U.S. Treasury Secretary Timothy F. Geithner’s shot to end the “currency war” by pushing for targets to shrink current-account gaps risks failing over the complexity of shifting trade and investment flows.
Geithner may use a Nov. 5-6 meeting of Asia-Pacific Economic Cooperation forum counterparts in Kyoto, Japan, to press his case for current-account deficit or surplus targets of less than 4 percent of gross domestic product. The issue will also likely feature at a Group of 20 summit in Seoul next week.
The U.S. has cited a glut of Asian savings for helping spark the credit crisis earlier this decade, while Asian officials now counter it’s the American central bank’s liquidity injections that are warping global capital flows. Geithner’s initiative is undermined by disagreements over the causes of the imbalances and the failure of similar efforts in the past.
“With the U.S. wanting China to make the yuan more flexible and having limited success with it, the current-account discussions will be an indirect approach” that may work better, said Tomo Kinoshita, deputy head of Asia economics research at Nomura Holdings Inc. in Hong Kong. The challenge is that “a concrete agreement on current-account targets will be difficult to achieve.”
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. While a central bank adviser indicated last week that China may be open to the idea, a Foreign Ministry official today reversed that impression.
“The artificial setting of a numerical target cannot but remind us of the days of a planned economy,” Vice Foreign Minister Cui Tiankai said at a press briefing in Beijing. Cui echoed concerns across emerging markets that the Federal Reserve’s asset purchases will hurt global confidence, while adding that the U.S. and China are capable of overcoming difficulties in their relationship.
Finance chiefs from the 21 APEC economies will discuss sustainable growth policies, and some officials may bring up currencies as part of those talks, Japanese Finance Minister Yoshihiko Noda told reporters in Tokyo today. The U.S. will press Asian trading partners, including China, to reduce trade surpluses and move toward market-set exchange rates, a Treasury official said in Washington before Geithner’s trip.
Coming a week before the Seoul summit of the G-20, which includes the largest developed and emerging markets, the APEC gathering may prove less substantive, according to economist Tai Hui. APEC spans smaller economies from Peru to Papua New Guinea. China’s Finance Minister Xie Xuren, won’t be coming to Kyoto, the Nikkei newspaper said this week.
“The market focus will still be on the G-20,” Hui, head of Southeast Asian economic research at Standard Chartered Plc in Singapore. “But we now have a greater clarity of what the Fed is doing so officials may have something a bit more concrete to discuss in terms of how to mitigate the impact of additional liquidity from the Fed.”
Asian officials warned that the Federal Reserve’s decision to pump $600 billion of liquidity into the U.S. to shore up growth will spark flows of capital to emerging markets that threaten asset-price bubbles.
Reaction to Fed
“Our country will actively consider implementing capital control measures,” Kim Ik Joo, a director general of South Korea’s finance ministry, said in an interview yesterday. Hong Kong’s central bank chief Norman Chan said his city’s housing market may come under pressure with money flowing in.
Brazil, which is a G-20 member while outside of APEC, criticized the Fed’s move yesterday, with Finance Minister Guido Mantega saying “it doesn’t work to throw money from a helicopter because this won’t make growth flourish.”
Geithner outlined his plan in a letter to G-20 colleagues two weeks ago, saying “reducing external imbalances below a specified share of” GDP would force those with persistent deficits to boost savings and those with lasting surpluses to cut export reliance. Four percent is “likely to emerge as the basic benchmark,” he said on Bloomberg Television last month.
By turning the focus to current accounts away from currencies, Geithner is hoping China will be more open to accelerating the yuan’s appreciation after curbing its gain to about 2 percent against the dollar since June. Li Daokui, an adviser to the People’s Bank of China, said his nation has the “political and economic foundation” for agreeing to targets.
“It’s kind of unworkable but it does show the G-20 on the right page, which is encouraging,” Chris Turner, head of foreign exchange research at ING Groep NV in London, said of the Geithner proposal. “For currency markets it’s encouraging to think you’ll see more flexibility in Asian currencies.”
Among G-20 economies, Saudi Arabia, Germany, Russia and China all have surpluses larger than 4 percent, while Turkey and South Africa have deficits bigger than that, according to the International Monetary Fund. The U.S.’s deficit is estimated at 3.2 percent.
While Thomas Stolper, Goldman Sachs Group Inc. economist in London, said Geithner’s plan makes “important progress” by approaching the long-standing issue of misaligned exchange rates from a new angle, it may still be slow to work because current accounts are the result of many variables including business cycles, commodity supplies and cultural preferences on savings.
“The likelihood of G-20 nations being able to agree on binding targets that take into account all the special factors must be small,” Stolper said.
The targets could be skirted, with China expanding its trade surplus with the U.S. and still hitting the overall goal by offsetting the imbalance elsewhere, said Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York.
Meantime, the U.S. may miss its own guideline once its economic growth picks up because of the tendency for its imports to surge when consumers spend more, Englander said.
The current account target is a “clever idea,” yet the G-20 has no way of making it binding, said Tim Adams, a former U.S. Treasury undersecretary for international affairs.
European governments ignored budget deficit targets for a third of the euro’s first decade, while a 2006 effort by the International Monetary Fund to encourage key nations to rebalance the world economy flopped.
The G-20 has also failed to follow its own commitments with Global Trade Alert, a monitor group, estimating more than 400 measures that hurt trading partners have been introduced in the past two years even amid repeated pledges to avoid protectionism.
“It not only won’t solve the imbalances problem, it will become a distraction from the need to make progress on the underlying policies from which the current account is derived,” said Adams, now managing director at the Fairfax, Virginia-based Lindsey Group, an economic advisory firm.