China resists G7 call to float currency

The United States scored a significant victory in its campaign to force China to float its currency at the meeting of the Group of Seven (G7) in Dubai over the weekend.

In an unusually strongly worded communiqué, the G7 called for "more flexibility" to allow markets to set exchange rates. John Snow, the US Treasury Secretary, hailed the statement as a "milestone change".

However, the unity between G7 ministers was undermined after Mr Snow committed a gaffe, saying Europe should pursue "more accommodative" monetary and fiscal policies - code for cuts in interest rates and rises in spending.

The US Treasury was forced to "clarify" his remarks, saying he was not calling for a rate cut. "He was simply underscoring the broad idea that you need good monetary, fiscal and regulatory policies to grow," said a spokesman.

In its communiqué, the G7 said: "We emphasise that more flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the international finance system, based on market mechanisms."

Mr Snow is under pressure from American manufacturers, who blame the loss of 2.7 million factory jobs since 2001 on what they see as an unfairly cheap yuan.

But the message was rejected by China, which said that blaming the yuan for US job losses was "far-fetched". Li Ruogu, assistant governor of the People's Bank of China, told a seminar in Dubai yesterday he "did not see the logic" of abolishing the peg.

"We've already promised that we will gradually liberalise, but I cannot give you a clear timetable. We want to do it as quickly as possible."

Financial analysts said the dollar was likely to come under renewed pressure as a result of the communiqué and said an upward revaluation of the yuan, which has hardly moved against the dollar in eight years, was likely within six months.

Alex Schuman, a foreign exchange strategist at Commonwealth Bank of Australia, said: "The outcome of the G7 meeting in Dubai represents a major victory for the US and Treasury Secretary Snow. The dollar will be allowed to fall. It will be open season on the dollar, particularly against the Asia bloc."

Deputy finance ministers held what German and Japanese officials called a constructive three-hour meeting with Chinese officials. Gordon Brown said: "We are not naming particular systems [but] there was a genuine view on flexibility and I would not go beyond that."

But observers said the broad wording of the statement could be seen as a block on government action to alter any exchange rate. Washington has diplomatically turned a blind eye to Japan's purchase of some $80bn (£50bn) of foreign currency this year to prevent the yen from strengthening against the dollar and the euro.

The G7 also unveiled a plan for structural economic reform, which it said was unique in committing each country to a specific programme.

"Our top priority is to raise productivity and employment," the communiqué said.

The UK committed itself to boosting skills and labour force productivity - two areas where it lags its main economic rivals. Mr Brown said: "You will see measures in [November's] pre-Budget report and the Budget on flexibility in the labour market and proposals on the physical planning system and the capital and product markets."

On the state of the world economy, the G7 echoed the cautious optimism in Thursday's world economic outlook from the International Monetary Fund. It said: "Recent data indicate a global recovery is underway. Equity markets have rebounded, confidence has increased, financial conditions have improved, oil prices are expected to remain stable and inflation is under control."