Group of 20 finance chiefs agreed on details of a new surveillance system aimed at highlighting and rectifying flaws in the world economy before they imperil growth.
The officials concluded talks in Washington today by outlining four methods they will use to decide when indicators such as budget deficits and external trade balances appear excessive. A country identified as having persistently dangerous levels of two of the measures will be subjected to further study and may have remedies suggested.
The aim of the plan is to spot imbalances earlier and then prescribe policies to fix them before they infect the world economy. The hope is such a process will deliver more-balanced international expansion after uneven trade and investment flows helped trigger the credit crisis.
“The guidelines operate like a net which holds the countries which violate or do not respect” them, French Finance Minister Christine Lagarde told reporters. Seven countries, including the US and China, are large enough to be of systemic importance and will face tougher monitoring, officials said.
The discussions proved difficult as China signaled concern that the initiative will give the US and Europe new ammunition in their push for the yuan to appreciate faster.
Differences over the root causes of imbalances and the lack of an enforcement mechanism may still undermine the initiative, said Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto.
“They’re working toward a fix, but we’re a long way from fixing the global imbalances,” said Toronto-based Sutton.
The G-20 oversees 85 per cent of the world economy and policy makers including US Treasury Secretary Timothy F. Geithner and Brazilian central bank governor Alexandre Tombini met as the number of risks to expansion grows. Higher oil prices are sapping consumer spending in the US, tighter monetary policy is curbing demand in China, Japan is struggling after last month’s earthquake and tsunami and Europe is still battling a debt crisis.
“The global recovery is broadening and becoming more self- sustained, with increasingly robust private demand growth,” the officials said in a statement. ‘But downside risks remain.”
Unrest in the Middle East and Japan’s natural disaster “have increased economic uncertainty and tensions in energy prices,” they said. Policy makers said there is “adequate spare capacity to meet global energy demand.”
The G-20 also agreed to strengthen coordination “to avoid disorderly movements and persistent exchange rate misalignments” and to establish a path to increasing the number of currency that comprise the IMF’s Special Drawing Rights. Policy makers will also research the use of capital controls further, officials said.
Having agreed in February to monitor indicators, including budget deficits and private savings rates, for signs of imbalances, the G-20 today outlined the guidelines against which they will be assessed. Two are focused on the circumstances and history of each economy and the others on historical comparisons with the remainder of the G-20 and similar countries.
Nations accounting for more than 5 per cent of the G-20’s gross domestic product will be more rigorously studied given their “greater potential for spillover effects,” the statement said. Canadian Finance Minister Jim Flaherty said the group is “not exactly the G-7 -- you have to include China and India.”
The G-20 wants to avoid a repeat of the last expansion when trade imbalances opened, which helped spark the deepest global recession in seven decades. China and other Asian nations recycled the dollars from their trade surpluses into US bonds, depressing global yields, while US consumers relied on the low interest rates to drive an USstainable global spending spree and record trade deficit, in a self-reinforcing cycle.
The International Monetary Fund this week predicted global current account imbalances will remain wide if countries with trade surpluses, such as China, fail to spur domestic demand and those with trade deficits, like the US, don’t save more. Data also showed China’s currency reserves exceeded $US3 trillion for the first time; in the US, lawmakers are at odds over how to pare a record budget deficit.
The next step is for officials to fine-tune the plan and present leaders with a list of those countries aggravating imbalances before a November summit in Cannes, France. Those countries would be coUSled by their counterparts on which policies to deploy.
Slowing agreement on the guidelines has been suspicion on China’s part that it’s being bullied into letting the yuan appreciate more quickly. China has limited its currency’s gain to about 4.5 per cent against the dollar since the end of 2009, sparking criticism it is fueling domestic inflation, building excessive reserves and exacerbating trade deficits.
Chinese central bank governor Zhou Xiaochuan said today in the southern Chinese province of Hainan that the G-20 should focus on economic issues and that his nation will continue to allow more flexibility in the yuan. Chinese officials say low interest rates in the west are causing strong capital flows into emerging markets such as theirs, a position echoed by the Group of 24 developing nations yesterday.
“The communique has fully reflected demands of all parties and is balanced,” China vice finance minister Zhu Guangyao said today. “China is satisfied with the result.”