G-20 Unity Born in Crisis Fractures as Leaders Pursue Own Ends
President Barack Obama finds himself on the defensive as world leaders gather in Seoul for the Group of 20 summit, with members disparaging U.S. economic policies they say weaken the dollar and stoke hot-money flows.
The U.S. Federal Reserve decision last week to pump $600 billion into world’s biggest economy has stolen the spotlight away from China’s currency. Brazilian Finance Minister Guido Mantega said today that the Fed’s move may inflate commodities prices and proposed the world move away from using the dollar as the main reserve currency. Former Chinese central bank governor Dai Xianglong this week faulted the U.S. for adopting policies without regard for the dollar’s global role.
The policy fissures and concern countries may react with currency devaluations and capital controls underscore how the G-20 unity displayed during the financial crisis has given way to national divisions as members chart their own recovery path.
“The last thing a developing economy wants is for that liquidity to distort their asset markets and create a destabilizing bubble,” Stephen Roach, Morgan Stanley’s nonexecutive Asia chairman, told Bloomberg Television in an interview yesterday. “The process is not going to work if they don’t come up with a multilateral solution.”
China, the world’s biggest holder of foreign exchange, yesterday took steps to stem capital inflows that threaten to drive up stock and property prices and today raised bank reserve requirements. South Korea may revive a 14 percent tax on domestic Treasury and central bank bonds held by foreigners as early as January to curb foreign-exchange volatility, a ruling party lawmaker said today.
Obama told G-20 leaders in a letter released today that “the most important contribution” the U.S. can make to the global economy is a strong U.S. recovery.
“What the Fed has done is absolutely the right strategy for the U.S. economy, and absolutely the right strategy for the rest of the world as well,” said Stuart Thomson, a fund manager at Glasgow-based Ignis Asset Management, which manages about 70 billion pounds ($113 billion) in assets. “They’ve got to get their growth, they’re just not so keen on the price for which they’re going to that growth via the exchange rate.”
Pre-summit skirmishes -- Germany has also criticized the Fed’s quantitative easing -- will test the G-20’s ability to recover the consensus that enabled participants to embark on $5 trillion of fiscal stimulus to end the world’s worst economic downturn in seven decades. Their first meeting, hosted by former President George W. Bush in 2008, came two months after the bankruptcy of Lehman Brothers Holdings Inc.
“Today the volume of transactions done in U.S. dollars surpasses by a long way the economic importance of the U.S.,” Mantega told reporters today in Seoul.
After uniting to rescue banks and cut interest rates and taxes to fight the credit crunch, members have since clashed on the withdrawal of stimulus, taxes on financial speculation and trade imbalances.
“The international community united as one spirit during the crisis,” South Korean President Lee Myung Bak said Nov. 3. “There are doubts over whether such cooperation can be achieved now the global economy is entering a recovery phase, with each country growing at a different pace.”
South Korea has $293 billion of foreign exchange reserves, more than 10 times the amount it held in July 1997 when the Asian financial crisis sparked currency collapses and a region- wide recession.
China also joined Germany in rejecting as inappropriate a suggestion by Treasury Secretary Timothy F. Geithner that the G-20 consider targets to rein in excessive current-account imbalances that can roil exchange rates. Today German Chancellor Angela Merkel said “Germany will not accept quantifiable targets” on trade surpluses.
China today reported a larger-than-forecast $27.1 billion trade surplus for October, the second-largest this year. The yuan climbed to the strongest level against the dollar since 1993, with the People’s Bank of China setting the daily reference rate at 6.645 yuan per dollar, the biggest gain since Oct. 8.
Morgan Stanley’s Roach said funds provided by the Fed’s bond purchases are seeping out of the U.S. in search of higher returns. The Australian dollar has surged past the greenback in value for the first time while commodities such as cotton, gold and copper are all trading at or close to record highs.
Some of the concerns have been overstated, World Bank President Robert Zoellick said in a Bloomberg Television interview today in Singapore.
“Even if you didn’t have quantitative easing, as long as you have differential growth rates you’re going to see capital flow to these emerging markets,” he said.
G-20 finance ministers and central bankers did agree last month to avoid competitive currency devaluations in a statement that is set to form the basis for the leaders’ communique this week. They also managed to rebalance voting rights at the International Monetary Fund to give emerging economies a greater say in the global financial system.
The expanded number of voices at the table after the G-20 replaced the G-7 as the leading body to manage the global economy may help explain the increased noise, said Michael Paulus, head of the Asia Public Sector Group at Citigroup Inc. in Hong Kong, and a former U.S. Treasury official.
“When you’ve got 20 members that are trying to agree on something it is much harder than when there were seven,” he said. If the Fed didn’t do the extra quantitative easing and “the U.S. economy went back into a double dip and shrank 2 percent, say in 2011, is the dollar going to go up? Is that going to help anyone?”
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