G7 frets about oil, China’s forex peg

Finance chiefs from the Group of Seven economic powers met on Saturday to discuss two of the global economic concerns over which they have least control -- high oil prices and China's fixed currency peg.

Increasingly aware of the group's ebbing influence amid shifting world economic power toward developing giants such as China, India, Brazil and Russia, many G7 officials said the world may simply have to adapt to higher oil prices.

The United States, meanwhile, lobbied G7 members to urge China to allow its currency to rise against the dollar - ratcheting up pressure on Beijing as the White House seeks answers for critics at home who say the administration has been too soft on what they see as an effective export subsidy.

Meeting in Washington for the second of four yearly meetings and against a backdrop of increasingly jittery financial markets, the G7 is made up of the United States, Britain, Canada, France, Germany, Italy and Japan.

Record oil prices, which have risen about 50 per cent over the past 12 months, and China's rigid currency peg to the dollar are frequently cited as two of the biggest risks to world economic stability.

US Treasury Secretary John Snow said on Friday the G7 was preparing for an era of more costly energy and could handle recent increases that have pushed prices over US$58 ($81.38) a barrel.

Another G7 official said: "Concern is growing because it seems the higher prices may not be out of line and are more permanent than was thought. We have to prepare the world to live with oil prices at these levels.".

With crude demand from the rapidly industrialising developing world one of the drivers of higher energy costs and oil producing nations already close to full production, the G7 may look at ways of simply mitigating the impact.

The need for better data on crude production and stockpiles is likely to be re-emphasised, officials said, along with an increased focus on conservation, alternative energy sources and improvements in industrial productivity.

The other big worry for the world economy, expected by the International Monetary Fund to grow a still-robust 4.3 per cent this year, is international trade and financial imbalances.

The US has run up balance of payments deficit with the rest of the world set to top six per cent of national income this year and monthly trade gaps exceeding US$60 billion.

Snow will come under pressure from some members to do more to cut the US budget deficit and lift household savings. But he will likely bat these away by repeating a long-standing pledge to half the deficit while applauding the Federal Reserve for gradually raising interest rates.

China's policy of keeping its exports cheap via fixing its yuan to the dollar will generate more vigorous debate.

China has said it will eventually allow a more flexible exchange rate but shows no sign of doing so soon. Its absence from the G7 table for the first time in three gatherings, dampens hopes of greater engagement with Beijing.

Snow said the US feels China has had ample time to bolster its banking sector to withstand a floating currency.

"They're there now," he said. "They've made enormous strides in fixing the financial infrastructure. ... It's time for the Chinese to move to flexible currency."

He echoed that message in bilateral meetings with France and Japan, a senior Treasury official said.

Bank of Japan Governor Toshihiko Fukui sounded a slightly more cautious note as Japan does not want any precipitous action that could destabilise its Asian neighbour.

"It is not about simply pressuring China," Fukui said, saying any discussion on the yuan should be broader-based.

Many G7 sources say the closing communique on Saturday will merely contain the usual call for currency flexibility, aimed chiefly at China but not mentioning it by name.

There was palpable concern in financial markets as the G7 members gathered. Economic worries, mainly centred on the impact of higher oil prices, sent the Dow Jones industrial average skidding 191.24 points to end at 10,087.51 on Friday.

The G7 sessions lead into spring meetings of the 184-nation International Monetary Fund and its sister lending institution, the World Bank, on Saturday and Sunday.

The issue of debt relief for the world's poorest nations, a thorny patch at the last G7 gathering in February when Britain and the US clashed about how to proceed, is expected to again throw off heat but shed little light.

British officials said they want to see progress in hopes of scoring a final deal by June, when leaders of the G7 and Russia meet in Gleneagles, Scotland. Britain, which holds the G7 presidency this year, has declared 2005 a make-or-break year for Africa.

- REUTERS