(Bloomberg, Sept 18, 2006) -- China and Japan opposed calls by U.S. Treasury Secretary Henry Paulson for the International Monetary Fund to police ``misaligned'' currencies, saying the role is outside its mandate and wouldn't solve global trade imbalances.

Paulson said the IMF should define ``acceptable country- specific exchange rate policies.'' China's central bank Governor Zhou Xiaochuan yesterday said adoption of ``command-style'' surveillance may cause the fund to ``deviate'' from its mandate.

Paulson is stepping up an effort launched under his predecessor, John Snow, to enlist the fund in the fight to get Asian countries to loosen controls on currencies that U.S. policy makers say fuel the record U.S. trade deficit. China and Japan oppose any efforts to give the IMF power to blame any particular nation or region for lopsided flows of trade and investment.

Asia may be concerned that reforms ``will give the U.S. a bigger stick to beat Asia with on foreign exchange,'' said Sean Callow, a strategist at Westpac Banking Corp. in Singapore.

The U.S. is trying to lower the bar for the IMF to take action against currency manipulation. The current standard, which requires proof of motivation, is so rigorous that the Treasury failed to apply it to China last year in two reviews of its trading partners' exchange-rate policies.

In their joint statement on Sept. 16, G-7 officials urged China to make its currency more flexible, while dropping an explicit call for the yuan to strengthen.

Zhou said IMF currency surveillance that focused on exchange rate regimes without examining a nation's macroeconomic policies would not be beneficial for financial stability.

Lose Credibility

Bank of Japan Governor Toshihiko Fukui told the IMF's steering committee that beefing up the fund's currency role could ``lead to focusing too narrowly on specific issues or specific countries.'' That could send ``incorrect signals to the market,'' he said.

``The issue of global imbalances cannot be solved with currency management alone,'' Fukui said.

European ministers attending the IMF committee meeting were divided over the role the fund should play in monitoring foreign exchange systems.

France's Finance Minister Thierry Breton said the IMF's proposed oversight of currency policies should ``more closely reflect'' the increasingly important role of emerging economies. His Spanish counterpart, Pedro Solbes, said assessing exchange rate levels was a methodological ``grey area.''

Nation-To-Nation Spats

Canada, the smallest of the Group of Seven industrial nations which met in Singapore on Sept. 16, backed Paulson's call. Finance Minister Jim Flaherty said the IMF in the past has been reluctant to act forcefully when countries engaged in policies ``that negatively affect other members or even the stability of the international monetary system.''

Snow and Tim Adams, Treasury's undersecretary for international affairs, have argued that the IMF has the potential to act as an honest broker in disputes over currencies, whereas nation-to-nation spats end up shrouded in politics.

The IMF's 184-country membership will likely endorse a plan to increase the votes of China, South Korea, Mexico and Turkey on Sept. 19, making official a proposal worked out by the fund's executive board on Sept. 1 in Washington. Paulson backed the effort, and said governments should strive to complete a broader overhaul of the voting structure by next year instead of 2008.

Build Faith

Paulson, making his first appearance at a meeting of the International Monetary and Financial Committee, also challenged richer nations to forgo any increase in votes they might get in a revamped allocation formula.

Paulson said the IMF should adopt a governance structure that emphasizes gross domestic product to end disparities under the current system that leave smaller countries such as Belgium with clout on par with China, the world's fourth-largest economy.

That's facing resistance from Germany and other nations that benefit from the current mechanism for allotting votes that takes into account exports and financial reserves.

``We challenge other industrial countries to join the U.S. in forgoing higher voting shares,'' Paulson said, repeating that the U.S., which represents about a third of the world economy, wants no more than its current 17 percent share of IMF votes.
Source:Bloomberg
tag:China economy