G-20 Criticism of Fed May Be Muted as Japan Crisis, Portugal Slow Economy

Chinese criticism of the Federal Reserve for flooding the world with money may get little traction among Group of 20 finance chiefs meeting in China as Europe’s debt crisis and Japan’s disaster take precedence.

U.S. Treasury Secretary Timothy F. Geithner, French President Nicolas Sarkozy, Chinese Vice Premier Wang Qishan and European Central Bank President Jean-Claude Trichet will gather in Nanjing for a one-day seminar on the international monetary system tomorrow. A Chinese state economist called for an end to the dollar’s dominance in a paper posted on a website yesterday, blaming the U.S. for fueling inflation.

A 9.0-magnitude earthquake in Japan, armed NATO intervention in Libya, and the heightened prospect of a bailout of Portugal are among developments since Sarkozy proposed the meeting seven months ago. At the same time, the Fed plans to end its $600 billion of Treasury purchases in June and officials have signaled that additional quantitative easing is unlikely as the American economy is showing signs of strengthening.

Criticism of U.S. monetary policy is “so yesterday,” said Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ in New York. “World leaders and monetary officials have a lot more important things on their plate.”

Xu Hongcai, an official at the China Center for International Economic Exchanges, revived complaints in his paper, saying U.S. monetary policies boosting global liquidity are the root cause of surging oil and commodity prices. His organization is helping to host the Nanjing event.

Capital Flows

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

German Deputy Finance Minister Joerg Asmussen said the event isn’t intended to deliver short-term fixes and is part of preparing for a G-20 meeting in Cannes in November that should yield more substantive results. He spoke in an interview yesterday en route from Berlin to Beijing.

The latest meeting comes after Portugal’s 10-year bond yield advanced to a euro-era record, unrest in the Middle East and North Africa pushed crude oil over $100 a barrel, and the Group of Seven nations this month triggered the biggest fall in Japan’s yen in more than two years. A weaker currency may help Japanese exporters to weather a disaster spanning nuclear leaks and the annihilation of northeastern towns.

Currency Intervention

Jim O’Neill, chairman of Goldman Sachs Asset Management International, said it will be “fascinating” to see how a Chinese delegation including central bank Governor Zhou Xiaochuan reacts to any discussion of the G-7 move. China itself intervenes to limit gains by the yuan, drawing criticism from trading partners including the U.S.

The currency traded at 6.5604 per dollar as of 10:23 a.m. in Shanghai today after touching a 17-year high of 6.5552 on March 22. Germany’s Asmussen said a more flexible currency would be in China’s interest and “this clearly is what they are very carefully pursuing.”

China has been one of the biggest critics of U.S. monetary policy, blaming it for driving up commodity prices and stoking inflation, which reached a 28-month high of 5.1 percent in China in November.

The Fed, which sets monetary policy independent of Geithner’s Treasury Department, has initiated two rounds of quantitative easing to support growth after the financial crisis.

Commodity Costs

“Some countries have further eased their monetary policies in order to spur economic recovery and that has caused rising global commodity prices,” Chinese Premier Wen Jiabao told chief executives gathered on March 21 at the Great Hall of the People in Beijing.

In an interview this week, Goldman’s O’Neill asked whether the Fed’s critics would rather see a permanently damaged American economy or a U.S. recovery where “one of the consequences might be higher commodity prices.”

O’Neill, who will speak in Nanjing in a panel on liquidity management moderated by U.K. Chancellor of the Exchequer George Osborne, said he expects possible changes to the International Monetary Fund’s Special Drawing Rights to be discussed. In 2009, Zhou suggested in a policy paper that SDRs may be the basis for a new global currency.

German Finance Minister Wolfgang Schaeuble said yesterday that he expects “quite some movement” this year in the discussion of exchange-rate issues and said talks may move from the G-7 to the G-20, or a sub-group consisting of the G-7 plus Brazil, Russia, India and China. He spoke to reporters as he travelled to Beijing.

Sarkozy’s Agenda

While French officials said there will be no group statements or decisions, Sarkozy’s own agenda in China includes pushing industrial projects such as Areva SA (CEI) nuclear-power plants, Airbus SAS planes and Alstom SA (ALO) high-speed trains.

Tomorrow’s event also reflects the French leader’s desire to organize a new “Bretton Woods” during his presidency of the G-20 to address what he has called imbalances in the global monetary system. He first raised the possibility of such a meeting in August and pressed the Chinese to act as hosts.

Bretton Woods, New Hampshire, was the site of a 1944 meeting which led to the establishment of the World Bank and International Monetary Fund.

“I think in some sense maybe the axis of discussion for this G-20 is going to be helping the Chinese assume a bit more prominence at the global table,” said Cliff Tan, head of emerging-markets research at Societe Generale SA in Hong Kong.

Source:  Bloomberg

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