Emerging economies hope to ensure G20 remains relevant (Feature)

By Andrew McCathie Nov 9, 2010, 3:06 GMT

Berlin - Leaders of world's powerful emerging economies travel to Seoul this week to ensure the Group of 20 (G20) remains the premier forum for economic issues despite a rift over currencies and new monetary measures to maintain the global recovery.

It is now more than a year since the G20 replaced the Group of 8 as the world's key economic grouping, largely in recognition of the crucial role played by emerging economies such as China, Brazil, Russia and India in driving world growth.

But since then foreign exchange market tensions have intensified between the emerging economies and leading industrialized states, with the US-led move this week to launch a fresh round of monetary stimulus opening up a new front in what has been dubbed a currency war.

Emerging economies are now gearing up to head off the threat posed by a wave of cheap dollars flooding their rapidly growing markets after the US Federal Reserve last week unveiled its 600-billion-dollar cash injection plan.

'Policy-makers in many emerging economies would presumably rather deal with the problems of stronger currencies and larger capital inflows than the fall-out from a renewed US economic downturn and a collapse in global commodity prices,' said Julian Jessop chief international economist with the research group Capital Economics.

Speaking in Beijing on Monday, Chinese Vice Finance Minister Zhu Guangyao said the Fed's new monetary easing was 'a shock to the stability of global financial markets.'

The two-day summit in Seoul is also likely to be a test of the sense of cohesion among the key emerging economies.

Launched in Washington in November 2008, the G20 summits have been held against the backdrop of signs of tensions among the four members of the BRIC group - Brazil, Russia, India and China - in part a result of Beijing's ascendancy on the world stage.

In the meantime, concerns about the US central bank's monetary stimulus plan are likely to make it more difficult to lay aside the conflict over currencies and for Washington to win the summit's backing for its initiative to set targets to rectify trade imbalances.

On Friday, Chinese Vice Foreign Minister Cui Tiankai dismissed the US proposal saying 'it is inappropriate for the G20 summit to discuss this target.'

China expects the US and other developed nations to intensify their focus on Beijing's currency exchange rate, which critics claim is manipulated to favour Chinese exports.

Chinese diplomats are preparing for another robust defence of the government's policy amid fears of the on-going currency war, according to Shi Yinhong, an international relations expert at People's University in Beijing.

China's major task at the G20 summit would be 'defensive action', linked to the controversy over China's refusal to accelerate its gradual loosening of the yuan's close peg to the US dollar, Shi told the German Press Agency dpa.

At the same time, echoing the views across Asia and Latin America about the Fed's cash injection move, Brazil's trade secretary Welber Barral said it would 'end up prompting retaliatory measures' to counter the risk of speculative money pouring into emerging markets.

The finance ministry of the G20 host South Korea has also warned it would consider controls to stem the threat of rising capital inflows.

Amid concerns that the drive to additional monetary stimulus might stoke inflationary pressures, India's central bank this week raised borrowing costs by 25 basis points.

But New Delhi plans to enter the G20 talks pitching for a consensus to resolve the currency row, Indian officials said.

'In this regard, we must demonstrate that we can, in the immediate term, cooperate to avert what many are now terming a currency war.' said Finance Minister Pranab Mukherjee. 'We must find a solution to this by the Seoul summit.'

Mukherjee said the issue 'could not be resolved through confrontation ... We should engage in the process of building up consensus.'

The Indian rupee has jumped by five-per-cent against the dollar this year.

Along with concerns over protectionism, India also plans to call for renewed efforts at financial reform and rebalancing of the global economy.

But further underscoring the frictions between the emerging and industrialized economies, India will also be calling on developed nations, in particular the US, to resist protectionism, saying such steps may retard the process of recovery.

The US state of Ohio's move in September to ban outsourcing state IT contracts to foreign companies hit the Indian IT industry, which depends on contracts from US companies.

Anjan Roy, Chief Economist at Federation of Indian Chambers of Commerce and Industry, a leading industry group, said serious difficulties could arise if key issues on the currency question and protectionism were not addressed.

'A mechanism for exchange rates should be evolved, otherwise there will be global imbalances, which will spawn protectionism and the whole system will go down,' he said.' The summit should give a clear direction as G20 economies represent 90 per cent of the global economy'.