World Crisis Online

China led resistance to making bulging foreign-exchange reserves a measure of economic imbalances as Group of 20 finance officials struggled for consensus on realigning the skewed world economy.

Sparring over early warning indicators reflected the split among fast-growing emerging countries and debt-laden advanced economies over how to prevent a repeat of the harshest recession since World War II. A deal remained elusive as of early afternoon, two G-20 officials said.

“G-20 discussions to date have revealed a limited willingness of countries genuinely to coordinate over policies outside a global crisis,” Bank of England Governor Mervyn King said as the two-day Paris meeting got under way yesterday. “The major surplus and deficit countries are currently pursuing economic strategies that are in conflict.”

With the world recovery entering a second year, the unity forged during the crisis is dissipating as up-and-coming powers challenge the deficit-scarred West’s formula for managing the international economy.

China will remain the world’s fastest growing major economy in 2011, with a 9.6 percent expansion, the International Monetary Fund predicts. The Washington-based lender sees 3 percent growth in the U.S. and 1.5 percent in the 17-nation euro area.

‘Reasonable Forecast’ “Most people see a world in which the emerging world’s growing 5, 6 percent; we’re growing between 3 and 4 percent, Europe and Japan somewhere between 1 and 2 percent,” U.S. Treasury Secretary Timothy F. Geithner said in Paris yesterday. “That seems a reasonable forecast.”

In a concession to U.S.-led pressure to push up its currency, China raised bank-reserve requirements yesterday for the eighth time in a year and indicated that a four-month old cycle of interest-rate rises will go on.

The yuan advanced to 6.5732 per dollar, the highest since late 1993, and Chinese officials signaled that further gains are in the offing to muffle domestic inflation and spur export-led growth in the U.S. and Europe.

Higher reserve standards are not “the only method that we’ll use to battle inflation, it’s about using all means including rates and currency,” People’s Bank of China Governor Zhou Xiaochuan said in an interview in Paris yesterday. “One method doesn’t exclude the other.”

Defusing Tension While the Chinese moves may have defused some tension at the meeting, western officials continued to push for a longer- term yuan boost and a realignment of the global economy to stoke growth.

China’s “moves with respect to their currency have been relatively minor,” Canadian Finance Minister Jim Flaherty told Bloomberg Television yesterday. “It’s important as part of rebalancing they are more flexible with respect to their currency. China promised to do more.”

Finance ministers and central bankers from the G-20, representing about 80 percent of world output, came with scaled- back ambitions. French President Nicolas Sarkozy welcomed them to Paris by dropping last year’s talk of a relaunch of the global monetary system to end the U.S. dollar’s supremacy.

France’s main aim for the meeting, which ends in late afternoon, is to move toward an accord on the use of economic indicators to monitor the trade and investment distortions that pitched the world into crisis.

‘Endless Discussion’ “I hope that your discussions will avoid getting bogged down in endless discussions on these indicators,” Sarkozy told the finance officials late yesterday at his Elysee Palace.

European Union officials want the scorecard to include the current-account balance, public deficit and debt, savings ratio, net foreign assets, reserve adequacy, real effective exchange rate and private debt, according to an EU position paper.

Chafing at restraints imposed by the richer world, the rapidly growing BRIC states — Brazil, Russia, India and China – - don’t want the scorecard to include the current account, the broadest measure of trade in goods and services.

China has “its own view” on the current account, Flaherty told reporters. He said it is “likely” that the imbalance measure will include public and private debt. Germany plumped for those two along with current account, the real exchange rate and currency reserves.

Russia refused to make management of its foreign-exchange reserves — the world’s third-biggest stash, at $449 billion — the subject of international bargaining.

Imbalances Ebbing “If the U.S. and the U.K. will put an amount of reserves as a kind of indicator, that’s our biggest concern,” Russian Deputy Finance Minister Dmitry Pankin told reporters in Paris yesterday.

In any event, imbalances are ebbing. The IMF predicts that China’s current-account surplus will narrow to 5.1 percent of gross domestic product in 2011 from as high as 10.6 percent in 2007, while the U.S. shortfall slims to 2.6 percent from 5.1 percent.

Moves are also afoot to bind China more closely into the world economy by adding the yuan to the IMF’s synthetic currency basket, known as special drawing rights.

Created in 1969 and last reweighted in November, the SDR is a composite of the dollar, euro, Japanese yen and British pound, though its role in financial markets is minimal.

Current SDR rules would require China to first make the yuan fully convertible, a step that would put it on the upward track desired by the U.S. and Europe.

“We will discuss ways to enlarge the SDR basket,” German Deputy Finance Minister Joerg Asmussen said in a Bloomberg Television interview yesterday. “One might think of adapting the rules in order to ease the way for more currencies to be part of the SDR.”