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S. Balakrishnan

Perhaps the most relieved at the outcome was Japan. A yuan revaluation would have forced up the yen at a time when its economy once again seems to be dithering.

LAST weekend's G-7 meeting in London began with a bang and ended with a whimper.

The agenda was weighty - debt relief for the poorest nations, tsunami relief, China's currency peg and foreign exchange markets.

Britain's Chancellor of the Exchequer, Mr Gordon Brown, piloted the loan write-off proposal, which, thankfully, went through without much fuss. Now that the burden of perpetual debt is off its back, sub-Saharan Africa should find ways - with the help of the international community - of getting on to the growth track and out of the poverty trap.

As expected, forex issues were not resolved. There are deep divisions both within the G-7 as well as between the G-7 and the other increasingly important economies of China and India - as of the moment particularly China.

The G-7, with the possible exception of Japan, thinks China's currency is significantly undervalued. For years, it has been pegged to the dollar despite the huge and continuing trade surplus with the US, which thinks China is not playing by the rules. As a result, the euro has borne the brunt of the adjustment necessary to correct America's trade deficit.

Europe is, naturally, not happy. As things are, German economic growth is anaemic. The euro's unfounded appreciation in the last few months has made life more difficult for the euro-zone economies.

The President of the European Central Bank, Mr Jean-Claude Trichet, does not blame the Americans as much as he does the Chinese. With its high growth and savings rates, fundamentals justify - even demand - a higher yuan. Because China is adamant about its exchange rate, the ECB has lost some degrees of freedom in its monetary policy. The euro's rise has forced its central bank to adopt a softer interest rate posture than it would like.

In the end, China had its way. It did not commit to any timetable to free the yuan or capital controls. And the G-7 meekly accepted it. Rumblings and grumblings, if any, were under the breath.

Perhaps the most relieved at the outcome was Japan. A yuan revaluation would have forced up the yen at a time when its economy once again seems to be dithering. Japan is publicly committed to a zero interest rate policy till it conquers deflation. A sharp rise in the yen will hit its exports and weaken the main prop to the economy.

The summit's focus on forex market volatility was less than expected, thanks to the dollar's sharp correction in the last month and a sanguine view on America's current account deficit in Mr Greenspan's speech on the eve of the conference.

An interesting sidelight was the invitation to India for the first time ever to dine at the high table along with the richest countries of the world in a G-7 gathering.

We are still not in the same league as China in the eyes of the G-7, but clearly becoming a presence. A definite shot in the arm for our prospects in the coming times.

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