Geithner expecting yuan to get stronger

United States Treasury Secretary Tim Geithner expects China will allow the yuan to strengthen because officials there understand it's in the interest both of domestic growth and global economic stability.

"They recognise it's important to the world," Geithner said in an interview with Bloomberg Television, after a meeting of Finance Ministers and central bankers in Gyeongju, South Korea.

As China's currency stance affects more countries, "China recognises that, and I think we're going to see them continue to move".

Geithner made the comments a day before an unscheduled visit to China for talks with Vice-Premier Wang Qishan to discuss relations between the world's two largest economies.

Under pressure from Congress to combat what Geithner says is an undervalued yuan, the Obama Administration used the weekend meetings to secure an agreement among the Group of 20 officials to avoid weakening their currencies.

They also vowed to increase efforts to reduce trade imbalances. Chinese officials still had a "ways to go" on loosening the yuan's ties to the dollar, the Treasury chief said.

"But I think they're committed to do that, because they recognise it's in their interest."

Trading in non-deliverable forwards showed traders stepped up bets on appreciation in China's currency, with 12-month contracts rising 0.5 per cent to 6.4405 per dollar in Hong Kong. The contracts reflect expectations for a 3.4 per cent gain in the coming year from the spot rate of 6.6570 in Shanghai.

The G20 talks concluded with a pledge to examine guidelines for current-account surpluses and deficits, without specifying how nations would set those goals. In the interview, Geithner said he believed 4 per cent of gross domestic product would become the benchmark for whether trade balances are misaligned.

Geithner and Wang "exchanged views on US-China economic relations" in the run-up to next month's G20 leaders' summit in Seoul, the Treasury said. G20 officials agreed to strengthen the International Monetary Fund's surveillance powers, saying the Washington-based lender should monitor budgets, financial regulation and foreign exchange policies.

The IMF's role would be to provide an early warning system for problematic swings in trade flows, Geithner said.

"It will help provoke changes in policies to reduce the risks that those will be sustained," said Geithner, who worked at the IMF from 2001 to 2003. "The IMF has to play cop."

The current account is the broadest measure of trade because it includes investment and transfer income, and it would be hard to achieve any correction in one without a currency shifting.

Saudi Arabia, Germany, Russia and China all run surpluses larger than 4 per cent of GDP, the IMF says.

Bundesbank president Axel Weber, who also attended the Gyeongju talks, said Germany shouldn't be blamed for having a current account surplus.

- BLOOMBERG