G20 meeting highlights conflicts over currency
Thursday, March 31, 2011
NANJING, China (AP) — The time is right for China to move ahead on internationalizing its currency, French President Nicolas Sarkozy told finance mandarins Thursday at a brainstorming session for the Group of 20 leading economies on reforming the international monetary system.
Differences over exchange rate policies and other key issues were apparent at the meeting in the eastern Chinese city of Nanjing, with Sarkozy urging that China’s currency, the yuan, become an international reserve currency, while U.S. Treasury Secretary Timothy Geithner said the yuan must trade more freely before that can happen.
Despite Beijing’s insistence that its own currency regime was not on the agenda, Sarkozy opened the gathering with an urgent call for action. The U.S. and other countries say that China’s currency controls keep its yuan artificially cheap, giving Chinese exporters an unfair advantage in international markets during good economic times and bad.
“It is clear that we must evolve toward a more flexible exchange rate system that will allow us to withstand shocks,” Sarkozy said. There is also a need, he said, for rules and supervision to ensure countries are protected from the excess volatility that can come with liberalized currency trading.
“Now that the crisis is past, the temptation to not act is very strong. If we lose the impetus that we achieved during the crisis then the world will slide inexorably back into instability and crisis,” he said before leaving for Tokyo. His visit to Japan is intended to express the G-20’s support for the country as it struggles to cope with the aftermath of the calamitous March 11 earthquake and tsunami, and the ensuring nuclear power plant crisis.
Geithner told a panel at the G-20 meeting that easing controls on exchange rates and shifting to more market oriented policies are key steps toward managing inflation
“The major currencies are all flexible, with essentially full capital mobility. Most major emerging economies now operate largely flexible exchange rate regimes, with very open capital accounts,” Geithner said.
Without mentioning China directly, he said there are still countries that have very tightly controlled currencies.
“This asymmetry in exchange rate policies creates a lot of tension,” he said, according to a text of the remarks provided to journalists. “It intensifies inflation risk in those emerging economies with undervalued exchange rates. And, finally, it generates protectionist pressures.”
Washington and other trading partners view China’s restrictions on trading in the yuan as a key factor in global economic imbalances such as the large trade and current deficits of many Western nations. But just before the Nanjing meeting, Beijing signaled its own frustrations with U.S. economic stimulus policies, which the Chinese in turn say are fanning surges in commodity prices.
Blasting U.S. dominance of the world financial system, a prominent Chinese economist published a commentary reiterating Beijing’s complaints over U.S. stimulus policies and global reliance on the U.S. dollar as the main global reserve currency.
“The U.S. Federal Reserve acts without any constraints, adding to the lack of stability in the global monetary system and also its unfairness. Only the United States can have an independent monetary policy and other countries must follow,” wrote Xu Hongcai, of the government-affiliated China Center for International Economic Exchanges.
The Fed was accused of trying to devalue the dollar when it decided last November to buy $600 billion in U.S. government debt, seeking to revive a moribund economy by encouraging more borrowing and spending through a policy known as quantative easing.
Xu urged a shift to use of SDRs, or Special Drawing Rights, a quasi-currency used by the International Monetary Fund in its dealings with member governments, as a substitute for U.S. dollar as the world’s dominant reserve currency. Beijing has invested more than $800 billion of its $2 trillion in foreign reserves in U.S. Treasuries but is uneasy about the dollar’s stability and says the world financial system should be more diversified.
Geithner concurred with Sarkozy’s call for the yuan to be included in the basket of currencies used for SDRs, which now includes the dollar, Japanese yen, euro and other European currencies — but with a caveat.
“Over time, we believe that currencies of large economies heavily used in international trade and financial transactions should become part of the SDR basket,” he said. But he added that “to achieve this objective, the concerned countries should have flexible exchange rate systems, independent central banks, and permit the free movement of capital flows.”
Sarkozy said it was time to agree on including the yuan in the basket of SDR currencies, but not as a replacement for the dollar.
“We must accept the inevitable internationalization of the great global currencies. This does not, of course, mean challenging the important role of the dollar and the euro, which must be stable currencies,” he said.
“But the internationalization of some currencies is already a reality. I am thinking in particular of the yuan and I welcome the ambition of the Chinese authorities in this respect.”
During recent talks in Paris, G-20 finance chiefs appeared close to agreement on tracking dangerous imbalances in the global economy by monitoring several key indicators: current accounts, real effective exchange rates, currency reserves and public and private debt levels.
China, however, has opposed focusing on exchange rates due to its resistance to letting its own currency, the yuan, appreciate against the dollar.
In his opening remarks, Chinese Vice Premier Wang Qishan reiterated Beijing’s desire to move only gradually on such issues.