Opportunity or threat — the G7’s China challenge

There is a new facet to China and Japan’s increasingly bitter economic and geopolitical rivalry — international summitry.

While Japan gets to attend the G20 events hosted by Beijing this year, China is conspicuous in its absence from the G7 meeting of major industrialised nations, despite having an economy that is larger than those of Japan, Germany and the UK combined. At last month’s gathering of G7 foreign ministers, a joint statement on maritime security expressed “strong opposition to any intimidating, coercive or provocative unilateral actions that could alter the status quo and increase tensions”.

The statement did not name China or cite its “island building” activities in the South China Sea specifically, but Beijing received the message loud and clear. In response, the Chinese foreign ministry summoned envoys from G7 member countries’ Beijing embassies to convey its anger that the club of advanced economies was apparently taking sides in territorial disputes.

The rift has made it less likely that China’s premier, Li Keqiang, will attend a face-saving summit with his Japanese counterpart around the G7’s concluding meeting at Ise-Shima. As of late April, the guest list for Tokyo’s G7 so-called “outreach summit” included Laos, Vietnam, Indonesia, Bangladesh, Sri Lanka, Papua New Guinea and Chad.

China’s awkward relationship with the G7 reflects individual members’ confusion on whether to treat China as an opportunity or threat.

For the US and Japan, the G7 is a useful tool with which to isolate Beijing on issues such as the South China Sea. Another is the Trans-Pacific Partnership, the US-led trading bloc that includes Japan and Canada but not China. Beijing, meanwhile, has had success in its own attempts to drive wedges between G7 members, most notably in recruiting the UK, Germany, France and Italy into the Asian Infrastructure Investment Bank, its answer to the World Bank.

As recently as January, it appeared that China’s own stewardship of the G20, a more inclusive collection of developed and emerging economies, was more of a liability than an opportunity to showcase itself. An ill-conceived stock market rescue, combined with confusion over the Chinese central bank’s currency policy, severely dented the international community’s confidence in Beijing’s policymakers.

By last December, China’s foreign exchange reserves were falling as much as $100bn a month.

As G20 finance ministers and central bankers gathered in Shanghai in late February, it appeared to be the worst possible time for the Chinese government to be hosting a high-profile financial gathering.

Mr Li and Zhou Xiaochuan, governor of China’s central bank, instead used the meeting to end their months-long silence and launch a public relations counter-offensive.

The Chinese foreign ministry summoned envoys from G7 member countries to convey its anger

The head of China’s market regulator, a convenient scapegoat for the market meltdown, was fired and, more critically, the precipitous declines in the country’s foreign exchange reserves were halted.

It is debatable, however, whether the latter outcome had more to do with Mr Li and Mr Zhou or the US Federal Reserve, which relieved much of the pressure building on the renminbi by backing down from a series of anticipated interest rate rises.

Similarly, China’s strong first quarter economic growth figure, released in April, provided international investors with additional reassurance about the current trajectory of the world’s second-largest economy. Yet it also led many to question whether the apparent recovery was a short-term phenomenon driven by an unsustainable credit boom.

Analysts believe that Chinese policymakers will continue to do whatever it takes to boost economic growth and confidence in the renminbi until September, when its G20 duties conclude by hosting heads of state at a summit in Hangzhou.

Only then might Beijing prioritise long-term financial stability over short-term economic growth.

But whether China’s desire for economic calm at home this summer is matched by a willingness to soothe regional tensions remains an open question.

In the weeks after the G7 foreign ministers’ statement on maritime security, the US expressed alarm over Chinese activity around the Scarborough shoal, a reef which is also claimed by the Philippines.

While the Obama administration has largely sat by and watched Beijing convert contested South China Sea reefs and atolls into artificial islands, complete with airfields, over recent years, the Scarborough shoal could be one place where the US and its allies actually attempt to stop Chinese reclamation before it starts.

Even if Beijing offered to rein in its disputed actions in the South China Sea, Tokyo has learnt the hard way that any step back that appears to be a concession by Beijing is often followed by two aggressive steps forward.

At the beginning of this year, at the same time Chinese vessels were winding down their recent spate of island-building in the South China Sea, China’s military was increasing the tempo of its incursions around the disputed islands that Japan calls Senkaku, and China calls Diaoyu, in the East China Sea.