G7 gives China nod on yuan as Europe keeps up pressure

G7 gives China nod on yuan as Europe keeps up pressure
Sat Feb 9, 2008 3:01pm GMT

TOKYO (Reuters) - Group of Seven finance ministers and central bankers gave China a slight nod on its efforts to unshackle the yuan and allow more appreciation, even as European officials kept up their pressure on Beijing for more action.

The final communique from the G7's Tokyo meeting on Saturday said "we encourage" the need for greater appreciation of the yuan, a slight softening from "we stress" in the communique from the last gathering in October.

The tweak in language comes as China has the let the yuan rise at a quicker pace against the dollar and the euro, especially after European officials made a visit to Beijing late last year and pressed the case for a broader rise in the Chinese currency.

But Europe also remained steadfast in its calls for China to keep allowing the yuan to strengthen while expressing worries about the single currency's elevated level against the dollar and other major currencies.

European Central Bank President Jean-Claude Trichet said after the meeting that the message on the yuan is very clear: "We welcome and we encourage it to accelerate."

ECB Governing Council member Axel Weber said China should allow currency flexibility not just against the dollar but also against other major currencies.

European Union Monetary Affairs Commissioner Joaquin Almunia said the euro's broad trade-weighted value "has reached a level we can consider is above equilibrium level."

The yuan has been a hot-button issue for G7 powers over the past years who believe Beijing's tight management of the currency keeps it unfairly weak, giving China a trade advantage while contributing to global economic imbalances.

Those imbalances in China have been highlighted by its burgeoning trade surplus with the United States and Europe, as well as its swelling foreign reserves that at more than $1.5 trillion (770 billion pounds) are by far the biggest in the world.

But the yuan faded from the focus of this meeting as a response to the financial market turmoil and potential for a broadening global economic slowdown from the U.S. housing market's collapse took centre stage.

In his post-meeting press conference, U.S. Treasury Secretary Henry Paulson didn't field a single question on currencies.

The G7's stance on China and exchange rates has been an evolving one. Initially, the G7 statement referred to countries with large trade surpluses, such as those in Asia, allowing greater exchange rate flexibility.

In July 2005, China finally dropped the yuan's peg to the dollar and allowed it to move in a tight band against a basket of currencies.

The yuan's glacial rise against the dollar at the beginning gradually accelerated, and the currency climbed 3.4 percent in 2006 and then nearly 7 percent last year.

The G7 acknowledged these steps, but in 2006 the G7 took investors and analysts by surprise by attaching an annex to its communique on global imbalances.



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