China Needs the G-8, as the G-8 Needs China

C. H. KWAN Consulting Fellow, RIETI

Without the participation of China, the limitations of the current regime for coordinating international economic policy under the Group of Seven (G-7) and Group of Eight (G8, which also includes Russia) have become more and more apparent. From now on, these two groups must strive to establish a new framework for enhancing mutual trust with China, with an eye to the country's joining as a formal member in the near future. Recognizing this, they are promoting exchanges with China in various forms. Following President Hu Jintao's participation in the G-8 summit meeting and expanded dialogue in Evian, France, in June 2003, China's finance minister and central bank governor are to be invited as special guests to the G-7 meeting of finance ministers and central bankers to be held in Washington, D.C. on October 1. For China, which has been promoting industrialization by riding the wave of globalization, membership in the G-8 would mean more than just elevated international status. In addition, joining the G-8 would allow China to alleviate possible trade friction through policy coordination with industrialized countries, and to use pressure from these countries as leverage to accelerate domestic reform.

Pros and cons of China's joining the G-8

As China emerges as an economic power, it has become a significant factor in discussions of such issues as industrial adjustments in developed countries and trade friction. As China's rise is likely to continue, its membership in the G-8 is only a matter of time.

However, the existing members of the G-8 have yet to reach a consensus over China's joining the club. According to some China specialists, the United States and Britain are taking a cautious stance on the grounds that China, unlike the democratic G-8 countries, maintains a communist regime. Japan, for its part, remains ambivalent: it hopes to enhance ties with China on the one hand, but does not want to lose its standing as the sole representative of Asia in G-8 on the other. Other members of the G-8, notably European countries, welcome China's membership, supposedly in a bid to restrain U.S. power.

Meanwhile, in China, many people have remained cautious about joining the G-8 for a number of reasons. To begin with, while the G8 is a "rich nations' club" basically composed of the world's most developed countries, China is still developing. Judging from how Russia, whose economy lags behind those of the other members, is positioned within the G-8, critics fear China is also likely to be treated as a second stringer, with its voice carrying little weight at least for a while. In addition, some in China are concerned that joining the G-8, may undermine its relationships with other developing countries because decisions made at the G-8 tend to favor industrialized countries.

Another concern voiced by those opposed to G-8 membership on the Chinese side is the possibility of impairing the function of the United Nations. If China joins the G-8, the organization would encompass all the permanent members of the U.N. Security Council, enabling them to hold talks outside the U.N. framework. Skeptics worry that under such circumstances, China may not be able to fully utilize its veto power in the Security Council.

Other reasons cited by naysayers include the likelihood that China will come under greater political and economic pressure from major powers and, in particular, they point to the possibility that China may be forced to change its policies against its economic interests and values.

Pursuing common interests through cooperation

In China, those opposing membership in the G-8 generally believe that the country's overall climate for economic growth would be undermined by joining the group, but the opposite may actually be the case. As the global economy becomes increasingly interdependent, China needs the G-8 just as much as the G-8 needs China. Since the administration of President Hu Jintao and Prime Minister Wen Jiabao came to power, China has been advocating the idea of "peaceful rise" as the fundamental principle of its foreign policy, the purpose of which is to develop the country without colliding with the existing order. For this policy to be successful, China must seek cooperation with the G-8 countries - which together account for two-thirds of the world's gross domestic product - in the areas of financial and foreign exchange stabilization, capital flows, energy and so forth. Moreover, given the fact that more than 90% of its exports are industrial products and its massive foreign reserves, in many areas China may find more common interests with industrialized countries than with other developing countries, which are dependant on the of primary commodities and burdened with foreign debts.

With a per-capita GDP only about $1,000, China surely is still a developing country. However, reflecting its population of 1.3 billion, China's GDP in terms of purchasing power parity (PPP) is now the second largest in the world, behind only the U.S. Even at the official exchange rate, China's economy is the seventh largest in the world (see table below). Also, the total value of China's imports and exports is expected to exceed $1 trillion this year. This would make it the third largest trading country in the world, putting it ahead of Japan and behind only the U.S. and Germany. Against the backdrop of its high economic growth, China's status in the global economy is expected to rise further and, accordingly, China will be able to assert a degree of influence in line with its economic power vis-a-vis the G-8 countries.

Table: Size of economies of G-8 countries and China (2003)

By securing its place to speak out through participation in the G-8, China will be able to raise objections to ideas proposed by developed countries without losing its position as a developing country, thereby guiding the existing international order in a direction more favorable to developing countries. China's participation, following Russia's, would transform the G-8 from a "rich man's club" that acts solely on the needs and perceptions of industrialized countries into a "great powers' club" that also reflects the needs and perceptions of developing countries. Key issues for the G-8, ranging from the war against terrorism to the problems of environment and energy, concern all the human beings, not just those in industrialized countries. China, which accounts for some 20% of the world's population, should play an important role in solving these problems.

Participation in the G-8 is unlikely to weaken China's role in the United Nations. The U.N., as it stands today, embraces so many member countries that its decision-making, though democratic, is not very efficient, which leaves it unable to cope with problems requiring quick decisions. On the other hand, although the G-8 is not an organization based on international law, its small number of members means it is quite efficient in policy implementation. The G-8, when joined by China, will bring together all the permanent members of the U.N. Security Council, thereby giving China greater influence over international politics. This, in turn, will foster greater international assertiveness by China as well. Using its status as both a developing country and as a member of the world's most powerful grouping, China will be able to secure a more advantageous position in the global community.

Using external pressure to accelerate reform

Indeed, when China joins the G-8 it is bound to face strong pressure from industrialized countries to adjust its policies, and foreign exchange policy will most likely be one of the focal issues. One major objection to China's formally joining the G-8 is its continued pegging of the renminbi (RMB) to the dollar at a fixed rate, which effectively prevents China from coordinating its foreign exchange policy with other countries. China, for its part, has been unenthusiastic about seeking formal membership in the G-8, weary of interference by industrialized countries in its foreign exchange and other policies. At the moment, however, external pressure is mounting on China to abandon the peg as the dollar declines against other major currencies. Internal pressure is also increasing, with the growing competitiveness of Chinese products relative to its trading partners. China will not be able to maintain the dollar peg forever. In any event, the Chinese government now hopes to shift to a "more flexible, market-oriented foreign exchange regime" as a medium- to long-term goal, thus leaving some room for compromise with the G-8 countries, although such a shift is premised on liberalization of trade and capital transactions, as well as the establishment of a sound financial and banking system.

In the light of the experience of overall economic reform to date, external pressures besides those related to foreign exchange policy may also turn out to be beneficial to China's long-term development. In 2001, after 15 years of tough negotiations, China finally achieved its long-standing goal of joining the World Trade Organization. During the negotiations, concerns were voiced that accession might deal a blow to certain domestic industries. As it turned out, however, China has been steadily consolidating its position as "the world's workshop" since joining the WTO. Contrary to the gloomy predictions, China's accession to the WTO is now viewed in a positive light for having accelerated the opening of the country and spurring internal reform. Likewise, China's joining the G-8 is expected to further promote the ongoing shift to a market-oriented economy, the establishment of rule of law, and country's integration into the global economy. As with its accession to the WTO, full membership in the G-8 may serve as a milestone in the implementation of the reform and opening-up of China, and its evolution from a poor to a rich county.

Hurdles remain, but when the G-8 members finally extend a warm welcome, there should not be any reason for China to refuse the offer.

September 28, 2004

September 28, 2004