Over the weekend, the Group of 20 convened in yet another meeting in Chengdu, China, where they reiterated a long-running pledge to use all policy tools to help boost confidence and growth, but instead of emphasizing monetary policy the group said they would focus on fiscal and structural measures. Then again, since incremental fiscal stimulus would likely result in additional central bank monetization in order to avoid a steep selloff in government bonds and risk a yield spike, what the G-20 really did is set the stage for even more central bank-funded deficit spending, aka soft helicopter money.
“The global economic recovery continues but remains weaker than desirable,” finance ministers and central bank governors said in a joint communique at the close of a two-day gathering in Chengdu, China Sunday. They clearly did not believe that the S&P at record highs is indicative of a US, or global, economy that is firing on all cylinders. Incidentally, neither does the BIS which a month ago warned about the dangers of overheating asset prices as a result of unprecedented global monetary stimulus.
“We will carefully calibrate and clearly communicate our macroeconomic and structural policy actions to reduce policy uncertainty, minimize negative spillovers and promote transparency.”
“Underscoring the essential role of structural reforms, we emphasize that our fiscal strategies are equally important to support our common growth objectives,” the group said, in slightly modified language from its last communique, issued in April. Three months ago, the group didn’t use the term “essential” for reform, nor the word “emphasize” for its fiscal policy. The April document also didn’t refer to fiscal strategies being “equally” important.
As in the April and February communiques, the G-20 said “monetary policy alone cannot lead to balanced growth.”
Additionally, and as has been the recurring theme for months, the G-20 repeated its pledge to avoid competitive currency devaluations, consult closely on foreign-exchange policy and resist all protectionism. Japan, as in the past, underscored that the communique also reaffirmed warnings against “excess” currency volatility.
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All of the above was largely in keeping the traditionally toothless and diplomatically correct phrasings of G-20 meeting statements.
But while the group traditionally tries to put on a united front, a curious divergence emerged following the latest meeting in China, where as Bloomberg notes Chinese and U.S. officials “showed signs of being at odds on how synchronized efforts to boost global growth need to be, with China stressing the need for improved coordination more than the U.S.”
U.S. Treasury Secretary Jacob J. Lew on Thursday talked down the need for crisis-level coordination as he headed to Chengdu, China, for the meeting. This follows a call by Chinese policy makers on Friday who added urgency to their earlier call to strengthen efforts across the globe to break down a prolonged period of sluggish growth.
“G-20 countries should intensify consultation and coordination, forge policy consensus, and guide market expectation,” Chinese Finance Minister Lou Jiwei said Saturday at a symposium kicking off the meeting. He repeated comments from President Xi Jinping that it’s “vitally” important for the group to enhance how it works together, adding that the “global economy is at a critical conjuncture” as the “impacts of the international financial crisis are still unfolding.”
On Friday, Premier Li Keqiang said that against the backdrop of rising protectionist pressures and increasing challenges in international trade policy, “it is critical to enhance international economic policy coordination.” He was referring to the recent increase in protectionism between China and the US, leading to a surge in new tariffs and duties against Chinese commodity exports, such as a recent 522% spike in duties for Chinese cold-rolled steel exports, as Beijing seeks to quietly flood the world with its excess production.
As Bloomberg adds, it is unclear if China is calling for the same level of policy coordination seen in 2008 and 2009, or what kind of commitment it wants from the G-20. The group isn’t at a stage of heated discussions over how policy coordination should take place, according to a Japanese Finance Ministry official who declined to be named, citing ministry policy. The G-20 agrees on using all available policy tools depending on the economic situation of each nation, the person said.
Perhaps one reason for the dicshord is the US’ intention to keep portraying the US as an “oasis of stability” in an otherwise chaotic world. China faces a transition to lower growth and a shift from an old-model economy fueled by debt and investment, to one led by consumers and services.
There is, of course, a glaring problem with any attempt to showcase China as an economy whose consumer is strong enough to propell its growth to the next level. As Caixin calculates China’s average household debt relative to GDP has already reached historic highs, driven by a surge in mortgage loans over the past few years. By the end of 2015, Chinese residents owed banks 27 trillion yuan (US$4 trillion), equivalent to 40 percent of China’s GDP. That puts China significantly above many other emerging economies, such as India, Russia and Brazil, according to data from the Bank of International Settlements. That means there isn’t much more room for households to keep borrowing.
It also puts Chinese consumer debt above that of the US.
The average urban household debt burden may be even higher due to conditions that make it difficult for rural residents, including migrant workers, to obtain bank loans. Each of China’s 172 million urban households owed an average of 156,000 yuan in debt at the end of last year, based on official data that show 40 percent of all Chinese households held urban residence permits in 2015. That’s 1.7 times the average disposable income for urban households. Expanding the definition to include people who live in cities but don’t have official urban residence permits, or hukou, the ratio falls to 1.25 times, still higher than the 1.2 times for the United States.
It appears that even before the Chinese handoff to consumer-led growth happened, Chinese consumers are already tapped out with unprecedented amounts of debt. This is precisely what China is worried about when it seeks greater global coordination, aware that a next debt-driven crisis is just over the horizon.
The U.S., however, is “a bright spot” in a world with a lot of uncertainties, Lew told reporters Saturday in Chengdu. He emphasized the need to “redouble” efforts to use all policy tools available to boost shared growth. At the same time, Lew said ahead of the meeting that he didn’t think “this is a moment that calls for the kind of coordinated action that occurred during the Great Recession in 2008 and 2009.”
Why this unwilingness on behalf of the US to even consider greater coordination – ostensibly in response to future crises? The answer is revealed from the conclusion of the G-7 meeting which took place in May in Sendai, Japan. Recall that following that summit, the Group of 7 most advanced countries refused to warn of a “global economic crisis” for one simple reason: the “sentiment can become self-fulfilling.“
According to Glenn Maguire, Asia-Pacific chief economist at Australia & New Zealand Banking Group, “Asia is feeling the brunt of the Chinese slowdown given its trade exposure, with a more marginal impact so far on the U.S. and Europe.”
“Hence it is not entirely surprising that a coordinated response to an unevenly felt dynamic could not be reached at the G-7 negotiating table,” Maguire said. “Moreover, the G-7 is obviously aware of the ‘announcement effect’ the official communique has,” he said. “In such a situation, warning of negative risks and sentiment can become self-fulfilling.”
Today, the G-20 effectively extended on this logic courtesy of Jack lew who once again was determined to suggest that the global financial system is “stable” despite clear signs to the contrary, including every central bank stepping in in the aftermath of Brexit and assuring the world that “markets” who not be allowed to drop, period.
Perhaps this latest attempt to squash pessimism will succeed, if only for the time being.
A number of countries had already taken steps to bolster growth in the run-up to the Chengdu G-20, which also occurred against a backdrop of diminished currency tensions compared with early this year. China succeeded in stabilizing growth in the first half of 2016 after unleashing easier credit and loosening its fiscal stance, while Japan is in the midst of compiling its own fiscal package. Britain’s new chancellor of the exchequer, Philip Hammond, had indicated openness to a more generous budget on July 22, when he told the BBC the U.K. could “reset fiscal policy” if necessary.
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In addition to the general tone of the communique, and the rising dischord between China and the US, one specific item that did generate attention was recent events in Turkey. As Bloomberg points out, there was no mention in the communique of Turkey, after disagreement among members over whether to include some reference. German Finance Minister Wolfgang Schaeuble Saturday told reporters that there’s great concern “in Germany and everywhere in Europe that what is happening in Turkey is not in line with what we understand as democracy and the rule of law,” amid a crackdown on political opponents in the wake of this month’s coup attempt.
Earlier, Turkish Deputy Prime Minister Mehmet Simsek, in a posting on Twitter, rejected any reference to his country’s political developments in the communique. However, according to Reuters, Turkey wanted the final communique to include an endorsement of the current government after the failed coup attempt last week, but did not succeed, G20 officials said.
Turkey’s Deputy Prime Minister Mehmet Simsek, attending the meeting, denied Ankara had sought such a reference, tweeting: “We have no such initiative.”
But European Commissioner for Economic Affairs confirmed on Sunday that Turkey had sought such a mention.
“It is true that Turkey wanted a line on that, that was debated in the drafting sessions but the minister, after talking to a few of us, estimated that it was wiser not to raise this issue in the G20 session itself. That was wise,” Moscovici told a news conference.
The Turkish government, which introduced a state of emergency on Wednesday after the failed coup and is considering bringing back the death penalty for the plotters, wanted the final communique of the G20, closely watched by markets, to include a paragraph on Turkey.
“Strengthening the rule of law is fundamental for sustainable development and we support the legitimate government of Turkey in its endeavours to enhance economic stability and prosperity,” the additional paragraph of the G20 was to say.
Officials from European Union countries, however, did not support that and the final communique did not mention Turkey.
This implies that tensions between Turkey and Europe continue to rise, although we doubt Erdogan is too nervous, as Turkey still has the upper hand over Germany with a very simple if effective trump card: 2 million Syrian refugees which it can unleash in Europe’s general direction on a moment’s notice. In light of the latest deadly attack in southern Germany by an allegedly insane Syrian refugee documented earlier today, we anticipate Turkey’s leverage will only increase in the coming weeks, and give Erdogan even more international political cover to continue his unprecedented purge of all domestic enemies in any way he sees fit.
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