China and the G-20 Summit

China will enter the April 2 G-20 summit with perceived strength, largely because it holds trillions of dollars worth of foreign exchange reserves while many of its fellow G-20 members are starved for cash. Beijing will try to use the G-20 summit to gain greater influence in the realm of global finance and beyond.

Chinese leaders are in very different circumstances from their peers as they head to London for the April 2 G-20 summit. The developed world remains in the clutch of a financial crisis that has hampered bank lending, and most of the richest Western governments and corporations are starved for cash. Meanwhile, Chinese banks are lending rapidly and Beijing itself rests on a massive cushion of $2 trillion worth of foreign exchange reserves. The contrast is stark.

Make no mistake; the economic downturn has wreaked havoc in China. Exports, the lifeblood of the Chinese economy, have nearly collapsed. The country’s manufacturing sector has been pummeled, creating waves of unemployment and increasing the frequency of incidents of social unrest. The Communist Party has worried publicly about its ability to guide the country through the storm. Debates within the Party over economic policy reached a fever pitch during the March National People’s Congress legislative sessions. Domestic security forces, including the People’s Liberation Army, are deployed across the country, ready to stamp out the first sparks of revolt — especially in hot spots such as Tibet and Xinjiang, but also in surrounding regions. Real economic strains have been compounded with an ominous atmosphere surrounding several anniversaries, from the “glorious founding” of the People’s Republic of China (1949) to the less-celebrated (by the government at least) Tibetan uprising (1959), the Tiananmen Square incident (1989) and the Falun Gong demonstrations (1999).

But despite this stack of causes for concern, China is in many ways better off than the world’s other top economies. From the onset of the global recession in late 2008, Beijing has attempted to turn the crisis into opportunity. First, Beijing has resisted tapping its $2 trillion reserves, which have served as a safety net while the central government moves ahead with aggressive spending to maintain the economy. China was one of the first countries to pass a stimulus plan, though the massive $586 billion package is actually focused on increasing domestic demand in the long term; it has added supplements, bailing out 10 of its most distressed industries. Meanwhile, Beijing has significantly loosened monetary and credit policies to prop up ailing businesses and fund a spending drive by state-owned giants as they make strategic acquisitions abroad at bargain prices.

Beijing thus enters the G-20 summit in a position of perceived strength thanks to its abundance of free liquidity, its rapid response to the crisis and its coping strategy. The United States relies on China to continue purchasing its government debt in order to finance deficits that are ballooning because of stimulus plans. Many of the world’s wealthiest countries are also craving cash — with some worrying they will not be able to sell their bonds — and businesses are on the verge of failing left and right, needing fresh investment. The all-purpose lifesaver amid the crisis, the International Monetary Fund (IMF), is itself in need of recapitalization so it can manage the flood of emergency loan requests from tottering developing countries. All eyes have turned to China as a potential source of badly needed funds.

With all this in mind, China’s leaders will attend the summit in London with the intention of furthering their lemons-to-lemonade strategy — despite their serious fears about domestic stability, on the surface they will strive to show that everything is in great shape. They will tout China’s importance as a powerful economy whose stimulus measures have served to spur some trade during a recession that has threatened to cut off nearly all trade, emphasizing the need for countries to coordinate policy responses to the economic crisis, notably through more fiscal stimulus. They also will push for reforms to financial institutions and regulatory schemes — though they will not get carried away with this, and will resist European efforts in this direction if they are seen as creating too much tension with the United States. The Chinese expect developing countries to be given a greater voice in global financial institutions and will champion the causes of the developing world. Most importantly, China intends to present itself as a positive force and “responsible stakeholder” in world affairs, and to win for itself a louder voice and more influential place in international institutions.

One area of focus in this regard is the IMF, which China is seeking to change in coordination with other developing countries in the G-20. The IMF is the lender of last resort for countries experiencing serious financial distress, from Iceland to Central Europe to Pakistan. China has offered to dip into its treasure troves to help boost the IMF’s resources on the condition that its quotas (and hence voting power) are increased. China would like to gain greater influence within the IMF in distributing funds, but also in other international institutions, and it would like to do so with clear recognition from the rest of the world that its participation is beneficial and necessary.

China’s rhetoric at the G-20 summit will not be entirely rosy. Beijing will take every opportunity to remind the world that the origins of this crisis are in the Western capitalist system, and that when that system failed, the Chinese system remained strong. Western countries, for their part, might claim that China’s reserves are too large or that its currency is deliberately undervalued. In this context, much will be made of Chinese President Hu Jintao’s scheduled meeting with Russian President Dmitri Medvedev, where the two are slated to discuss a plan to create an alternative global reserve currency that would replace the U.S. dollar in global trade. The proposed currency allegedly would be based on the IMF’s system of Special Drawing Rights. China’s talk about resisting global dollarization is not new; Chinese officials have been rhetorically challenging the dollar and proposing the yuan as an additional global reserve currency since before the start of the financial crisis, and China has experimented with using the yuan for trade with Hong Kong and others. But a global currency cannot be created overnight, nor can it be created by the mere desire for it to exist — even if every G-20 member, including the United States and its allies, shared that desire.

None of this amounts to anything substantial, and China knows it — the purpose is to put the United States in a defensive position ahead of the summit, thus pre-empting potential criticism aimed at China from any direction. In truth, China wants to protect the value of the dollar to maintain the worth of its own dollar-denominated investments. Deep down, China sees the U.S.-centered global system as essential, and does not wish to stir up bad feelings with the United States, which would only postpone global economic recovery.

Topics such as a new global currency will be thrown around outside of Hu’s bilateral engagements, but in actuality they will serve as pretexts under which he and his partners will discuss more pressing concerns, ranging from security to trade relations, depending on whether Hu is meeting with U.S. President Barack Obama, British Prime Minister Gordon Brown, Japanese Prime Minister Taro Aso, Brazilian President Luiz Inacio “Lula” da Silva, South Korean President Lee Myung Bak, Australian Prime Minister Kevin Rudd or Thai Prime Minister Abhisit Vejjajiva (who is attending as a representative of the Association of Southeast Asian Nations).

Beyond the rhetoric, China’s purpose is to use the G-20 as a means to achieve ends it has been pursuing throughout the financial crisis as it seeks to maximize its relative external advantage and win a more influential seat at the global financial round table while maintaining internal stability. China will seek to make itself central to a network of countries that wish to emphasize that their interests are not directly aligned with those of the United States, but China will do so without directly challenging the United States — which is by far its No. 1 trading partner, considering all of the intra-Asian trade links for which the United States is the end destination. A coalition of countries talking about becoming independent of the United States, while not in fact attempting anything of the sort, serves several purposes, ranging from diplomacy to domestic populism. But ultimately, China still sees the United States as the center of the global system for some time to come, and is not interested in Russia’s efforts to create an anti-American pole — it knows that it depends on continued U.S. consumption of Chinese goods and noninterference with Chinese domestic affairs. Beijing does wish to put constraints on American power, however, and it hopes to do so by gaining international support and enhancing its own role as a player on the world stage.

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