G20: China takes on the west
With its confidence boosted by the relative success of its stimulus package, China is predicting that it will lead a global recovery
Jonathan Fenby
guardian.co.uk, Wednesday 1 April 2009 12.00 BST
With France and Germany at loggerheads with the United States and Japan, and Britain desperately trying to find a middle ground, the G20 meeting in London appears an all-too-accurate reflection of the problems rich nations have in co-ordinating their response to the global crisis. In another way, too, the summit echoes one of the big gaps in managing the world economy – the co-option of China into decision making.
While he found time to go to Latin America as well as shuttling round Europe, Gordon Brown did not manage to make it to Beijing (or Tokyo or New Delhi, for that matter). Given that China is now the world's third-largest economy and has the biggest foreign exchange reserves, it might seem perverse for Brown to have left contact with China to diplomatic channels.
With the OECD warning that world trade is in freefall, the role of China is of obvious significance. Last November, it became the first nation to apply a major fiscal package in response to the crisis, a measure that has been followed by assurances from Prime Minister Wen Jiabao that more will be spent if necessary. As well as the November package, which will be devoted largely to infrastructure, Beijing has opened the monetary tap with hugely increased bank lending and announced measures to help 10 key industrial sectors.
As a result, the stance taken by the Chinese Communist party leader and president, Hu Jintao, in London, will be a key factor in determining whether the summit marks a real effort to confront the crisis. In particular, the meeting will show if the now fashionable formulation of "G2" – the US and China – holds water, given the synergy between the two nations.
Despite its economic rise over the last three decades, the mainland has not been a major player in global forums, largely by its own choosing as it pursued Deng Xiaoping's advice to keep its head down while it concentrated on growing richer as a result of the economic sea change he introduced 30 years ago. But this is now changing for three reasons that need to be taken into account at the London meeting.
First, while it is being hit hard by the slump in external demand and its own weak domestic consumption, China had not suffered the financial meltdown rocking the west. That is largely due to the fact that its banks were already state-owned, that they had not gone in for dodgy financial instruments, and that they have now opened the lending sluices to pour liquidity into the economy. They still have many faults, and may face a new wave of bad loans in a few years, but for the moment their balances have been strengthened and their loan ratios are low – and they do what the government tells them to.
Second, China is insistent that, while it still faces major problems in reviving economic growth, it is taking the lead in coping with the crisis through its stimulus package, even if the danger is that it does not sufficiently address the fundamental need to boost domestic consumption and improve the welfare system. The official forecasts from Beijing that growth will hit 8% this year may turn out to be propagandist whistling in the wind, but the confidence is there.
The World Bank reckons that 6.5% is more likely. Even that would be a sharp contrast to the performance of the west and Japan. Such growth may be achieved through short-term measures that do not address the mainland's longer-term need to rebalance the economy. But the plans – from more than 100 urban infrastructure projects in Beijing to huge railway developments including hundreds of miles of high-speed track and a major overhaul of the power grid system – are impressive.
Third, on the back of what has been announced since the launch of the stimulus package in November, China is making its voice heard in economic and financial matters as never before. It is not just that its leaders are speaking out, but that they are doing so in a much sharper tone than before. In Davos, earlier this year, Prime Minister Wen Jiabao delivered some hard home truths to the western financial world. What he said about the "unsustainable model of development, characterised by prolonged low savings and high consumption" was undeniable. What was interesting was that he said it at all, and in such a forum.
This month, Wen has been back on the charge, expressing his worries about the safety of China's US treasury bonds, echoed by senior monetary officials at the People's Bank of China. Visiting New York, a Chinese bank regulator has expressed concern about his country's dependence on the dollar through its US government securities. This week, the governor of the central bank, Zhou Xiaochuan, has criticised "governments that have not emulated China's decisive stimulus action" and published an essay calling for the expansion of IMF Special Drawing Rights as an alternative to the dollar.
Chinese officials say the crisis has shown that a unipolar world financial system is now untenable. The state newspaper, China Daily, has run a front page headline saying simply "Obama must do more to clean up dollar mess", while the Communist party newspaper People's Daily has been delivering regular tickings-off to the west for its misconduct. Today, its front page was a story about an economic planner forecasting that "China, not the US, will lead economic recovery".
Sixty years ago, when the Communists set up the People's Republic, Mao Zedong proclaimed that China had stood up again. For all the major problems it faces at home, the tens of millions of migrant workers thrown out of work, the flaws in the system and the uncertainties about the longer-term effectiveness of Beijing's medicine, the mood on the mainland appears to reflect the mixture of danger and opportunity contained in the Chinese word for crisis.
This means that Brown and company face a different kind of dragon at the London summit. If, as looks probable, the G20 proves incapable of producing any real solutions, the new China will still have to be dealt with. It can no longer be seen simply as a producer of low-cost goods reliant on its reserves of cheap labour and capital and on imported technology. The second generation of market-led economic reform will be, in many ways, more challenging than the first. That challenge will not only be for China, but also for the rest of a world in which the mainland is now an integral part.
