- Japan will host the G7 Fiscal Leaders Meeting on May 11-13
- The rising risk of a US debt default could put pressure on Yellen
- G7 seek agreement to diversify supply chains away from China
- Outreach meeting to debate emerging market debt problems
- Persistently high inflation and slowing growth are among the topics of discussion
TOKYO, May 10 (Reuters) – China will be the elephant in the room at this week’s meeting of Group of Seven (G7) financial leaders, who will seek to diversify supply chains away from the country – but will also seek Beijing’s cooperation up for grabs in solving global debt problems.
The conflicting goals add to the vulnerabilities faced by the wealthy G7 democracies due to their heavy reliance on China, the world’s second largest economy and the second largest external holder of US debt.
The rising risk of a US debt default, already rattling financial markets after recent bank collapses, will overshadow the three-day meeting that begins Thursday in the Japanese city of Niigata.
While Treasury Secretary Janet Yellen will attend talks of G7 financial leaders, US President Joe Biden on Tuesday signaled the possibility of canceling his trip to Hiroshima for next week’s summit if the debt problem is not resolved.
“The dollar — and Treasuries — is viewed as the sure foundation of the entire global financial system,” Yellen said Monday in a warning about the damage a default could do to the US economy and financial markets.
“It’s trustworthy and it’s the ultimate safe-haven asset and a failure to raise the debt ceiling, which hurts US creditworthiness, would put that at risk. So that’s a real problem.”
The US debt crisis is a concern for Japan, which holds the G7 presidency this year and is the world’s largest holder of US debt.
Other key issues set to be discussed at this week’s G7 meeting include ways to strengthen the global financial system, steps to stop Russia from dodging sanctions over its invasion of Ukraine, and global economic risks such as a stubbornly high one Inflation, Japanese officials say.
Japan hopes to issue a joint G7 statement after the meeting, they added.
There are signs of a slowdown in China
As host, Japan has compiled a long list of other issues that are likely to leave policymakers little time to enjoy Niigata’s prized rice wine, many of which are linked to China.
Among them is a plan to agree on an ambitious declaration to diversify supply chains “away from countries like China” through partnerships with low- and middle-income countries.
To underscore his desire to win over the “Global South,” Japanese Finance Minister Shunichi Suzuki invited this year’s African Union leader, Comoros, to a fact-finding meeting scheduled for Friday.
Five other countries have been invited to the meeting, including Brazil, India and Indonesia – but not China – although emerging market debt problems will be high on the agenda.
On the other hand, Tokyo is urging China to attend a creditors’ conference it has set up to settle Sri Lanka’s debt. Beijing attended the first round of talks on Tuesday as an observer rather than an official participant.
As the world’s largest official bilateral creditor, China should participate in significant debt relief for troubled countries, but it has for too long served as a “roadblock” to necessary action, Yellen said last month.
There has been uncertainty over whether the G7 can persuade emerging economies to help build supply chains less dependent on China, as many have been hit by aggressive US interest rate hikes that have increased their dollar-denominated debt burden.
“Emerging market debt problems are becoming more serious, partly because of the strong dollar,” said Takahide Kiuchi, an analyst at the Nomura Research Institute.
“The agenda of the talks shows that the G7 is becoming increasingly politicized, with a focus on fighting China.”
Inflation is likely to remain the key issue for the G7 central bank governors. Many of their economies are at a turning point as previous aggressive rate hikes begin to slow growth and unsettle the banking system.
The International Monetary Fund last month revised its global growth outlook for 2023, warning that a severe flare-up in financial system turmoil could push manufacturing to near-recessionary levels.
Data released on Tuesday showed that China’s imports fell sharply in April and export growth slowed, daunting policymakers’ hopes that a strong recovery in China’s economy will offset an expected slowdown elsewhere in the world.
(This story has been rearchived to correct the spelling of “heavy” in paragraph 2)
Reporting by Leika Kihara and Tetsushi Kajimoto; Additional reporting by Takaya Yamaguchi; Edited by Kim Coghill
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