G20 BATTLELINES

REUTERS/Jo Yong-Hak

World leaders may be able to agree to new financial regulations

and praise an IMF power sharing deal at a G20 meeting this week,
but tensions over global imbalances and how to deal with them are
simmering. Reuters takes you to the frontlines of this diplomatic battle
with analyses, commentary, scenarios, videos and graphics

NOVEMBER 2010
G20 NOVEMBER 2010

SCENARIOS

Can G20 make FX, trade progress

in Seoul and beyond?
By Alan Wheatley,
Global Economics Correspondent Investors flee to emerging markets
SEOUL, Nov 8 Capital inflows into developing countries have been massive as investors seek higher returns

T
amid the Fed’s recent easing of monetary policies, which have further weakened the dollar.
ensions over exchange rates, global Equity fund flows - $ billion All emerging markets Japan Global
80
economic imbalances and aggressive U.S. Western Europe U.S.

monetary easing form an inauspicious 60

backdrop to the Nov. 11-12 summit of the Group of
20 major economies in the South Korean capital. 40
Following is the roadmap that the G20 might
take as it strives to put the world economy on a 20
sounder footing and dampen the risk of a prolif-
eration of currency and trade disputes. 0

WILL THE SEOUL SUMMIT BE DEEMED -20

A SUCCESS

04/11/10
Probability: high -40
Jan Feb Mar Apr May Jun Jul Aug Sep Oct
The acrimony over currencies and trade policy is
Source: EPFR Global
real.
But leaders already have two important ac-
cords in the bag that they will endorse and bran- the yuan, China’s currency, at a level it says is
dish as evidence that they are making the world unfairly low, making it impossible for U.S. firms
safe from a re-run of the 2008 financial crisis that to compete in global markets and so destroying
brought the world economy to the verge of col- U.S. jobs.
lapse. China and other emerging markets counter Q+A
First, regulators have agreed on a comprehen- that the Federal Reserve’s plan to print money
sive package of measures to phase in tougher to buy U.S. government bonds to try to boost What’s on the
capital requirements for banks so they could ride growth will send footloose capital pouring their G20 AGENDA?
out a big shock without the need for taxpayer way.
• The Group of 20 ad-
bailouts. They fear the result will be to inflate asset bub-
vanced and emerg-
The G20 will also approve a related menu of bles and push up their exchange rates to un- ing countries that
options on how to ensure the failure of a major competitive levels against a dollar that can only represent 85 percent
global bank does not bring the entire financial depreciate. German Finance Minister Wolfgang of global economic
system to its knees. Schaueble agrees. Last week he called U.S. pol- output are meeting in
Second, G20 finance ministers last month icy “clueless”. Seoul on Nov. 11 and
agreed to a shake-up of voting power at the In- But one of the purposes of international sum- 12 to ink agreements
ternational Monetary Fund that gives more say to mits is to instil confidence in markets by putting committing them to
fast-growing emerging economies such as China. on a show of cohesion. avoid “competitive
devaluations” of their
The deal, ratified by the IMF board on Friday, So at a meeting of Asia-Pacific finance minis-
currencies.
will make the fund more representative, thus ters in Kyoto at the weekend, it was noteworthy
enhancing its credibility. IMF chief Dominique that U.S. Treasury Secretary Timothy Geithner • The meeting follows
Strauss-Kahn called the change historic. G20 backed away from a controversial proposal to put on from last month’s
leaders will surely concur. a figure on how big a surplus or deficit a coun- meeting of finance
try may run on its current account, the broadest ministers and central
WILL ROWS OVER CURRENCIES SPOIL THE measure of trade. bank governors in
ROSY GLOW The question of underlying imbalances will South Korea.
Probability: diminishing probably still dominate debate in Seoul. But
If G20 leaders seek in Seoul to highlight divisions leaders are likely to kick the issue down the road
over exchange rates and monetary policy, they by instructing their officials to work on defining
will have an easy task. “indicative guidelines” for current account im-
Washington blames Beijing for holding down balances – a lowest common denominator out-
2
G20
come that will allow everyone to claim victory –
and asking the IMF to oversee the process.
DO PROTECTIONIST RISKS GROW IF THE G20
SIDESTEPS BIG ISSUES
Probability: likely, but within limits
Slow growth and high unemployment in the
United States and most of Europe, coupled with
a renewed rise in China’s trade surplus, make a
fertile breeding ground for protectionism.
Economic nationalism is in the air. Witness
Canada’s rejection of a $39 billion hostile bid by
BHP Billiton for Potash Corp, or China’s restric-
tions on exports of valuable rare earths.
Currency market intervention by Japan in Sep-
tember to hold down the yen, and capital con-
trols imposed by Brazil and Thailand also smack
of selfishness, purists say. The risk as they see it
is of tit-for-tat responses that distort and desta-
bilise markets.
“G20 countries have to respect the letter as
well as the spirit of the anti-protectionist pledges
they have made,” Angel Gurria, secretary-gener-
al of the Organisation for Economic Co-operation
and Development (OECD), said.
Julian Jessop, chief international economist at
Capital Economics in London, doubts that cur-
rent account targets, while a good idea in many
respects, would amount to much in practice.
“But without tangible commitments from the
major surplus countries, a lurch towards protec-
tionism and a global trade war will be increas-
ingly likely,” he said in a report.
Indeed, since their summit in June, G20 gov-
ernments have implemented 111 new measures
that harm foreign commercial interests, bringing
the total to 511 since the crisis began, accord-
ing to Simon Evenett, coordinator of the Global
Trade Alert monitoring group.
But Evenett, an economics professor at St. Gal-
len University in Switzerland, said protectionism
had been contained so far.
“Recent currency disputes have not led to an
outburst of across-the-board tariff protection,
and countries with large current account sur-
pluses have not been disproportionately targeted
with murkier – that is, less transparent – forms of
protection either,” he said.
WILL THE PACE QUICKEN WITH FRANCE IN THE
G20 CHAIR?
Probability: guaranteed
France takes over the presidency of the G20 after
the Seoul summit and President Nicolas Sarkozy
is itching to develop ambitious plans to reform
the international monetary order. He also wants
NOVEMBER 2010
Asian central bank intervention and capital controls will
ultimately not be successful in the face of the Fed’s QE2
liquidity measures, says RBS strategist Woon Khien Chia
to make currencies and commodities less vola-
tile.
“France’s ambition is that everybody agrees
to sit around the table to set down the bases of
a new system that guarantees stability in the
world,” Sarkozy said last week after talks with
visiting Chinese President Hu Jintao.
Sarkozy persuaded Hu to host a high-level
seminar of experts on these issues early in 2011.
WILL THERE BE
The dollar’s dominance irks both leaders, who
FIRM CURRENT
arrived at a “real convergence of views” on the
ACCT TARGETS?
objectives to achieve, a French official said.
What short-term achievements are practicable • This has been
is another matter: France has been unhappy with dropped by the U.S.
the dollar’s hegemony since Charles de Gaulle after vocal opposition
was president half a century ago. from China and Ger-
For a start, history shows that reserve curren- many among others.
cies take a long time to lose their status. China
• The idea was a non-
has proposed the IMF’s Special Drawing Right as
starter and setting a
an alternative, but most experts are dismissive.
numerical target of 4
The SDR, they object, is not even a currency but percent of gross do-
the IMF’s synthetic in-house unit of account. mestic product for a
As for tackling trade imbalances, if there was country’s current ac-
an easy solution, policy makers would have found count balance was
it by now. unenforceable in any
And the G20 is such a broad, disparate group case.
that the chances of a “grand bargain” of new
policy commitments must be low – at least in
the absence of a new crisis that concentrates the
minds of leaders in a way that the collapse of Le-
hman Brothers did in 2008 and catapulted the
group to prominence in the first place.
(Editing by Miral Fahmy)
3
G20 NOVEMBER 2010

ANALYSIS

G20 finds common ground

opposing U.S.
By Emily Kaiser
WASHINGTON, Nov 7
G20 ECONOMIES
The G20 was established in 1999 as a response to the financial crises of the late 1990s

T
he Group of 20 is beginning to look more
like the G19 plus 1 as emerging and rich
and to a growing recognition that key emerging-market countries were not adequately
included in the core of global economic discussion and governance
The G20 is made up of the finance ministers and central bank governors
of 19 countries and the European Union

countries alike accuse the United States of GROSS DOMESTIC PRODUCT HOW THE G20 COMPARES
breaking a vow of unity. Per capita at current prices in US$ G8 nations Other G20 states EU27 GDP at current prices in US$ billion
This week’s G20 summit will require every bit U.S. Canada France Britain Germany Italy China Russia EU 16,107
47,132 45,888 40,591 36,298 40,512 33,829 4,283 10,522
of President Barack Obama’s diplomacy skills af- U.S. 14,624
China 5,745
ter the Federal Reserve embarked on a new $600 Japan 5,391
billion bond-buying spree, sparking criticism Germany 3,306
France 2,555
from four continents that the U.S. central bank Britain 2,259
was ignoring the global repercussions. Japan
Italy 2,037
Brazil 2,024
Officials from Germany, Brazil, China and EU27 42,325
Canada 1,564
32,284
South Africa were among those expressing con- South Korea
20,165
Russia 1,477 World GDP
61,963
1,430 G8
cern that the Fed’s money printing could weak- India
Australia 1,220 33,212
en the dollar, drive up commodity prices and Mexico
9,243
Mexico 1,004 G20
54,135
send uncontrollable waves of investor cash into South Korea 986
Turkey 729
emerging markets. Indonesia 695
If the G20 fails to defuse these global ten- South Saudi
Saudi Arabia 434
Brazil Argentina Turkey Africa Arabia India Indonesia Australia South Africa 354
sions, it may heighten investor concerns that 10,471 8,663 10,207 7,101 16,641 1,176 2,963 54,869 Argentina 351
Rest of world
7,828
policymakers are drifting further apart, leaving
GDP GROWTH % CURRENT ACCOUNT AS % OF GDP
the world economy vulnerable to another bout of
upheaval. China
India
10.5
9.7
Saudi Arabia
Germany
6.7
6.1
Domestic politics and policies make Obama’s Turkey 7.8 Russia 4.7
Brazil 7.5 China 4.7
job tougher. Argentina 7.5 Japan 3.1
He arrives in Seoul for the Nov. 11-12 summit South Korea
Indonesia
6.1
6.0
South Korea
Argentina
2.6
1.7
weakened by a crushing congressional election Mexico 5.0 Indonesia 0.9
Russia 4.0 -1.2 Mexico
defeat for his Democratic Party. His primary task Saudi Arabia 3.4 -1.8 France
will be to convince his peers the Fed’s actions do Germany
Canada
3.3
3.1
-2.2
-2.4
Britain
Australia
not run counter to a U.S.-led push for global co- Australia 3.0 -2.6 Brazil
South Africa 3.0 -2.8 Canada
operation to even out economic imbalances. Japan 2.8 -2.9 Italy
South African Finance Minister Pravin Gordhan U.S.
Britain 1.7
2.6 -3.1
-3.2
India
U.S.
said the Fed’s move “undermines the spirit of France 1.6 -4.3 South Africa
Italy 1.0 -5.2 Turkey
multilateral cooperation that G20 leaders have Sources: IMF, Eurostat Note: GDP per capita for EU27 is calculated by Reuters using IMF data
fought so hard to maintain during the current
crisis.”
German Finance Minister Wolfgang Schaeuble click for interactive chart
was less diplomatic. He called U.S. policy “clue-
less.”
It was less than five months ago that G20 lead- G20 + QE2 = CATCH 22
ers gathered in Toronto, talking in warm and Since that Toronto meeting, the dollar has
fuzzy terms about “collective well-being” and dropped 11 percent against a basket of curren-
“shared objectives.” cies, driving up currencies in Japan, Brazil, the
“G20 members have a responsibility to the euro zone and elsewhere. The biggest exception
community of nations to assure the overall health is China, where the tightly managed yuan has
of the global economy,” the leaders said in their gained a relatively modest 2 percent versus the
closing statement in June. dollar since late June.
“If we act in a coordinated manner, all regions Obama’s response to G20 criticism is expected
are better off, now and in the future.” to be that the world needs a healthy U.S. econ-

4
G20 NOVEMBER 2010

omy, and the U.S. economy needs healthier ex-

ports. GOVERNMENT DEBT
Fed Chairman Ben Bernanke himself said a General government debt as a percentage of GDP
strong U.S. economy was critical for the global
recovery, and his central bank was well aware of 25 50 75 100
the dollar’s “special role” in the global economy Sweden 42.5
and monetary system. Denmark 44.9
Indeed, G20 members all seem to agree that Germany 76.1 Finland 49.8
Netherlands 65.3 Estonia 9.2
the world needs a better balance between cash- Belgium 99.6 Latvia 44.0
rich exporters such as China and Germany and Britain 77.4 Lithuania 37.7
heavily indebted consumer countries like the Ireland 105.6 Poland 54.4
United States. The difference lies in how best to Luxembourg 18.0 Slovakia 41.5
Czech Rep. 39.6 Hungary 81.3
accomplish that. France 83.0 Romania 30.4
For emerging markets fearful that the Fed’s Portugal 80.4 Bulgaria 15.1
Spain 63.3 Italy Cyprus 61.2
flood of cash will swamp their economies, the 117.6 Malta
Austria 69.6 Greece 133.2
United States does not seem to be keeping up its 71.6
Slovenia 42.0
end of the “shared objectives” bargain. Canada 83.3
That makes it harder for Washington to push Russia 11.0
China
24.0
for policy changes elsewhere, particular in Bei-
jing, which insists the yuan is not the primary U.S.
85.9 Japan
culprit behind big global trade gaps. Treasury 213.3
Secretary Timothy Geithner’s proposal to set Mexico
S. Korea
numerical targets limiting current account im- 38.1
38.6
balances was roundly rejected at a G20 finance
ministers meeting last month.
The Obama administration was the driving
force behind a proposal adopted by the G20 in
Pittsburgh last year to promote more balanced South Saudi
Brazil Argentina Turkey Africa Arabia India Indonesia Australia
global growth. 62.5 55.4 44.1 38.2 4.4 75.8 25.8 21.6
That framework may be the best bet for G20 Source: Fitch Ratings
consensus at this week’s Seoul summit.
Unlike Geithner’s numerical targets, the The Fund told the G20 nations in June that if
framework for balanced growth calls for mutual they adopt mutually supportive policies, they
assessments to ensure domestic policies don’t could raise global output by $4 trillion and create
disrupt global growth. 52 million jobs in the medium term.
G20 countries submitted their medium-term
Unless leaders can put on a convincing show of
economic plans for International Monetary Fund
cooperation in Seoul this week, those loftier eco- A GREATER ROLE
review last month. Leaders may agree to keep FOR EMERGING
nomic goals may remain well out of reach.
this process going beyond Seoul, keeping the MARKETS?
IMF as arbiter. (Editing by Dan Grebler)
• Enhancing the role
of developing coun-
tries by giving them
greater voting and
quota rights in the In-
ternational Monetary
Fund could make them
share the burden of
resolving global eco-
nomic problems in-
stead of indulging in
unilateral action. That
said, this issue will be
difficult to police and
countries from Brazil
to South Korea are all
taking measures.

Guides take a rest behind caricatures of G20 leaders at a booth advertising for the upcoming G20 summit in
Seoul November 5, 2010. REUTERS/Jo Yong-Hak
5
G20 NOVEMBER 2010

ANALYSIS

Zoellick’s currency plan

highlights dollar angst
By Paul Taylor
PARIS, Nov 8 Gold Targets $1,430, But Mind The Dollar

W
orld Bank President Robert Zoellick’s
surprise call for a new global currency
system with gold as a reference point
highlights the depth of unease about a weaken-
ing dollar that is fuelling trade and currency ten-
sions.
It may be aimed more at drawing China into
the international monetary system than at actu-
ally reverting to an anchor role for gold, which
most economists and central bankers see as un-
realistic.
Timed to fuel debate ahead of this week’s G20
world economic summit in Seoul, Zoellick’s pro-
posal for a coordinated system of floating curren- Spot gold has a near-term technical target at $1,430, but watch for
cies, including China’s yuan, is a departure from any dollar strength as gold’s correlation with the greenback has
20 years of U.S. dogma about leaving exchange strengthened again, says Reuters North Asia Editor Phil Smith
rates to markets.
It comes at a time when Washington and Bei-
jing are at odds over global economic imbalanc- • Zoellick
es, the yuan’s exchange rate, and the U.S. Fed- idea reflects
eral Reserve Bank’s renewed decision to create
more money to buy Treasury bonds.
global angst
This Fed policy, known as quantitative easing at weak dollar
or QE2, has helped depress the dollar, drawing and QE2
international criticism.
“Bob Zoellick not only has got a lot of historical • Currency
perspective, but he also understands the global cooperation
dynamics better than most,” said Jim O’Neill, to loom large
chairman of Goldman Sachs Asset Management.
“With the French about to take over the chair of
in French G20
the G20, we’re going to get a lot more about this agenda
sort of thing.”
Zoellick, a veteran former U.S. policymaker, • Experts see
called for “a cooperative monetary system” that gold anchor
would include the dollar, the euro, the yen, the role as
pound sterling and the yuan, which would move unfeasible
“towards internationalisation and an open capi-
World Bank President Robert
tal account. Zoellick speaks during a me-
“The system should also consider employing dia conference at the closing
gold as an international reference point of mar- of a Central American Inte-
ket expectations about inflation, deflation and gration System (SICA) meet-
ing at a hotel in San Salvador
future currency values,” he said. July 20, 2010.
REUTERS/Oscar Rivera
SDR ROLE FOR YUAN?
French officials said some of his ideas, aired in an chair from next week.
opinion article in the Financial Times, mirrored Paris wants to help integrate China, whose cur-
initiatives that President Nicolas Sarkozy aims to rency is not yet convertible, into the international
promote during France’s 12 months in the G20 monetary system gradually, enabling an orderly
6
G20 NOVEMBER 2010

appreciation of the yuan to

help balance global trade
flows.
Gold performance in different currencies
These ideas were at the cen- Gold closed at $1,409.05/ounce mark on Nov 8, 2010
tre of talks Chinese President
Gold price - rebased to June 2, 2010 Gold price - rebased to June 2, 2010
Hu Jintao held in France with 120
Sarkozy last week. Little fil- $
tered out in public, except for CNY
Chinese agreement to host a 110
G20 experts’ conference next
year on reforming the interna- Euro
tional monetary system. 100 Yen
A French official involved
in preparations for the G20
presidency said a key Paris 90
aim was to achieve the inclu-

09/11/10
Gold hit a three month low on 29/07/2010
sion of the yuan in the basket
of major currencies used to 80
J J A S O N
calculate the International 2010
Monetary Fund’s Special
Source: Thomson Reuters
Drawing Right.
Reuters graphic/Catherine Trevethan
That would help turn this
national accounting tool into
a real reserve currency by encouraging a mar- tion, when the volume of international commerce
ket for it, including bond issuance in SDRs, and has grown exponentially.
encouraging central banks to use it in their re- The gold price has soared and become more
serves, the official said. volatile than in previous decades since the start
O’Neill of Goldman Sachs said that might be of the financial crisis in 2008 partly as a safe ha-
achieved very soon, since the IMF is due to com- ven for risk-averse investors but chiefly because
plete a five-year review of SDR weightings by Jan. interest rates in major economies at are histori- “These
1 and its board is due to discuss the matter later cally exceptional lows. discussions
this month. Gilles Moec, senior European economist at
“A really smart thing for the IMF to do now Deutsche Bank, said talk of a return to the gold
boil down to
would be put the (yuan) into the SDR today. Then standard cropped up each time there was a crisis one thing: that
the SDR would suddenly have some obvious in the exchange rate system. But there was a fun- people are
appeal to people in the private sector, and that damental problem with using the gold price as looking for
could quite rapidly open the door to less depend- a proxy for inflation, when it reflected the supply
ence on the dollar and a more shared interna- and demand for an underlying commodity.
an anchor.
tional monetary system,” he said in a telephone “These discussions boil down to one thing: that Since the Fed
interview. people are looking for an anchor. Since the Fed is now getting
is now getting into some uncharted territory with into some
GOLD DOESN’T GLISTEN its QE2, the need for this kind of anchor is getting
However, there is more scepticism about any idea stronger,” Moec said.
uncharted
of a return to even a modified gold standard. China is worried for the value of its huge hold- territory
European Central Bank President Jean-Claude ings of U.S. Treasurys, as well as its export com- with its QE2,
Trichet, speaking after a meeting of central bank- petitiveness, while other, more open emerging the need
ers from industrialised and emerging countries in economies feared sudden inflows of hot money
Basel, said they did not discuss the gold stand- into their markets, inflating their exchange rates.
for this kind
ard. European nations are worried that they will be of anchor
“In my memory, such an idea was mentioned stranded with an uncompetitively high euro ex- is getting
a long time ago by Jim Baker when he was Sec- change rate, and that the Fed’s money-printing stronger.”
retary of the Treasury in the 1980s,” Trichet said, may eventually stoke inflation.
adding that he had “no particular comment”. “Without getting as grand as the Gold Stand-
– Gilles Moec,
Zoellick was a senior Treasury official under ard, I think everyone would be more comfortable Deutsche Bank
Baker. if ... we had some idea where things would be in
One key reason for the collapse of the post- five years from now, if we had some kind of an-
World War Two Bretton Woods monetary system chor,” Moec said.
in 1971, when President Richard Nixon took the
dollar off the gold standard, was that there was (additional reporting by Daniel Flynn in Paris
no longer enough gold to back world trade. and Lesley Wroughton in Washington; editing by
That is even more true in the age of globalisa- Giles Elgood)
7
G20
Q+A - What would Zoellick’s new monetary order look like?
By Alan Wheatley,
Global Economics Correspondent
SEOUL, Nov 9
W
orld Bank President Robert
Zoellick has stirred a hornet’s
nest with his proposal for a new
“co-operative” monetary system, with a
role for the yuan, that might refer to gold
to gauge market expectations of inflation.
Following are the answers to some ques-
tions raised by Zoellick’s far-reaching sug-
gestions.
WHY GO PUBLIC WITH THE IDEA NOW?
• Discontent over erratic currency swings
has intensified since the global financial
crisis, which dealt the greatest shock to the
world economy since the collapse of the
Bretton Woods regime of fixed but adjust-
able exchange rates in 1971.
Some academics foresee ever-greater
volatility, making the search for a more sta-
ble system all the more urgent. Zoellick is
adding spice to this debate.
Robert Aliber, professor of international
economics and finance at the University of
Chicago, said in an email that Zoellick was
to be applauded for taking the initiative to
reduce instability.
“The last forty years have been the most
turbulent in monetary history. There have
been four waves of financial crises; each
wave has involved the failure of many of the
banks and credit institutions in three, four
or more countries at about the same time,”
Aliber wrote in a new paper.
These failures, he said, have often been
associated with abrupt slumps in exchange
rates – something which runs counter to the
assumption by proponents of free-floating
currencies that adjustments to imbalances
would be smooth and gradual.
“These large changes in currency values
result from large changes in the scope and
direction of cross-border movements of
money; the reversal in the direction has led
to very sharp depreciations of currency and
has contributed significantly to domestic
financial crises.
“The international monetary arrange-
ments now are dysfunctional,” Aliber con-
cludes.
IS THERE A FRENCH CONNECTION? AND
A CHINESE ONE?
• Very much so.
France, which takes over the rotating
chair of the Group of 20 major economies
after this week’s Seoul summit, wants to
make global monetary reform the centre-
piece of its presidency.
One issue France wants to tackle is how
the international system can protect coun-
tries from volatile fluctuations on the capi-
tal account of the sort Aliber describes.
New International Monetary Fund instru-
ments, including the precautionary credit
line and the flexible credit line, and South
Korea’s suggestion of regional safety nets,
go some way to addressing this problem.
A thornier issue, according to a French
official, is diversification away from the
dominance of the dollar. This was compli-
cated for political reasons with the United
States but also because it is not clear what
the best alternative is.
Zoellick advocates a “co-operative mon-
etary system” that is likely to need to involve
the dollar, the euro, the yen, the pound and
the yuan, also known as the renminbi.
That has echoes of an idea floated in
March 2009 by Chinese central bank gov-
ernor Zhou Xiaochuan, who suggested that
the dollar could give way as the premier
reserve currency to a beefed-up Special
Drawing Right, the IMF’s unit of account.
Zhou did not say as much – he did not
need to – but the yuan would be part of the
SDR basket he had in mind.
“It would be not only a good thing for
China, but good for the SDR because it
would better reflect the structure of global
trade and the economy,” said Ding Zhijie,
a professor with the University of Interna-
tional Business and Economics in Beijing
and an adviser to the Chinese government.
DOES THIS SPELL THE DEMISE OF
THE DOLLAR
• The Federal Reserve’s new policy of print-
ing money to buy $600 billion of govern-
ment bonds has raised widespread fears
among emerging nations that Washington
is trying to export its economic problems to
the rest of the world via a weaker dollar.
“With the Fed’s quantitative easing, the
dollar is losing its position as an anchor
currency in the international monetary sys-
tem,” Ding, the Beijing professor, said.
Zoellick put things differently, calling for
the global monetary order to evolve in a
way that “reflects emerging economic con-
ditions” – code for the meteoric rise of the
likes of China, India and Brazil.
A deal endorsed last Friday by the IMF’s
executive board to shift six percent of voting
power in the fund to such dynamic emerg-
ing economies fits into this mould.
On the foreign exchange front, the un-
folding imperative is to carve out a bigger
role for the yuan, the currency of the world’s
second-largest economy but one that is not
convertible on the capital account and so is
NOVEMBER 2010
barely used beyond China’s borders.
That could be about to change, though.
With China aggressively expanding use
of the yuan for trade settlement, “a finan-
cial revolution of truly epic proportions”
could be at hand, economists at HSBC said
in a new report.
The Fed’s latest easing will surely only
encourage governments, reserve manag-
ers, companies and individuals to think
about alternatives to the dollar, they said.
“Given China’s heightened gravitational
pull in the world economy, the renminbi
is an increasingly credible rival. The world
economy is, slowly but surely, moving from
greenbacks to redbacks,” the HSBC econo-
mists said.
WHAT’S NEXT?
• As Zoellick said, it takes time to develop a
new monetary system.
One thing to watch is the composition
of the SDR. The next review of the basket
– now made up of the dollar, euro, yen and
pound – is due to be completed in January.
Under present criteria, the yuan would
not be eligible because it is not a convert-
ible currency. But politicians can waive
that rule and, in any case, the facts on the
ground are changing as China permits yuan
deposited outside China from trade settle-
ment to flow back into the bond market.
Including the yuan in the SDR basket
seems an obvious first step and is some-
thing the Chinese are ready to discuss, the
French official said. But when, he asked?
Next year? In a decade?
A more representative SDR should ap-
peal to asset managers and, theoretically,
transform it into a real currency.
But history has not been kind to synthetic
currencies.
Only a few SDR bonds were issued and
the appeal of the European Currency Unit
– the precursor of the euro – was no match
for the anchor of the European Monetary
System, the mighty German mark.
Ultimately, many believe, the dollar will
share its reserve status not with the SDR
but with the euro and the yuan. But just
how soon that might come about, and how,
is unknowable.
“Governments may start talking about
maintaining relative stability between ma-
jor currencies, but it is still too soon to fore-
cast what any new system will look like,”
Ding, the Chinese professor, said.
(Additional reporting by Zhou Xin; Editing
by John Chalmers)
8
G20 NOVEMBER 2010

EXCLUSIVE

WTO, OECD, UN to warn G20

on currency threat
By Jonathan Lynn
GENEVA, Nov 3

T • Currency
he global economy faces an increased other governments are also complaining about
threat of protectionism because of tensions these and other countries’ currency policies.
tensions risk
over exchange rates, the heads of three in- The comments also signal a significant change
ternational organisations will warn leaders of the in the WTO’s assessment of the environment for fuelling
G20 in a forthcoming report. trade. In previous reports for earlier G20 summits protectionism
The warning is contained in a report on trade it has argued that G20 countries had largely kept
and investment from the World Trade Organi- protectionism under control. • Protectionist
zation (WTO), Organisation for Economic Co- Lamy, OECD Secretary-General Angel Gurria
operation and Development (OECD) and United
pressures
and UNCTAD Secretary-General Supachai Pan-
Nations Conference on Trade and Development itchpakdi will argue that G20 countries have con-
intensifying
(UNCTAD), commissioned by the G20 for its sum- tinued to resist protectionist pressures since the
mit in Seoul. last summit, the source said.
“Protectionist pressures clearly have intensi-
But they will say that high unemployment in
fied because of currencies for one thing and cur- WILL THERE BE A
many G20 countries, macroeconomic imbalanc-
rent account imbalances,” said a source familiar TRADE DEAL?
es between them and exchange rate tensions are
with the report, who asked not to be identified.
fuelling protectionist pressures.
The report marks growing concern among sen- • G20 members have
ior policy-makers over the disputes over curren- They will urge G20 leaders to address the trumpeted their com-
cies. threat to the stability of the global trading sys- mitment to free trade
Last month WTO Director-General Pascal tem from perceptions that currencies may be and generally have not
moving to pursue comparative advantage. introduced new pro-
Lamy, who has previously refrained from getting
The three will also point out that the number of tectionist measures.
involved in arguments about exchange rates, However, some of the
said disputes about currencies could threaten new restrictive measures in trade and investment
fiscal expansion plans
trade and economic recovery. has been increasing only slowly but this steady recently implemented
The United States is calling on China to let its accumulation has not been matched by the re- by countries as they
undervalued yuan currency appreciate, while moval of emergency measures since the crisis clawed their way out
China is complaining that easy U.S. monetary ebbed. They will call on G20 leaders to give pri- of the global econom-
policy is destabilising other countries. Many ority to removing them. ic slowdown in 2008
and 2009 directly tar-
geted domestic indus-
Real effective exchange rates tries. There have also
as of Sept 2010 vs 2005
been some non-tariff
Percent measures.
U.K.
Korea
• In general, it has
Argentina
been surprising that
Mexico
there has not been
U.S.
Euro
much protectionism,
S.Africa although a range of
Japan G20 economies from
India Brazil to Indonesia
S.Arabia and South Korea have
Canada imposed capital con-
Turkey trols.
Australia
China
• They are unlikely
Indonesia
Russia
to make sufficient
08/11/10

Brazil
progress to reignite
-20 0 20 40 60
the Doha trade round
BIS effective exchange rate, Real (CPI-based), Broad Indices Monthly averages; 2005=100 talks.
Source: : Bank for International Settlements, Thomson Reuters
Reuters graphic/Catherine Trevethan
9
G20 NOVEMBER 2010

BREAKINGVIEWS

Fed’s QE2 may make for less

cooperative world
By Ian Campbell
LONDON, Nov 4

W
hen the United States inflated a hous-
ing bubble, it got itself into trouble.
Now it is blowing bubbles abroad, and
may get the rest of the world into trouble. That is
how some emerging economies regard the U.S.
Federal Reserve’s decision to print another $600
billion by mid-2011. Their anger is an inauspi-
cious backdrop to the G20 summit. The United
States may now find it harder to get cooperation
on the yuan and global imbalances.
Self-interest and global interest are colliding.
There is resentment in America about high un-
employment and the perceived culpability of the
cheap Chinese yuan. The Fed has acted in what
it sees as America’s interest. The U.S. economy
is recovering, but slowly. Its new money-printing food prices are rising too fast. The Fed’s actions
might be seen as a big insurance policy: stimulate will fan that. Emerging-economy asset prices PROGRESS IN
now and we definitely won’t become like stag- are also inflating. These economies don’t want FINANCIAL
nant Japan, seems to be the view of Fed chair- a flood of cheap foreign money flowing into eq- REGULATION?
man Ben Bernanke. Patience might have been uities, bonds and property. Brazil has imposed
better but Bernanke’s fear of not doing enough is taxes on foreign investment in bonds; South Ko- • Aside from endorsing
understandable. rea is muttering about capital controls. Emerging Basel III world leaders
will also sign off on
More dollars, however, mean weaker dollars. economies know the flow will eventually recede
the Financial Stability
The rest of the world will naturally protest that – and may leave burst bubbles behind. Board’s proposals on
the United States is being hypocritical in preach- The Fed’s timing could hardly be more unfor- dealing with “too big
ing against currency wars. The falling dollar, tunate. When G20 leaders meet in South Korea, to fail” banks.
moreover, has unfortunate side effects such as many of them will decry the Fed’s new easing.
commodity price inflation. In India and China, That risks distracting attention from the fact that • However these pro-
the yuan is pegged to posals are expected
the devaluing dollar, to be fairly broad with
G20 GDP growth - 2010 forecasts while the euro, yen and disputes over details,
such as the need for
other emerging econo-
Percent additional capital
Italy
mies soar. surcharges for large,
France Well, you act in your inter-connected banks,
U.K.
interests, we act in unlikely to be resolved.
U.S.
Japan ours, China can say. The
S.Africa United States won’t • France, which takes
Australia
have much answer to over as G20 host after
Canada
Germany that now. Korea, is expected to
S.Arabia push for new global
Russia rules that curb specu-
Mexico – The author is a
lation in commod-
Indonesia Reuters Breakingviews ity markets but some
Korea
Argentina
columnist. The opin- regulators say there is
xxx Brazil ions expressed are his no big appetite among
Turkey
India
own – many of the leaders for
08/11/10

China further reform.

0 2 4 6 8 10 12
click FoR A
Source: International Monetary Fund, World Economic Outlook Database, October 2010
Reuters graphic/Catherine Trevethan
BASEL III PRIMER
10
G20 NOVEMBER 2010

China’s stance on economic issues

BEIJING, Nov 5

C
WHAT WILL BE
hina on Friday gave a briefing ahead of basis in either theoretical or practical terms. AGREED?
the G20 summit in Seoul. Following are “Therefore, we believe that it is inappropriate
the comments of Vice Foreign Minister Cui to discuss such a topic at the G20. This would • There was what the
Tiankai on a range of economic and financial is- send the wrong message to the world that the organisers termed a
hardening of the rhet-
sues. G20 cares about unimportant issues. That will do
oric on currencies in
no good for the world economic recovery. the final communiqué
ON G20 AGENDA of the finance minis-
“The G20 should revolve around common issues YUAN REFORM ters last month, with a
facing the global economy, rather than be nar- “As for China’s exchange rate, we have steadily shift to “market deter-
rowly focused on the technical issues of certain moved ahead with reform.” mined” exchange rates
countries or certain areas, and still less the spe- “But if anyone or any country gives China a from “market oriented”
cific issues facing emerging market economies.” specific target, requiring the yuan to appreciate in the agreement at
“If any issues about a specific country are to be to a designated level during a given period, that the previous summit in
Toronto. It also called
discussed, they should discuss the issues of the would indeed be asking us to manipulate the
for countries to avoid
main reserve currency-issuing country, because renminbi’s exchange rate, and it is something “competitive devalua-
their policies have a big impact on the global that we will of course not do.” tions”.
economy.”
“There are indeed many imbalances in the THE FED’S QUANTITATIVE EASING • The language of the
global economy, such as in north-south devel- “They own us some explanation.” communiqué agreed by
opment, the development of the international “I’ve seen much concern about the impact of leaders is unlikely to go
financial system and representation in global fi- this policy on financial stability in other coun- beyond that agreed by
nancial decision making. All these are structural tries. As the main issuer of a reserve currency, we finance ministers and
financial markets are
imbalances.” would hope that it (the United States) adopts a
not pricing in any dra-
“So we believe a discussion on current account responsible position.” matic shift.
targets misses the whole point.” “It is fair to say that all emerging economies
“If you look at the current global economy, and developing countries, including China, are • World leaders in-
there are many issues that merit more atten- influenced by macro-economic policies from the cluding U.S. President
tion – for example, the question of quantitative major reserve currency-issuing country, and we Barack Obama and
easing. In recent days, the issue has raised great certainly will keep a close eye on how these poli- Chinese President Hu
concern among all economies in the world. cies impact us.” Jintao will also sign a
“In addition, some major economies have im- “In economic terms, such policies will have a pact to agree what will
be presented as a com-
plemented an almost-zero interest rate policy for spillover effect. But I am afraid, if such policies
prehensive framework
a long period, and the impact that this will have continues, the spillover may turn into a flood. So I in which to address
on other countries’ economic stability is another think the international community has reason to global economic imbal-
issue of wide concern.” be concerned.” ances.
“These are the issues that have systemic and “The Federal Reserve has the right to make its
structural implications for the world economy, own decisions, and it need not consult with any • The Basel III rules on
and they are worthy of our attention.” other country beforehand. And there is no one to bank capital and liquid-
impose a specific target on it.” ity will be endorsed by
CURRENT ACCOUNT TARGETS “But we hope they can consider the impacts on the leaders and hailed
as a milestone in finan-
“As for current account targets, of course, we other countries in the world when they make de-
cial regulation.
hope to seem more balanced current accounts. cisions, not just their own economy.”
But we believe it would not be a good approach “We are willing to have a discussion with the • There are unlikely
to single out this issue and focus all attention on United States about the impact of such a policy to be firm targets on
it. The artificial setting of a numerical target can- on the Chinese economy and the world economy.” fiscal consolidation,
not but remind us of the days of planned econo- monetary policy, and
mies.” IMF REFORM exchange rate poli-
“China has carried out market-oriented reforms “We note that the recent G20 finance ministers’ cies. Optimists say the
in its economic system over many years, but now and central bank governors’ meeting set targets framework will be re-
fined and that this is
there are some people in the world who want us for reform. That represented progress.”
a good starting point.
to go back to the days of a planned economy. This “The essence of IMF quota reform is to reflect Pessimists say the com-
really surprises us. more accurately the current reality in the global muniqué is just words
“In addition, for both the academic and busi- economy. The distribution of quota shares in the that are unlikely to be
ness communities, such a target lacks a concrete IMF has long lagged behind global economic matched by action.

11
G20 NOVEMBER 2010

realities. This situation should be addressed as

soon as possible.” FX – CAUGHT IN THE CROSSFIRE
“It is most reasonable and sensible to increase
New Zealand stuck in the middle of currency wars
China’s quota share in the IMF, but on this issue
China does not seek to maximise its own self-in-
terest. Rather, we hope to see a win-win situation
for all emerging market economies and other
members of the IMF.”
“The completion of quota reform does not sig-
nify the end of IMF reform. Many countries have
said that the quota system itself needs to be re-
formed, and the IMF governance structure also
needs to be reformed. These are tasks for further
IMF reform going forward.”
“This is not the end, not even the beginning of
the end, but the end of the beginning.”

(Reporting by Zhou Xin and Simon Rabinovitch;

Editing by Ken Wills) Finance Minister Bill English says as a small nation New Zealand
has little influence in the currency wars – and tends to get squeezed
by its larger partners.

Thailand open to capital controls as FX tensions build

Finance Minister Korn Chatikavanij says Thailand may implement

more capital controls to combat excessive inflows, as tensions
sparked by easy U.S. monetary policy intensify.

QE2 sharpens Japanese and Korean

exporter competition

The Fed’s QE2 could reshape Asian exporters’ heated competition in

global markets, and finally tilt the field in favour of some Japanese
exporters like Murata over their South Korean rivals.
12
G20 NOVEMBER 2010

FACTBOX

Emerging economies gain clout

as IMF doubles quotas
GYEONGJU, South Korea, Oct 23

F
ast-growing emerging economies within the Fund has not kept pace with their
will get more clout at the International emergence as major engines of global growth. WHAT IS SEOUL’S
Monetary Fund under a landmark • China will leapfrog Germany, France and DEVELOPMENT
agreement clinched on Saturday that reflects a Britain in the Fund’s power rankings, with its AGENDA?
shift in global power from industrial countries. quota share rising to 6.19 percent from 3.65
percent. India will be in 8th spot, Russia in 9th • It is fairly unconten-
tious for the countries
• Under the deal, more than 6 percent of and Brazil in 10th, according to the Russian
here, although some
voting shares at the Fund will shift to dynamic finance ministry. of the “excluded” 172
developing countries such as China, which • Together, the four – known by the acronym countries do not feel
will become the third-biggest member of the BRICs – will have 14.18 percent of IMF quotas. the same. That said,
187-strong Washington-based lender. • Emerging markets as a whole will have a 42.29 the G20 represents a
• Europe will give up two of the eight or nine percent share, which the G20 said was likely to big step up as a more
seats it controls at any given time on the IMF’s rise further following a comprehensive review of inclusive group for de-
Executive Board, which will continue to have 24 the quota formula due by January 2013. velopment than the G7.
members. • Thrashing out which smaller European
• Seoul has advanced
• As part of a wide-ranging package, the G20 countries will give up their board seats is likely
an eight-pillar devel-
also agreed to double the IMF’s quotas, which to take a year or more. The G20 set a final opment agenda and
determine how much each country contributes deadline of October 2012. Belgium, Denmark, multi-year action plan
to the IMF and how much it may borrow from it. the Netherlands and Switzerland are among the for the G20 that has
• The quotas currently total about $340 billion. possible losers. been generally well-
• The governance reforms amount to an overhaul • The fund’s current five biggest members – the received as moving
of the global economic order established when United States, Japan, Germany, France and beyond the aid debate
the Fund was set up after World War Two. Britain – have their own seats on the IMF board and financial targets
• Washington, which has a 17.67 percent share and are allowed to appoint their executive for donor countries
that are rarely met.
of IMF quotas will retain its veto on the Fund’s directors.
most important decisions. These will continue • Under Saturday’s deal, these directors will now • Some observers have
to require a super-majority vote of 85 percent, have to be elected by the full board. said that poor de-
according to IMF officials. • China, Russia and Saudi Arabia also have their veloping economies
• The G20 agreed a year ago to transfer at own seats. The rest of the membership is divided simply cannot mimic
least 5 percent of voting rights to developing into constituencies, which elect an executive South Korea’s turbo-
countries such as India and Brazil whose clout director to vote for the group as a whole. charged surge to be-
come a high income
economy and that
watering down aid’s
Cover Photo: People are reflected on a sculpture in front of the Coex Convention Centre, the venue of the G20 summit, in importance will let rich
Seoul November 8, 2010. REUTERS/Jo Yong-Hak nations off the hook.

For comments, queries or tips: (Editing by

Miral Fahmy)
John Chalmers Vidya Ranganathan
Editor, Political and General News, Asia Economics Editor, Asia
+65 6870-3812 Phone: +65-68703090
john.chalmers@thomsonreuters.com Vidya.Ranganathan@thomsonreuters.com

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