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G-7 presses China on yuan flexibility, wants hedge funds watched

Section: Daily Dispatches

By Matt Moore
Associated Press
via Yahoo News
Saturday, February 10, 2007

ESSEN, Germany -- China came under renewed pressure Saturday from the Group of Seven to make its yuan more flexible, while Japan emerged from the meeting without a public scolding, despite criticism beforehand that its weakened yen was hurting other economies.

The finance ministers and central bankers from the world's wealthiest nations also called for more vigilance on the rising power of hedge funds, but favored a conciliatory approach toward the industry. They also said major developed economies were showing solid growth, and that added that energy efficiency and diversification -- particularly renewable forms -- remained a priority.

China's tight control of its currency and huge trade surpluses have raised concerns in the West. The G-7 lauded China's commitment to "rebalance growth," but called on the country to let the yuan have greater flexibility in responding to market movements.

"Over the last two days, we discussed ways to keep the global economy growing in a balanced way, including stimulating domestic demand in Japan and Europe and pressing for greater exchange-rate flexibility in China," U.S. Treasury Secretary Henry Paulson said.

When the G-7 formed, comprising Britain, Canada, France, Germany, Italy, Japan, and the United States, China was an insular, closed communist state. In the three decades since, China's growth has exploded as it embraces elements of capitalism.

China has amassed more than $1 trillion in foreign currency reserves as it buys dollars to control the value of the yuan -- a practice G-7 finance ministers have criticized in the past.

Ahead of the meeting, Japan had faced complaints from the euro zone that its weakening yen was giving the country an unfair competitive edge, making Japanese goods cheaper than those in the EU.

But Japan was left out the G-7's declaration on foreign currency issues, while China was mentioned by name.

"In emerging economies with large and growing current account surpluses, especially China, it is desirable that their effective exchange rates move so that necessary adjustments will occur," the ministers said.

Japan was defended by its G-7 partners, including euro-zone politicians.

German Finance Minister Peer Steinbrueck said Japan made it clear during the talks "that the Japanese economy is on a recovery path and that exchange rates should reflect this."

Luxembourg Prime Minister Jean-Claude Juncker, who leads the informal group of finance ministers from the 13 countries that use the euro, said Japan's economic recovery was solid and that his "Japanese colleagues did express the feeling that the exchange rate should express the economic fundamentals."

"Japan is moving out of long and difficult deflationary circumstances," International Monetary Fund Managing Director Rodrigo de Rato said Saturday. "The best thing Japan can do for the global economy is to keep growing."

Germany has made dealing with hedge funds a priority its EU and G-8 presidencies this year given their rising influence over companies. Finance Minister Peer Steinbrueck has said the country wants G-7 nations and EU countries to try to pre-empt any risks that speculative hedge funds may pose to the global financial system.

The high-risk, largely unregulated and secretive investment pools have traditionally been the investment domain of the wealthy but have become popular with pension funds, life insurance companies and small investors looking for high returns.

The G-7 ministers said the group would talk with fund operators and the private sector and ask the Financial Stability Forum, a gathering of financial ministers, regulators, institutions and others, to reassess the impact of the funds on global markets.

Looking at energy concerns, the G-7 members said that global inflationary pressures have lessened, in part because of lower energy prices, but said they would continue to keep an eye on consumer prices.

They also said that finding, and using, more energy efficient methods, along with diversifying sources, had become an increasing concern.

The G-7 members were hopeful the Doha round of free trade talks would resume.

"We remain committed to resisting protectionist sentiment and fully support the relaunch of the Doha trade negotiations," they said in the statement.

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