G-20's Focus Shifts From China to Europe

Europe Dow Jones Newswires

A few short months ago, China's economic problems were fueling global panic in markets and drawing unwanted attention and rebuke by the world's largest economies.

Now, China's economic challenges have taken a back seat to more pressing geopolitical concerns among finance ministers and central bankers from the Group of 20 largest economies, allowing Beijing to return to the role it prefers: showcasing its growing clout on the world stage.

Britain's surprise vote to leave the European Union, Turkey's recent coup attempt, a series of horrific terror attacks, souring global growth prospects and threats of an Italian banking crisis are drawing the scrutiny of the world's finance chiefs. July's meeting in Chengdu stands in contrast to the last G-20 finance leaders' meeting, held in February in Shanghai.

Then, fears of a China-induced currency war and an economic meltdown in the world's second-largest economy left the host nation on the defensive. The Chengdu meeting, which ends Sunday, is the last major G-20 event before the financial group's September summit in Hangzhou.

"The Chinese economy is a 'stability anchor' for the global economy," Premier Li Keqiang said Friday ahead of the meeting of the G-20, which acts as the world's economic executive board. "Prophecy of China's economy heading for a hard landing is rarely heard now."

China continues to face questions about its currency policy and its steel exports. Foreign industries and their governments accuse the country of undercutting their markets unfairly by selling goods at prices below the cost of production. But those worries currently pale against much hotter fires elsewhere in the world.

"Brexit, the Turkish coup, and the U.S. elections have certainly helped redirect attention away from China," said Standard Life Investments Ltd. economist Alexander Wolf, adding that markets often have a "limited attention span."

The U.K. vote to leave the EU has cast a pall over the global economy, prompting the International Monetary Fund to downgrade its outlook and warn that growth could slip dangerously lower if U.K. and EU leaders don't quickly address investor concerns about their future together. The coup against Ankara's leadership revived political-risk worries in many emerging markets. And Republican presidential candidate Donald Trump's talk of hiking tariffs is spurring worries the U.S. could pull the world into a global trade war.

Meanwhile, G-20 officials say Chinese management of the economy has risen to the challenge. Beijing has recalibrated its communication on exchange-rate policy and monetary and fiscal policies after global markets shuddered under what many said last year were management missteps.

"China is undergoing an important structural transformation," said Italian Finance Minister Pier Carlo Padoan. Unlike earlier this year and last, no officials at the Chengdu G-20 mentioned China's economy as a fundamental vulnerability to the global economy, Mr. Padoan said.

"Any transition has bumps here and there, but the overall direction of the change has been positive," he said.

Beijing has taken active steps to restore confidence, repeatedly pledging since February not to depreciate the currency for competitive advantage. That helped allay fears of an imminent currency war.

The Asian powerhouse has also benefited from the Federal Reserve's decision to delay an interest-rate increase, allowing authorities here to gradually depreciate the yuan, also known as the renminbi or RMB, without alarming investors.

"China has committed to moving in an orderly way toward a more market-oriented exchange rate," a senior U.S. Treasury official said. "I've observed over the last months...a willingness to actually intervene to support the RMB to keep the RMB from depreciating more."

China in recent months addressed fears of a financial crisis sparked by a flood of capital leaving its shores by tightening bank supervision, cracking down on unauthorized foreign-exchange traders and making it more difficult for customers to exchange funds. Foreign-exchange reserves have declined by $30 billion to $40 billion a month recently, compared with a $514 billion decline in 2015 and nearly $100 billion in January.

Also fueling the world's more sanguine view of China, economists say: policy makers' view that more fiscal spending, greater stability of capital outflows and other moves to curtail volatility are important as global growth slows, issues that play to China's strength.

Beijing answered global concerns that its economy was slowing faster than it acknowledged by injecting a flood of money into the financial system, frontloading infrastructure spending and easing restrictions on its massive property sector. That saw second-quarter growth match the 6.7% rate in the first quarter, which was the economy's slowest pace since the global financial crisis.

The stimulus keeps China's economy humming along, allowing Beijing to claim economic stability and put growth on track to hit the government's annual target of 6.5% to 7%.

But, many economists caution, China may be buying growth now at the expense of output later.

The return to credit-fueled growth pushes up already-high corporate debt levels, fuels the problem of industrial overcapacity, blunts reform efforts and sets back efforts to shift the economy from state-directed growth.

"There is already a big problem of impaired loans which are on banks' books which have not really been dealt with," said IMF chief economist Maurice Obstfeld. "There needs to be a re-intensification of efforts in that area."

Economists warn medium-term risks in China are rising. Standard & Poor's Financial Services says corporate-credit quality is deteriorating faster than at any time since 2009. Corporate debt levels are estimated at 145% of gross domestic product, up from less than 100% of GDP in 2007.

Those levels, the IMF says, "are high by any measure."

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