Eurozone leaders urge China to let currency strengthen to help boost global growth

Tuesday, October 5, 2010

Europe calls on China to let currency appreciate

BRUSSELS — European leaders on Tuesday urged China to let its currency rise and narrow a trade deficit that has strained relations, while promising Asian countries in return more power in global financial institutions.

China did not, however, commit to new currency action at a summit that highlighted how the global financial crisis had shifted the economic balance of power eastward.

At the end of a two-day Europe-Asia summit dominated by the timid economic recovery, all 48 partners agreed that “in the interest of greater stability, we intend to move together.”

On the sidelines of the summit — held amid careful decorum, chandeliers and old-world mansions and palaces — China’s Prime Minister Wen Jiabao and his Japanese counterpart Naoto Kan had what they claimed was a chance meeting in the sprawling corridors. Japan declared an end Tuesday to a dispute with China over a high-seas collision last month.

Most of the summit though, centered on the global recovery. After Europe acknowledged that Asia should be granted more power in the traditionally Western-dominated institutions such as the International Monetary Fund, it wanted Beijing to move on the currency front.

The leaders of the 16 nations that use the euro met with Wen early Tuesday and urged China to allow its currency to appreciate, stressing that a weak yuan is hampering global growth by creating trade deficits in the U.S. and Europe.

Luxembourg’s Jean-Claude Juncker, head of the eurozone, EU Monetary Affairs Commissioner Olli Rehn and European Central Bank President Jean-Claude Trichet told Chinese Prime Minister Wen Jiabao that the yuan’s “effective exchange rate remains undervalued.”

China is under mounting pressure to loosen its tight grip on the yuan’s value, which it keeps artificially low against the dollar and other key currencies, as Beijing’s trade partners worry about their trade deficits with the world’s biggest exporter and second-biggest economy.

The summit conclusions said that “all ASEM partners have to play a part in addressing economic distortions and weaknesses in policy.” The EU trade deficit with China stood at a staggering €133 billion last year.

Earlier, Juncker insisted that “given China’s important role we do think that a significant and broad-based appreciation” of China’s currency would “promote a more balanced growth to the benefit of both China and the global economy.”

Echoing strong U.S. concerns, the three urged China to stoke more domestic demand — a stronger currency would provide Chinese households with more power to purchase and import goods.

Juncker said Europe had welcomed China’s June 19 decision to make the yuan’s exchange rate more flexible but added that has not worked well enough.

The euro-yuan rate is “not exactly what we would have hoped,” said Trichet.

In response to recent market speculation about a possible currency war, in which countries try to lower their currencies to gain trade advantages, Juncker said, “this would be most destructive as would be any form of trade protectionism.”

The yuan has weakened against the euro in recent months, which could affect exports from the 16 countries that use the euro at a time when the region is struggling to maintain growth amid government cuts and worries about sovereign debt in some countries.

The EU said it would be prepared to give up some of its power base at the IMF to emerging countries, a concession that could cost it two seats on the governing board and the right to have a European heading the Washington, D.C.-based organization, which hands out billions of dollars in loans around the world.

At the moment, EU countries occupy nine of the 24 seats.

The summit conclusions said that “IMF quota shares must be shifted to dynamic emerging markets and developing countries by at least 5 percent from overrepresented to underrepresented countries.”

Associated Press Writer Arthur Max contributed to this report

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