Yuan escapes criticism from G20; not from U.S., IMF


Reuters | Sat Jun 5, 2010 | 5:54pm IST

China’s currency policies were spared a specific mention in the ‘Group of 20’ communique on Saturday, but U.S. Treasury Secretary Timothy Geithner and the IMF kept up pressure for a stronger yuan. Both in a letter to G20 colleagues and comments after the conclusion of their meetings here, Geithner characterized a more flexible yuan exchange rate as a central and necessary component of rebalancing the global economy. He said China had ambitious reform plans aimed at strengthening domestic consumption so it could rely less on exports for its growth. "A necessary part of that process of reform, and the Chinese leaders have acknowledged this and recommitted to this, is to resume what they call the reform of their exchange rate mechanism," Geithner told a news conference in South Korea’s main port city.

International Monetary Fund Managing Director Dominique Strauss-Kahn joined Geithner in pointing out that China’s currency, also known as the renminbi, was too weak. "The IMF still believes that the renminbi is still substantially undervalued…even a revaluation of 20-25 percent doesn’t solve all the imbalances and you have more to do, so it’s only part of the problem and you still have other imbalances, Strauss-Kahn told reporters. After allowing the Yuan to strengthen gradually over three years from about 8.28 to the dollar in July 2005 to 6.83 in July 2008, the Chinese authorities virtually pegged it to the dollar in 2008 to help exporters weather the global financial storm. Beijing has resisted pressure from manufacturers and lawmakers in Western countries to unshackle the yuan and let it appreciate in line with China’s growing economic strength.  

SOFTER APPROACH

Geithner in recent months has taken a softer approach on pressing China to move towards a market-determined yuan rate, saying it was "China’s choice," to do so. In April, he postponed a much-anticipated U.S. Treasury report on whether China was manipulating its currency, preferring instead to use international gatherings, such as last month’s U.S.-China economic talks and G20 summits to lobby Beijing for change. But lack of action by a summit of G20 leaders later this month in Toronto could prompt some U.S. lawmakers to push for punitive trade sanctions against China. Europe’s debt crisis, which has prompted a steep drop in the euro, has caused markets to dampen their expectations for a stronger yuan anytime soon. Yuan offshore forwards, or non-deliverable forwards now price in barely any yuan appreciation in the next 12 months.

But U.S. Treasury officials want to keep the focus on the yuan as a key component of the rebalancing debate, as many economists do not believe that trade and financial imbalances can shift without it. "Within the G-20, we discussed how the ongoing shift toward higher savings in the United States would need to be complimented by stronger domestic demand growth in Japan and in the European surplus countries, and sustained growth in private demand, together with a more flexible exchange-rate policy, in China," Geithner said in a statement delivered in Busan. Beijing shot back with an admonishment for rich nations to take "effective measures" to tackle their tepid growth and fiscal woes. The official Xinhua news agency quoted Chinese finance minister Xie Xuren after the G20 meeting as urging developed economies to "maintain basic stability among the major reserve currencies". He urged policy makers to keep an eye on inflationary and fiscal risks, while seeking to restore growth, Xinhua said.

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