FINANCE ministers and central bank governors from the Group of Seven have used the strongest words yet to raise the pressure on China to allow its currency to appreciate.
Representatives of the world’s top economic powers said on Friday: "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, by maintaining an artificially low exchange rate, is not playing its part in helping to reduce the world’s gaping trade imbalances.
With the yuan firmly pegged to the US dollar, it has depreciated against the euro this year as the greenback has weakened.
US Treasury Secretary Hank Paulson said that all G7 members agreed China must act.
Canada’s outgoing central bank governor, David Dodge, summed up the general mood: "We are seeing some adjustment in the US dollar. We need to see some adjustment in Asia."
But the G7 barely papered over the cracks on other exchange rate issues.
The president of the European Central Bank, Jean Claude Trichet, said it was "very important" that the US reaffirmed its long-standing mantra that a strong US dollar was in the US national interest.
French Finance Minister Christine Lagarde also saw great significance in the "strong dollar" policy. "I hope the financial markets will hear this," she said.
Mr Paulson augmented his comments on a strong US dollar with the following qualification.
"I believe that currency valuations should be determined based on underlying economic fundamentals in a competitive marketplace," he said, making it clear that he had no quarrel with the sharp decline in the market price of the US dollar this year.
Earlier on Friday, the deputy governor of the People’s Bank of China, Wu Xiaoling, 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 co-ordinated 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 British Chancellor Alistair Darling, who said that "markets should resolve" currency valuations, pouring cold water on the idea that the G7 should try to talk up the US dollar against European currencies.
The G7 did not respond to record high oil prices but said that expensive energy, 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 the Financial Action Taskforce, a watchdog linked to the OECD in Paris, for "taking steps to protect the international financial system from the various money laundering and terrorist financing risks related to Iran".
It said there were many risks of "illicit finance" associated with Iran and added that "financial institutions are advised to take into account these risks".
