G20 keeps up snail's pace of global monetary reform

One analyst, Citi's Steven Englander, was struck by the Alice-in-Wonderland feel to Thursday's gathering.

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"So there is this meeting in Nanjing where all countries but one are trying to figure out how to get rid of the dollar as the world's major reserve currency, one country is trying to keep its currency as the world's major reserve currency but have it depreciate against all the others, and one country wants its currency to become a reserve currency but doesn't want anyone to buy it without permission.

"The intended outcome is reform of the international monetary system," Englander said in a note.

The country trying to preserve its hegemony is, of course, the United States. The aspiring reserve-currency country that wants to have its cake and eat it, too, is China.

LOCKING HORNS

The tug of war between the two led to a stalemate at February's Paris G20 over whether a big current account surplus or deficit is a good indicator of an unbalanced economy. The answer might seem obvious. But China, feeling picked upon because of its hefty surplus, dug in its heels and objected.

The bone of contention in Nanjing was over the conditions for including the yuan in the Special Drawing Right (SDR), the International Monetary Fund's quasi-currency that is part reserve asset and part in-house accounting unit.

The technical aspects of the debate are arcane, but the political significance is straightforward.

Adding the yuan to the basket of four currencies that now make up the SDR would confer prestige on China but also impose responsibilities: for the step to be of practical importance and not just a symbol of China's rise, the currency would have to be freely convertible and no longer semi-pegged to the dollar.

And that, for China, is a two-step too far. Beijing wants to dismantle capital controls and free up the yuan, also known as the renminbi (RMB), on a timetable of its own choosing. So being in the SDR would be nice, but it is not a paramount objective.