G20 elicits only half-step forward from China

By Wei Gu
February 22, 2011

By Wei Gu
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

HONG KONG — China has taken half a step forward at the G20. Beijing has agreed, after much wrangling, for trade balances to be included as one of the group’s new gauges of global imbalances. This could be a good sign, if China sees its own trade becoming more balanced. Less encouraging is what Beijing wanted to be left out — including scrutiny of its very imbalanced $3 trillion foreign reserves.

China had refused to consider targets for current account imbalances back when the G20 met in Seoul in 2010. It has now yielded to a precise set of indicators, on the understanding that two key ones are left out. In goes the trade balance as a factor to be monitored. Out go changes in foreign-exchanges reserves and suggestions of misaligned currencies.

In trade terms, China’s surplus is already shrinking as a percentage of GDP, down from about 10 percent during 2007-2008 to 3 percent in 2010. The surplus shrank to $183 billion in 2010, as rising inflation, imports and wages helped balance things out. Its G20 concession suggests China’s policymakers expect that happy trend to continue.

Scrutiny of forex reserves and exchange rates would be less welcome. China amasses foreign reserves by buying up currency, which helped keep the value of the yuan down. Limit that, and Beijing can less easily manage the currency. Restrictions on money flowing out make the reserves even bigger. China drew $106 billion in foreign direct investment in 2010, almost twice as much as its outbound investment.

So while the trade surplus is shrinking, the less-discussed capital account surplus rose 14 percent in 2010 to $166 billion. Money has flooded into China, partly chasing the undervalued yuan. That has led the People’s Bank to amass $450 billion in reserves in 2010.

By excluding reserves and currency from G20 monitoring, it suggests that Beijing has little aim of freeing up the yuan or its capital account soon. Nor is it even much consolation that China set its yuan trading rate at a record high on the first day after the G20 weekend meeting. Symbolic gestures of goodwill timed around politically sensitive summits are becoming Beijing’s forte.

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