Global financial imbalances could torpedo global growth and lead to widespread economic disorder if they are not dealt with carefully, leading financial policy-makers warned yesterday.
“We are all in the same boat, and if it sinks no one will escape,” China’s vice minister of finance Li Yong cautioned. An uncontrolled unravelling could trigger wider currency crises, economic recession, trade protectionism, and disruption of global capital flows, he said, addressing his counterparts from the US, Japan, India and Germany.
There could be a “very costly and disorderly adjustment” in global imbalances, agreed India’s finance minister P. Chidambaram, although US Treasury under secretary for international affairs Tim Adams argued that there is still scope for changes to be “orderly.”
The disagreements between the US and Europe on one side and Asia on the other go far deeper than divergences over the likely pace of rebalancing. Both sides adopted defensive stances yesterday, claiming that their opponents’ suggested cures could be worse than the disease.
Adams questioned whether “others understand what the consequences of any [rapid] reduction in the US deficit could be.” It took a long time for global financial imbalances to build up and they could take a long time to unwind, he said, adding that “it is a general equilibrium problem that will require a general equilibrium solution.”
China’s Li cautioned that the appreciation of the renminbi demanded by Washington threatens to cause an implosion in the economy which is rapidly becoming the main driver of global growth.
Japanese finance minister Sadakazu Tanigaki concurred, observing that “over-reliance on exchange rate adjustments could deal a blow to global markets.” Imbalances have to be addressed through “structural adjustment” in the real economy, he insisted.
The attitudes of the Chinese and Americans represented something of a retrenchment from more aggressive positions taken at the IMF meeting a couple of weeks ago with Adams declining to repeat direct appeals for a stronger Chinese currency. Apart from a closing tirade against American protectionism Li was also less belligerent than some of his colleagues; People’s Bank of China governor Zhou Xiaochuan stressed in a recent interview with Emerging Markets that respective trade balances pose more of a problem for the US than China.
“The task for the US is much harder than the other countries. Although some people pay a lot of attention to China the imbalance in China seems not that serious,” Zhou noted, adding that it will be “not very difficult” for his nation to curb its deficit to around 3% of GDP. The US’s 2005 current account deficit of $805 billion (6.4% of GDP) compares with China’s surplus of $161 billion (7.2% of GDP).
Most speakers at yesterday’s session on global imbalances – including officials from US, China, Japan, India and Germany - tried to reassure financial markets by saying that they saw no danger of a significant further fall in the dollar’s value. However, Tanigaki observed that recent dollar depreciation suggested that the market may have misinterpreted the recent G7 statement that exchange rates should reflect economic fundamentals as a reason to sell the dollar.
German Bundesbank director for international relations Wolfgang Morke added his advice to the warnings. “The possibility of a disorderly unwinding of global imbalances is by no means zero,” he said. This raises the “chilling prospect” that a falling dollar could trigger a wave of global trade protectionism,” he said. “I am very worried about that scenario.” What Morke called “beggar one’s neighbour” trade policies should be avoided at all costs as global imbalances are tackled, he added.
There were some messages of hope. “I see no reason why the adjustment should not be an orderly one” given a balanced approach with everyone making a contribution, said Adams. ADB president Haruhiko Kuroda agreed but stressed that Asia was doing its part, with countries like China and Malaysia introducing greater exchange rate flexibility, and that Asia’s efforts must be matched by equal efforts in the US and Europe.