China in the aftermath of the G20 summit

peterdrysdale

Emeritus Professor peter Drysdale

By Peter Drysdale, Emeritus Professor of Economics, Head of the East Asian Bureau  of Economic Research and Editor-in-Chief of East Asia Forum in the Crawford School  of Public Policy at the Australian National University.

Prof Drysdale recently gave a public lecture at the University of Sheffield as part of the School of East Asian Studies Seminar Series on the topic of China and the G20. You can listen to his lecture here.

Among all the myriad agendas that have attached themselves to the G20, the key question after the Hangzhou meeting is whether China added strategic value to the world’s premier economic dialogue.

It’s not the divisions over objectives and values that were the problem. It was that the process has been, almost inevitably, been hijacked and side-tracked from the main strategic tasks that face the global economy and international community today. Printing and spending government money in various ways to pump up economic activity after the global financial crisis was relatively easy compared to addressing the present malaise that faces the global economy today. Reliance on monetary policy to stoke the global economy is no longer a practical option.

The global economy is in serious trouble, with problems that run even deeper than the global financial crisis. Though they are less immediately discernible, their destructive power will be more long-lasting if they are not addressed now.

The world is at a major turning point, with Brexit in Europe and the political mood in the United States, still the largest economy on earth, leading industrial countries decisively away from globalisation and into retreat from trade and economic expansion. The trends are already clear, with shrinking global trade and stagnation gnawing at the heartland of the industrial world. These are harbingers of longer term structural decline in the industrial world unless there is collective global choice to reverse the malaise.

Unlike the financial collapse, this new global economic sickness is more difficult to discern but no less palpable. It is a disease that is taking hold and will wreak its insidious havoc over a decade, not in the weeks or months immediately ahead like the global financial crisis did when it hit global financial markets. The G20 was at its most successful in responding to the financial crisis in 2009. At Hangzhou, leaders had to recognise the global economy is staring at the prospect of deeper abyss now and bring a sense of urgency — if not crisis — to their deliberations.

Europe will be pinned down by what Brexit has done to it for years and years and, whether Hillary Clinton takes the US presidency or not, Donald Trump has mobilised forces that could take the United States down a similar road.

To be judged successful in the long term, Hangzhou had to lay the foundations for dealing with the powerful undertow of anti-globalisation. Dealing with that was the principal challenge that G20 leaders faced in Hangzhou. If they had squibbed it, the Hangzhou summit would have been a failure. Indecisiveness at Hangzhou would have complicated China’s carefully choreographed entry into a lead role in running the global economy and received harsh reviews down the eternity of history.

On this key issue and others, China’s leadership was more adept than many would have judged likely. Both Presidents Xi and Obama, as well as other leaders, addressed the anti-globalisation movement head on, and brought the damage that the slide into trade protectionism and retreat from openness to investment is doing to global trade and the global economy to the front of the global agenda after a struggle with putting it there on the way towards the summit.

Real power in global governance requires intellectual input into the international financial and economic agenda, policies and rules — the effective exercise of “soft” power’. This was particularly the case at Hangzhou. It is clear that China still lacks the capacity alone to make that kind input into global affairs. But what paid off demonstrably in China’s management of the Hangzhou G20 summit was its huge effort at international consultation in the lead-up to the summit, and its capacity to absorb and respond effectively to collective input in forging a global consensus that was more than moderately proactive.

That the world’s two superpowers and largest emitters announced their ratification of the Paris accord jointly just prior to the G20 summit, demonstrates that China can work effectively together with the United States despite their differences and also breathed new life into the process as the platform for global cooperation and coordination of global leadership. This brought the strategic goal of mitigating climate change back to centre stage at the G20. It was in the middle of the G20 held in Australia in November 2014 that the China and United States announced a major deal to curb greenhouse gas emissions and work together on the issue — to the embarrassment of its host, climate change sceptic, prime minister Tony Abbott.

There were three other key issues on which the Hangzhou summit made some progress: the ability to progress the G20 growth agenda (this is all about what in China is called supply-side reform); the ability to achieve something ambitious on trade and investment (this is about reforming the trade system and building a system we do not yet have to secure investment openness); and the ability to deliver tangible actions to strengthen the global financial system against crisis.

The fundamental purpose of the G20 is to set the strategic direction. The worry has been that the G20 is drifting away from this role and becoming more like an international think tank than the steering committee for the global economy that it was set up to be. The G20’s deliverables are increasingly bureaucratic, focused on commissioning reports, holding meetings, developing strategy papers, publishing high level principles and high level policy documents than on setting strategic direction and getting it rolling through global agencies and instruments.

The G20’s fundamental comparative advantage is in its ability to reform global governance and developing consensus on steering global economic decision making. Its role is to look at the big global strategic picture, not get bogged down in the bureaucratic detail.
‘Despite global economic difficulties’, says Wang Wen from China’s lead G20 think tank, ‘China has maintained a high growth rate and has managed to consolidate the foundation of its real economy. Its long-term economic growth and potential in sustainable growth suggest that China has unique experience in promoting development’.

The most important asset that China and most of Asia brought to the G20 meeting at this time, of course, was its own continuing commitment to open economic growth and the priority that is attached to supply-oriented economic reform as the driver for growth and achieving economic potential. China has a key responsibility as the world’s largest trader for attending to the vulnerabilities in the global trading system. The strength of global trade is now tied intimately to securing the openness of the global investment regime. Hangzhou, above all, needed to begin the crafting of a new agenda for the global trade and investment regime.

The global financial safety net also remains a mess. It is too small and fragmented to deal with a large crisis and its increased fragmentation is posing a number of serious challenges. Cooperation between the IMF and regional financing arrangements is a first step. And bringing China into the swap and other cooperation arrangements among the majors is a crucial second. The first issue was dealt with at Hangzhou; the second issue is yet to be.

The Chinese way is to think big strategically. Hangzhou would not have been as successful as it was without this essential Chinese ingredient together with a preparedness to forge shared leadership.

There are many anxieties and uncertainties out there in the world about China and its future.

  • China’s international economic presence has suddenly become big; people all around the world have to deal with the China factor because it permeates every major issue of the day, whether they know terribly much about it or not
  • What China has to deal with in keeping its economy on course to deliver moderate affluence to the Chinese people in the next decade or two is big: no country has ever had to effect a set of reforms under such intense international spotlight in the global market of this scale and complexity ever before.
  • The Chinese political system is different from that the countries which are already rich. Is it capable of delivering the goods, and how can you deal with it if it does – or for that matter if it doesn’t?
  • No country has trod this path before without presuming to use its economic power to carve a slice of global political power, with perhaps the exception of Japan second time round. Every move China makes in the political sphere, in the South China Sea or in setting up the AIIB seems open to interpretation that China aims to overthrow the established political order.

These anxieties are major undercurrents in thinking about China in the established industrial powers. But China, more now that perhaps even a few months ago, despite its structural economic slowdown, is still growing more than twice the rate of the world economy and appears like an island of economic stability in a global sea of economic troubles. Its leadership in the year of its G20 presidency has modestly reinforced that image, though there is still a long way to go.

Continuing to put its own commitments to economic and political reform on the table; moving forward on open trade and investment; committing to deeper financial reform and capital account opening (as well as concomitant political reform); undertaking to be a lead partner in a new global trade and investment agenda; and extricating itself from its overbearing projection in the South and East China Seas will all be critical elements in building momentum in success going forward.