The other G20 issue: remember China?

With our focus so firmly fixed on the tension between the U.S. accent on stimulus and the deficit preoccupations of Canada and Europe, the question of China’s place in the G20 has been pushed a bit to the side of this weekend’s summit.

But the question of how willing China might be to play ball by letting its currency appreciate and otherwise boosting domestic demand is arguably of more long-term importance than this weekend’s stimulus-vs-austerity rift. After all, many argue the imbalance between America’s spending and China’s saving is the crucial economic question of the age.

And if the challenge here was only reconciling, say, Angela Merkel’s inclination to retrench with Barack Obama’s instinct to stimulate, the old G8 would surely suffice. The strains are mainly among the old rich countries. The G20 was meant, remember, to expand the summit club to reflect 21st-century global realities, so a more telling test of the new group’s utility will be China’s reaction to peer pressure at the Toronto summit table.

Obama and Chinese President Hu Jintao met for a bilateral this morning, where the U.S. president praised China’s tentative pre-summit signal that it would let its currency rise somewhat. As well, Obama invited Hu to visit the U.S.

However, Chinese officials at the summit are saying any exchange moves will be made taking domestic economy priorities into account first, rather than because China is bowing to pressure from its new G20 partners.

If that sounds like defiance, it might simply reflect the internal reality of China’s evolving economic policy. Donald Brean, co-director of the G20 Resarch Group at University of Toronto, and a professor at the U of T’s Rotman School of Management, says China is indeed divided within.

“It’s a conflict between China’s central bank and the department of commerce,” says Brean, an expert on China who has lived and worked there. “The department says, ‘A low exchange rate has been working well for twenty-five years.’ The central bankers are saying, ‘We cannot sustain this imbalance.’ It’s not just international; it’s an internal imbalance.”

That’s good news for the G20. It suggests that shrewd summit players will pick up on the factions inside China that share the desire of the rest of the world for a Chinese economy that buys more and sells perhaps a little less aggressively.

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