G7 presses China on yuan, says world economy sound

WASHINGTON (Reuters) - Global financial markets are improving but uneven conditions may persist, and China must allow the value of its yuan currency to rise more rapidly, finance officials from the rich nations said on Friday.

The world economy remains strong, although recent market turmoil, high oil prices and weakness in the U.S. housing market will likely drag on growth, finance ministers and central bankers from the Group of Seven said in a communique released after a meeting here.

The G7 members were eager to calm volatile markets, but even as they met, stock prices tumbled around the globe because of concerns about slowing economic growth. Caterpillar Inc (CAT.N), a heavy-equipment maker and bellwether for the U.S. economy, reported disappointing earnings and said there was a 50-50 chance of a U.S. recession next year.

The dollar sank to fresh lows, adding to earlier losses when it became clear the G7 -- the United States, Britain, Canada, France, Germany, Italy and Japan -- would not express any explicit concern on the greenback's weakness. Oil prices briefly topped $90 a barrel.

When the finance leaders gathered here six months ago, they said it was "desirable" that exchange rates, especially China's, move so that global trade imbalances can adjust. The concern is that a weak yuan makes Chinese exports more affordable, hurting exporters in the United States and Europe.

Friday's communique took a stronger tone.

"We welcome China's decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we stress its need to allow an accelerated appreciation of its effective exchange rate," the G7 officials said.

Just before the G7 meeting began, a senior Chinese central bank official said allowing the yuan to rise faster would have only a limited impact on China's huge trade surplus and could hurt the world economy.

Wu Xiaoling, the deputy governor of the People's Bank of China, told a Washington conference that China wants to broadly restructure its economy and not focus only on exchange-rate policy.

China has always taken the position -- repeated on Monday by President Hu Jintao -- that it will move gradually and at its own speed on currency and other economic reforms.

ON THE MEND, SLOWLY

The G7 are also struggling with the consequences of U.S.-originated credit market turmoil stemming from a crisis in subprime mortgage markets that was exported in the form of widely sold securities based on weak loans.

The communique said financial market conditions required close monitoring, and called on "market participants" to examine shortcomings exposed by the credit crisis.

When credit conditions worsened in early August, central banks responded by injecting hundreds of billions of dollars of cash to unfreeze financial markets, and the U.S. Federal Reserve slashed its benchmark interest rate last month to protect the U.S. economy from fallout.

But with the dollar falling and oil soaring, inflation fears have grown, and the G7 members acknowledged the delicate balance between promoting growth and keeping prices in check.

In the communique, they said they had acted "resolutely" to protect the stability of global financial markets, but added that "monetary policy must remain vigilant in maintaining price stability," a nod to inflation concerns.

Axel Weber, who sits on the European Central Bank's Governing Council, told Reuters in an interview that the ECB was ready to act if needed to counter higher inflation risks.

The communique also addressed increasing concerns about state-controlled investment vehicles known as sovereign wealth funds, calling them "important participants in the international financial system" while cautioning that more transparency into their investment practices was needed.

The group asked the International Monetary Fund, World Bank and Organization for Economic Cooperation and Development to examine issues of transparency and accountability.

The G7 members will host an outreach dinner later on Friday with countries including China and Saudi Arabia that control large investment funds.

(additional reporting by Yoko Nishikawa, Tamawa Kadoya, Sumeet Desai, Louise Egan, Steven C. Johnson, David Lawder and Paul Eckert in Washington)