WSJ: World Bank's Zoellick: US, China Not To Blame For Currency Appreciation Elsewhere

The U.S. and China aren't to blame for the sharp appreciation in currencies in nations like Brazil, said World Bank President Robert Zoellick, who also urged Group of Seven nations to set a model for emerging markets on currency policies.

'I don't think (currency appreciation in Brazil and elsewhere) is driven either by the Fed or primarily by Chinese policies,' Mr. Zoellick said, referring to the U.S. Federal Reserve Board. In an interview with The Wall Street Journal ahead of the World Bank and International Monetary Fund spring meetings, he added, 'The greatest driver (is) fundamental recovery and growth dynamics.'

The Brazilian real and others currencies are appreciating rapidly, Mr. Zoellick said, because growth in emerging markets is so much faster than it is in wealthy nations. Capital flows to the faster-growing nations, boosting the value of their currencies, he added.

Debate over currency policy is likely to be a big part of the Washington gatherings, which include meetings of the G-7 industrialized nations and the broader Group of 20 nations. Some developing nations blame the ultra-low interest rates of the Fed on the one hand and China's undervalued currency on the other hand for producing a flood of capital into their countries, which is hard for them to manage.

Mr. Zoellick urged China to 'move toward a flexible exchange rate and appreciate its currency.' But he said the pace and depth of currency appreciation depends on China's ability to fundamentally shift its growth model so it depends less on investment and exports and more on domestic consumption. China's leaders have recognized that such changes are in the country's long-term interest, but the government has made little progress in making the transition.

Mr. Zoellick said the World Bank is working with Chinese authorities to help make structural changes. The organization is offering advice on pension systems, so consumers won't feel they have to save so much for their old age, and urging China to change its dividend policy for its state-owned companies, so the firms pay more of their profits to the government. That money could be used to fund social programs, many analysts have urged.

Unless China feels that its economy depends less on a cheap currency to help exporters, Mr. Zoellick said, it will be wary of letting its currency appreciate faster.

'Rather than endlessly debate (the issue of Chinese exchange rates), one wants to explain to China and others the benefits of flexible exchange rates and independent monetary policies, including dealing with things like inflation,' he said. 'Then you can encourage the structural change that they think is an important prerequisite' for freeing up their currencies.

Mr. Zoellick also argued that the G-7--the U.S., Canada, Britain, France, Germany, Italy and Japan--could help set standards in currency policy that ultimately would be adopted by emerging markets. 'The G-7 should have an understanding or norms' on currency policy, he said. 'They should agree to have flexible exchange rates and not intervene unless they all agree' to do so, as occurred during the recent intervention to halt the rise in value of the yen.

'Then they can try to move emerging markets toward (those norms),' he said, recognizing the process will take some time.