G-20 Nations Wrangle Over Strengthening Vow on Currencies

Group of 20 nations’ efforts to tackle currency and trade imbalances floundered as China rejected policy prescriptions that fault its exchange rate regime and directed criticism at additional monetary easing in the U.S.

“Don’t make other people take the medicine for your disease,” Yu Jianhua, a director general at China’s Ministry of Commerce, told reporters in Seoul late yesterday. “Quantitative easing will have a very big impact on developing countries including China.”

At stake for the global economy is averting a repeat of the currency and trade tensions that erupted in the 1930s and were blamed for worsening the Great Depression. 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 dominated by exchange rates.

“The Chinese can’t help but think this is just a way of continuing to point the finger at China,” said Neil Mackinnon, an economist at VTB Capital Inc. in London and a former Treasury official. “It doesn’t look as if we’re going to see anything specific or substantive that will address global imbalances.”

China’s record $28 billion trade surplus with the U.S. in August heightened criticism its government maintains an unfair cap on yuan appreciation to the detriment of U.S. businesses. Obama, who has pledged to double exports within five years, has sought to broaden the currency debate by linking it to a worldwide effort to rein in current-account excesses.

Germany’s Surplus

Germany’s current-account surplus as a percentage of gross domestic product for 2010 is set to be 6.1 percent, the second highest in the G-20, after Saudi Arabia, based on International Monetary Fund projections. The U.S. is likely to see a deficit equivalent to 3.2 percent of GDP, the third deepest, it said.

China is seeking to modify the language on trade imbalances in the summit communique, said a German official taking part in the talks who requested anonymity because he isn’t authorized to speak publicly for the government. G-20 finance chiefs last month agreed to “pursue the full range of policies conducive to reducing excessive imbalances and maintaining current account balances at sustainable levels.”

Obama and Hu spent “the bulk” of their talks discussing exchange rates before attending a dinner with other leaders, said White House press secretary Robert Gibbs. Canadian Prime Minister Stephen Harper said he was “not so sure” an agreement can be reached in time for the summit’s conclusion later today.

‘Underlying Causes’

“They have to deal with the underlying causes for this instability, which are these imbalances,” said Josef Ackermann, chief executive officer of Frankfurt-based Deutsche Bank AG. “It’s not about assigning blame to who is in deficit and who is in surplus — the markets will decide who is in surplus and who in deficit — but to create a framework to find the right balance.”

China’s yuan rose 0.16 percent to 6.6238 per dollar as of 5:30 p.m. in Shanghai yesterday, according to the China Foreign Exchange Trading System. 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. China permitted a faster pace of gains this week, a strengthening of about 0.8 percent since Nov. 8, the yuan’s biggest three-day advance since a currency peg ended in July 2005.

Geithner, China

U.S. Treasury Secretary Timothy F. Geithner has said that the yuan remains undervalued and that China needs to show continued commitment to allow the Chinese currency to rise further over time. China has countered by saying that a quick increase in the yuan’s value would cause economic and social disruption.

The G-20 meeting of finance ministers and central bankers last month agreed to move toward “more market-determined exchange rate systems” and make efforts on “reducing excessive imbalances.” The U.S. Federal Reserve a week later said it would pump $600 billion into the economy to spur growth. Brazil, Germany and China said the move would drive down the dollar and fuel speculative capital flows that risk asset bubbles.

Commodity Prices

Copper on the London Metal Exchange rose to a record yesterday, while gold and cotton touched all-time highs this week as investors sought assets as a hedge against currency debasement. The weak dollar and low interest rates are fueling inflows of funds to higher-yielding markets, with governments in South Korea, Brazil and Taiwan raising barriers to foreign investors.

Former Federal Reserve Chairman Alan Greenspan, writing in an opinion piece in the Financial Times yesterday, said that both the U.S. and China were depressing their currencies.

“We will never seek to weaken our currency as a tool to gain competitive advantage,” Geithner said in an interview with CNBC television, according to a transcript released yesterday.

China, the U.S.’s second-largest trading partner, had a trade surplus in excess of $170 billion with the U.S. in the 12 months through August, according to the American Department of Commerce.

Opposing Targets

China, along with Germany, opposed a suggestion last month by Geithner that the G-20 consider targets for reining in current-account imbalances. To meet the targets, countries like China would likely have to let the value of their currency rise, making their exports more expensive.

Differences in competitiveness between nations can’t be leveled by “politically imposed limits,” German Chancellor Angela Merkel told global business leaders in Seoul yesterday.

Setting limits on trade gaps “is an idea that should be discussed,” French Finance Minister Christine Lagarde said.

France takes over the presidency of the Group of 20 tomorrow after the summit chaired by South Korea’s Lee.

“Some countries, those with big deficits, need to deal with those deficits,” U.K. Prime Minister David Cameron said in Seoul. The big fear is “countries pursuing beggar-my-neighbor policies — trying to do well for themselves but not caring about the rest of the world.”


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