US raises currency concerns at G20 meeting

Timothy Geithner says the value of the Chinese yuan has made life difficult for other developing economies [EPA]

The United States treasury secretary has told a G20 meeting that countries should have flexible exchange rates in a thinly veiled attack on China which Washington says is using tight currency controls to gain an economic advantage.

Addressing finance ministers and central bankers in the Chinese city of Nanjing, Timothy Geithner said controlled exchange rate regimes were the flaw of international monetary system.

He called for countries to permit free flows of capital to be major players in the global currency order.

Geithner offered a straightforward diagnosis. While major currencies moved freely and most emerging economies were well along that path, there were still some with little exchange rate flexibility, he said.

He added that this asymmetry fuelled inflation risks in the economies whose exchange rates are undervalued, magnified currency appreciation in others and also generated protectionist pressures.

“This is the most important problem to solve in the international monetary system today. But it is not a complicated problem to solve,” Geithner said, according to the prepared text of his remarks.

“It does not require a new treaty, or a new institution. It can be achieved by national actions.”

Without mentioning China directly, he said there were still countries that had very tightly controlled currencies.

The Chinese government told participants at the seminar not to mention specific currencies in their speeches and to keep their focus on broader questions in the global monetary system, according to a source attending the meeting.

But Geithner’s comments follow accusations levelled by Washington against Beijing of manipulating the yuan by keeping it artificially low in order to give Chinese exporters an unfair advantage.

Broader global problem

The G20 seminar, coming after last October’s summit on currency wars in the South Korean city of Gyeongju, was spearheaded by France, which is pushing a reform agenda in its year-long presidency of the group.

The seminar was meant to be focused on ills in the monetary system.

The US has long called on China to let its currency rise more quickly, and last year threatened to expose China as a currency manipulator in its reports released annually by the treasury on currency practices by its major trading partners.

In recent months, Geithner has taken to casting the Chinese currency as a broader global problem, saying that it is making life difficult for other developing economies.

India and Brazil, among others, have agreed, saying that a cheap yuan has undermined their competitiveness.

Nicolas Sarkozy, the French president, weighed in by urging that the yuan should become an international reserve currency.

“It is clear that we must evolve toward a more flexible exchange rate system that will allow us to withstand shocks,” Sarkozy said.

There is also a need, he said, for rules and supervision to ensure countries are protected from the excess volatility that can come with liberalised currency trading.

“Now that the crisis is past, the temptation to not act is very strong. If we lose the impetus that we achieved during the crisis then the world will slide inexorably back into instability and crisis.”

Washington and other trading partners view China’s restrictions on trading in the yuan as a key factor in global economic imbalances such as the large trade and current deficits of many Western nations.

But just before the Nanjing seminar, Beijing signalled its own frustrations with US economic stimulus policies, which the Chinese in turn say are fanning surges in commodity prices.

The Federal Reserve was accused of trying to devalue the dollar when it decided last November to buy $600bn in US government debt.

The move sought to revive an ailing economy by encouraging more borrowing and spending through a policy known as quantative easing.