U.S v China currency war
G20 refuses to back US push on China yuan
November 12, 2010 - 7:34PM
Leaders of 20 major economies on Friday refused to endorse a US push to get China to let its currency rise, keeping alive a dispute that has raised the spectre of a global trade war.
At the end of their two-day summit, the leaders of the Group of 20 rich and developing economies - including President Barack Obama and China's Hu Jintao - issued a watered-down statement that only said they agreed to refrain from "competitive devaluation" of currencies.
Such a statement is of little consequence since countries usually only devalue their currencies in extreme situations such as a severe financial crisis.
The real dispute is over Washington's allegations that Beijing resorts to "competitive undervaluation" - artificially keeping its currency, the yuan, weak to gain a trade advantage. But the US position itself has been undermined by its own recent policy of printing money to boost a sluggish economy, which is weakening the dollar.
The joint statement avoided the words "competitive undervaluation", which was a reference to China's currency policy that had been inserted into a draft of the statement by officials during pre-summit negotiations.
The dispute over whether China and the United States are manipulating their currencies is threatening to resurrect destructive protectionist policies such as those that worsened the Great Depression in the 1930s.
The biggest fear is that trade barriers will send the global economy back into recession. A law the United States passed in 1930 that raised tariffs on imports is widely thought to have deepened the Great Depression by stifling trade.
The G20 leaders pledged to move towards more market-determined exchange rate systems and enhance exchange rate flexibility. Although directed against China, the statement leaves significant room for interpretation since the language is vague and does not impose any timeframe for enforcing a market-determined exchange rate.
The US says a higher-valued yuan would make Chinese exports costlier abroad and make US imports cheaper for the Chinese to buy. It would shrink the US trade deficit with China, which is on track this year to match its 2008 record of $US268 billion ($A268.12 billion), and encourage Chinese companies to sell more to their own consumers rather than rely so much on the US and others to buy low-priced Chinese goods.
Other countries are irate over the Federal Reserve's plans to pump $US600 billion ($A600.27 billion) into the sluggish American economy. They see that move as a reckless and selfish scheme to flood markets with dollars, driving down the value of the US currency and giving American exporters an advantage.
Some critics warn that US interest rates kept too low for too long could inflate new bubbles in the prices of commodities, stocks and other assets. Developing countries such as Thailand and Indonesia fear that falling yields on US government bonds will send money flooding their way in search of higher returns. Such emerging markets could be left vulnerable to a crash if investors later decide to pull out and move their money elsewhere.
Friday's statement is unlikely to immediately resolve the most vexing problem facing the G20 members: how to fix a global economy that's long been nourished by huge US trade deficits with China, Germany and Japan.
Exports to the United States powered those countries' economies for years. But they've also produced enormous trade gaps for the US because Americans consume far more in foreign goods and services than they sell abroad.
[ Last edited by atomic3d at 12-11-2010 18:32 ]
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