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China/US - Two "Indispensible Powers"

Alastair Newton - 2nd February 2011

The phrase “indispensible power” is most closely associated with Madeleine Albright, who first used it publicly to describe the United States shortly after she was sworn in as Secretary of State in December 1996. In May 2009, the then British Foreign Secretary David Miliband opined that “China is to become an indispensible power in this century in the way the US became such in the 20th century (as described by Madeleine Albright)”.i

The December 2009 climate change summit and November 2010 G20 summit suggest that international agreement on major issues is already just as dependent on Beijing as it is on Washington.ii And few would argue that the Sino-US relationship is anything other than the most important bilateral relationship in the world today.

So where does that relationship stand in the wake of President Hu Jintao’s January 2011 state visit to the United States?

The Currency Question

“This committee will no longer view the relationship with China purely through the currency.”iii

Representative Kevin Brady, Chairman of the US House of Representatives’ Ways & Means Trade Sub-Committee, January 2011

After a succession of draft “anti-China” bills over several years which went nowhere in the US Congress, in September 2010 the House of Representatives passed H.R.2378 (aka the “Ryan Act”). Had the bill been approved by the Senate and been signed off by the President it would have obliged the Administration to take account of the alleged undervaluation of the RMB in calculating anti-dumping duties against China. The substantive impact of this would probably not have been that significant – the Obama presidency has seen just three cases of additional duties on imports from China (ie tyres, tubular steel pipe, aluminium products). But its symbolic significance could have been considerably greater.

That it failed to secure Senate approval was probably just for lack of time.

On the eve of Hu Jintao’s state visit, Senator Charles Schumer and others introduced a fresh bill to Congress, designed to force the Administration to take a tougher line with China over its exchange rate policy. However, some of the heat has gone out of this issue thanks to:

• Faster RMB appreciation of 6.2% annualised in nominal terms since mid-2010 (and, as Treasury Secretary Tim Geithner has pointed out, 10% plus in real terms);iv

• The passing of the US Mid-Term elections, campaigning for which saw “China bashing” prevalent among members of both parties.

For the time being, therefore, Congress, focusing on other priorities, will not pursue “anti-China” legislation. Nevertheless, with US unemployment likely to remain above 9% this year and popular sentiment weighing against China, the issue is far from dead.

The Other Side Of The Coin

China had been looking to shift the focus onto US monetary policy since Wen Jiabao’s claim in March 2010 that the US would only achieve its target of doubling its exports by 2015 through “competitive devaluation” of the dollar.v To this end it has been aided by the US Federal Reserve’s launch of a second round of quantitative easing (“QE2”) just prior to the 10/11 November G20 Summit.

Reflecting Chinese concern over US monetary policy, on the eve of his visit to Washington Hu Jintao claimed to the press that the prevailing international currency system was “a product of the past”.vi Consistent with that view, the last year has seen an acceleration of China’s efforts to internationalise the RMB (with geopolitical implications), notably through:

• A growing number of currency swop deals (now totalling eight) with other central banks;

• Encouraging bilateral trade and foreign investment to be financed in RMB – a programme which was expanded to cover economies worldwide and to 20 Chinese provinces and municipalities last June;

• Launching last July trade in offshore RMB bonds in Hong Kong – the so-called “dim sum” market.vii

However, true internationalisation would require significant liberalisation of China’s financial system, of which there is little sign as yet.

A Warmer Welcome?

One of the US’s priorities for Hu Jintao’s visit was to press China to join the WTO’s plurilateral government procurement agreement, thereby opening up central and regional government contracts to foreign contractors. There appears to have been some significant progress on this count.

For its part, China is looking for reciprocity in terms of its sovereign wealth-related investments. But, despite the openness of high deficit economies to Chinese investment in their bonds, the recovery of the global economy may yet see renewed resistance to Chinese investment in “sensitive” sectors including in the US.

The Velvet Glove…

“The message coming from the world’s second largest economy for the past year has been clear; China wants to accelerate the integration of the global economy, but on its own terms…. It is trying to forge post-American globalisation.”

“A Strategy to Straddle the Planet”, Financial Times, 18 January 2011

In the context of his January 2011 visit to Europe, Chinese Vice-Premier Li Keqiang noted that:

“China’s development calls for international co-operation over access to markets and resources, and…requires a peaceful external environment.”viii

Access to markets and resources will remain China’s top foreign policy priority for the foreseeable future – and bring with it some interesting consequences, notably:

• “Soft” diplomacy – epitomised by Li Keqiang’s mission to Europe – will play an increasingly important role in China’s international projection;ix

• Beijing will use its financial muscle to deepen economic ties regionally and globally (eg through major investments in high-speed rail);x

• To protect its overseas interests/investments, China will have to move away from its established policy of non-intervention (eg in Sudan);

• Confucian Institutes will continue to proliferate worldwide.

…And The Mailed Fist?

As Philip Stephens noted recently in the Financial Times:

“One of the paradoxes of great power status is that it brings its own vulnerabilities. China’s dependence on foreign raw materials means it has more to lose. This has empowered the PLA. So has rising nationalism transmitted…across thousands of internet sites.”xi

China’s leaders would ignore popular pressures at their peril – and may have to grapple with rising nationalist sentiment in the coming years.

According to the Asia Society’s Orville Schell at the heart of this lies a Chinese desire for “…respect and admission of stature”.xii This is consistent with the view of the Lowy Institute’s Michael Wesley that China may, in time, try to push the US away from its maritime borders to enhance its authority over littoral states.xiii

In recent years China has reached a settlement with neighbouring states on a number of disputed land borders (India being the one outstanding issue, in a dispute which Chinese Premier Wen Jaibao acknowledged would be difficult to resolve despite his otherwise very positive tone on Sino-Indian relations during his official visit to Delhi in late 2010).xiv However, Beijing remains in dispute over maritime borders with several littoral states in the South China Sea, an area which China’s press has described this region as a “core interest” (ie on a par with Tibet).xv

In July 2010 US Secretary of State Hillary Clinton, speaking at the ASEAN Regional Forum, called the South China Sea a US “national interest”. Her call for diplomatic solutions to territorial disputes there has been backed up recently with a high-profile US naval presence. Littoral states – notably Vietnam – have been quick to welcome this move.

As Figure 1 confirms, despite the recent focus in the western press on China’s naval build-up and development of anti-ship missiles, the Chinese navy currently falls considerably short of posing a serious challenge to US superiority in the Pacific region – even if, that is, Beijing was looking to do so; and with the US still accounting for more than 40% of total global defence spending (ie around seven times more than China – see Figure 2) that is likely to remain the case for many years to come.xvi

Figure 1: The Gulf In Naval Strength
 

CHINA/US: RELATIVE NAVAL POWER 2011
 
Chinese Navy
US Navy
Aircraft Carriers
0
11
Cruisers
0
22
Destroyers
28
56
Frigates
52
21
Submarines
65
71
Principal Amphibious Ships
1
31
Command Ships
0
2
Aircraft
290
900
Active Personnel
255,000
335,822
Sources: IISS/US Department of Defense/SIPRI

 

Furthermore, in December 2010 Japan – which currently has the second largest blue-water navy in the Pacific – announced that it would be shifting its military focus away from Russia to strengthen its southern defences.xvii

Figure 2: The Gulf In Defence Spending
 

 

 
Country
Spending ($bn)
World Share (%)
1
United States of America
607
41.5
2
People's Republic of China*
84.9
5.8
3
France
65.7
4.5
4
United Kingdom
65.3
4.5
5
Russia*
58.6
4
6
Germany
46.8
3.2
7
Japan
46.3
3.2
8
Italy
40.6
2.8
9
Saudi Arabia
38.2
2.6
10
India
30
2.1
* denotes SIPRI estimates
Source: SIPRI (2009)

 

Pyongyang – A Shared Problem

The sinking of the Cheonan in March 2010 and the November 2010 artillery attack on the South Korean island of Yeonpyeong – have underlined that North Korea remains a major threat to regional security. The motivation for North Korea’s recent malfeasance likely includes:

• Smoothing the succession of Kim Jong-un;

• Looking ahead to a possible return to the negotiating table, trying to extort concessions from the international community in return for better behaviour.

The US will continue to press China to pressure North Korea. It is almost certainly no coincidence that, shortly after Hu Jintao’s recent meeting with Barack Obama, Pyongyang finally agreed to high-level military talks with South Korea which will include – at the latter’s insistence – both the Cheonan sinking and November’s artillery attack on the agenda.

For now, tensions have eased and, as I speculated in a paper published by Global Policy last year, we may now be in for a period of relative calm on the Korean peninsula.xviii But another major incident cannot be discounted even though at least informal multiparty talks may be resumed shortly.

Furthermore, whatever incentives are offered, North Korea is likely to remain intransigent over its nuclear capabilities and aspirations and a potential source of Sino-US friction for the foreseeable future.

2012: A Potential “Perfect Storm” Politically?

“The current generation of leaders in Washington and Beijing can probably be relied on to prevent Chinese-American antagonism rising to dangerous levels. It is the next generation that we should be worrying about.”

Gideon Rachman, Financial Times, 18 January 2011

Without wishing to gainsay Mr Rachman’s view of the current generation of leaders, we may not have to await the arrival of the next generation given the tensions which can all too easily occur in the run-up to shifts of leadership as candidates look to play primarily to domestic audiences. For, in addition to the handover of power to China’s 5th generation leadership, 2012 will see:

• Taiwan: Legislature (January) and Presidential (March) elections; and,

• United States: Presidential and Congressional elections in November.

Furthermore, North Korea will celebrate the 100th anniversary of the birth of Kim Il-sung on 15 April, the date by which the leadership has promised that the country will be “strong and prosperous”. Having clearly failed to achieve the second of these objectives, there may be an overwhelming temptation to try to demonstrate the first.

Richard MacGregor of the Financial Times described Hu Jintao’s visit to Washington as “one stop on a much longer journey”.xix Getting through the potential hazards of 2012 without significant mishap would mark another important step on that journey.

 

 

Alastair Newton is Senior Political Analyst at Nomura International plc. The views expressed in this article are those of the author and do not necessarily represent those of Nomura International plc.

 

1“China ready to join US as world power” by Julian Borger, The Guardian, 17 May 2009.
2 See, eg, “China learns to play, and win, by the rules” by Jonathan Holslag, Financial Times, 13 December 2010.
3 “Renminbi issue is put on the back burner” by Alan Beattie, Financial Times, 20 January 2011.
3 Ibid.
4 “Wen stands firm on yuan” by Wu Jiao and Xin Zhiming, China Daily, 15 March 2010.
5 See, eg, “Excerpts from Hu Jintao interview”, The Washington Post, 16 January 2011.
6 “Yuan direction” by Robert Cookson and Geoff Dyer, Financial Times, 14 December 2010.
7 “The world should not fear a growing China” by Li Keqiang, Financial Times, 9 January 2011.
7 See, eg, “China and Europe: Bear gifts for friends” by James Kynge, Geoff Dyer and James Blitz, Financial Times, 14 January 2011.
9 See, eg, “A strategy to straddle the planet” by Geoff Dyer, David Pilling and Henny Sender, Financial Times, 18 January 2011.
10 “A risen China reaches for power” by Philip Stephens, Financial Times, 10 December 2010.
11 “How Beijing will treat the rest of the world” by David Pilling, Financial Times, 20 January 2011.
12 Ibid.
13 See, eg: “Wen’s trip to India stirs up old squabbles” by James Lamont and Geoff Dyer, Financial Times, 14 December 2010; and “Premier strides out on mission across the Himalayas” by James Lamont, Financial Times, 16 December 2010.
Consistent with Wen Jaibao’s stated views, in his 1 February 2011 annual address on internal security, Indian Prime Minister Manmohan Singh claimed significant progress in securing the disputed territory of Arunachal Pradesh over which China has claims – see, eg, “India strengthens border with China” by James Lamont, Financial Times, 2 February 2010.
For more background on the possible evolution of India’s foreign policy relative to both China and the US see “India and the US: ‘Natural Allies’ or Uneasy Bedfellows”, by Alastair Newton and Ritika Sen, Global Policy, 18 January 2011.
14 See, eg, “Testing the waters”, The Economist, 29 July 2010.
15 “Beijing builds to hold US power at bay” by Geoff Dyer and Richard McGregor, Financial Times, 19 January 2010.
16 See, eg, “Japan to shift focus of defence to China” by Mure Dickie, Financial Times, 14 December 2010.
17 “North Korea: Calmer Waters Ahead?” by Alastair Newton, Global Policy, 22 August 2010.
18 “Hu visit one stop on a much longer journey” by Richard McGregor, Financial Times, 19 January 2011.