In spite of ongoing currency wars, there are no surprises to report from G-20 participants at the IMF's annual meeting. Indeed, I cannot recall ever being surprised by major agreements at any IMF or G-Whatever meeting.
Year in and year out the achievement is the same, a pledge to cooperate more. This year we see a slight twist: the G-20 agrees to have the IMF to create reports on the U.S., China, the U.K. and the Eurozone.
Translation: The talks failed.
Bloomberg reports Finance Chiefs Fail to Resolve Currency Spat as G-20 Splits
Leaders of the world economy failed to narrow differences over currencies as they turned to the International Monetary Fund to calm frictions that are already sparking protectionism.
Exchange rates dominated the IMF’s annual meeting in Washington on concern that officials are relying on cheaper currencies to aid growth, risking retaliatory devaluations and trade barriers. China was accused of undervaluing the yuan, while low interest rates in the U.S. and other rich nations were blamed for flooding emerging markets with capital.
Finance ministers and central bankers pledged to improve cooperation, yet did little to show how they would alter their ways beyond agreeing to let the IMF to study the matter.
Days after Brazilian Finance Minister Guido Mantega set the tone for the gathering by declaring a “currency war” was underway, officials held their traditional battle lines. U.S. Treasury Secretary Timothy F. Geithner and European Central Bank President Jean-Claude Trichet were among those to signal irritation that China is restraining the yuan to aid exports even as its economy outpaces those of other G-20 members.
“Global rebalancing is not progressing as well as needed to avoid threats to the global economic recovery,” Geithner said. “Our initial achievements are at risk of being undermined by the limited extent of progress toward more domestic demand- led growth in countries running external surpluses and by the extent of foreign-exchange intervention as countries with undervalued currencies lean against appreciation.”
Some forms of protectionism may already be on the rise. Ukraine’s Deputy Premier Serhiy Tigipko said in an interview in Washington that his country may follow South Korea, Poland, Brazil and other emerging markets in introducing capital controls to prevent short-term investments from fueling currency volatility. India may also intervene to “prevent the disruption of the macroeconomic situation,” Reserve Bank of India Governor Duvvuri Subbarao told reporters.
Unable to find common ground themselves, governments agreed the IMF should serve as currency cop by preparing reports which show how the policies of one economy affect others. The studies will focus on the U.S., China, the U.K. and the euro area.
“The need to have this kind of spillover report has been discussed for months and now it’s part of our toolbox,” IMF Managing Director Dominique Strauss-Kahn said.
Preparing Reports Useless
Brazil set the tone for the meeting with complaints about currency wars, but Brazil can scream its wants but no one can force China (or any other country), to do anything.
Since the IMF cannot set or enforce policy decisions, it was known in advance the whole conference was a waste of time and money.
The main "achievement" is the G-20 countries all agreed to have the IMF prepare reports. Sheesh. What a waste of money. What good is yapping and preparing reports when no one will act on those reports?
Capital Controls, Constant Bickering are Signs of Increasing Stress
The fact that Ukraine will follow South Korea, Poland, and Brazil in setting capital controls (with Japan, the US, Europe, and China all at each other's throats) is a clear indication of global currency stress.
Something is sure to blow sky high, but what and when is still not clear.
China to Cap the Yuan's Rise at 3 Percent
All the pressure being applied to China is likely to be futile given that a Chinese Central bank researcher says China must cap yuan rise this year
China need not worry about whether U.S. lawmakers label the country as a currency manipulator and should instead halt the yuan's rise at an appropriate time, said Wang Yong, a professor at the central bank's training school in Zhengzhou, Henan province, according to the Securities Times.
"This is the red line for yuan appreciation," he said, referring to a 3 percent rise.
"Once the line is crossed, it means the yuan's exchange rate will be derailed from the normal track and the government should intervene in the market in a timely manner," Wang added.
Adding Fat to the Fire
The yuan has risen 2.3% this year, certainly not the 20-40% that Congress and Geithner wants. Thus, limits of 3% are likely to infuriate Congress.
Bear in mind that announcements of a possible 3% cap could be China's way of setting expectations deliberately low, with a planned reversal coming at an opportune time later.
However, moves of 20% or even 8% are highly unlikely to be in the cards.
For more on economic tensions and currency wars please see:
- Prepare for Currency/Trade Wars; How Might China Respond to US Tariffs?
- Global Competitive Debasement; Currency Wars Begin; Message of Gold
- Trichet's Exit Strategy Trapped by PIIGS; Currency Tensions Continue to Build; China Tells EU to Stuff It
It will be interesting to see how Congress responds to news of a possible 3% cap on Yuan appreciation. With an election coming up, followed by a lame-duck session, China may have correctly calculated Congress will not do anything, at least for at least 3-4 months.
Regardless, tensions beneath the surface continue to mount. All it may take to see some very unwise legislation is a few more bad job reports and unemployment rising.