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G7 calls for more flexible yuan

Group of Seven finance ministers yesterday renewed a call on China to adopt greater exchange rate flexibility.

"We reaffirm that exchange rates should reflect economic fundamentals," the ministers said in a statement after a one-day meeting here. "Greater exchange rate flexibility is desirable in emerging economies with large current account surpluses, especially China, for necessary adjustments to occur."

The statement reiterated a call for China and other Asian economies to allow their currencies more freedom to appreciate that was issued by the G7 -- Britain, Canada, France, Germany, Italy, Japan and the US -- last April.

The US and some of its key trading partners have been prodding China to abandon its policy of confining its currency, the yuan, to a tightly controlled trading regime.

That policy, they argue, undervalues the yuan, giving Chinese exports an unfair advantage in global markets.

China did approve a small revaluation of the yuan in July last year but the currency remains bound in a narrow range, appreciating at a snail's pace to Washington's great disappointment.

Speaking ahead of the G7 statement, the head of China's central bank, Zhou Xiaochuan (周小川), said China would move gradually to make its currency more flexible.

"Chinese policy is clear, so we are gradually moving towards more flexibility with the [currency] regime," Zhou told a seminar in Singapore on the sidelines of the IMF-World Bank annual meeting.

He said the shift from the US dollar peg in July last year to a managed exchange rate was "still in the first stage."

Zhou later told reporters that if market conditions demonstrated a need for a wider trading band for the yuan then "we may consider a wider band."

He declined to say when more flexibility would be allowed in the yuan exchange rate but explained China was still working on reform of its banking and financial sector which would take time.

Zhou said one of Beijing's priorities was to stimulate domestic demand to reduce China's dependency on exports as a key driver of growth.

On interest rates, he noted that the Chinese central bank had hiked rates in May and last month, so "we still need a bit of time to observe the response of our economy" before considering further monetary policy tightening.

Both Zhou and China's finance minister Jin Renqing (金人慶) held a working lunch with G7 earlier yesterday.
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