Major economies promise to reduce imbalances

China on Saturday pledged to gradually increase the flexibility of its currency as part of broader policy measures agreed by five major economic players to address global economic imbalances.

A list of the measures was released after meetings of the International Monetary Fund's policy-setting committee by the five -- the United States, Japan, Saudi Arabia, China and euro-area nations -- following year-long talks led by the IMF.

But the policies simply represent an inventory of existing plans to reduce a gaping trade shortfall in the United States, introduce growth-enhancing reforms in the euro area and Japan, improve investment in oil-producing countries like Saudi Arabia, and cut China's heavy reliance on exports.

An IMF official noted the plans were more detailed than the Agenda for Growth, an initiative by the Group of Seven rich countries to address issues in their own countries that were generating imbalances.

"The implementation by each participant of these policies would in combination constitute a significant further step toward sustaining solid economic growth and resolving imbalances," the five parties said in a joint statement.

IMF Managing Director Rodrigo Rato said the statement showed a shared commitment to reducing the massive imbalances in trade and investment flows that many see as the global economy's Achilles' heel.

"One should not underestimate that these five economies ... have willingly accepted a joint document and shared responsibility on global imbalances," Rato said. "Of course, we will see how things evolve in the future."

John Lipsky, the IMF's No. 2 official, added: "There was agreement among each of the participants in the multilateral consultation that their proposals were in their own interests as well as in the general interest."

Lipsky and other IMF officials led talks between senior policy-makers from all five parties to persuade them to act to reduce imbalances, primarily big U.S. trade and budget gaps and hefty trade surpluses in Asia and oil-producing nations.

Among the policy-makers who participated were U.S. Treasury Under Secretary Tim Adams and Hu Xiaolian, the deputy governor of China's central bank.

MORE FLEXIBILITY

The IMF has long warned that failure to take action against imbalances raised the risk of abrupt and excessive changes in exchange rates and asset prices, and hotter trade disputes.

In the statement, China repeated a vow to increase the flexibility of its yuan currency, but it offered no timelines or targets.

It also promised to speed up banking system reform and spur domestic demand, saying cutting its trade surplus with the rest of the world would be a priority this year.

The statement noted that China had introduced greater flexibility in the yuan's exchange rate and said China's "foreign exchange market infrastructure has been significantly improved."

In July 2005, China abandoned a long-standing policy of pegging the yuan to the U.S. dollar. But it still keeps the currency, which has risen only 5 percent since Beijing's policy shift, on a tight leash.

As it has on numerous occasions in the past, China promised to move toward greater yuan flexibility over time.

"Exchange rate flexibility will gradually increase, with attention paid to the value of a basket of currencies," the statement said.

Some IMF and G7 sources said that language was significant because it meant that China was not only focusing on the U.S. dollar, which has been weak, but also on other currencies.

China also plans to boost household incomes and rural consumption as part of its efforts to stimulate demand. Beijing would also change export tax rebate policies in an effort to reduce its trade surplus, the statement said.

In its "to-do" list, the United States repeated it would strive to narrow its budget gap over the medium term, in part by reforming the budget process to contain spending growth, even as it raised tax incentives to spur private savings.