G-20 Back Gradual Currency Moves, Trade Monitoring
Nov. 12 (Bloomberg) -- Group of 20 leaders agreed to develop early warning indicators to head off economic turmoil as emergency talks on Ireland's debt reminded them the recovery from the global financial crisis remains fragile.
Finance ministers from the G-20 will work next year on a set of so-called indicative guidelines designed to identify large economic imbalances and actions needed to fix them, according to a joint statement released as the Seoul summit came to a close.
"Uneven growth and widening imbalances are fueling the temptation to diverge from global solutions into uncoordinated actions," the leaders said in the statement. "Uncoordinated policy actions will only lead to worse outcomes for all."
The agreement may shift the focus away from the U.S.-China dispute over the value of the yuan because it puts pressure on all G-20 nations to work to limit their trade and savings imbalances, Morgan Stanley nonexecutive Asia Chairman Stephen Roach said.
"It really gives the G-20 a far more workable framework to address the broad subject of imbalances," Roach said in an interview. "This is a far more reliable alternative than to try to resolve a multilateral problem through a bilateral currency" dispute.
A U.S. government official said the meeting also produced a consensus that exchange-rate changes are to happen gradually. The American official, speaking to reporters on condition of anonymity, said the U.S. was encouraged by progress on the Chinese currency.
Ireland Gatecrashes
Global leaders, including U.S. President Barack Obama and Chinese President Hu Jintao, met as global markets were giving a reminder of the financial crisis that led to the first G-20 meeting in November, 2008.
EU members of the G-20 are meeting today as Irish bond yields are soaring on concern the European Union will need to step in with a bailout. The leaders are discussing the Irish debt crisis and will probably issue a joint statement later today, said Steffen Seibert, a spokesman for Merkel.
China's benchmark Shanghai Stock Exchange Composite Index fell 5.3 percent today, the most since August 2009, and commodities tumbled amid speculation China is preparing to raise interest rates to curb inflation.
The new guidelines will be worked out with the help of the International Monetary Fund and will be developed next year when France holds the presidency of the G-20, according to the statement.
Capital Controls
The statement may also have provided some countries with cover to enact capital controls to limit exchange rate swings.
"In circumstances where countries are facing undue burden of adjustment, policy responses in emerging market economies with adequate reserves and increasingly overvalued flexible exchange rates may also include carefully designed macro- prudential measures," the statement read.
The agreements emerged after leaders struggled to find ways to address trade imbalances as China rejected policy prescriptions that fault its exchange-rate policy and directed criticism at monetary easing in the U.S.
"The Chinese jealously hold their right to be flexible, their right to adjust," said Donald Brean, co-director of the G20 Research Group at the University of Toronto. "They would not want to commit to something that is so rigid with respect to their trade imbalances. That is not to say they don't understand the underlying forces that are causing them."
China has run up a $201 billion trade surplus with the U.S. for the first nine months of this year, more than the U.S. deficit with the next seven-largest trading partners combined, according to Commerce Department data.
Obama, Hu
The pivotal roles China and the U.S. must play to get a breakthrough at the G-20 was underscored by an 80-minute meeting between Presidents Barack Obama and Hu Jintao yesterday dominated by a discussion about exchange rates.
U.S. Treasury Secretary Timothy F. Geithner has said that the yuan remains undervalued and that China needs to show a continued commitment to allow its currency to rise further over time. China has argued that a quick increase in the yuan's value would cause economic and social disruption.
The People's Bank of China set the reference rate for yuan trading at 6.6239 per dollar today, the strongest since a peg ended in July 2005. The yuan has risen about 3 percent against the U.S. currency since June 19, when China said it was allowing a resumption of appreciation that was frozen in 2008.
Geithner said last month that a ratio for current-account surpluses or deficits of 4 percent of gross domestic product was "likely to emerge as the basic benchmark countries look to." Governments from China to Germany rejected any move to set a target for current-account surpluses or deficits as a percentage of GDP.
"We agreed that we can't measure sustainable growth and imbalances with one indicator, but that we need a number of indicators," German Chancellor Angela Merkel told reporters. "These indicators will now have to be discussed, and that's what the finance ministers will in detail next year."
To contact the reporters on this story: Tony Czuczka in Seoul at aczuczka@bloomberg.net Michael Forsythe in Seoul at mforsythe@bloomberg.net
To contact the editor responsible for this story: Bill Austin at billaustin@bloomberg.net
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