G20 tries to dispel fears over China

Finance ministers from the G20 nations have insisted the global economy has nothing to fear from a China slowdown as they tried to dispel the pall of gloom that has been cast by sagging growth and market turmoil.

At the end of a two-day meeting in Turkey the representatives, accounting for 85 per cent of the world's output, expressed confidence in the economic forecast in spite of mounting evidence that global growth is falling short of expectations.

European ministers showed firm support for Beijing, which convinced many G20 officials that its devaluation and new currency management arrangements constituted a step towards a more market-determined exchange rate rather than a ploy to boost exports.

Absolute determination

German finance minister Wolfgang Schauble said the G20 agreed there was no reason to fret over slower Chinese growth, while European Union Commissioner for economic affairs Pierre Moscovici praised “the absolute determination of the [Chinese] authorities to sustain growth”.

US support was more tempered. US treasury secretary Jack Lew pressed Lou Jiwei, his Chinese counterpart, for a signal that China would allow market pressures to drive the renminbi up as well as down.

Economists have struck a sanguine tone about the impact of China’s malaise on American growth – one of the global economy’s few bright spots – ahead of a US Federal Reserve meeting on whether to raise record low interest rates for the first time in nearly a decade.

Global growth forecasts have been coming down, with the International Monetary Fund expected to cut its outlook in its autumn update, but direct linkages between China and the US – the world’s two biggest economies – are narrow.

This suggests a sharp Chinese downturn could leave the US economy less waterlogged than many of its partners.

Peterson Institute of International Economics president Adam Posen argues the market ruckus has been overblown. While China’s government has mismanaged the situation, only a modest portion of the population is exposed to the stock market falls and there is evidence consumption has held up, he said. “People are making too much of the China slowdown. Financial and trade links directly from China to the US are quite limited,” he added.

Set against this, however, are the broader ripple effects from China’s woes. Research to be published by Oxford Economics this week will argue the key risk to the US from a big Chinese downturn is via its indirect impact on other emerging markets, which could trigger financial stress and a more generalised trade slowdown. While US exports directly to China may be modest, emerging markets account for closer to half of US merchandise exports, it says.

At the Fed, officials are tracing possible China-linked risks ahead of its meeting on September 16th and 17th. The central bank would not want to lift rates at a time of severe market volatility, but if markets calm by September 16th other factors will come into play. – Copyright The Financial Times Limited 2015