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China Pledges Moves Toward Floating Currency - 2004-10-01

China says it will move to abolish the fixed rate system that links its currency to the dollar, and allow financial markets to set the value of its currency. The announcement followed talks between top U.S. and Chinese financial officials on the sidelines of a meeting of ministers from the seven most industrialized nations.

China says it will move "firmly and steadily" toward allowing its currency's value to be determined by market forces. But there is no timetable for ending the yuan's fixed rate peg to the U.S. dollar, a system that has been in place for many years.

China is participating for the first time in a portion of the meeting of what has been called the Group of Seven finance ministers. The G-7 includes the United States, Canada and Japan and the four largest European economies. These major economies guide policy decisions of the International Monetary Fund and World Bank, which are holding their annual meetings Saturday and Sunday here in Washington.

The IMF managing director says it is in China's own interest to adopt a more flexible exchange rate.

U.S. Treasury Secretary John Snow, who is hosting the G-7 meeting, similarly has long advocated a modification of China's fixed rate currency system, and re-iterated that stand on Thursday, before China's announcement.

"The basic concept of a currency that reflects underlying (economic) fundamentals, that moves in accordance with those fundamentals, I think, is awfully important, so that the adjustments that need to occur do continue to occur," he said. "And there is a natural adjustment process for balance of payments imbalances."

Faced with a huge trade deficit with China, the United States has been pushing for an upward adjustment of the yuan, on the assumption that the trade imbalance will ease, if Chinese goods cost more to Americans, while U.S. goods are cheaper to the Chinese.

The finance ministers are discussing the world economic outlook, and in particular, the outlook for energy prices, which have nearly doubled in the past year. Oil producing Saudi Arabia and Russia are participating in portions of the G-7 meeting.

There is also discussion once again of more generous debt relief for the world's poorest countries, many of which are repaying more in debts than they are receiving in new loans or grants.