A controversial move by the United States increased tensions Monday between the US and China over different views on what to do about yawning trade imbalances at the Group of 20 summit here this week.
President Obama, in New Delhi at the end of the first leg of his 10-day Asian tour, rebuffed widespread international criticism of last week’s decision by the Federal Reserve Bank to buy up $600 billion in US Treasury bonds.
The Chinese, under strong US pressure to drastically revalue their currency, blasted the Fed’s move as an effort to depreciate the value of the dollar by printing more dollars. Why, Chinese officials asked, should they then have to revalue the Chinese yuan against the dollar, as the US has repeatedly demanded, in order to cut down China’s enormous trade surplus with the US?
Mr. Obama, as expected, stressed the benefits a strong US economy. “The Fed's mandate, my mandate, is to grow our economy,” he said. “That’s not just good for the United States, that's good for the world as a whole.”
That message was not convincing to the Chinese or to other major exporters.
The Germans, according to diplomatic sources, view the Fed’s move, on top of earlier purchases of $1.7 billion in US Treasury bonds, as a challenge deliberately timed to put them on the defensive at the G20 summit here Thursday and Friday at which leaders are supposed to come up with a consensus on what to do about huge global imbalances.
China’s vice finance minister, Zhu Guangyao, repeated Chinese objections Monday, charging that the US in the second round of “quantitative easing,” or QE2, “did not recognize its responsibility to stabilize global markets.” Nor, he said, did the US “think about the impact of excessive liquidity on emerging markets.”
The reference to “emerging markets” is especially important since China is seen as the leader of rising new economies that expect to play a much greater role in the G20 than was possible in the G7.
The G20 held its first summit in Washington in 2008 at the outset of the global financial crisis and since then has eclipsed in importance the G7, which includes the US, Canada, Britain, France, Germany, Italy, and France. Russia was added to the G7, turning it into the G8 in deference to its role at the heartland of the former Soviet Union, but is also widely viewed as an emerging market.
More than just China upset?
A wide range of countries, not just emerging markets, appear upset by the Fed’s attempt to shore up the US economy by printing more bank notes. Germany’s finance minister, Wolfgang Schauble, called the move “clueless,” and South Africa’s finance minister, Pravin Gordhan, said it would “undermine the spirit of multilateral cooperation that G20 leaders have fought so hard to maintain during the current crisis."
In the wake of this response, the “sherpas,” or senior finance officials representing each country, reportedly were frantically attempting to reach a consensus on wording of a final "actions statement" in time for the arrival of the chiefs of state on Wednesday on the eve of the G20 summit.
South Korean officials feared, however, that that goal would be considerably more difficult to achieve than the vaguely worded consensus arrived at by finance ministers and central bank governors last month. Ministers at that conference rejected a plea by US Treasury Secretary Timothy Geithner to agree to hold surpluses and deficits within a band of 4 percent of current accounts surpluses.
Mr. Geithner, in the furor over the Fed’s move, backed down on the idea of a specific goal. After last weekend's meeting of finance ministers of the Asia-Pacific Economic Cooperation group in Kyoto, Japan, he remarked that targets were “not something you can reduce easily to a single number.”