CHINA’S STEERING OF G-20

Times could hardly be more unpropitious than at present for China to be at the helm of G-20 when its own slowdown, tumbling asset market and volatile currency are adding to risks for even the weakened global growth getting derailed in 2016.

In its troubled transitional phase of rebalancing growth towards greater domestic consumption in the world’s second largest economy, China is battling with an array of unforeseen problems with spillover effects on trade, financial flows and currencies for the rest of the world. Its leaders keep assuring the world that with positive fiscal and prudential monetary policies, China would avert a hard landing.

Otherwise, for China, 2015 was an eventful year when it launched the Asian Infrastructure Investment Bank (AIIB) with 57 founding members on board and also headquartered BRICs’ National Development Bank (NDB). However, with Russia and Brazil in recession besides China’s policy-induced slowdown, BRICS has come under a cloud for the present. India has become an exception and plays an enhanced role as a global growth-driver .

Ahead of China’s hosting the G-20 finance ministers meeting in Shanghai (Feb 26-27), IMF has called for “strong policy responses” nationally and collectively by the major advanced and emerging market economies, to head off what could land the world in a recession in 2016.

In the latest update, as China slows, India remains ahead with its IMF projection unchanged at 7.5 per cent in 2016 and in 2017 as against China’s 6.3 and 6.0 per cent respectively. IMF assumes India is growing at a “robust pace, reflecting lower commodity prices, higher real incomes, and recent policy reforms”. But the IMF’s note to G-20 on the global economy and the status of its leading players, also underlines India’s macroeconomic challenges, such as “high inflation expectations and large fiscal deficits.” The monetary policy stance needs to remain “tight” to ensure a durable reduction in inflation and inflation expectations.

Fiscal consolidation should continue, according to IMF, “underpinned by comprehensive tax reform and further reductions in subsidies”.  As India gets ready to roll out its budget on February 29,  IMF has also a word of caution on financial stability if “vulnerabilities in corporate financial positions and public bank asset quality are left unaddressed”.

Finance Minister Arun Jaitley is grappling with the ordeal of reconciling conflicting objectives like raising public investment while adhering to fiscal consolidation. Multiple goals and rural and social priorities have also been spelt out by finance ministry officials.

Whatever be the picture, neither IMF nor credit rating agencies are in favour of relaxation in pre-determined targets in fiscal consolidation ( a 3.5 per cent deficit fiscal 2017 set earlier). They, however, see India’s fiscal problems would extend over the medium term and would necessitate greater attention to reforms in expenditure management.

In India, IMF note adds, authorities should build on recent progress to further relax long-standing supply bottlenecks, especially in the energy, mining, and power sectors, as well as in the food storage and distribution sectors. Implementing labor market reforms also remains a priority, it said. IMF has projected global growth at 3.4 per cent in 2016 which would need co-ordinated action plans that G-20 agree on at Shanghai. It has had to revise down the 2015 estimate to 3.1 per cent from 3.4 per cent in2014. After slowing unexpectedly at the end of 2015, global activity has weakened further in early 2016, it said, amid falling asset prices (as in India) and increasing financial market turbulence. The finance ministers of G-20 would be as much concerned with the global impact of policies that China would bring to bear in tackling its huge debt and volatile exchange rate, though Chinese leaders have asserted there would be no further devaluation as in August 2015. Global equity market declines are accompanied by further tightening of financial conditions in emerging economies. A surge in corporate bonds adding to its high debt levels may further raise risks to stabilisation in China even as there are continuing apprehensions on how it handles its exchange rate policy. US looks for more categorical statements on possible devaluation of the Chinese currency yuan which has also become a reserve asset recently included in IMF’s SDR basket of major currencies. What could cause global growth to get derailed, tantamount to recession, given the fall in demand despite low commodity prices? Persistence of recent developments in financial markets, along with only modest recovery in advanced economies, notably USA, China’s rebalancing and worsening of prospects for oil exporters and diminished growth in emerging and low-income economies are all factors listed to lead to a derailed recovery at a moment when the global economy is highly vulnerable to adverse shocks.

Also, as IMF points out, China’s current transition is one of the key factors behind the weakening of global manufacturing, trade, and investment. World trade growth has sharply gone down. The deceleration in Chinese manufacturing activity, especially in some overcapacity sectors, has brought a significant slowdown in imports and impacted commodity prices and confidence.

Oil prices have further declined markedly, reflecting subdued global demand and expectations of sustained increases in production by OPEC members. In the result the expected impact for growth from lower oil prices proved weaker, as it generated less demand support, lowered global growth and sustained low-inflation environment.

The global economy is thus at a point when it has become highly vulnerable to adverse shocks, according to IMF. These include shocks of a non-economic origin related to geopolitical conflicts, terrorism, refugees, and global epidemics which loom over some countries and regions. 

If unchecked, it could have serious spillover impacts on global economic activity. In effect, what has been urged upon G-20 finance ministers at Shanghai is to take note of “the fragile conjuncture” of all the shocks that have emerged, which heighten the urgency of policy responses by all nations that would strengthen growth and also help manage vulnerabilities which both the financial and real sectors of the economies are faced with.