US finance chief hits out at Chinese currency policies as ministers meet in South Korea

Written by Ray Clancy

Finance ministers and central bank governors from the world’s 20 largest economies are gathering in South Korea today as concerns grow about the possibility of a currency war.

Over the next two days the economic policy makers will try to reach agreements on the global financial system.

The stakes are high. The world’s three largest economies, the US, China and Japan are entwined in terms of trade and investment. But economists say the relationship is out of balance. In part, the reason is that China’s currency is significantly undervalued. That gives Chinese exporters, their competitors say, an unfair advantage.

To protect their own export industries, Brazil, Japan and Thailand have taken steps to slow the appreciation of their currencies. A number of other countries, including India and South Korea, are considering similar moves.

Research fellow Kwak Soojong at the Samsung Economic Research Institute in Seoul says both Washington and Beijing appear ready for compromise. He notes China’s surprise interest rate increase earlier this week as one sign of flexibility.

US Treasury Secretary Timothy Geithner us urging those running big trade surpluses to alter their currency regimes for the sake of global growth. In the letter addressed to other G20 finance ministers attending the talks in South Korea, Geithner said nations should aim to reduce their surpluses or deficits to a certain share of gross domestic product in the coming years.

G20 nations with large deficits should boost national savings via credible medium term fiscal targets and boost their exports, he said in the letter. Conversely, G20 countries with persistent surpluses should undertake structural, fiscal and exchange-rate policies to boost domestic sources of growth and support global demand,’ Geithner wrote.

In a direct attack on China’s policy of keeping a lid on the yuan’s value to benefit Chinese exporters, he adds; ‘G20 countries should commit to refrain from exchange rate policies designed to achieve competitive advantage by either weakening their currency or preventing appreciation of an undervalued currency. G20 emerging market countries with significantly undervalued currencies and adequate precautionary reserves need to allow their exchange rate to adjust fully over time to levels consistent with economic fundamentals.’

Emerging markets in Asia have been swamped by a tidal wave of capital seeking higher returns as the US and Europe struggle for growth. Expectations of further US monetary policy easing have exacerbated the flows.

Geithner said the International Monetary Fund should take the lead in monitoring currency commitments made by the G20 powers, via a twice yearly report. The IMF itself should be reformed ‘to increase the voice and representation of dynamic emerging economies’ his letter concluded.

The meetings are a prelude to the G20 leaders’ summit in Seoul next month.