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Bankers Worry about US Budget, Trade, China's Currency


Economic policy makers at this weekend's meeting of the International Monetary Fund and World Bank agreed on a debt cancellation package and warned about the potential destabilizing effects of global economic imbalances-principally the large trade surplus in China and the corresponding large deficit in the United States.

China and the United States have been the principal growth engines for the world economy during the past two years. China has been growing by nine-percent and the United States, the world's biggest economy, by nearly four percent. These two countries have accounted for as much as two-thirds of world growth since 2003.

But China and America's trade imbalances have worsened in recent months. China's surplus, says the IMF, could reach a figure equal to seven percent of its economic output. The U.S. trade deficit this year will reach nearly six percent of gross domestic product.

The worry is that unless these gaps narrow, higher global interest rates or a sharp weakening in the dollar could result.

British Chancellor of the Exchequer Gordon Brown, who chairs the IMF policy making committee, says his panel wants action to correct the imbalances.

"This includes fiscal consolidation (i.e a narrowing of the budget deficit) to increase national savings in the US, greater exchange rate flexibility in emerging Asia (i.e China), and structural reforms in the euro area, and structural reforms including fiscal consolidation in Japan," Mr. Brown says.

IMF head Rodrigo de Rato, a former Spanish finance minister, says the United States could reduce the trade deficit if it narrows its budget shortfall.

"We see the need to increase revenue (base) through tax reform that would increase the tax base," Mr. de Rato says.

The United States and several European finance ministers favor a further, much stronger revaluation of the Chinese currency. China abandoned its decade old fixed-currency peg to the dollar in July, but the currency has risen by less than two-percent.

Many economists say at least a 10 percent revaluation is required to bring down the Chinese trade surplus. Several officials worry that unless the global imbalances are substantially reduced there will be a new wave of trade protectionism in the form of new U.S. and European restrictions on imports from China.

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