A year after Lehman, assertive China eyes influence

 

If any country can be said to have had a good crisis, it is China.

As global leaders prepare for their third emergency summit in 10 months, China stands out as being in a stronger position today than it was before the convulsions triggered by the collapse of investment bank Lehman Brothers a year ago this week.

China is too small to "save the world", even though it is the first major economy to pull decisively out of its downturn.

But Beijing has earned respect for its rapid, overwhelming monetary and fiscal policy response to the crisis, while the country's banks have so far sailed serenely through the storm.

Even global investors are increasingly taking their cue from Shanghai's notoriously volatile stock market.

"China is walking taller on the world stage than it was a year ago" said Mark Williams with Capital Economics in London.

"There's a degree of confidence in their own thinking and way of policy-making that they maybe didn't have 12-18 months ago," he added.

Back then, Washington was constantly harrying Beijing to let the yuan rise in value and to deregulate its markets. 

Now, with the Group of 20 rich and emerging economies gathering again in Pittsburgh next week, the shoe is on the other foot.

A chastened United States has not only put its calls for speedier reform of China's financial sector reform on mute but has been forced to defend itself against repeated charges by China of a malign neglect of the dollar.

Andy Rothman, a macro strategist for broker CLSA in Shanghai, said it was wrong to think of events of the past year as marking a shift in the balance of financial power because the U.S. economy was still so much bigger than China's.

But he said it could well mark a turning point in attitudes and how the two countries deal with each other. Moreover, China was now an integral part of the global policy debate, even though it is not formally a member of the Group of Eight industrial nations.

"In the past the Chinese have probably felt that they were treated too much as a younger, inexperienced cousin in dealing with the G8. But now they feel that their responses to the global crisis and the situation here have demonstrated that they should be treated on equal terms," Rothman said.

WIELDING POWER

Michael Kurtz, an economist with Macquarie in Shanghai, agreed.

As a result of the crisis, China's legitimate interests as a major stakeholder in the dollar and other currencies in which it has invested its $2.13 trillion (1.28 trillion pounds)in official reserves were suddenly being catered to more actively than in the past.

"It's not that China has accrued more power so much as that China is revealing itself as being willing to wield that financial power in more diverse ways than in the past. So it's causing the global community to sit up and take much more notice," he said. 

Markets are particularly twitchy about Beijing's goal to gradually reduce the primacy of the dollar in global trade and finance. Central bank governor Zhou Xiaochuan has proposed instead a greater role for the Special Drawing Right, the International Monetary Fund's in-house unit of account.

Rothman at CLSA plays down the importance of Zhou's proposal, and Chinese policymakers acknowledge there is no practical alternative to the dollar as the world's main reserve currency.

But there is deep concern that Washington will be unable politically to withdraw the monetary and fiscal stimulus injected into the economy in time to prevent a spike in inflation and the debasement of the dollar.

Accordingly, researchers say China is likely to keep using its new-found influence to promote the yuan as a trade settlement currency, despite a lukewarm response to initial pilot schemes.

"The goal is risk mitigation," Kurtz said. "China knows they are now disproportionately exposed to dollar risks in the medium to long term."

ACTIVISM

A related policy priority is to nurture what Kurtz called a more permissive environment for cross-border mergers and acquisitions so that China does not find the door slammed in its face when it goes shopping for energy and natural resources.

"They need to find ways to convert their massive dollar stockpile into assets that in some measure contribute to China's long-term economic well-being and self-interest" he said.

Despite China's greater assertiveness since the onset of the crisis, some foreign politicians believe Beijing could and should be doing much more. 

"China is at great pains to tread lightly as it grows" British Business Secretary Peter Mandelson said in Beijing last week. "But there is now no alternative to the full leadership role that its economic status deserves."

That judgment seems harsh. Yes, China could suck in more goods from the rest of the world by letting the yuan resume its rise and opening its markets wider.

If it did, it would also be less vulnerable politically to charges that its exporters sometimes sell at unfairly low prices, as in last week's U.S. decision to slap duties on cheap Chinese tyres.

But Beijing is playing an increasingly active role in Asian policy-making circles, in the World Trade Organisation and in the debate over the shape of international financial institutions. The days when China was content to sit on the sidelines are over.

"It's not as though there's some new Chinese model that they can now go out and start aggressively shopping to the world. They don't have that more than anyone else ever did" Kurtz said.

"Therefore I'm not sure they become more influential in terms of being able to peddle a particular consensus or growth model to the rest of the world. They can't. They have to struggle with 'what do we do now' just like everyone else does."