China, the elephant in the global economic-recovery room

Extrait de: China, the elephant in the global economic-recovery room, Doug Saunders, Globe and Mail ,Feb. 20, 2011

The top 10 economies In private, though, the central bankers and finance ministers of the world’s 20 largest economies, gathered in Paris this weekend to confront looming global economic problems, almost all paint a picture of China’s surging economy as a powerful black hole whose inward draw is sucking up a huge share of the world’s debt, currency reserves, food, commodities and jobs.

Rather than simply surging ahead of the rest of the world, in this view:

Beijing’s policies are actively holding back other developing countries and jeopardizing wealthier competitors.

China’s $3-trillion pile of currency reserves, its unwillingness to purchase imports and especially its artificially low currency-exchange rate have sent much of the rest of the world spiralling into instability, in this view.

“That can’t go on too long,” French Finance Minister Christine Lagarde, the host of the summit, said of China. “As is often the case with big imbalances, a system collapses.”

China’s growth,

propelled by its cheap currency, is overheating dangerously and restricting the ability of other countries to compete and grow,

Bank of Canada governor Mark Carney warned in an interview.

“It is absolutely in our interests and the interests of everybody around the G20 table, that China grows at a sustainable pace,” he said. “And you can grow too fast in the short term and have it fall back in the medium term. And it’s not clear that the policy mix … in China is yet appropriate for medium-term balance.”

The International Monetary Fund issued a report Saturday warning of the consequences of a “two-speed recovery.”

“The global economic recovery is advancing. However the recovery remains uneven, with downside risks in advanced economies remaining elevated while overheating risks are growing in emerging economies,” it said.

But there is much evidence that Beijing is aware of the issue, which could jeopardize its own export markets by preventing consumer recovery in the West.

Global GDP Growth


Top 10 World Economy

Chinese authorities surprised observers this weekend by agreeing to a monitoring mechanism designed to detect and prevent future out-of-control imbalances. The mechanism will measure China’s currency exchange rates and balance of payments, as well as its levels of public and private debt. It is a step toward setting up rules to forbid countries from accumulating overly large reserves of cash or debt, and triggering another 2008-style crisis.

Most governments – including those of other developing countries – want China to end its policy of pegging its currency, the renminbi, to the U.S. dollar and keeping it artificially low. Brazilian and Indian officials this weekend complained that this is causing a surge of investment in their own, free-floating currencies, pushing their value upward and choking off exports.

Indeed, among the most outspoken critics of China’s extreme growth were officials from other formerly poor countries, who said that by having non-floating, artificially low currencies, Asian countries including China were driving currency investors to other emerging-market currencies, pushing their value upward, and preventing them from competing for exports with China.

“All Asian countries need to stop devaluating their currencies, it is a set of responsibilities, it is not just China,”

Brazilian Finance Minister Guido Mantega said.

The G20 countries, in their communiqué released on Saturday, expressed the problem diplomatically: “While most advanced economies are seeing modest growth and persisting high unemployment, emerging economies are experiencing more robust growth, some with signs of overheating.”

Exactement, il faut avoir un équilibre beaucoup plus sérieux.

But officials warned that the consequences could be grave.

“We all need to keep in mind that we’re all going through a pretty amazing transformation of the global economy, it’s never happened in this order of magnitude,” said Mr. Carney. “Never have so many people been integrated so quickly, never have capital markets been as open as they are now, and this process creates the prospect of lifting billions out of poverty, creating tremendous wealth and improving prosperity for people – but also in that process, creating real risks and vulnerabilities, so we have a collective responsibility to try to manage through this, and not lose those gains.”

Extrait de: Importance of weekend G20 agreement shouldn't be dismissed: expert, Vancouver Sun, February 20, 2011

PARIS — A watered-down weekend agreement by G20 finance ministers on ways to measure possibly dangerous economic "imbalances" still represents an important advance in the fight to avoid another global recession, according to a senior Canadian business commentator.

"Indicators are the basis of a compromise on how to proceed and should be welcomed as a way to use peer pressure to keep moving forward," said Wendy Dobson, a former senior Canadian Finance Department official, in an email interview.

"That process should not be dismissed out of hand," she said of critics dismissing the importance of the G20 agreement reached by ministers.

The deal reached Saturday, which was struck thanks to Canadian leadership according to Finance Minister Jim Flaherty, accepted China's plea to remove as specific categories both current account balances and foreign exchange reserves.

"We accomplished the goal without using the two words that China did not wish to use," said a grinning Flaherty, who claimed Canadian leadership in securing the deal.

"Canadian leadership helped bridge the gap between China and the rest of the G20," he told Canadian journalists at the end of the two-day meeting. "Canada proposed the arrangement that was ultimately accepted and my officials and I worked aggressively to secure the agreement."

One G20 official, who spoke on condition of anonymity, said both Canada and the U.S. "worked very hard" to deliver a deal. But the official noted that Germany and France are also claiming credit for the breakthrough, and added that the BRIC countries — Brazil, Russia, India and China — also played important roles.

China is sensitive to accusations it is keeping its yuan currency artificially low in order to boost exports, which in turn results in the stockpiling of foreign reserves.

The U.S. government, which is struggling with a large trade deficit and knee-buckling debt problems, has for years blamed China for creating an uneven playing field.

"It wasn't easy, there were obviously diverging interests," French Finance Minister Christine Lagarde said after announcing the agreement.

Dobson, co-director of the Institute for International Business at the University of Toronto's Rotman School of Management, said politics was at the root of the intense haggling that led to the compromise.

China, which is reluctant to be seen bowing to Washington's demands, was "foot-dragging" due to internal political pressures during a period of leadership transition, she said.

France also complicated the process because President Nicolas Sarkozy, preparing for the 2012 election campaign, used the G20 gathering to push for pet political projects that included a tax on financial transactions, plans to limit sharp commodity price fluctuations, and a major reform of the international monetary system.

The French proposal on monetary reform was "an ill-timed distraction with so much else going on," Dobson complained.

Flaherty acknowledged that there is no immediate indication that China will go beyond any concessions over words to actually deal with complaints about its policies, including its alleged artificially-low currency

Bank of Canada Governor Mark Carney, who attended the two-day meeting with Flaherty, said Saturday's progress represented only one step in a series of meetings leading to the G20 leaders summit in November in Cannes, France.

"Ultimately the test is policy, the test isn't process," Carney said.

U.S. Treasury Secretary Timothy Geithner underscored the ongoing concerns here when he complained that progress has been limited despite years of complaints that American companies are at a disadvantage competing with Chinese exporters.

"China's currency remains substantially undervalued, and its real effective exchange rate — the best measure to judge its currency against all of its trading partners — has not moved much in this latest period of exchange rate reform."

Canada and India had been tasked at last November's G20 leaders'summit in Seoul to come up with a list of indicators that would make it easier to keep track of imbalances, such as excessive debt or trade deficits or surpluses, or accumulation of sky-high foreign reserves.

But China dug in its heels Friday, arguing against the inclusion of foreign reserves. Beijing is annoyed by criticism over its $2.8 trillion US in reserves.

For similar reasons it also objected to the inclusion of the term "current account," which measures a country's net performance based on trade deficits or surpluses as well as the flow of income derived from interest and dividends.

"The global recovery is strengthening but is still uneven and downside risks remain," the ministers declared. "While most advanced economies are seeing modest growth and persisting high unemployment, emerging economies are experiencing more robust growth, some with signs of overheating."

The prime example of a global imbalance is the Chinese economy, which is expected to grow by almost 10 per cent this year, according to the International Monetary Fund, more than triple the IMF's projection for the U.S.

Among the concerns in China is an overpriced real-estate market, the same problem that played a huge role in worsening the impact of the 2008 meltdown on the American, Spanish and Irish economies.

Canada, despite being in relatively strong financial shape and despite having a healthy banking sector, is one of the countries on the wrong side of the current account "imbalance."

Carney said last month that the "thing that keeps me up at night" is Canada's drastic swing over the past three years, going from a current account surplus of two per cent of gross domestic product to a deficit totalling four per cent of GDP.