G20 meeting considers steps to prevent capital flight and to restore investor confidence

Though charting a course for global economic recovery and bolstering investor sentiment would be high on the agenda of global leaders during the G20 summit in St Petersburg, Russia, attention will also be drawn to how China, the world's second-largest economy, is combating slower growth.

The meeting, which comes at a time when the currencies of emerging economies, barring China, have taken a major hit, will also be an important platform for Chinese President Xi Jinping to reassure the world that the economic climate and growth pipeline still remain robust in China, experts say.

"China is way ahead of other economies in competitiveness and productivity, and still has the best credentials for sustained long-term growth," says Gregory Chin, associate professor of political economics at York University in Ontario, Canada.

Xi is expected to reassure global leaders that the recent growth blips are part of an industrial transformation and not a sign of waning confidence. He will also use the opportunity to assure them that China will come out with more policies to facilitate long-term growth.

At the same time, Xi will be an active participant in the global deliberations aimed at restoring investor confidence and making the current international trade, investment and financial system more fair, open and inclusive. The discussions are also expected to touch upon the plans by the US Federal Reserve to wind down its quantitative easing program and what that will mean for the world.

Chin, who has tracked several G20 summits, says President Xi will bring a "new spirit of boldness" to the meeting.

"The challenging world conditions and even tensions within the Asian region are prompting the Chinese leadership to take bold, careful and calculated global measures," says Chin, a Chinese-Canadian scholar who specializes in evolving global governance and China's role.

"I expect this new spirit of boldness to continue at the G20 level also."

Chin says Xi has been at the forefront of several recent important global engagements like the recent US-China Strategic and Economic Dialogue. "The close interactions shared by the two presidents during that meeting is an example of the new thinking in Chinese foreign policy. State Councilor Yang Jiechi's recent remarks about the need for a 'new diplomacy' for China also highlights the new boldness."

Chin expects Xi to focus on encouraging growth in the world economy, and also on securing financial stability, international banking and other related financial reforms to enhance the role of emerging economies in the system.

Economic growth in China has been a much-discussed topic recently, due to the lower growth numbers during the first two quarters of the year. Economic growth during the first six months was 7.6 percent, the lowest in the past three years. China's overall economic growth eased to 7.8 percent last year, the weakest since 1999.

However, experts like Chin do not see any cause for concern yet. "China is taking several steps to reduce its reliance on exports and to boost domestic demand along with various steps for sustaining domestic growth. To achieve this it is also important to foster and support innovation," Chin says.

This does not mean spurring just technological innovation, he says. "China really needs to consider other aspects like environmental protection. It is not only about saving the planet physically but also about protecting the conditions for human beings so that they can enjoy a good, healthy life and for the long-term survival of the human species and the biosphere."

From a policy perspective, China's new government is already taking steps in that direction. There are already enough indications that when it comes to policymaking, it is focusing more on environmental protection than development.

In June, the State Council came out with 10 measures aimed at reducing air pollution. Among the measures are steps that restrain expansion of energy-intensive and polluting industries, a revised energy structure and strict punishment for polluters. Last month, the State Council outlined several measures to improve people's wellbeing.

With more policies in the pipeline, it is clear that China's economic restructuring is creating a new cycle of development and growth, which starts from environmental protection and pollution control. Better welfare measures are also expected to ensure healthier lives and rein in medical spending, which in turn could prompt Chinese families to boost consumption, experts say.

"I believe that economists like Hu Angang are correct in saying that green growth, clean production, environmental protection and managing climate change need to be the central focus for China," Chin says.

US President Barack Obama had a similar opportunity to push for changes in America's growth model when he assumed office in 2009. "But the moves in the US toward more environmentally sound and high-tech growth have been slow, and cautious. It is really vital for China, and the rest of the world, if China can pioneer the speedy transformation to the new growth model."

Chin also says China needs to make serious efforts to curb speculation in residential and commercial real estate and continue to fight government corruption.

Bubble traps

Martin Schoenhals, adjunct professor, Columbia University's School of International and Public Affairs; and chair of the Department of Anthropology, Dowling College in New York, has a different outlook on economic prospects for China. Schoenhals, who has tracked China's development for several decades and conducted several case studies in inland regions such as Sichuan province, is particularly concerned by real estate bubbles.

"A large number of apartments are being bought by speculators. This is a familiar pattern and a dangerous one. If and when the price of apartments starts to fall, as happened during the 2008 economic crisis in the US, speculators will start selling and the declines will become unsustainable," Schoenhals says.

"I'm surprised that some experts feel that China can somehow escape this situation, when others like Japan, the US and Europe could not."

Schoenhals is also worried about the employment challenges when 300 million people, equal to that of the US population, move to big cities. "I'm worried about this trend. Yes, wages are higher in big cities. But does this mean that all the peasants who move to big cities can earn more money?"

The government should consider more balanced development of big cities, townships and rural regions, he says.

Paul De Grauwe, professor of finance at the London School of Economics and Political Science, also believes that a slowdown is inevitable in China due to its excessive reliance on bank credit and due to huge overcapacity in many sectors. "There are many challenges for countries that rely on this kind of system. China's medium and long-term growth rates will decline significantly compared with what it has experienced during the past two to three decades."

Bluford Putnam, chief economist of CME Group, the world's leading derivatives marketplace with headquarters in Chicago, says the Chinese economy is in the midst of a healthy and natural deceleration as it matures and the population ages.

Putnam says the rate of infrastructure investment maintained over the past decade is no longer sustainable because of the success of modernization, which in turn means that incremental gains from new projects are not as high as they were earlier.

The delayed impact on labor force growth from decades of the family planning policy means a smaller supply of labor, which implies slower economic growth. As economies modernize their infrastructure as China has done, the next phase of growth and development is expected to come from building stronger financial institutions and more robust markets, Putman says.

"This is a transition period for economic growth. The infrastructure development period with 10 percent annual real GDP growth is a thing of the past."

In the decade of the 2020s annual GDP growth in China may well be about 4 percent, still much higher than Western, industrialized economies, he says.

"The transition decade in which we are now is likely to experience a continuation of the decelerating economic growth pattern. There is no hard landing, and the decelerating growth is a natural by-product of past development success."

Song Li, deputy director of the Institute of Economic Research of the National Development and Reform Commission, says that though China's potential for economic growth is starting to decline, the trend is still not significant.

"I believe that China can still achieve annual economic growth of about 8-9 percent once the world economy starts improving."

Robust fundamentals

Chi Fulin, president of the China Institute of Reform and Development, says China can sustain annual growth of 7-8 percent over the next decade if the government speeds up urbanization, boosts domestic consumption and implements a radical market-oriented reform agenda.

Even more upbeat is Justin Lin Yifu, former chief economist of the World Bank. A professor at Peking University, Lin says China can maintain annual growth of 8 percent for another 20 years. "This is the potential and China needs to strengthen reforms to turn it into a reality."

Chin of York University says his confidence in China's economy derives from the recent government steps to manage fiscal and monetary situations and the well-designed tools it has devised to protect against external shocks.

De Grauwe of the London School of Economics and Political Science says that global markets are generally guided by euphoria or fear. "Both of them are bad guides. The government should not be swayed by the guide swings. China is already breaking the idea of letting the market decide everything."

The International Monetary Fund used to "require all member nations to liberalize their capital movements", but recently, it has been reluctant to say so, he says. "I think part of the reason for this is the great influence China has exerted on global institutions like the IMF."

China's capital control model is in contrast to the one in the US and Europe, where the financial markets are deemed always to be right. "China's experience has shown that the European and US models are wrong and more needs to be done to strengthen capital flow regulations," De Grauwe says. "Other countries should copy this particular aspect of China's macro economic policy to avoid destabilizing the global economy."

Both Chin and De Grauwe agree that sound regulation on capital flows in China has helped cushion external shocks. China's high-speed growth during the economic crisis has also helped spur the recovery of other global economies. The US economy is reviving, while the European economy, though still fragile, has managed to ward off a second recession.

Business leaders are also confident that China's economic transformation will help create more market opportunities for them.

Nancy McKinstry, chief executive officer of financial services firm Wolters Kluwer in Netherlands, is another expert who is bullish about China.

The government's focus on upgrading industries and moving beyond manufacturing and the desire to move 300 million more people into cities in the coming two decades will help maintain the economic momentum.

Several new steps announced by the government aimed at reducing red tape and facilitating trade, such as abolishing taxes on small businesses with income of less than 20,000 yuan ($3,300; 2,500 euros) a month, will promote entrepreneurship and growth, she says. "The ingenuity and hard working capabilities of the Chinese people will also create a strong workforce to support growth."

China is not only playing a bigger role in world financial markets, but also encouraging its companies to adopt global standards and products, and spurring innovation, she says.

It is also encouraging to see the government taking steps to stimulate investment and hiring in the services industry, McKinstry says.

"Professional services like law, finance and healthcare will be the new high growth sectors and the mainstay for future growth.

"The next priority for China will be to push for the adoption of risk management solutions across its industries, thereby setting a global standard for financial institutions and other major sectors," McKinstry says.

Eric Goldschneider, managing partner of Antwerp-based chemical trading company Arpadis and who has had close business contacts with China for more than 10 years, says he has seen China changing from a net importer of polyurethanes to a net exporter of the same and becoming a world leader in flame-retardants.

"China has gathered huge competitiveness in manufacturing high-end products, and this should be one of the main drivers for future economic growth in the next two decades."

Though real estate and exports will continue to be important for China, Goldschneider expects a big jump in domestic consumption due to the rising middle class and urbanization of inland cities.

He also believes that IT, telecom, food, personal and medical care, life insurance, transport and distribution will be the growth industries.

"I believe that my son Edouard's generation (born in 1999) will experience and benefit from China as much as my generation did from the US."

Goldschneider has already enrolled his son in a Chinese academy so that the youngster can learn Chinese language and culture and about the importance of the financial sector in China.

"The more the next generation is educated, the better they will be prepared for this shift of power and the better the growth opportunities," he says.

fujing@chinadaily.com.cn

(China Daily European Weekly 09/06/2013 page1)