The Group of Seven on Friday night said: 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 countries are increasingly concerned that China is not playing its part in helping to reduce the world’s gaping trade imbalances by maintaining an artificially low exchange rate. With the renminbi quite firmly pegged to the dollar it has depreciated against the euro this year as the dollar has weakened.
Friday night’s statement was a significant strengthening of the G7’s language. Hank Paulson, the US Treasury secretary, told reporters the all G7 members agreed that China must act.
David Dodge, Canada’s outgoing central bank governor, summed up the general mood. We are seeing some adjustment in the US dollar. We need to see some adjustment in Asia,” he said.
But the G7 barely papered over the cracks on other exchange rate issues. After the statement was released on Friday night, Jean Claude Trichet, president of the European Central Bank, said it was very important” that the US reaffirmed its long-standing mantra that a strong dollar is in the US national interest. Christine Lagarde, the French finance minister, also saw great significance in the so-called strong dollar policy. I hope the financial markets will hear this,” she said.
In a separate news conference on Friday, Mr Paulson augmented his comments on a strong dollar with the following qualification: I believe that currency valuations should be determined based on underlying economic fundamentals in a competitive market place,” he said, making it clear that he had no quarrel with the sharp decline in the market price of the dollar this year.
Earlier on Friday, Wu Xiaoling, deputy governor of the People’s Bank of China, again refused to change China’s currency policies until it had managed to reform its financial system. To solely adjust the exchange rate in the absence of restructuring policies will hurt the real economy and global growth,” she said.
The G7 statement added a new commitment for its members to co-operate as appropriate” on currencies. But asked whether the reference in the text to co-operation implied a possibility of coordinated currency intervention, a US Treasury official said, absolutely not”.
Mr Paulson said there was a real affirmation of market determination” of exchange rates at the meeting and he received support from Alistair Darling, the UK chancellor, who told reporters on Friday that markets should resolve” currency valuations, pouring cold water on the idea that the G7 should try to talk up the dollar against European currencies.
The G7 did not respond to record high oil prices but said that expensive energy prices, the global credit squeeze and the weak US housing market would moderate” global economic growth. It added that the ‘functioning of financial markets is improving” but uneven conditions are likely to persist for some time”.
It has asked the Financial Stability Forum, a global advisory body on financial markets, to bring forward regulatory responses in the areas of managing liquidity in banks, the accounting and valuation on complex financial derivatives, the role of credit ratings agencies and the regulation of banks off-balance sheet vehicles.
The G7 held a dinner on Friday night to discuss sovereign wealth funds and said it was important that they operated on the basis of non-discrimination, transparency and predictability. It has asked the International Monetary Fund, the World Bank and the Organisation for Economic Co-operation and Development to examine the issues.
The G7 also issued a strong statement on Iran, commending...