For the last five years, international summits have been dominated by calls from Western countries to have China raise the value of its currency, the renminbi, in order to stop the huge outflow of capital into China (which now has more than $3-trillion in cash reserves). More broadly, there is a desire to balance monetary systems so that import-dominated nations do not build up huge current-account deficits - - the problem that is at the root of both the European and the US crises.
This time around, there is some small progress - - no grand pledge to rebalance, but at least some language that points in the right direction. And Canada is claiming credit for much of it.
Notably, it includes a promise, apparently endorsed by Beijing, to do things that will raise China’s exchange rate (although it should be noted that insurance and Beijing’s policy are already doing this to a large degree).
"China will rebalance demand toward domestic consumption by implementing measures to strengthen social safety nets, increase household income and transform the economic growth pattern. These actions will be reinforced by ongoing measures to promote greater exchange rate flexibility to better reflect underlying economic fundamentals, and gradually reduce the pace of accumulation of foreign reserves,” the draft reads.
The document welcomes “Russia's foreign exchange regime to allow the rouble to move more in line with market forces and China's determination to increase exchange rate flexibility consistent with underlying market fundamentals.”
An Ottawa official said that language “was largely due to Canada’s work as the had of the framework working group.”
The Financial Stability Board
On the same day that Bank of Canada Governor Mark Carney was appointed to leave the influential but largerly powerless Financial Stability Board, the G20 members appear to have pledged to give the FSB some real muscle. The draft communique will give new powers to the international body. "We have given the FSB a strong political mandate and need to give it a corresponding institutional standing, with legal personality and greater financial autonomy, while preserving the existing and well-functioning strong links with the BIS [Bank for Inernational Settlements]" the draft said (the final draft could have different wording).
The FSB will be beefed up by broadening its steering committee. The committee, is said "should include the executive branch of governments of the G20 Chair and the larger financial systems as well as the geographic regions and financial centers not currently represented."
What was not immediately clear is when the FSB will get these powers, how it will get them and, ultimately, whether it could actually regulate banks as opposed to merely setting policies it hopes will be adopted by the banks.
The International Monetary Fund
Based on the draft communique, it appears that the International Monetary Fund will take on a fire fighting role that that Europe's bailout fund, the 440 billion euro European Financial Stability Facility (EFSF) does not have, or more precisely, does not yet have.
The G20 draft says "we support the IMF in putting forward the new Precautionary and Liquidity Line (PLL) and call on the IMF to expeditiously finalize it. This would enable the provision, on a case by case basis, of increased and more flexible short-term liquidity to countries with strong policies and fundamentals facing exogenous, including systemic, shocks."
The EFSF was supposed to take some of these roles, but it clear that it is still a work in progress, so the IMF is stepping into the breach. According to G20 sherpas on Friday, the goal is to get the EFSF up and running as quickly as possible. They said clarity should be in place by the end of November. By then, they hope it will be in position to attract foreign sponsors, such as China.
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