BEIJING/KYOTO, Japan, Nov 5 (Reuters) - China on Friday rebuffed a U.S. initiative to set targets for trade imbalances, setting the stage for what could be a testy summit of world leaders in Seoul next week.
Vice-Foreign Minister Cui Tiankai also rejected any attempt by other countries to set target ranges for the yuan, also known as the renminbi, to appreciate.
"That would indeed be asking us to manipulate the renminbi’s exchange rate, and it is something that we will of course not do," Cui told a news briefing.
Efforts to reduce imbalances that are destabilising the global economy will be high on the agenda of the Nov. 11-12 summit of the Group of 20 forum of leading economies in the South Korean capital.
"Of course, we hope to see more balanced current accounts," Cui, China’s chief G20 negotiator, said. "But we believe it would not be a good approach to single out this issue and focus all attention on it. The artificial setting of a numerical target cannot but remind us of the days of planned economies."
U.S. Treasury Secretary Timothy Geithner last month floated the idea of capping surpluses and deficits on the current account — the broadest measure of trade in goods and services — at four percent of gross domestic product.
German Economics Minister Rainer Bruederle also dismissed the proposal at the time as smacking of old-style central planning.
ASEAN, the 10-nation group of southeast Asian countries, will also raise concerns at the G20 summit over the U.S. proposals.
"We would like to work with G20 to correct imbalances," Thai Finance Minister Korn Chatikavanij told reporters in the Japanese city of Kyoto where Asia-Pacific finance ministers are meeting.
"But we are concerned that the U.S. plan about current account balances might lead to trade protectionism."
The United States believes an undervalued yuan is a major cause of global imbalances and has been pressing Beijing, largely in vain, to let the currency rise more swiftly to reflect the strength of what is now the world’s second-largest economy.
But the waters of the debate have been muddied by the Federal Reserve’s decision on Wednesday to print money to buy $600 billion in long-term bonds in an effort to revive the flagging U.S. economy.
The policy is known in market jargon as quantitative easing (QE).
PROBLEMS AND PROPOSALS
With U.S. interest rates likely to stay near zero for the foreseeable future, resentment is rumbling around the globe that the U.S. central bank’s initiative will generate even more instability by inflating asset bubbles and increasing inflation.
"QE creates excessive liquidity that flows over to countries like Brazil," Henrique Meirelles, the head of Brazil’s central bank, said in Chicago on Thursday.
"Definitely, for Brazil it does create a problem and Brazil will present proposals in that regard to several countries — the U.S. and China — to reach a different agreement not to generate so many distortions."
Zhou Xiaochuan, China’s central bank governor, said while Beijing could understand that the Fed was implementing more monetary easing in order to stimulate the U.S. recovery, it it may not be a good policy for the global economy.
Japan’s central bank on Friday gave details of its own asset-purchase programme, announced last month. Worth 5 trillion yen ($62 billion), it is just a tenth the size of the Fed’s scheme.
By pointing out the difference in scale, Economics Minister Banri Kaieda suggested that the Bank of Japan might face calls in the future for an expanded scheme.
BOJ Governor Masaaki Shirakawa has also signalled the central bank’s readiness to top up the asset-buying fund if economic conditions worsen further.
Tokyo’s Nikkei 225 stock index surged nearly 3 percent, extending an ebullient global reaction to the Fed’s easing. Asia-Pacific stocks outside Japan rose 1 percent, a day after Wall Street closed at a two-year high.
Cui said he was worried at the prospect of a flood of money pouring into global markets in search of higher yields. As the issuer of the world’s main reserve currency, the United States needed to adopt a responsible position.
"They owe us some explanation," he said. "I’ve seen much concern about the impact of this policy on financial stability in other countries," he said.
INTEREST RATES
An official newspaper said China needed to respond by raising interest rates again following a surprise increase on Oct. 19.
"We must not forget the Japan lesson. We must tighten internal policies to deal with external easing so as to avoid the formation of asset bubbles," the China Securities Journal said in a front-page editorial.
The paper said deep interest rate cuts by Japan in the 1980s, intended to cushion the impact of a surge in the yen engineered by Washington, pumped up asset prices and led to deflation when the bubbles burst.
Inflationary pressures prompted both India and Australia to raise interest rates this week. Other countries are considering administrative controls to staunch unwanted inflows of footloose global capital.
Thailand’s Korn said he accepted that the country’s currency, the baht, would appreciate due to strong economic fundamentals, but he wanted to avoid damage from a sudden reversal in speculative money.
Thailand is prepared to introduce further capital controls, either alone or in cooperation with other countries, to combat excessive inflows from ultra-easy U.S. monetary policy.
"We are willing to take whatever measures when necessary," he told Reuters before the start of a meeting of finance ministers from the Asia-Pacific Economic Cooperation (APEC) forum in Kyoto.
Thailand has imposed a 15 percent withholding tax on interest and capital gains earned by foreign investors on Thai government bonds. Brazil has also taxed foreign buyers of its bonds.
The APEC meeting, which will be attended by Geithner, will provide an early opportunity for emerging economies to voice their views of the Fed’s initiative.
