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Treasury Management 2011

Chinese stance throws G20 indicator deal into doubt

Reuters) - China rejected plans on Friday to use real exchange rates and currency reserves to measure global economic imbalances, casting heavy doubt on the ability of Group of 20 major economic powers to reach agreement.
Speaking shortly before the start of a two-day meeting of finance ministers and central bankers, Chinese Finance Minister Xie Xuren also said the G20 should use trade figures rather than current account balances to assess economic distortions.
G20 countries, which together account for 85 percent of world economic output, are trying to agree a set of measurements as a basis for economic policy guidelines to avoid a repeat of the 2008 global financial crisis.
"We think it is not appropriate to use real effective exchange rates and reserves," Xie said at a meeting with Russian, Brazilian and Indian counterparts.
The hardline Chinese stance highlighted splits over how to define economic imbalances and prescribe action to remedy them, a key aim of France's G20 presidency.
A G20 official said China was the only country which spoke against accepting the list of indicators.
"I cannot tell you what will happen tomorrow. Nobody knows," he said. "No-one is trying to push China into a corner."
Two other G20 sources said negotiators had failed to reach agreement on a list of indicators by which to measure imbalances in the global economy and would leave it up to their finance ministers to try and seal a deal on specifics on Saturday.
Even then, agreement was uncertain, they said.
French President Nicolas Sarkozy, who holds the G20 presidency this year, urged ministers not to get sidetracked by the indicators dispute and welcomed the fact that China had agreed to host a G20 seminar on reforming the international monetary system in Shenzhen in late March.
"I want to avoid your debates getting bogged down in interminable discussion about these indicators, which are distracting us from the essentials," Sarkozy said in a speech.
The European Union's economic affairs commissioner, Olli Rehn, said the right indicators to tackle global imbalances included the current account, the real effective exchange rate and currency reserves as well as public and private debt.
"Especially, the current account and the real effective exchange rate are essential," Rehn told reporters.
Canadian Finance Minister Jim Flaherty said there was consensus on two indicators measuring public and private debt and negotiations were continuing on other measurements.
But even if all the yardsticks are agreed, there is no sign of numerical targets even being broached.

Sarkozy told the ministers that economic policy coordination was the only way forward. "Giving priority to national interests would be the death of the G20," he said.
France has also run into opposition with its two other G20 priorities -- greater transparency and regulation of commodities prices and reform of the international monetary system.
COMPROMISES
Differences over the causes of and cures for global economic imbalances were also on display at a public debate among the world's top central bankers on Friday.
Bank of England Governor Mervyn King, reflecting the view of many Western policymakers, said the world risked protectionism or another financial crisis if policymakers failed to reduce currency distortions and other imbalances.
Chinese central bank governor Zhou Xiaochuan said Beijing would decide the pace of the appreciation of the yuan and would not be swayed by pressure from other countries.
Behind closed doors, senior officials wrangled over possible compromises to solve the indicators conundrum.
One option mooted would allow China to opt out of the balance of payments criterion and use its trade balance instead.
But Flaherty said Canada opposed that and the two G20 sources said an opt-out was a non-starter.
The G20 official said China's opposition had left G20 deputies with limited options to suggest on Saturday: either accept the four indicators or reject them; introduce a hierarchy where some indicators count more than others or use a time delay for their gradual introduction.
With world shares near 30-month highs, investors seem content for the G20 to take its time, whereas at the height of the crisis two years ago markets were baying for policy action.
AT ODDS ON MONETARY POLICY
In a public debate before the G20 meeting, the U.S. and Japanese central bankers defended their easy money policies against criticism from some emerging countries that they were fuelling disorderly capital flows and commodity price spikes.
U.S. Federal Reserve Chairman Ben Bernanke said faster growth in emerging markets and "the maintenance of undervalued currencies by some countries" had contributed to price rises and unsustainable patterns of global spending.
Bank of Japan Governor Masaaki Shirakawa acknowledged that loose monetary policy in the developed world was pushing capital into emerging economies and helping inflate commodities prices but said it was necessary nonetheless.
Emerging powerhouses such as China have already raised interest rates to combat inflation and complain that "hot money" risks destabilising their economies, pointing the finger at the Federal Reserve's money printing to pump prime its economy via a $600 billion bond purchase programme.

In turn, Washington has been urging China to let the yuan rise faster, which it says is vital for balanced global growth.
But People's Bank of China Governor Zhou said: "External pressure has never been an important factor of consideration and we have never paid special attention to it."
(Additional reporting by Toni Vorobyova, Gui Qing Koh, Louise Egan, Julien Toyer, Catherine Bremer, Toni Vorobyova, Glenn Somerville; Writing by Paul Taylor and Mike Peacock)

Sentance slams Bank forecasts, urges rate hike now

(Reuters) - Bank of England rate-setter Andrew Sentance made his most outspoken attack yet on the central bank's economic forecasts Thursday, saying they understated inflation risks and the need for a rate hike.
The long-standing hawk, who has voted for higher interest rates since last June, highlighted the divisions on the Bank's Monetary Policy Committee and made clear his growing frustration with the central bank's poor track record on forecasting inflation.
Sentance's criticism set him on a collision course with Bank Governor Mervyn King who Wednesday warned markets not to get ahead of themselves in pricing in monetary tightening.
"My judgement is that the upside risks to inflation are understated in the published fan charts. And monetary policy would most likely need to be tightened faster and by more than the markets currently expect to bring inflation back to target," Sentance told a conference in London.
Sterling rose as investors saw the remarks as a further sign that King may be losing the centre of gravity on the nine-member committee.
Simon Hayes, UK economist at Barclays, said the substance of Sentance's speech was not new but the tone was "arguably more assertive" in emphasising the growing rifts on the MPC.
Sentance was joined by MPC newcomer Martin Weale in voting for a rate hike in January, and there is speculation that minutes from this month's meeting, due next week, will show that others joined them.
MPC RIFT
Quarterly forecasts published by the Bank Wednesday suggested inflation would subside to 1.7 percent on a two-year horizon if interest rates were to rise to 1 percent by the end of this year.
Sentance made clear he did not agree with this assessment and criticised the Bank's reliance on calculations of the output gap -- something many economists believe can never be accurately gauged -- in its assessment of future price pressures.
He said a number of indicators suggested the degree of spare capacity in the economy was smaller than after previous recessions and argued that the small, open nature of the economy meant monetary policy needed to be set in a global context.
"This tendency to overweight the downward pull of spare capacity in the UK economy and underweight the upward impact of external inflationary pressures has resulted in big upside inflation forecast errors over a number of years," he said.
"And it also underpins the over-optimistic assessment of the medium-term inflation outlook in the current set of forecasts published yesterday."
Inflation has been above the Bank's target for most of the past five years, yet the central bank appears reluctant to change its forecasting process.
Money markets show investors expect the Bank to raise rates by a quarter-point in the first half of this year, with at least one further hike by December.

Interest rates have stood at a record low of 0.5 percent since March 2009, a level Sentance believes is no longer justified given inflation pressures and a steady global recovery.
One of the advantages of raising interest rates now would be a rise in the value of the pound, Sentance said. This would help offset the rising cost of imported commodities, which have helped drive inflation to double the Bank's 2 percent target.
"The value of the pound on the foreign exchanges therefore needs to be one of the key areas of focus for the MPC as we seek to steer ourselves out of the current phase of high inflation," he said.
(Reporting by Christina Fincher and Fiona Shaikh; Editing by Ruth Pitchford)