WASHINGTON – The Bush administration said Friday the International Monetary Fund should do a better job of policing whether countries are running an appropriate currency regime, a change that could increase pressure on China to reform its currency system in a way that would reduce America's huge trade deficits.
Treasury Undersecretary Tim Adams (search), the administration's point person on international economics, said the IMF needs to be "far more ambitious in its surveillance of exchange rates."
His comments came on a day when Treasury Secretary John Snow (search) and Federal Reserve Chairman Alan Greenspan were serving as hosts for a meeting of their colleagues from the Group of Seven rich industrial countries and five major emerging economies, including China.
Prior to that meeting, the Chinese announced a modification to Beijing's new currency regime that would allow the Chinese currency to move in value by a slightly greater amount against non-dollar currencies. However, the Chinese did not modify the small 0.3 percent change that it will allow in the yuan's value against the dollar on a daily basis.
Treasury Department spokesman Tony Fratto said the Chinese indicated in July when they scrapped a decade-long policy placing a fixed link to the dollar, that they would continue to take steps toward greater flexibility in the Chinese exchange rate, something the Bush administration has been lobbying for as a way to deal with America's soaring trade deficit with China.
"This is a technical step in that process and we will continue to monitor their implementation," Fratto said. He replied "no comment" when asked if the administration was disappointed that China did not announce that it would allow the yuan to rise in value by a greater amount against the dollar.
In his speech on IMF reforms, Adams said the 184-nation lending agency already has the authority to hold special consultations when it deems that a country's currency is having a major impact on another nation. But in more than a quarter of a century, the IMF has only used this power twice, Adams said.
"The perception that the IMF is asleep at the wheel on its most fundamental responsibility — exchange rate surveillance — is very unhealthy for the institution and the international monetary system," Adams said in a speech at a conference sponsored by the Institute for International Economics, a Washington think tank.
Chinese Finance Minister Jin Renqing (search) and Zhou Xiachuan, the head of China's central bank, were invited as special guests at a working G-7 lunch where officials will examine major threats facing the global economy at present, from America's huge trade deficits to the soaring price of energy.
Also invited to the meetings as guests of the G-7 were finance officials from Russia, India, Brazil and South Africa.
The G-7 talks were taking place ahead of the annual meetings Friday and Saturday of the 184-nation International Monetary Fund and its sister lending institution, the World Bank.
Also on the agenda for the meetings was an effort to finalize a deal to forgive more than $40 billion in debt that the world's 18 poorest countries — many of them in Africa — owe to the IMF, the World Bank and other international lending organizations.
Adams, in a briefing with reporters, said one area where change should be made is in the G-7 itself. He suggested the group needed to expand to take account of a number of rapidly growing economies and that some of the countries attending Friday's meeting should be considered for membership.
"I believe we ought to put some of these countries on a glide path to being full participants in the G-7," Adams told reporters this week.
Russia already participants in the annual Group of Eight leaders' summit but has not been a full-fledged participant in financial discussions because the size of its economy ranks far below the G-7 countries — the United States, Japan, Germany, Britain, France, Italy and Canada.
Friday's discussions mark the third time that China has participated in the G-7 talks over the past year. At each of the previous meetings, the United States highlighted the need for China to scrap its decade-old system of linking its currency tightly to the U.S. dollar. China on July 21 announced that it was allowing the yuan to rise in value by 2.1 percent against the dollar and would in the future link the country's currency to a marketbasket of foreign currencies, not just the dollar.
However, American manufacturing groups contend that China's currency is undervalued by as much as 40 percent against the dollar and the small revaluation allowed by the Chinese will do virtually nothing to narrow a U.S. trade deficit with China.
The trade gap soared to a record of $162 billion last year and is expected to be 30 percent higher this year because of a surge of Chinese imports of clothing and fabric.