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China takes on the world

After he launched China on to a market-led course in 1978, Deng Xiaoping counseled caution in international relations.

China should, he advised, keep a low profile while enriching itself and not alarm the countries whose markets for its exports would replace deficient domestic demand. Hu Jintao and his leadership colleagues must have decided that the time has come to shed such caution. China not only adopts a higher global profile, but is increasingly ready to take positions that earn the world’s disapproval, be it on the valuation of its currency or its support for regimes in Sudan, Iran and Burma. And now that more muscular approach by Beijing confronts the Obama administration’s drive to reassert Washington’s interest in Asia.

This could provide a testing experience for both sides of the so-called G2, a concept that has never really taken off if only because of the rocky path of Sino-US relations since President Barack Obama’s visit to the People’s Republic a year ago. The flashpoints are evident. Hillary Clinton’s assertion that freedom of navigation in the South China Sea runs straight up against China’s claim to sovereignty over the waters to its south. Washington’s growing closeness to India, including backing New Delhi’s claim to a permanent seat on the UN Security Council is not to Beijing’s taste. The US-Japan relationship remains a constant source of concern for China. The same goes for US–South Korean links. US arms sales to Taiwan rile Chinese leaders who insist that the island is part of the People’s Republic.

During three months just spent in Beijing, I was struck repeatedly by the sharp tone adopted towards the US not only by ideologues and media propagandists, but by senior economists who insist that failure of American economic policy is responsible for the world’s ills. The fact that the US Federal Reserve’s new bout of quantitative easing, or QE2, went down like a lead balloon at the G20 summit in Seoul showed that China is not short of allies.

A researcher with a think tank attached to the Commerce Ministry, Mei Xinyu, summed up the dismissive Chinese view of the US in China Daily this month: “The US’ top financial officials need to shift their people’s attention from the country’s struggling economy to cover up their incompetence and blame China for everything that is going wrong in their country.”

Moving into conspiracy theory, the op-ed article concluded that, by attacking China, finance officials in Washington foster speculative opportunities for Wall Street firms, which then offer them big jobs after they leave government office. Ahead of the G20 meeting, China rejected the US plan as harking back to the days of planned economies – nice irony coming from the last major state ruled by a Communist Party, one that just unveiled its latest Five-Year Plan. At a Beijing conference, the governor of China’s Central Bank, Zhou Xiaochuan, spoke of being ready to deal with the wash of money unleashed by QE2 as if he were a doctor preparing for a troublesome affliction. Cooperation over global warming seems at a dead end. China still values investments by companies such as Intel, yet promotion of domestic companies in its stimulus package and an increasingly tough regulatory climate for foreign firms complicate a business relationship that has flourished since the 1980s. As the mainland moves up the technological and value chain under its next Five-Year Plan, trade tensions are set to rise.

China trade was once all about cheap exports. But if Chinese development goes to plan, import substitution for big-ticket items will become the order of the day. In a little noticed development this month, China unveiled a prototype of a 150-seat airliner due to go into service by 2016, complicating Boeing’s sales to the world’s second biggest market for commercial aircraft, not to mention the impact on Airbus.

On the other side of the Pacific, tougher rhetoric from the White House and Treasury as the US finds itself under political pressure at home and increasingly bereft of economic allies abroad does not point to a benign future with Washington and Beijing working together for the benefit of the world at large. Speaking at a European Central bank conference in Frankfurt on November 19, US Federal Reserve Chairman Ben Bernanke hit back at Chinese criticism, noting that “currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected 
market fundamentals.”

Hu’s visit to Washington in January will be the touchstone. In an interview with The Australian newspaper, Secretary of State Clinton said that China’s current policies in the region were designed to test other nations and insisted that Beijing should abide by international law. The problem is that the law is extremely vague on key points of conflict, notably the sovereignty of rocky islands that may sit on top of large 
energy reserves.

The US-China spat has greater resonance because of the way Washington backed Japan in the row over the detained Chinese trawler and the flurry over China’s decision to halt exports of rare-earth minerals 
to Japan.

If the relationship continues its downward spiral, Hu’s visit risks turning into a confrontation. If only for domestic political reasons, Obama may well feel he must show that he can stand up to China for instance, by slapping duties on selected imports, resisting Beijing’s maritime claims goods or holding China to account on its environmental record. Hu, due to stand down as Chinese leader in late 2012, has no wish to leave office remembered as the man who caved in to the US.

Such a standoff is dangerous for both countries – and the world. It could lead to damaging protectionism. Depicting China as an enemy may be an attractive electoral gambit for an administration that feels need to display its muscles. Beijing will respond in kind. High-level and dispassionate statesmanship is required, with each party giving some ground and trying to scale down the currency rhetoric while engaging in serious discussion on common approaches to environmental measures. Whether either party has the wherewithal remains in question. On their performances so far, one can only remain pessimistic.

Jonathan Fenby is China director of the 
research service Trusted Sources and author of the Penguin History of Modern China

© 2010 Yale Center for the Study of Globalisation