G-20 Pledges to Avoid Devaluations in Push to Defuse Global Trade Tensions

Group of 20 finance chiefs sought to calm trade frictions that threaten the world economy by pledging to avoid weakening their currencies to boost exports and to let markets increasingly set foreign-exchange values.

The G-20 agreed to “move towards more market-determined exchange-rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies,” finance ministers and central bankers said after talks yesterday in Gyeongju, South Korea. U.S. Treasury Secretary Timothy F. Geithner and Chinese Vice-Premier Wang Qishan may continue the debate today when they meet in Qingdao, China, for previously unscheduled talks.

It was the first time the finance officials made a joint stance on exchange rates as they tried to end concern that nations from the U.S. to China are relying on cheap currencies to spur growth, risking a protectionist backlash. The policy makers delayed further debate over a U.S. proposal for current account targets until next month’s Seoul summit of leaders, while agreeing the gaps should be made more sustainable.

“The terms of the currency policy are so vague and broad that they can be interpreted into different meanings by each country as well as market players,” said Oh Suk Tae, an economist at SC First Bank Korea Ltd. in Seoul. “I’m not sure whether the currency war is over. We need to see actions in line with the verbal vows.”

Recycle

The finance officials previously avoided joint statements on currencies for fear of alienating China. The communique still recycles language used at previous G-20 leaders’ summits in London and Toronto and falls short of the currency accords of the 1980s.

The group also called the economic recovery “fragile and uneven.” Seeking to increase the influence of emerging nations in running of the International Monetary Fund, it endorsed what IMF Managing Director Dominique Strauss-Kahn called the “biggest reform ever” of its governance.

Europe will surrender two seats on the lender’s 24-member executive board and a majority of countries will shift more than 6 percent of so-called quotas to under-represented countries. Quotas determine voting rights, financial commitment and access to aid.

Dollar’s Slide

The policy makers met as China’s restraint of the yuan and the U.S. dollar’s recent slide force trade partners including South Korea and Brazil to temper gains in their own floating currencies to remain competitive. The dollar has dropped as the Federal Reserve mulls easing monetary policy to lift growth.

The currency on Oct. 22 completed its first weekly advance since early September against a basket of currencies, according to IntercontinentalExchange Inc.’s Dollar Index, rising 0.6 percent. Yuan forwards dropped the most in 22 months on the same day amid speculation China will rely more heavily on interest- rate hikes to damp inflation after raising its benchmark for the first time since 2007.

China should open its markets and Fed Chairman Ben S. Bernanke heard “criticism” of its current policy stance from within the G-20, German Economy Minister Rainer Bruederle said.

“It’s the wrong way to try to prevent or solve problems by adding more liquidity,” Bruederle said. “Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate.”

Combating Deflation

European Central Bank President Jean-Claude Trichet said combating deflation risks “was also a contribution to global prosperity.”

To dilute the focus of such meetings on currencies and make a revaluation of the yuan more palatable to China, Geithner suggested countries set goals for their current account surpluses or deficits. While South Korea and Canada were among those to back the initiative, it was challenged by major exporters Germany and Japan.

The group will “pursue the full range of policies conducive to reducing excessive imbalances and maintaining current account imbalances at sustainable levels,” the statement said. The IMF will deepen its monitoring of currencies and persistently large trade gaps.

The G-20 members will flesh out details by the Seoul forum, a U.S. official said. Although Japanese Finance Minister Yoshihiko Noda said Geithner wanted a 4 percent cap on trade imbalances, the official said the U.S. doesn’t expect a fixed target and may instead push for a range with an eye on having sustainable trade positions by 2015.

Balanced Growth

“We need to work to achieve more balance in the pattern of global growth,” said Geithner. “This requires a shift in growth strategies by countries that have traditionally run large trade and current account surpluses, away from export dependence and toward stronger domestic demand led growth.”

Bundesbank President Axel Weber, who also attended the talks, said Germany shouldn’t be blamed for having a current- account surplus.

A current account is the broadest measure of trade because it includes investment and transfer income, and it would be hard to achieve any correction in one without a currency shifting. Saudi Arabia, Germany, Russia and China all run surpluses larger than 4 percent of gross domestic product, while Turkey and South Africa have deficits bigger than that, according to the IMF.

The G-20 has long attempted to narrow such imbalances and pivot the world economy away from its reliance on excess U.S. demand and Chinese savings after those fault lines helped trigger the credit crisis. Limiting talks to foreign exchange is too inflexible for nations with trade surpluses and refocusing them on current accounts would allow tools other than currencies to be used, officials said.

Yuan’s Rise

Even as it runs a trade surplus and builds currency reserves, China has curbed the yuan’s rise to about 2 percent since a June pledge to introduce more flexibility, arguing anything other than a gradual appreciation would cause social and economic disruption. At the same time, the Fed has sent the dollar tumbling by leaning toward the purchase of more assets to tackle unemployment near a 26-year high and weak inflation.

Caught in the middle, emerging markets are embracing capital controls or intervening themselves to stay competitive with China and slow the inflow of speculative cash. South Korea is discussing several measures including a bank tax or levy on financial transactions, and Brazil last week raised taxes on foreign capital for the second time this month.

Advanced economies agreed to be “vigilant against excess volatility and disorderly movements in exchange rates,” the G- 20 statement said. Geithner said the U.S. backs a “strong dollar” and recognizes its global responsibility to support it.

Trading Edge

The G-20’s statement will encourage Asian nations to allow their exchange rates to rise without having to worry they will end up doing so alone and lose a trading edge, said Douglas Borthwick, head of foreign-exchange trading at Stamford, Connecticut-based Faros Trading. He said the yuan may climb to 6.60 per dollar in November from 6.66 at the end of last week and predicted the dollar will drop against the euro and yen.

For all the complaints it faces, China let the yuan gain the most versus the dollar since 2005 in September and by more than 20 percent in the last five years. The Bloomberg-JPMorgan Chase & Co. Asia Currency Index is up about 3 percent since August.

“China and its neighbors see the need to strengthen their currencies,” said Borthwick, whose firm executes currency transactions on behalf of hedge funds and institutional clients. “Going forward they will all move together and allow their currencies to strengthen, over time resulting in a more balanced economy.”