When China hosted economic policymakers from the G-20 countries in Shanghai earlier this year, Chinese leaders hoped to present their vision for a new international economic order in which Beijing would take a place commensurate with its wealth. Instead, they found themselves reassuring the G-20’s jittery central bankers that China’s turbulent economy was not headed for a hard landing and that Beijing would not further devalue the yuan.
The episode was another reminder of the extent to which Chinese economic policymakers must now take global expectations into account. To do otherwise could weaken Beijing’s case for global economic leadership and hamstring its ability to wield influence abroad using its economic power. China’s 13th five-year plan, approved by the National People’s Congress earlier this month, demonstrated the country’s reluctance to acknowledge this reality and its preference, instead, for short-term measures aimed at improving its domestic economy.
BEIJING IN A BIND
China faces the so-called trilemma of international economics, which holds that a country cannot maintain more than two of the following three positions at the same time: a fixed exchange rate, an independent monetary policy, and free capital flows. Beijing has chosen to keep its exchange rate stable by drawing from its $3.2 trillion in foreign reserves, and Chinese leaders are clearly committed to an active monetary policy. On March 5, Chinese Premier Li Keqiang announced that monetary stimulus will be a key expansionary tool in Beijing’s efforts to reach a GDP growth target of between 6.5 and 7.5 percent in 2016. In addition, money growth will increase from 12 percent in 2015 to 13 percent in 2016, as Beijing injects an additional 17.9 trillion yuan (or around $2.75 trillion) in new financing relative to 2015’s 15.3 trillion yuan (or around $2.35 trillion). Over the course of this year, the government may also announce further changes to interest rates and bank reserve requirements to keep credit readily
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