U.S. wants China to float currency
LONDON (AP) – The United States will push China to untie its currency from the dollar as soon as possible, a top U.S. Treasury Department official said Friday ahead of the Group of Seven finance ministers meeting. “Our discussions with China have been good and candid,” said John Taylor, the U.S. Treasury Department’s undersecretary for international affairs. “We know they are taking steps toward a more flexible exchange rate.”
Taylor, who is standing in for U.S. Treasury Secretary John Snow, was to meet with Chinese economic policy-makers Friday. He said the United States would like to see China adopt a flexible exchange rate “as quickly as possible.”
People’s Bank of China Governor Zhou Xiaochuan, however, hinted in an address to business and government leaders that China will be asking for more time.
Zhou did not address the issue directly, but said China needed more time to reform its economy – a position repeated often by Chinese officials in the run-up to the meeting of finance ministers from the leading industrialized nations, where China has guest status.
Chinese leaders say they eventually plan to let the yuan trade freely but argue that for now, keeping the currency stable is the best option for the Chinese economy – and by extension, the world economy.
“We know that reforming the financial sector takes time,” Zhou said Friday. “We need time to educate a new generation of bankers.”
China’s pegging of the yuan to the U.S. currency has supercharged its exports as the dollar has declined – dealing a double blow to Japanese and European companies already facing competition in international markets from now-cheaper U.S. products. Critics contend the yuan is undervalued by as much as 40 percent.
Several attendees are expected to highlight the United States’ huge deficits, which have been a drag on the dollar. The euro rose from about $1.20 in September to a high of $1.3667 at the end of December, and the dollar tumbled from about 111 yen in September to 102 toward the end of the year. The dollar has since recovered a bit.
European Central Bank president Jean-Claude Trichet told the conference it was unacceptable for developed countries to run long-term current account deficits.
“The industrialized world as a whole is in deficit, there is a current account deficit, and there is no offsetting of the U.S. current account deficit by the other industrialized countries,” Trichet said. “That of course means that we are structurally asking the rest of the world to finance us. … It doesn’t seem to me that this is an acceptable and sustainable long-term feature of the present functioning of the global economy.”
The U.S. trade and budget deficits and the purchase of large U.S. dollar reserves by Asian countries were combining to cause “global imbalances,” said Bank of England Governor Mervyn King.
U.S. Federal Reserve Chairman Alan Greenspan told the conference that a variety of factors from a weaker dollar to tougher budget discipline in Congress may finally start to restrain the explosive growth in the American trade deficit.
A weaker dollar should narrow the deficit by making foreign goods more expensive to American consumers and U.S. exports cheaper for foreigners, Greenspan said. He said one of the reasons that has not happened yet is that foreign companies have been willing to take a hit on their profit margins rather than raise prices in the U.S. market.
But Greenspan said there were indications that foreign companies have reached a point where they are no longer willing to absorb the impact of the weaker dollar and will start boosting the price of their goods in the U.S. market.
“Many other exporters to the United States have exhibited pricing strategies similar to those of European firms,” he said. “Chinese exporters, of course, have not had to address this issue because China continues to hold its renminbi at a fixed rate against the dollar.”
The U.S. trade deficit with China hit a record $16.8 billion in October, and the euro zone’s trade deficit with China widened to more than 41 billion euros in the first 10 months of 2004. The surging exports helped push China’s trade surplus to a six-year high of $31.98 billion in 2004.
Zhou said Friday that China would strive to reduce its current account surplus with the rest of the world.
Most observers expect the G-7’s official statement to be little more than a repetition of the communique at last year’s summit in Boca Raton, Florida, when the ministers called for market forces to determine exchange rates.
The G-7 nations have also invited representatives from South Africa, Brazil, India and Russia – an indication the group is taking seriously criticism that it is no longer representative of the world’s economy.
AP-ES-02-04-05 1110EST