The U.S., China and five other large economies will face deeper scrutiny from their peers to ensure their policies don’t derail a global expansion that finance chiefs bet is strong enough to absorb recent shocks.
The seven countries have a gross domestic product greater than 5 percent of the Group of 20 nations’ economy, and so carry “the greater potential for spillover effects,” G-20 central bankers and finance ministers said during weekend talks in Washington.
Drawing up the list is part of a plan to spot imbalances in individual economies such as large trade gaps, and prescribe policies to fix them before they harm global growth. For now, the recovery is “broadening and becoming more self-sustained” even as unrest in the Middle East and North Africa, as well as Japan’s earthquake and tsunami, raise “uncertainty” about the outlook, policy makers said.
The economies named are “too big to ignore,” said Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. The G-20 is “approaching a situation where there are common principles for them all and that those who deviate from them will be called to the dock.”
The push to rebalance the world economy so its growth relies less on drivers such as U.S. demand and Chinese exports will likely encourage appreciation of emerging market exchange rates against those of developed economies, New York-based Englander said. He predicts the Chinese yuan will rise to 6.18 per dollar over the next 12 months after it touched 6.5290 last week, the strongest since 1993.
Policy makers were in Washington for the semi-annual talks of the 187-member International Monetary Fund and World Bank as investors query the strength of expansion. In addition to the Japanese disasters, the price of oil is above $100 a barrel, monetary policy is tightening in China, and European nations from Greece to Portugal continue to struggle to finance their debts. World Bank President Robert Zoellick said the world is “one shock away” from a food crisis.
Even as it noted “downside risks still remain,” the G-20 nevertheless sounded more optimistic than in February when it complained of uneven growth and high unemployment in rich nations. At the end of a week in which German carmaker Volkswagen AG posted record first-quarter sales and French retailer Carrefour SA said its first-quarter sales rose 3.9 percent, policy makers noted “increasingly robust” private demand growth and enough spare capacity to meet energy needs.
U.S. stocks fell last week, giving the Standard & Poor’s 500 Index its second straight weekly decline as companies from Alcoa Inc. to Google Inc. reported quarterly results that missed estimates.
Jim O’Neill, chairman of Goldman Sachs Asset Management in London, predicts the S&P 500 will rise to at least 1,400 by the end of the year from 1,319.68 last week as the recovery endures. Hiring and household balance sheets in the U.S. have also improved.
The focus of the discussions was the G-20’s new surveillance system for the world economy, of which it represents 85 percent. The goal is to foster balanced international growth after skewed trade and investment flows -- reflected in China’s $3 trillion foreign reserves and U.S. trade deficits -- helped trigger financial turmoil.
Having agreed two months ago to monitor indicators including budget deficits, private debt and external trade balances for signs of excess, policy makers now have guidelines against which to test them. They are based on historical performance and circumstances of the individual country and comparisons with other economies.
The U.S., Japan, Germany, France, U.K., India and China will be probed the most thoroughly because of their importance to the world economy.
The next step is for officials to work with the IMF to study the countries’ policies before telling leaders which ones are aggravating imbalances, and what measures can be taken to correct them, at a November summit in Cannes, France. The IMF’s policy committee said separately that the Fund will study how the financial policies of one country impact others.
“The net is a little bit tighter for those countries that are considered of systemic importance,” French Finance Minister Christine Lagarde told reporters.
After a contentious summit in Paris two months ago, where China won omission of currency reserves from the list of indicators, Vice Finance Minister Zhu Guangyao said he was “satisfied with the result” of the Washington meeting.
His country still faced pressure from officials including U.S. Treasury Secretary Timothy F. Geithner and Mexican central bank Governor Agustin Carstens to let the yuan appreciate faster after gaining just 4.5 percent since 2009. The G-20 agreed to look more closely at currency misalignments.
Challenges to the G-20 process include its reliance on peer pressure to spur needed changes and the suspicion of emerging markets that it will be used by developed economies to ramp up pressure to increase currency flexibility, said Sophia Drossos, currency fund manager at Morgan Stanley Investment Management in New York.
In a sign of these challenges, finance officials argued over the causes of, and cures for, capital flows surging into developing nations. The U.S. blamed China’s currency policy, while Brazil pointed the finger at low interest rates in rich nations.
“Emerging markets are going to be concerned about how these rules will be implemented,” said Drossos. “There are also questions about how adequately any of the rules can be enforced.”
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