Bernanke urges G20 to tackle volatile cash flows

PARIS (AFP) – The torrent of cash flowing into emerging markets is a challenge to global economic stability, Federal Reserve boss Ben Bernanke warned Friday, urging fellow G20 policymakers meeting in Paris to act.

As the world grapples with the effects of a mad rush of investment into countries like China, Bernanke urged policymakers to “clarify and strengthen the rules of the game,” in a bid to prevent instability.

“Capital flows are once again posing some notable challenges for international macroeconomic and financial stability,” the Fed chairman said on the fringes of a meeting of finance ministers and central bank governors of the Group of 20 developed and emerging economies.

Bernanke said the flows could stoke inflation, price bubbles and currency appreciation that will hurt emerging economies if not brought under control.

But many rich nations, including the United States, also argue the flows are just one symptom of broader trade imbalances that also need to be addressed.

Faced with slow growth at home, they argue emerging economies are not doing enough to reduce their massive trade surpluses or reverse protectionist policies that artificially boost competitiveness.

Both sides have traded barbs about who is to blame.

The United States and Europe have accused China of keeping the yuan artificially weak to boost exports and make imports less competitive.

Meanwhile Beijing has accused Washington of over-easy monetary policy that has encouraged harmful capital flows.

Bernanke — who has strongly backed the Fed’s ultra-low interest rates and stimulus spending — said “such concerns should be put into perspective.”

Claiming “increased appreciation” for the challenges that now face policymakers in emerging markets, Bernanke nonetheless denied the Fed’s polices were to blame.

He cited higher investment returns in places like China, India and Brazil as one reason for investors flocking to those markets.

He added that policymakers in Beijing, Brasilia or New Delhi could prevent their economies from overheating through exchange rate adjustments and monetary or fiscal reform.

“To achieve a more balanced international system over time, countries with excessive and unsustainable trade surpluses will need to allow their exchange rates to better reflect market fundamentals and increase their efforts to substitute domestic demand for exports,” Bernanke said.

“More generally, the maintenance of undervalued currencies by some countries has contributed to a pattern of global spending that is unbalanced and unsustainable,” he added, in a remark apparently aimed at Beijing.

At the Paris meeting, G20 policymakers are set to discuss a common framework for measuring trade gaps — the first tentative step toward addressing them.

“I am pleased that our French hosts are focusing the work of the Group of 20 on these challenging, but crucially important, issues,” Bernanke said.

“I am hopeful that we will make substantive progress on them in the year ahead — an outcome that will strengthen the global economy and benefit all countries.”