World Bank's Zoellick welcomes efforts on yuan

MONTREAL (Reuters) - The World Bank on Monday welcomed China’s efforts to make its currency more international and suggested the Chinese economy may make a surprisingly strong comeback.

When asked in a question-and-answer session whether China might decrease its purchases of U.S. treasuries, World Bank chief Robert Zoellick warned against any abrupt, unilateral moves that could worsen an already fragile global financial situation.

U.S. policy makers have tried to allay fears in China that Washington’s bulging budget deficit and loose monetary policy may ultimately fan inflation, undermining U.S. bonds and the dollar.

“Over time, I think I could see China moving further in diversification of its reserves, but one has to recall that China has been very sensitive about maintaining its exchange rate versus the dollar and you can’t do that unless you’re buying dollars, and if you’re buying dollars you’re going to be holding dollar securities,” Zoellick said at an economic conference in Montreal.

“So what it really shows is there’s a symbiotic relationship ... In this environment, if you had protectionism burst out on one side or the other, or have some doubt put in about financial markets, those are the type of factors that could take a fragile situation and make it worse.”

Zoellick defended the U.S. dollar as the global reserve currency of choice. But he also welcomed efforts to make the yuan a major international currency.

On Sunday, a top Chinese banker called on the U.S. government and the World Bank to sell yuan-denominated bonds in Hong Kong and Shanghai, saying it was also in U.S. interests to see the yuan traded around the globe.

“Ultimately, that’s a good thing. And ultimately it’s good if you’ve got, I think, some multipolarity of reserve currencies to create, to make sure that people manage them well,” he said.

“There is some risk in that system. We haven’t had that for hundreds of years ... so that’s going to require some of this multilateralism to work differently.

Zoellick also said he sees no need for governments to add further stimulus to ensure a global economic recovery.

“I wouldn’t, frankly, be trying to have additional sort of spending built in, in part because one of the challenges in this environment -- and you see in this discussion with (German) Chancellor (Angela) Merkel and others -- is getting the balance right between expenditures to get out of the hole with building a problem for the future,” Zoellick said in the session at an economic conference in Montreal.

“So rather than focus on stimulus, I think the key issue now is how to combine the stimulus with making the credit system work, clean up the banks. If you have a stimulus without making the credit system work its like a sugar high.”

He said it was not clear where demand would come from to fuel global recovery.

Reporting by Louise Egan and Rita Devlin Marier