G-20 pledge seen as positive outcome for markets

Tokyo

DESPITE the fact that G-20 finance ministers and central bank governors meeting in Shanghai at the weekend did not come up with the "growth agenda" some were looking for, there were some positive achievements that should help calm markets this week, analysts said.

"You have to say it's positive when financial leaders promise to coordinate and exchange more information," former Goldman Sachs Asia vice-president Kenneth Courtis told The Business Times on Sunday from Shanghai after he attended the G-20 gathering.

"What they said in effect was that 'we will not all of a sudden devalue our currencies and you find out about it the next morning, or we will not impose negative interest rates or capital controls without letting you know that we are going to do that,' " Mr Courtis said.

Jeroen Dijsselbloem, chairman of the eurozone finance ministers, said G-20 members had agreed to inform each other in advance about policy decisions that could lead to devaluations of their currencies, Reuters reported.

The commitment that leaders made to improve communication and coordination may help calm markets that have been living in fear of a sudden and possibly major devaluation of China's yuan, and which were "shocked" by Japan's recent decision to introduce negative interest rates, Mr Courtis told BT.

Even so, analysts said that financial markets are unlikely to be reassured completely by the promise of improved communication among financial leaders and will scrutinise carefully economic data from G-20 countries for signs that global growth is continuing moderately as stated in Shanghai.

"Chinese authorities need to present a mid-term structural reform plan with concrete schedule and a package of measures to stabilise the yuan, based on recognition that communication between Chinese authorities and markets has caused market volatility and capital outflows," Japan's finance minister Taro Aso said at a briefing in Shanghai.

China's hope of getting the group of advanced and leading emerging economies to agree in Shanghai to a "powerful growth programme (for the global economy) ran into a road block" of opposition from the US and Germany principally, sources who did not wish to be identified told BT.

The administration of US President Barack Obama is seen as a "lame duck government" that would be unable to deliver on any major new growth initiative while Germany essentially argued that it is already delivering stimulus to the world, said one.

According to Mr Courtis, who is now chairman of commodities group Starford Holdings, it was not so much China's suggested initiatives for the G-20 as the state of China's own economy - the world's second largest - that was at the centre of financial leaders' attention in Shanghai.

"What really bothers them is that China is still providing 40 per cent of world growth and there is little expectation that Japan or Europe is going to do better" by way of boosting global growth even if the US economy is improving, he said.

"If an economy that is producing 40 per cent of the world's growth all of a sudden produces only 25 per cent, then you have problem. You don't want to be blind-sided by that. You need to be able to see it coming and prepare for it."

China appeared to have "got the message", said Mr Courtis, pointing to the fact that both People's Bank of China governor Zhou Xiaochuan and China's finance minister Lou Jiwei had "gone out of their way" in Shanghai to improve transparency with regard to policy communication.

Another concern that emerged from high-level meetings in Shanghai was the fear that if Japan's economic growth falls into "negative territory, the yen will drop to new low levels, and that will in turn trigger devaluations in Korea, China, across Asia and around the world", Mr Courtis said.

Bank of Japan governor Haruhuko Kuroda claimed in comments at the end of the G-20 meeting that he had secured the "understanding" of G-20 officials that the negative interest rate shock Japan sprang upon the world was not simply a cover for depreciation of the yen.

G-20 financial heads were essentially "whistling in the dark" in Shanghai, Mr Courtis added. "They know that commodity prices are weak and that a lot of companies are going bankrupt and cannot afford to pay back their bank debts."

This could force many commodity producing countries to "devalue their currencies very aggressively", he suggested. G-20 leaders "know that there are big problems out there but their strategy in Shanghai was 'let's say that things are pretty good. If we say there are real problems, who know's what's going to happen on Monday when the markets re-open?'"