Economic Calendar

Thursday, March 31, 2011

Sarkozy Backs Broader Role for Yuan as Geithner Urges Flexibility at G-20

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France's president Nicolas Sarkozy

French President Nicolas Sarkozy said the yuan should be in the International Monetary Fund’s Special Drawing Rights, a unit of account derived from the value of the dollar, yen, pound and euro. Photographer: Qilai Shen/Bloomberg

The U.S. and France signaled openness to a greater role for the yuan while stressing the importance of exchange-rate flexibility as Group of 20 officials met in China to discuss the international monetary system.

French President Nicolas Sarkozy said the yuan should be in the International Monetary Fund’s Special Drawing Rights, a unit of account derived from the value of the dollar, yen, pound and euro. U.S. Treasury Secretary Timothy F. Geithner said world powers’ currencies should be included “over time” so long as they have flexible exchange rates and free capital flows.

Chinese officials said that the yuan’s value wouldn’t be a topic at today’s seminar in Nanjing and Geithner didn’t refer to the currency directly in his prepared remarks. At the same time, he said the mismatch between flexible currencies and the “tightly managed” exchange rates of some emerging economies is the most important problem to solve in the international monetary system.

China will continue to proceed with currency reform at its own pace” and regardless of Sarkozy and Geithner’s comments, said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd., who formerly worked for the International Monetary Fund and the European Central Bank.

The yuan touched 6.5488 per dollar in Shanghai today, the highest in 17 years. The U.S. describes the currency as still “substantially undervalued,” with American lawmakers arguing that gives China, the world’s biggest exporter, an unfair advantage in global trade.

‘Overwhelming’ Support

The Special Drawing Rights basket is reviewed every five years by the IMF’s executive board, and the most recent changes took effect in January. The next review will be in 2015, according to the Washington-based fund’s website.

Jim O’Neill, chairman of Goldman Sachs Asset Management, said the “overwhelming” view at today’s event seemed to be that the yuan should be included earlier than the IMF procedures may currently allow. His view is that the currency doesn’t need to be fully convertible and should be brought in “now.”

Sarkozy said that imbalances under existing monetary arrangements indicate the need for a “more flexible system” rather than a return to fixed or managed exchange rates.

G-20 finance chiefs, central bankers including the European Central Bank’s Jean-Claude Trichet and private economists are meeting for the one-day seminar that Sarkozy initiated on altering the monetary system to reduce the risk of a repeat global financial crisis.

IMF’s Role

The French president said that the IMF should have a bigger role in supervising nations’ balance of payments and reserves to help limit risks.

In October 2008, after the collapse of Lehman Brothers Holdings Inc., the volatility of the world’s major currencies rose to the highest level since at least 1992, according to a JPMorgan Chase & Co. index. Price swings also increased in May last year because of Europe’s debt turmoil and this month because of Japan’s earthquake.

The Group of Seven nations intervened to weaken Japan’s yen after the March 11 disaster. Sarkozy suggested today that a broader group should monitor currency markets.

Today’s meeting at the Purple Palace resort is being attended by economists including Nobel laureate Robert Mundell. It’s intended to lay the groundwork for an agreement at the G-20 summit in Cannes, France, in November that would lead to a more “stable and resilient” monetary order, Sarkozy said.

‘Financial Protectionism’

With France holding the presidency of the G-20 this year, Sarkozy has made the monetary system one of his priorities. He said today that without extra rules for foreign-exchange regimes, there is a risk of more conflict over currencies.

Sarkozy recalled the G-20’s unity at the height of the global financial crisis in 2009. Now, nations pursuing their own interests risk a “proliferation of unilateral measures during crises resulting in a new financial protectionism in which all economies suffer,” he said.

A gathering of G-20 finance ministers in February underscored the difficulties, with China resisting the inclusion of foreign-exchange reserves as a yardstick for gauging global imbalances. Sarkozy views China’s decision to host today’s event as a first step toward a more flexible yuan that should result in its inclusion in the IMF’s currency basket.

Created in 1969, Special Drawing Rights serve as international reserve assets and represent potential claims on usable currencies of IMF members. As of March 30, one SDR was the equivalent of $1.5797.

Capital Flows

“Currencies of large economies heavily used in international trade and financial transactions should become part of the SDR basket,” Geithner said. “To achieve this objective, the concerned countries should have flexible exchange-rate systems, independent central banks and permit the free movement of capital flows.”

An SDR system without the yuan would be “ridiculous” and lack legitimacy, People’s Bank of China adviser Li Daokui said in Nanjing.

Chinese President Hu Jintao told Sarkozy yesterday in Beijing that China views the internationalization of the yuan as inevitable, with only the pace of the move in question, a French official said.

Officials including French Finance Minister Christine Lagarde are discussing topics including “shortcomings in the international monetary system” and dealing with volatile capital flows, according to the schedule for the conference at Nanjing, a city on the Yangtze River, about 170 miles (270 kilometers) from Shanghai.

U.S. Monetary Policy

Nations including Brazil, China and South Korea have argued that U.S. monetary easing has added to the threat of inflows of capital fueling inflation and asset bubbles. Ahead of today’s meeting, Xu Hongcai, a Chinese state economist, revived complaints about U.S. monetary policy in a paper that said the world had fallen into a “dollar trap.” Xu is an official at the China Center for International Economic Exchanges, the co- host of the Nanjing event.

China has an extra stake in the U.S. maintaining the value of the dollar as the biggest foreign holder of Treasuries, owning more than $1.1 trillion of the securities. China’s build- up of a world-record $2.85 trillion of foreign-exchange holdings, driven by trade surpluses and limits on gains in the yuan, highlights imbalances blamed for contributing to the global financial crisis.

--James Hertling, Michael Forsythe, Kevin Hamlin, Bonnie Cao in Nanjing and Zheng Lifei in Beijing. Editors: Paul Panckhurst, Sunil Jagtiani

To contact the Bloomberg News staff on this story: James Hertling at jhertling@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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