G-7 Says Global Expansion Will Slow After `Market Turbulence'

By Simon Kennedy and Kevin Carmichael

Oct. 20 (Bloomberg) -- Group of Seven finance ministers and central bankers said the credit-market rout will slow economic growth and strengthened calls for China to let its currency appreciate.

``Recent financial market turbulence, high oil prices and weakness in the U.S. housing sector will likely moderate'' the global expansion, officials said in a statement after meeting in Washington yesterday. ``Our overall economic fundamentals continue to be strong and emerging markets are providing critical impetus.''

Policy makers met for the first time since a collapse in demand for assets backed by U.S. subprime mortgages sparked a surge in international borrowing costs. They told investors to address ``shortcomings'' in risk management.

The group also urged an ``accelerated appreciation'' of the Chinese yuan as Europe and Canada joined the U.S. in complaining it remains undervalued and threatens their trade balances.

``That was the biggest change,'' U.S. Treasury Secretary Henry Paulson told reporters after the meeting. French Finance Minister Christine Lagarde said she was ``happy'' the yuan was singled out.

The G-7 set aside differences over the dollar's drop to a record low against the euro, sticking to past language in saying ``excess volatility'' in currencies is ``undesirable'' and that they should trade in line with fundamentals. Other than the yuan, no specific currency was mentioned.

Stocks Tumble

The G-7 accounts for about two-thirds of the $53 trillion world economy and comprises the U.S., U.K., Japan, Germany, Italy, France and Canada. Officials met as U.S. stocks slid the most in two months, hurt by lower corporate earnings and the deepening American housing recession.

The Dow Jones Industrial Average fell 366.94 points, or 2.6 percent, to 13,522.02 yesterday in New York. Treasuries rallied and two-year notes posted their biggest weekly advance since the Sept. 11 terrorist attacks, with the yields dropping to 3.78 percent from 4.23 percent a week ago.

Paulson, European Central Bank President Jean-Claude Trichet and their counterparts asked an advisory panel to keep working on proposals to improve how markets work. The Basel- based Financial Stability Forum will study how risk is managed, liquidity is measured and credit rating companies operate.

``It will take a little time for markets to stabilize,'' said Japanese Finance Minister Fukushiro Nukaga. Bank of Italy Governor Mario Draghi said ``there has been significant damage to the financial system and the damage will continue.''

Defaults Climb

Mortgage defaults by Americans with poor credit histories prompted the collapse in June of two hedge funds managed by Bear Stearns Cos. and triggered a worldwide sell-off in the debt markets.

As losses in securities linked to subprime mortgages started to spread in July, investors exited high-risk assets. The amount of asset-backed commercial paper outstanding tumbled to $899 billion in the week ended Oct. 10, from a high of $1.14 trillion at the end of June, according to Fed figures.

By the middle of August central banks from Frankfurt to Oslo were injecting liquidity and the Federal Reserve reduced its discount rate. The U.S. central bank subsequently cut its benchmark rate on Sept. 18.

Different Language

That backdrop forced the G-7 to temper its enthusiasm on the global expansion after ministers said in May that growth was ``robust'' and that ``risks for the outlook have abated.'' The International Monetary Fund this week cut its forecast for world growth next year and warned even its new prediction of 4.8 percent may be optimistic.

``Within the G-7 you have economies that are each the focus of the credit-market tightening, so unsurprisingly they're all getting more worried,'' said David Hensley, an economist JPMorgan Chase & Co. in New York. ``The risks to the outlook are now to the downside.''

The G-7 praised market participants in the U.K. and U.S. for acting to relieve strains in some markets. Banks including Citigroup Inc. this week said they plan to form an $80 billion fund to revive demand for asset-backed commercial paper.

The increased pressure on China to encourage gains in the yuan came after complaints from European and Canadian governments that it has slumped against their currencies while advancing 3.9 percent against the dollar this year.

Dollar Drop `Appropriate'

``It's appropriate we've had U.S. dollar depreciation,'' Bank of Canada Governor David Dodge said. ``The problem is it's really been Europe and Canada that have been the main focus.''

People's Bank of China Deputy Governor Wu Xiaoling told a conference in Washington that the currency is moving in the right direction and eventually other governments will be satisfied.

Focusing on China may have been the consequence of an inability among the G-7 to agree on action to stem the dollar's decline, which the French and Italian governments have blasted and Paulson has avoided criticizing.

Paulson repeated that while a ``strong dollar is in our nation's interest'' he wants exchange rates to be set in free markets. Europe's G-7 members are also divided with German Finance Minister Peer Steinbrueck telling reporters that the euro's value is ``nothing dramatic.''

The ``lack of consensus to talk up the dollar'' means it will extend its slide next week, said Robert Fullem, vice president of U.S. corporate currency sales at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York.

Looking beyond their borders, the G-7 officials called on banks to be wary of risks associated with doing business with Iran and called for rules to guide investments by sovereign wealth funds.