Financial Regulatory Forum

Cautious China backs G20 coordination; EU proposes bank rules

By Reuters Staff
September 23, 2009

President of the European Commission Jose Manuel Barosso speaks during a news conference in Warsaw April 30, 2009. By Simon Rabinovitch and John O’Donnell
BEIJING/BRUSSELS, Sept 23 (Reuters) – China offered some support on Wednesday to U.S. plans to build a more balanced global economy, as world leaders seek to agree ways to nurture a tentative recovery and prevent future crises.
The European Union unveiled its blueprint for an overhaul of the way banks and financial markets are policed, with plans for a banking super-watchdog and a pan-European supervisor that it hopes can be replicated on the global stage.

Leaders of the Group of 20 countries meet in the United States on Thursday and Friday, their third gathering since the collapse of investment bank Lehman Brothers a year ago, with their the focus now shifting from combating the worst recession since the 1930s to discussing how to prevent it happening again.

Central to the talks will be a U.S. plan to correct the world’s economic imbalances by shrinking surpluses in big exporting countries like China and boosting savings in debt-laden nations including the United States.

U.S. President Barack Obama wants a framework of “mutual assessment” where the International Monetary Fund (IMF) would make policy recommendations on rebalancing to the G20 every six months, according to a paper obtained by Reuters.

“We approve of countries strengthening their macro-economic policy coordination and together pushing forward the sustainable and balanced development of the world economy,” China’s foreign ministry said.

However, it appeared to be much less sure about concrete coordinated policy action, saying advice from international financial bodies should be for reference only and that countries should decide on economic policies according to their own national conditions.

Analysts say Obama’s plan will meet resistance from China if it poses any risk to its economic growth.

EU BANKING PLANS
The European Union said its proposed banking super-watchdog would have the power to overrule individual countries, such as Britain, which is fighting to keep control over the centrepiece of its economy, the City of London financial centre.

“Our aim is to protect European taxpayers from a repeat of the dark days of autumn 2008, when governments had to pour billions of euros into the banks,” European Commission President Jose Manuel Barroso said in a statement.

“The European system can also inspire a global one and we will argue for that in Pittsburgh.”

The rules, aimed at reforming an industry blamed by many for triggering the economic slump, need the approval of the 27 EU national governments and the European Parliament to take effect.

German Finance Minister Peer Steinbrueck accused London of doing its best to block stricter rules.

“There is clearly a lobby in London that wants to defend its competitive advantage tooth and nail,” Steinbrueck told Stern magazine in an interview released on Wedneday.

DEVELOPING COUNTRIES
Also up for discussion in Pittsburgh will be reforms to the IMF, trade policy, and global warming.

India’s prime minister called for a strong warning against protectionism as he set out for the gathering.

Earlier this month, the United States slapped tariffs on Chinese-made tyres earlier this month, reviving fears of a tit-for-tat round of protectionist measures that risk strangling trade and plunging the global economy back into recession.

“We would also like to see a strong message to emerge from Pittsburgh against protectionism in all its forms, whether trade in goods, services, investment or financial flows,” Manmohan Singh said, adding the global economy was “not out of woods”.

Developing nations are becoming increasingly vocal in calling for a greater role at international bodies like the IMF, and China repeated its support for this cause on Wednesday.

While the G20 meeting may signal another step in a long-term global power shift, investors will focus on hint as to how the United States and Europe plans to wind down massive emergency stimulus programmes without destabilising economies again.

“We believe that some level of global coordination is likely in the quarters ahead. This is particularly for central bank exit strategies which may be coordinated so as not to trigger adverse currency movements,” Glenn Maguire, Societe Generale’s chief Asia economist, said in a note.

“Yet, we remain sceptical on the ability to put into place a more rigid framework that would enforce a new economic world order,” Maguire said.

The G20 will also discuss climate change, where rifts remain between rich and developing nations over how quickly to cut carbon dioxide emissions and who should pay.

A top White House adviser said on Wednesday the United States was still working on a possible deal with G20 partners to phase out subsidies for fossil fuels.

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