The G20 Leaders’ Summit takes place today and tomorrow in Hangzhou, China. Compared with the Finance Ministers and Central Bank Governors meeting in late February, there seems to be less pressure for a short-term policy response or initiative. Instead, Beijing’s proposal suggests that policy makers will use the opportunity to advocate some medium-term agenda, such as reforms to the global monetary system, promotion of green finance, infrastructure investment and potentially make more progress on the bilateral trade deal between China and the US.
The theme of the summit is ‘Toward an Innovative, Invigorated, Interconnected and Inclusive World Economy’. The meeting will likely focus on the following aspects:
Global monetary system: The new Special Drawing Rights (SDR) basket that includes the RMB will become operational in October. China will likely want to take the opportunity presented by the summit to push for broader usage of the SDR in the global monetary system, advocate reforms of the IMF and ways to better monitor global capital flows.
Economic activity has stabilised in China, supported by fiscal expansion
Over the past few years China has increasingly become more involved in the global financial regulatory structure and signalled strong interest in shaping future policies. China will also start to disclose SDR-denominated foreign exchange reserves data in the near future.
Green finance: Developing financial tools to promote environmentally-friendly investment is a key initiative from China this year. With environmental protection and restructuring of overcapacity sectors high up on China’s domestic policy agenda, green finance is increasingly seen as part of the solution. China will likely advocate more policy support to overcome some of the issues that could hinder the development of green finance, such as measurement of externality, duration mismatch and lack of proper disclosure and risk assessment.
China’s own internal development in this field has been rapid. Since the beginning of the year, a total of RMB120bn worth of green bonds have been issued in China, accounting for 45 per cent of green bonds issued globally within this period.
Infrastructure investment: With global consensus shifting away from monetary easing to fiscal expansion and structural reforms, China will likely advocate a more prominent role for fiscal expansion, such as infrastructure investment. In particular, China will want to seek a greater role for initiatives such as the ‘One Belt, One Road’, the Asian Infrastructure Investment Bank, BRICs New Development Bank and the New Silk Road Fund to play in global infrastructure projects.
Trade deals: Another potential topic of discussion is the negotiation for the Bilateral Investment Treaty (BIT) between China and the US, which started in 2008. In the aftermath of Brexit, any hint at trade deals between China and the UK, or the European Union, will also be important.
Compared with the Finance Ministers and Central Bank Governors Meeting in late February, there appears to be less immediate need for a major policy initiative from the upcoming meeting in Hangzhou. Market concerns over RMB depreciation, growth risks and competitive devaluation by major currencies have receded. Economic activity has stabilised in China, supported by fiscal expansion. And even while data have disappointed in July and concerns about private sector investment remain, fears over ‘hard landing’ have subsided. Meanwhile, the near-term market impact of Brexit appears limited, particularly given the prospect of further easing in the UK.
With less near-term worries on the radar, we think China’s policy makers will seek to advocate a more medium-term agenda for the global economy, one that features reforms to the global monetary system, greater use of green finance, and a more prominent role for infrastructure investment. Chinese policy makers may also try to push for more progress on the bilateral trade deal with the US, given that President Obama’s term is drawing to an end.
Qu Hongbin is chief China economist of HSBC Bank plc.