By Nagesh Narayana: Subscribe to Nagesh's RSS feed
June 5, 2010 1:40 PM EDT
Finance ministers and central bankers of the Group of 20 industrial and developing nations who met on Friday and Saturday in the South Korean city of Busan said in a communiqué that the global recovery will face challenge in increasing market crashes.
U.S. Treasury Secretary Timothy Geithner who sought for "a more flexible exchange-rate policy in China" said foreign exporters can no longer count on the American consumer toabsorb the world's exports and lift the global economy.
Echoing similar views, International Monetary Fund Managing Director Dominique Strauss-Kahn said that "something obviously has to be done" on the value of the Chinese currency, but cautioned that this alone would not entirely resolve global imbalances.
The caution is not without reason. China, which has the highest reserves of US currency, may trigger volatility in the global greenbuck if it wanted to shed its foreign reserves burden anytime. In fact, whenever mainland China shed its dollar reserves, there was a clear move to balance the market with Hong Kong stepping in to increase its reserves in the past several months this year. Any sudden volatility in the dollar may even upset China's reserves and exports.
One serious proposal at the G-20 summit that many nations welcomed was South Korea and Indonesia's proposal for global "financial safety nets" creating multilateral credit lines apart from the IMF and World Bank packages to ward off sudden external shocks. The idea is likely to be taken up at the Toronto G-20 summit to be held on June 26-27 and again at a Seoul summit in November.
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The proposal may help stem another currency crisis like the one that had hit the Asian currencies in the late 1990.
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