The G20 summit held in St. Petersburg, Russia on September 5-6 passed “the Leaders Declaration” and a “St. Petersburg Action Plan.” Both explicitly stated that “ Strengthening growth and creating jobs is our top priority”.
The action plan recognized that the world economic recovery is characterized by “weak growth and persistently high unemployment” and thus “we are fully committed to take decisive actions to a job-rich, strong, sustainable and balanced growth path.”
Undoubtedly, both the US and China, as the world two largest economies and members of G20, share a strong responsibility in supporting this common goal.
Persistent Contribution to World Growth
A recent IMF report prepared for the G20 summit noted the signs of improvement in developed economies, with the US and Japan showing stronger growth, and the euro-zone having a 0.3% GDP growth in Q2, 2013. It also noted the considerable slowdown in emerging economies, and estimated that short-term world economic growth might be driven mostly by the US.
With a 2.5% growth in Q2 GDP, the US economy is solidly on the path of a moderate recovery. In view of its 22.5% share of world GDP in 2012, if the whole year US GDP could grow by 2.2%, as estimated by IMF in its July World Economic Outlook, the US would contribute 0.5 percentage point to total world GDP growth for 2013. Or 16% of total world GDP growth of 3.1% (also estimated by the IMF July WEO report). However, the world economic recovery certainly needs more engines of growth.
There has been a flood of worries about the slowdown of Chinese economy, and even a fear of a possible hard landing or even crash. However, the 7.6% GDP growth for H1, 2013 is nothing to be alarmed about. There are four major problems in the Chinese economy that we need to address carefully: over-capacity of outdated industry facilities, environment pollution, real estate bubbles, and local government debt, fostered by excessive liquidity supplies. China must change its growth mode and pursue a healthy, clean, sustainable growth based on restructuring and technology upgrade before too late. Hence, a slower but more sustainable growth will definitely secure a long term balanced growth. The slowdown is thus manageable. It is unlikely that China’s GDP growth rate will fall below 7.0%. Its GDP growth rates have been estimated at 7.5% or slightly higher for 2013, and by around 7.0% for the next few years. Even at 7.0%, China will still enjoy one of highest growth rate among world leading economies and will hit the goal of doubling GDP within this decade.
In view of China’s share in the world GDP (11.5% in 2012), the 7.5% growth in the country this year will contribute 0.86 percentage point to total world GDP growth, or 28% of its 3.1% growth. China and the US combined will contribute 44% to total world growth.
Both China and the US should do a good job at home to secure a stable, sustainable growth. If the US could keep an annual growth rate of 2.5%, and China could keep 7.0%, all for 2014-2015, the two countries combined will contribute 1.4 percentage points for total world GDP growth each year, a significant contribution towards realizing the St. Petersburg Action Plan.
Coordination for Global Financial Stability during QE Tapering
China and the US should also work together to help support growth in other economies, as the world economic growth should be broad-based. The two countries could step up trade and investment with the euro-zone to reinforce its vulnerable recovery. And they should support other BRICS countries by cushioning the spillover implications of FED QE tapering.
Since the start of 2013, the trend of international financial flows has been reversed, caused by, to a large extent, the spillover effect of FED QE tapering. It has been estimated that approximately $95 billion of capital moved into the US ETF since the start of this year, while $8.4 billion moved out of ETF in emerging economies. This in turn, has caused a rise of the lending costs in those economies, with 10 year government bond premium at 9% in India, highest since 2008, and that in Indonesia and South Africa at 30 months and 19 months highs respectively. Twenty currencies in emerging economies fell sharply in August, except the Chinese yuan.
The sharp downturn in emerging economies will cause a major challenge to the world economic recovery and thus should be seriously addressed.
The St. Petersburg Action Plan says that, “we commit …that policies that support domestic growth also support global growth and financial stability and to manage their spillovers on other countries.” The US, as a signatory to the Plan, should manage FED QE tapering spillovers to other countries. The Fed needs to enhance the transparency and calibration in its tapering tempo to avoid capital market shocks. Both the US and China should work with the IMF and BIS for more concerted efforts to avoid excess volatility in world financial flows and disorderly movements in exchange rates, and to reduce the risks of excess volatility caused by speculation.
The BRICS countries have launched a common foreign exchange reserve pool of $100 billion for any stringent situations, with China contributing $41 billion, Russia, Brazil and India each $18 billion and South Africa $5 billion. As one of the Regional Financial Arrangements (RFAs) endorsed by the G20 summit, it will be a necessary complement to IMF resources and could help cushion volatile international financial flows.
Both China and the US should help the other emerging economies in their own restructuring and consolidation through reform and opening, and thus improving their economic fundamentals for an early return to a faster, sustainable growth path.
Upholding the Multilateral Trading System
The Leaders Declaration emphasized, in particular, the utmost importance of an open trade and investment system, as the national resources for further growth are almost exhausted. It regards the WTO-based trading system crucial for restoring global growth. The Leaders Declaration called strongly for all the WTO members to show the necessary flexibility and reach a successful outcome in this year’s multilateral trade negotiations, namely to hit an early harvest in Doha Round at the 9th WTO Ministerial Conference at Bali, Indonesia, December 2013.
China and the US are currently engaged in different RTA agendas, with the US focused on TPP and TTIP and China on CJK and RCEP. However, all the RTAs are complementary to the multilateral trading system with the latter prevailing over all the RFAs. As the world two largest trading powers, China and the US have a vital responsibility to take all the necessary initiatives and play a key role. The two countries should have intensive communications within the next three months before the Bali conference, both bilaterally and multilaterally. On the basis of frequent information exchanges on the status quo of the remaining issues, both should consult with other WTO members. China could work more with other developing members and the US could work more with other developed members. If the Bali conference does reap some early harvest, no matter big or small, the Doha Round will gain fresh steam, and the WTO will play a stronger role in supporting the world free trade system and thus promoting a strong, sustainable, balanced economic growth at large.
He Weiwen is co-director, China-US/EU Study Center, China Association of International Trade