G7 compromises over calls to reform sovereign wealth funds

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The G7 group of leading industrialised economies called for greater transparency from sovereign wealth funds yesterday, but stopped short of proposing reforms that might limit the activities of the state-backed investment vehicles.

Some nations had dem-anded a tougher approach but the G7 compromised after the UK, in particular, argued that any regulation of the funds' activity should be based on existing competition rules and genuine considerations of national security, rather than a return to protectionism.

The British Chancellor, Alistair Darling, said he believed inward investment – including that by sovereign wealth funds – was "not only necessary, but welcome". He said the British Government was "vehemently against" any moves to re-establish protectionism, provided the funds "play by the rules" in a commercial manner.

Even so, the political dim-ension of sovereign wealth funds, state-backed investment giants operating in strategic sectors of the economy, will remain controversial. The G7 will meet the governments involved in these funds, including China, to discuss their operation. Some, such as those run by Kuwait and Norway, have been operating with little incident for decades.

The G7 finance ministers were meeting in Washington in the wake of turbulence in the credit markets, slower global growth, the weakening dollar, record oil prices and growing concerns in some quarters about the role and importance of sovereign wealth funds.

The G7 stated: "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 accelerated appreciation of its effective exchange rate."

However, the group was unable to press its case immediately, as the main Chinese representatives are absent from this week's meeting of the International Monetary Fund, attending instead the Communist Party conference in Beijing.

The fundamental problem for the G7 is that the world's exchange rate system is half fixed (the US, some gulf states and east Asia) and half floating (broadly, the rest of the world). As the East Asian economies grow ever more important, this dual system is becoming untenable.

Some analysts are hopeful that next year's IMF and G7 meetings will come closer to the resolution of these difficulties, provided that the dollar's slide doesn't become "disorderly" in the intervening months. A call to Opec to increase the supply of crude may also help stabilise that market.

The G7 also said it wanted to see better surveillance of economies and markets, specifically via new rules for overseeing the liquidity and risk management pro-cedures of financial instit-utions, and a re-examination of the role of the credit agencies.

The Financial Stability Forum, which takes in the world's governments, central banks and financial regulators, will bring forward proposals for the G7, the IMF and other multilateral bodies to examine next year.

The Chancellor added: "Regulators need to be far more focussed on liquidity and the way in which financial derivatives are traded and how credit agencies operate."

Mr Darling has also been pressing his counterparts for progress on the World Trade Organisation's stalled Doha round of trade talks, which he described as "absolutely essential".