China's pick-n-mix G20 promise

Lowy Interpreter

Finance ministers and central bank governors from countries representing 85 per cent of the world's economic output who gathered in Sydney last weekend agreed to lift their combined five-year GDP forecast by more than 2 per cent. In real terms, the pledge would add $US2 trillion to the world economy.

Reuters, which otherwise prides itself on objective reporting, almost made fun of the target:

“The Group of 20's proposal to lift economic activity by 2 percent over the next five years has so many holes in it, there's no wonder it was the first official target that all members felt happy to agree on,” it wrote.

Indeed one wonders why, if collective political head-nodding is all it takes to raise growth forecasts, the finance ministers hadn't decided on higher growth a couple of years ago. Markets on Monday shrugged at the news.

One hole in the 2 per cent figure was left unpicked by Reuters and others: China didn't buy into it. Zhou Xiaochuan, governor of the People's Bank of China, said in a statement:

“China will work on balancing the need for economic growth, reforms and stability. Growth of 7-8 per cent is not only suitable for China, it is also good for advancing world economic growth and sustaining the global economic environment.”

China's growth rate for 2013 was 7.7 per cent, and the forecast for this year is about the same. In other words, China won't be attempting to hasten growth, post-G20. The country accounts for around 13 per cent of the total GDP of the group. Other countries will thus have to pick up the slack for the target to be met.

China seemed to play along with other proposals at the G20 meeting. On structural reform, Governor Zhou said Beijing is taking a cautious response to the recent growth in shadow banking on the mainland.

Last year JP Morgan estimated China’s shadow banking industry nearly doubled between 2010 and 2012 to nearly $US6 trillion. Experts are divided on whether shadow banking poses a serious threat to China's economic stability.

Zhou's 'cautious response', it should be noted, doesn't equate with eliminating shadow banking. A document issued by China's State Council last December and leaked to a domestic news outlet in January described shadow banking as 'beneficial', 'complementary to the regular financial system', and 'the inevitable result of financial innovation.' The document ordered financial regulators to increase 'oversight' of unregulated lending. At the G20, then, Governor Zhou didn't tell the full story.

One Sydney resolution that gained a bit attention in China was the G20's reinforced commitment to clamping down on tax avoidance and 'neutralising' tax havens. Delegates endorsed common standards for sharing bank account information across borders and promised an automated tax information exchange by the end of next year.

China watchers will remember revelations from the International Consortium of Investigative Journalists in January on the extensive use of tax havens by China's elite. The report found that at least five current or former top officials have incorporated companies in the Cook or British Virgin Islands. It estimated between $US1 trillion and $US4 trillion in untraced assets have left China since 2000.

Chinese state media took more interest in the G20’s pronouncements on tax avoidance than other issues discussed in Sydney – without mentioning, of course, the extent of the problem in China. All trace of the ICIJ report has been wiped from the Chinese internet.

Whether China will stand by the G20 commitment to share bank account information across borders remains to be seen. If the country’s response to the ICJI findings is anything to go by, it seems unlikely.

Originally published by The Lowy Institute publication The Interpreter. Republished with permission.