As the world economy slips into financial turmoil, governments around the world are looking for answers. Some are looking at new solutions. Italy is reportedly the latest European country to turn to China to help rescue it from financial crisis by making large bond purchases and strategic investments in its companies.
Buying bonds is fine in the short term but China must become much more engaged internationally if the crisis is to be resolved.
Where has China been during the worsening global financial situation? It has made no dramatic moves – this time – to shore up the world economy. Moreover, strongly worded Chinese reactions to the US fiscal debate leaves little doubt as to where Beijing assigns the blame.
Beyond directing attention back onto the US, how has Beijing responded to the turmoil on financial markets? China has continued to buy US debt and increased its purchases of European debt, while warning foreign officials about avoiding reckless monetary policy. At the same time, Beijing has continued to fend off external pressure to change its exchange rate regime and re-emphasised its promise to reorient its growth model towards increased domestic consumption and public spending on welfare.
China’s leaders can take some satisfaction from their success in resisting what they see as “unfair” US and G7 attempts to deflect the burden of adjustment for bilateral trade imbalances onto China.
But why hasn’t China been more involved in stabilising markets? For Beijing, the past three decades have been a ‘golden age’, in which China has made enormous gains simply by playing by the rules of others, by riding a system that was established and maintained by others – and by loosening state controls. China has done extremely well by keeping a low global profile and focusing on its own developmental needs. Nor were the existing powers looking to share global leadership with China.
However, it’s not all looking good for China’s rulers now. Leaving aside their growing domestic challenges, when they look out to the horizon, the unfortunate reality is that they also see a world wracked by growing economic problems and socio-political instability. Ma Delun, vice governor of the central bank, recently told a financial forum in western China that the challenges of the long-term fiscal sustainability of the United States, Europe’s worsening debt problems and Japan’s troubling economic performance were further compounding global financial instability. Beijing policy makers are not counting on major foreign markets to recover quickly.
China’s leaders must be feeling somewhat lonely. Despite their inclination to “lay low and conceal brilliance,” they are slowly coming to realize that they must become more engaged internationally.
International realities are calling on China to do more to help restore global financial stability and, even more important, to stimulate global growth.
When buying bonds, Beijing should push European countries toward shared solutions – such as eurobond options – and encourage budgetary coordination across the eurozone. This would help avoid moral hazard among some European countries which may be looking to play China off against the stronger EU states. Beyond buying bonds, China can help stimulate growth by redistributing its accumulated surplus and by increasing Chinese outward investment both in deficit ridden economies and in the developing world.
Beijing could also step up, diplomatically, by offering to host the next G20 leaders summit after Mexico 2012 – and inject some life back into global coordination.
For the G7 countries, facing a deepening crisis of financial confidence, the time has also come to shift gears and go beyond pushing the single message that China must change its exchange rate regime. Western economies have much to gain if they enhance their calls for China to “do more” by asking Beijing to contribute to global growth through investment.
Such a shift would bring not only needed adjustments in global benefit sharing but also pave the way for healthy changes in global power sharing.
Gregory Chin is chair of the China Research Group, director of global development at The Centre for International Governance Innovation and a professor of political economy at York University, Canada.