Capital flows, monetary challenges focus of G20

Ministers and bankers from G20 nations meet in China this week to discuss challenges facing the world monetary system, but Beijing has ruled out one of the hottest topics -- its exchange rate regime. The central bank chiefs and finance ministers from the Group of 20 leading economies gather Thursday in the eastern city of Nanjing, as the global recovery faces hurdles such as Japan's quake disaster and Eurozone woes. This "is the first time that a big emerging country" hosts a G20 meeting, according to France, which currently holds the group's rotating presidency. Those attending include US Treasury Secretary Timothy Geithner and his Chinese counterpart Vice Premier Wang Qishan, International Monetary Fund chief Dominique Strauss-Kahn and World Bank head Robert Zoellick, diplomatic sources say. Host China has already said its exchange rate system will not be up for discussion, despite ongoing criticism that its yuan currency is massively undervalued, giving it an unfair trade advantage. The French president's Elysee office said Paris "is not expecting decisions on (China's) exchange rate regime", but that it hoped "Chinese authorities will contribute to the debate on the international monetary system reform." At a meeting in Paris in February, the G20 agreed to a set of indicators to measure economic imbalances between surplus exporters like China and nations with structural deficits like the United States. The non-binding indicators gauge internal imbalances, focusing on budget deficits, public debt and private savings. External indicators, meanwhile, look at the trade balance and investment flows, "taking due consideration of exchange rate, fiscal, monetary and other policies," the G20 has said. But China, which has the world's largest foreign reserves valued at more than 2.8 trillion dollars, has baulked at many of the indicators amid fears they could result in more pressure over trade and its yuan currency. In Nanjing, though, such imbalances "will not be at the centre of discussions," one Western diplomat said. Instead, one of China's major concerns -- speculative capital flows -- will be a key item on the agenda. Like other emerging markets, China feels that despite strict capital controls, it is being victimized by fund flows seeking higher short-term returns than can be found in developed markets. Beijing says these flows of so-called "hot money" are feeding inflation at a time when soaring prices -- and their potential for causing social instability -- are a major source of worry for the Chinese government. Another topic will be IMF special drawing rights (SDRs) -- global reserve assets created to supplement member nations' official reserves -- which France hopes can play a larger role in helping countries out of financial crises. China has said it wants more currencies to be part of the basket making up the SDRs -- now comprising the dollar, the euro, the yen and the pound -- and Strauss-Kahn has indicated he is supportive of the yuan being included. Numerous bilateral meetings will also be held in Nanjing. Geithner may discuss the next US-China strategic and economic dialogue to be held this spring, while French President Nicolas Sarkozy will meet with his Chinese counterpart Hu Jintao in Beijing ahead of the Nanjing meeting. Sarkozy and Wang will also open the G20 seminar. The impact of the March 11 quake and tsunami in Japan -- which has disrupted the disaster-hit nation's automobile and electronics sectors and left supply chains around the world lacking crucial components -- may also be discussed. The euro-zone debt crisis that has again embroiled Portugal is also of interest to the IMF and many of the G20 nations, among them China, a purchaser of European sovereign debt. By Boris Cambreleng