Analysis: G20 keeps China onboard but tough talks lie ahead
PARIS (Reuters) - A hard-fought compromise saved a weekend G20 meeting from failure by winning Chinese backing for a set of indicators on economic imbalances, but the divided group faces a tougher task agreeing on how to use the list.
Saturday's deal was a first step toward a framework for G20 nations to monitor each other's economies with the aim of avoiding a repeat of the global crisis, triggered by the bursting of a U.S. credit bubble funded by Asian savings.
The idea of a list was launched at a November G20 summit in Seoul to defuse tensions from U.S. allegations that Beijing was keeping its yuan currency undervalued to boost its exports.
But China's refusal to include exchange rates and currency reserves threatened to block a deal until the tense final moments of the talks, when rich nations agreed to drop them.
China also succeeded in removing a reference to current account imbalances in favor of the more narrow trade balance, where Beijing expects its surplus to shrink as it boosts domestic demand under a five-year plan.
But there were also victories for developed countries, which won inclusion of net investment income flows, a measure of interest on Beijing's nearly $3 trillion in reserves. More importantly, they secured a commitment from China, which had been reticent, to move ahead with the process.
"China gave in to a precise set of indicators but ensured that exchange rates and current accounts were not singled out," said Luca Ricci, head of international economic research at Barclays Capital. "The problem is that having more indicators is not going to make it easier to reach concrete steps that can bring effective solutions to the global imbalances."
"The traditional issues are still there: the United States wants China to have a stronger exchange rate and more domestic demand," he said, "And China wants to support exports via a weak exchange rate and, because it has weaker banks than some countries, doesn't want to open up its capital account."
ECONOMIC CHANGES MAY EASE PRESSURE
France, which chairs the Group of 20 this year, has said it aims to reach an agreement on the next step in the process -- a set of "indicative guidelines" for using the indicators -- at a G20 finance ministers meeting in mid-April in Washington.
Saturday's communique said the guidelines would take into account specific circumstances, like commodities producers such as Saudi Arabia with large trade surpluses. It also stated that these guidelines would not be "targets."
Despite such caveats, members countries were quick to establish their red lines. Wolfgang Schaeuble, finance minister of world No. 2 exporter Germany, said after talks ended that there would be no numerical targets on some indicators.
IMF Managing Director Dominique Strauss-Kahn said the tense talks reflected the resurgence of national interests in the wake of the crisis -- undermining the G20 two years after it helped broker a deal to pull the world economic back from the brink.
"What I was worried about, I'm sorry to say, materialized, which is that it's more difficult than before to have people agree," he said. "Our task to reach this consensus was not even that difficult."
France's attempts to gradually draw China into a dialogue on its currency met with scant success. Central Bank Governor Zhou Xiaochuan said China would not be pushed into faster yuan appreciation, nor did Beijing offer more flexibility to win a place for the yuan in the basket of currencies backing the IMF's Special Drawing Right assets, as France has suggested.
But China did agree to host a seminar on reform of the international monetary system in Shenzhen in late March, with the involvement of the central bank and foreign ministry.
Barclays' Ricci said that in the wake of the crisis tensions over global imbalances may ease as the U.S. Federal Reserve winds down its quantitative easing, relieving some pressures on prices and exchange rates in emerging countries.
The absence of cheap money could also remind Washington that it needs China's savings to help fund its large deficit.
"If, as we expect, emerging market countries including China also gradually increase their domestic demand then the issue of global imbalances will become less pressing," Ricci said.
"The G20 has a role to play in bringing countries together for discussions, but I would not focus just on these economic indicators. Financial sector reform is an area where it has made a lot of progress and there is probably a lot more to come."
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