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The G20 was supposed to be the premier forum for managing the global economy when the world’s biggest economic problem is a chronic lack of demand in China.
It is therefore very unfortunate that President Xi Jinping has decided not to attend this weekend’s summit in New Delhi, instead sending Premier Li Qiang there and in the process highlighting how limited options other countries will have if China tries to address its economic challenges Rely on demand from the rest of the world. Since Xi Jinping will not be present to address the issue, other world leaders should consider how they would handle the situation in his absence.
As Brad Setser of the Council on Foreign Relations puts it pointed out, China’s economic weakness has little direct impact on other advanced economies because China makes a lot for itself and buys very little from other countries. Only a fraction of U.S. output reflects the manufacture of goods and their export to the world’s other economic powerhouse.
The question is not causing a slowdown elsewhere, but what happens if China tries to grow through exports, as it did in the 1990s and 2000s. China’s current account surplus already accounts for 2% of its massive economy. Problems arise if Beijing tries to raise the value of the yuan, especially if it does so through policies designed to keep the value of the yuan lower.
Today, the benefits of such policies to China are questionable. Given the size of its economy and the size of its manufacturing trade surplus, it’s hard to see how foreign demand could contribute big enough to offset a faltering housing market.
However, the focus on exports fits with Mr. Xi’s goal of strengthening China’s high-tech industries and his aversion to stimulus aimed at domestic consumption. Encouraging Chinese citizens to travel domestically rather than abroad is an example of how policy can divert demand from other countries.
Even if the shift in demand to China is not enough to drive strong domestic growth, it could still disrupt the world economy. Most obviously, if China makes its products more competitive, they will displace production elsewhere.
More subtly, current account surpluses must be offset by capital flows. Before the 2007-08 financial crisis, the recycling of Chinese surpluses led to easy financial conditions globally, just as Germany exported savings to countries like Greece as part of the 2011 eurozone crisis. This phenomenon in the global economy is not one that anyone should be eager to revisit.
So what can the rest of the G20 do besides urging China to create more demand itself? There are no easy answers.
One thing to note is that China’s growing surplus is only superficially attractive. The economic climate of the mid-2000s was welcome: it left Western consumers living beyond their means even as it accelerated the decline of manufacturing. For now, a deflationary push from China will help address the rising cost of living. This will alleviate a source of pain for many Western politicians.
However, compared with 20 years ago, there should be more consensus in the international community against China’s huge surplus. China’s economy is bigger and richer than it was then. Japan and Germany, long prospered by exporting luxury cars and capital equipment to China, now face a meteoric rise as car exporters. The rest of Asia competes with China in export markets, so outside of pure commodity exporters most countries face some sort of stake.
If the U.S. did not withdraw from economic cooperation itself, as it did from the Trans-Pacific Partnership trade agreement, it would have more of a position to make these points. With U.S. diplomacy now so focused on military and security competition with Beijing, any opposition to Chinese economic policy would be viewed with suspicion by many other countries.
That leaves the question of tools. A major G20 achievement was agreement to avoid devaluing currencies for competitive purposes, and maintaining that consensus in New Delhi is crucial. Yet there are no enforcement mechanisms even for outright currency manipulation, let alone more nuanced policies that push up current account surpluses but are imperceptible, let alone controversial.
This is a fundamental flaw in the global economic system, dating back to the establishment of the Bretton Woods system after World War II: countries with persistent current account deficits will eventually be forced to adjust through currency crises, but there is no mechanism by which to do so. Disciplining countries with persistent surpluses. However, one country’s surplus must be another country’s deficit.
Deep reform and collaborative management of the world economy will require the joint efforts of the United States and China—and that seems more remote than ever today. What world leaders can do at the G20 – to everyone, not just China – is to signal that they oppose policies that rely on demand from other countries to stabilize their domestic economies.
robin.harding@ft.com
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