Finance ministers and central bank governors from the Group
of 20 rich and emerging nations, along with key officials from international
finance and lending organizations, meet Friday and Saturday in the South Korean
city of Gyeongju. Their deputies meet Thursday.
The gathering comes just two weeks after they failed at a
meeting in Washington to iron out differences that have led to fears the world
could descend into a so-called currency war that causes another downturn.
In such a scenario, countries devalue their currencies to
gain a competitive advantage over competitors in a less-than-robust world
economy that has yet to fully recover from the effects of the global financial
meltdown two years ago. Trade barriers are erected in response, hitting
international commerce and sending the economic recovery into reverse.
The Gyeongju meeting also offers the last chance to calm
such anxieties ahead of a summit of the group’s leaders scheduled next month in
Seoul.
David Cohen, head of Asian forecasting at Action Economics
in Singapore, said the finance meeting represents a “real test” for the G20
given the prominence it has assumed in leading the global economy.
“I think there’s a lot of pressure on them,” Cohen said.
“I think they understand that it’s in no country’s interest
to revert to a currency war, to all the protectionism that would accompany
that.” Currencies, long a source of contention, face renewed focus amid broader
strains in the global economy left over from the financial crisis.
China, the world’s No. 2 economy, is under renewed pressure
over its management of the yuan, which the US, the European Union and Japan say
is undervalued, giving its exporters an unfair competitive advantage.
The broad weakening of the dollar amid poor prospects for
the US economy and the outlook for possible further monetary easing by the
Federal Reserve is another factor adding to the strain.
And so-called hot money investment flows into emerging
countries in search of higher yields than can be fetched in the developed world
have turned up the heat on those currencies, particularly in Asian nations such
as South Korea.
Some governments as a result have tried to stem currency
appreciation through measures including direct intervention in markets or by
imposing controls on capital or taxes on foreign investment.
Finance Minister Yoshihiko Noda of Japan, which is dealing
with a strong yen that threatens to derail the country’s tepid economic
recovery, expressed hope that the G20 can come up with a creative solution to
the dispute over currencies.
“Different people will have their own perspectives on the
issue, so I hope this leads to good ideas,” he said Tuesday, adding that
“excessive capital flows into emerging economies” are part of the problem.
“The question now is what to do about it,” he said.
US Treasury Secretary Timothy Geithner told the Wall Street
Journal that part of the problem is “there is no established sense of what’s
fair” amid a diverse currency landscape.
“In the first category are those undervalued by any measure,
including China,” he said in an interview Wednesday. “In the second are
emerging economies with flexible exchange rates that intervene or impose taxes
to try to reduce the risks of significant overvaluation, of bubbles and
inflationary pressure. And then there are the major currencies, which are
roughly in alignment now.” China, which has drawn persistent criticism over the
yuan, would have a key role to play in achieving any currency accord. Beijing,
however, has said it sees no reason for the exchange rate issue to even be
taken up by the G20.
Still, Yim Jong-rong, first vice minister at South Korea’s
Ministry of Strategy and Finance, expressed optimism some kind of deal may be
reached on currencies.
“In my opinion, a compromise will likely be made, especially
since China has done its part by raising key interest rates and all sides know
that a trade war benefits no one,” he said Thursday according to Yonhap news
agency.
China’s central bank said Tuesday it hiked its key interest
rate by a quarter percentage point to 2.5 percent, the first such increase
since 2007.
The currency problem also threatens to distract the G20 from
concentrating on its principal task of coordinating polices to bolster the
world economy, shore up the financial system with tougher rules and standards
aimed at avoiding a repeat of the 2008 meltdown and reforms to the
International Monetary Fund.
The meeting in scenic Gyeongju, once the capital of an
ancient Korean kingdom, comes ahead of a summit of the group’s leaders
scheduled next month in Seoul, where they plan to consider proposals such as
strengthened capital requirements for banks.
South Korean President Lee Myung-bak, who hosts that
meeting, cautioned last week that failing to resolve the currency issue could
stoke protectionism and harm the world economy.
The G20 has been around since 1999, but emerged as the key
steering committee for the global economy in the wake of the financial crisis —
supplanting the Group of Seven — as emerging countries demanded more say.
The forum includes advanced economies such as the United
States, Germany, Japan, Britain and Australia as well as emerging ones like
China, Turkey, Brazil, India and Mexico.
