China’s push to oust US from Asia-Pacific

By S.P.SETH

China is flexing its muscles to assert its power on a range of issues. An interesting recent development of considerable significance over a period of time is the downgrading, by China’s Dagong Global Credit Rating agency, of US Treasury bonds from the top AAA rating to AA rating, with negative outlook.

This is China’s first entry into the world of rating credit worthiness of different countries. China believes that the existing international credit rating system (involving agencies like Moody’s, Standard and Poor’s and Fitch) hasn’t worked well.

The Dagong chairman, Guan Jianzhong, reportedly said, “The essential reason for the global financial crisis and the Greek crisis is that the current international rating system cannot truly reflect repayment ability.”

By downgrading the US Treasury bonds and assessing other countries’ economic credentials (for instance, Japan, Britain and France have low AA- ratings), China is setting itself up as the alternative, if not the only, economic powerhouse.

If China were to follow the logic of its own Dagong agency, it would stop investing in US Treasury bonds and might even start winding down its considerable investments in the US bonds. Which could be very de-stabilizing for global economy, and damage China’s US-denominated investments.

The important question is: what leads China (Dagong obviously is a government approved credit agency, because nothing of this significance happens in China without its authorization) to believe that it can do a better job of credit rating than the existing agencies?

The assumption here is that China has a strong economy, with virtually no sovereign credit risk. But, if China were an open and transparent country, it would have to be concerned about its economic vulnerability on two counts. First, China’s total debt (to include central, regional and local authorities as well as other government instrumentalities) is estimated by some experts as close to 100 per cent of its GDP. If the hundred percent figure is true or close to reality, China’s credit worthiness is as flaky as the most indebted countries in the world.

Any country that rates its debt at 20 per cent, when the real figure is so much higher, cannot be trusted with rating the sovereign credit risk of other countries.

It should also apply to Western credit agencies because their track record in predicting the recent global economic crisis, as well as the Asian crisis of 1997 and 1998 and the bursting of the dot.com bubble of year 2000, was pretty terrible.

In their case, though, one might be able to say that they didn’t speak for their governments. In China’s case, despite the Dagong’s claim of independence, it is not believable. For instance, its report was launched at the headquarters of China’s official Xinhua News Agency.

At the second level: in the last year China experienced a phenomenal growth in lending by its banks and other agencies. According to one estimate, in the first half of 2009, Chinese bank lending was 28 per cent higher than official figures.

More and more loans have been repackaged into investment products, not unlike the subprime mortgage products. As William Pesek writes in Bloomberg, “Repackaging loans and moving them off balance sheet is exactly what got corporate America into trouble and almost killed Wall Street.” He adds, “Such practices raise the odds that China is paving the way for a wave of bad debts.”

China’s economy seems to combine the elements of both American and Japanese economic malaise of phenomenal credit growth, and emerging bubbles in real estate and stock markets.

In other words, setting up a credit rating agency doesn’t make China a superpower.

But China is not only challenging the US on the economic front, but also in regard to issues of territorial and maritime sovereignty. For instance, in the nineties, it had passed domestic legislation claiming South China Sea as its territorial waters.

However, at that time, it looked like an ambit claim still subject to peaceful negotiations with its Asian neighbors, with rival claims. China has now proclaimed the South China Sea into its “core national interest” beyond any negotiation.

Which means that China could restrict and control traffic through South China Sea, with one-third of all global commercial shipping passing through it.

In this way, China is not only claiming sovereignty, but also challenging the dominance of the US navy.

But the US response is as timid as it could be, with its Assistant Secretary of State, Kurt Campbell, emphasizing the importance of dialogue “not just with China but with our friends in south-east Asia, to ensure that we fully support the 2002 process between China and south-east Asian states to deal with any outstanding issues through diplomacy.”

China certainly doesn’t have any intention of doing it through diplomacy when it has nominated South China Sea as its “core national interest.”

At the same time, China has reacted strongly to the joint US-South Korea naval exercises in waters around South Korea. Coming as these exercises do after the sinking of the South Korean naval ship, Cheonan, by North Korea, these are a warning to Pyongyang that the US remains committed to the defense of South Korea.

China’s foreign ministry spokesman, Qin Gang, had earlier warned that China “firmly” opposed any foreign warships or aircraft conducting activities undermining China’s security in the Yellow Sea and China’s coastal waters.

China, though, is unwilling to exercise its leverage on Pyongyang to draw it back from its brinkmanship.

Indeed, North Korea is ratcheting up its rhetoric by warning of a “physical response” to new US sanctions—whatever that means.

The US Secretary of State, Hillary Clinton, said at the recent ASEAN Regional Forum gathering in Hanoi that ”… Peaceful resolution of the issues on Korean peninsula will be possible only if North Korea fundamentally changes its behavior”.

That doesn’t look like happening soon, if at all, while China looks the other way.

North Korea’s belligerence, as well as China’s assertive claims to maritime areas in South China Sea and elsewhere, is causing great concern in Japan. The US is also worried about China’s expansive claims to regional waters, now backed up with its blue-water fleet.

A Japanese government panel has reportedly recommended deploying more armed forces in coastal areas where Chinese naval traffic has increased.

The panel also recommends a more activist role for Japan in its alliance with the US. The report, as quoted in Yomiuri Shimbun, says: “From the viewpoint of strengthening the Japan-US alliance, there should be political will…to allow [Japanese forces] to attack missiles bound for the United States.”

In other words, the recommendation is for further strengthening and tightening of US-Japan security relationship.

China is pursuing a policy of laying claim to as much of Asia-Pacific (whether as sovereign territory or sphere of influence) as it can get away with it.

Most of its neighbors, even where they contest China’s claims, are not inclined to stand up to Beijing because of its growing power.

As for the US, it seems to have lost its puff. China obviously wants to push the US out of the Asia-Pacific region. And if the US doesn’t take a stand on issues like South China Sea, the US might find itself pushed out of Asia-Pacific region.

At present the US has two loyal allies in the region—Japan and Australia. In the case of Japan, unless the United States asserts its regional role and presence, Tokyo might feel abandoned and start adjusting itself to a China-dominated region.

As for Australia, its medium and long-term prospect looks like being China’s quarry, with Beijing eventually able to dictate its policies.

.