G-20 Spat Risk Eases as U.S. Eschews Pushing Targets
U.S. Treasury Secretary Timothy F. Geithner refrained from pushing for current-account targets and China hailed the potential effect of Federal Reserve easing at a finance ministers’ meeting days before the Group of 20 summit.
The Fed’s move to buy $600 billion of Treasuries could contribute “tremendously” to global growth, Vice Finance Minister Wang Jun said after Asia-Pacific Economic Cooperation forum finance chiefs met in Kyoto, Japan, Nov. 6. At the same gathering, Geithner said current-account deficits or surpluses aren’t “something that is amenable to limits or targets.”
Policy makers from Asia to South America have warned that the Fed’s decision to pump liquidity into the U.S. will depress the dollar and spark flows of capital to emerging markets that threaten asset-price bubbles. China’s Vice Foreign Minister Cui Tiankai said Nov. 5 the U.S. step may hurt global confidence, while rejecting state-planning style targets for trade deficits.
“It looked like there was going to be quite a lot of conflict or lack of agreement going into the G-20 but this suggests there may be a bit more accord,” said Mitul Kotecha, head of global foreign-exchange strategy at Credit Agricole CIB in Hong Kong. “There is some toning down of the rhetoric on the Fed’s policy but in return, the U.S. will be looked upon to tone down” its push to shrink trade and investment imbalances.
Geithner said G-20 leaders, who meet in Seoul Nov. 11-12, are poised to approve last month’s agreement among finance ministers to avoid long-term current account surpluses or deficits, “assessed against indicative guidelines to be agreed.” The G-20 includes the largest developed and emerging nations, from the U.S. and Germany to Japan, China, India and Brazil.
While the Treasury chief said last month that 4 percent of gross domestic product was “likely to emerge as the basic benchmark countries look to,” he refrained from repeating that guideline in Kyoto. He instead noted policy makers have tried to address persistent trade and investment imbalances since the 1940s, and “it’s a process that’s going to take some time.”
China’s response to the Fed’s quantitative easing continued today, with Vice Finance Minister Zhu Guangyao saying it will provide a “shock” to the global economy and increase “hot money” flows to emerging economies. Zhu told reporters in Beijing the U.S. hasn’t “fully realized” the possible impact of the policy, which China hopes will help the global economy.
In Kyoto, Wang highlighted language in the APEC finance chiefs’ statement that nations with reserve currencies must be “vigilant against excess volatility disorderly movements.” The dollar has a majority of global foreign-exchange reserves, according to the International Monetary Fund.
“We pay close attention to the U.S. quantitative easing policy,” Wang said two days ago. “Quantitative easing policy that’s aimed at boosting the U.S. economy will help the revival of the global economy tremendously.”
Wang’s comments contrasted with those of Vice Foreign Minister Cui, who demanded an explanation from the Fed in a Nov. 5 press briefing in Beijing because “many countries are worried about the impact of the policy on their economies.”
Officials from China, Germany and Japan opposed a set target for current accounts in the past month even as Canada and Australia indicated openness to the idea. Among the G-20 nations, Saudi Arabia, Germany, Russia and China all run surpluses larger than 4 percent, and Turkey and South Africa have deficits bigger than that, according to the International Monetary Fund.
“We’re trying to make sure as the world economy recovers, that future growth is sustainable and we don’t see re-emerge the kind of excess imbalances on the trade side, either surpluses or deficits, that could threaten future growth and the future financial stability,” Geithner said at a joint press conference after the Kyoto meeting.
Thai Finance Minister Korn Chatikavanij said in a Nov. 5 interview with Bloomberg Television that while Geithner’s push to discuss global imbalances in trade and investment flows is a “constructive approach,” Southeast Asian nations oppose setting specific targets.
“We didn’t discuss a specific number,” Japan’s Finance Minister Yoshihiko Noda said after the APEC meeting. “However, both surplus and deficit countries must address these imbalances. We hold the same understanding that there is a need for multi- faceted cooperation to ensure that current accounts are sustainable.”
Underlying the U.S. push to address the imbalances is the assessment by the Fed that a surfeit of Asian savings helped spark the credit boom earlier this decade, which ended in the biggest financial crisis since the 1930s. Now, officials from Asia to Latin America counter it’s the American central bank’s liquidity injections that are warping global capital flows and driving down the dollar.
Brazilian Finance Minister Guido Mantega escalated the international rhetoric in September, saying a “currency war” had begun, with nations seeking to cheapen their exchange rates to bolster exports. G-20 finance ministers and central bank governors then aimed to defuse the tensions with their Oct. 23 communique pledging to avoid “competitive devaluation.”
China has kept its currency’s advance against the dollar to less than 3 percent since mid-June, a strategy that’s contributed to other currencies rising and nations taking steps to prevent an “unfair disadvantage,” Geithner said last month.
Todd Elmer, a Singapore-based currency strategist, wrote today in a note to investors that Geithner’s “shift in rhetoric represents a modest dollar negative since it suggests the status quo which has resulted in trend dollar weakening is likely to remain in place.”
Geithner told reporters in Kyoto two days ago that the U.S. views a “strong dollar” as in its interest and “we will never use our currency as a tool to gain competitive advantage.” The Dollar Index, which IntercontinentalExchange Inc. uses to track the dollar against the currencies of six major U.S. trading partners including the euro and yen, slid last week to the lowest level since December 2009.
Geithner’s plan was in part designed to broaden discussions beyond China’s exchange-rate policy, blamed by U.S. lawmakers and companies for keeping the yuan artificially low in a subsidy for local exporters.
“The fact that the Fed is undertaking quantitative easing has made it very difficult for U.S. officials to accuse other countries” of manipulating their currencies “when they are indirectly debasing the dollar,” Kotecha said.
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