Geithner Harnesses G-20 to Push for Yuan Revaluation

Group of 20 finance chiefs may intensify pressure on one of their own today as the U.S.-led campaign for China to revalue the yuan broadens from Washington to Mumbai and Brussels.

Three weeks since U.S. Treasury Secretary Timothy F. Geithner called today’s G-20 talks in the U.S. capital an “avenue for advancing U.S. interests” on the Chinese currency, counterparts are rallying to his side. Central bankers in India and Brazil this week backed a stronger yuan as did the International Monetary Fund and European Union governments.

Speculation the G-20 will press China for a revaluation, after the body ducked the topic of exchange rates in recent years, lifted yuan forwards to a three-month high yesterday. Whether the lobbying proves successful provides another test of the G-20’s ability to achieve results as splits over hedge fund rules and bank taxes fracture the united front its members formed in battling the global recession.

“Given that Secretary Geithner has forestalled pressure for unilateral U.S. action by framing the China currency issue as a G-20 multilateral concern, it would be surprising if exchange rates were not discussed at some length,” said Daniel Price, former President George W. Bush’s G-20 negotiator, who is now a partner at law firm Sidley Austin LLP in Washington.

Photographer: Nelson Ching/Bloomberg

Timothy Geithner, U.S. Treasury secretary, speaks during a meeting with Wang Qishan, vice premier of China, unseen, at the Great Hall of the People in Beijing, on June 1, 2009. Close

Timothy Geithner, U.S. Treasury secretary, speaks during a meeting with Wang Qishan,... Read More

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Photographer: Nelson Ching/Bloomberg

Timothy Geithner, U.S. Treasury secretary, speaks during a meeting with Wang Qishan, vice premier of China, unseen, at the Great Hall of the People in Beijing, on June 1, 2009.

Daylong Talks

G-20 finance chiefs including Geithner and European Central Bank President Jean-Claude Trichet begin a day of talks at 9:30 a.m. in Washington, with a statement and press conferences scheduled for about 5 p.m. It’s their first meeting since September’s decision by leaders to make the G-20 the premier forum for setting international economic policy. G-7 officials dined together last night without releasing a communiqué.

Japanese Finance Minister Naoto Kan told reporters after the dinner that countries are “mindful about not ordering each other to do things in an open forum” as such an approach “could actually spur a backlash from China.”

After scrapping a peg to the dollar in July 2005, the Chinese government allowed the yuan to gain 21 percent before holding it at about 6.83 to the dollar since July 2008. While that aids its exporters, it has incurred criticism abroad for hurting foreign companies and fanning Chinese inflation.

In delaying a twice-yearly report on whether China is manipulating its exchange rate, Geithner said April 3 that he aimed to use the G-20 meeting “to make material progress” at a time when U.S. lawmakers are threatening tariffs on the nation.

Brazil’s Take

Geithner is already finding supporters abroad. Brazil’s central bank President Henrique Meirelles said April 20 it’s “absolutely critical” that China let its currency appreciate. European officials will today seek an “effective real appreciation of the renminbi,” according to an EU draft document prepared for the G-20 talks.

Finding backers “should be quite easy” for Geithner because less developed economies are suffering the most from China’s currency regime, said Harvard University professor Niall Ferguson. Reserve Bank of India Governor Duvvuri Subbarao said April 20 exports to India from China have grown faster than shipments in the other direction “and that obviously is a reflection of differences in the exchange-rate management.”

“The principal losers from the weak renminbi are other emerging markets, not the U.S.,” said Ferguson, author of “The Ascent of Money: A Financial History of the World.”

Timetable

China may not hold out much longer, said Kevin Lai, an economist at Daiwa Capital Markets Hong Kong Ltd. The IMF said in an April 21 report that allowing the yuan to gain would help cool the country’s expansion, which the Washington-based lender expects to accelerate to 10 percent this year from 8.7 percent in 2009.

Chinese executives including Yang Yuanqing of Beijing-based computer maker Lenovo Group Ltd. and Qin Xiao of China Merchants Bank Co. said last month they favored a stronger yuan.

“There is a consensus that an appreciation now works to China’s advantage,” Lai said. Bank of Israel Governor Stanley Fischer said in an interview in Washington yesterday that tempering “the threat of domestic overheating” was a reason to let the yuan rise.

The G-20 avoided the topic of exchange rates after its leaders began regular meetings in November 2008 because of the need to first integrate China into the international policy- making fabric. That may now be changing as the recovery strengthens and authorities pledge policies that make the world less reliant on U.S. demand and Chinese savings.

‘Coming Back’

“One problem which had been extensively discussed before the crisis about the global imbalances has been a little forgotten during the crisis” and “are clearly coming back today with the recovery,” IMF Managing Director Dominique Strauss-Kahn said in a press conference yesterday.

International lobbying may still take time to pay off. It took almost two years of G-7 pressure for China to loosen the yuan’s peg to the dollar in July 2005. In a sign some in China are still against allowing the yuan to gain, an industry ministry official, Zhu Hongren, yesterday said another global recession remains a risk and criticism of the yuan hurts the country’s trade outlook.

“We expect China to wait a bit longer,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York.

Any currency dispute may not be the only schism at the Washington talks, which occur a year after G-20 leaders agreed to craft a $1.1 trillion plan to aid the world economy.

Bank Levy

While policy makers favor having banks cover more of the cost of future bailouts, an IMF recommendation that taxes be applied to non-deposit liabilities and the sum of profit and compensation has received a mixed reception.

Although the U.K. and U.S. have welcomed the IMF’s ideas, Canadian Finance Minister Jim Flaherty said a levy may hurt banks and backfire by fueling risky behavior. Japan’s Kan has noted “situations differ for each nation” and his country already has its Deposit Insurance Corp.

Geithner has also been urging European leaders to reconsider their approach to tightening regulation over hedge funds. Europe’s proposed Alternative Investment Fund Management directive includes provisions to limit non-European funds’ access to the EU market. Differences also extend to how to raise the quantity and quality of capital at banks.

“The risk, which is not only a risk but already materialized somewhat, is that different parts of the world will have their proposals, which all make sense when you’re looking at the interests and problems of the countries preparing these reforms, but which may be somewhat inconsistent,” Strauss-Kahn said yesterday.

The G-20 accounts for about 85 percent of global gross domestic product. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., U.K. and EU.

To contact the reporter on this story: Simon Kennedy in Washington at skennedy4@bloomberg.net

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