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Analysis

Shanghai's Solid, Slow Start to China's G20 Year

John Kirton, Co-director, G20 Research Group
February 28, 2016

G20 finance ministers and central bank governors meeting in Shanghai on February 26–27 got China's year as G20 host off to a solid if slow start. In their communiqué, they took several small steps to move many of the detailed items forward on the big, broad, built-in G20 agenda and added a few initiatives of their own on the key issues of terrorist financing and green finance. But their "steady as she goes" approach saw few significant strides on several of the major issues dominating current global concerns, from slowing growth, through risks and vulnerabilities from currency, commodities and equity markets, to the need for deeper, restructuring and reform. The results will thus disappoint many who had high hopes for the Shanghai G20 meeting to reduce immediate risks and introduce China's ambitious top priority of transformative innovation for the medium term. But they are consistent with China's cautious, consensus-oriented approach to G20 leadership since the beginning.

The Shanghai participants got off to a strong start by realistically recognizing the many major risks now facing the global economy, society and polity. Their list comprised slowing growth and commodity prices, changing capital movements, escalating geopolitical tensions, growing refugee flows and "the shock of potential UK exit from the European Union." Yet this sense of shock, instability and vulnerability did not propel them to a strong performance in the actions they took. They quickly declared that the current market volatility and broader public concerns did not reflect "the underlying fundamentals of the global economy." They thus agreed largely to wait and watch, continue what they were doing, and commission more research and reports.

To spur global growth, the G20 finance ministers and central bankers pledged to use all monetary, fiscal and structural tools but started by saying they would do so "individually," with "collectively" coming in second spot. They promised little new on fiscal policy, tax policy, investment and structural reform. They agreed to integrate their growth and investment strategies, review their 2014 Brisbane Action Plan to lift growth at least 2% above the 2013 estimated trend by 2018 and improve their implementation monitoring. But they did not initiate a full-scale mid-term review and repair a plan clearly falling behind.

On exchange rates they largely repeated old language, as if the volatility and concerns of 2016 over the Chinese renminbi, U.S. dollar and Japanese yen did not exist. Their words "We will consult closely on exchange markets" was a welcome step, but less than the promise of closer cooperation and coordination that globalizing, volatile exchange markets require now. Their pledge to communicate more clearly was confined to macroeconomic and structural policy, excluding exchange rates in their own right.

Shorter shrift was given to global commodities and equity and other markets in China and elsewhere. Their concluding paragraph on energy dealt only with phasing out fossil fuel subsidies. Nowhere were the present plummeting oil prices and high-level energy principles from the 2014 Brisbane Summit addressed. Similarly, the Shanghai paragraph on financial regulation and supervision usefully nudged forward the ongoing work on banks' total loss-absorbing capacity and capital requirements, derivatives, insurers, financial market infrastructure, central counterparties, shadow banking, asset management, securitization, macro prudential frameworks and financial inclusion. But it said nothing directly about stock markets in Shanghai or elsewhere. No direct reference to crime and corruption appeared here, in the following paragraph on tax or elsewhere in the communiqué. On tax, the G20 reported China's own go-it-alone initiative: "China would make its own contribution by establishing an international tax policy research center for international tax policy design and research as well as technical assistance to developing economies."

On infrastructure, however, the Shanghai participants did collectively launch a "global infrastructure connectivity alliance initiative." On terrorist finance, green finance and climate change, they also departed from their dominant approach of review, research and report later to take new, urgently needed collective steps. They declared that "we are resolved to combat decisively terrorist financing," pledged to intensify their cooperation and asked the Financial Action Task Force that they dominated to intensify its work on tackling the terrorist financing "threats." On green finance, in order to address "pressing environmental challenges," they directed in detail the work of their new G20 Green Finance Study Group. They also promised that developed countries would provide financial support for the United Nations Paris Agreement on Climate Change through the Green Climate Fund.

Moreover, buried in the fine print at the end of the communiqué was a clear sign that China's ambitious top priority of transformative innovation to fuel a new generation of growth would soon get underway. The section on "Initiatives for Further Action" included: "We call on the [International Monetary Fund] and the [Organisation for Co-operation and Development] to continue to provide technical support and further work on the enhanced structural reform agenda, including updating the policy papers based on the proposals by China, the IMF and the OECD and members' feedbacks."

Many will welcome China's leadership at Shanghai in broadening the G20 agenda to embrace the urgent global threats of terrorist finance and climate change and in offering cautious, consensus-oriented leadership to design and construct an innovative, transformative superhighway to generate sustained economic, environmental and social growth for the 21st-century world. In all, Shanghai will be a very good start to China's G20 in 2016, if the participants at Shanghai got their response to the vulnerable global economy right. If they did, the exchange rate and stock market instabilities and uncertainties of the summer of 2015 and January 2016 will not reappear and Shanghai's calm confidence will set a solid foundation for preparing and producing China's ambitious priorities for the leaders' Hangzhou Summit on September 4–5. But if not, Shanghai will be seen as a costly missed opportunity to meet the clear and present dangers of the moment and also get a fast start on the bold innovation agenda that China has properly put first for its year as G20 host.

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