NANJING, China — The international monetary system doesn’t need a wholesale overhaul, but inconsistencies in exchange rates policies are largely to blame for ongoing problems and uncertainties, Treasury Secretary Timothy Geithner said Thursday at a Group of 20 financial summit.
Though China officially took the yuan off the table as a topic of conversation for the G-20 gathering, opening comments at the one-day currency summit inevitably danced around the issue. In his remarks, as prepared for delivery in a session closed to the press, Geithner said flexible exchange rates are desirable and can better protect against economic jolts.
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The treasury secretary, who has led the Obama administration’s criticism of China’s two-year lock on its exchange rate, said he doesn’t believe the international monetary system needs vast reforms, but rather more stable policies from member nations. He also said he supports some gradual changes to the system.
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“The most compelling gaps in the present system are the weaknesses and inconsistencies in the approaches that govern exchange rate policy and the use of capital controls, and in the incentives for cooperative policy action to limit economic imbalances,” said Geithner, who called currency regime variables “the most complicated problem” in the monetary system.
“The major currencies are all flexible, with essentially full capital mobility,” he added. “Most major emerging economies now operate largely flexible exchange rate regimes, with very open capital accounts. Some emerging markets run tightly managed exchange rate regimes with very extensive capital controls, though this is starting to change.”
“This asymmetry in exchange rate policies creates a lot of tension,” he continued. “It magnifies upward pressure on those emerging market exchange rates that are allowed to move and where capital accounts are much more open. It intensifies inflation risk in those emerging economies with undervalued exchange rates. And, finally, it generates protectionist pressures.”
In his opening speech, French President Nicolas Sarkozy said that now is the time for reform of the International Monetary System, including adding new currencies to the Special Drawing Right — the basket used by the International Monetary Fund. Sarkozy said he supports adding the yuan, not yet a globally traded currency, to the basket of currencies in the international monetary system. Developing countries should have greater representation, he argued, to better protect against economic meltdowns when one country’s currency carries great weight.
“The internationalization of some other currencies is already a reality; I am thinking in particular of the yuan and I welcome the ambition of the Chinese authorities in this respect,” the French president said. “Is it not time today to reach agreement on the timetable for enlarging the basket of SDR to include new emerging currencies such as the yuan?”
Sarkozy also called for greater supervision by the International Monetary Fund, in particular to guard against protectionism.
In his brief remarks to the conference, Chinese Vice Premier Wang Qishan said he sees reform of the International Monetary System as a complex process that will take time. Wang did not address exchange rate issues.