China Hands Over G-20 Stewardship With Economy Stable, For Now

  • Policy makers assague global investors after a shaky start
  • Concerns remain over debt and buildup in leverage, IMF warns

China has turned from a shaky steward to a stalwart of the Group of 20.

When China assumed the presidency of the G-20 in December, its economy was faltering, the yuan was besieged by speculators and its stock market was in the midst of an unprecedented rout. The turmoil roiled markets across the world, helping wipe out more than $6 trillion in global equity value in the first two months of 2016.

As central bank governors and finance ministers concluded their gathering in Washington over the weekend, China’s renewed stability contrasted with tepid growth elsewhere and a populist backlash against globalization. Yet the lending expansion that’s underpinned growth has also led to a further buildup in debt and fueled a surge in housing prices in major cities.

“Despite its positive contribution to short-term growth, rapid credit expansion, revamped real-estate sector driven growth and slow SOE sector reform are raising vulnerabilities,” said Changyong Rhee, the Asia-Pacific director at the IMF, at a briefing in Washington. The IMF urged the government to cut off support to nonviable state-owned enterprises. 

The failure of some pledged reforms to live up to expectations is fueling trade tensions. The European Union last week imposed tariffs as high as 73.7 percent on two types of steel from China in a bid to curb competition for EU producers. The duties on hot-rolled coil and heavy plates punish Chinese exporters such as Wuhan Iron & Steel Co., Angang Steel Co. and Hebei Iron & Steel Co. for allegedly selling the goods in the EU below cost, a practice known as dumping.

Changing Sentiment

Still, China’s current economic and market stabilization is a sharp contrast to the fear of a hard landing that gripped markets at the start of 2016.

“I would give them credit” for stabilizing the economy and shaping the global economic agenda at the G-20, said Ding Shuang, head of Greater China economic research at Standard Chartered and a former economist at the International Monetary Fund, in an interview in Washington. “They’ve achieved quite a lot.”

China’s call for infrastructure spending and structural reforms has been embraced by other policy makers as a consensus forms that unconventional monetary policies are nearing the end of their effectiveness. By boosting lending and lifting spending on roads, bridges and railways, authorities helped underpin the industrial sector even as external trade remains tepid. Industrial profits surged about 20 percent in August after falling for much of 2015 and factory prices are close to emerging from more than four years of declines.

The Washington-based IMF’s latest forecasts predict China’s economy will expand 6.6 percent this year and 6.2 percent in 2017, unchanged from earlier projections. By contrast the IMF lowered its 2016 forecast for advanced economies to a paltry 1.6 percent.

‘More Confidence’

“I have more confidence in the stability of China’s economy than before,” Yi Gang, deputy governor of the People’s Bank of China, said at a panel during the IMF meetings.

In the currency market, the yuan has been trading around 6.7 per dollar for the past three months, while unwinding some appreciation against other major currencies. The weakness in the trade-weighted exchange rate helped alleviate some pressure on exporters without triggering any disruption. Declines in foreign reserves have moderated, signaling capital outflow is easing under tighter restrictions.

“They’ve done a better job communicating,” said David Dollar, a senior fellow at the Brookings Institution and former U.S. Treasury attache to Beijing, during a panel discussion in Washington. By stepping up implementation of capital controls, they’ve thrown "some sand in the wheels” of the outflow trend, he said.

Reform Promise

Chinese policy makers have pledged to deepen economic reforms. Central bank Governor Zhou Xiaochuan said in a statement that policy makers will curb credit growth and have taken measures to cool the property market. The government is carrying out major overhauls including implementing market-based pricing mechanisms and expanding the social safety net to boost demand, Finance Minister Lou Jiwei said. 

IMF members reiterated their commitment on Sunday to use all policy tools -- including monetary, fiscal policies and structural reforms -- to boost expansion. They also warned that rising political tensions over free trade could undermine a recovery that’s already sluggish, a theme highlighted at the G-20 summit in Hangzhou, China. Germany will take over the G-20 presidency in December and has begun to lay out a targeted agenda.

For a look at Germany’s G-20 policy priorities, click here

China’s presidency of the G-20 also saw it become more integrated into the global financial architecture. Its voting power at IMF has increased to the third largest after the U.S. and Japan, and the yuan became the world’s fifth reserve currency this month with its inclusion in the Special Drawing Rights basket. China is also considering joining the Paris Club, a group of creditors that specializes in loans to governments.

All these efforts are “part of a big picture of bringing China to the system,” said Markus Rodlauer, deputy director and mission chief for China at the IMF.

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