Chinas removal of currency peg paves way for successful G20 summit

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OTTAWA - The log jam blocking the way to a successful G20 summit in Toronto this week is beginning to break up.

After months of deadlock over how much major countries should sacrifice for the good of global stability, the United States and China have each taken small steps to rebalance the precarious state of the world economy.

"We can see the outlines of what could make Toronto a 'success'," said Wendy Dobson, co-director of the University of Toronto's Institute for International Business.

"The moves in China and the U.S. are in their own as well as the global interest."

Late Thursday, U.S. President Barack Obama sent a letter to his G20 colleagues presenting a medium-term plan to grab control of his country's ballooning deficit.

The goals are moderate, and analysts wonder if Obama will be able to turn the plan into a reality. But the fact that Obama made the commitment in a letter to the most powerful leaders in the world is significant.

Prime Minister Stephen Harper followed up on Friday by publicly suggesting standards for indebted countries to meet in order to bring their debts and deficits under control before it's too late.

Then on Saturday, China surprised the world by announcing it would stop pegging its currency to the U.S. dollar, and instead allow the yuan to fluctuate within a range tied to a basket of currencies.

Chinese authorities warned that the move would not result in an immediate major fluctuation of its currency. But they also briefed key G20 ambassadors as the move was being announced, to let the world know they were serious, sources say.

The Chinese announcement comes just days after officials warned harshly that they would not be pressured by an angry U.S. Congress into making changes to China's currency regime. The United States has long argued that the Chinese yuan is drastically undervalued, and serves as an export subsidy that destabilizes global trade.

So the announcement shows that China has enough good will to work with the G20 toward a productive summit, analysts said.

"It's a start," said Thomas Bernes, acting executive director at the Centre for International Governance Innovation in Waterloo, Ont.

The G20 needs three major actions in order to reach a deal on how to make the global economy stable, he said: a credible U.S. plan to control its deficit; greater exchange-rate flexibility from China, and a plan for economic growth in Europe.

"There is some progress on the first two, although uncertainties clearly remain," Bernes said in an email. "Can Obama really deliver, given that it is Congress and not the president who will determine in the end? How much flexibility will China allow?"

Indeed, China sought to dampen the celebrations on Sunday. Central bank officials posted a notice on their website saying they did not expect any major fluctuations - although market watchers were still on edge, not knowing quite what to expect at market open on Monday morning.

Until Thursday night, expectations for the G20 Toronto summit were low.

The group has proven successful in the past, coming together to mitigate the effects of the global financial crisis by agreeing to a massive worldwide stimulus program.

But with the pressure of the global recession abating, countries were squabbling endlessly about how to best bolster their banking systems, prevent future bank collapses, and rebalance global growth over the long term.

Leaders and analysts alike feared that another crisis would be in the offing without commitments from the United States to control its spending and from China to encourage more spending and allow its currency more flexibility.

"At a time when market uncertainty persists, it is imperative that we deliver credible and real measures that show we are committed to a sustained and durable recovery to the benefit of all our citizens," Harper wrote in a letter to the G20 leaders last week.

He welcomed the Chinese currency announcement as "an important step forward" that he hopes will inspire other G20 countries at the summit.

Harper has been burning up the phone lines in recent weeks, contacting most of the G20 leaders to enlist their support for progress on financial regulations and austerity plans.

It's not uncommon for countries to make key moves just before a summit, says John Kirton, who heads the G20 Research Group at the University of Toronto.

"No major power wants to be seen at home as being dictated to by the summit, and making its moves just after the summit," Kirton said by email.

Even though the steps taken so far are small, the G20 will have its work cut out for it in making sure they are not empty promises, said Bernes.

"Efforts will be required to ensure credibility for these policy stances, so they are not seen as tokens," he said.

And there's still another elephant in the room, he added: Europe.

Many European countries have been spooked by Greece's sovereign debt crisis, and are taking bold measures to cut their spending and reduce deficits. But some analysts feel they may be acting too hastily, and could well be undermining European and global growth at a delicate time.

Plus, European banks have not gone through the same purging as those in the United States, after the financial crisis. So there remain fears that financial institutions on the continent are not strong enough.

Organizations: University of Toronto, Institute for International Business, U.S. Congress International Governance Innovation G20 Research Group

Geographic location: China, United States, Toronto OTTAWA Europe Waterloo Greece

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