Eugene Kiernan: China was the ghost at the G7 feast

The recent G7 meeting, with its main agenda item of building back the world economy, was notable not just for the first face to face meeting of many of the world’s leaders, but also for the absence of one of the major players on the global stage – China.

China, of course, is not a member, despite representing approximately one fifth of global GDP and population. It had been part of the G8 plus 5 in 2007, a grouping which sought to include emerging economies in the global discussion.

But what was interesting in this year’s G7 was how heavily China, despite not being there, featured in final communiques and outcomes. So if it was the “ghost at the feast” at the G7, it was visible to a lot more than just Macbeth.

The reality is that economic and geopolitical intersections between China and G7 countries are simply too numerous and consequential for the one-way traffic we saw in Cornwall.

Trade tops that list of intersections.

Pre-Covid, financial markets would lurch with every twist and turn in the US-China trade war of the combative Trump years. Tweets, rather than talks, seemed the preferred negotiation style. This tension hasn’t really gone away. A truce from January 2020 removed some sanctions and China agreed to buy additional US goods. This was to be a temporary solution and there are even doubts as to whether China has in fact complied. US business leaders expecting a fresh approach from a Biden administration are being frustrated. At best the US-China trade policy is a work in progress with both committing to comprehensive reviews. Trade issues will no doubt return to the front pages and Congressional elections in 2022 may prevent too doveish a stance from the Biden administration

Inflation is top of the mind for policy makers in the developed world – especially in the US. Fears of excessive stimulus driving prices higher and forcing interest rate hikes dominate much economic debate. Policy in China has a role to play here. China, long a source of disinflation, is now seen by some as an inflation risk to the upside.

Factory gate prices in China are rising at a rate of 9 per cent per year. This along with soaring shipping costs and a stronger currency will push up the price of Chinese-made goods and components. Will it persist? China doesn’t have the low wages of the early 2000s to offset any other inflationary pressures. For China’s overall consumer price index, this pipe-line inflation is being offset by a significant fall in pork prices – down 25 per cent in the year. So it is probably too soon to say whether this Chinese inflationary channel, just like US price pressure, is itself transitory or more permanent.

Even in the case of the global vaccine roll-out there will be a need for dialogue and coordinated response. At the moment, the impetus is to get jabs into arms. But as we make progress, the emphasis may well shift to the efficacy of the different vaccines being administered. While it is very early in the process, initial research studies, and indeed the experience in countries such as Chile, where Chinese vaccines dominate, suggest that Chinese developed vaccines such as Sinovac and Sinopharm have lower estimated efficacy than “western” counterparts. Should the world move to settle on the most effective vaccine, how might that be decided and what role will the WHO play? Some form of consensus building will be required.

There are too many areas of common self-interest in the relationship between China and the “West” for final communiques to be the prime source of discussion. And this is before consideration of issues like tension in Taiwan strait, an unravelling of the 1997 Hong Kong agreement, climate change, human rights issues and more.

Clarity and cooperation in areas such as trade, monetary policy and vaccines will be important for global stability. And that importance only gets amplified as China outstrips the world in economic growth.

For the next three years, US and European economies are forecast to grow cumulatively by about 12-14 per cent. The corresponding figure for China is over 20 per cent!

Successful outcomes require two-way communication rather the one-way communiques.

Eugene Kiernan is an independent investment strategist and is president of the Chartered Institute for Securities and Investment