Finance officials from the world’s major economies start a two-day meeting in China on Saturday where they will confront challenges to global growth from Britain’s decision to leave the European Union and consider deeper structural reforms. Worries over currency manipulation will also factor into the discussions, but a US official indicated that the depreciation of China’s yuan to five-and-a-half year lows, and the Chinese central bank’s reaction, were understandable.
The spectre of protectionism, highlighted by US Republican presidential candidate Donald Trump’s “America First” rhetoric and talk of reworking or quitting trade agreements, will also hang over the finance ministers and central bankers from the Group of 20 as they consider ways to spur sustainable growth.
The G20 officials’ meeting in the southwestern Chinese city of Chengdu will be a debut of sorts for Britain’s newly-appointed finance minister Philip Hammond, who will be grilled about the UK’s plans for keeping up economic growth. “There will be a lot of attention to this meeting as we gather for the first time since the Brexit vote shook markets,” said one Asian finance official. “I expect G20 debate to focus more on potential effects from Brexit on the real economy in the longer term, which should be a matter of concern for emerging economies.”
The International Monetary Fund this week cut its global growth forecasts because of the UK Brexit vote, saying that uncertainty over Britain’s future trade relationship with Europe will stall investment and sap consumer confidence. Data out of Britain on Friday seemed to bear out fears. A business activity index posted its biggest drop in its 20-year history, a sign that Britain’s economy appears to be shrinking at the fastest rate since the financial crisis in the wake of last month’s Brexit vote.
On Friday, Hammond said the UK could reset fiscal policy if necessary, his strongest comments to date on how policy may change after Britain’s historic decision to leave the European Union. Currencies appear poised to be less of a hot-button issue than they were when the finance heads met in Shanghai in February. At that meeting, China had to counter concerns about the possibility it would devalue its currency and spark a global currency war.
A senior US Treasury official signalled on Thursday that US Treasury Secretary Jack Lew was not likely to give China a hard time about the drop in the yuan to five-and-a-half year lows, noting that the People’s Bank of China had intervened to slow the slide.
“Their interventions have been consistent to a transition to a market-oriented exchange rate and it hasn’t had the character of an intervention that we would say by design is to try and gain an unfair advantage,” the official said. “It wouldn’t be fair to say that over the last few months the downward movement of the RMB was something that was fundamentally driven by policy decisions.”