G-20: Differing US, China Rhetoric on Imbalances

♠ Posted by Emmanuel in , at 9/22/2009 11:38:00 AM
Watch what we do, not what we say - John N. Mitchell

The late John N. Mitchell, Richard Nixon's first attorney-general, said something that pretty much sums up how we should approach political pronouncements on contentious issues. Some statements are for dramatic effect to please domestic audiences; some are to appease international ones; some aim to deceive; and, of course, some actually bear some semblance to actual policy stances. Subsequently thrown in jail for his role in the Watergate scandal, few mistake Mitchell's lack of scruples for lack of ability.

And so we now have pronouncements from two of the lead protagonists in the saga of global economic imbalances. Up first is the United States with its unique excuse for its massive budget deficit which goes, "we need to run massive deficits now so we can resume economic growth sooner that will help keep get our financial house under control." Their president, "China Currency Coalition" Obama, is certainly making the right noises again in asking for global demand growth to come from elsewhere as he has in the past:
A document outlining the U.S. position ahead of the September 24-25 Group of 20 summit in Pittsburgh said exporters, which include China, Germany and Japan, should consume more, while debtors like the United States ought to boost savings. "The world will face anemic growth if adjustments in one part of the global economy are not matched by offsetting adjustments in other parts," said the document, which was obtained by Reuters on Monday.

The framework drafted by U.S. policy makers foresaw analysis of G20 members' economic policies by the International Monetary Fund to figure out if they were consistent with better balanced growth. "We call on our finance ministers to launch the new framework by November," the document said, signaling a determined effort to maintain momentum for change created by last year's global financial crisis.

The United States envisages the IMF playing a central role in a process of "mutual assessment" by making policy recommendations to the G20 every six months.
Therein lies the rub: the IMF is obligated to perform Article IV surveillance on each member country on a regular basis. Among other things, these meetings should help head off financial and monetary instability. However, these surveillance reports have often produced less-than-decisive commentary, especially with regard to China. As with other countries that aren't encountering balance-of-payments shortfalls and are instead running healthy surpluses, it's hard for the IMF to get traction on them. The last we heard from the IMF, there was serious infighting going on there as to what they should do with America's wishes to label China's currency "fundamentally misaligned" as it hasn't performed Article IV surveillance on China for the longest time. Aside from once again showing a Western bias, doing so could lead to a full-scale North-South punch out.

China's position of global economic imbalances is precisely along these lines. For the PRC, addressing them are code words for bashing China's currency regime as well as its export-led growth. In other words, they will have no part of it:
China expressed scepticism on Thursday about a US and European push to launch an effort to tackle global economic imbalances at next week’s G20 summit in Pittsburgh. Zhou Wenzhong, China’s ambassador in Washington, said: “People should not focus on only one thing, that is balancing the economy.” The International Monetary Fund should concentrate on doing a better job of monitoring the build-up of financial risks...

While China is committed to shifting its growth model over time so it is less reliant on exports and more based on domestic demand, it is wary of a global push on imbalances, apparently due to fears it could become a way of bashing Beijing over its trade surplus.

Imbalances were “certainly not the root cause of the problem”, Mr Zhou said. “The root cause of the crisis is the lack of supervision and abuse of the openness of the market, very risky levels of leverage and too much speculation.” He said China wanted to see moves to improve global financial supervision, strengthen bank capital and create global early warning systems to identify threats. “China intends to play an active role in international efforts to revive the global economy but the responsibility for causing the crisis is not ours,” said a senior official in Beijing on Thursday.

China is likely to argue that it is already doing a substantial amount to rebalance its economy. Although imports and exports have both slumped this year, imports have fared less badly as a result of demand for commodities created by the government’s fiscal stimulus programme. China’s current account surplus, which reached nearly 10 per cent of gross domestic product last year, is forecast to fall to about 5 per cent of GDP this year.
In other words, "it's not our fault that you misspent the billions and billions we've lent you" for China. The PRC misses the point that all that borrowed money to fool around with had to come from somewhere first. Clearly, I am more on board with the US on this matter though it has a host of other agendas for promoting consumer demand in China such as offering retail banking services. Nothing wrong there, I think. Instead of funding ever-riskier ventures with massive leverage Stateside, why not help funnel massive Chinese savings into Chinese and not American consumption? As I've often said, both sides veer into wildly opposite directions with regard to market financialization. There are opportunities here if only both parties would recognize them.

And, solutions here will not likely involve the IMF--a highly controversial player LDCs do not usually consider as impartial.