G-7 Resumes Lobbying of China to Let Yuan Appreciate (Update1)

Dec. 5 (Bloomberg) -- Finance ministers and central bankers from the world's richest nations resumed their two-year push for China to make its currency more flexible, arguing that steps taken so far fall short of what the world economy needs.

``China's new exchange rate system has operated with too much rigidity,'' U.S. Treasury Secretary John Snow told reporters in London after a weekend meeting of officials from the Group of Seven industrial nations. ``This poses risks to China's economy and the global economy.''

The yuan has appreciated just 0.4 percent since China's July 21 decision to replace a decade-long peg to the U.S. dollar with a basket of currencies and allow its exchange rate to rise 2.1 percent. The country's major trading partners said that's not enough to help cut a record U.S. trade deficit and bolster economic growth in Europe and Japan.

``We believe China needs some time to get accustomed to their new currency regime, but a considerable time has already passed,'' said Japanese Finance Minister Sadakazu Tanigaki in London. ``I expect China to make its currency a little bit more flexible.''

``It's no surprise that the pressure is back on,'' said Lorenzo Codogno, co-chief European economist at Bank of America Corp. in London. ``At the end of the day, China allowed their currency to appreciate, but because they did so only marginally there is disappointment elsewhere.''

G-7 Frustration

The G-7's increased frustration, which came more than two years after it began lobbying China, was reflected in a statement released after the talks.

``Further flexible implementation of China's currency system would improve the functioning and stability of the global economy and the international monetary system,'' it said. When the officials last met in September they granted China some breathing room by calling its new currency regime ``welcome.''

Lawmakers and manufacturers outside of China say an undervalued yuan hands Chinese exporters an advantage, contributing to a record trade deficit in the U.S., slow expansions in Japan and Europe, and job losses in all three.

``This part of the world has to contribute to the solution of global imbalances,'' European Central Bank President Jean- Claude Trichet said. Such disparities, protectionism, high oil prices and ``the possibility of increasing inflationary pressures'' are a threat to a ``solid'' world economy, the G-7 said in its statement.

More to Come?

The pressure on China may intensify. While the U.S. Treasury last week declined to name it a currency manipulator in a semi- annual report, U.S. lawmakers say they may revive efforts to punish China with trade tariffs unless it lets the yuan rise.

Chinese Finance Minister Jin Renqing declined to comment on currencies after meeting his G-7 counterparts.

``We exchanged views on the world economy and finance ministers gave support to the trade negotiations and meeting in Hong Kong,'' Jin told reporters. The World Trade Organization's 149 governments gather in Hong Kong on Dec. 13-18 in the so- called Doha round of trade talks. The round was supposed to have wrapped up a year ago with a global deal to benefit mainly poor nations.

In a bid to advance the WTO talks, the G-7 finance ministers extracted promises from India and Brazil in return for pledges by the European Union and U.S. India agreed to sweeten its offer to cut industrial tariffs in half and Brazil said it's prepared to negotiate on commercial services and ``make further offers'' to reduce its own border duties on manufactured goods.

Important to World Economy

Brazil and India have led a group of about 20 developing countries demanding that the European Union and U.S. scale back spending that supports farm exports before they consider further opening their markets to goods such as machinery or insurance.

The U.S. has already volunteered to eliminate most agricultural subsidies if Europe does the same. The EU's counter offer to cut support up to 60 percent has been criticized by U.S. officials for excluding some ``sensitive'' products and not matching U.S. tariff cuts.

``There is obviously concern among the G-7 about whether the Hong Kong talks can yield sufficient progress in terms of the WTO,'' Canadian Finance Minister Ralph Goodale said. ``It's important for the world economy.''

Meeting in Geneva on the same day as the G-7, trade ministers from the U.S., EU, Brazil, India, Japan and Australia said they may be able to resolve differences over agricultural support by March 1.

The G-7, which accounts for two-thirds of the world economy, is composed of the U.S., Japan, Germany, U.K., France, Canada and Italy. Its finance ministers next plan to convene in early 2006 in Russia.

Defusing Criticism

The group's central bankers sought to defuse criticism from finance ministers that they risk imperiling economic growth by raising interest rates.

ECB council members, including Trichet, said their decision last week to increase the benchmark interest rate by a quarter point to 2.25 percent won't hurt the economy of the dozen nations which share the euro and that they're not planning a series of increases. Bank of Japan Deputy Governor Toshiro Muto said its rates would also stay low.

Finance ministers welcomed the commitment by central bankers to preserve economic growth. France's Thierry Breton said it was ``very important that the ECB has indicated it's not the start of a cycle which could have tough consequences for growth.'' Breton said Nov. 29 higher rates were not ``legitimate to fight inflation which doesn't exist.''

The London talks marked the 55th and final G-7 meeting for Federal Reserve Chairman Alan Greenspan, who will retire on Jan. 31 after almost 19 years at the U.S. central bank.

``Sadly, as we take forward actions over the coming months, we will have to do so without one man who has had a bigger influence over the global economy in recent years than any other,'' said U.K. Chancellor of the Exchequer Gordon Brown.

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Riad Hamade at rhamade@bloomberg.net.