By Mark Magnier and Ian Talley
CHENGDU, China -- A few short months ago, China's economic
problems were fueling global panic in markets and drawing unwanted
attention and rebuke by the world's largest economies.
Now, China's economic challenges have taken a back seat to more
pressing geopolitical concerns among finance ministers and central
bankers from the Group of 20 largest economies, allowing Beijing to
return to the role it prefers: showcasing its growing clout on the
world stage.
Britain's surprise vote to leave the European Union, Turkey's
recent coup attempt, a series of horrific terror attacks, souring
global growth prospects and threats of an Italian banking crisis
are drawing the scrutiny of the world's finance chiefs. July's
meeting in Chengdu stands in contrast to the last G-20 finance
leaders' meeting, held in February in Shanghai.
Then, fears of a China-induced currency war and an economic
meltdown in the world's second-largest economy left the host nation
on the defensive. The Chengdu meeting, which ends Sunday, is the
last major G-20 event before the financial group's September summit
in Hangzhou.
"The Chinese economy is a 'stability anchor' for the global
economy," Premier Li Keqiang said Friday ahead of the meeting of
the G-20, which acts as the world's economic executive board.
"Prophecy of China's economy heading for a hard landing is rarely
heard now."
China continues to face questions about its currency policy and
its steel exports. Foreign industries and their governments accuse
the country of undercutting their markets unfairly by selling goods
at prices below the cost of production. But those worries currently
pale against much hotter fires elsewhere in the world.
"Brexit, the Turkish coup, and the U.S. elections have certainly
helped redirect attention away from China," said Standard Life
Investments Ltd. economist Alexander Wolf, adding that markets
often have a "limited attention span."
The U.K. vote to leave the EU has cast a pall over the global
economy, prompting the International Monetary Fund to downgrade its
outlook and warn that growth could slip dangerously lower if U.K.
and EU leaders don't quickly address investor concerns about their
future together. The coup against Ankara's leadership revived
political-risk worries in many emerging markets. And Republican
presidential candidate Donald Trump's talk of hiking tariffs is
spurring worries the U.S. could pull the world into a global trade
war.
Meanwhile, G-20 officials say Chinese management of the economy
has risen to the challenge. Beijing has recalibrated its
communication on exchange-rate policy and monetary and fiscal
policies after global markets shuddered under what many said last
year were management missteps.
"China is undergoing an important structural transformation,"
said Italian Finance Minister Pier Carlo Padoan. Unlike earlier
this year and last, no officials at the Chengdu G-20 mentioned
China's economy as a fundamental vulnerability to the global
economy, Mr. Padoan said.
"Any transition has bumps here and there, but the overall
direction of the change has been positive," he said.
Beijing has taken active steps to restore confidence, repeatedly
pledging since February not to depreciate the currency for
competitive advantage. That helped allay fears of an imminent
currency war.
The Asian powerhouse has also benefited from the Federal
Reserve's decision to delay an interest-rate increase, allowing
authorities here to gradually depreciate the yuan, also known as
the renminbi or RMB, without alarming investors.
"China has committed to moving in an orderly way toward a more
market-oriented exchange rate," a senior U.S. Treasury official
said. "I've observed over the last months...a willingness to
actually intervene to support the RMB to keep the RMB from
depreciating more."
China in recent months addressed fears of a financial crisis
sparked by a flood of capital leaving its shores by tightening bank
supervision, cracking down on unauthorized foreign-exchange traders
and making it more difficult for customers to exchange funds.
Foreign-exchange reserves have declined by $30 billion to $40
billion a month recently, compared with a $514 billion decline in
2015 and nearly $100 billion in January.
Also fueling the world's more sanguine view of China, economists
say: policy makers' view that more fiscal spending, greater
stability of capital outflows and other moves to curtail volatility
are important as global growth slows, issues that play to China's
strength.
Beijing answered global concerns that its economy was slowing
faster than it acknowledged by injecting a flood of money into the
financial system, frontloading infrastructure spending and easing
restrictions on its massive property sector. That saw
second-quarter growth match the 6.7% rate in the first quarter,
which was the economy's slowest pace since the global financial
crisis.
The stimulus keeps China's economy humming along, allowing
Beijing to claim economic stability and put growth on track to hit
the government's annual target of 6.5% to 7%.
But, many economists caution, China may be buying growth now at
the expense of output later.
The return to credit-fueled growth pushes up already-high
corporate debt levels, fuels the problem of industrial
overcapacity, blunts reform efforts and sets back efforts to shift
the economy from state-directed growth.
"There is already a big problem of impaired loans which are on
banks' books which have not really been dealt with," said IMF chief
economist Maurice Obstfeld. "There needs to be a re-intensification
of efforts in that area."
Economists warn medium-term risks in China are rising. Standard
& Poor's Financial Services says corporate-credit quality is
deteriorating faster than at any time since 2009. Corporate debt
levels are estimated at 145% of gross domestic product, up from
less than 100% of GDP in 2007.
Those levels, the IMF says, "are high by any measure."
Write to Mark Magnier at mark.magnier@wsj.com and Ian Talley at
ian.talley@wsj.com
(END) Dow Jones Newswires
July 23, 2016 23:20 ET (03:20 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.