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Caroline Atkinson, director, External Relations Department, IMF, left, and Andrew Crockett, chairman, Per Jacobsson Foundation, center, watch as Mohamed El-Erian, CEO and co-CIO of trillion-dollar bond fund manager PIMCO, delivers the Per Jacobbson Lecture at the IMF/World Bank annual meeting in Washington DC, Sunday Oct 10, 2010. Jacobsson, a Swedish national, was managing director of the Fund from 1956 to 1963. IMF Photo/Cli
The leading economic powers from developed and emerging economies failed to
defuse global currency tensions at the annual meetings of the IMF (International
Monetary Fund) and World Bank at the weekend in Washington DC.
China said the US was destabilising emerging economies by allowing
ultra-loose monetary policy to flood the emerging world with money, while the US
called on the Fund to increase surveillance of exchange rates and the
Treasury secretary Tim Geithner said: "...the IMF must strengthen its
surveillance of exchange-rate policies and reserve accumulation practices. We
recognize that precautionary reserve accumulation is appropriate to a point and
may well have helped several emerging market economies cope with the adverse
effects of the recent global financial crisis. However, excess reserve
accumulation on a global scale is leading to serious distortions in the
international monetary and financial system, and is inhibiting the international
adjustment process. We look forward to the IMF's upcoming discussion of reserve
adequacy and urge the development of new reserve metrics. An upgrade of the
analytical tools for evaluating reserve holdings is long overdue."
China would continue reform of the formation mechanism of its
currency exchange rate to improve its flexibility, but will do so in a gradual
way, Zhou Xiaochuan, governor of the People's Bank of China, China's central
bank, said in Washington on Sunday.
Westerners prefer the Western medication method that is quick but drastic,
while Chinese people prefer traditional Chinese medication that is slower and
giving time for different herbs to take effect. A steep rise of Chinese currency
yuan would cause harm, Zhou told a group of bankers and reporters during a
luncheon speech at the 2010 annual membership meeting of the global banking
industry group, Institute of International Finance (IIF).
To manage China's currency is a "complicated art," as you have to take
into consideration domestic inflation, unemployment rate, gross domestic product
(GDP) growth, balance of payments and other factors, he added.
The communiqué following the principal
IMF meeting referred to countries
working “co- operatively” but
contained no evidence that the principal
economies could find agreement on any of
the issues that divide them.
Dominique Strauss-Kahn, IMF managing
director, called on countries not just
to sign up to warm words but to take
concrete steps. “The language is
ineffective. The language is not going
to change things. Policy has to be
Canadian Finance Minister Jim Flaherty said the
major industrialised countries were in broad
agreement on the need for more specific "parameters
and guidelines" for large trading nations to follow.
Such a pact could be made at the upcoming November
the G-20 nations in South Korea. China is part of
"We need to aim for more clarity over what the
rules of engagement are," he said.
By keeping the renminbi/yaun value from rising
only marginally against the US dollar, China is
forcing other developing countries to also intervene
in markets to keep their currencies from becoming
economics coined by the leftwing Cambridge economist Joan Robinson,
Financial Times columnist Sir Samuel Brittan has said: “It is no accident that beggar-my-neighbour trade
policies are associated with what I have previously called Tory
Bourbonism in fiscal policy, by which I mean treating the national
budget as if it were the budget of a private citizen that has in
some sense to be ‘balanced’. If so-called Keynesian policies for
using fiscal policy to manage demand are disavowed and monetary
policies prove inadequate, we are left with only export promotion
and import discouragement to promote recovery.”
times the Japanese yen has hit a 15-year high against the US dollar and earlier
this month Japan intervened in the foreign exchange markets to push the value
Japanese economist, Tadashi Nakamae, said
in the FT last week that: “Even if the yen was overvalued in 1995
there is little doubt that the yen is currently undervalued. Japan’s
currency is now at a similar level to its peak in 1995, when it hit
¥79 against the dollar. During the past 15 years while Japan’s
consumer price index (CPI) fell 1%, CPI in the US increased 42%. So
Japanese prices came down 43% more than American prices.”
The economist said low interest rates have kept zombie companies alive and the
problem for the yen is that Japan’s neighbours have kept their
currencies below 1997 fx rates against the US dollar despite having
grown strongly since the Asian financial crisis of that year.
The Wall Street Journal reported on Saturday that Asia’s forex reserves
climbed 3.1% to a record in September as the region’s central banks
bought dollars aggressively to temper the rise in their own
currencies: Reserves reported by 11 key Asian central banks,
excluding China’s, rose to $2.963trn at the end of September
from $2.875trn at the end of August, as compiled by Dow Jones
China, by far the world’s largest reserves holder, reports its
totals quarterly. It had $2.454trn at the end of June and will
release its next estimate later this month.
Asian reserves are heading towards 40% of US annual GDP.
The Thai baht has risen 10% this year and
Thai Finance Minister Korn Chatikavanij said in
Washington that it is
not only hurting the country's exports, but
complicating internal debate over issues such as
raising the minimum wage.
"There is every fundamental reason our currency
should appreciate. But if we adjust, everybody
should adjust," Chatikavanij said. "We need to see
the major economies sit down and talk about it like
Discussing the risk of global currency wars, with Christian Carillo, head of Asia-Pacific interest rate strategy at Societe Generale Corporate & investment Banking. He tells CNBC's Karen Tso and Sri Jegarajah, that with economies underperforming, domestic political pressures will increase for measures that will not be beneficial to anyone:
The IMF will step up its focus on global systemic
stability and is closer to wrapping up a package of reforms that
will make the 187-member institution more representative and better
able to tackle the economic problems facing a globalized and
interconnected economy, Dominique Strauss-Kahn
At the end of a meeting of the IMF’s policy steering committee,
the managing director expressed optimism about completing a series
of reforms that will make the IMF more reflective of the new global
economy by increasing the say in the institution of the dynamic
emerging markets now leading the world out of recession.
“We have gone extensively into reform of the IMF—quotas,
governance with all its components, the composition and size of the
executive board,” said Youssef Boutros-Ghali, the Egyptian finance
minister who is head of the International Monetary and Financial
Committee (IMFC) of the Fund.
“There has been extensive progress. All of the parties involved
are converging toward a package that we think will move the
institution toward a new level, make it more adaptable and capable
of dealing with the problems that have become multilateral in most
of their features,” Boutros-Ghali said.
The meeting was part of the IMF-World Bank Annual Meetings in
Washington that have gathered around 10,000 central bankers,
ministers of finance and development, private sector executives,
labour leaders, civil society representatives, and academics to
discuss issues of global concern, including the world economic
outlook, poverty eradication, economic development, and aid
Uneven global recovery
In a communiqué, the IMFC said that the economic recovery around
the world was proceeding, but remains fragile and uneven across the
“Faced with this source of potential stress, we underscore our
strong commitment to continue working collaboratively to secure
strong, sustainable, and balanced growth and to refrain from policy
actions that would detract from this shared goal,” the communiqué
Ministers said their priorities were to address remaining
financial sector fragilities; ensure strong growth in private sector
demand and job creation; secure sound public finances and debt
sustainability; work toward a more balanced pattern of global
growth, recognizing the responsibilities of surplus and deficit
countries; and address the challenges of large and volatile capital
movements, which can be disruptive.
They said rejection of protectionism in all its forms must remain
a key element of a coordinated response to the crisis and renewed
efforts were urgently needed to bring the Doha trade talks to a
The IMF and World Bank held their semi-annual meeting last weekend, and a brewing battle over currency volatility and the prospects for global economic growth will be hot topics. Former Chinese central bank official Zhu Min, who is a pecial adviser to the managing director of the IMF, shared a preview with CNBC:
Urgently action was also needed to reinforce the IMF’s role and
effectiveness as a global body for macrofinancial surveillance and
Strauss-Kahn, who throughout the meetings has stressed the need
for renewed cooperation to tackle global problems, told reporters
that he expected IMF members to agree in either days or weeks on
needed reform of the institution. "We are still not there, but not
“Still some divergent views, but I am used to this. I think we
are on the right track.”
The aim is for a shift in
quota share to dynamic emerging market and developing countries
of at least five percent from over-represented to under-represented
countries by January 2011. In addition, there is a commitment to
protecting the voting share of the poorest members.
But Strauss-Kahn emphasized that countries getting an increased
quota share needed to play a correspondingly bigger role in
stabilizing the global economic system. “They cannot be at the
center and be a free rider. The more they are at the center, then
you need to take part in stabilizing the system. That is the logic.”
Boutros-Ghali said that the quota and voice reforms, coupled with
improvements in how the IMF monitors the global economy, would make
the institution better able to face the future.
Strauss-Kahn said that systemic stability was an issue of
paramount importance, and the IMF is the institution best placed to
address it. The IMF was introducing new “Spillover Reports” that
would assess the impact of policy actions in major economies for
other parts of the world.
As a sign of the importance attached to these issues, the
MD said he will attend the concluding meetings of the
annual Article IV surveillance missions to each of the systemic
countries or regions - - the United States, the United Kingdom, the Eurozone, China, and Japan. These are first steps, and other tools are
being developed and refined.
The IMFC said that stronger and evenhanded surveillance to
uncover vulnerabilities in large advanced economies is a priority.
Surveillance should also be better focused on financial stability
issues and their macroeconomic linkages, and more attentive to