Paris: Finance ministers of the world’s major economies reached a fudged accord on Saturday on how to measure imbalances in the global economy after China prevented the use of exchange rates and currency reserves as indicators.
French finance minister Christine Lagarde, who chaired the Group of 20 talks, said the deal nevertheless represented a significant step towards better coordination of economic policies worldwide to help prevent another financial crisis.
“It wasn’t simple. There were obviously divergent interests but we were able to reach a compromise on a text that seems to us to be both balanced and demanding in its implementation,” she told a news conference.
Ministers and central bank governors agreed on a list of indicators including public debt and fiscal deficits, private savings and borrowing, the trade balance and other components of balance of payments such as net investment flows.
But at Chinese insistence there was no mention of the real effective exchange rate or of foreign currency reserves.
“Reserves have been dropped,” Lagarde acknowledged, adding that the deal included a mechanism to take account of exchange rates when assessing the overall balance of payments.
The United States and other western countries accuse Beijing of keeping the yuan artificially undervalued to boost its exports, hence accumulating massive foreign currency reserves that they say distort the world economy.
US Treasury Secretary Timothy Geithner repeated after the talks that China’s currency “remains substantially undervalued” and its real exchange rate had not moved much despite a slow appreciation since a reform last June.
“There is broad consensus that the major economies, not just Europe, Japan and the United States but also the large emerging economies, need to allow their exchange rates to adjust in response to market forces,” he said.
The world’s number two economy, which overtook Japan this week, has resisted Western pressure to substantially revalue its currency to help rebalance global growth.
China’s trade surplus has shrunk of late, perhaps explaining why it prefers that measure.
Western and Japanese officials said the indicators would in practice cover balance of payments and foreign reserves, even if those terms had been omitted to assuage Beijing. Chinese Finance Minister Xie Xuren left without speaking to reporters.
“We needed to be inventive about wording in the communique in consideration for a country that did not want to use the term ‘current account balance´... The statement lists components of the current account balance,” Japanese finance minister Yoshihiko Noda told reporters.
Lagarde said the indicators were not binding targets but would lead to the drafting of guidelines for coordinated economic policies to reduce distortions, and then to a mutual assessment process.
Germany, Europe’s biggest exporter, which has resisted US efforts to set numerical targets for current account surpluses, said no specific goals would be set for certain indicators.
The G-20 ministers acknowledged that economic recovery was diverging between developed and developing economies, but they differed in their assessment of global inflation risks.
The communique noted that while growth was subdued in most developed economies, with unemployment high, major emerging markets were roaring ahead, “some with signs of overheating”.
European Central Bank president Jean-Claude Trichet said inflationary pressures coming from energy and commodities prices must be taken seriously, and the ECB was determined to avoid second-round effects on wages.
But Geithner said inflation risks in the United States were moderate.
French President Nicolas Sarkozy, who holds the G-20 presidency this year, urged ministers on Friday not to get bogged down by the indicators dispute and welcomed the fact that China had agreed to host a seminar on reforming the international monetary system in Shenzhen in late March.
France has also run into opposition with its two other G-20 priorities - greater transparency and regulation of commodities prices and reform of the international monetary system.
The G-20 communique said ministers agreed to work on strengthening the international monetary system to help avoid disruptive fluctuations in capital flows and disorderly movements in exchange rates.
China and Brazil complain that “hot money” inflows risk destabilising the economies of emerging countries, pointing the finger at the U.S. Federal Reserve’s money printing via a $600 billion bond purchase programme.
With world shares at 30-month highs, investors seem content for the G-20 to take its time, whereas at the height of the crisis two years ago markets were baying for policy action.