In his 1933 novel Lost Horizon British author James Hilton introduces the world to the idea of a place called Shangri-La. “Haven’t you ever dreamed of a place where living was not a struggle but a lasting delight?” he asks.
The high priest of Shangri-La is a semi-immortal man with mythical powers who dresses Chinese-style, but speaks impeccable English.
And though he was writing 80 years ago, Hilton could almost be describing Zhou Xiaochuan, China’s central bank governor. The 68 year-old, who has held his job long past retirement age, speaks fluent English and spent last weekend holding court at a very modern day Shangri-La – the hotel of that brand name in Shanghai.
Zhou was the star attraction at the G20 meeting of global finance ministers and central bankers, which China was hosting for the first time. After months of almost monastic silence, Zhou’s declaration that “there is no basis for persistent yuan depreciation from the perspective of economic fundamentals,” was met with a welcome sigh of relief, not least by IMF chief Christine Lagarde who said his message was “loud and clear”.
But creating a world of “lasting delight” is proving to be more of a struggle. Growth rates are slowing, stock markets are falling, bond yields are turning ever more negative and many analysts are starting to wonder whether central banks are running out of ammunition to pump-prime growth back to the levels seen before the global financial crisis in 2008. As Martin Wolf concludes in a Financial Times commentary, the “economic forces that have brought the world economy to zero real interest rates and include negative central bank rates are, if anything, now strengthening”.
At the end of their two-day meeting, the G20 leaders released a communiqué, which neatly summed up the problem. “The global economic recovery remains uneven and falls short of our ambition for strong, sustained and balanced growth.” Their solution: “We will use all our policy tools; monetary, fiscal and structural – individually and collectively – to achieve these goals.”
In Lost Horizon, the four protagonists who find themselves in Shangri-La (in their case, after a plane crash) are divided on how to solve their predicament. The same appears to be true of the world’s finance ministers and central bankers, suggesting that the collective action they talk of will remain as far off as Shangri-La itself.
The US has called for countries such as Germany to fuel growth through infrastructure investment, but has been rebuffed. German Finance Minister Wolfgang Schauble even told delegates “the debt financed growth model has reached its limit”. Germany believes other countries, particularly those in the eurozone, need to address structural issues in their labour markets. “We are not lacking in policy proposals,” Schauble stated. “We’re lacking in policy implementation.” Bank of England Governor Mark Carney backs Schauble’s argument: “In most advanced economies difficult structural reforms have been deferred.”
In its comments section one FT reader suggests the world’s central bank governors should go on a “QE strike” for the next three years, thereby forcing governments to face up to the electorally painful reforms they need to undertake.
The Chinese and the US, meanwhile, have a ‘chicken and egg’ stance on where responsibility lies for the dollar’s strength and the renminbi’s weakness. An editorial on Hexun.com, China’s largest financial news portal, suggests Wall Street is responsible for the current economic malaise thanks to its “strategic decision” to short commodities, particularly oil.
It believes global investors want China to provide another 2008-style stimulus (when the State Council injected Rmb4 trillion, or $586 billion, into the economy) but advises its government not to heed the clarion call. “We need to think carefully about playing our good card,” it comments. “We should consider how it can benefit us rather than providing US and European capitalists with another channel to ride on China like parasites.”
US officials, on the other hand, have been keen to make sure China and other countries do not engage in competitive devaluations to boost exports, or rely on US consumers to carry world demand. In a widely quoted interview with Bloomberg, US Treasury Secretary Jack Lew said the US is “doing pretty well but can’t provide all the demand for the world”. He added that a “beggar-thy-neighbour strategy” would only have a domino effect that does nothing to create growth.
What no one doubts is that China has been making difficult structural reforms. A few days ahead of the G20 meeting, the government opened up its interbank bond market to all but hedge funds in another sign it is making the renminbi a more freely tradable currency.
Yet having said it will not devalue the renminbi, the Chinese government immediately guided it down when markets reopened on Monday, setting the exchange rate 0.17% lower and prompting a new stock market sell-off. Later the same day, the People’s Bank of China (PBoC) also cut banks’ reserve requirement ratio (RRR) a further 50 basis points, confirming its easing bias.
HSBC believes there will be 400bp of RRR cuts in 2016 and a further 50bp of lending rate cuts. It also says Beijing is likely to use fiscal tools such as tax cuts to stimulate growth. Chief China economist Qu Hongbin says it is entirely possible the fiscal deficit will be expanded from 3.5% in 2015 to up to 5% in 2016 to “accommodate the restructuring in overcapacity sectors”.
Ahead of the G20 some analysts had called on world leaders to draft a new Plaza Accord to reduce the dollar’s strength, but Chinese Finance Minister Lou Jiwei dismissed the idea as a “fantasy”.
His American counterpart Lew also said “markets shouldn’t expect a crisis response in a non-crisis environment.”
The only coordinated response to emerge from the Shanghai G20 ended up being its communiqué. At the conclusion of Lost Horizon the hero, Hugh Conway, tries to find his way back to Shangri-La: a place where the wise recognise their responsibility to future generations. “Do you think he ever found it?” the narrator asks. The author never lets us know.
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