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G7 finance chiefs debate reducing supply chain reliance on China

By Christian Kraemer and Tetsushi Kajimoto

NIIGATA, Japan (Reuters) -Finance leaders of the Group of Seven (G7) advanced economies discussed the need to make global supply chains more resilient by reducing over-reliance on China, German Finance Minister Christian Lindner said on Friday.

Japan, which is hosting a three-day G7 meeting to debate key global themes in the city of Niigata, has been leading fresh efforts to diversify supply chains away from China by building partnerships with low- and middle-income countries through investment and aid.

Countries such as Germany wanted to reduce its dependency on China, Lindner told a press conference. "Here, emerging and low income countries come into play," he added.

But while the G7 rich democracies are likely to agree on the partnership deal to beef up supply chains, they are not on the same page in terms of how far they should go in countering China - the world's second largest economy that is not a G7 member.

The United States is at the forefront in pushing for stronger steps. Treasury Secretary Janet Yellen has called for targeted controls in investment to China to counter what she saw as Beijing's "economic coercion" against other countries.

While wary of China as a strategic rival, Germany is cautious, however, of being seen as forging a G7 front against Beijing given its heavy reliance on trade with the country.

Japan is also sceptical about the idea of investment controls due to the huge impact such a move could have on global trade and its own economy, government officials say.

A Japanese finance ministry official who participated in the G7 talks told reporters on Friday the idea was discussed at the meeting, but that Japan's initiatives were not targeted at any particular country.

British Finance Minister Jeremy Hunt told the Nikkei newspaper on Thursday the G7 must counter China's economic coercion, though made no mention of investment controls.

GLOBAL RISKS LOOM

Hanging over the meeting was a lack of progress in resolving a U.S. debt ceiling stalemate.

The G7 nations can little afford further risks to their fragile economies and there were some voices of concern raised over the potential dire consequences if the U.S. were to fail to resolve the impasse, which could tip its economy into recession.

A scheduled meeting on Friday between U.S. President Joe Biden and top lawmakers was postponed until early next week as the two sides seek a compromise to avoid a catastrophic default.

Germany's Lindner said he hoped U.S. politicians would come to a "grown-up" decision on talks to raise the $31.4 trillion debt ceiling - the maximum amount the U.S. government is authorised to borrow.

World Bank President David Malpass told Reuters the risk of a U.S. default added to problems already facing the global economy that was entering a prolonged period of slow growth.

"It looks like global growth will fall below 2% this year in 2023, but then, as you look at future years, it may stay low for several years," due to rising borrowing costs and high levels of debt, Malpass said on Friday in Niigata.

Stubbornly high inflation has forced U.S. and European central banks to hike interest rates aggressively, weighing on their economies and stoking fears of financial instability after the failure of three U.S. banks.

The health of the global financial system and measures to avert another digital bank run were discussed at the G7 meeting, the Japanese finance ministry official said.

"What's important is that at present, the (global financial system) is resilient but that we shouldn't be complacent," the official said.

The G7 finance leaders are expected to issue a joint statement after their three-day meeting ends on Saturday.

(Reporting by Leika Kihara, Andrea Shalal, Christian Kraemer and Tetsushi Kajimoto, Additional reporting by Takaya Yamaguchi in Niigata, Yoshifumi Takemoto in Tokyo; Writing by Leika Kihara; Editing by Kim Coghill and Alex Richardson)