This week, the financial leaders of the Group of Seven (G7) advanced economies will discuss the idea of implementing targeted controls on investment in China, which analysts see as a double-edged sword that may make little progress.
China is high on the agenda of the G7 financial leaders’ meeting in Niigata, Japan. The current head of the Group of Seven, Japan, is leading new efforts to diversify supply chains and reduce heavy dependence on Beijing.
But the group is not in agreement with how far it should go in the fight against China, as damage to trade with the world’s second largest economy could deal a serious blow to export-oriented countries such as Germany and Japan.
The United States is leading the way in pressing for stronger action against China. Treasury Secretary Janet Yellen said Thursday that many G7 members share the United States’ concerns about China’s use of “economic coercion” against other countries and are considering ways to counter such behavior.
“We are having discussions with our G7 colleagues, and I expect these meetings to continue, at least informally,” Yellen said of US pressure to impose such restrictions.
Germany is increasingly wary of China as a strategic competitor and is considering steps to rethink bilateral relations, but it does not want to be seen as a front for the G7 against China.
Five officials said his country, which is showing sensitivity to Germany, has led calls for caution about targeting sanctions against China in the context of new EU sanctions over Russia’s invasion of Ukraine.
A German government source said on Thursday that next week’s G7 leaders’ summit may discuss introducing targeted controls on investment in China, but that any scrutiny of investment would focus on areas of strategic importance.
Talks between financial leaders will lay the groundwork for the Hiroshima Summit.
Host country Japan is wary about the idea of outward investment controls against China, given the huge impact this could have on global trade and its economy.
“Reducing outside investment will be very difficult,” said one of the officials, who spoke on condition of anonymity due to the sensitivity of the issue.
“For example, the United States is investing so much money in China that it makes you wonder if you can really impose restrictions,” the official said.
British Chancellor of the Exchequer Jeremy Hunt told the Nikkei on Thursday that the G7 must confront Chinese economic coercion, but made no mention of investment controls.
Another, less controversial initiative backed by the G7 is partnerships with low- and middle-income countries to diversify supply chains away from countries like China.
Japan has invited six non-G7 countries, including Brazil, India and Indonesia, to an awareness meeting on Friday where supply chain partnerships will be discussed.
However, analysts question the effectiveness of such moves to counter China.
“It is very difficult to single out China given its economic strength,” said Toru Nishihama, senior emerging markets economist at the Dai-ichi Life Research Institute. This could divide global trade, hurt global growth and hurt the G7 economies themselves.
The wealthy G7 democracies will also fight to help emerging economies solve their debt problems by isolating China, the world’s largest creditor.
US officials have been vocal about their growing frustration with China’s sluggishness in requests for debt relief, as last month’s roundtable on sovereign debt at the spring meetings of the International Monetary Fund and World Bank yielded little progress.
The G7 finance leaders are expected to issue a joint statement after their three-day meeting on Saturday.
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