The G7 and China
in the Management of the International Financial System

Professor John Kirton
Department of Political Science
Centre for International Studies
University of Toronto

Paper prepared for an International Think Tank Forum on "China in the 21st Century and the World," sponsored by the China Development Institute, China International Center for Economic and Technical Exchange and the National Institute for Research Advancement, Japan, Shenzen, China, November 11-12, 1999. I gratefully acknowledge the research assistance of Gina Stephens, Natalie Armstrong, Ivan Savic, Diana Juricivec and Paul Jacobelli in the preparation of this paper. Version: November 3, 1999.

Abstract
Introduction
1. The Debate Over China's Relationship to the G7: Object, Associate or Member
2. The G7/G8 Treatment of China, 1975-1999: from Adversary to Associate
3. China's Role in the Global Financial Crisis of 1997-1999
4. The Move Toward Meaningful Association: From G22 to FSF and G20
5. Prospects and Proposals for Strengthened Partnership: Options for Intensified Association
References

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Abstract

For several years, scholars, practitioners and analysts in "think tanks" have conducted an ever more vigorous debate about China's proper relationship with the G7 and now G8 club of major industrial democracies, as this forum increasingly emerges as an effective centre of global governance for the international financial system of the 21st century. During its quarter century in operation thus far, the G7/8 system has substantially transformed its relationship with China, moving during the 1990's from its initial Tienanmen engendered focus on China as an adversary and object of collective G7 admonition to the current emphasis on China as a supportive player and potential associate of the G7/8 in managing the many economic and political challenges a rapidly globalizing, post European Cold war system have brought. This progression has hastened recently with the responsible and helpful role China played, in its own interest, in supporting the G7's efforts to combat the Asian-turned-global financial crisis of 1997-9 and to construct a new international financial architecture more appropriate to the conditions of the twenty first century. This new role for China has led to its inclusion in recently created forums such as the G22 and G20, with the G7 at the core, to manage and modernize the international financial system. Its approach to these bodies and the issues at the centre of their agenda, together with the assets and vulnerabilities China brings, suggest that it is time to develop options for further associating China with the G8 itself, as the July 2000 Okinawa summit approaches.

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Introduction

Speaking on May 17, 1998 at the conclusion of the 1998 annual Summit of the leaders of the Group of Eight major industrial democracies, host Tony Blair noted that in their final session of the Summit, the leaders had "paid particular tribute in the discussion we had this morning to the work that China has done in the aftermath of the Asian financial crisis and to its very strong commitment to financial stability" (Blair 1998). The tribute represented a genuinely heartfelt expression of the gratitude that the G8 leaders and many others felt toward China for not devaluing its currency or taking other measures that would have compounded the challenge the G7 faced in responding to the crisis that cascaded through Asia during 1997. In the world of the G8, where economic and political measures are uniquely linked, it may also have signaled a hope that China might be helpful in coping with the coming challenge identified immediately after by Blair - the need for a "firm and agreed response to the Indian nuclear tests." Whatever the precise blend between past economic performance and future political expectation, it was clear from this passage that China had at long last acquired a strong and comprehensive relevance, as a potential partner, of the major industrial democracies as they worked through the G7 and G8 to offer global governance to an unstable world. China's emerging relevance was underscored by it inclusion in the new G-22 that President Clinton had launched at the APEC leaders' meeting in November 1997, and by China's membership in the new G20 that the G7 finance ministers created in September 1999.

These advances in China's association with the G7 reflected an emerging consensus that China, whatever its current problems, had after two decades of reform, opening, and rapid growth, acquired an increasing influence on the prospects for peace and development of the Asian region and world as a whole, and that it was ready to play a responsible role as the twenty-first century opened. This new consensus was reflected in the intensification of a debate, conducted most visibly among analysts in "think tanks," over how far and by what formula China should become associated with a G7/8 that had expanded in 1998 to embrace Russia as a virtually full partner. It was further evident in the altered attitude toward China of G7 leaders, ministers and officials, who had moved from their initial and longstanding treatment of China as an adversary to punish to an approach premised on China's role as a useful, and in some respects, essential associate. This progression was hastened by the part China played in the Asian-turned-global financial crisis of 1997-9, and in the effort to reconstruct the international financial architecture that came in the crisis' wake. China's role as a highly relevant and responsible power did much to make it a leading member of the new G22 and G22, and, through these mechanisms, an institutionalized associate of the G7. It also raised the question of whether China alone now warrants some form of enhanced, closer attachment with the G7 and G8 itself.

This paper argues that the time has come to consider the rationale, the steps and the forms that such a singular, enhanced association might take, and to develop the options to make such a step possible in the near future. To be sure, any major move toward full membership must await China's demonstrable acceptance of the domestic political values that all G8 members share. Yet China's current clear commitment toward marketization and opening, its existing advances in political and social opening, and the very weakness and instability it is experiencing, in part as a result of implementing those economic measures, puts it in a similar position to the USSR/Russia that the G7 developed a privileged dialogue with in the years from 1991-1993. Moreover, unlike Russia at present, China has the potential to be a source of strength as well as vulnerability in reinforcing the precarious stability that has now returned to the international financial system, and in forwarding the recently interrupted move toward a genuinely global system of open finance. Its current role in the G20, alongside such countries as Argentina, Turkey, and South Korea, is an insufficient recognition of its weight in the world, but also a suitable incubator to socialize it into the role of an effective collaborator at a higher level. The co-incidence of the G7/8 Summits taking place in Okinawa, Japan, in July 2000 offers an auspicious occasion and opportunity for taking the first step towards forging this enhanced association.

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1. The Debate Over China's Relationship to the G7: Object, Associate or Member

The issue of China's proper relationship with, or even prospective place in, the G7/8 has been a prominent feature of the debate over reform of the Summit process launched by the end of the European cold war during the past decade. Amidst the rich array or opinions featured in this debate, three broad schools of thought about China have dominated. The first treats China as an outside object, neither worthy of greater inclusion nor a country bringing valuable assets into the G7/8. The second considers China to be a valuable associate, with more formalized links to the G7/8 bringing net advantages to both. The third judges China to be a legitimate member, particularly after Russia's admission, of some if not all of the G7/8 institutions.

a. Outside Object:

The first school of thought treats China as an outside object, warranting no institutionalized association with the G7. Canadian scholar John Kirton has well reflected the core position that China lacks the full set of qualities required for membership in this exclusive club. He predicts: "Today's often touted prospective entrants - China, India, Indonesia, Brazil - will only be admitted if and when, in the still distant future, they become enduring market-oriented, democratic major powers, and thus acquire the fully systemic perspective, sense of responsibility and capacity to contribute to global order which flows from these attributes" (Kirton 1999: 48).

Perhaps the leading scholar of the Summit, British diplomat and now academic Nicholas Bayne, shares this attitude, although for reasons rooted directly in the functioning of the G7/8 rather than the qualities of China itself. He writes: "large populous countries, like China, India, Mexico and Brazil, deserve more weight as they open up their large internal markets..(but)..present G7 membership provides the best opportunity for exerting reciprocal pressure between the highly developed countries of Europe, North America and Japan, which would be lost if the composition were changed" (Bayne 1995).

Even those that believe the G7/8 Summit itself needs new members, for reasons of representativeness and legitimacy, do not necessarily privilege or even include China in their list of prospective associates. For example, American scholar Jeffrey Sachs has argued for the G8 to expand into a G16. But unlike developing Brazil, India, South Korea and South Africa, and then democratic Nigeria, Chile and Costa Rica, he does not specify China as a desirable new entrant. (Sachs 1998)

It is noteworthy that those treating China as an outside object consider China to be one among a large class of prospective associates, with Brazil and India being the most frequent colleagues or surrogates. By this calculus, those finding the G7/8 grounded in a particular value or deficient in a certain aspect could well favour others on the list. Privileging the G7/8's democratic character would make India the obvious candidate, while a desire for greater geographic representativeness would point to Brazil (given the presence of existing member Japan to represent Asia).

b. Worthy Associate

The second school of thought views China as a worthy associate of the G7/8, although one lacking at present, and perhaps for some time, a legitimate claim for full membership. British scholar Michael Hodges has argued that "China is a major player, not only in the regional context of the 1997-8 Asian crisis, but also in the world economy as a whole" (Hodges 1999: 71). He concludes that "it may be useful to extend formalized links between the G7 or G8 and China, given the growing importance of China to the global economy."

A more developed analysis in the same direction comes from American analyst William Whyman. He treats China's relevance not only in the context of other candidates, but of Russia in the years just prior to its admission into the new G8. Whyman begins by noting the need to give "large emerging economies such as China, India and Brazil" a voice in the major international economic regimes "or their support for an open, multilateral economic system and their domestic economic liberalization cannot be assured." (Whyman 1995:151). The new constellation of power and the new global challenges further underscore a claim. He continues: "if the G-7 follows a path that refocuses on guiding the international economic system, there is a logic to including the emerging giants of the twenty-first century such as China, India, Brazil, and maybe even Indonesia, Nigeria or a unified Korea." (Whyman 1995:157). He concludes, however that in the short to medium term, such a prospect is unlikely, and that limited moves toward greater association should be sought.

c. Legitimate Member

A third school of thought regards China, at present, as a legitimate member of some or all of the G7/G8 system. This school begins with the longstanding criticism of the institution on the grounds that it lacks legitimacy or effectiveness because it excludes such robust and rising powers as China (Commission on Global Governance 1995, ul Haq 1994, Jayarwedna 1989). The case, argued by those who both want to expand the G7, or replace it with a more representative institution as the center for global economic governance, rests on several major claims: the world's ten largest and most rapidly growing economies on a purchasing power basis include China, India, Brazil and Russia, with Mexico, Indonesia and the Republic of Korea not far behind; these countries have much of the world's population; without them the G7 accords low priority to the development issues that preoccupy most of the world; and expanded membership would thus make the G7 or its replacement more representative and effective.

One of the earliest calls for China to be given full membership offered a more comprehensive set of rationales. Writing in 1993 American analyst W. R. Smyser, argued, presciently, that the G7 should focus on devising "new international financial and monetary arrangements that can handle the potential crises that might arise and that one can already foresee," that Russia should be given full membership in 1994, and that "As soon as possible after that, and subject to political developments in Beijing, the People's Republic of China (PRC) should also be invited to the summit meetings." He continued: "The PRC now has one of the world's fastest growing private sectors, a considerable trade surplus, and the potential for explosive advances in modern industry. It has the world's largest population, and it must join the global economic and political system to help that system function effectively No summit can carry out any decisions that it may make if the PRC does not agree to them. Once the PRC joins, the summit will be the G-9, and it will again be the central coordinating mechanism of the world." (Smyser 1993: 26-7). Notably, however, given his conception of the summit's central purpose, Smyser felt that Russia and the PRC should be excluded from the G-7 monetary and financial forum, which would be reserved for those who hold "the financial balance of the world."

These calls were echoed, in a less singularly China-focused fashion, soon after. Immediately prior to the Lyon 1996 Summit, American ex-official and scholar Zbigniev Brzezinski called for the creation of a G11. He argued that the G7 "membership is no longer representative of power or of principle and it needs to be expanded. Russia...cannot now be excluded....China, India and Brazil are as entitled to participation as Russia and in some respects much more so" (Brezinski 1996).

By 1998, American analyst Fred Bergsten, just before President Clinton's June 1998 visit to China, argued the converse of the Smyser proposition. Bergsten noted the World Bank's estimate of China as the world's third largest economy and its "increasingly central role in the world economy" and thus judged it "should shortly begin participating in the "finance G-7'" of ministers and central bank governors. However, its continued failure to democratize, Bergsten concluded, rendered its participation in the Summit itself premature. Sharing this view was the editorial staff of the British magazine the Economist, which in 1998 declared China to be "an island of stability, perhaps a new economic leader in the region, worthy of a seat at the G7's top financial table" (Economist 1998).

The Asian financial crisis led others to look with favour on full membership for China in the G8 itself. Canadian scholar Peter Hajnal, writing a year later, suggested that China, despite its "lack of commitment to democracy and human rights," is a "plausible future candidate" of the Summit itself, by virtue of China's position as "a potentially major economic power," the only UNSC P5 member not in the new G8, and an economy by many indicators that surpasses Russia's (Hajnal 1999: 30)

Others sought to admit China by modifying the G7/8 system more broadly. Former Canadian sherpa and analyst Sylvia Ostry has outlined an expanded G8 with three concentric circles. Here an inner G3 of the US, Japan and Germany for leadership and crisis management, is joined by a middle ring of the current G7/8 with the possible addition of China for geopolitical, security and global issues, and an outer circle of representative major regional powers such as Brazil, India, Australia, South Africa and a more democratic Nigeria (Hajnal 1999: 29-30). Alternatively, the case for admitting China through the contraction of G7 membership has been offered by one of Canada's leading economist journalists, David Crane. He suggests that the 1997-9 financial crisis created the case for a new G5, composed of the US, Germany, Japan, Russia, and China alone (Crane 1997).

The debate over China's proper relationship thus features disagreement over two major dimensions. The first is China's domestic and international economic, political, social, demographic and geographic behaviour, character and capabilities, in both absolute and relative terms, in a transforming international system. The second is the impact of Chinese membership on the G7/8 itself, in both positive and negative ways. Much less attention has been given to several other crucial analytic issues: the treatment the G7 and the institutions it controls has actually accorded China during the past decade; China's desire for closer association; the effect of greater G7/8 association and membership in adjusting China's behaviour, definition of interests and sense of identity; why the particular combination of China's vulnerabilities and G7/8 capabilities may provide the basis for a claim; the impact of greater Chinese association on the other major claimants in the world; and the G7's needs for China in order to maintain the concerted power of the G7/8 over the global system and an effective equality of power among its members within.

Especially against the volume and variety of the analysis in the debate over Summit reform and the place of China, it is also noteworthy how little intellectual effort has been devoted to devising reasons and formulae for China to become more associated with the G7/8 system, in ways that fall short of full membership. This lacuna is especially unfortunate, given the major interrelated issues that require careful consideration for such an advance to occur. These include: the specific formula that will maximize the benefits and minimize the costs for China's enhanced participation, both for China and the G7/8 itself; the impact that China's enhanced association would have on other potential associates, including fellow regional Asian and APEC partners such as South Korea and India; and whether such association can be reversed, held at a particular level indefinitely, or, is, following the Russian and European Union cases before it, a prelude to ever more full membership.

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2. The G7/G8 Treatment of China, 1975-1999: from Adversary to Associate

The intellectual movement by outside scholars and think tank analysts towards contemplating in general terms a closer formal association of China with the PRC, fuelled in part by the challenges of the international financial system in the 1990's, has been matched by the changing treatment accorded to China by G7/8 leaders, ministers and officials themselves.

During the G7's first decade following its 1975 creation, China was relevant to it largely as a matter of context. China formed part of the adversarial environment the G7 faced as it increasingly dealt with a host of largely geopolitical issues. These focused on global arms control, such as nuclear proliferation, the missile technology control regime, and intermediate nuclear forces, and regional security issues, such as the Indochinese refugees, Kampuchea and stability on the Korean peninsula. While China was a direct calculation in the closed discussions among leaders and ministers, it was deemed neither sufficiently relevant nor sufficiently within the domain of potential public suasion or verbal deterrence to be worthy of direct mention in the G7's various communiqués.

This changed in 1987 when the Chairman's Summary on Political Issues at the Venice Summit included the passage: "In Asia, we agreed that particular attention should be paid to the efforts for economic reform undertaken by China." (Hajnal 1989: 352). For the first time China had become an object of direct public collective G7 attention, an implicit if highly tentative associate, an object of economic rather than political interest, and one whose domestic as opposed to external policies were of note.

It is useful to compare this initial treatment of China with that of the Soviet Union that year. The G7 at Venice declared: "We are following with close interest recent developments in the internal and external policies of the Soviet Union. It is our hope that they will prove to be of great significance for the improvement of political, economic and security relations between the countries of East and West. At the same time, profound differences persist; each of us must remain vigilantly alert in responding to all aspects of Soviet policy." (Hajnal 1989:345). It is noteworthy that the G7 recognized perestroika in both Russia and China with an equal, early significance, and directed at China none of the suspicion visited upon Russia.

The following year saw a decisive reversal in the G7's attitude toward China, prompted by the Tienanmen incident. The 1989 Paris Summit of the Arche, which received the letter from Gorbachev that ultimately led to Russia's inclusion in the new G8, issued a special "Declaration on China" that condemned China's violent repression in defiance of human rights. Here Canadian Prime Minister Brian Mulroney combined with host President Mitterrand, against the resistance of Japan and the United States, to achieve an endorsement of high-level sanctions aimed at China, including the suspension of bilateral ministerial contacts, and the suspension of the arms-trade and World Bank loans to China. With the Paris Summit celebrating the 200th anniversary of the practical political birth of the concept of human rights, the juxtaposition highlighted democracy and human rights as the core shared property of G7 members, and China's attachment to antithetical values. Moreover, armed with this referent, the G7 signaled its concern over Hong Kong.

However even with this emphasis on democracy, the 1989 Summit did include the hope that the interruption of Tienanmen would soon be past, and that the economic reform noted the previous year would be accompanied by its political equivalent. The G7 leaders declared: "We look to the Chinese authorities to create conditions which will avoid their isolation and provide for a return to cooperation based upon the resumption of movement towards political and economic reform and openness" (Hajnal 1989:408).

This same emphasis, led again by Mitterrand and Mulroney over the resistance of the US and Japan, arose at Houston in 1990. Despite a relaxation of their sanctions, the G7 continued to express collective concern, in part to exert a deterrent effect on future PRC action. However they did acknowledge some positive developments in China, and moved to support new lending that would contribute to the reform of the Chinese economy in the environmental field. Moreover, it was the environmental issue that brought China for the first time into the core economic Declaration, did so as one of a group of G7 associates, and rendered China an object of G7 applause. The G7 declared: "We applaud the announcement in London by some major developing countries, including India and China, that they intend to review their position on adherence to the Montreal protocol; and its amendments." (Hajnal 1990:22). Even in the immediate aftermath of Tienanmen, China had become an ecological associate.

At London in 1991 China was dealt with only in the Chairman's summary. But it now attracted a full paragraph and again was the subject of applause. The G7 welcomed "China's co-operation with the international coalition in opposing Iraqi aggression and over other regional issues. It approved a continuation of a process, already underway, of rebuilding contacts with China and concluded that "Unconditional extension of Most Favoured Nation status to China by the US would contribute to their goals." (G7 1991). The G7 had thus come to see China as a responsible associate in global security matters, and, in classic G7 fashion, was willing to link this to favourable treatment on economic issues such as trade.

At Munich in 1992 China again received G7 applause, this time for China's acceptance of major international arms control regimes. A paragraph in the Chairman's Statement described China's recent developments toward economic reform as "encouraging", but also called for "greater efforts toward political reform," and asked for "considerable further improvement" in human rights. It welcomed China's accession to the Nonproliferation Treaty and application of the Missile Technology Control regime, and expressed the hope that China would play "a more constructive role in the international sphere."

Although China was absent from the G7 statements at Tokyo 1993 and Naples 1994, it returned as a subject of attention and approval at Halifax in 1995. A "China paragraph" in the Political Declaration welcomed "China's growing participation in international and regional processes for "dealing with political, economic and security affairs." Noting that each member would pursue its dialogue with China "in the interests of a more stable and prosperous world," it looked forward to a smooth 1997 transition in Hong Kong "with the object of maintaining its economic prosperity and social stability." A subsequent paragraph called on the parties to a territorial dispute in the South China Sea to resolve their differences peacefully, in accordance with international norms.

By Lyon 1996, the G7's conception of China's relevance was focused exclusively, on arms control. Here the G7 welcomed China uniquely for joining with other G7 members and affiliate Russia in signing two treaties establishing nuclear weapons free zones in the South Pacific (with France, Russia, Britain and the USA) and in Africa (with the US, France, and Britain, but notably not G7 affiliate Russia).

Denver 1997 marked a step level jump in the attention the G8 accorded China. Surrounded by Russia's robust participation in the Denver "Summit of the Eight", the imminent transition in Hong Kong (taking place a mere two weeks after the Summit), and the visibility of the US-China relationship in the US, the Denver Declaration dealt with China in two ways. First it welcomed "the recent agreement among Russia, Kazakstan, Kyrgystan, Tajikistan, and China on reduction of military forces along their borders" and declared it to be "an important contribution to the region's security." Second, and most importantly, it dealt at length with Hong Kong. Here, amidst the attention devoted to the maintenance of Hong Kong's political freedoms in the post transition period, the G8 placed equal emphasis on the economic dimension. Noting the G8's "durable interests in this financial and economic center" it called for the preservation of stability, prosperity and an independent monetary and economic system, and noted that Hong Kong's fundamental freedoms and the rule of law were the essential underpinnings for Hong Kong's future economic success.

Behind this articulated agreement among the G8 lay a deeper consensus about China's relationship with the G7, at the moment of Russia's major step toward full admission. There were media reports that the Japanese, angry that the US had invited Yeltsin as a virtually full participant, were asking why China was not invited (Erlanger 1997). Yet no-one in the host US Government, or any other G7 government had considered including China in the G7 (Kirton 1997). There was an underlying if largely unarticulated conviction that China did not play by the rules of the game of democracy and free trade, to a degree unlikely to be changed by the APEC logic of ameliorating PRC's attitudes and action through inclusion, and the socializing effects of personal bonding among leaders in an informal setting. Equally, however, no-one in the US Government argued that there was a need to create a de facto G8, with Russia included, in order to counter a now powerful Chinese threat.

This consensus remained firm despite the acute debate raging in the United States about American policy toward China, a debate that pitted the business community against those from the liberal-left who were concerned about human rights issues such as Tibet. The geopolitical right also saw China as the emerging threat. The US and Japan tacitly endorsed a gentle version of this view. Responding directly to the Chinese missiles fired at Taiwan the previous year, they issued new defence guidelines allowing military co-operation in the extended maritime reaches off Japan (Fry, Kirton and Kurosawa 1998). The Chinese strongly opposed this move, viewing the extension of Japanese support for US military operations as aimed directly at them. Such an atmosphere heightened the conflict between the G7's historic role as the moral centre for rendering judgments about the practices of non-democratic regimes, including the PRC, and the latter's desire to play to the individual commercial self-interest of G7 members.

In preparations for Denver, the US, seeking a Congressional renewal of authority to trade with China on an MFN basis, proposed that the G7 issue a strong statement on Hong Kong. It was supported by Britain. Canada and other G7 members were cautious. However, all came to agree that the Denver Summit should issue an extensive statement of support for democratic freedoms in Hong Kong. In the leadup to Denver, the PRC learned that the draft G7 communiqué included a passage on Hong Kong. In keeping with their general aversion to having the G7 develop a view on China, they protested strongly. Yet none of the G7 suggested altering their proposed passage in response.

At Denver there was much private discussion among the leaders about China's intentions for Hong Kong, as well as an extensive treatment by the foreign ministers. The positions of the G7 members were consistent with those publicly seen in the earlier co-sponsorship of the UN resolution on human rights in Geneva and subsequently in the G7 members' decision to send representatives to attend the installation of the new legislature in Hong Kong (a ceremony which only the Americans and British ultimately boycotted). The US and the British pushed to have the G7 issue a strong statement of support for the preservation of democratic freedoms in Hong Kong. The Japanese, while quite concerned about the PRC takeover, were more cautious. Prime Minister Chrétien's and Foreign Minister Axworthy's interventions were consistent with Canada's very strong policy of engaging China. Its fixed axis was a commitment that no country would outflank Canada as a friend of China in the region. Despite these cautions, Canada fully shared the general anxiety about PRC behaviour, and the conviction that a clear statement of concern was required. Chrétien and his foreign minister stressed the importance of holding free elections for a new legislature within a year, a commitment they felt they had successfully recorded in the concluding communiqué. The leaders agreed that they would co-ordinate their positions on the handover. The extensive communiqué statement on China employed language the US had been using for months and emerged unchanged from the draft of a week earlier.

A second economic area which concerned China was trade. At the Spring 1997 news conference in Europe announcing NATO's enlargement and Russia's participation in the Denver Summit of the Eight, US Secretary of State Madeline Albright and Treasury Under-Secretary Larry Summers had indicated that the US looked forward to Russia joining the WTO on "commercially acceptable" terms. The Denver Summit of the Eight communiqué, in contrast, noted: "We support the goal of early Russian accession to the WTO on the basis of conditions generally acceptable to newly acceding members." The apparent softening raised the question of whether Russia might be a precursor for an early and special arrangement for the PRC to enter the WTO. However there was no G7 support for such a relaxation. The communiqué of the G7, meeting alone, affirmed this strict condition. It read: "We attach a high priority to expanding the membership of the WTO, on the basis of commitments to adhere to WTO rules and to provide commercially meaningful market access." In the case of China, the US in particular, with a major trade deficit with the PRC, remained strongly insistent that China accede to the WTO only when it fulfilled all the normal conditions. Canada's position was broadly similar, although Canada was prepared to support early access once the PRC met basic conditions for financial services liberalization and access for agricultural products.

Such issues highlighted the need for the G7 to remain an exclusive forum of like-minded members with advanced economic credentials and understandings to perform the essential task of stabilizing the world economy at a time of incipient crisis. Yet the onset of the Asian financial crises in the weeks and months following Denver began to change G7 attitudes. The autumn 1997 visit to Washington of Jiang Zemin, and his November 1997 post-APEC tour of Canada took place largely on the terms demanded by the PRC. They represented an act of normalization after the strained US-China relationship since Tienanmen and a reinforcement of the strengthening Canada-China relationship of the Chrétien years.

The shift in attitude was evident at Birmingham 1998, when host Tony Blair noted in his concluding press conferences that the G7 "paid particular tribute in the discussion we had this morning to the work that China has done in the aftermath of the Asian economic crisis and to its very strong commitment to financial stability." Indeed, it was only the late timing of the discussion that prevented the tribute from being encoded in the communiqué itself. (Bayne 1998).

At Cologne 1999, the focus on debt relief and Kosovo and the end of the 1997-9 financial crisis left little room for attention to China's relevance. Yet China's performance during these difficult two years left a lasting legacy. The G7 at Cologne decided to expand the membership of the new Financial Stability Forum (FSF), and to create a new, broader group (GX) of systemically important countries. The new member included Hong Kong in the FSF and China itself in the GX.

By the time of the Cologne Summit then, the G7 had come a long way from its historic absence of direct interest in China, and the Tienamen-bred treatment of China as an adversarial repressive regime. The G7's initial, pre-Tienanem interest in China in the domestic economic domain had expanded to embrace a full array of economic, political and global subjects, on a domestic, regional and international plane. Moreover, the 1997-9 financial crisis had brought China to a position where it was applauded by the G8 for it constructive role, and made a core associate in the new forums the G7 created to construct a new international financial architecture in the wake of the crisis.

It was thus not surprising that 1999 G7/G8 host, German Chancellor Gerhard Schroeder, visiting Tokyo on November 2, 1999 en route to China, publicly declared his support for a further step. Speaking at a news conference with Japanese Prime Minister Keizo Obuchi at the Japan National Press Club at the end of a three day visit to Japan, Schroeder called for China to "attend" become "involved in discussions" at, and become a "part of" the G8 summit in the future. Noting the size and importance of China, he argued: "In the 21^st century, it will certainly be meaningful to involve China in discussions" on controlling and preventing regional conflicts and promoting international co-operation" (Suk 1999). In response, the host of the year 2000 summit Japan sounded a cautious note, asking publicly whether "a membership expansion would enable us to maintain effective policy coordination" and "whether China wishes to join." The same day, China publicly urged the G8 to listen more to Beijing and other developing countries, pointed out that China is the largest developing country, and expressed the hope that the G-8 could narrow the gap between developed and developing countries, while also promoting global stability and balanced development.

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3. China's Role in the Global Financial Crisis of 1997-1999

An important cause of the G7/8's shift to view China as an associate and potential partner was the role China played in the response to the global financial crisis of 1997-9 and in the subsequent task of reforming the international financial system. Throughout the Asian and global financial crisis of 1997-9, China approached the challenge of both crisis response and system reform with clear, consistent and quite distinctive positions. These positions often accorded with those of its Asian neighbours and placed it at odds with the emphasis of the G7. Yet from an early stage, China's positions were shared by some G7 members, including those from beyond Asia. As the crisis progressed, adjustments in the initial G7 consensus, in response to a changing reality, narrowed the still substantial policy gap. By the end, there was sufficient convergence and partial overlap that a closer and potentially fruitful dialogue between the G7 and China could be realistically envisaged.

As the Asian financial crisis opened, China faced the global economy from a position of relative strength. Unlike Japan and South Korea at a comparable stage of their economic development, China had an outward looking policy grounded in considerable amount of inward and outward foreign direct investment. Unlike Russia during the past decade, China began in a state, not of economic collapse, but of economic strain at worst, accompanied by some considerable economic strengths. The latter included a major trade surplus both overall and with the United States in particular, and the world's second largest source (after Japan) of convertible foreign exchange reserves. It was thus understandable that China was seeking to play a larger role in regional and global affairs, and that the crisis offered it an opportunity to do so.

a. Crisis Response

From the start of the crisis, China was active in the mobilization of resources, beyond those of the IMF from its regular mechanisms, to deploy in support packages for the beleagured Asian economies. It participated in the support package for Thailand, and in the plan for Indonesia.

China's main contribution came, as the G7 at Birmingham recognized, in not devaluing its currency and thus keep pace with and retain its competitive position vis a vis its many Asian neighbours who were devaluing theirs. It was not self-evident, at least in retrospect, that the threat of a Chinese devaluation was particularly strong. Apart from Hong Kong, the crisis placed little strain on the Chinese economy. Nor was it in China's interest to devalue. There was little pressure on their export account, which continued its large surplus, due to the relatively rising currency and soaring demand from the US, and the willingness of the latter to serve as a "spender of last resort." There was a general recognition that China's currency was locked to the US dollar, and that any devaluation could have led to a massive loss of confidence in, and flight of capital from, China itself. Closer to home, China's export markets, beginning with Japan, were afflicted by a lack of domestic demand in those economies, rather than any currency-related price elasticity relating to the goods China wished to sell. Indeed, on a trade-weighted basis, its currency suffered no net appreciation of any harmful proportion. Moreover capital inflows to China continued at a solid, if declining rate, and certainly at one well in excess of that enjoyed by its crisis afflicted Asian neighbours. Any fear of devaluation thus did not reflect the trade and debt structure of the Chinese economy.

Throughout the crisis, China proclaimed at every opportunity that it did not devalue its currency. Their Finance minister, Vice-Minister and Central Bank Governor constantly argued at IMF annual, Interim Committee, Development Committee and G24 meetings that China's refusal to devalue was its way of giving a guarantee to the international community and of maintaining stability in the region. Their emphasis on this argument may have been enhanced by their sensitivity to those private sector analysts who suggested, when the crisis broke, that its real origins lay in China's 1995-6 devaluation, and the attendant message that China favoured external adjustment rather than domestic reform of its own state-owned enterprises.

A second clear and consistent Chinese position was its very early and very strong advocacy of substantial, low-conditionality funding packages for the afflicted Asian economies. China argued vehemently that the support package to Thailand should be larger, offered earlier, with more front-end loaded disbursement, and with lower conditionality (including none regarding banking reform, corruption) than the IMF chose. It was a position that, in retrospect, appeared to some in the G7 to have had considerable merit.

On the Indonesian package China from the outset vocally opposed the rigidity of the IMF program, arguing that it went too far with fiscal compression. China's early advocacy of fiscal flexibility placed it in alliance with Japan, which was the leader in this coalition, and with Canada, which began to argue the case for stimulus and social sensitivity at an early stage. The Japanese push, aided by Canada and China, succeeded in changing IMF policy in this regard.

In these and subsequent cases the Chinese rarely departed from a narrow conception of the IMF's role. They wished to allow national authorities in afflicted Asian economies to determine what was best for their own economies. In their view, the IMF should just prepare analysis, offer options, describe costs and benefits and let the afflicted country decide what to do, rather than prescribe a particular path.

China's sense of solidarity with its Asian neighbours was further demonstrated in its willingness to contribute to the support packages, and its restraint in criticizing other Asian partners. Consistent with its belief in the "Asian way", and perhaps its fear of reciprocal criticism, its views were highly nuanced, balanced, and extremely sensitive in regard to political advice. They were a major proponent of the "Asian way", highlighting the particular circumstances and uniqueness of the East Asian societies, and thus the social and political and cultural context of any adjustment program.

b. System Reconstruction

China's strong supportive role in regional crisis response was accompanied by a clear approach to some of the major issues of international financial system reform. In the first instance, China argued internationally for regional responsiveness and responsibility in response to the crisis, rather than a reliance on the multilateral mechanisms of the IMF. Secondly, it was attracted, if not vocally, to the Japanese pioneered concept of a new Asian Monetary Fund, pioneered by the Japanese in the summer and autumn of 1997, as a substitute for the International Monetary Fund. Thirdly, China was very strongly opposed to letting hedge funds have the freedom to move capital in and out of countries in ways that could destroy small economies. This was a position that received the strong support of most of its neighbours in the region. And fourthly, in contrast to the new orthodoxy in favour of flexible exchange rates as a shock absorber, it tended to favour for an international regime the fixed exchange rates backed by currency intervention that it enjoyed at home.

China's approach began with a sense of Asian solidarity. It played a very active role in the debate over the Japanese proposal for an Asian Monetary Fund (AMF), initially offered as a stand-alone facility. Here China favoured a middle way, calling for complementary parallel instruments and mechanisms more sensitive to Asian values. Hong Kong was one of the earliest economies to provide the inter-bank swap arrangements among central banks that were the precursor to any AMF. Indeed, a major portion of the resources made available by other emerging Asian economies was through such provision of liquidity to central banks, with the Hong Kong contribution totaling several billion dollars.

China's support for a greater regional role was seen from the start of the crisis, in its support for the "Manila Framework" - the other strand of the now emerging Asian financial network. The Framework was designed to bring together Asian finance ministers and central bankers. Here the Japanese proposed a formal mechanism, while the ASEAN countries preferred a less formal approach. China again sought a middle way, calling for a greater degree of co-operation and a Framework that spelled out what Asian values were.

A similar positioning appeared in regard to the Asian Development Bank (ADB) - another large area where Asians countries were attempting greater regional co-operation. In the second version of the AMF, the Japanese proposed that the ADB could serve as the secretariat for the new entity. The US, Europeans and Canadians continued to resist (as they had the initial AMF proposal of a stand alone facility). China supported developing regional co-operation but never voiced support for a separate institution, or declared that they wanted to undermine the IMF and World Bank.

On the broader issues of the new architecture, China has often taken a multi-track approach, in recognition of its responsibilities for the very different societies of both Hong Kong and mainland China. This duality is evident in China's position on transparency in regard to the financial sector, corporate governance, accounting, and banking standards.

Yet there are several areas where China stands in less restrained opposition to the position of the G7. On the codes of conduct proposed by the British, Canadians and German and to some extent the US, China has been cautious. It is the most conservative country regarding the transparency of markets, the public sector, and central banks. Here it is one of the most virulent opponents, arguing that such transparency would cause not stability but greater volatility. On this issue their divergence with the G7 has widened, as Japan's initial 1997 support for discretion and confidentiality has now been replaced by a strong emphasis on publication.

China has also opposed the G7 on Codes of Good Practice for Social Policy, a project pioneered by the Britain, Canada and the US, along with Australia, which the World Bank has started working on. China has been the country most strongly opposed. While Japan has reservations about the project, it has been prepared to support it.

A further area of divergence is fiscal transparency and Codes of Good Practice on Fiscal Policy, a favorite of Canada and Britain where the IMF is currently developing a code. Here China has stood in consistent opposition. In late 1997 and early 1998 it questioned the validity and value of the whole exercise. It now stresses the voluntary nature of the code.

Despite these divergences there are several areas where China is closer to the G7 consensus. China favours lending into arrears, as do most G7 members. China, along with most G7 members, does not see moral hazard as the major problem that Germany does.

China has also been very constructive regarding hedge funds, a subject of particular PRC passion. It is very vocally concerned about how at the margins highly leveraged banking, insurance and securities firms and hedge funds can very quickly destabilize countries that are otherwise doing well. It thus calls for greater international financial regulation. Here China has been joined by Japan, Malaysia and other Asian countries, while the US, Britain, Canada and Europe remain much less concerned.

China's views here reflect a broader, longstanding analysis of the causes and impact of the Asian crisis. Along with some Asian countries it sees the virulence of the Asian crisis arising due to the behaviour of foreign institutions and how they leveraged their portfolios by pouring billions into emerging markets and then pulling these funds out at the first sign of trouble. They regard such herd behaviour, as in Indonesia, as socially destabilizing, causing massive poverty, unemployment, civil unrest, domestic strife, family breakdown and independence movements. Such results defy their desired "social market economy," a concept which gives equal weight to economic development and social stability. They thus judge IMF programs primarily according to their impact on social stability, and resist IMF involvement in issues of corporate governance, securities commissions, risk management in financial markets, social practices and political problems such as corruption.

Despite their still deeply grounded and substantially divergent positions, China has played an increasingly vocal, active, engaged, and influential role in crisis response and system reconstruction. In the great debate between Japanese and Malaysian led Asian regionalism and Bretton Woods based multilateralism, China has often taken a middle position in their public statements. On important issues, they have shared a similar position to that of Japan, Canada, and many other G7 members. Moreover, they have come to see themselves as a large country and economy, a linchpin of Asia economically along with Japan, and as a responsible international citizen. They thus wish, and feel they ought to be involved, in all relevant forums.

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4. The Move Toward Meaningful Association: From G22 to FSF and G20

This shifting conception of China among G7 and G8 leaders has been accompanied by concrete moves to bring China into a closer institutionalized relationship as an associate of the G7. Spawned initially by China's new financial power, and hastened by its responsible role in the 1997-9 Asian and global financial crisis, such a movement has been centered on, and thus far confined to, an association in the field of finance, and at the level of finance ministers and central bank governors

a. The Early Associations

The move toward China's institutionalized association with G7 dominated finance forums began in the late 1990's with the creation of the New Arrangements to Borrow (NAB), in which Hong Kong is involved. The NAB, whose creation was prompted by the December 1994 Mexican peso crisis and the Halifax G-7 call to the G-10 to double the monies available to the IMF under the General Arrangements to Borrow (GAB), was approved by the IMF Executive Board on January 27, 1997 and entered into force on November 17, 1998. The NAB, whose secretary is housed at the IMF, is similar to the longstanding GAB, but brings to bear more funds and additional contributors (Bergsten and Henning 1996). Both were used during the crisis. The fact that the NAB had more money and more flexibility than the GAB proved essential in the successful containment of the crisis. The Hong Kong Monetary Authority, one of the 25 members of the NAB, has a contribution of 340 million SDR's, which puts it on a par with Finland, Korea, Malaysia, Singapore and Thailand at the lowest level of contribution. Canada, the lowest-ranked G7 member in the NAB has 1,396 SDR's while the USA, the top-ranked G7 member, has 6,712.

A further step came with the formation of the Group of 22, created at the initiative of President Clinton at the November 1997 APEC leaders' meeting in Vancouver. China participated as a member in the Group's activities over the subsequent year, centered on reports on particular aspects of the financial architecture. The activities of the Group proved instrumental in the creation of the new G20, as a successor body more closely integrated with the work of the established international financial institutions. The experience with the G22 and parallel G33 had highlighted the need "for a regular international consultative forum with a broader membership than the G-7" and one integrated into the governance structures of the IMF or World Bank (Canada 1999).

A subsequent step came in the spring of 1999 with the creation by the G7 Finance Ministers in Bonn on February 22, 1999, based on a formula composed by German central bank governor Hans Tietmeyer, of a new Financial Stability Forum. The Forum's purpose is to "promote information exchange and coordination among the national authorities, international institutions and international regulatory or experts groupings with responsibilities for questions of international financial stability" (Financial Stability Forum 1999). Its initial membership consisted of the finance ministries, central banks and leading regulators of each of the G-7 countries, along with the chairs of the international regulatory organizations and representatives of international financial institutions.

The Forum first met at the IMF in Washington on April 14, 1999. At the Cologne Summit in June 1999, G7 leaders decided to expand the group beyond G7 member countries to include the "systemically important emerging economies." Thus Hong Kong, Singapore, Australia and the Netherlands were added as participants for the Forum's subsequent meeting in Paris on September 15, 1999.

b. The G20

The most recent advance that China has made in securing association with the G7 and recognition of its strong relevance in the redesign of the international financial system has been in its inclusion as a founding member of the new Group of Twenty (G20) forum of finance ministers and central bank governors. The G20, chaired for its first two years by Canadian Finance Minister Paul Martin was formally created at the September 25, 1999 meeting of the G7 Finance Ministers. It was created "as a new mechanism for informal dialogue in the framework of the Bretton Woods institutional system, to broaden the dialogue on key economic and financial policy issues among systemically significant economies and to promote cooperation to achieve stable and sustainable world growth that benefits all" (G7 1999). To launch the G20 at its first meeting in Berlin in December 1999, the G7 finance ministers would thus invite "counterparts from a number of systemically important countries from regions around the world," as well as representative of the EU, IMF and World Bank.

The G20, from its initial formulation as the GX to its September birth, was the product of different approaches among G7 members. These will determine in part how the new body evolves. The French, supported by the Italians, were opposed to the very creation of the G20, for fear that it would undermine the authority of the IMF, which their compatriot Michel Camdessus headed, and the new International and Monetary Financial Committee which they preferred. The USA and Japan were very much in favour of the new body. Britain, while supportive, was somewhat reserved, for fear that the G20 might undercut in practice the prominence of the new International and Monetary Financial Committee, which Britain's finance minister George Brown was chosen to initially chair. Their early emphasis was on restricting the discussions to be held within the new body. Canada was supportive, in part because it wished to see a broader consultative structure that was more formalized, linked to other institutions, and less controlled by the USA and its preferences than it perceived the G22 to have been.

As outlined by its Canadian chair, the G20 "fulfills the commitment by G-7 leaders at the June 1999 Summit at Koln "...to establish an informal mechanism for dialogue among systemically important countries within the framework of the Bretton Woods institutional system" (Canada 1999). Its mandate is to "promote discussion and study and review policy issues among industrialized countries and emerging markets with a view to promoting international financial stability." Its initial 18 country members consisted, in addition to the G7, of Argentina, Australia, Brazil, China, India, Mexico, Russia, Saudi Arabia, South Africa, South Korea, and Turkey. Canada would host the second meeting in 2000. The chair would rotate among participants with two year terms, and with the initial chairs being chosen from among the G-7 countries.

Through the inclusion of China, the G7 recognized China as a "systemically important country," a "key emerging market" with a different viewpoint than that of the most industrialized countries, and a representative of the Asian region.

It shared the former status with ten other countries (including G8 member Russia), and the latter with fellow Asian region countries Australia, India, and South Korea. One of two unfilled country positions was reserved for Indonesia, which would be awarded it once and if its stable democratic transition were completed and current G7 concerns about its political and human rights abuses ended. While other Asian countries, notably Malaysia, were claiming a place, some among the G7 felt that Asian countries such as Thailand would, on the grounds of size and the absence of currency controls, be better suited. The pattern of membership thus constituted a recognition that in this financial forum, China was in the same class as Russia, and in one above that of Indonesia and Malaysia.

Yet in the diplomacy designing the new institution, China clearly had pride of place. During this process there was never any serious consideration of excluding China from the group. They were seen to rank above Argentina, Mexico, Korea, Turkey, and as a country that might some day overtake Canada and Italy. While there was much discussion about membership, no-one's list excluded China. In contrast, some lists excluded Australia, Korea, Turkey, and Saudi Arabia (although the latter's provision of ample funding proved decisive in the end).

The functions of the group suggested an even broader relevance for China. To be sure, the G20 was a deliberative rather than decisional body, but one designed to encourage 'the formation of consensus" on international issues" (Canada 1999). However it was one with a policy focus, a mandate to promote international financial stability. Chair Paul Martin suggested it "will focus on translating the benefits of globalization into higher incomes and better opportunities everywhere," including working people around the world (Beattle 1999). Although concentrating on longer term rather than immediate policy issues, Martin declared;" There is virtually no major aspect of the global economy or international financial system that will be outside of the group's purview." (Beauchesne 1999).

Its relationship with other bodies also suggested a robust role for its members. It would operate within the framework of the Bretton Woods institutions, involve their representatives (including the Chair of the Interim and Development Committees) and the EU fully in its substantive discussions, in order to ensure that its work was "well integrated." It would "help co-ordinate the activities of other international groups and organizations, such as the Financial Stability Forum", "facilitate deliberations in the new International and Monetary Financial Committee, and potentially develop "common positions on complex issues...to expedite decisionmaking in other fora."

Its potential importance was further suggested by its institutional characteristics. These included the firm control of the chair by the G7, the two year rotational cycle, the linkage of its meetings to those of the G-7 meetings at the start of each year, the presence of a deputies process to prepare for and support the meetings, its ability to call on the resources of the IMF, World Bank and outside experts, and its ability to "form working parties to examine and make recommendations on issues related to its mandate."

The early emphases by the Canadian chair suggested an effort to turn the new institution into an influential forum. The Canadians envisaged the possibility of holding the second ministerial meeting in June 2000, a mere six months after the first. They further contemplated holding it in Toronto, despite fears that this could detract from the lead-up to the G7 finance ministers meeting and G7/G8 Summit in Japan in July. The Canadian hoped that the timing and location would better enable the new Group, whose conclusions could be recorded in a Chair's Statement, to influence the G7/G8 meeting itself.

Substantively, the central Canadian objective was to avoid having the body generate the traditional north-south divide. Canada thus wanted to keep the Group focused on sharing experiences, and open discussion, rather than the statement of hard positions. Their emphasis was heightened by the views of some, such as another newly included finance minister, who saw the new Group as an excellent opportunity for the "South" to press its issues against the "North".

China proved ready to join the new Group, in part due to the G7's and Paul Martin's desire to use it to promote for better supervisory and self regulation arrangements. It was clear that China would be dealing from a position of strength in the new G20. It should quickly emerge as one of the most influential members, and advocate of a distinctive approach, within the club. With US$150 billion in foreign exchange reserves, second only to Japan in the world, it would come with a position of domestic strength. That strength also would give it a particular perspective on managing the international financial system, generating a bias in favour of fixed exchange rates backed by currency intervention. An open question for G7 members, however, was whether in the area of trade in financial services, such as banking and insurance, China would be ready to recognize the need for a process of international participation on a fair basis over time, rather than one which sequestered the best part of its growing domestic market for domestic firms.

There are, however, legitimate questions as to whether this new involvement on the part of China in this fledgling Group constitutes a sufficient degree and form of institutionalized association with the G7. One doubt arises from the view of some who see the G20 as part of the "G7-ization" of the world. In this view, the G20 was born to legitimate G7 initiatives to the wider world, by securing a broader consensus for G7-generated ideas. The G20's eleven non-G7 members are thus destined to affect issues merely on the margin, to be informed of G7 initiatives, and to be given some semblance of participation. The G20 underscores the fact that the G7 does not want to leave the reform of the international financial system to the IMF or World Bank, where developing countries have an institutionalized role.

A second doubt arises from the known difficulties of China being positioned merely as a full member of other developing country groupings - in this case, the eleven emerging economies (minus the one Australian exception) that join with the G7 to constitute the 18 member G20. Although China is a full member of the IMF's mixed membership Interim Committee and Development Committee, it is only an observer at the exclusively developing country clubs of the G24 meetings, and, outside the Bretton Woods system, at the G77. This mutually beneficial arrangement arises from the fact that China does not want to be fully linked to a group, given that it sees itself as a group unto itself. In addition, such groups are reluctant to have China as a full member for fear that its exceptional size would lead it to dominate.

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5. Prospects and Proposals for Strengthened Partnership: Options for Intensified Association

Looking ahead, there are thus good grounds for considering the rationale and developing the options for the enhanced institutionalized association of China with the G7/G8, including its possible involvement at the leaders level, and possibly as early as the Japanese-hosted Okinawa summit on July 21-3, 2000. In practice, although it is not self evident that the Russian case is the only relevant referent, the G7/G8 attitude will be heavily based on their recent experience with Russia. This includes the issues of why the G7 had such a powerful interest in Russia, whether the process and fact of Russia's admission has lessened in practice the criteria of the domestic democratic character and performance of a member in the larger interest of socializing difficult but powerful countries, and whether the Russian inclusion thus far has yielded as much or more than its early enthusiasts and ultimate deciders envisaged. Yet beyond any disappointments with or euphoria over recent Russian behaviour, as with Chechnya or Kosovo respectively, it is important to also take a more forward looking intellectual approach, and one focused more firmly on the specificity of China.

From the perspective of the G7/8, the rationale begins, as with Russia, with the collective strategic interest in the full integration of China into the global system, with the full and balanced set of rights and obligations which accompany that status. The current issue is whether China, even under the current leadership, has a political culture, ideological legacy, and distinctive national values that would allow it to contribute meaningfully to the development of a G7/8 consensus on core issues such as the reform of international institutions. From the perspective of China, the question is whether they would wish to move from their current position midway between the developing countries and the G7/8, and absorb the adjustments in their position on several issues that such a movement toward greater association would require. There are grounds for caution on both counts.

In developing options for enhanced association, however, several conclusions from the record of the past decade serve to provide a rationale, set a path, and define a degree of advance, for the next steps. To begin with, China's record during the 1997-9 financial crisis sustains the case that there is sufficient convergence and compatibility of interest between China and G7 members to make a further degree of institutionalized association potentially desirable and workable. Secondly, given the exceptional position of China, and the need to maintain the G7/8's core asset of constricted participation, it is China alone that could and should be accorded this next incremental upgrade. Thirdly, such an upgrade should be limited, and be less than full membership at present, in recognition of the core democratic character of the existing G7 club, and the need to maintain a democratization incentive vis a vis countries such as India, Russia and China itself. Fourthly, such an association should not create a configuration limited to either the economic or the political domain, or indeed to a singular or selected aspect of the G7's agenda. For during the past decade the G7 has cumulatively recognized China's multidimensional relevance. Moreover the unique strength of the G7 from its inception has been its ability to link political and economic dimensions to the mutual support of objectives in each domain. And both G7 and China's objectives during the international financial crisis and system reconstruction are premised on a linkage of both domains, if with distinctive end states currently in mind. This factor of multidimensional relevance and linkage suggest concentrating a list of options on those components of the G7/8 system where China is currently under-associated, but including one's which relate to the unique ability of leaders to embrace, link and tradeoff considerations from all domains.

The first option consists of an association with the G7's functional bodies, at the ministerial level and below. Such a step has several precedents, both in the creation by the G7 of regimes initially confined to G7 members, but that expanded over time on a functional basis to include outside countries of greatest relevance. As the involvement of Ukraine at the 1995 Winnipeg ministerial conference suggests, it is possible, even at the ministerial level, to single out a single country for such association, and to do so in ways that do not create a presumption or dynamic of recurrent and permanent participation.

On the assumption that the G20 will serve in the near future as an adequate forum for dialogue on the core financial issues, and that the accumulating experience in such finance-focused forums will sustain the case for constructive dialogue, enhanced awareness and attitudinal adjustment through greater association, attention would be devoted under this option to identifying G7/8 forums where China is most likely to make an issue specific contribution. Of particular interest, given China's global and regional security role, is to associate China with the G8 foreign ministers forum. This could take the form of a joint meeting on the margins of the United Nations General Assembly next autumn, at the December 1999 Berlin conference on peacebuilding or at the G8 foreign ministers meeting in Miyazaki in the leadup to the Okinawa summit.

A second option envisages an association at the leadership level. This would allow a full array of issues to be considered, at the discretion of each party to the dialogue. It would allow large, initially intellectual and cognitive, linkages and trade offs to be made. It would reap the full advantage of the Summit's role as a deliberative institution. And it would better signify the enhanced status China could deserve in the international community. The central objective of the G7/8 would be to secure a first hand understanding of the future intentions of China's leadership in the reform process, and to encourage them to move from a regional to a stronger global perspective and sense of responsibility. The first summit of the new millennium, and one being held in Asia, would provide an appropriate symbolic occasion for such a step. The presence of China would reinforce the objective of an otherwise reluctant Japanese host in having an Asian focus for the Okinawa summit.

Any move to association at the leaders level should begin, and could be confined to, preparatory steps. These would include the inclusion of China on the pre-Summit tour of G8 colleagues that Prime Minister Obuchi could take. It could expand into a meeting in Japan on the eve of the summit between the Chinese leader, should he prove willing, and Prime Minister Obuchi as summit host, along the lines of the honour Japan accorded Indonesia's President Suharto when the former hosted the last G7 summit in 1993. As in 1993, Prime Minister Obuchi could be accompanied by any G7 colleagues who wished to participate. Japan's two G7 partners in the North Pacific Triangle, and Russia, might see it in their interest to do so.

The third option is to hold a formal meeting between China's leader and the G7/8 as a collectivity, on the eve of the opening of the G7 and G8 summit. As with the dinner dialogue between the G7 leaders and the 15 developing country leaders that French President Mitterrand invited to Paris on the eve of the opening of the Summit in July 1989, such a format would enable an exchange of views on a full array of subjects, with a timing that would enable both G7 leaders and G8 leaders to take maximum account of China's positions and perspectives in their deliberations in the following days. It would be a sufficiently large advance that it could make it easier for China's leadership to accept such an invitation.

Such options would appear to be cautious steps, in contrast to the bold vision aroused by Chancellor Schroeder of making China a full summit member in one large, complete and irreversible step. A similar contrast arose in the wake of President Bush's public musings at Munich in 1992 that Russia should be admitted as a full member of the G8 club. But caution is in order, especially as the G7 and G8 remain fully preoccupied with absorbing a Russia whose challenges may well provide enough work for another decade. Yet the lesson of Russia underscores the advantages of advancing the hitherto very tentative association with China, both to mobilize China's very real strengths, and to address at an early stage its vulnerabilities before the costs they could create compound.

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