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Next month's meeting of the Group of 20 (G-20) countries in Seoul, South Korea comes at a vexing time for global financial markets. The Western powers are pressuring to China to put the brakes on its currency depreciation; central banks around the world are racing each other to see who can drive down the value of their currencies the fastest; and the emerging markets are seeking greater influence and representation in global economic decision-making.
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These, and a handful of other contentious topics, will no doubt occupy the financial ministers and other officials who will gather in Seoul.
“I think the member nations will also be comparing notes on how their economic recoveries are going,” said Michael Yoshikami, president of YCMNET Advisors in Walnut Creek, Calif.
“Economies are now starting to stabilize, and we have seen stimulus measures put in place in China, the U.S. and Europe. They may try to decide what extra measures would be necessary to keep the recovery moving forward.”
China has come under specific criticism from both Europe and the United States. These economic giants on opposite of the worlds are at loggerheads over currency policy -- and there is no solution in sight.
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Desperate not to compromise the strength of its crucial export business, China refuses to do anything to strengthen its currency. Meanwhile, the U.S. and euro zone, dealing with their own fragile recoveries and huge debt burden, have warned China (and other emerging market nations) that their currency moves threaten to weaken the global economic recovery.
Timothy Geithner, the U.S. Treasury Secretary, has said that nations with big trade surpluses should allow their currencies to appreciate
to avoid a damaging series of devaluations.
"When large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same," Geithner said.
Similarly, IMF Managing Director Dominique Strauss-Kahn told the Financial Times that using exchange rates as a “policy weapon” to hurt other economies and raise a country's own exporters "would represent a very serious risk to the global recovery."
There is also the fear that simultaneous currency-weakening measures by central banks might lead to a trade war (in addition to what is now perceived to be a “currency war”) and perhaps lead to the imposition of trade tariffs.
“Trade tariffs are dangerous and have proven to be bad for economic growth,” Yoshikami stated. “Free trade is the best way to grow economies.”
Not surprisingly, China has turned a cold shoulder to such entreaties.
Chinese Premier Wen Jiabao warned the European Union to cease pressuring Beijing into revaluing the yuan, explaining that an abrupt shift like that could prompt social turmoil in China.
"Many of our exporting companies would have to close down, migrant workers would have to return to their villages," he said in Brussels. "If China saw social and economic turbulence, then it would be a disaster for the world."
