Rebalancing global growth


WASHINGTON — Finance ministers and central bank governors in Washington at the IMF/World Bank annual meetings ended their discussions last weekend with a whimper of a final communique. There was much talk of currency war and trade war in the hallways and hotels, but in the end the leaders postponed the main issue.

Catastrophe looms unless someone can persuade China that growing economic power should be matched with growing global responsibility, while persuading the United States to cool its rhetoric.

The International Monetary Fund’s key committee was full of pious blah-blah, without a single mention of “dollar” or “renminbi” or even “currencies.” The final paragraph of a three-page statement said: “While the international monetary system has proved resilient, tensions and vulnerabilities remain as a result of widening global imbalances, continued volatile capital flows, exchange rate movements, and issues related to the supply and accumulation of official reserves.” It called upon the IMF to “deepen its work” on these issues “including in-depth studies to help increase the effectiveness of policies to manage capital flows.”

The IMF has been studying these issues in depth for several years, but shareholder member governments who control the IMF have refused to take action. Beijing has most years blocked publication of IMF reports on its economy. Passing the ball back to the IMF without giving it the power to act on its recommendations is potentially dangerous.

Why was the final communique so weak? IMF managing director Dominique Strauss-Kahn replied wearily: “There is only one obstacle and that is an agreement of the members. . . . The language is not going to change things. Policies have to be adapted.” The former French finance minister added that “there is no way to believe that global growth can be rebalanced without some changes in currency values.”

The U.S. and China have become the public protagonists on the question of currencies, with U.S. Treasury Secretary Tim Geithner using the IMF forum to step up the pressure on Beijing to revalue the renminbi. Given next month’s U.S. midterm elections, the hawkish mood in Congress, and the prospect that President Barack Obama and his Democrats face losses in both houses, he has little option.

It is not clear what the next U.S. move could be without firing the first shots in a potentially disastrous currency and trade war. In London, George Soros warned that a currency war, with China against the rest of the world, could lead to the collapse of the world economy.

China is equally firm, driven by fear of being seen as a pushover and by worries that a rapid renminbi appreciation would eat into its exports and create unemployment and social unrest. Premier Wen Jiabao himself took the message last week to European leaders in their den. At the IMF, China stressed that currency appreciation would occur “gradually,” whatever that means (a 2 percent rise since June against a falling dollar is not much) and hit back by blaming the U.S. for its low interest rates and loose money policies.

The Europeans and Japan are also concerned about damage to their currencies, exports and jobs. “Wen more or less told the rest of the world to get lost,” said one European official. “He said China could not allow large-scale unemployment. But we are all already bleeding, so this is Beijing publicly saying only China’s jobs matter.”

Japan spent billions of dollars to halt the rise of the yen and Finance Minister Yoshihiko Noda claims that other members of the industrialized nations understood Tokyo’s intervention.

But did Noda understand? The yen was at 82.3 against the U.S. dollar when he intervened, and slipped to 85, but this week it was 81.8 as it galloped toward an all-time postwar high. Noda has obviously been nodding off if he hasn’t noticed that his intervention amounted to a badly spent few billion.

Other countries have joined a growing queue to express their fears. Brazil was the first before it was fashionable to use the words “currency war,” but India also said it might intervene “to prevent volatility and the disruption of the macroeconomic situation. Ukraine also said it would consider capital controls.

Finance Minister Korn Chatikavanij of Thailand, which has weathered a 10 percent revaluation of the baht this year — and 25 percent over five years — said: “There is every fundamental reason our currency should appreciate. But if we adjust, everybody should adjust. We need to see the major economies sit down and talk about it like adults.” His voice of common sense was lost in the hubbub. But if strong economies like Japan, South Korea and Switzerland have intervened, why shouldn’t everyone?

There are several problems preventing proper corrective action. One is the size of the daily foreign exchange market: $4 trillion a day is a lot of liquidity swooshing round and can easily become a noxious flood for any one currency. Another is that there are not enough places for the money to go. If sentiment is against the U.S. dollar, as it has been, then the euro and the yen are the beneficiaries — or the victims — of the hot money flows.

Not even Japan, with reserves of more than $1 trillion has enough money to be able to build a dam against the surge of money. Maybe China has. Some maverick economists have claimed that with reserves officially counted at almost $2.5 trillion or 30 percent of global reserves, and unofficially more like $3 trillion plus, Beijing today has sufficient strength to play the market.

If Beijing diversifies from dollars to yen — as it has recently — that not only adds variety to its holdings, but strengthens the yen. Noda complained that if it was acceptable for China to buy Japanese debt instruments, why couldn’t Japan reciprocate? Premier Wen stressed China’s support for Greece in buying its bonds, but that will also have the effect of strengthening the euro to China’s advantage.

China is stubborn, but there has also been a lot of unimaginative thinking. American economists and congressmen complain bitterly that the yuan is undervalued and cite figures of 25 to 50 percent for the extent. China responds that 20 to 30 percent revaluation would sink China’s exports and jobs. Yes, a sudden appreciation would be damaging, but what about a 10 percent revaluation, as Soros suggested, or 15 percent over a year?

It is in China’s interests to build its domestic economy and not keep adding to its immense pile of foreign exchange with the risk of huge losses. It’s time to think imaginatively about solutions and cooperation or we will all be sunk.

Kevin Rafferty is author of “Inside Japan’s Powerhouses,” a study of Japan Inc. and internationalization.