It first convened in a French chateau in 1975 – when the Cultural Revolution was in its fag end phase and China was an economic basket case. Anyone who suggested then that the People's Republic of China might one day become the world's seventh largest economy and a member of this economic elite, would have been dismissed as a daydreamer.
At first, only national leaders met; then meetings were held at the ministerial level – finance and trade initially. It was a G5 Club, then with Italy, a G6 club, made up of the United States, Great Britain, France, Germany, Italy and Japan, really all the old colonial powers. Canada made it the G7 when it joined in 1976. Russia, which will host the 2006 summit as a full member, makes it the G8, – or G9, if you count the EU, which has been attending meetings.
The EU's attendance, if one considers the voice that it gives to economic midgets like Portugal or some of the Union's new Eastern European members, makes China's exclusion seem especially odd.
True, the G7 was originally set up as a forum of industrialized democracies, but it seems members are prepared to bend a bit on that point – or they would not have invited China for a look-in ahead of the G7 meeting of finance ministers early last month.
Indeed, that was a precedent, and if old-guard G7 members hope to retain some influence on world events, they might well consider it as the first step to China's fast-track entry. The original members met in France in hopes of making some headway on the key issues of the day: the high cost of oil, and the inflation that always goes with it, and worrying rises in unemployment.
Everybody blames China for taking their jobs away. And many blame China for the latest round of global inflation because it keeps raising orders for oil, steel and other commodities, pushing up world prices in turn. Part of that demand, of course, is driven by US, European and Japanese manufacturers based in China, all of them trying to corner Chinese markets or to maintain their markets elsewhere by shifting to lower-cost production centers like China.
World production shifts to China
But the bottom line is, a huge amount of production that the West and Japan used to control and sell to the world has shifted to China, which is reason enough for it to be a G7 member. Jim O'Neill, the chief global economist at Goldman Sachs International, was quoted in one Reuters report as saying G7 members were now dealing with events beyond their control. "In this peculiar time of our history, the biggest issues involve those outside the G7," he told the news agency.
China seems ambivalent about the whole business. As Finance Minister Jin Renqing told Chinese media in Washington after dinner with G7 finance ministers, "We have no immediate plans to join the G7." Joining clubs comes at a cost, and undoubtedly Beijing finds dealing with compliance issues constantly raised at the World Trade Organization wearing. It has spent over a year getting nowhere trying to secure market-economy status (MES) from the WTO's big power brokers expressly to avoid accusations of dumping because, without MES, trade partners can slap tariffs on Chinese goods on a mere suspicion. If China had MES, China's accusers would at least have to crunch some numbers and actually prove their case – and someone besides China would have to worry about compliance.
The G7 wants China to de-link the yuan from its US dollar peg and let market forces set its value. Never short in the bombast department, some US senators contend the yuan is 40% under- valued and if everything were fair and square – and market-driven – US manufacturers would be competitive again. President Bush, campaigning to hold onto his job, again made a pitch in October to President Hu Jintao to get moving on a market-based yuan.
Undoubtedly, the market would at this point push the value of the Chinese currency up. Since China has turned itself upside down playing by other people's rules over the last two decades – watching its state enterprise system disintegrate with huge job losses in the process – Beijing is understandably wary of taking any more hits than it has to. For that reason alone, it is reluctant to publish a timetable on the transition to a market-based currency, although it has committed to de-link eventually. A higher yuan could conceivably hit exports and even tumble a few more state enterprises already on the edge. But gaining a seat in this world council could also gain China important friends as it steps further out into the world. China could also have a moderating influence on decisions affecting her interests. But most of all, China's membership in the G7 would add a needed voice in addressing macroeconomic issues that need tending to – from joblessness and energy shortages to debt and environmental relief.
As for the US senators who think all would be put right if China's currency jumped 40% in value, they might remember what happened when the Reagan administration forced Japan into a 50% revaluation of the yen in 1985's Plaza Accords. As journalist and academic Philip Golub noted in Le Monde Diplomatique, "the policy had unintended consequences: the appreciation in the yen transformed Japan overnight into the world's leading creditor, and quickened the pace of Asian regional economic integration by pushing Japanese firms to relocate their lower value-added export activities to South East Asia. Redeployment of Japanese manufacturing capacity quickly created a concatenated Japan-centered regional division of labor in East Asia.
Japanese exports suffered briefly but within a year roared back to where they were, as manufacturers brought on more cost-efficient manufacturing techniques and raised quality to the point where price in many cases didn't matter.
G7 members might take this example of backfiring currency gamesmanship as a caution, and invite Hu Jintao to join them rather than talk down to him as an outsider. The gesture might even take them a step closer to seeing a timetable for floating the yuan. Like mother said: Talk nice to the gentleman.