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Asian currencies worry EU, US

China yesterday issued a robust defense of its foreign exchange policies, a day after G7 stepped up pressure on Beijing to let its undervalued currency appreciate.

"Stable renminbi [yuan] is not only beneficial to China. It is beneficial to neighbouring economies and beneficial to the whole world," Li Ruogu, deputy governor of the Bank of China said on the sidelines of the International Monetary Fund and World Bank meetings here.

On Saturday, finance ministers and central bank chiefs from the world's seven richest countries stepped up pressure on Asian countries to reform their currency systems, backing a US call for "flexibility" in global exchange rates.

Although the final communique did not refer to any specific nations, the call for flexibility was a clear message to Asian countries -- most notably China -- to change currency regimes that Washington argues are hitting US exports.

"We emphasize that more flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the international financial system, based on market mechanisms," said the statement.

While officials said the US was largely behind the use of the word flexibility in the statement, Washington also found support from Europe, which fears undervalued Asian currencies could be bad news for its economy.

European policy makers are worried that the euro could undergo a damaging surge when the US current account deficit causes the dollar to fall, if the Asian countries do not let their currencies appreciate.

European Central Bank president Wim Duisenberg reaffirmed his belief that the eventual adjustment of the major imbalances in the global economy was "unavoidable but it has to be smooth and gradual."

The communique came after US Treasury Secretary John Snow failed earlier this month to persuade Beijing to give ground on the currency issue, which has become a politically sensitive topic in the US in the light of its persistently high jobless rates.

Snow said after the G7 meeting that "flexible exchange rates are an antidote for global imbalances."

China is not the only country whose currency is fretting Washington. Several other Asian countries have currency pegs to the dollar and Japan has intervened in the foreign exchange markets to curb the strength of the yen and boost its exports.

While the reference to "major countries" also appeared to be directed at Japan, which has sold some US$80 billion worth of yen this year to prevent the yen from punching through the ceiling of ¥115 per dollar that is widely seen as making the difference between profit and loss for many Japanese exporters.

Bank of Japan governor Toshihiko Fukui denied that the G7 had singled out any country.

"That applies to all countries and is not just limited to China or Japan," he said.

Officials from the G7 (Britain, Canada, France, Germany, Italy, Japan and the US) insisted that the Japanese delegation had raised no objections to the final version of the communique.

Still, Jim O'Neill, chief global economist at Goldman Sachs, said the communique was surprisingly clear-cut and pointed to upward pressure on the yen when markets reopened today.

O'Neill expected the yen would settle into a new range of ¥105 to ¥115 per dollar from the band of ¥115 to ¥120 that had prevailed for months until traders, anticipating the G7's decision, pushed the currency to a two-and-a-half-year high of ¥114 on Friday.

"The Bank of Japan might still intervene, but any intervention would be very carefully designed to stop dramatic yen strength as opposed to weakening the yen," O'Neill said.
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