BEIJING (Reuters) - Just as it was never realistic to think China could single-handedly save the world economy, it’s probably wise to tone down any expectations that Beijing somehow holds the key to a new international financial order.
Premier Wen Jiabao promised after talks among 43 Asian and European Union countries that China would actively participate in a November 15 summit that President George W. Bush is convening to rake over the global credit crisis.
China, which keeps its own markets on a tight leash, will presumably support any drive to keep a better check on new-fangled financial instruments and cross-border money flows.
“We need financial innovation, but we need financial oversight even more,” Wen told a news conference on Saturday.
But Beijing shows scant interest in debating whether a wholly new monetary regime is called for — whether, perhaps, the current crisis has its roots in the floating exchange rates that replaced the Bretton Woods system of fixed-but-adjustable rates, centered on the dollar, backed by gold and supervised by the International Monetary Fund, that collapsed in 1971.
“I don’t think China can do much. Officials have said that what is important for China is to handle its own business well, which I think is quite right,” said Zhang Bin with the Chinese Academy of Social Sciences, the government’s top think-tank.
To be sure, Beijing regularly rails against what it sees as Washington’s irresponsible stewardship of the dollar and against market volatility that endangers the stability that China craves.
But discussion of the crisis in Beijing is dominated by the risks for China of holding so many dollars in its reserves.
A senior EU official who attended the summit said Chinese policy makers have little to say when the question turns to overhauling the system that permitted those reserves, and the economic imbalances they mirror, to build up in the first place.
An official at the People’s Bank of China ruled out a new international monetary order, while Zhang, who is a financial economist, called the idea “a load of rubbish.”
“The basic global monetary system with U.S. dollar as the reserve currency will not change,” he said. “China is not ready yet to inject substantial change into the system.”
China has the world’s fastest-growing economy, but its financial markets are not mature or open enough, Zhang said.
And crucially, he added, although it may be bought and sold for purposes of trade and investment, the yuan is not convertible for purely financial transactions.
This rules out a place for the yuan in central banks’ foreign exchange reserves — something that Thailand, for one, has said it would like to change so the yuan can become an anchor currency in Asia.
Justin Lin, the World Bank’s chief economist, also cited the yuan’s limited convertibility as a reason why it was premature to talk about a big role for China in any new world financial order.
“China is not strong enough,” he told Reuters during a forum this weekend at Peking University, where he was a professor.
All this sets the stage for interesting talks in Washington.
French President Nicolas Sarkozy said on Saturday that he wanted currency questions to be on the summit agenda, while U.S. Treasury Secretary Henry Paulson put down a marker last week by saying it was “an unnatural act” for a big economy like China to have a comparatively inflexible exchange rate regime.
Beijing could be forgiven for retorting that its economic and financial model is working quite well, thank you.
Capital controls and a tightly managed exchange rate shielded China from the worst of the 1997/98 financial crisis and, 10 years on, are once more offering a large degree of protection.
“China will have a bumpy road, but I don’t think it will get into serious trouble,” said David Dollar, head of the World Bank’s office in Beijing.
From President Hu Jintao down, officials insist the greatest contribution China can make to regional and global stability is to sustain fast growth — an aim that chimes with the Communist party’s overriding priority to raise living standards at home.
“The Chinese leadership have very clear ideas of where it’s going. Domestic economics and politics come first, and for that the capital account has to remain closed,” said Carsten Holz, a professor of economics at Hong Kong University of Science and Technology.
Holz said it could take 10 to 15 years for China to remove its capital controls.
The Washington summit and follow-up meetings need to establish whether there is a common will to draw up new global financial rules and, if so, what basic principles to follow on critical issues such as exchange rates and capital flows.
Pascal Lamy, the director-general of the World Trade Organization, said the task was dauntingly complex.
“It’s a minefield. It will take years, assuming people have a reasonably clear idea at the beginning of what the agenda will be,” Lamy told reporters last week during a visit to Beijing.
Additional reporting by Eadie Chen and Langi Chiang; Editing by Sonya Hepinstall