x Abu Dhabi, UAETuesday 23 January 2018

G20 leaders fail to break deadlock on currencies

World leaders' agreement on broad economic principles did not lead to a consensus on the issue of how to fairly value their currencies.

SEOUL // The world's most powerful leaders agreed yesterday on broad economic principles but failed to reach consensus on the nagging problem of how to fairly value their currencies.

The two-day Group of 20 economic summit, the most contentious so far of the series of meetings first held in 2008, sidestepped that issue. A "leaders' declaration" promised to "ensure ongoing recovery and sustainable growth and enhance the stability of financial markets" but failed to get down to specifics.

Instead the declaration - an attempt to bridge vast differences among members of the group - called for "moving toward more market-determined exchange rate systems, enhancing exchange rate flexibility to reflect underlying economic fundamentals".

That wording, vague as it is, was the strongest language that US negotiators could persuade the Chinese and others to accept. The US contends that China enjoys an enormous trade surplus with the US in large part because Chinese currency is vastly undervalued.

The declaration called for "refraining from competitive devaluation of currencies" but said nothing about the need for China to change the value of its currency so Chinese goods would be more expensive on the US market.

A number of leaders expressed dismay over the decision of the US Federal Reserve to buy more Treasury bonds, which may reduce the value of the dollar.

Globally, the greatest fear is that the international currency wars will intensify. Some leaders hold the US responsible for some of the world's financial ills while absolving China and others who might not be doing enough to reduce their surpluses.

The summit declaration did not mention any country by name, but the US president, Barack Obama, after its release, was frank in singling out China.

"We welcome China's rise," he said. "It's good to get people out of poverty." Nonetheless, Mr Obama said China's currency "is an irritant not just to the United States but to a lot of trading nations".

China, he observed, "spends enormous amounts of money interfering in the market to keep it undervalued".

Mr Obama argued against the view of the Chinese and Germans, shared by many at the summit, that the United States was depreciating its own currency. He said the Federal Reserve decision "was not designed to have an impact on the dollar. It was designed to grow the economy".

The US president, in one-on-one meetings with China's President Hu Jintao and Germany's Chancellor Angela Merkel, did not succeed in convincing them of the need to reduce their countries' surpluses.

Mr Obama cited the risks of protectionism.

"No nation must assume the road to prosperity depends on exports to the US," he said.

"We will continue to watch the appreciation of Chinese currency" - that is, to see if the Chinese would seriously raise the value of the yuan as a first step to cutting burgeoning exports and the country's current account surplus.

None of the leaders considered an earlier American suggestion for keeping their trade surpluses within four per cent of current accounts surpluses.

If currency imbalance was the most urgent topic confronting the Group of 20, the failure of the US and South Korea to come to terms during Mr Obama's visit on a Korea-US free trade agreement was equally important.

In a sense, the currency issues were a microcosm of the greater problems of overall imbalances in trade.

"A lot of countries including South Korea depend on exports," Mr Obama said. "They want to see us grow" - that is, for American consumers to have the resources to spend more on imports from Korea and elsewhere.

He was not, he said, "interested in trade agreements just for the sake of trade agreements". Somehow there must be a way "to find a sweet spot that works for both Korea and the United States".