NANJING, China—Top officials at a meeting of the world's major developed and emerging economies offered starkly different views on exchange rates and other elements of the international monetary system, underlining the challenges facing efforts to find a new global financial architecture.
Highlighting the tensions overshadowing the one-day meeting of Group of 20 officials in the eastern Chinese city of Nanjing, U.S. Treasury Secretary Timothy Geithner emphasized the importance of flexible exchange rates in prepared remarks that were a thinly veiled criticism of China's currency policy—which Beijing had insisted shouldn't be discussed at the meeting.
Participants at the gathering voiced agreement that the International Monetary Fund's role should be larger, that capital controls can be useful in some circumstances, and that China's currency should eventually be included in the IMF's special drawing rights, or SDR, a synthetic currency that some see as an alternative to the dollar.
But the officials, who also included French President Nicolas Sarkozy and Chinese central-bank governor Zhou Xiaochuan, differed widely on the means and speed for achieving those goals, and on which elements of the global financial system most need change.
G-20 finance ministers will next meet in Washington on April 15, a day ahead of the IMF spring meeting. But the continuing disagreements raise questions about the effectiveness of the group in plotting common action after the fear of a global financial collapse has faded. G-20 critics have warned that the group could devolve into another international body that is long on talk but unable to produce concrete results.
Mr. Geithner didn't specifically mentioned the yuan—whose value China closely manages—but he argued that flexible exchange rates help countries better absorb shocks, and that the tension between flexible currencies and those that are "tightly managed" is "the most important problem to solve in the international monetary system today."
The Treasury secretary's remarks, on one of the thorniest issues dividing the world's two biggest economies, reflected disagreement that has clouded the Nanjing gathering since its inception. China reluctantly agreed to Mr. Sarkozy's request to co-host the meeting, a hybrid between an official meeting of the G-20 and an academic seminar that the French president hoped would further his country's agenda as head of the G-20 this year. But Beijing sought to minimize the gathering's importance, holding it far from Beijing, limiting it to a single day and insisting that its own widely criticized exchange-rate policies weren't up for discussion.
The U.S. and other governments have long complained that China unfairly keeps the yuan undervalued to benefit its exporters, and asserted that the policy aggravates global trade and capital imbalances. China has let the yuan rise just 4.2% against the dollar since ending its de facto peg in June—far slower than critics want.
The G-20 has made "global rebalancing" a central goal—meaning trade-deficit countries like the U.S. save more and import less while trade-surplus countries like China do the opposite. But, in practice, that has meant the group has become the central forum for pressuring China to let its currency appreciate faster.
Beijing argues that U.S. policy—in particular the Federal Reserve's practice of buying Treasury debt to try to keep interest rates down, known as quantitative easing—has weakened the dollar and sent big capital flows into emerging markets that are fueling inflation.
Ahead of Thursday's meeting, a prominent Chinese government academic blasted the Fed's policy and the dollar's global dominance, saying they are the "significant problems" in the international monetary system. Xu Hongcai, a professor at the China Center for International Economic Exchanges—a state-run think tank that was a co-organizer of the Nanjing gathering—said dollar dominance has aggravated financial crises, and he blamed Fed policy for excess global liquidity and inflation.
Chinese officials speaking Thursday avoided addressing the currency issue directly, instead issuing relatively vague calls for gradual change to the global system.
Mr. Zhou, the People's Bank of China governor, said the international community shouldn't focus on quick fixes, in what appeared to be a dig at U.S. pressure for faster yuan appreciation. "China and emerging economies have a strong hope that we can look further than the short term, and use the medium- and long-term view to start to adjust the global economy," he said. Vice Premier Wang Qishan, the top Chinese official at the gathering, said Beijing will work with others toward "a more equitable global monetary system."
Mr. Sarkozy repeated calls for the G-20 to agree on a timetable for the inclusion of the yuan in the basket of currencies underlying special drawing rights, which France sees as a means to help wean the world off the dollar and to promote a stronger, more freely convertible yuan—a central goal for France's G-20 leadership.
Mr. Geithner said the U.S. supports changing the composition of SDRs to include "currencies of large economies heavily used in international trade and financial transactions." But he listed conditions that would make including the yuan impossible without deep reforms that China is unlikely to accept, saying countries whose currencies are included should have "flexible exchange rate systems, independent central banks, and permit the free movement of capital flows," Mr. Geithner said. The SDR basket is now made up of the dollar, the euro, the pound and the yen.
China's policy makers have said they will gradual increase the yuan's flexibility and open further to international capital flows, but China's central bank operates under the strict control of the Communist Party leadership, which has ultimate say over all key economic policies.
Mr. Zhou said Thursday that China isn't in a hurry to add the yuan to the SDR basket but that it will likely happen "sooner or later." Li Daokui, a Chinese economist and adviser to the People's Bank of China, said the international community shouldn't link yuan's convertibility to SDR changes.
Chinese officials seemed "a lot more circumspect about including the yuan in the SDR basket," said Eswar Prasad, former head of the IMF's China division, who participated in Thursday's discussions. "They seem to be worried it will put more pressure on them to move towards currency convertibility than they would like."
Several participants Thursday said there is growing consensus among G-20 members that countries should be able to use capital controls under certain circumstances.
"Today, we see them more as part of the toolkit, although only in specific circumstances and not, of course, as a substitute for good macroeconomic policies," said Dominique Strauss-Kahn, managing director of the IMF, which in the past has resolutely opposed capital controls.
Mr. Geithner called for the IMF to advise nations on "the appropriate use of prudential tools, rather than capital controls, to limit the risks that large capital inflows imperil domestic financial stability."
Mr. Sarkozy argued the IMF should have powers monitor members' capital accounts, which measure investment flows, and not just their current accounts, which mainly measure trade, as is the case now.
But developing countries—in particular, Brazil, according to one participant—expressed wariness of overly rigid rules for using capital controls, wanting to maintain a freer hand.
Rintaro Tamaki, Japan's vice finance minister for international affairs, said he had proposed giving the IMF a new mandate for financial stability. But he said there was "quite persistent opposition" to the idea of expanding the Fund's role as a global lender of last resort because of concerns that it would create moral hazard by making countries think they could take excessive risks and still be bailed out.
Mr. Geithner argued that the IMF should be given greater freedom to publish its analysis of countries' exchange rates and imbalances, something China has resisted.
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