2ND G7 warns on global growth, asks China to act on yuan By Shada Islam

Deutsche Presse Agentur
Published: Saturday September 16, 2006

By Shada Islam, Singapore- Finance chiefs from the world's leading Group of Seven (G7) industrialized nations Saturday warned that a slowing US economy, oil price hikes and rising national trade protectionism were endangering global growth. G7 nations also called on China to further ease controls on the yuan, saying they wanted Beijing to allow "greater exchange rate flexibility."

"Exchange rates should reflect economic fundamentals," said a G7 statement, adding: "Excess volatility and disorderly movements in exchange rates are undesirable for economic growth."

The statement, reflecting US and American fears that a cheap yuan is allowing China to flood world markets with low-cost goods, followed a G7 working lunch with Chinese Finance Minister Jin Renqing and central bank chief Zhou Xiaochuan.

The low value of the Japanese yen was also debated, with G7 finance chiefs pointing out that Japanese recovery was now broadly- based.

European Central Bank President Jean-Claude Trichet said ministers had agreed that the yen "should reflect these developments."

G7 members, including Britain, Canada, France, Germany, Italy, Japan and the US, also called for a quick revival of the crippled Doha round of trade talks.

Finance ministers of the group met in Singapore for a day-long review of the world economy ahead of the annual meetings of the International Monetary Fund and the World Bank next week.

Their final statement noted positive trends in the global economy. But it also warned that the upbeat outlook was being endangered by "moderating growth" in the US, as well as by "tight and volatile energy markets, rising inflation expectations ... and the spread of protectionist tendencies."

"We will remain vigilant to these developments," the statement added.

The G7 warning came on the heels of new forecasts by the IMF predicting a 5.1 per cent growth worldwide in 2006.

But the IMF also cautioned that the US economy expanded at an annual rate of just 2.9 per cent in the second quarter of this year, down from 5.6 per cent in the first.

In contrast, Eurogroup chairman Jean-Claude Juncker pointed out that eurozone economies were performing better than they had in six years.

"We are very confident this performance can be sustained," said Juncker.

Eurozone finance chiefs last week said economies in the 12-nation currency bloc were set to grow by 2.5 per cent in 2006, compared to 1.4 per cent in 2005.

G7 ministers identified high energy prices as a key reason for concern.

To prevent further oil price volatility, the G7 said there must be greater transparency and reliability in energy market data and more investment in oil exploration, production, transportation and refinery capacity.

The decision to suspend the Doha round of trade talks and subsequent fears of worldwide protectionism were weighing heavily on the global economy, ministers said.

All World Trade Organization (WTO) members must show "political will and flexibility" to resume the Doha round as soon as possible, ministers underlined.

The Doha talks, launched in November 2001, were put on ice in July this year amid transatlantic quarrels on liberalizing farm trade.

G7 ministers backed IMF reform through a rejigging of countries' voting shares. This is aimed at giving emerging nations, including China, a stronger voice in the running of the 184-member international lending agency.

"Fundamental reform is necessary for the IMF to maintain its legitimacy, relevancy and credibility in the changing global economy," said the statement.

The group backed IMF proposals for a two-step reform process, with four countries - China, South Korea, Mexico and Turkey - receiving an immediate ad-hoc increase in their voting power.

They also said the planned second-stage reform should work to "achieve a further alignment of members' quotas ... based on a revised formula."

However, the statement gave no further details on the proposed reform.

The US wants GDP to be a key factor in determining votes in the IMF board but EU countries fear this will force them to give up some of their eight seats on the 24-strong IMF executive board, leading to a loss of Europe's global clout.

Tackling the threat of a disorderly unwinding of global economic imbalances - a reference to the huge US current account and budget deficit compared with large export-led surpluses in China and other Asian countries - G7 ministers said the effectiveness of IMF surveillance of such developments must be enhanced.

© 2006 DPA - Deutsche Presse-Agenteur