economics

February 9, 2010

Why China is stoking war of words with US

Filed under: Uncategorized — ktetaichinh @ 1:02 am
Tags: , ,

Beijing’s belligerence is a diversionary tactic. There’s nothing like nationalist outrage to sweeten unpopular economic reform

Europeans bemoaning the loss of their prominent world-governing (or, at least, photo-op-ing) role in the almost defunct G7 of industrial powers often worry that in future the world will not be steered by the broad and representative G20, but by a “G2” consisting of America and China. If so, the current war of words between those two giants should make the Europeans (and Japanese) feel lucky to be out of it. Harder to work out, though, is quite what this word-war means.

To some degree, admittedly, it is just following typical Chinese patterns. As Nicolas Sarkozy and Angela Merkel, the French and German leaders, both know, if you agree to meet that gentle, smiling fellow the Dalai Lama, you will get an earful from Beijing about how talking to the exiled spiritual leader is tantamount to fomenting a revolution in occupied Tibet (sorry, in an integral part of the Chinese nation). That is also why it is to Barack Obama’s credit that he is insisting on meeting the Dalai Lama this month when he visits America.

Mr Obama will do so in the full knowledge that this will aggravate the rather fraught US-China relationship. This was made fraught most particularly by America’s latest sale of arms to Taiwan, a sale worth $6.4 billion (£4.1 billion), which includes systems to defend the island against the large Chinese missile battery stationed near by, and which simply continues defence support mandated by the 1979 Taiwan Relations Act, passed by Congress at the time when America switched diplomatic recognition to the mainland.

Again, no topic is more probable to provoke colourful Chinese invective than Taiwan. I recall, some years ago, a friendly interview with a man who was then China’s top arms control expert, and is now a senior UN official, suddenly changing when I mentioned Taiwan. He slammed his fist on the table and shouted that he was prepared to die over the issue of Taiwanese separatism. I hope not here and now, I thought to myself.

What is unusual about China’s reaction to these two traditional issues is the volume of its response and that it is threatening sanctions against American firms. It has just imposed penalties on American chicken imports, in retaliation for US protectionism against Chinese car tyres. The Chinese Government has been very truculent over the alleged hacking of Google and 30 other foreign companies by Chinese cyber-warriors, refusing to investigate — which bolsters the belief that the hackers work for the Government.

Nor is America the only Chinese target. The hackers also attacked departments of the Indian Government, including the Prime Minister’s office. In Indian eyes China has become increasingly provocative over the two countries’ long-running territorial disputes in the Himalayas, over which a short border war was fought in 1962. China has been building up its troop numbers along those disputed borders. And to this list you can also add the obstreperous stance China took in the Copenhagen climate change conference last December.

So what explains this apparent rise in Chinese belligerence? For the past two decades the country’s official policy has been to keep its head down in international affairs, in line with a dictum of Deng Xiaoping, its great leader of the 1980s: “keep a low profile and hide your claws”, he said, while focusing on building up your strength. That was a good description of Chinese policy in the 1990s and for much of this decade. But it now looks out of date.

One tempting explanation is Chinese confidence. China has been the big winner from the global economic crisis, runs this argument. Not only did it survive the crisis without suffering social unrest, it has seen its growth rebound strongly — indeed, back into double digits during the most recent quarter. Its huge fiscal stimulus package and expansion of lending by state-owned banks has been much lauded. It was popular in Davos last week to claim that China is in the vanguard of a revival of state-led capitalism, with the Beijing model being increasingly admired by other emerging economies.

This interpretation is tempting for any American or European who feels weak and self-critical about their region’s power and prospects. It is certainly true that China is increasingly viewed with awe by others, even if many countries (notably India) also fear or resent it. It is also true that many Chinese feel that their country is on a roll.

But there is another explanation. If you look more closely, China’s economy starts to look much less strong. The huge increase in money supply and bank lending that revived its GDP growth is bound to lead to inflation — and is already doing so. If its apparent strength is to be sustained, China needs to find a new model, a new source of growth, now that reliance on exports to the US and Europe looks like a thing of the past. For even a state-run banking system cannot continue to boost lending by 35 per cent a year indefinitely without causing problems.

That is why a popular debate in the markets concerns whether China is experiencing an asset bubble and whether there is a risk of its growth collapsing in the same way as Japan’s did in 1990. That comparison looks far-fetched, for although asset-price bubbles are evident in some local property markets they do not look like enveloping the whole economy. But more plausible is the idea that current policies are producing a dangerous rise in conventional inflation. To deal with it will require a sharp — and sharply unpopular — change of policy, tightening credit conditions and regaining control over interest rates and the money supply by revaluing or even fully floating the Chinese currency.

That, of course, is exactly what Americans and Europeans have been lobbying for. It would not, however, be comfortable for the Chinese leadership to seem to be doing this in response to foreign pressure. So a diversionary tactic, aimed at rallying nationalistic support at a time when painful changes are needed, looks suspiciously convenient.

This is a more comfortable explanation for the recent word-war than simple Chinese assertiveness. A change of Chinese economic policy would be highly welcome, given the need to get the world into a much better balance between surplus countries like China and deficit ones such as America and Britain. It would also please other developing countries, which suffer badly from China’s artificially cheap exchange rate. Yet the short-term results could be far from comfortable: more Chinese nationalism, even less Chinese co-operation. Jaw-jaw may be better than war-war, but that doesn’t make it nice

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