Analysis: China G20 to go nowhere fast on global currency reform

A lack of cohesion on global monetary reform will be on display this week when the Group of 20 wealthy and developing economies meets in China for a seminar, an event that was supposed to have been a starting point for Sino-French efforts to design a new global currency order.

At the start of its year-long G20 presidency, the French government thought it could count on China as a partner in spearheading change. Four months on, those hopes have been dashed by the reality of conflicting national interests and the enormity of the challenge in any serious attempt at reform.

Discussion topics at the seminar, which takes place on Thursday, still sound ambitious.

A first panel is set to look at shortcomings in the international monetary system. In a sign of the importance that France attaches to the event, President Nicolas Sarkozy will deliver the opening speech, though he will be the only head of state attending the meeting.

But all the signals from China are that it is a most reluctant host, its commitment to the cause of reform less extensive than France had believed.

Stuttering cooperation stems in part from a rancorous G20 meeting in France in February, when China fought hard against a plan to include exchange rates and currency reserves as indicators for identifying economic imbalances.

"China doesn't think that there's really much room for progress in the G20 under France. The government (Beijing) has become more realistic in pushing instead for yuan internationalization ... something it can achieve itself," said Zhang Ming, an economist in the Chinese Academy of Social Sciences, a top government think-tank in Beijing.

"It's not as enthusiastic as before about getting into the currency reform issue," Zhang added

Despite being a showpiece of Sarkozy's G20 agenda, basic details about the seminar have only been finalized at the last minute. China agreed just a month ago to hold it in Nanjing, a second-tier city that was the national capital in the past but has little economic or political clout today.

The Chinese foreign ministry has also taken pains to distance itself from the seminar, emphasizing that France is the organizer and China merely the staging ground. It has insisted that a small think-tank headed by a retired vice premier is responsible for the Chinese side of the planning.

Tough Road

Even if France and China were getting along swimmingly, reform of the global monetary system was never going to be a simple task.

France seized on a proposal made two years ago by People's Bank of China Governor Zhou Xiaochuan to build up the special drawing right (SDR), the International Monetary Fund's unit of account, into a global reserve currency that would eventually displace the dollar.

In an essay that garnered much attention at the time, Zhou said the objective was to have a super-sovereign currency, one that is "disconnected from the economic conditions and sovereign interests of any single country."

Laying out his G20 priorities, Sarkozy said in December that he wanted to look at widening the SDR's role and reducing reliance on the dollar. Given that China had mooted this idea, its backing would have seemed a foregone conclusion.

But as France is learning, China's enthusiasm for the SDR has cooled along the way. A series of Chinese officials have said Zhou's essay was mainly an academic exercise. Zhou himself later said that he had put the proposal forward as a way of deflecting criticism of China's own currency, which many other governments say is artificially cheap.

"China understands that reforming global financial and monetary institutions will be a gradual process. It won't be looking for radical or dramatic outcomes from the G20 summit," said Guo Xian'gang, vice president of the China Institute of International Studies in Beijing.

"China will prefer a more cautious path than Sarkozy might want to support," he said.

Yuan or SDR?

Beijing's fundamental concern about the dollar may in fact be much narrower than the supposed dysfunctions it causes in the global economy. With about two-thirds of its $2.85 trillion invested in U.S. assets, China worries that any fall in the dollar will erode its own wealth.

The solution need not be so complicated as fashioning a new global reserve currency, Owen Humpage, a senior economic adviser in the research department of the Federal Reserve Bank of Cleveland, wrote in a rejoinder to Zhou's initial essay.

"Countries, like China, that worry about their expanding dollar portfolios have another option: allow their currencies to appreciate," he said.

China has followed that advice to a limited extent since the middle of last year, letting the yuan rise about 4 percent against the dollar.

Beijing has also intensified efforts to shape the yuan into an international currency, especially for settling trade deals, a transition that will limit its exposure to the dollar over time.

China has not entirely forgotten the SDR. But rather than beefing up the IMF currency in its own right, internationalization of the yuan has become the prism through which Beijing views the SDR.

Xia Bin, an academic adviser to the Chinese central bank, wrote in a book this year that Beijing should aspire to have the yuan join the dollar, pound, yen and euro as a component of the SDR basket.

"This would be a reflection of the yuan's international status and it would also be a basic foundation for the process of further internationalizing the yuan," he said.

Practically, including the yuan in the SDR would make little difference, because the Chinese currency would still not be fully convertible. However, in a symbolic sense, it would capture China's vision of the future global monetary order, one in which the yuan plays an increasingly central role.

[Source: By Simon Rabinovitch, Reuters, Beijing, 29Mar11]

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