By Andrzej Zwaniecki
Washington File Staff Writer

Washington -- High-level financial officials from the seven most industrialized countries will meet for the first time as a group with their Chinese counterparts to discuss reform of China's currency exchange regime and other issues, a U.S. Treasury Department official says.

Even though finance ministers and central bank governors from the Group of Seven (G7) countries have held bilateral meetings with China's finance minister and central bank director, the G7 officials as a group and their Chinese counterparts see a meeting at this level as the best way to move forward on the issue of a flexible exchange rate in China, Under Secretary of the Treasury John Taylor told reporters September 22.

The G7 comprises Canada, Germany, France, Italy, Japan, the United Kingdom and the United States.

The first meeting between G7 and Chinese senior finance officials took place in September 2003 in Dubai.

Asked whether elevating the meeting to the ministerial level is the first step toward inviting China to the G7, Taylor said that the special October 1 session on the sidelines of the G7 regular meeting the same day is a "natural" result of China's growth and increasing influence in the world economy. He said that a next step in G7-China relations will depend on how this meeting goes.

"We have to wait and see what the evolution is of this kind of group," he said.

In September 2003, the G7 finance ministers issued a general call for more flexibility in exchange rates in major countries or economic areas to "promote smooth and widespread adjustments in the international financial system."

Since then, U.S. Treasury Secretary John Snow has repeatedly said that a pegged exchange rate is not appropriate for major economies such as China's and called on the leadership of that country to accelerate its efforts to move to a flexible exchange rate.

China has for almost a decade pegged its currency -- the renminbi, or yuan -- to the U.S. dollar at a fixed rate. Generally considered undervalued, the renminbi has helped China to boost its exports and fueled China's trade surpluses with its major trading partners. China's exchange rate policy has grown into a hot political issue and a major source of concern for U.S. policymakers as the U.S. trade deficit with that country hits record levels.

Taylor said China has moved toward a flexible exchange rate by taking steps such as opening its banking sector to foreign banks and relaxing some controls on capital movement. But he said that the timing of the actual shift to a new exchange rate regime depends on how quickly the country can put all the necessary elements together.

"We are very positive about they are moving to and intend to have a flexible exchange rate," he said.

Taylor said that G7 officials during their regular meeting will discuss structural changes in their respective countries, efforts to forgive or reschedule most of Iraq's external debt and other issues. He said that international talks to forgive that debt are expected to be completed by the end of 2004.

"Everything is on track to fulfill that commitment," he said.

Taylor said that some countries have already formally committed to eliminate the "vast majority" of Iraq's debt, which is estimated at about $120 billion.

President Bush during the June Group of Eight (G8) summit on Sea Island, Georgia, called for reducing Iraq's debt by 80 to 90 percent. The International Monetary Fund (IMF) has provided Iraq's creditors with an analysis of Iraq's debt sustainability, including its economic growth prospects and reconstruction requirements, according to news reports citing a U.S. official.

Taylor also reviewed the agenda of the IMF and World Bank October 2-3 meetings. He said that, before the meetings, Secretary Snow will speak on the strategic review of the two institutions, participate in an October 1 meeting of G8 and Broader Middle East and North Africa finance ministers, and meet with finance ministers from the Andean and some other countries.

The G8 comprises the G7 countries plus Russia.