Finance ministers of the world’s major economies reached a fudged accord on Saturday on how to measure imbalances in the global economy after China prevented the use of exchange rates and currency reserves as indicators.
French Finance Minister Christine Lagarde, who chaired the G20 talks, said the deal nevertheless represented a significant step toward better coordination of economic policies worldwide to help prevent another financial crisis.
“It wasn’t simple. There were obviously divergent interests, but we were able to reach a compromise on a text that seems to us to be both balanced and demanding in its implementation,” she told a news conference.
Ministers and central bank governors agreed on a list of -indicators, including public debt and fiscal deficits, private savings and borrowing, the trade balance and other components of balance of payments such as net investment flows.
However, at Chinese insistence there was no mention of the real effective exchange rate or of foreign currency reserves.
“Reserves have been dropped,” Lagarde said, adding that the deal included a mechanism to take account of exchange rates when assessing the overall balance of payments.
The US and other Western countries accuse Beijing of keeping the yuan artificially undervalued to boost its exports, hence accumulating massive foreign currency reserves that they say distort the world economy.
US Treasury Secretary Timothy Geithner repeated after the talks that China’s currency “remains substantially undervalued” and its real exchange rate had not moved much despite a slow appreciation since a reform in June last year.
“There is broad consensus that the major economies, not just Europe, Japan and the United States but also the large emerging economies, need to allow their exchange rates to adjust in response to market forces,” he said.
The world’s No. 2 economy, which overtook Japan this week, has resisted Western pressure to substantially revalue its currency to help rebalance global growth.
China’s trade surplus has shrunk of late, perhaps explaining why it prefers that measure.
Western and Japanese officials said the indicators would in practice cover balance of payments and foreign reserves, even if those terms had been omitted to assuage Beijing. Chinese Finance Minister Xie Xuren (謝旭人) left without speaking to reporters.
“We needed to be inventive about wording in the communique in consideration for a country that did not want to use the term ‘current account balance’ ... The statement lists components of the current account balance,” Japanese Finance Minister Yoshihiko Noda told reporters.
Lagarde said the indicators were not binding targets, but would lead to the drafting of guidelines for coordinated economic policies to reduce distortions, and then to a mutual assessment process.
Germany, Europe’s biggest exporter, which has resisted US efforts to set numerical targets for current account surpluses, said no specific goals would be set for certain indicators.
The G20 ministers acknowledged that economic recovery was diverging between developed and developing economies, but they differed in their assessment of global inflation risks.
The communique noted that while growth was subdued in most developed economies, with unemployment high, major emerging markets were roaring ahead, “some with signs of overheating.”