US, China must lead global rebalancing

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The United States and China will have to lead a rebalancing of global growth as the world economy slowly emerges from a downturn, the euro zone will tell G7 financial leaders this weekend according to a document prepared for the meeting.

Finance ministers and central bank governors from the Group of Seven (G7) industrialised nations meet Friday and Saturday in the small town of Iqaluit in north Canada. The G7 includes the US, Canada, Japan, France, Germany, Britain and Italy.

The document, which sums up the agreed views of the 16 countries using the euro, said global trade and savings imbalances, which deepened the global economic downturn, have decreased during the crisis, but were still a medium-term challenge and need to be unwound in an orderly way.

"Looking further ahead imbalances will widen again -- driven by the recovery of oil prices and global trade -- although at a lower level compared to the period before the crisis, with the exception of China where the current account surplus will continue to increase in dollar terms," the document said.

"The United States and China will have to take a central role in the rebalancing of global growth," said the document, which was obtained by Reuters.

To achieve this, the United States should boost domestic savings, cut its budget gap and improve financial regulation.

"Beyond the current short-term counter-cyclical requirements, fiscal consolidation should remain the main objective," the document said.

Unless US fiscal and monetary stimuli are withdrawn once economic recovery is well established, it said, expansionary policies could sow the seeds of instability, including the building up of bubbles.

China needs to boost domestic consumption by improving its social safety nets.

"A reformed taxation of state-owned enterprises' profits would increase tax revenues, which could, in turn, be used to finance increased state spending on social safety nets without jeopardising longer-term fiscal sustainability," it said.

China should also allow its yuan currency, now effectively pegged to the dollar, to appreciate, the document said.

"Its current exchange rate policies may induce a return to large global imbalances and may drive up asset prices which could jeopardise China's financial stability."

Beijing could start rebalancing its growth model next year, it said.

"The 12th five-year plan starting in 2011 should aim at laying the foundations of a different Chinese growth model, which relies less on export-led growth and more on private consumption."