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News : Global Economy Last Updated: Oct 12, 2010 - 9:27:57 AM

IMF meeting fails to defuse global currency tensions
By Michael Hennigan, Founder and Editor of Finfacts
Oct 11, 2010 - 6:05:07 AM

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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 reserve accumulation.

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 adapted.”

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 meeting of the G-20 nations in South Korea. China is part of that group.

"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 uncompetitive.

On “beggar-my-neighbour” 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.”

In recent 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 down.

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 Newswires.

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 adults."

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:

Other developments

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 said.

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 effectiveness.

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 membership.

“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 said.

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 successful conclusion.

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 policy collaboration.

IMF reform

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 far off.”

“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 cross-border spillovers.

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