on its exports. "We face challenges adjusting to the rise of the Canadian dollar, which has borne the brunt of the U.S. dollar adjustment," Finance Minister Jim Flaherty said in a press conference. He figures Canada has taken about a third of the burden as the U.S. trade deficits have moderated, while the euro area has taken another third. Canada and European governments want China and the rest of Asia to absorb more of the hit to exports as U.S. demand slows. However, Chinese central bank officials, speaking at a conference on the sidelines of the meetings, said they believe structural economic reforms will have a greater impact on Chinese trade surpluses than currency appreciation. "China's trade surplus was mainly a result of imbalanced domestic economic structure, as well as international labor allocation and the international monetary system," People's Bank of China Deputy Governor Wu Xiaoling said. Tight credit and financial market turmoil is compounding the slowdown in growth in the U.S. and Europe, creating still more pressure by domestic industries for protection from imports. The G7 ministers said trade and cross-border investment promote economic prosperity. They said the global economy can benefit from growing investment by sovereign wealth funds - government-owned pools of capital, some of which have swelled with proceeds of foreign currency market intervention. And the ministers again called for rapid completion of the long-stalled Doha Round of trade negotiations. Later Friday, G7 ministers planned a dinner with representatives of countries holding the largest sovereign wealth funds, several of which have assets worth more than $100 billion. Participants invited to the dinner included China, South Korea, Kuwait, Norway, Russia, Saudi Arabia, Singapore and the United Arab Emirates. The G7 is worried the growing clout of these investment funds could distort financial markets, should fund managers make investment decisions for political or strategic reasons rather than to maximize profits. U.K. Chancellor of the Exchequer Alistair Darling said that sovereign fund investment "needs to be a two-way process and crucially, companies and sovereign wealth funds have to act on a commercial basis not on any other basis." Ministers are also concerned the prospect of foreign funds making more equity investments in companies could spark protectionism. "We see merit in identifying best practices for sovereign wealth funds in such areas as institutional structure, risk management, transparency, and accountability," the G7 said. The G7 said it was examining the causes of the credit market crisis of late August and September, and that it discussed a report from the Financial Stability Forum. Ministers also discussed reform of the IMF and the World Bank, saying the G7 would continue to work toward a package of reforms to increase representation for developing countries to better reflect changes in the global economy. That goal is a ways off since outgoing IMF Managing Director Rodrigo Rato failed to secure agreement on key elements of a deal before stepping down at the end of the month. G7 aides said that incoming managing director Dominique Strauss-Kahn will essentially have to start from scratch in developing an agreement to overhaul IMF voting shares. The G7 also talked about the need for a coordinated approach to energy security and climate change and discussed ways to increase investments in clean-energy technology. However, ministers made only passing reference in their communique to oil prices, despite crude oil futures price tiptoeing above $90 per barrel this week. Speaking to reporters, European Central Bank governing board member Axel Weber said Friday high oil prices are "an upside risk for inflation development and it is a downward risk for economic development." G7 officials noted that global growth has held up through steady increases in crude oil prices through the last several years.