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A special report on China and America

A wary respect

Oct 22nd 2009 From The Economist print edition


America and China need each other, but they are a long way from trusting each other, says James Miles.

“OUR future history will be more determined by our position on the Pacific facing China than by our position on the Atlantic facing Europe,” said the American president as he contemplated the extraordinary commercial opportunities that were opening up in Asia. More than a hundred years after Theodore Roosevelt made this prediction, American leaders are again looking across the Pacific to determine their own country’s future, and that of the rest of the world. Rather later than Roosevelt expected, China has become an inescapable part of it.

Back in 1905, America was the rising power. Britain, then ruler of the waves, was worrying about losing its supremacy to the upstart. Now it is America that looks uneasily on the rise of a potential challenger. A shared cultural and political heritage helped America to eclipse British power without bloodshed, but the rise of Germany and Japan precipitated global wars. President Barack Obama faces a China that is growing richer and stronger while remaining tenaciously authoritarian. Its rise will be far more nettlesome than that of his own country a century ago.

With America’s economy in tatters and China’s still growing fast (albeit not as fast as before last year’s financial crisis), many politicians and intellectuals in both China and America feel that the balance of power is shifting more rapidly in China’s favour. Few expect the turning point to be as imminent as it was for America in 1905. But recent talk of a “G2” hints at a remarkable shift in the two countries’ relative strengths: they are now seen as near-equals whose co-operation is vital to solving the world’s problems, from finance to climate change and nuclear proliferation.
Choose your weapons

Next month Mr Obama will make his first ever visit to China. He and his Chinese counterpart Hu Jintao (pictured above) stress the need for co-operation and avoid playing up their simmering trade disputes, fearful of what failure to co-operate could mean. On October 1st China offered a stunning display of the hard edge of its rising power as it paraded its fast-growing military arsenal through Beijing.

The financial crisis has sharpened fears of what Americans often see as another potential threat. China has become the world’s biggest lender to America through its purchase of American Treasury securities, which in theory would allow it to wreck the American economy. These fears ignore the value-destroying (and, for China’s leaders, politically hugely embarrassing) effect that a sell-off of American debt would have on China’s dollar reserves. This special report will explain why China will continue to lend to America, and why the yuan is unlikely to become a reserve currency soon.

When Lawrence Summers was president of Harvard University (he is now Mr Obama’s chief economic adviser), he once referred to a “balance of financial terror” between America and its foreign creditors, principally China and Japan. That was in 2004, when Japan’s holdings were more than four times the size of China’s. By September 2008 China had taken the lead. China Daily, an official English-language newspaper, said in July that China’s massive holdings of US Treasuries meant it could break the dollar’s reserve-currency status any time. But it also noted that in effect this was a “foreign-exchange version of the cold-war stalemate based on ‘mutually assured destruction’”.

China is exploring the rubble of the global economy in hopes of accelerating its own rise. Some Chinese commentators point to the example of the Soviet Union, which exploited Western economic disarray during the Depression to acquire industrial technology from desperate Western sellers. China has long chafed at controls imposed by America on high-technology exports that could be used for military purposes. It sees America’s plight as a cue to push for the lifting of such barriers and for Chinese companies to look actively for buying opportunities among America’s high-technology industries.

The economic crisis briefly slowed the rapid growth, from a small base, of China’s outbound direct investment. Stephen Green of Standard Chartered predicts that this year it could reach about the same level as in 2008 (nearly $56 billion, which was more than twice as much as the year before). Some Americans worry about China’s FDI, just as they once mistakenly did about Japan’s buying sprees, but many will welcome the stability and employment that it provides.

China may have growing financial muscle, but it still lags far behind as a technological innovator and creator of global brands. This special report will argue that the United States may have to get used to a bigger Chinese presence on its own soil, including some of its most hallowed turf, such as the car industry. A Chinese man may even get to the moon before another American. But talk of a G2 is highly misleading. By any measure, China’s power is still dwarfed by America’s.

Authoritarian though China remains, the two countries’ economic philosophies are much closer than they used to be. As Yan Xuetong of Tsinghua University puts it, socialism with Chinese characteristics (as the Chinese call their brand of communism) is looking increasingly like capitalism with American characteristics. In Mr Yan’s view, China’s and America’s common interest in dealing with the financial crisis will draw them closer together strategically too. Global economic integration, he argues with a hint of resentment, has made China “more willing than before to accept America’s dominance”.

The China that many American business and political leaders see is one that appears to support the status quo and is keen to engage peacefully with the outside world. But there is another side to the country. Nationalism is a powerful, growing and potentially disruptive force. Many Chinese—even among those who were educated in America—are suspicious of American intentions and resentful of American power. They are easily persuaded that the West, led by the United States, wants to block China’s rise.

This year marks the 30th anniversary of the restoration of diplomatic ties between America and China, which proved a dramatic turning point in the cold war. Between the communist victory in 1949 and President Richard Nixon’s historic visit to China in 1972 there had been as little contact between the two countries as there is between America and North Korea today. But the eventual disappearance of the two countries’ common enemy, the Soviet Union, raised new questions in both countries about why these two ideological rivals should be friends. Mutual economic benefit emerged as a winning answer. More recently, both sides have been trying to reinforce the relationship by stressing that they have a host of new common enemies, from global epidemics to terrorism.

But it is a relationship fraught with contradictions. A senior American official says that some of his country’s dealings with China are like those with the European Union; others resemble those with the old Soviet Union, “depending on what part of the bureaucracy you are dealing with”.

Cold-war parallels are most obvious in the military arena. China’s military build-up in the past decade has been as spectacular as its economic growth, catalysed by the ever problematic issue of Taiwan, the biggest thorn in the Sino-American relationship. There are growing worries in Washington, DC, that China’s military power could challenge America’s wider military dominance in the region. China insists there is nothing to worry about. But even if its leadership has no plans to displace American power in Asia, this special report will say that America is right to fret that this could change.

Politically, China is heading for a particularly unsettled period as preparations gather pace for sweeping leadership changes in 2012 and 2013. Mr Hu and the prime minister, Wen Jiabao, will be among many senior politicians due to retire. As America moves towards its own presidential elections in 2012, its domestic politics will complicate matters. Taiwan too will hold presidential polls in 2012 in which China-sceptic politicians will fight to regain power.
Triple hazard

This political uncertainty in all three countries simultaneously will be a big challenge for the relationship between China and America. All three will still be grappling with the aftermath of the global financial crisis. Urban Chinese may be feeling relaxed right now, but there could be trouble ahead. Yu Yongding, a former adviser to China’s central bank, says wasteful spending on things like unnecessary infrastructure projects (which is not uncommon in China) could eventually drain the country’s fiscal strength and leave it with “no more drivers for growth”. In recent weeks even Chinese leaders have begun to sound the occasional note of caution about the stability of China’s recovery.

This special report will argue that the next few years could be troubled ones for the bilateral relationship. China, far more than an economically challenged America, is roiled by social tensions. Protests are on the rise, corruption is rampant, crime is surging. The leadership is fearful of its own citizens. Mr Obama is dealing with a China that is at risk of overestimating its strength relative to America’s. Its frailties—social, political and economic—could eventually imperil both its own stability and its dealings with the outside world.

http://www.economist.com/specialreports/displayStory.cfm?story_id=14678579