IMF chief warns recovery in peril if cooperation fails

October 18, 2010

, SHANGHAI, Oct 18 – The head of the IMF on Monday warned central bankers that the global recovery would be "in peril" if the world\’s major economies do not keep working together, amid mounting fears of a currency war.

The comments from International Monetary Fund managing director Dominique Strauss-Kahn came at the end of a meeting in Shanghai that brought together high-level officials from Asia, Africa, Europe, and North and South America.

The Shanghai conference follows IMF and World Bank annual meetings earlier this month, where finance officials discussed how to strengthen the recovery from the worst recession since World War II and the global financial system.

It also comes ahead of this week\’s key Group of 20 meeting in South Korea, where currency reform is expected to dominate talks, amid fears that nations could adopt trade barriers in the face of competition from Asian exports.

"The spirit of cooperation must be maintained. Without that, the recovery is in peril," Strauss-Kahn said in closing remarks, according to a copy of his speech released by the Washington-based IMF.

"Today, there is a risk that the single chorus that tamed the financial crisis will dissolve into a cacophony of discordant voices as countries increasingly go it alone. This will surely make everybody worse off."

Strauss-Kahn and PBOC chief Zhou Xiaochuan co-chaired the closed-door meeting, according to the IMF.

The US Federal Reserve was represented by Kevin Warsh, a member of the central bank\’s policy-setting Federal Open Market Committee.

The talks were focused on macro-prudential policies — the big systemic picture of reducing the risk of too-big-to-fail institutions, Chinese central bank policy adviser Xia Bin told reporters outside the meeting room.

In the run-up to the G20 finance ministers\’ meeting, which begins Friday in preparation for next month\’s Seoul summit, South Korea has warned that frictions over the currency upheaval are growing and could lead to trade protectionism.

The United States, facing mid-term elections next month, has ratcheted up the pressure on China to allow the yuan to rise more rapidly, but Beijing insists its currency must not be used as a "scapegoat" for US economic woes.

With Beijing keeping a tight grip on the yuan, many other Asian economies are suffering as their currencies soar against the dollar. Despite Europe\’s debt woes, the euro has also surged.

Xia issued a thinly veiled warning to the United States not to print more money to stimulate growth.

"The key is to restrict issuance of currencies of major powers, which is very difficult," Xia said.

"A nation that historically has had the dominant currency will not easily give up its interests."

When asked whether China feared a currency war, He Fan, an economist for the Chinese Academy of Social Science, a top government think tank, said he thought such a situation would be averted.

"Yes, we are concerned. But given historic lessons, a large-scale currency war is unlikely," He said between attending meetings.

"But we are going to see continuing conflicts particularly in the East Asian region. Countries like Japan and South Korea have similar economic structures and both have limited room for monetary policy adjustment."

Beijing should now tighten capital controls even further to prevent a flood of hot money — speculative funds — from coming into China on expectations that the yuan will appreciate, which would fan inflation, He said.

A year ago, the Group of 20 developed and developing nations tasked the IMF with stepping up its focus on global systemic stability.

Authorities agreed a broader approach was needed to spot weakness in the increasingly interconnected financial system, to complement the traditional micro-prudential regulations of bank-by-bank audit and supervision.

Asia-Pacific leaders will meet for a summit in Japan following the G20 gathering in Seoul next month.


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