Gyeongju, South Korea : Group of 20 finance chiefs concluded talks yesterday with the US running into resistance as it pushes targets for current-account imbalances as a new way of prodding China and other Asian nations to let their currencies rise.
G20 finance ministers and central bankers met in Gyeongju, South Korea, after weeks of accusations that countries from the US to China risk sparking a trade war by relying on weaker exchange rates to spur economic growth.
Seeking a solution, US Treasury Secretary Timothy F. Geithner proposed in a letter that G20 members pursue policies to reduce trade surpluses and deficits "below a specified share" of their economies.
That suggestion on Friday split the forum of emerging and industrial economies. "Setting numerical targets would be unrealistic," said Japanese Finance Minister Yoshihiko Noda, while German Economy Minister Rainer Bruederle rejected a "command economy" approach. Indian Finance Minister Pranab Mukherjee said caps would be hard to quantify.
In interviews with Bloomberg Television, Canadian Finance Minister Jim Flaherty said the idea was a "step in the right direction" and Australian Treasurer Wayne Swan called it "constructive."
Limiting gains
By turning the focus to current accounts away from currencies, Geithner is hoping China will be more agreeable to accelerating the yuan's appreciation after limiting its gain to about two per cent against the dollar since June.
Without naming any country, he said governments should not use exchange rates to seek "competitive advantage" and urged those with "significantly undervalued currencies" to allow an adjustment. Chinese officials have countered by promising a gradual increase of the yuan, saying that a sudden rise would cause social and economic disruption.
The US recommended deficits or surpluses of no more than four per cent of the gross domestic product, Noda said. The International Monetary Fund this month estimated China's surplus will swell to 7.8 per cent of GDP in 2015 from 4.7 per cent this year.
The current account is the broadest measure of trade because it includes investment and transfer income, and it would be hard to achieve any correction in one without a currency shifting.
The officials seem unlikely to reach an agreement that changes the "status quo" on exchange-rate and monetary policies this weekend, Giulia Comotti, a foreign-exchange strategist at Barclays Capital in London, wrote in a research report Friday.
"It is hard to see any significant policy changes coming out of the G20 this weekend given that the differences between the different groupings seem especially wide and their incentives diverse," Comotti said.
The Dollar Index fell 0.01 per cent, while the Standard & Poor's 500 Index added 0.2 per cent.
The Stoxx Europe 600 Index was down 0.2 per cent after falling as much as 0.4 per cent.
The yield on the 10-year Treasury note rose one basis point to 2.56 per cent.
The G20 officials are trying to end what Brazilian Finance Minister Guido Mantega calls a "currency war" as next month's Seoul summit of leaders nears. China's restraining of the yuan even as it runs a trade surplus and builds currency reserves has been attacked for distorting markets as has the recent slide of the dollar as the Federal Reserve shifts toward easier monetary policy.
Other variables
Fed officials need to be mindful of the effect their actions are having on the dollar, said Richard Fisher, president of the Fed bank of Dallas and a former deputy US trade representative.
"We need to be aware of the impact whatever we do has on other variables, and one of the variables is the dollar, the value of the dollar against other currencies," Fisher said in an interview last week.
Nations caught in the middle such as Brazil and South Korea are embracing capital controls or intervening themselves to stay competitive with China and limit inflows of speculative cash from North America and Europe.
This has raised concern from policymakers and investors that the friction will spark a round of devaluations and retaliatory protectionism, derailing an already fragile global economic recovery.
"If we fail to reach an agreement now and delay it to next time, the global economy will face a serious risk and it will unnerve people," South Korean President Lee Myung Bak told the meeting.
The G20 has long sought ways to rebalance the world economy away from its reliance on excess US demand and Chinese savings.
Limiting those talks to foreign exchange is too inflexible for nations with trade surpluses, a South Korean official said.
Looking at the current account allows countries to decide on which tools to adopt to reduce imbalances, including currency changes, he said.
"It is now clear that exchange rates and monetary policy must be given equal time with fiscal policy in the discussion on balanced growth," said Daniel Price, a former G20 adviser to President George W. Bush and now a partner at law firm Sidley Austin LLP in Washington. "The Seoul Summit could usefully agree targets."
The G20 policymakers are also debating whether to make their first joint comment on currencies since their leaders began meeting in 2008, having previously resisted remarks for fear of alienating China.
A draft statement included a pledge to avoid "competitive undervaluation" of exchange rates. The final text is scheduled for release at about 5pm local time.
Under pressure
Setting current account targets still leaves Asian economies under pressure to allow their currencies to gain, said Win Thin, global head of emerging markets strategy at Brown Brothers Harriman & Co. in New York. His estimates on the basis of purchasing power have the yuan, Thai baht and Philippine peso undervalued by at least 70 per cent.
China has limited the yuan's rise since a June pledge to introduce more flexibility, forcing other countries to try and control their exchange rates to keep a trading edge with the world's largest exporter. South Korea discussed several measures including a bank tax or levy on financial transactions and Brazil last week raised taxes on foreign inflows for the second time this month.
Geithner's proposal leaves questions, said Tim Adams, a former US Treasury official. Among them is whether governments will detail how and when they'll meet the goals and what happens if they're missed. The risk is a repeat of the euro-area budget deficit targets which were violated in a third of the euro's first decade, he said.