The credit crunch
Oct 30th 2008 | BEIJING
From The Economist print edition
In a whirl of financial summitry, China ponders how to wield its new-found clout
“WE SWIM together, or we sink together,” said the European Commission’s president, José Manuel Barroso, as Asian and European leaders gathered in Beijing for a summit on October 24th and 25th that was dominated by the global financial crisis. But China, proclaiming itself relatively unscathed, is in no rush to act.
The crisis is pushing the world’s fourth-largest economy, with the biggest foreign-exchange reserves, to the centre of global summitry. The prime minister, Wen Jiabao, has said China will “actively participate” in a meeting of world leaders called by George Bush to discuss the issue on November 15th. After the Asia-Europe meeting, or ASEM, Mr Wen headed to Russia and Kazakhstan, venue for a pow-wow of Central Asian leaders, for more talks with global finance at the forefront.
But for all its avowed confidence in its own future (“the impact is limited and controllable,” said Mr Wen), and its hinted aspirations for a world financial order less dominated by America and its dollar, China does not want to throw its weight around. At ASEM, the seventh such biennial gathering since 1996, China echoed Mr Barroso’s calls for concerted international action. But it had few ideas to offer on what this should involve. More regulation of the international financial system, Mr Wen unadventurously proposed.
The most concrete idea discussed by the Asian countries at ASEM was to set up an $80 billion fund by the middle of 2009 to help countries in the region deal with liquidity problems—a plan already agreed in May. The bulk of the money would come from China, Japan and South Korea, but details of how much each would contribute and how the fund would be managed have yet to be announced.
For China, with $1.9 trillion in reserves, and Japan, with nearly $1 trillion, the proposed amount is hardly massive. But the countries giving most are likely to wield most clout. The participating countries, which also include the ten members of the Association of South-East Asian Nations, are a fractious lot and have differing views, not least over the roles of China and Japan in Asia. Most of them are still far too touchy about sovereignty to agree on any meaningful pooling of it.
Chinese leaders told ASEM that their priority was to keep their own economy running smoothly. This, said Mr Wen, was China’s “greatest contribution to the world”. China’s economic growth has recently slowed, unusually, to a single-digit rate (9% in the third quarter) and many economists expect it to remain that way next year. But its buoyancy is a solace to Asian countries, several of which enjoy trade surpluses with China, and to the European Union, for which China is the fastest-growing market—albeit, as the Europeans like to point out when they complain about Chinese trade barriers, still no bigger than Switzerland. At least European moans about successive years of the yuan’s depreciation against the euro, making European exports costlier, have now been silenced by a reversal of the trend.
China seemed reluctant at first to let the financial crisis dominate ASEM’s agenda. But it lost nothing by doing so. It deflected attention from climate change, another big issue of concern. The Europeans want China to make stronger commitments to cut its carbon emissions. But if there were concerns at ASEM about backsliding by China as it focuses more on boosting growth and employment, participants were too well-mannered to raise them publicly (just as they were all far too tactful to complain that Taiwan, Asia’s fifth-biggest economy, is not even represented at ASEM because of China’s objections).
A shared sense of crisis also gave China a face-saving way of engaging in some fence-mending. Germany’s chancellor, Angela Merkel, who had riled the Chinese by meeting the Dalai Lama in September last year, was told by President Hu Jintao during a meeting on the sidelines that China’s relations with Germany were “good”.
That is as far as a Chinese leader will ever go towards saying that all is forgiven. Japan’s new prime minister, Taro Aso, was also cordially received despite his China-sceptical views, and despite his just having signed a security pact with India, which some at least in China will see as directed against their country. Japan and China agreed to set up a hotline. China and Vietnam agreed to finish marking their contentious land border by the end of the year.
But while China relishes the attention it commands at such gatherings, it is resisting the temptation to swagger in its dealings with America. There are concessions China would like. One would be an end to America’s de facto power of veto in the IMF. Recently it has been showing its pique at this by blocking publication of an IMF report examining whether China has been manipulating its exchange rate for the sake of trade advantage. A Chinese newspaper said America must give up its control over the IMF in return for China’s helping out in the crisis. But the government has not gone that far in public.
In Russia, with whose leaders China shares strong misgivings about America, Mr Wen did allow himself to say that developing countries should have a stronger say in a new financial system. He also said there was a need to “diversify” the global currency system, a tactful way of saying the dollar’s sway should diminish. But ASEM’s closing statement said the IMF should play a critical role in helping badly-hit countries. Its only caution was that this should be “upon their request”.
Albert Keidel of the Carnegie Endowment for International Peace, a Washington think-tank, says China does not want “to be seen as a problem for existing powers” at this stage of its economic development. But he also argued in a recent paper that there could be trouble ahead as recession in the West, which he believes China could ride out, stokes protectionist demands. The crisis could also result in China’s economy surpassing America’s earlier than expected—well before 2030, Mr Keidel suggests. Hard as Chinese diplomats try to wear a friendly face, this would be a psychological jolt for Americans.