In early August and in September, G7 governments met and pledged to take the necessary measures to support financial stability and growth, and reassure fragile financial markets.[i] The financial press reported that market participants and economists dismissed the statements as vacuous and insufficient.[ii] The view was that global measures that do not include the major emerging economies — in particular China — are meaningless.
Some have asked, rightfully, what happened to the G20? Commentators have suggested that the French presidency was preoccupied with trying to defend its domestic financial sector from overexposure to European debt, and lacked the political wherewithal to rally the G20. Perhaps it has been easier for G7 countries to reach out to their usual partners. Brazilian officials have suggested that the problems lie primarily with the G7, and it’s best to leave it to them to resolve the issues — but can they?
In late August, French leaders did visit Beijing to work on some major “announceables” for the Cannes summit in November, and Chinese authorities reciprocated by setting up a special task force. There may still be some big announcements to come at Cannes involving China. More recently, European leaders have approached Beijing to help with their debt bailouts by buying state bonds and providing strategic investment.
Where has China been during the worsening global financial situation?
China has continued to buy US debt and has increased its purchases of European debt. At the same time, Beijing has continued to fend off external pressure to change its exchange rate regime, and has maintained its focus instead on reorienting its growth model toward increased domestic consumption and public spending on social welfare systems. For some in China, this is enough.
China has not made dramatic moves — this time — to shore up the world economy. If we recall, when the global financial crisis hit last time, China worked in concert with the advanced economies to lower interest rates. Beijing also contributed to a de facto global stimulus package in late 2008 and early 2009, which helped avoid a worldwide depression.
The strongly worded Chinese reactions to the US fiscal debate and urging to European countries to get their financial house in order, leaves little question about where China sees the source of the problems.
Remarks in China Daily, are revealing: “Even if the United States and the world economy do ride out the current game of brinkmanship relatively unscathed, Washington needs to conduct an in-depth self-examination” about “how U.S. politicians can improve their mindset so that they will care at least a bit more about the rest of the world when handling domestic affairs with global reverberations.”[iii]
China’s leadership, if they so choose, 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.
Chinese leaders have, understandably, told European governments that they want greater clarity on the depth of the financial problems and to see a clear road map, before they will make any dramatic moves in bailing out Europe.
However, time is ticking for China’s rulers. Leaving aside domestic challenges, when they look out to the horizon, the unfortunate reality is they also see a world that is wracked by growing economic problems and socio-political instability.
Despite their preference to “lay low, and conceal brilliance,” China’s senior leaders are slowly coming to realize that they have to do more on the global economic stage.
International realities are calling on China to become more directly involved in restoring international financial and economic stability, and more important, to be more active in stimulating global growth.
China can do so through international redistribution of its accumulated surplus by, for example, increasing its foreign investment in both deficit-ridden economies and the developing world.
China’s official news agency has suggested recently that China, with its vast foreign exchange reserves and experience in building infrastructure, could help the US renew outdated roads, bridges and railway systems.
It also said that Chinese money can do a lot more than buy European government bonds — that together, China and Europe can devise initiatives in financial services, technological innovation, renewable energy and a low carbon economy.
Beijing could also step up, diplomatically, by offering to host the next G20 leaders summit after Mexico in 2012 — and thereby inject some life back into current global coordination efforts.
For the West — facing a growing crisis of financial confidence — the time has also come to shift gears, and consider going beyond pushing the single message that China must fundamentally change its exchange rate regime. Western economies have much to gain if they could engage China in “doing more” by asking Beijing to contribute more directly to stimulating global growth and jobs creation, through increased 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.
A shortened and earlier version of this commentary was published by the Financial Times.
Endnotes:
[i] Daniel Flynn and Annika Breidhardt. “Marseille lays bare G7 differences and lack of policy room.”Reuters, September 10, 2011. Available at: www.reuters.com/article/2011/09/10/us-g-idUSTRE7880S620110910.
[ii] Alan Beattie and Joe Leahy. “G7 pledge on stability gets cool reception.” Financial Times. August 8, 2011. Available at: www.ft.com/intl/cms/s/0/09fdb37e-c1dc-11e0-bc71-00144feabdc0.html#axzz1VFbry5Ah.
[iii] “G7 urges measures to bolster stability, growth.” China Daily. August 8, 2011. Available at: www.chinadaily.com.cn/world/2011-08/08/content_13067279.htm.