The question looms large as the G-20 prepares to meet on November 15 in Washington: What will China do? The meeting is widely expected to provide a roadmap for managing the global financial crisis. The road-map is likely to spell out a new global financial architecture.
Whatever be the shape of this construct, it?s likely to assign a key role to China.
An interesting aspect of the current crisis management is the increasingly larger role being visualised of Asian economies. Asia?s rising importance is a reflection of the rapid changes taking place in the global economic balance of power. Asian economies, led by China, are aggressively acquiring key financial assets. The meltdown has precipitated transfer of ownership in financial assets from the US and Europe to Asia. This will influence the outcome of the G-20 meeting. China?s views will be particularly important along with those of Korea and India.
Most G-20 members broadly agree on the steps to be taken. Confidence in financial market needs to be restored urgently. This calls for greater availability of resources with financial institutions. At the same time, lenders must pick up these resources with consummate ease and invest in expansive projects. Resource availability will improve as governments inject more funds in financial systems. Lenders will come forward as interest rates drop further. Projects too, shouldn?t be a problem. The world, particularly Asia, still requires a lot of infrastructure.
Many expect China to kick-start the expansion. Jeffrey Sachs not only wants China to invest in housing and infrastructure but also extend currency swaps to ASEAN and rest of Asia. He has urged China, Japan and Korea to trigger a coordinated expansion in Asia. The G-20 is expected to zero in on Asia as the ?hub? for recovery. China will be expected to figure at the core of the hub.
China should look forward to playing a key role in the recovery process. This is consistent with its enhanced importance in the global financial order. A proactive role in crisis management will help it in expanding its portfolio of key financial assets. However, there could be some problems in this regard.
First, it has to impart a completely different stand to its current policies. Like most other emerging markets, China was following tight monetary policies till recently. These were meant to control inflation and overheating. But priorities have changed drastically. Domestic price stability is no longer the main goal of monetary policy. The latter now needs to promote credit. Such a quick turnaround may not be easy. Second, China would be wary of extending swaps and credit lines elsewhere. Its banking system continues to hold non-performing assets produced by bad loans. Despite withdrawal of loan limits, Chinese banks may not be eager to lend to businesses with weak outlooks. There are uncertainties over whether there will be further FII withdrawals and dips in reserves in other Asian markets. China may not be willing to park its surpluses in countries with weak fundamentals.
Third, China will look hard at the ability of its economy to generate new growth momentum. Latest quarterly estimates put Chinese GDP growth at 9%. This is the lowest for the Chinese economy in the last five years. One of the main reasons behind the dip is a drop in exports. Slump in US and European markets are choking off export demand. The biggest hits are being taken by volume-driven low-cost exports. This Christmas is likely to see much lower sales of Chinese toys. Sagging property prices are also pulling down investments. As real estate cools off, envisioning new investment plans might be difficult.
The international community will urge China to use surplus reserves for activating infrastructure expansion. For China, this could be a double-edged sword. It would be happy to lead global financial recovery and steer the process. But giving up large chunks of reserves might reduce its ability to acquire more assets down the line.
The G-20 is conscious of China?s influence on the global financial order. This is unlikely to go unchallenged. Some members, particularly the US and European countries, might wish to highlight China?s role in accentuating global imbalances. The main issue will be China?s pegged and undervalued exchange rate. The US and Europe may argue that the exchange rate has been instrumental in generating China?s trade surpluses with major partners and creating global trade imbalances. They may press China for discontinuation of its exchange rate policy. They might be prepared to trade this off against the prospect of China picking up more American and European financial assets.
The author is a visiting research fellow at the Institute of South Asian Studies in National University of Singapore. These are his personal views