Daily Management Review

G7 Finance Heads Face A Difficult Trade-Off In Contemplating Actions To Confront China


G7 Finance Heads Face A Difficult Trade-Off In Contemplating Actions To Confront China
The Group of Seven (G7) advanced economies' finance ministers are going to discuss this week the concept of placing targeted limits on investments to China, which economists describe as a double-edged sword that will make little progress.
China is on the minds of G7 finance leaders meeting in Niigata, Japan, with present G7 chair Japan spearheading new attempts to broaden supply chains and lessen their reliance on Beijing.
However, the group is divided on how far it should go in challenging China, as damaging trade with the second-largest economy in the world could be devastating to export-dependent countries like Germany and Japan.
The United States is leading the charge for tougher measures on China. Treasury Secretary Janet Yellen stated on Thursday that many members of the G7 economies supported the United States' worries about China's use of "economic coercion" against other countries and were thinking about countermeasures.
"We have been engaging in discussions with our G7 colleagues, and I would expect that that would continue these meetings, at least in some informal way," Yellen said on the U.S. push to impose such curbs.
Germany is growing apprehensive of China as a geopolitical threat and has pondered moves to evaluate bilateral ties, but is afraid of being perceived as creating a G7 front against China.
Five diplomatic sources told Reuters that Germany led calls recommending prudence about targeting China amid new European Union sanctions imposed in response to Russia's invasion of Ukraine.
While the G7 leaders' summit next week may discuss placing targeted curbs on Chinese investments, any screening of investments would be limited to strategically critical regions, a German government source said on Thursday.
The consultations among finance leaders will lay the basis for the Hiroshima summit.
Because of the significant impact on global trade and the Japanese economy, host Japan is wary of imposing outbound investment restrictions on China.
"Restricting outbound investment would be quite difficult," said one of the officials, who spoke on condition of anonymity due to the sensitivity of the matter.
"The United States, for one, is making a lot of money investing in China, which makes you wonder if you can really impose restrictions," the official said.
Jeremy Hunt, the British Finance Minister, told the Nikkei newspaper on Thursday that the G7 must oppose China's economic coercion, although there was no reference of investment limits.
Another less contentious strategy supported by the G7 is the formation of alliances with poor and middle-income countries in order to broaden supply chains from nations such as China.
Japan has invited six non-G7 countries, notably Brazil, India, and Indonesia, to a Friday outreach meeting to examine supply chain relationships.
Analysts, on the other hand, are cautious about how successful such counter-China measures will be.
"It's very difficult to leave China out given its economic might," said Toru Nishihama, chief emerging market economist at Dai-ichi Life Research Institute. "Doing so could divide world trade, damage global growth and hurt G7 economies themselves."
By isolating China, the world's largest sovereign creditor, the G7 rich democracies would also face difficulties in assisting emerging economies in resolving their debt concerns.
Officials in the United States have been forthright in their anger with China's stalling on debt restructuring requests, with last month's sovereign debt roundtable convened during the IMF-World Bank spring meetings making no progress.
After their three-day summit concludes on Saturday, the G7 finance leaders are likely to make a united statement.