G20 binds China to currency peace pact

G20 binds China to currency peace pact

International Monetary Fund Managing Director Christine Lagarde (first row second right) gestures as finance ministers and central bank governor gather for a group photo during the second day of the G20 meeting in Ankara on Saturday. (AFP photo)
International Monetary Fund Managing Director Christine Lagarde (first row second right) gestures as finance ministers and central bank governor gather for a group photo during the second day of the G20 meeting in Ankara on Saturday. (AFP photo)

Global finance chiefs persuaded China to join a foreign-exchange peace pact as they sought to contain the tensions unleashed by the country’s stock-market rout and its August devaluation.

Finance ministers and central bankers from the Group of 20 nations are drafting a communique that will include a commitment to avoid “competitive devaluations,” a senior official from the US Treasury told reporters in Ankara Saturday. That’s the first time the G20 has used such language since 2013.

China is on the defensive as its slowing economy and market turbulence send shock waves through emerging markets just as the United States is preparing to raise interest rates. With the MSCI emerging market index down 18% so far this year, an earlier version of the statement prepared before the meeting cited “recent volatility in financial markets” and the need to monitor potential spillovers.

The Chinese delegation’s presentation was the main focus of the two-day meeting, Spanish Economy Minister Luis de Guindos said.

“They explained that the Chinese economy is in a period of transition,” Guindos told reporters. “They are heading to a new normal situation for them, which will be growth around 6 or 7%.”

China’s surprise decision to revalue the yuan as it tried to contain the stock market turmoil caused the currency to drop the most in 21 years last month, triggering exchange-rate declines elsewhere in the emerging world on concern that a weaker yuan will hurt countries exporting to China.

‘It Wasn’t Enough’

Zhou Xiaochuan, governor of China’s central bank, told his counterparts that his country had had to deal with the bursting of a stock market bubble as he described policy makers’ plans, according to Japanese Finance Minister Taro Aso.

“It wasn’t enough,” Aso told reporters. “They may have tried to be constructive, but they weren’t detailed enough.”

The Chinese delegation said they were trying to limit disruption as the economy shifts to a different growth model, according to an international official participating in the talks. They said they are trying to reduce indebtedness and planning measures that will regulate swings in the stock market.

The Shanghai Composite index has lost about 40% since reaching a three-year high in June.

“China is definitely trying to play a constructive role,” Canadian Finance Minister Joe Oliver said in an interview. “It is the second-largest economy in the world and so when it slows down it has global implications. That is I think what we are dealing with.”

Stability Forecast

The Chinese delegation said the currency move wasn’t an attempt to grab exports from their international competitors and that explanation was accepted by the other nations, according to the international official.

“No one can predict exactly on the market volatility, but I’m confident that the renminbi exchange rate will be more or less stable around the equilibrium level,” Yi Gang, China’s deputy central bank governor, said in an interview as he headed into Friday’s session. “The Chinese economy’s fundamentals are fine.”

The Chinese asked for specific references to their problems to be left out of the final communique, a euro-area aide said.

US Treasury Secretary Jacob J. Lew told Chinese Finance Minister Lou Jiwei in Ankara on Friday that it’s important for China to signal that it will allow market pressures to drive the yuan up as well as down. China should avoid persistent exchange-rate misalignments and refrain from competitive devaluation, Lew said, according to a Treasury statement.

Fed Hikes

China’s slowdown comes as the Federal Reserve is considering raising US interest rates for the first time in nine years. Vice Chairman Stanley Fischer explained the arguments for and against an early increase in US interest rates, de Guindos said.

The draft statement seen by Bloomberg News before the talks began said that in line with the improving outlook, “monetary policy tightening is more likely in some advanced economies, which may remain one of the main sources of uncertainty in financial markets.”

Some delegates from emerging markets said at the meeting that the Fed should get on with raising rates to end uncertainty, according to an official who was present.

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