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Sunday, May 9, 2004

Seat China at the top table

Special to The Japan Times

Can China successfully take the steam out of its overheating economy without causing a collapse, or more appropriately, given the steam metaphor, a meltdown? The question is not an academic one, but very real — and not just for the 1.3 billion people in China.

Other economies, from neighbors Hong Kong, Taiwan, Japan and Korea to Europe and the United States, which would also be hit by any exploding lava, are vitally interested in how China manages its economy.

The transformation of China's economy even within the last five years has been little short of remarkable. The rest of the world has reason to watch and worry, especially given the Chinese appetite for key global commodities starting with oil. Not everyone is sanguine about the notion that the special Chinese mixture of the invisible hand of market forces and the iron fist of direct intervention will produce the right result.

But what is more remarkable is that world leaders in Washington last month for the spring meetings of the International Monetary Fund and World Bank seem to have given no more public thought to inviting China to share their top table deliberations as a full member of the Group of Seven industrial nations. The closest to a public discussion came when a U.S. Treasury official said, correctly, it is not a decision for the U.S. to make, but that China's participation at some point in the future would "clearly be useful."

The debate about the usefulness, or otherwise, of China's participation is not a new idea. It was started in the mid-1990s after Russia had been invited to join some discussions as a sort of partial G7 member. Luminaries including former U.S. national security adviser Zbigniew Brezinski argued that China, India and Brazil were just as entitled to representation as Russia was, and a G11 of all these countries should constitute the top table.

The argument against the inclusion of China, or India or Brazil, was that the G7 should be a club of like-minded nations, namely market-oriented, democratic and thus with the "fully systemic perspective, sense of responsibility and capacity to contribute to global order which flows from these attributes," as one opponent of China put it.

Last month Makoto Utsumi, Japan's vice finance minister for international affairs from 1989 to 1991, put forward the view against China by claiming that it did not have a "proper system." He tried to explain what he meant by adding that "the G7 is a place where real decisions are made. There is a lot of negotiation that goes on that is never revealed. It's a difficult thing for a country to join."

I suppose what he was trying to say is that China is not one of the boys, and cannot be trusted with secret discussions about the dollar, the yen and the yuan. But at the Dubai G7 annual meetings last year, I was told that there was precious little real discussion among the principals, the finance ministers and central bank chiefs. They just took the communique as drafted by their sherpas, and then individual ministers added their own gloss. So much for the press ballyhoo.

I can see Utsumi's argument. It is not so easy to see senior Chinese below ministerial and senior party level in tete-a-tete confidential conversations with Utsumi's successor, Zenbei Mizoguchi, and his polished counterparts from the U.S., Britain, France, Germany, Italy and Canada.

The Chinese would be uncomfortable at first, and would have to get over the difficulty of taking the initiative in discussions and not referring back to Beijing for instructions at every twist and turn. But Utsumi knows that Chinese officials are smart enough to learn G7 table manners quickly.

China's economic muscle is today so strong that it is hard to justify Canada or Italy a place at the top table and not China (and India, too). Now that they have sacrificed their own currencies to join the euro, surely Italy, France and Germany should be represented by a single person? That is the real can of worms that the cozy G7 club does not want to open.

But the hard economic fact of life in 2004 is that, besides being the workshop of the world, in market-exchange rate terms, China's is the sixth-biggest economy in the world (and will overtake Japan as No. 2 by 2012).

Yes, it is certainly true that China does not know how the real world works — true enough in relation to Hong Kong where Beijing comrades have been taken in by the rubbish spouted by oligopolist property moguls whom Mao Zedong would have strung up in a few minutes. It is true that the yuan is not freely convertible. But China is sitting on several billion fistfuls of dollars in foreign-exchange reserves, so it has a potentially large influence on global currency markets.

As with the World Trade Organization, it is surely better to draw China into the global economic and financial decision-making process so that it becomes more responsible and responsive in its policies. Invite China to Washington in the autumn, set a timetable — and conditions, if you like — for China to have its own seat at the top table in two to three years.

It is well to remember the wisdom of the late former U.S. President Lyndon Johnson: It is better to have a powerful figure inside the tent pissing out, than outside pissing in.

Kevin Rafferty was managing editor at the World Bank 1997-99 and editor of daily newspapers during the IMF annual meetings 1990-96 and 2003.

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