Part of the focus on the renmimbi comes because the G7 is split on the dangers of the euro’s recent rise against the dollar while all the members of the powerful bloc of economies can agree that that China must allow its exchange rate to rise faster, particularly against the euro.
The Chinese policy of allowing a slow appreciation of the renmimbi against the US dollar has led to a depreciation of the Chinese currency against the euro this year as the dollar has fallen sharply on world currency markets.
Ever since 2004, the G7 has called for exchange rates to “reflect economic fundamentals”, adding that “excess volatility and disorderly movements in exchange rates are undesirable for economic growth”.
At the 2004 meeting at Boca Raton, the G7 added that “more flexibility in exchange rates is desirable for major countries or economic areas that lack such flexibility”, a phrase that had China in its sights without naming it.
But as China’s trade surplus with the US and Europe has accelerated, the G7 language has become ever more explicit. At the April meeting when the finance ministers and central bank governors of the US, Japan, Germany, UK, France, Italy and Canada said: “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 signs are in place for a further strengthening of the language at Friday’s meeting. European voices have been growing ever louder with the official spokesman for Nicolas Sarkozy, the French president, saying this month the renminbi was “artificially undervalued”, and Jean Claude Juncker, the Luxembourg prime minister and president of the euro group, calling the renminbi a “real problem” this week.
China, for its part, has reiterated its ambition gradually to allow more flexibility into its exchange rate but has made absolutely no commitment to change its policy, even with high level delegations visiting the country from the US, Europe and the IMF.
But its intransigence and its absence from the G7 meeting is unlikely to deter the leading rich countries. Jim Flaherty, the Canadian finance ministers said he would not be surprised to see further pressure put on China. “I expect we’ll have more pressure from the other market currency countries, especially with the euro being at a relatively high value now,” he said.
The US has been vocal for some time over China’s delay in allowing its exchange rate to rise and is pleased with the new mood in Europe. Robert McCormick, the Treasury undersecretary told a news conference: “We welcome the efforts of the Europeans to make that case to China as well”.
Agreement on the need for China, the world’s fourth largest economy, to act is perhaps all the easier this time as it masks a greater disagreement among the G7 over whether the US dollar and the Japanese yen are also undervalued against European currencies.
France and Italy think they are. Christine Lagarde, the French finance minister said in an interview in the International Herald Tribune, that there was “a competitive disadvantage in having a strong euro, versus a relatively weak yen, a deliberately weak yuan and a low dollar”.
Romano Prodi, the Italian prime minister agreed. He said the strong euro ”makes export from the euro zone difficult”.
But the German and UK governments, alongside the International Monetary Fund staff, think all the talk about the damaging consequences of a strong currency is a side show.
Alistair Darling, the chancellor of the exchequer dismissed the concerns over the euro, saying: “I think the G7 really needs to concentrate on perhaps some of the longer-term structural reforms that are necessary in the economies of the world.”
Peer Steinbrück said he liked a strong euro, while Hermann Remsperger, a board member of the Bundesbank, said “German exports are much more dependent on the growth of foreign markets than on the exchange rate”.