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China faces myriad challenges as it puts plan to revive world economy on top of G20 agenda

China is hoping to find a recipe to revive global economic growth when it hosts its first G20 summit next week, but challenges are mounting in the form of domestic problems and regional tensions, with this week’s suicide car bombing at the Chinese embassy in Kyrgyzstan only adding to them.

Around 40 world leaders are expected to attend the two-day summit, which will begin in Hangzhou, Zhejiang province, on Sunday. Among them will be representatives of the 19 richest countries and the European Union, developing nations and the world’s top trade and financial organisations.

The location will be familiar to President Xi Jinping, who spent five years in the city from 2002 when he served as the province’s Communist Party chief.

China has put a lot of important issues on the summit agenda, with its recommended tonic for world economic growth at the top of the list. It wants monetary and fiscal stimulus polices to be reined in, with more emphasis put on “structural reforms” in areas ranging from free trade to the labour market.

“President Xi Jinping will seek to achieve a landmark agreement to revive global growth, while leaving political tensions aside, particularly China’s territorial claims in the South China Sea,” said Ricard Torne, a senior economist at Barcelona-based consultancy FocusEconomics. “Promoting innovation and inclusive growth will be on Xi’s agenda, along with strengthening global trade in a context of rising protectionist measures.”

Check out our multimedia package on the G20 in Hangzhou – the face of China’s heritage, achievements and aspirations

World leaders are keen to find a solution as economic growth continues to disappoint. A year ago the International Monetary Fund projected that global gross domestic product would grow 3.8 per cent this year, but its latest update trimmed those expectations to 3.1 per cent.

China was the envy of the world after escaping largely unscathed from the 2007-08 global financial crisis. A 4 trillion yuan stimulus package introduced by Beijing in the aftermath of the Western financial system’s meltdown bolstered the Chinese economy but also allowed problems – ranging from swelling bad loans in its financial system and local government insolvency – to fester.

Having learned a lesson from the consequences of aggressive monetary expansion, China has set out to address chronic economic problems in recent years – trying to switch from an investment-led growth model to a consumption-led one, encouraging technology development and innovation and vowing to cut excess industrial capacity and break the monopolies of state-owned enterprises (SOEs).

Zhao Xijun, a finance professor at Renmin University in Beijing, said: “China has gained some experience in structural reforms while maintaining steady economic growth. The experience is valuable to countries with similar problems amid an economic slowdown.”

Beijing is eager to promote the China-model on the world economic and financial stage, hoping to use the summit to stake out a more commanding role to match its status as the world’s second-largest economy.

However, while the incumbent G20 president was in the “enviable position” of having solid economic growth this year – with year-on-year GDP growth of 6.7 per cent in the first half of this year, the sustainability of that growth was questionable, said David Dollar, a senior fellow with the John L. Thornton China Centre at the Brookings Institution in Washington.

“China’s excess capacity will definitely be a topic, if not in the formal sessions, then in the side meetings, such as a Xi-Obama meeting,” Dollar said, referring to US President Barack Obama.

China’s steel exports have been a major source of trade rows with the United States and European Union, who say they exacerbate a worldwide overcapacity problem and lead to job losses at their steel mills.

In a joint letter about the upcoming summit to European heads of state or government on Tuesday, European Council President Donald Tusk and European Commission President Jean-Claude Juncker said “urgent and effective” action was needed to cut overcapacity in the steel and other sectors, including tackling subsidies and other market-distorting measures.

Another risk to the Chinese economy, Dollar said, was that it was keeping zombie SOEs afloat with lending. It was doing so to smooth an industrial downturn, but risks were building up as a result, he said.

Pinning its hopes on the private sector to drive economic growth, China is set to promote affordable finance to low-income groups and small and medium-sized enterprises (SMEs) at the summit and encourage private sector participation in infrastructure investment projects at home and overseas.

Chen Nan, director of China’s SME Federation, a Beijing-based non-governmental organisation, said the intentions might be good, but SMEs could only benefit when concrete implementation details were in place.

“Speaking of inclusive financing, China has no credit appraisal system tailored for SMEs, which makes it hard for them to get funded,” Chen said. “SMEs are very interested in infrastructure projects. But as they are usually big government projects, SMEs have no way to participate until SMEs get included in their procurement lists.”

Apart from talks on the global economy, the meeting will be mostly dominated by discussion of mounting security risks and political uncertainties, economists say. They include the consequences of Britain’s vote to leave the EU, widespread terrorist attacks and the ongoing conflict in Syria.

“The terrorist attack at the Chinese embassy in Bishkek, Kyrgyzstan, will reinforce the security agenda at the G20 summit, threatening to relegate much-needed negotiations on economic issues to a second plane,” Torne said.

A suspected suicide bomber rammed a van through the entrance of the Chinese embassy in Kyrgyzstan’s capital on Tuesday, killing himself and injuring at least three others. Both nations labelled it a terrorist attack.

Li Wei, an anti-terrorism expert at the China Institutes of Contemporary International Relations in Beijing, said he suspected Uygur Muslim extremists were behind the attack.

“Discussion of security and anti-terrorism is on the agenda of the G20 summit, and it’s an unavoidable topic,” Li said.

The security concerns may justify the unprecedented controls Hangzhou has adopted for the summit, including traffic restrictions, the closure of hotels to people not associated with the summit, strict X-ray scanning of personal belongings in public venues and patrols of the city’s streets by large teams of security personnel.

Additional reporting by Shi Jiangtao