Tag Archives: G-20

G-20 Finance Ministers To Stumble, Squabble Through Paris Meeting

The G-20, whose finance ministers and central bankers meet in Paris this weekend, no longer looks as unified, and thus as relevant, as it did in the heat of the global financial crisis. Its summit meeting in Seoul last November left a lot of unfinished business on the table — global imbalances, capital flows, America’s monetary policy and China’s exchange rate. This weekend’s ministerial meeting has to pick these up again if there is to be any hope that they can be cleared off the table when their bosses convene for their heads of state and government summit in Cannes in November.

Since Seoul, there has been some progress on the issue of the yuan’s revaluation and China’s rebalancing by shifting from export-led to domestic-demand-led growth, though neither far nor swiftly enough to satisfy Beijing’s critics on either score. China, like most of the advanced G20 members with the notable exceptions of the U.S. and Japan, has also made a start on draining off some of the liquidity pumped in by stimulus programs. Beijing has also made more moves to make the yuan a more international currency though it is not yet sufficiently convertible for inclusion in the currency mix behind the IMF’s Special Drawing Rights. However, reform of the international monetary system and global governance are pet projects of this year’s G-20 president, France’s President Nicolas Sarkozy. Those could put some wind behind China’s sails in Paris, but it will be mostly rhetorical wind we suspect. A fully internationalized yuan remains a distant prospect.

The most that is likely to be achieved in Paris is some sort of agreement over which national economic indicators should be used to analyze global imbalances. Even these will be no more than broad-brush current-account measures. Numerical targets to set against those indicators aren’t in even the wildest imaginations. China, along with Germany, the world’s two biggest exporters, have made clear that they have set their faces against any target for current-account imbalances expressed as a percentage of GDP.

Commodity prices, and particularly the high prices of agricultural commodities, are most likely to hijack the agenda. This is an issue of acute interest to Beijing, where drought and inflation remain stubbornly persistent and thus politically threatening. The French have been pushing the idea of G-20 price controls, though it is far from clear how those would work in practice even if they could be agreed on, which is doubtful given the disparate commodities interests of the G-20 members. Sarkozy has called a first ever meeting of G-20 agriculture ministers in May, but it is whether finance ministers decide to doing anything about commodity derivatives that will matter more. We suspect we shall see nothing more biting than a study.



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U.S. Lawmakers’ Effort To Push China Over Yuan Again Going Nowhere

The attempt of two U.S. lawmakers to reintroduce legislation that would  let the U.S. impose emergency tariffs against China if its currency is found to be undervalued, isn’t likely to get any farther than it has on previous occasions, even though its language is toned down from before. There aren’t sufficient Republican votes for such a measure and the Republican leadership’s priorities are more domestic issues. Even if the bill did somehow manage to pass the House of Representatives, as it did last time, it would likely again die in the Senate.

Last week, the U.S. Treasury, in a biannual report to Congress politely delayed until after President Hu Jintao’s state visit to Washington, declined to label China a currency manipulator, but said progress toward allowing the yuan to appreciate was “insufficient”. The yuan has risen only 3.64% against the dollar since it was unpegged from the greenback in June 2010. The currency hit a new high against the dollar on Thursday, at 6.585, displaying its usual upward mobility ahead of a G-20 finance ministers’ meeting.

The ministers convene with central bankers in Paris next week to follow up on pledges made at the G-20 summit in Seoul to move towards market-determined exchange rates and to shun competitive devaluations. The U.S. has been trying to make common cause with Brazil to put pressure on Beijing to accelerate the yuan’s appreciation, and the International Monetary Fund has been dangling the carrot of inclusion in the basket of currencies on which its Special Drawing Rights are based but for which the yuan would have to be freely tradeable. Yet China is likely to hold its line that its currency needs to appreciate gradually to avoid social dislocation, and switch attention to what it sees as the damaging effects of the U.S. Federal Reserve’s quantitative easing and capital flows into emerging economies causing imported inflation.

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G-20’s Seoul Inaction Plan

If there is one thing that can be said about the newly-concluded G-20 summit in Seoul it is that everyone can claim it was a success, without having to do anything immediately about it, and certainly not the same thing. The final communiqué’s wording left open many interpretations of its headline commitments, that the major economies have agreed to refrain from competitive devaluations, that they will get the IMF to come up with indicative guidelines to tackle imbalances, and give emerging economies a bigger say in the IMF.

None of those represent much if any advance from where the G-20’s finance ministers had got earlier this month at their preparatory meeting, but given the gradual drifting apart of the consensus over the coordinated management of the global economy that had formed to deal with the global financial crisis of 2008 and the substantial differences over currencies, trade and quantitative easing going into the meeting (and expressed acrimoniously at times during it, we hear, particularly when Chinese and American officials were in the same room) that was not nothing. But the leaders came up with neither timetables nor hard goals to turn their good intentions, however vague, into actionable policy:  a what, but no when nor how much. (Asking the IMF to look at something next year doesn’t count as a when.)

So on to the APEC summit in Yokohama for many of the G-20 leaders to reprise many of the same economic issues with similar lack of progress. Meanwhile, this Bystander feels, the Seoul Action Plan, for, yes, the G-20’s communiqué lays it out, will be rather like the revaluation of the yuan, all in its own time.

This post was first published on Market Bystander.

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China To Hold Growing Sway Over World Energy Industry

The International Energy Agency’s latest World Energy Outlook (to 2035) says China’s demand for energy will rise by 75% between 2008 and 2035, accounting for 22% of the world’s energy consumption, up from 17% today. Put another way, China will account for 36% of the growth in the world’s energy demand (see snapshot of IEA graph below). The IEA’s projections are based on the assumption that governments will do no more than meet any commitments already given on energy conservation, greenhouse gas emission reductions and the phasing out of fossil-fuel subsidies. (That so-called New Policies Scenario is the most conservative of the three sets of assumptions about governments’ intentions the IEA makes.)

It is hard to overstate the growing importance of China in global energy markets. [The IEA’s] preliminary data suggest that China overtook the United States in 2009 to become the world’s largest energy user, Strikingly, Chinese energy use was only half that of the United States in 2000….Prospects for further growth remain strong, given that China’s per-capital consumption level remains low, at only one-third of the OECD average.

The IEA also says that China’s growing need to import fossil fuels will have an increasingly large impact on international markets. It will account for half the net growth in global crude oil demand over the period, largely because it will need more fuel for cars and lorries. It will also have a voracious appetite for natural gas, the more so if coal use is restrained on environmental grounds. Its needs are likely to make the oil and gas producing nations of Central Asia such as Kazakhstan, Uzbekistan, Turkmenistan and Azerbaijan which draw from the Caspian basin a significant new energy region. Similarly, Beijing’s push to develop new low-carbon energy technologies could help drive down the costs of those through economies of scale.

In China, energy demand triples between 2008 and 2035. Over the next 15 years, China is projected to add generating capacity equivalent to the current total installed capacity of the United States.

Electricity generation is likely to be at the forefront of the transition to low-carbon technologies. The greatest scope for increasing the use of renewable energy sources in absolute terms, the IEA says, lies in power generation. China is already a leader in wind power and solar photovoltaic (PV) production as well as having become a leading supplier of the equipment thanks to strong government investment support. The IEA says China will add 335 gigawatts of wind generation capacity, 105 gigawatts of nuclear and 85 gigawatts of solar PV by 2035 (and put 8.5 million electric vehicles on its roads).  That said, coal-fired generation will remain substantial in China, with 600 gigawatts of new capacity exceeding the growth of the renewables and exceeding the current capacity of the U.S., E.U. and Japan.

The IEA takes aim at subsidies for fossil fuels, which it calls the “single most effective measure to cut energy demand”. It wants them phased out to end the market distortions that make it more difficult for low-carbon technologies to get development investment. It says that such subsidies amounted to $312 billion worldwide in 2009, though that was down from $558 billion the previous year. China was the fifth largest subsidizer in 2009, behind Iran, Saudi Arabia, Russia and India, at just shy of $20 billion. About half of that went to electricity generated from fossil fuels and most of the rest equally to coal and oil. Beijing has been moving towards more market based pricing for energy, but as the figures show, there is still a ways to go.

The subsidies analysis was done at the behest to the G-20, whose leaders are meeting in Seoul shortly and where climate change and the successor to the expiring Kyoto protocol on climate change will be on the agenda. The IEA lays out how heavily the burden lies on China and the U.S. to cut back emissions if the ideal target of limiting the increase in global temperatures to 2°C is to be hit by 2035: 32% China, 18% the U.S. 50% rest of the world. Low-carbon technologies would need to account, the IEA reckons, for over three-quarters of global power generation by then and plug-in hybrids & electric vehicles for 39% of new sales. That day may not come, or at least not fully, but the era of cheap fossil fuels is over. China is already investing heavily in those areas and giving itself a first mover advantage that the rest of the world may find difficult to claw back.

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Beijing Heeds The Lessons Of Japan’s Yen Revaluation

As G-20 finance ministers and central bankers meet in Seoul to call a verbal truce at least in the currency wars, Bloomberg has a piece noting that China has taken note of what happened to Japan after the 1985 Plaza Accord led to the rapid appreciation of the yen against the dollar.

A short history lesson for younger readers: Following the accord between what was then the G-5 to depreciate the dollar against the yen and the mark, the dollar fell by 51% against the yen between 1985 to 1987. Japan’s exports shrank, unemployment rose, cracking the system of lifetime employment at the large conglomerates, and the economy slowed dramatically — the endaka fukyo, high-yen recession. The cutting of interest rates to get the economy going again led to the asset bubbles which, after they inevitably went pop, left the country mired in debt, which in turn has left the Japanese economy becalmed in the still waters of recession and deflation ever since.

Now Japan made policy mistakes and had a political and social system designed to absorb external shocks rather than effect change when change was needed, so the analogy only goes so far, but Beijing doesn’t want to go anywhere near there in the first place. Hence its determination to let its own currency appreciate only gradually.

There are two other lessons from Japan’s experience in the 1980s that won’t have escaped the notice of China’s leaders. First, it was Japan’s huge current account surpluses that had given it the global buying power in the 1980’s that made the country “No 1” and raised a scare among developed nations, particularly the U.S., that Japan was taking over the world and would eclipse the U.S as the world’s leading economy. When the current account surpluses disappeared, Japan’s emerging clout on the world stage evaporated with it. Second, what happened to Japan’s economy after the Plaza Accord led eventually to the long-ruling Liberal Democratic Party lose its monopoly grip on power.

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