3.31.2011

Currency Issues Back in the Forefront

US Treasury Secretary Tim Geithner put currency issues back in focus at a G20 seminar earlier today. In a not-so-thinly veiled jibe aimed at the Chinese hosts of the event, Geithner suggested that many of the currency problems in the world today could be solved without treaties, negotiations or new institutions. Instead, unilateral state decisions to allow currencies to revaluate alone could go some way toward solving imbalances.

At the core of this long-standing dispute is the American notion that a depressed yuan makes Chinese exports cheaper, causing them to be artificially high and thus leading to the enormous trade imbalances that currently exist.

Perhaps it is not an entirely new carrot to be held out in this ever-developing situation, but one thing that has been discussed more openly recently is the inclusion of the yuan in the IMF's Special Drawing Rights, essentially a reserve currency which is exchangeable for its component currencies. China wants to be in the basket that currently includes the dollar, the yen, the euro and the pound. Among other uses, IMF loans are calculated on the SDR interest rate. Inclusion in the basket would be another signal of China's 'arrival' on the global stage. Here is Geithner on this idea in general terms:


"We believe that currencies of large economies heavily used in international trade and financial transactions should become part of the SDR basket, and that to achieve this objective, the concerned countries should have flexible exchange rate systems, independent central banks, and permit the free movement of capital flows." (emph. added).

Geithner's unequivocal statements to the effect that the yuan won't be included until it is no longer being manipulated might ring of hypocrisy in the ears of Chinese officials. Nonetheless, as the US holds enough votes under its own control to veto any big changes in the supermajority set-up of the IMF, it is a fact of life that Beijing will have to accept the air of inevitability around anything Geithner says. In broader terms however, it is just another reminder that this multi-fronted battle show no signs of a ceasefire any time soon.

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