World Crisis Online

G20 Finance ministers and central bank governors pose for a family photo at France Finance Ministry in Paris. Photographer: Miguel Medina/AFP/Getty Images

Group of 20 finance officials agreed to closer monitoring of global economic imbalances, in a step toward smoothing the trade and investment distortions that plunged the world into crisis.

Yardsticks such as the current account and public and private debt will make up a scoreboard that, while not binding, may give the U.S. and Europe leverage to push for an appreciation of China’s currency.

With the world recovery entering a second year, yesterday’s G-20 sparring match over early warning indicators reflected the determination of emerging countries to challenge the West’s formula for managing the international economy.

“It wasn’t easy, there were obviously diverging interests,” French Finance Minister Christine Lagarde told reporters after chairing the Paris meeting. The goal is “to test economic policies and determine to what extent they are favorable for all countries together and not just the basis of domestic economic policy.”

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.

‘Strengthening’ Recovery

“The global recovery is strengthening but is still uneven and downside risks remain,” the G-20 finance ministers and central bankers, representing 80 percent of world output, said in a statement. “While most advanced economies are seeing modest growth and persisting high unemployment, emerging economies are experiencing more robust growth, some with signs of overheating.”

On the eve of the meeting, China sought to ease the Beijing-Washington tension by raising bank-reserve requirements for the eighth time in a year and indicating that it will fight domestic inflation by extending a four-month-old cycle of interest-rate increases.

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 on Feb. 18. “One method doesn’t exclude the other.”

The yuan’s advance to 6.5732 per dollar on Feb. 18, the highest since late 1993, left U.S. and European policy makers calling for further gains to spur Chinese imports of western goods.

Currency Language

“China’s currency remains substantially undervalued, and its real effective exchange rate — the best measure to judge its currency against all of its trading partners — has not moved much in this latest period of exchange-rate reform,” U.S. Treasury Secretary Timothy Geithner said.

Hammered out in two days of talks, the G-20 statement didn’t delve into currencies, beyond echoing a November pledge to enhance exchange-rate flexibility and strive to avoid “disorderly movements in exchange rates.”

China blunted western calls for the roster of indicators to include its $2.8 trillion in foreign-exchange reserves, the export-led symbol of its blossoming into the world’s second- largest economy.

The use of reserves to judge whether countries are importing enough from the rest of the world was also a sore point with Brazil, Russia and India, which together with China make up the “BRIC” cluster of developing economies.

‘Deft Diplomacy’

China also objected that the use of the current account, the widest measures of trade, as a benchmark would give the West an opening to force up the yuan.

In what Geithner called “deft diplomacy,” the French hosts massaged the statement to include the current account’s components — trade and investment income — while labelling it the “external imbalance” to appease Chinese sensitivities.

“The impact of reserves through the current account is very much included,” Bank of Canada Governor Mark Carney said. “The substance of it is there. It’s just wording.”

The next step, at the G-20’s meeting in mid-April, will be to turn the mathematical yardsticks into the basis for a voluntary set of guidelines for national economic policy.

Ebbing Imbalances

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.

There was little discussion of binding 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 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. The SDR’s future is on the agenda of a lower-level working group.

“Some conditions have to be met before the Chinese currency is ready,” German Finance Minister Wolfgang Schaeuble said. “The Chinese know this. This goal won’t be reached this year.”

France, with close ties to North Africa, also got the ministers to pledge support for Egypt and Tunisia, though the statement didn’t mention the popular revolts that unseated autocrats there and have spread to other Arab countries.

To contact the reporters on this story: James G. Neuger in Paris at jneuger@bloomberg.net; Mark Deen in Paris at markdeen@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net