G20 offers China a chance to save the world economy – by saving its own

Andy Xie says success of the summit won’t be decided by how flawless a host China is, but by how far Beijing will go to restructure its economy, thereby lifting global growth

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Published: 11:31am, 28 Aug 2016Updated: 11:35am, 6 Jul 2017

China has the potential to lead the world by example. Illustration: Craig Stephens

China is heavily invested in the G20 summit in Hangzhou (杭州) to ensure its success. But, how should success be defined? Since its inaugural meeting in 1999, it’s hard to recall any significant success from G20 summits. Violent anti-globalisation protesters tussling with heavily armed police seem to be the most memorable G20 imagery. One thing we can be sure of is that the Hangzhou summit will have none of that. But, apart from exquisite dinner banquets and perfect group photos of global leaders by the West Lake, could this summit achieve more?

In an era of people power, what can a gathering such as G20 do?

If not, it would be a great pity. The world is at its most critical juncture since the end of the cold war in 1989. The global consensus on globalisation is broken, especially among its main promoters in the West. It is largely a consequence of mistakes made by the Western elite. They didn’t take policy measures to help those whose wages were dragged down by globalisation. And they took advantage of low inflation due to global competition to pursue expansionary monetary policies, which inflated non-tradeable sectors like housing, education and health care, enriching a small minority of asset owners by squeezing the middle class.

Chinese workers check carbon fibre silk thread in a factory in Lianyungang, Jiangsu province. China has been the largest beneficiary of the globalisation of the past quarter of a century. Photo: AFP

The political backlashes could throw the West into a prolonged period of instability. It may end globalisation as we know it. China has been the largest beneficiary of the globalisation in the past quarter of a century. It has more at stake than anyone else, and should do something about it.

If China stops overinvesting and balances its economy, the global economy would receive a huge positive boost. The resulting virtuous cycle would sharply decrease the negative sentiment towards globalisation.

China will miss its growth targets ... but that’s OK

China’s potential growth rate is falling into the 4-5 per cent range. Given such levels of growth, the sustainable level of investment should be less than 30 per cent of gross domestic product. The current level is about half of GDP, and it is being propped up by subsidies with “forced savings”. Hence, the return on investment is artificially depressed to extremely low levels. Because China’s investment is very large, the overinvestment is holding down investment everywhere else. This is the reason for weak economies and bubbles everywhere.

Unless China changes, stimulus by central banks can only make things worse. Reforms in China can revive China’s and the global economy.

Chinese enjoy a water park inside the world’s largest building in Chengdu, Sichuan. With the right structural reforms, China could become the largest consumer market in the world. Photo: AFP

Come September, a world in crisis will look in vain to the G20 for leadership

The necessary structural reforms would make it the largest consumer market in the world. Every other economy would benefit. China’s global status would be recognised by all. China is big; it doesn’t need to fight for global status. If China makes its domestic economy efficient, it will be assured of its global status automatically.

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