An annual political show took place this July in Washington D.C. The phrase ‘G2’ has hardly any legitimate use today apart from describing this two-day summit between China and the US. The time commitment made by high officials from both states seemed justified by the long list of agreements and promises on strategic and economic issues. Yet one should not take this Sino-US friendship too seriously, nor should one give too much credence to the efficiency of the countries’ officials. At the end of the day, the keynotes of the dialogues more or less repeat themselves every year.
The main take-away from this piece, however, is that China does seem to be using the dialogue to lock in its reform plans, despite the lack of progressive changes to the agreements. Since the agreements are unenforceable and deal with many long-term issues, China and the US do not have to comply with their promises anytime soon, making it difficult to assess the parties’ true intentions. But as China’s economic reform picks up speed and reflects previous dialogue outcomes, it becomes clear that the new leadership means business. The same old agreements between the US and China may actually be more concrete than a mere proof of friendship.
The economic track of this year’s dialogue addressed four areas: strengthening economic policy, promoting open trade and investment, enhancing global cooperation and international rules, and fostering financial stability and reform. Compared with last year’s commitments, few changes have been made this year on China’s part. However, this does not mean China wants to stay in its comfort zone. On the contrary, it is pushing forward the reforms needed to meet previous dialogue commitments. Additionally, the minor progress made in the fields of economic policy, trade and investment, and financial stability reveals China’s forbearance: China would not raise the bar if it did not intend to reach higher.
In the 2012 dialogue, China agreed to increase the dividend payout ratio of state-owned enterprises to optimize income distribution. Nothing happened until March 2013, when the newly appointed Minister of Finance Lou Jiwei said the government would enrich the public budget by gradually raising the payout ratio. The same commitments to adjust income distribution regimes were made at this year’s conference. Moreover, market-based interest rate reform appeared in the recent two dialogues, both of which China honored by taking steps towards implementation. In July 2012, the central bank expanded the rate floating range for financial institutions. In July 2013, People’s Daily, the mouthpiece of the Communist Party of China, quoted Li Lihui, head of Bank of China, on his anticipation of further liberalization.
The most observable progress of this year’s summit lies in fostering financial stability. According to the agreements, the US and China will strengthen cooperation in sharing information on shadow banking activities and develop tools to mitigate shadow banking risks, among other measures. The 2012 talks, meanwhile, had barely touched upon shadow banking. Given China’s growing concerns for over-lending, the new agreements demonstrate China’s determination to make greater strides on that front.
China also expressed interest in entering into substantive Bilateral Investment Treaty (BIT) negotiations with the US after nine rounds of technical discussions. The BIT will cover all phases of investment and will be negotiated according to a negative list approach. The readiness and high standards of the potential BIT negotiation had not been made explicit in previous dialogue agreements. Moreover, China made more promises for foreign investment in service sectors this year. Officials mentioned specifically the Shanghai Free Trade Zone (SFTZ) pilot project, which is designed to provide equal access for all types of enterprises. At roughly the same time, the State Council announced the official plan to launch the SFTZ project, despite strong opposition from the state’s bank and securities regulators. Liberalizing investment in service sectors also means loosening control over currency exchange and interest rates. Premier Li Keqiang is serious about his economic reforms after all.
Keynotes of the strategic track change more frequently than those of the economic one. This year, cyber security, energy, and the Democratic People’s Republic of Korea were in vogue. At past summits, the strategic track agreements have had few implications except for enhancing mutual trust. The economic track, however, can have more direct impact on specific policies. The changing rhetoric in this political show, combined with China’s actual policy shifts, clearly show China’s priorities regarding economic policy moving forward.
