As G20 Leaders Set Deal, Geithner Criticizes China
By LIZ ALDERMAN
Published: February 19, 2011

Treasury Secretary Timothy F. Geithner took direct aim at China on Saturday at a meeting of the world’s most powerful economies, saying that the nation’s currency was still “substantially undervalued” and that recent steps taken by Beijing to adjust its value were too small.

Mr. Geithner’s remarks came as financial leaders from the Group of 20 gathered here said they had agreed on a set of common guidelines to identify when economic and financial developments in some countries would create problems for the rest of the world. The agreement was forged after France and Germany persuaded China to accept a compromise on proposed yardsticks to measure the potential problems.

Mr. Geithner said that even though China had allowed its currency, the renminbi, to appreciate against the dollar since last summer, it had not been enough. As such, the United States and its European partners say, China still retains an unfair edge in trade that is driving the world’s economies to operate at two speeds.

“Its real effective exchange rate — the best measure to judge its currency against its trading partners — has not moved much in this latest period of exchange rate reform,” Mr. Geithner said.

Countries that keep their currencies artificially low, he added, are fueling inflationary pressures within their own economies and forcing others to bear the burden of spillover effects, he added.

The set of guidelines agreed upon grew out of concerns that fast growth in China and other emerging markets would stoke inflation and trade imbalances that could destabilize a recovery.

China had originally tried to quash efforts to measure those differences by looking at real exchange rates and currency reserves, which the United States and other Western countries see as having contributed to the financial crisis. China has accumulated substantial currency reserves in United States dollars, helping it to hold down the value of the renminbi and run up a large trade surplus.

But China, after discussions with France and Germany, agreed to include those elements in the guidelines, along with public and private debt levels.

Beijing’s currency policy has helped stoke a breakneck pace of growth in China that, together with other emerging markets, has also fueled a surge in food and commodity prices. Analysts say the higher prices have contributed to wide social unrest in Egypt and across the Middle East, and in other struggling economies worldwide.

The International Monetary Fund estimates that commodity prices jumped 20 to 30 percent last year, a trend that Dominique Strauss-Kahn, the head of the I.M.F., said was “creating a lot of problems for low-income countries and vulnerable people.”

“We’re reaching a danger point” in these countries, Robert Zoellick, the president of the World Bank, said in a separate telephone call with a small group of journalists. He said he urged G20 officials to “put food first in 2011,” even as they bicker over technical ways to measure imbalances in the world economy.

Mr. Geithner said the United States would support measures to limit the potential for the manipulation of commodity prices through greater transparency and oversight of the commodity and derivative markets.

The worries about inflation come as the global recovery moves at an uneven pace, Mr. Strauss-Kahn said. “Asia is doing well, Latin America and Africa, too,” he said. “But unemployment is still very high in advanced economies. So this recovery won’t deliver sustainable growth,” he said.

China’s initial resistance highlights a daunting challenge for policy makers as the world’s economies move at two speeds. Not surprisingly, each country is pursuing its own self-interest to resolve internal economic problems. These include high unemployment in the United States and difficult austerity measures in Europe, as countries tighten their belts to mend finances, as well as inflation threats in fast-growing nations.

“It’s very difficult to see any government doing something in its fiscal affairs just to benefit the broader system,” Jacob Frenkel, the chairman of JPMorgan Chase International, said in Paris last week at a meeting of the Institute for International Finance.

Bringing China on board is a particular challenge, he added. “It’s clear the Chinese currency will need to appreciate,” Mr. Frenkel said, although that alone won’t address the desire by other countries to see China start spending more of its savings to buy up imports, a trend that would help even out trade imbalances. Lacking broad welfare and retirement safety nets, the Chinese tend to save more than they spend.

But cajoling Beijing is a losing proposition, Mr. Frenkel said, because the Chinese don’t want to be seen as being pushed around.

Instead, he said, governments should tell China they understand why it has a savings glut, “and then say, ‘let us help you design a system that helps you save less,’ “ he said. “That would be a win-win strategy,” he said.

source:
nytimes

__________________
It's Not Over 'til I Win