Now if this is adopted at the next G20 Summit, then this will be a major move forward. The G20 Summit may now be expected to formalise the targets to rein in global trade imbalances. The caveat remains that China's acceptance does not mean much, unless they are seen to have implemented and stuck to the norms. Earlier, for example, China has promised to free up its currency peg with the dollar just before the last G20 Summit. Notwithstanding that announcement, the renmenbi peg has changed little. India, on its part, however, has refused to accept any specific targets for trade surplus or deficit. Finance minister Pranab Mukherjee is reported to have observed that G20 should devise country specific solutions rather than give out a “numerical straitjacket”.

The idea underlying the suggestion of the United States for limits on trade account was that very large imbalances—trade surplus as well as trade deficit—tend to generate overall conditions of instability. Cumulative imbalances convert into foreign exchange reserves, on one side, and overhand of debt, on the other. Hence, there should be corrective steps to prevent these from assuming too large proportions. In a way, the huge build up of trade deficit of the US which was cheaply funded by China contributed to the overall situation in which the financial melt-down could take place. The US trade deficit had translated into an equal amount of surplus for China which was in turn invested in the US government bonds and created a cheap money regime in the US. In a way, the surplus and deficit fed each other into an aggravated overall imbalance.

However, for China to agree to such a solution at this point of time is a fundamental shift in its economic strategy followed so far. Why? Because agreeing to limiting its trade surplus will mean China will have to stop depending on exports to drive its economic growth. Any limit on exports and trade surplus will mean China should start depending on its domestic consumption demand for continuing to grow. Explaining China's acceptance of the US proposal, Mr Li Daokui, who is a member of Chinese central bank's monetary policy committee, had observed that China's external surplus was already falling because of rising wages in the country, strong consumption demand and relocation of industries. He is reported to have said, according to the London-based Financial Times: “Market forces are pushing China to make this adjustment, whether we want to or not”. That is not completely correct since China is not known to have followed the dictats of the market any more than its human rights critics urgings to follow a humane treatment of political dissent. But the political powers seem to have seen the need for change in economic strategy and already set in motion subtle changes in ground level work programmes.

Only last week, Chinese Communist Party leaders had approved its eleventh five year plan which has incorporated this re-oriented economic strategy. The plan aims to transform China from a low-wage nation of factory workers and farmers to a consumer society. The plan has laid stress on developing technology and its capacity in science and move over generally from low cost manufacturing of mass items into the newer fields of knowledge-based industries. It will emphasise quality and give competitiveness not through low costs but through quality, design and innovation. The new plan will encourage imports. Almost to announce its arrival at the new mileposts, China this week stunned the world with its new high speed trains which are being claimed as the fastest in the world.

The changed stance in the G20 finance ministers meet in Seoul was therefore the harbinger of a policy transformation in China. If you look at the sudden change in China's stance as a riddle, the riddle has to be seen in the broader context of the change in the Communist Party's thinking of China in the future. Hopefully, with this China's mindset of a closed society also changes. (IPA Service)