Thursday, September 23, 2004

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China and the G-7

Paul Blustein reports in the Washington Post about a very important invitation:

China will participate in a special meeting with the Group of Seven industrialized countries on Oct. 1, the U.S. Treasury said yesterday, an announcement that could herald Beijing's eventual membership in the elite economic club.

John B. Taylor, the undersecretary of the Treasury for international affairs, said one major purpose of the meeting will be "high-level engagement" with the Chinese on their currency policy, which has become a politically charged issue in the United States.

Beijing's longtime policy of fixing its exchange rate at 8.3 yuan per dollar is viewed by many economists, manufacturers and labor groups as giving Chinese products an unfair price advantage in world markets, and the Bush administration has come under criticism for failing to press the matter more aggressively.

Calling the meeting "a historic first engagement," Taylor said it will be held over dinner in Washington after a regular session of top G-7 policymakers on global economic issues. Jin Renqing, the Chinese finance minister, and Zhou Xiaochuan, governor of the People's Bank of China, will join counterparts including Treasury Secretary John W. Snow and Federal Reserve Board Chairman Alan Greenspan.

Asked whether the Chinese will be invited to future meetings or given full membership in the group, Taylor declined to rule either possibility in or out.

"The next steps will depend on how this meeting goes," he said. But he strongly indicated that more such meetings are likely, saying that they "are useful in making progress on economic reform" and that the currency issue "is a very natural one for the G-7 to discuss with China" given its implications for global trade and finance....

Following the end of the Cold War, Russia was also invited to join the group's annual leaders' summit, which was re-christened the G-8. Russian officials also attend some of the meetings of finance ministers and central bank governors, though they do not participate in the sessions dealing with matters such as exchange rates. Russian officials will not attend the meeting with the Chinese, Taylor said.

I suspect it will be quite some time -- if ever -- before China becomes a full-blown G-7 member. Having participated in the G-7 process while at Treasury, it involves an intense and ongoing consultation among officials up and down the chain of command. This kind of close working relationship doesn't always produce consensus, but there is a shared trust in the value of the consultation process. When the states in question are on the same page -- or at least pretty close to each other -- it's a powerful coordination tool.

The trillion-dollar questions are whether a) Chinese preferences are even close to the advanced industrialized states on global economic matters; b) Whether the G7 finance ministries are willing to trust their Chinese counterparts. You'd think I would have firm answers to those questions -- but I don't.

Still, the outcome of this meeting will be very interesting to observe.

posted by Dan on 09.23.04 at 12:41 PM


I always get the feeling of "be careful what ou wish for" when we start complaining about chinese exchange rates. In orser to sustain that rate, China very helpfully invests in our ludicrously spiraling national debt. When China decides it can no longer do this, things in this country are going to get really really ugly, as interest rates suddenly soar.

posted by: Appalled Moderate on 09.23.04 at 12:41 PM [permalink]

Dan, do you have any sense of the impact Hu Jintao's evident success in consolidating his authority will have on China's discussions with the G-7?

With all the news out of Iraq and elsewhere this hasn't gotten much attention, but it's a pretty important story.

posted by: Zathras on 09.23.04 at 12:41 PM [permalink]

For what is worth (not much). I'm pretty convinced that China will not be doing any meaningful revaluation anytime soon regardless of what happens at this meeting. It is not in China's interest and suddenly it is not so clearly in our interest either. I think central bankers around the table will probably agree that its better that the emporer keep his nice new clothes on for a few more quarters before anyone even broach the subject seriously.

posted by: Michael Carroll on 09.23.04 at 12:41 PM [permalink]

Complaints about the Chinese trade surplus bug me for fundamental reasons. They run a trade surplus with the world of about $10 bil., on total exports, and imports, approaching $500 bil.(including services). For practical purposes, that's balance. The fact that they run a big surplus with us and a corresponding deficit with the rest of the world is our doing. If we're going to run a monster savings/investment gap, we have to run a trade deficit with somebody.

posted by: Tony on 09.23.04 at 12:41 PM [permalink]

Bloomberg's William Pesek reported on as much last week in 'Asians Would Conquer Europeans With a G-4':

A more viable option, the FT quoted these authors as saying, would be for the G-7 to turn over its role to the G-4 and a council of 15 big economies that could set a broader global agenda. Such an arrangement, the study observes, would be more effective in tackling issues like financial supervision and relations between debtors and creditors.
It's becoming a farce to see G-7 officials gather without a Chinese voice. That's particularly true when economic officials meet on the sidelines of Group of Eight summits, which include Russian officials. Russia's economy may be too nuclear to be allowed to fail, but China's is more than three times bigger.
If the G-7 is averse to a drastic shakeup -- and odds are it will be -- it should at least add China to its meetings. There are valid arguments against it. For one thing, China's economy lacks transparency. For another, it's no coincidence that G-7 members are democracies. China's poor records on political representation and human rights may give pause to officials in more developed nations.
China's fast-growing economic weight is undeniable, though. It arguably has been a bigger contributor to global growth in the last couple of years than the U.S. Demand from China also did what officials in Japan couldn't for 14 years: engineer a recovery.
At the same time, a Chinese role in a G-4, or in the G-7 itself, would provide a framework for prodding Beijing to alter its currency policy. It also would allow officials from Washington to Tokyo to get a better reading on China's efforts to address the bad-debt problem in it banking system, reduce poverty and contain the rising threat of HIV/AIDS.
The G-7, the study's authors say, already is suffering from "diminishing legitimacy and representativeness." And its ability to recalibrate events in the global economy will dwindle further in the years ahead. Giving Asia a bigger role seems a rational way for the economic elites to stay potent.

Re: a yuan 'reval'...

It is usual to be polite to guests, but Group of Seven finance ministers and central bankers are unlikely to resist the temptation to gnaw on old bones when China joins them for dinner next week. US rhetoric against China's fixed exchange rate has quietened down, but the yawning trade deficit remains and the protectionist card always helps at election time. Indeed, the markets are pricing in a (slightly) increased likelihood of renminbi revaluation.
China was always going to look at its own needs first. The internal case for revaluation is now weaker than it was. At the beginning of the year the position appeared clear to traders: relentless investment and credit growth meant inflationary pressures were ripe for being tackled through currency appreciation. Since then, China has mostly used administrative fiat to temper overheating while avoiding a hard landing. It can certainly claim some success in this, though not yet victory.
Credit growth is cooling. That could fall further: tightening credit by fiat makes it harder to turn the taps back on afterwards. True, inflation ratcheted higher, but that owes much to food. From China's viewpoint, revaluation of the renminbi is currently unnecessary and would be disruptive at a time of banking reforms. That could make dinner conversation rather stilted. US finance officials can console themselves with the fact that their Chinese counterparts are still buying $11bn worth of US Treasury and agency debt a month and pick up the tab for dinner.
Like AM says, be careful what you wish for, for we rely upon the kindness of strangers... Er, guests.
posted by: Archer on 09.23.04 at 12:41 PM [permalink]

Do Canada and Russia and Italy and France really matter for these meetings? International trade for these countries (except for Canada's trade with the US) is tiny, their reserves are small, they have relatively little real impact on global capital or trade flows.

Why not the G5: US-Japan-China-Germany-UK?

posted by: lex on 09.23.04 at 12:41 PM [permalink]

Russia's economy may be too nuclear to be allowed to fail, but China's is more than three times bigger.

Eliminate oil and gas from each country's GDP, and China's economy is an order of magnitude bigger.

posted by: lex on 09.23.04 at 12:41 PM [permalink]

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