With China at G-7, new leverage

Welcome to the club, China. At least to the dining room.

Chinese officials, for the first time, are slated to dine Friday night with finance ministers of the Group of Seven, the world's most powerful industrial democracies.

It's the latest sign not only of China's rising industrial might, but also of the G-7's impetus to keep closer tabs - and exert more influence - on a nation that is fast becoming an economic colossus.

The Washington dinner, which precedes a meeting of G-7 finance ministers and central bankers, is regarded as adding pressure on China to meet its international economic "responsibilities."

Translation for today: Revalue the yuan so it's not so cheap. But the broader message is: Association with the G-7 club has a price - conformity with the rules of global trade and finance.

The focus on China has implications far beyond the world of white tablecloths and stemware. China's explosive growth is being blamed for everything from lost manufacturing jobs to a troubling surge in US trade deficits. But it's also providing jobs for Minnesota iron miners and cutting consumer prices from clothing to hardware.

Last year China accounted for nearly one-fifth of the growth in world trade. Its imports grew 40 percent. Yet its long-standing bilateral trade imbalance with the US mushroomed to $132 billion last year, more than one-quarter of America's global trade deficit of nearly $500 billion.

"China is emerging as a very significant player in the world economy," says Marcus Noland, an economist at the Institute for International Economics in Washington.

In 2001, China was accepted into the World Trade Organization, the body which regulates international commerce. Beijing has "by and large" lived up to its WTO obligations, says Frank Vargo, a trade expert at the National Association of Manufacturers in Washington. The G-7 invitation is further recognition of the clout of China and its 1.3 billion people.

"Very important and very encouraging," Mr. Vargo says. As a major economic player, China should "act like one."

China's decade-old practice of fixing the value of its currency against the US dollar will almost certainly be one issue at the Treasury banquet. Perhaps foreseeing this, on Tuesday in Beijing, Premier Wen Jiabao told a group of US corporate executives that China will loosen its control over the exchange rate to give market forces a bigger role in determining the yuan's value. He didn't say when that would happen. But it's the first time China's No. 1 leader has talked, at least obliquely, of a revaluation of China's currency.

The International Monetary Fund, too, this week called on China to let the yuan "float" in world currency markets.

A revaluation has been long sought by governments and industry in the US, Japan, and Europe, all facing an onslaught of Chinese exports.

Over the past 25 years, China's economic performance has been spectacular. Growth has been so rapid that a quarter billion Chinese have been pulled out of poverty. China now ranks as the world's second largest economy, if measured by the purchasing power of the yuan. China accounts for roughly 12 percent of world output, almost twice as much as Japan by this measure.

China has $480 billion of US Treasury securities in its international monetary reserves, the result of large trade surpluses with the US. China's huge financial reserves, if switched substantially out of the dollar into the euro or yen, could put upward pressure on United States interest rates as the Treasury strives to finance the huge budget deficit in Washington. Vargo notes, though, that Japan's government ceased buying Treasuries this year, with no apparent effect on US interest rates.

China's likelihood of being accepted into a G-8 club is probably small at this time, because it is not a democracy. But perhaps China could win observer status. "China has to be brought into the tent," says economist Noland.

The Bush administration has been under intense pressure from manufacturers and trade unions to get China to act soon to revalue its currency.

A China Currency Coalition, which includes the industrial, agricultural, and labor associations, last month made a "Section 301 petition," a complaint under US trade law, to the administration charging China with "unreasonable and discriminatory" trade policies. This was rejected. The administration said it was doing everything it can in this regard.

Legislation has also been introduced into Congress that would threaten China with WTO and International Monetary Fund sanctions if it does not float its currency. But the issue is on hold until after Nov. 2 elections.

Noland thinks it would be best for China simply to revalue the yuan by 15 to 25 percent against the dollar, rather than floating its value according to supply and demand on the foreign exchange markets. He warns the yuan might weaken, not strengthen. Vargo talks of a 20 to 40 percent revaluation.

Whatever happens, no one expects the US trade deficit with China to wither away.

And a revaluation would be costly to China. A study by the Center for Economic and Policy Research in Washington finds that a 42 percent yuan revaluation would reduce the value of China's dollar reserves by $171.6 billion - equivalent to 10 percent of China's gross domestic product.

China has contacted the Chicago Mercantile Exchange, talking about procedures for setting up "derivatives" for the yuan, a financial technique allowing business to hedge against changes in the yuan's value.