Flaherty says China against bid for bank levy

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Finance Minister Jim Flaherty says he has the backing of China in his fight against a charged U.S. and European proposal to create an international tax on banks. But those familiar with how Chinese policy is made aren't so sure that Beijing has made up its mind on an issue that threatens to derail the Group of 20 summit in Toronto later this month.

On a whirlwind trip to Shanghai and Beijing ahead of a meeting of G20 finance ministers that begins Friday in South Korea, Mr. Flaherty met Wednesday with Finance Minister Xie Xuren and will meet Thursday with People's Bank of China governor Zhou Xiaochuan.

"The answer is yes," the Canadian minister said when asked whether he believed China is also opposed to a global bank tax, which is supported by the International Monetary Fund as a way of ensuring taxpayers are never again placed in the position of bailing out failing banks. "There's not substantial support in the G20 [for a bank tax] which has been proposed by a few countries."

Mr. Flaherty has in recent weeks taken his fight against the bank tax on the road, preaching against it during a trip to India last month and during a recent meeting with the finance ministers of Brazil, Argentina and Mexico, all of whom are G20 members. Treasury Board president Stockwell Day also raised it with Chinese leaders during a recent trip.

Without mentioning China, Mr. Flaherty suggested to a press conference that Canada's counter-proposal of better regulation, along with an instrument known as "embedded contingent capital," was gaining support over the bank tax idea. "I think that there's substantial support in the G20 for some sort of special reserve fund - Canada's idea about an embedded contingent reserve fund - to be used at a time of crisis to ensure that financial institutions that contribute to a crisis bear the costs of that contribution, and not taxpayers."

Proponents of the bank tax argue a co-ordinated levy is necessary to create a fund that could be used, instead of taxpayers' money, to bail out the sector in the event of another crisis. Canada, meanwhile, advocates a type of self-insurance, under which banks would be required to issue a special type of security that would act as bonds during good times but which would automatically convert into shares once certain conditions are reached, boosting the bank's capital in a crisis.

If China does indeed favour the Canadian proposal, it could set up an interesting showdown at the G20 pitting those in favour of a bank levy - primarily countries that had the experience of bailing out banks during the recent economic crisis - against those countries who believe their financial systems weathered the storm and therefore have no need for such a tax.

Debate over the issue already divided an April meeting of G20 finance ministers held in Washington, where Canada, Japan and Australia were vocal in their opposition to a bank tax proposal backed by U.S. President Barack Obama. At that meeting, China and South Korea both maintained ambiguous positions.

Those familiar with China's G20 position said that despite Mr. Flaherty's confidence, the Communist Party leadership still had not decided whether it would support or oppose the idea of an international bank tax. "I think China is holding an open attitude to it now. If this proposal is really used to prevent financial speculation, I think China theoretically might not oppose it," said Xu Mingqi, deputy director of the World Economics and Politics Institute at the Chinese Academy of Social Sciences. "China is still discussing the details of this proposal and won't be simply saying support or oppose now."

Mr. Flaherty said that during his trip he also planned to raise the issue of China's currency, the yuan, which economists say Beijing keeps artificially low to the benefit of Chinese exporters. Beijing, however, has ignored outside pressure to revaluate the yuan for nearly two years, and Mr. Flaherty didn't sound too optimistic that repeating Canada's position would have any impact now.

"It comes up regularly every time we meet, and I'm sure it will come up this time, the need for currency flexibility," he said in response to a question from a Chinese reporter. "Canada has consistently advocated for flexibilities in currencies, including the Asian currencies. There was some flexibility in the Chinese currency before the [global economic]crisis, and we anticipate that that will return."

Mr. Flaherty crossed paths in Shanghai with International Trade Minister Peter Van Loan, who arrived Monday for a series of meetings aimed at promoting Chinese investment in Canada, as well as addressing the growing trade imbalance between the two countries. The two ministers presided Wednesday over the signing of four research agreements between the National Research Council of Canada and Chinese partners, as well as four minor investment deals involving Canadian firms. The two ministers then welcomed a bewildered Chinese family of three that was jointly identified as the one millionth visitor to Canada's pavilion at Expo 2010, which opened May 1 in Shanghai.

Mr. Van Loan, who met Wednesday with China's minister for science and technology as well as the vice-minister for commerce, said that despite some splashy Chinese investments in recent months in Canada's oil sands and other natural resource companies, there was plenty of more room for more involvement in the sector from the world's fastest-growing economy.

"Chinese investment in the Canadian economy has stepped up, including in resource companies. That being said, it is still a very, very modest amount of investment over all, when you consider the size of our resource sector," he said. "In terms of future investments, they will continue to be evaluated on the tests that we have. The major test is, is this going to create jobs and prosperity for Canadians? If you can satisfy that test, in most cases you will be approved. We certainly want to encourage more investment."

Mr. Van Loan added that Canada's trade deficit with China, which stood at $28.5-billion last year, was a lingering concern, suggesting lumber and wood-frame construction as areas where he hoped to see Canadian exports to China rise.

"It's no doubt that right now we are running a significant trade deficit with China; it's about a four-to-one ratio right now. We certainly look forward to that evening out. I think that compared with other major trading partners [the trade imbalance with Canada]is one of the most glaring ones that China has," he said.