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Finance ministers of the world’s major economies reached a
fudged accord on Saturday on how to measure imbalances in the global economy
after China prevented the use of exchange rates and currency reserves as
indicators.

French Finance Minister, Christine Lagarde, who chaired the
Group of 20 talks, said the deal nevertheless represented a significant step
towards better coordination of economic policies worldwide to help prevent
another financial crisis.

“It wasn’t simple. There were obviously divergent interests but
we were able to reach a compromise on a text that seems to us to be both balanced
and demanding in its implementation,” she told a news conference.

Ministers and central bank governors agreed on a list of
indicators including public debt and fiscal deficits, private savings and
borrowing, the trade balance and other components of balance of payments such
as net investment flows.

But at Chinese insistence, there was no mention of the real
effective exchange rate or of foreign currency reserves.

“Reserves have been dropped,” Mr Lagarde acknowledged, adding
that the deal included a mechanism to take account of exchange rates when
assessing the overall balance of payments.

The United States and other western countries accuse Beijing of
keeping the yuan artificially undervalued to boost its exports, hence
accumulating massive foreign currency reserves that they say distort the world
economy.

U.S. Treasury Secretary, Timothy Geithner repeated after the
talks that China’s currency “remains substantially undervalued” and its real
exchange rate had not moved much despite a slow appreciation since a reform
last June.

“There is broad consensus that the major economies, not just
Europe, Japan and the United States but also the large emerging economies, need
to allow their exchange rates to adjust in response to market forces,” he said.

The world’s number two economy, which overtook Japan this week,
has resisted Western pressure to substantially revalue its currency to help
rebalance global growth.

China’s trade surplus has shrunk of late, perhaps explaining why
it prefers that measure.

Western and Japanese officials said the indicators would in
practice cover balance of payments and foreign reserves, even if those terms
had been omitted to assuage Beijing. Chinese Finance Minister Xie Xuren left
without speaking to reporters.

“We needed to be inventive about wording in the communique in
consideration for a country that did not want to use the term ‘current account
balance’. The statement lists components of the current account balance,”
Japanese Finance Minister Yoshihiko Noda told reporters.

No specific goals

Mr Lagarde said the indicators were not binding targets but
would lead to the drafting of guidelines for coordinated economic policies to
reduce distortions, and then to a mutual assessment process.

Germany, Europe’s biggest exporter, which has resisted U.S.
effort to set numerical targets for current account surpluses, said no specific
goals would be set for certain indicators.

The G20 ministers acknowledged that economic recovery was
diverging between developed and developing economies, but they differed in
their assessment of global inflation risks.

The communique noted that while growth was subdued in most
developed economies, with unemployment high, major emerging markets were
roaring ahead, “some with signs of overheating.”

European Central Bank President, Jean-Claude Trichet said
inflationary pressures coming from energy and commodities prices must be taken
seriously, and the ECB was determined to avoid second-round effects on wages.

But Mr Geithner said inflation risks in the United States were
moderate.

French President, Nicolas Sarkozy, who holds the G20 presidency
this year, urged ministers on Friday not to get bogged down by the indicators
dispute and welcomed the fact that China had agreed to host a seminar on
reforming the international monetary system in Shenzhen in late March.

France has also ran into opposition with its two other G20
priorities — greater transparency and regulation of commodities prices and
reform of the international monetary system.

The G20 communique said ministers agreed to work on
strengthening the international monetary system to help avoid disruptive
fluctuations in capital flows and disorderly movements in exchange rates.

China and Brazil complain that “hot money” inflows risk
destabilising the economies of emerging countries, pointing the finger at the
U.S. Federal Reserve’s money printing via a $600 billion bond purchase
programme.

With world shares at 30-month highs, investors seem content for
the G20 to take its time, whereas at the height of the crisis two years ago,
markets were baying for policy action.