September 22, 2003	Monday	Rajab 24, 1424

DUBAI: This weekend’s G7 meeting will reverberate through currency markets, but if it earns a place in the financial history books it will be for another reason: China’s arrival at the top table of economic policy-making.

A call for Asia to let its currencies float higher to help smooth out global economic imbalances was the highlight of a Saturday communique by the Group of Seven leading industrial nations and could send the Japanese yen shooting higher.

But any shock to the yen will fade.

China’s emergence in Dubai, without fanfare or fuss, as a direct dialogue partner for the G7 will not.

Officials said landmark talks, prior to the G7 meeting, at deputy finance minister and central bank governor level were likely to become a regular occurrence, reflecting the growing clout of an economy that is already the world’s sixth-largest.

A Japanese official said there were no plans for now to raise the status of the discussions to ministerial level.

But, asked whether the informal exchanges could lead to an expansion of the G7, the official said: “You could interpret it that way... the G7 is comprised of nations that affect the global economy. If that process changes, it is natural for the participants to change. A natural process is occurring.”

A high-ranking official from another G7 country dismissed a suggestion that China could join the club as nonsense at this stage but said the big economic powers were keen to rope Beijing informally into deliberations on collective currency management.

“It’s a start, the start of a process,” the official said.

The G7 is made up of the United States, Japan, Britain, France, Germany, Italy and Canada. Russia attends parts of the finance ministers’ talks but is not a fully fledged member.

ANCHOR AWAY?: On the substance of the Dubai meeting, China swiftly rebuffed the G7’s call for more flexibility in exchange rates based on market mechanisms — a thinly veiled plea for Beijing to widen the tight band in which it has pinned the yuan, or renminbi, against the dollar for the past eight years.

Li Ruogu, deputy governor of the People’s Bank of China, the central bank, said a steady currency was a valuable anchor for a country struggling with high unemployment, a mountain of bad bank loans and other intractable economic problems.

However, Li carefully left open the door to a change in policy that some economists believe is only a matter of time given the huge capital inflows that are making it hard for Beijing to maintain the yuan’s virtual peg of 8.28 per dollar.

“A relatively stable renminbi exchange rate is not only beneficial to us, it’s beneficial to the neighbouring economies and it’s beneficial to the whole world,” Li told a meeting of the Institute of International Finance, a banking lobby group.

“But having said that, it doesn’t mean we will stick to the current scheme. We have already promised to continuously reform and reach a more flexible exchange rate and to gradually liberalise the capital account. That’s our goal,” he said.

China argues that prematurely floating the yuan or removing capital controls could spell disaster for its still-rudimentary financial system. For that reason, Li said he could not provide a timetable for liberalization.

But in what some analysts took as a sign of a greater readiness to consider change, Li added: “We want to do it as quickly as possible.”

TO REVALUE OR NOT?: The main pressure for a stronger yuan comes from Washington.

With an election less than 14 months away, US President George W. Bush is deluged by complaints from American manufacturers that China is gaining an unfair edge in world markets by keeping its currency undervalued.

Li rejected that argument, pointing out that China was running big trade deficits with most of its Asian neighbours and that its overall surplus was shrinking rapidly.

Nicholas Lardy, an authority on the Chinese economy with the Institute for International Economics in Washington, said he favoured a 20 per cent one-off revaluation of the yuan. The currency should then be re-pegged against a basket of currencies — not just the dollar — and allowed to trade in a wider band.

Lardy said he did not favour such a move because of its trade impact, which he estimated would cut China’s $103 billion trade surplus with the United States by only $10 billion.

Rather, a revaluation was needed to halt a flood of hot money into China which was fuelling a “reckless” credit boom that would generate a huge new pile of sour loans.

Ironically, that would delay the clean-up of China’s banks that is a precondition of the capital account liberalization and currency flotation that the G7 has pushed for in Dubai.

“We’re going to find that this period of time — the last three or four quarters — is a substantial setback to the creation of a commercially sound banking system,” Lardy said.—Reuters