* Says Canada will avoid arbitrary, punitive rules
* Lays out G20 priorities, as host of summit in June
* Don't stop stimulus yet, but prepare exit strategies
* Criticizes manipulation to undervalue currency (Adds details from speech)
OTTAWA, Jan 28 (Reuters) - Canadian Prime Minister Stephen Harper, distancing himself from hard-liners in the bank reform debate, warned on Thursday against excessive regulation of the financial sector.
"Canada ... believes that financial sector regulation must have the right purposes and must not be excessive ... Canada will not go down the path of excessive, arbitrary or punitive regulation of its financial sector," Harper said.
Addressing the World Economic Forum in Davos, Switzerland, he noted that higher regulatory standards in Canada meant its banks did not require bailouts. He said that if inadequate regulation in other countries was not addressed, "the consequences could actually be worse than before the crisis."
The prime minister repeated Canada's stance that rather than impose a set of global regulations, each country should fix its own system and then submit to international scrutiny.
Harper said there was no public demand in Canada for "retaliatory measures" against domestic banks since they did not fail or require public assistance.
"Our approach to financial sector regulation, while historically much more activist than in many other countries, has not been to micromanage the affairs of a complex industry," he said.
He did not directly refer to U.S. plans to limit the size of banks or British and U.S. ideas of putting some kind of levy on banks to recoup public subsidies, but leaders are engaging in a lively discussion about just how to approach reform.
Harper's speech was intended to lay out an agenda for the G20 and G8 summits Canada is hosting in June.
He said the top priorities of the Group of 20 developed and emerging countries are:
- financial sector reform
- stimulus programs
- global trade and growth strategies.
The G20 has replaced the Group of Eight industrialized countries as the main forum for economic discussions, but Harper said the G8 still has a role to play in promoting democracy, development, and peace and security. He is pushing a G8 initiative to promote maternal and child health.
Harper said that because the economic recovery is "a mile wide but only an inch deep" and job creation is "very tentative", it was too early for countries to call a halt to stimulus programs.
"But, while it is absolutely too soon to abandon stimulus programs, it is no longer too early to start thinking about a strategy to exit them," he said.
He also took oblique aim at China for not letting its yuan rise, saying that G20 partners "must embrace enlightened views" and not say things like: "Let your currency trade at market rates; we'll keep ours undervalued."
He added: "Notions rooted in a narrow view of sovereignty and national self-interest must be reconsidered." (Reporting by Randall Palmer; editing by Rob Wilson)