China Shows Its G-20 Might, Wins on Imbalances

In case you missed it, and I can't blame you if you did because it mostly consisted of theatrics as opposed to anything substantial, the G-20 convened a meeting on the question of global economic imbalances over the weekend in Paris and issued a tame communique. Instead of having a substantial bearing on such imbalances, however, it casts more insight on that perpetual question of "Hu's the daddy of the world economy?" Coming into this meeting, the Chinese position was already well understood on the matter of using indicators for imbalances. Which is to say that overall the lesser, the better. At the meeting proper, the PRC held firm in the face of near-universal clamour for using such indicators to prevent another 2008:

China is the only country blocking an agreement on a set of indicators to measure global imbalances, leaving deputies with a limited number of options to present to ministers on Saturday, a G20 official said. The official said G20 deputies had drafted a list of two sets of internal indicators--public debt and deficits and private savings--and two sets of external ones--the current account or trade account as well as reserve levels combined with real exchange rates.

"China is reticent, generally speaking," he said, noting Beijing preferred to include the trade balance rather than the current account. "And its position on reserves and the exchange rate is well known," the official said. China's opposition had left G20 deputies with limited options to suggest on Saturday: either accept the four indicators or reject them; introduce a hierarchy where some indicators count more than others or use a time delay for their gradual introduction, the official said.

Among the Europeans, the Germans were holding out for some Chinese hide:

Germany dug its heels in ahead of G20 talks on global economic imbalances on Friday, with a German source saying Berlin wanted nothing less than agreement on a full list of indicators used to tackle such mismatches, including exchange rates. G20 finance ministers meet in Paris on Friday evening and Saturday to discuss a series of indicators that could be used as benchmarks for judging when one of other of the world's economic powers should change economic policy.

Meanwhile, the Americans brought their usual sob story to the table [quick, bring me a hankie], albeit with some additional flourishes given the wider audience of G-20 member countries. They probably thought a message of "China hurts everyone including fellow LDCs" would have added resonance:

Treasury Secretary Timothy Geithner on Saturday pointed to the problems China's tightly controlled currency poses for other developing economies and said Beijing still had further to go to let its currency rise. Talks at a Group of 20 meeting in Paris centered round efforts, led by Germany and G20 presidents France, to persuade China to include its yawning current account surplus and undervalued currency in a list of measures aimed to start a process of rebalancing the global economy.

There was little public evidence that the United States itself had pushed Beijing hard on that issue, but Geithner reiterated that there was still some way to go in the steady appreciation of the yuan. "China's currency remains substantially undervalued, and its real effective exchange rate -- the best measure to judge its currency against all of its trading partners -- has not moved much in this latest period of exchange-rate reform," Geithner told a press conference after the meeting.

When all was said and done, let's just say China largely got its way at the G-20. Although not necessarily a positive outcome, it goes to show you how the PRC's influence now looms large at these international confabulations. Not only was there any mention of currency reserves in the final communique, but the rest of the terminology was watered down to the point of, well, being back to where we were before. There too was no mention of REER (real effective exchange rate) being used as an indicator as per Geithner's overtures:

The Group of 20 dropped currency reserves and provided compromise wording on other indicators in a list of measures it will use to assess global economic imbalances, a post-meeting communique showed on Saturday. The deal, struck after two days of deadlocked negotiations in Paris, gives ground to China, who had resisted the inclusion of reserves and the current account balance in the list [it favoured using the trade balance].

There was no mention of reserves and rather than the current account and real effective exchange rates, the group agreed to use "the external balance composed of the trade balance and net investment income flows and transfers, taking due consideration of exchange rate, fiscal, monetary and other policies."

Try and make that mishmash of weasel words stick. You can't identify transgressors as there are no hard and fast indicators of exchange rates, fiscal and monetary policies that would identify a nation due for adjustment. Again, read the communique and weep.

Bottom line: Why don't they just give China enough policy space to figure out what it already understands on its own? Attempts to gang-tackle it at international summits clearly haven't worked, and the latest G-20 gathering is no exception. In fact, my argument is that others bloviating about currencies and reserves only makes matters worse by raising Chinese resistance. Generally, states (except for the weakest ones) do not welcome the image of being cowed by foreign nattering nabobs of negativity. What more China?