At a G20 sponsored international financial conference this week in Nanjing, Timothy Geithner again urged China to reform its currency exchange rates. From the NYTimes:
Treasury Secretary Timothy F. Geithner urged China again on Thursday to adopt a more flexible exchange rate policy, saying failing to do so could worsen inflation in China and impede growth in other parts of the world.
In a speech here, Mr. Geithner never mentioned China’s currency,the renminbi. But he made clear that Beijing’s strict control over the value of its currency was at odds with flexible exchange rates in other major economies. He said the issue had become “the most important problem to solve in the international monetary system today.”
“It does not require a new treaty, or a new institution,” he said. “It can be achieved by national actions to follow through on the work we have already begun in the G-20 to promote more balanced growth and address excessive imbalances.”
Chinese policy makers are concerned with American calls for monetary reform, though, because they feel that the U.S. has been irresponsible with its own monetary policy.
The United States government, the Chinese argue, would like the Chinese to buy the country’s bonds, but seems determined to weaken the dollar’s long-term prospect by adopting loose monetary policies, thereby undermining the value of China’s huge holdings of Treasury bonds.
Other emerging-market countries are also worried about whether the dollar is facing a long-term decline, analysts say.
“The big issue is the dollar has to and should decline in value because the U.S. is running big deficits,” said Eswar S. Prasad, a professor of economics at Cornell University and a conference participant. “And that frustrates China and other emerging market countries. They know they have to buy lots more U.S. Treasuries if they continue accumulating foreign exchange reserves. And the value of those dollar reserves will eventually fall.”
The more convoluted details in this particular Nanjing meeting concerned the renminbi and potentially reforming its role in the International Monetary System. From the International Financial Times:
The bone of contention in Nanjing was over the conditions for including the yuan in the Special Drawing Right (SDR), the International Monetary Fund’s quasi-currency that is part reserve asset and part in-house accounting unit.
The technical aspects of the debate are arcane, but the political significance is straightforward.
Adding the yuan to the basket of four currencies that now make up the SDR would confer prestige on China but also impose responsibilities: for the step to be of practical importance and not just a symbol of China’s rise, the currency would have to be freely convertible and no longer semi-pegged to the dollar.
And that, for China, is a two-step too far. Beijing wants to dismantle capital controls and free up the yuan, also known as the renminbi (RMB), on a timetable of its own choosing. So being in the SDR would be nice, but it is not a paramount objective.
“If everyone welcomes the yuan’s inclusion in the SDR, we’ll also be happy to see that happening a bit early. But we are not in a hurry. We are patient,” Chinese central bank governor Zhou Xiaochuan said after the meeting.
Privately, Western ministers and central bank governors hope that laying out the terms of entry will give ammunition to reformers such as Zhou who are locked in constant battle with conservatives over the pace of financial liberalization.
It appears China is once again at odds with the West and the issue of exchange rates is unlikely to be resolved through international consensus. From Financial Times:
Wang Qishan, Chinese vice-premier, emphasised his nation’s view that global monetary reform was a “long and complex process” that could only be explored and implemented gradually. The uneasy stand-off between the main players was a repetition of February’s meeting of G20 finance ministers and central bank governors.
Described privately by those taking part as one of the least constructive G20 gatherings since the crisis, the delegates found it difficult to agree on the right way to measure global trade imbalances, preventing the grouping from discussing policies that might lead to their resolution.
China has cooled to the idea of moving too quickly towards inclusion of the renminbi in the SDR basket and Mr Geithner, who holds a veto on any such move, laid out conditions that would be unacceptable to the Chinese.
Mr Geithner said currencies should only be included in the SDR basket if their countries had flexible exchange rates, independent central banks and allowed free movement of capital flows. China does not meet any of those criteria.