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> G-20 Overcomes China Opposition to Agree on Imbalance Yardsticks
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> By James G. Neuger and Theophilos Argitis
>
>
> Feb. 21 (Bloomberg) -- Group of 20 finance chiefs overcame Chinese
> opposition to start crafting an early warning system to detect when
> economic fault lines are opening that may imperil global growth.
>
> Seeking to smooth lopsided trade and investment flows which helped
> plunge the world into a credit crisis and recession, the G-20’s
> finance ministers and central bankers concluded talks in Paris on
> Feb. 20 by listing the yardsticks they will monitor to see whether
> imbalances are forming. Among them: budget deficit levels, the
> external imbalance and private savings rates.
>
> The scorecard, which will be enforced through peer pressure rather
> than hard targets, hands the U.S. and Europe a new way of alerting
> China to the economic impact of a yuan that U.S. Treasury Secretary
> Timothy F. Geithner calls “substantially undervalued.” After
> initially resisting the list in all-night talks amid concern it
> would be used as a weapon against their currency policy, the
> Chinesediluted some of its language and secured the omission of
> foreign exchange reserves.
>
> “The bottom line is that we see slow but steady progress towards
> better international policy coordination aiming at reduced global
> imbalances,” saidThomas Stolper, chief currency strategist at
> Goldman Sachs Group Inc. in London. “The G-20 statements are visibly
> becoming the result of compromise about words and specific
> expressions.”
>
> Yuan Prospects
>
> The roster of indicators may still be more than investors expected
> and by encouraging a rebalancing of the world economy away from U.S.
> demand may initially mean a weaker dollar, said Callum Henderson,
> global head of currency research in Singapore at Standard Chartered
> Plc. He predicts the yuan to rise to 6.20 per dollar by the end of
> the year from last week’s 13-year high of 6.5732.
>
> The G-20 met for the first time this year under the chairmanship of
> France as inflation begins to replace weak growth as the biggest
> risk for some of its members, which together account for about 85
> percent of the global economy. The officials signalled concern over
> the new threat by noting some emerging markets are displaying “signs
> of overheating” and agreeing to study the forces behind surging
> commodity prices, which pushed oil to a 16-month high in January and
> world food prices to a record.
>
> The G-20’s statement maintained the view first established last year
> that its members will enhance currency flexibility and strive to
> avoid “disorderly movements in exchange rates.” Officials spent most
> of their time crafting a framework to underpin such rhetoric.
>
> Global Recession
>
> The intention is to avoid a repeat of the last expansion when
> national trade imbalances opened that later helped trigger the
> deepest global recession in seven decades. U.S. consumers relied on
> the low interest rates resulting from foreign borrowing to drive an
> unsustainable global spending spree and record trade deficit, while
> China and other Asian nations recycled the dollars from their trade
> surpluses into U.S. bonds, depressing global yields and providing
> fresh impetus to the cycle.
>
> The concern now is that new distortions may begin building as the
> global economic recovery gathers steam, yet does so with engines
> firing at different speeds. The International Monetary Fund predicts
> China will remain the world’s fastest-growing major economy in 2011,
> with a 9.6 percent expansion. The Washington-based lender sees 3
> percent growth in the U.S. and 1.5 percent in the 17-nation euro area.
>
> Indicator List
>
> The new plan will require governments to better eye a list of
> economic indicators that feature public debt and fiscal deficits,
> private savings rate and debt, the external imbalance composed of
> the trade gap and net investment income flows and transfers “taking
> due consideration of exchange rate, fiscal, monetary and other
> policies.” The next step, at the G-20’s meeting in mid-April, will
> be to turn these indicators into the basis for a voluntary set of
> guidelines for economic policy.
>
> The list of indicators will provide rich countries with an
> alternative to telling emerging markets to “stop manipulating
> currencies” by allowing them to highlight the “consequences of
> supporting your currency artificially,” said David Tulk, chief rates
> and currency strategist at Toronto-Dominion Bank’s TD Securities unit.
>
> U.S. and European officials maintain China’s exchange rate
> management undermines the world economy by fuelling domestic
> inflation, filling currency reserves and exacerbating western trade
> gaps by handing Chinese exporters an edge in global markets. China
> responds that low interest rates in the west are propelling hot
> money capital into emerging markets such as theirs and that a quick
> revaluation of the yuan would risk decimating their economy’s growth.
>
> Currency Reserves
>
> Missing from the list of indicators is currency reserves which now
> stand at $2.8 trillion in China alone, providing an export-led
> symbol of its recent rise to become the world’s second-largest
> economy. China, which had wanted to focus on the smaller trade gap
> definition, also diluted the final language so that it mentioned the
> current account’s components and not its title.
>
> “It wasn’t easy, there were obviously diverging interests,” said
> French Finance Minister Christine Lagarde. The goal is “to test
> economic policies and determine to what extent they are favorable
> for all countries together and not just the basis of domestic
> economic policy.”
>
> Negotiating Power
>
> Helping China push back in the talks were Brazil, Russia and India
> in another sign of how such developing nations increasingly wield
> negotiating power commensurate with their recently-found economic
> strength. The tensions within the Paris talks again suggest the G-20
> nations may find it easier to fight fires as they did during the
> recession than in preventing them.
>
> “The organization is losing relevance,” said Geoffrey Yu, a currency
> strategist at UBS AG in London.
>
> Geithner used his personal press conference to lambast the Chinese
> for the yuan’s appreciation, which they have limited to about 4
> percent over the past year.
>
> “China’s currency remains substantially undervalued, and its real
> effective exchange rate -- the best measure to judge its currency
> against all of its trading partners -- has not moved much in this
> latest period of exchange-rate reform,” Geithner said. China is
> “leaning heavily” against appreciation, he also said.
>
> Chinese Move
>
> On the eve of the meeting, China raised bank-reserve requirements
> for the eighth time in a year and officials indicated in Paris that
> they will fight domestic inflation by extending a four-month-old
> cycle of interest-rate increases.
>
> For all the time spent discussing their threat, imbalances are
> ebbing. The IMF predicts that China’s current-account surplus will
> narrow to 5.1 percent of gross domestic product in 2011 from as high
> as 10.6 percent in 2007, while the U.S. shortfall slims to 2.6
> percent from 5.1 percent. The risk is the gaps re-open as the
> recovery strengthens.
>
> There was little discussion of binding China more closely into the
> world economy by adding the yuan to the IMF’s synthetic currency
> basket, known as special drawing rights. Created in 1969 and last
> reweighted in November, the SDR is a composite of the dollar, euro,
> Japanese yen and British pound, though its role in markets is minimal.
>
> Current SDR rules would require China to first make the yuan fully
> convertible, a step that would put it on the upward track desired by
> the U.S. and Europe. The SDR’s future is on the agenda of a lower-
> level working group.
>
> “Some conditions have to be met before the Chinese currency is
> ready,” German Finance Minister Wolfgang Schaeuble said. “The
> Chinese know this. This goal won’t be reached this year.”
>