Europe pressures China as currency war bites

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Europe pressured China Tuesday to let the yuan rise as fears grew of a global "currency war" while a French call for a new, more stable world monetary order received short shrift from Germany.

A trio of top eurozone officials urged Chinese Premier Wen Jiabao to live up to a June vow to make the yuan more flexible to counter accusations Beijing deliberately undervalues its currency so as to boost exports and growth.

The call came as a two-day Asia-Europe Meeting (ASEM) gathering 46 nations wound up with a consensus for more effective global economic governance.

European Union president Herman Van Rompuy said financial reform "remains our number one priority."

Earlier, euro group chief Jean-Claude Juncker, European Central Bank head Jean-Claude Trichet and European Union economic affairs chief Olli Rehn each told Wen the yuan, or renminbi, should be allowed to find its natural level.

"Orderly, significant and broad-based appreciation of the renminbi (yuan) would promote more balanced growth," Juncker said after talks with Wen on the margins of a Europe-Asia summit, stressing the yuan remains "undervalued."

The euro hit fresh eight-month highs on Tuesday well above 1.38 dollars, highlighting the problems for the eurozone as its currency soars against a weakening dollar and the yuan, undercutting its export competitiveness.

The hot topic overshadowed the meeting even though not on the official agenda and will figure prominently at direct talks between Brussels and Beijing on Wednesday.

The issue will also likely loom large at the annual International Monetary Fund meeting beginning Friday.

French President Nicolas Sarkozy, who takes the chair of the Group of 20 leading global economies next month, wants to to see a new world monetary order so as to head off what could turn into a dangerous, beggar-thy-neighbour race to the bottom, similar to what happened in the 1930s Great Depression.

"We don't have a single place, worldwide, where we can (resolve) monetary issues," Sarkozy said.

"Everyone does as they want, everyone, each to their own, tries to preserve their own sovereignty but we are living in the 21st century without a monetary order," he told fellow leaders at the Asia-Europe meeting.

The idea, however, was instantly shot down by German Deputy Foreign Minister Werner Hoyer, who deemed it "particularly vague."

The United States and the European Union have become become increasingly frustrated by the massive trade surpluses that China and other emerging countries build up on the back of cheap exports.

China pegged the yuan at about 6.8 to the dollar for the past two years but said in June that it would allow the unit to rise, partly to calm growing criticism of Beijing.

Since then, however, the yuan's gains have been minimal while Wen has warned that allowing the currency to strengthen too much could wreck Chinese exports and spark massive social unrest if the economy slumped as a result.

On Monday, he called for stability in the exchange rates of major currencies, a move taken to mean there would be no change in Beijing's stance on the yuan.

Some analysts believe the yuan should be valued as much as 40 percent higher and Brazil's Finance Minister Guido Mantega has warned that the world is already locked in "an international currency war."

Wen meanwhile also wants Europe to give far more say to developing countries in how the world is ordered, not only in the IMF but also in the other agencies such as the World Bank.

"We have sent clear signals on the modernisation of the international financial institutions," Van Rompuy said at the close of the ASEM meeting.

"This process needs to take into account the realities of today's world economy -- the shifts that have taken place and the strong growth in dynamic emerging markets and in developing economies."

European governments agreed last week to hold talks with the United States and other partners on giving the developing economies a greater say but hedged their offer with significant conditions.

© 2010 AFP

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