China's currency an issue at G7 meeting
Updated
Debt and threat Greece's budget shortfall poses to Europe's economic wellbeing overshadowed the meeting of top finance officials from the G7 group of the world's richest developed nations.
As Scott Alle reports a report calling for greater exchange rate flexibility again highlighted issues over China's resistance to revaluing the yuan.
Presenter: Scott Alle
Speakers: Matt Robinson, senior economist at Moodys
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ALLE:
Concerns about Greece's deficit aside, G7 finance ministers did sit down to continue work on continued economic stimulus measures and tougher regulation of global banks.
But exchange rate flexibility was also on the agenda, with a report prepared for the finance chiefs.
It recommends major economies with inflexible currencies must consider strengthening them if the global economy is to be weaned off its dependence on spending by US consumers and the high level of savings in many Asian countries.
Matt Robinson is a Senior Economist at Moodys.
ROBINSON:
The global downturn showed at least one side of that circular argument was unsustainble
ALLE:
Governments and central banks want to avoid another cycle of US consumers relying heavily on overseas borrowing, which in turn funds rapid growth in Asia's export economies, resulting in structural imbalances in the world economy.
But China's trade surplus is boosted by its currency peg and it continues to amass huge levels of foreign currency reserves.
As of December last year those reserves totalled $2.4 trillion dollars...more than the GDP of G7 member Italy, the world's 7th largest economy.
ROBINSON:
Given the perpetual support from the western consumer is longer a given Chinese policy makers will have do something to move away from the country's dependence on US consumers and I guess that's what G7 finance minister were essentially trying to say, that policy ministers in China need to do something from that end to assist this global rebalancing.
ALLE:
That something could involve - as some market watchers are predicting - a 5 or 10 per cent revaluation in the yuan this year.
Last week US president Barack Obama vowed to apply more pressure on Bejing to allow the yuan the appreciate, while Treasury secretary Timothy Geithner backed up those comments saying at the G7 meeting, that Chinese officials realise a more flexible exchange rate is in their economy's interests.
A stronger yuan would help damp inflation fears by lowering the local-currency cost of the raw materials China imports. But it would also it would also eat away at China's cost advantage in global trade and devalue the country's foreign currency holdings.
Matt Robinson from Moody's.
ROBINSON:
There is this pressure for China to allow some kind of appreciation and its probably inevitable they will. The fact is we don't know when that might occur; it might be later this year, it could be two years down the track before China feels it has its domestic economy in order so that it is able to allow for that appreciation without destabilising or derailing its own economic agenda.
ALLE:
That agenda includes keeping currency appreciation in check to help support a recovery in exports, but also restraining inflation.
Currency issues will no doubt be raised at the G20 meeting in Canada in June, but the top policy makers at the People's Bank of China will have to assess what's best for the world's third largest economy.
