G20 FINANCE leaders bent to China’s will as they reached a compromise deal on new procedures to measure economic imbalances between the world’s major powers.

Concerned about the fragility of the nascent recovery of the global economy, the adoption of new economic indicators is the first step towards a new system in which countries with excessive imbalances would be asked to adopt corrective measures.

But Chinese negotiators succeeded in blocking proposals to include real exchange rates and currency reserves as key indicators in the assessment process. The development underscores the increasing political clout of China, whose economy recently outpaced Japan to become the world’s second largest after the US.

For years, the country has resisted western demands to substantially revalue its currency to help rebalance global growth. As the meeting finished up on Saturday evening, US treasury secretary Timothy Geithner pointedly said the yuan remains substantially undervalued.

The inclusion of foreign reserves in the assessment criteria could have provided a basis for findings that China – or any other emerging economy – was not importing enough from trading partners.

Beijing was supported by Brazil, Russia and India, the developing countries who with China form the so-called BRIC group.

“Reserves have been dropped,” said French finance minister Christine Lagarde, chair of the meeting.

“It wasn’t easy, there were obviously diverging interests, but we were able to reach a compromise on a text that seems to us to be both balanced and demanding in its implementation.”

The agreement to examine public and private debt, fiscal deficits and private savings when assessing imbalances comes as the French G20 presidency tries to develop a new system to co-ordinate global economic policy.

According to Ms Lagarde, the targets are not binding. Via a mutual assessment process in co-operation with the IMF, they would contribute to “indicative guidelines” for the alignment of policies to reduce economic distortions.

The basic aim is “to test economic policies and determine to what extent they are favourable for all countries together and not just the basis of domestic economic policy”.

The examinations will also take account of the trade balance and net investment income flows and transfers, while “taking due consideration” of exchange rates and fiscal and monetary policy.

Ms Lagarde said the meeting took note of inflationary pressures and “excessive volatility” in raw material costs, something France has vowed to tackle during its year as chair of the G20 group.

European Central Bank chief Jean-Claude Trichet said inflationary pressures due to oil, energy and commodity prices “are to be taken seriously.”

In a communique, the G20 countries took note of dangers to the turnaround of the world’s economy. “The global recovery is strengthening, but is still uneven and downside risks remain,” they said.

“While most advanced economies are seeing modest growth and persisting high unemployment, emerging economies are experiencing more robust growth, some with signs of overheating.”

Global leaders fear such pressure could compromise the slower-paced recovery of the US and that of Europe, which is still struggling to contain the euro zone sovereign debt crisis and correct weak public finances in a succession of single currency countries.

However, Mr Geithner expressed confidence in the determination of the European authorities to resolve such problems and strains in the banking system.

“European leaders have made it clear they will do whatever it takes to make sure the nations affected and their banks have access to financing as they implement these very challenging, multi-year programs of fiscal and financial reform.”

Mr Geithner criticised China’s currency policy. “There is broad consensus that the major economies, not just Europe, Japan and the United States but also the large emerging economies, need to allow their exchange rates to adjust in response to market forces.

“Since June 2010, China’s authorities have allowed their currency to appreciate against the dollar at a pace of about 6 per cent a year in nominal terms, and more than 10 per cent a year in real terms, given faster inflation in China than in the US.

“Nonetheless, China’s currency remains substantially undervalued, and its real effective exchange rate – the best measure to judge its currency against all of its trading partners – has not moved much in this latest period of exchange rate reform.”