G-20 Seeks to Refrain From Competitive Undervaluation

G-20 Seeks to Refrain From Competitive Undervaluation
Police officers check cars ahead of the G20 Finance Ministers and Central Bank Governors' Meeting in Gyeongju, South Korea. Photographer: Tomohiro Ohsumi/Bloomberg

Group of 20 finance chiefs are planning to say members will refrain from “competitive undervaluation” of their currencies in a bid to soothe trade tensions before they derail the world economy.

Finance ministers and central bankers will say after talks conclude in Gyeongju, South Korea, on Oct. 23 they want a “more market-determined exchange rate system that minimizes adverse effects of excess volatility and disorderly movements in exchange rates,” an official from a G-20 country said today, citing a draft statement and speaking on condition of anonymity.

G-20 policy makers are convening amid concern countries are pursuing weaker exchange rates as a route to stronger economic growth, either by limiting currency gains with interventions like China or by discussing possible monetary easing, as the U.S. and U.K. have done. The risk is of a protectionist backlash that curbs economic growth, with emerging markets including Brazil and South Korea already introducing capital controls to stay competitive.

The U.S. is pushing for the G-20 to agree on a statement of cooperation on exchange-rate issues either this weekend or when its leaders meet next month in Seoul, a U.S. official said today.

Feel Comfortable

China needs to let the yuan rise so other emerging market nations will feel comfortable letting market forces affect their currencies, Treasury Secretary Timothy F. Geithner said in a Wall Street Journal interview published today, repeating a theme from speeches he gave Oct. 6 in Washington and Oct. 18 in Palo Alto, California. Geithner also said that “major currencies” are “roughly in alignment now.”

The U.S. is trying to forge a united front among the Group of Seven nations in urging China and other emerging market nations to let their currencies rise, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York.

“How the dollar does against the euro and sterling might be different than how the dollar does against Asia,” Chandler said. He predicted there would be increasing pressure on China at the G-20 meetings, without an international agreement on intervention such as the Plaza Accord in 1985.

China’s Growth

China’s surprise shift to higher interest rates this week underscores the task developing nations face as they struggle to keep speculative cash from destabilizing their economies. Pressure grew today on the country to allow the yuan to extend its gains as data showed the economy grew 9.6 percent in the third quarter and inflation accelerated to its fastest pace in two years.

The U.S. backs current-account targets to gauge whether individual trade surpluses or deficits are sustainable, and Geithner wants the International Monetary Fund to take on a larger role of economic surveillance, U.S. officials said. The G-20 must help the IMF fulfill its roles in overseeing global monetary systems and giving countries frank evaluations of their exchange-rate policies, the Treasury official said.

Canada wants to “address, with our G-20 colleagues, mechanisms to enhance and timelines to enhance the flexibility of currencies,” Bank of Canada Governor Mark Carney told reporters yesterday.

Bank of England Governor Mervyn King said finance chiefs need to reach a “bargain” to coordinate economic policies, though real agreement would require a “revolution.”

‘Grand Bargain’

“What is needed now is a grand bargain among the major players in the world economy,” King said in an Oct. 19 speech to business leaders in Dudley, England. “A bargain that recognizes the benefits of compromise on the real path of economic adjustment in order to avoid the damaging consequences of a move towards protectionism.”

“The weapon of choice today is a competitive devaluation,” Nobel Prize-winning economist Joseph Stiglitz said yesterday in an interview on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays. “Of course, not everybody can weaken their currency relative to others.”

Geithner delayed a report on foreign-exchange markets last week, saying the yuan remained undervalued and that China needed to show continued commitment to allowing the currency to rise against the dollar over time. The yuan has risen about 2 percent since a two-year peg against the dollar was scrapped on June 19.

China Central Bank Governor Zhou Xiaochuan earlier this month said his nation needs to avoid the “shock therapy” of excessive yuan appreciation and “very fast” gains probably wouldn’t end global economic imbalances. Premier Wen Jiabao also warned of the dangers of a rapid rise, saying yuan gains of 20 percent to 40 percent would exacerbate Chinese unemployment and cause social upheaval.

Download: Stiglitz on the U.S Economy, Kaufman on Inflation: Audio


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