The finance ministers of the world’s twenty largest economies managed to reach agreement toward reducing global trade and currency imbalances in Paris this weekend.
Most nations in the G20 agreed to improve coordination of economic policy but China and the United States have been diametrically opposed on a number of issues. While the Americans want China to faster appreciate its currency, Beijing has opposed including exchange rate and currency reserve criteria in economic indicators, fearing domestic unrest if Chinese exports decline.
A compromise was reportedly reached after softening criteria on current account surpluses. Interest payments for China’s foreign currency reserves would not be included in the calculation of the account balance which measures trade and capitals flows in and out of a country.
While China has let the value of the yuan increase in recent years, it has simultaneously been buying up American dollars to keep their own currency cheap. This allows Chinese exporters an advantage over foreign competitors on the global market.
China has pointed at the Federal Reserve’s policy of quantitative easing as a cloaked method of driving down the exchange rate of the dollar and artificially enhancing American competitiveness. Many developed nations worry that the fiscal crisis in the United States could eventually trigger another financial panic. Public debts and deficits as well as private debt levels will therefore be included in the indicators.
The question now is to decide how to assess the agreed upon indicators and what to do whenever a major imbalance is identified.
While China and Russia previously agreed to reduce their dependence on the American dollar, Brazil and Canada supported proposals to include the yuan in the International Monetary Fund’s basket of special drawing rights this weekend which seen as a step toward making the Chinese a reserve currency.
Most G20 members feel that their central banks have become too dependent on the dollar and favor an extended role for special drawing rights. Beijing does not allow foreigners to freely buy yuan however — another method of protecting the value of its currency.
The French, who chair both the G8 and the G20 this year, also plan international action to curb the volatility of food and fuel prices as inflation soars.
The World Bank reported earlier this week that food prices had reached “dangerous levels,” estimating that up to 44 million people have been reduced to poverty since last summer as a result of mounting commodity costs.
French president Nicolas Sarkozy has argued that speculators need to be reined in to prevent food prices from spiking but the root problem is scarcity.
Prices reached a record high in 2008, causing riots and protests across the developing world. Last year, severe weather conditions in some of the world’s largest food exporting countries damaged supplies, inflating prices almost 20 percent compared to the year before.
Flooding hit the planting season in Canada and destroyed crops of wheat and sugar cane in Australia. Drought and fires devastated harvests of wheat and other grains in Russia during the summer, prompting Moscow to ban exports.
There was little division among the G20 conference on implementing extra safeguards for the world’s major banks. Within two years, bank capital and liquidity rules should be enhanced while stress testing is set to become regular practice.