Obama Sharpens Yuan Criticism After G-20 Nations Let China Off the Hook
President Barack Obama attacked China’s policy of undervaluing its currency minutes after he and other Group of 20 leaders ended a summit that failed to agree on a remedy for trade and investment distortions.
“It is undervalued,” Obama said of the yuan, speaking to reporters in Seoul after the meeting concluded. “And China spends enormous amounts of money intervening in the market to keep it undervalued.”
The G-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. Obama and his South Korean counterpart, Lee Myung Bak, failed to complete a free-trade agreement.
The two-day gathering was marked by clashes over whether Chinese or U.S. policies were more to blame for economic imbalances that endanger the global recovery. China took aim at the Federal Reserve’s monetary easing, highlighting dangers it said the move posed to financial stability and rejecting policy prescriptions that fault its exchange-rate regime.
“I have to give this round to the Chinese,” said Tim Condon, head of Asian research at ING Groep NV in Singapore. “In an international negotiation like this China has seized on” the easing “to its advantage and managed to deflect any kind of criticism the U.S. might have been able give.”
Obama and Hu have arrived in Japan, where about half of the G-20 leaders will gather again in Yokohama for a weekend meeting of the Asia-Pacific Economic Cooperation forum.
Finance ministers from the G-20 will work next year on a set of “indicative guidelines” designed to identify large economic imbalances and the actions needed to fix them, according to a joint statement released as the Seoul summit came to a close. The indicators will be selected with the help of the International Monetary Fund and developed next year when France holds the G-20 presidency, the statement said.
“Uneven growth and widening imbalances are fueling the temptation to diverge from global solutions into uncoordinated actions,” the statement said. “Uncoordinated policy actions will only lead to worse outcomes for all.”
China has $2.65 trillion of foreign currency reserves, more than double any other country. It ran up a $201 billion trade surplus with the U.S. in 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.
Cliff Tan, head of emerging-market currency research at Societe Generale SA in Hong Kong, said the summit did nothing to curb what he sees as an inevitable decline in the dollar against emerging-market currencies.
“The Fed will be buying Treasuries next week and I expect the world will continue to try to diversify away from a currency they don’t particularly want more of at present,” Tan said. “And that still means a weaker dollar.”
The G-20 said emerging markets facing a surge of capital inflows can adopt regulatory steps to cope, offering them cover to limit currency swings and stem asset bubbles as the U.S. adds $600 billion of liquidity from the Fed’s quantitative easing.
“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 G-20 leaders said in the statement.
G-20 discussions were clouded by concern Ireland may need the European Union to step in with a bailout after its bond yields surged to a record, a reminder of the financial crisis that led to the first summit in November 2008.
“These were hard and sometimes difficult negotiations,” German Chancellor Angela Merkel told reporters in Seoul. “In the end the spirit of cooperation prevailed.”
The statement didn’t mention numerical goals for curbing current account imbalances, which U.S. Treasury Secretary Timothy F. Geithner had broached until days before the summit. He 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.” China and Germany, which run two of the world’s largest surpluses, rejected the idea of targets.
“We agreed that we can’t measure sustainable growth and imbalances with one indicator, but that we need a number of indicators,” Merkel said. “These indicators will now have to be discussed, and that’s what the finance ministers will take up in detail next year.”
Stephen Roach, nonexecutive Asia Chairman for Morgan Stanley, said today’s agreement may shift the focus away from the U.S.-China dispute over the yuan because it puts pressure on all G-20 nations to address trade and savings gaps.
“It really gives the G-20 a far more workable framework to address the broad subject of imbalances,” Roach said in an interview from Mumbai. “This is a far more reliable alternative than to try to resolve a multilateral problem through a bilateral currency” dispute.
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.
Obama and Hu met for 80-minutes yesterday in talks spokesmen for both presidents said were focused on the currency.
“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.”
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