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Economy Watch
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April 29 Updates
| World Economic Chiefs Strengthen Cooperation To Boost Recovery
The world economic and financial leaders gathered in Washington for the IMF-World Bank Spring Meetings. They enhanced a variety of fronts to help reinforce the global economic recovery and to reach agreement on a series of efforts to create a more stable international economic and financial system.
It is reported that the IMF has accelerated discussions with Greek authorities on a financing package. “I am impressed with the Greek authorities' determination to take the actions necessary to put their economy back on track,” IMF Managing Director Dominique Strauss-Kahn said in a statement on April 25 after meeting with Greek Finance Minister George Papaconstantinou.
“The IMF, the European partners, and everyone involved in the financing effort recognises the need for speed. I am confident that we will conclude discussions in time to meet Greece’s needs,” he added.
Cooperative Approach
The economic and financial leaders of the IMF and the Group of Twenty (G-20) industrialised and emerging market economies agreed to build on the cooperative, multilateral approach which helped the nations combat the global crisis and considered a number of initiatives, including possible taxation of the financial sector and mutual consultations between major economies about their policies.
Youssef Boutros-Ghali, chairman of the International Monetary and Financial Committee (IMFC) of the Fund said, “We have surveyed many issues. First and foremost, the global economy, the global economy seems to be recovering. The worst is definitely behind us. But, we are not out of the woods yet. We see a strengthening of economic recovery, but we also see an unevenness in this recovery, unevenness within countries, and unevenness between countries.”
Boutros-Ghali, the Finance Minister of Egypt, said. “We have initiated for the first time joint sessions with the G-20 and we are discovering both of us the synergy that can come from common work between the two groups, the IMFC and the G-20.” Ministers from the Group of 24 developing countries also held discussions and issued a communiqué at a press conference. The four days of talks, involved some 2,000 delegates from 186 countries.
Economic Recovery
The key focus of the meetings was to discuss the developments of the economic recovery. In the latest World Economic Outlook (WEO), the IMF said the world economy was recovering from the global crisis better than expected, but saw activity reviving at different speeds in different parts of the world.
As reported, IMF’s Managing Director, Strauss-Kahn said the world had entered a fourth phase of the crisis—the rebuilding phase. The world had gone through three earlier phases: initial panic, coordinated international response; and relief when measures began to work. However he added that the recovery is still unstable. Unemployment is high, activity is still being propped up by accommodative policies, the financial sector still needs to be repaired, budgets are looking dicey in some countries, and the return of large-scale capital inflows challenges emerging markets.
Groundwork
John Lipsky, IMF’s Deputy Managing Director said the meetings had laid the groundwork for progress on a variety of initiatives later in the year. They included:
• Mutual assessment. The G-20 Framework for Strong, Sustainable and Balanced Growth is a compact that commits the G-20 to work together, with the aid of the IMF, to evaluate if their policies are collectively consistent with sustainable and balanced global growth.
• Financial sector reform. The Fund is pressing for agreement by the end of 2010 on rules pertaining to capital and liquidity, a minimum toolkit for addressing systemic risk, and a framework for working out cross-border resolution issues.
• IMF mandate. Following the crisis, the IMF is reviewing its mandate to better align it with what the multilateral lender does in practice. The IMFC said the crisis had underlined the importance of strengthening the analysis of systemic risks and linkages, of avoiding moral hazard, and of responding to such crises with sufficient resources, and well-tailored facilities with adequate safeguards. The committee called for full and open debate about the future role of the Fund.
• IMF quotas and governance reform. Policymakers committed to completing governance and quota reform at the IMF before January 2011. The intend is to reflect the shift in world economic power toward dynamic emerging market economies through redistribution for quotas—which reflect the contribution of each member to the Fund and the relatively voting power.
• Support for low-income countries. Things remain difficult for low-income countries and the world’s poorest. The IMFC thanked countries that have committed additional loan and subsidy resources for concessional lending, and called on other donors to contribute. The Development Committee of the World Bank and IMF said the crisis had interrupted progress in reducing poverty and the impact will be long-lasting.
China’s Next Currency Shift May Help Balance Trade In the Region
China last revalued its currency in 2005, the shift failed to balance trade with the U.S and the region. Experts forecasted that the next shift, which might come within months, may be more successful.
The main difference is the change in the world economy shaped by the worst financial crisis since the Great Depression. It is reported that the U.S. consumers are shaken by an unemployment rate to 9.7 percent in the last three years, are saving more and spending less. China’s leaders are moving to lessen their economy’s dependence on exports after a collapse in foreign demand chopped one-third from the country’s record 2008 trade surplus of $298.1 billion.
“The post-crisis world has left us with a highly challenged U.S. consumer,” said Jim O’Neill, Chief Global Economist for Goldman Sachs Group Inc., London. “The crisis has forced the Chinese to shift to a world in which domestic demand is going to drive growth.”
Balanced Growth
“It’s healthier in the long run for the world economy to have more-balanced trade and growth,” said Allen Sinai, chief global economist at Decision Economics Inc. in New York.
According Bloomberg News, China will allow the renminbi or the yuan to gain this year, according to all 19 analysts surveyed. Twelve are forecasting a move by June 30, making it cheaper for Chinese consumers to buy foreign products and pushing up the cost of the country’s own goods in international markets.
Yuan Forwards
It is reported that the yuan forwards climbed 0.1 percent last week compared with the previous week, according to data compiled by Bloomberg. Twelve-month nondeliverable forwards stood at 6.6110 per dollar as of 5:25 p.m. April 23 in Hong Kong, after briefly reaching a three-month high of 6.593 the day before. The contracts reflect bets the currency will strengthen 3.3 percent.
Some Asian nations have already begun to raise their currencies in anticipation of China’s shift. Singapore revalued its exchange rate on April 14, saying it will seek “modest and gradual appreciation” in the local dollar.
The People’s Bank of China said it wanted to promote “the basic equilibrium of the balance of payments” when it announced a 2.1 percent revaluation of the yuan from 8.28 to the dollar on July 21, 2005. It subsequently allowed the currency to rise through July 2008, when it pegged it at 6.83 to protect its exporters from the worldwide crisis. The 21 percent advance from 2005 to 2008 didn’t prevent world trade from becoming more lopsided. China’s surplus nearly tripled, to a record $298.1 billion in 2008 from $102 billion in 2005. The U.S. deficit barely fell, to $696 billion from $715.3 billion, according to data revealed by the U.S. Census Bureau.
Imbalances
According to the Bloomberg News, U.S. consumption declined for the first time in a generation and Chinese exports tumbled 16 percent in 2009 from the previous year. China’s trade surplus plunged to $196.1 billion last year, while the U.S. deficit nosedived to $378.6 billion. China’s 4 trillion yuan ($586 billion) stimulus has helped accelerate development of the nation, which historically has been left behind by the export-driven coastal regions. Urban fixed-asset investment in China’s central and western areas surged 36 percent and 35 percent last year, respectively, outpacing the east coast’s 24 percent growth.
Tim Adams, U.S. Treasury Undersecretary said he doesn’t think China will allow the currency to rise fast enough to have a meaningful impact on the imbalances and the recovery. He also expressed doubts that China and the U.S. will need to restructure their respective country’s economies to help make the yuan appreciation succeed. He also added that the export sector remains powerful in China, while there’s little appetite in the U.S. to tackle the current fiscal year’s projected record $1.6 trillion federal budget deficit.
Most foreign companies are positioning themselves for increased demand in China on a stronger yuan and shift in the focus of economic growth more toward local consumption.
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