Harper welcomes China’s yuan decision

OTTAWA — Canada welcomes China’s move to let its currency become more flexible but will wait to see what the results are before passing final judgment, Prime Minister Stephen Harper said on Monday.

The Chinese move was widely seen as a way of reducing international tensions over the yuan before a Toronto summit of leaders from the Group of 20 leading and emerging nations on June 26-27.

“The proof will be in the pudding over time, but I think it’s fair to say this is a very positive announcement by China. More broadly it does show China not simply doing some positive things, but China assuming a more global view,” Mr. Harper said in an interview.

Western nations have long argued that China’s policy of effectively pegging the yuan to the U.S. dollar gave it an unfair trading advantage by ensuring Chinese exports remained cheap, even as much of the world was struggling to emerge from recession.

Some of China’s strongest critics in the U.S. Congress have already made it clear they are unimpressed with the announcement, and the United States itself called for “vigorous implementation” of the policy.

The currency question is still very sensitive and Canadians officials warn against putting too much focus on China at the summit in case it starts to feel it is being singled out.

Mr. Harper said the G20 would discuss China’s move as part of a broader assessment of policies designed to ensure balanced and sustainable growth.

“I’ve never wanted to focus strictly on one country or strictly on one issue but it’s an important part of seeing emerging economies increase domestic demand which is a big part of the puzzle going forward,” he said.

When asked whether the G20 would ask China to give more of a commitment to let the yuan strengthen, he replied: “This is always an issue of discussion. I think there will be some discussion around that but, as I said, I think people will be looking to see what actually happens going forward.”

The G20 will also have to focus on splits emerging between nations such as the United States, which fears a focus on debt reduction rather than continued stimulus spending will choke off a global recovery, and Germany, which wants the question of spiraling deficits to be urgently addressed.

Mr. Harper sent a letter to his G20 peers last week suggesting countries cut their deficits in half by 2013 and stabilize, or start reducing, their debt-to-GDP ratios by 2016. The targets are relatively easy for some nations but will be very hard for others to achieve.

“The targets set out in my letter are probably minimalist,” Mr. Harper said. “These are the things that, at a minimum, advanced countries are going to have to achieve.”

Ottawa sees a balancing act required to protect growth, with an immediate focus on stimulus while preparing for fiscal consolidation in the medium term.

“In the short term, we need to continue to deliver stimulus … we are not suggesting the early or premature termination of that,” Mr. Harper said.

Yet at the same time, he said, markets wanted to see that G20 leaders understand the risks posed by heavy sovereign debt levels in some advanced economies.

“We’re starting to see interest rates creep up in some countries … and that’s a signal that people have to take a look at their debt stock. If your debt stock is enormous, even a small interest rate increase could have quite serious effects on growth,” he said.

Mr. Harper also hopes the G20 will send a signal to markets that it will meet its self-imposed timelines for financial sector reform, aimed at stricter bank capital and liquidity rules to prevent future crises.

As the United States and Europe push ahead with quite different rules for their own domestic banks, Mr. Harper said he did not expect countries to have identical systems and was satisfied with the level of co-ordination in the G20 around the core changes for banks.

Leaders of some of the Group of 20 nations meeting in Canada this weekend will want to hear more about how China plans to make its currency more flexible, Canadian Finance Minister Jim Flaherty said in New York on Monday.

“Some countries will want to see more detail and perhaps even a schedule of some sort,” he told reporters when asked whether China’s announcement on Saturday that it would make the yuan more flexible meant the currency issue would not be such an important topic at the meetings.

On Canada’s own currency, Mr. Flaherty said the nation’s economic performance amid the world recession meant the Canadian dollar’s strength made sense. The Canadian government’s concern, he said, was about volatility.