G-20 Keeps Up Snail’s Pace of Reform

Beijing. Another month, another inconclusive meeting of the Group of 20 finance ministers: reform of the international monetary system is proving a hard, thankless slog.

True, this week’s seminar in the eastern city of Nanjing confirmed the consensus that changes are needed to put the world economy on a firmer financial footing, keep a closer eye on capital flows and ensure the global monetary order better reflects the clout of China and other emerging giants.

But the devil is in the detail, and, for all the ministerial proclamations of progress, the latest talks served mainly to show that French President Nicolas Sarkozy will have his work cut out to devise a reform blueprint in time for a summit in November. France is this year’s chair of the Group of 20 leading economies.

One analyst, Citi’s Steven Englander, was struck by the Alice-in-Wonderland feel to the gathering. “So there is this meeting in Nanjing where all countries but one are trying to figure out how to get rid of the dollar as the world’s major reserve currency, one country is trying to keep its currency as the world’s major reserve currency but have it depreciate against all the others, and one country wants its currency to become a reserve currency but doesn’t want anyone to buy it without permission.”

“The intended outcome is reform of the international monetary system,” Englander said.

The country trying to preserve its hegemony is the United States. The aspiring reserve-currency country that wants to have its cake and eat it, too, is China.

The tug of war between the two led to a stalemate at February’s Paris G-20 over whether a big current account surplus or deficit is a good indicator of an unbalanced economy.

The answer might seem obvious. But China, feeling picked upon because of its hefty surplus, dug in its heels and objected. The bone of contention in Nanjing was over the conditions for including the yuan in the Special Drawing Right, the International Monetary Fund’s quasi-currency that is part reserve asset and part in-house accounting unit. The technical aspects of the debate are arcane, but the political significance is straightforward.

Adding the yuan to the basket of four currencies that now make up the SDR would confer prestige on China but also impose responsibilities: for the step to be of practical importance and not just a symbol of China’s rise, the currency would have to be freely convertible and no longer semi-pegged to the dollar. And that, for China, is a two-step too far.

Beijing wants to dismantle capital controls and free up the yuan on a timetable of its own choosing. “If everyone welcomes the yuan’s inclusion in the SDR, we’ll also be happy to see that happening a bit early. But we are not in a hurry. We are patient,” Chinese central bank governor Zhou Xiaochuan said after the meeting.

Privately, Western ministers and central bank governors hope that laying out the terms of entry will give ammunition to reformers such as Zhou who are locked in constant battle with conservatives over the pace of financial liberalization. “Nothing happens immediately, but it certainly sets the stage for those inside China who want to say ‘look at what the world is prepared to give us if we do a bit more reform,’ ” said Jim O’Neill, chairman of Goldman Sachs Asset Management.

O’Neill, who took part in the Nanjing seminar, judged that the talks had brought the yuan’s inclusion in the SDR a step closer and speculated that the IMF might not wait until its next scheduled review of the SDR basket in 2015 to change its make-up.

Reuters