China’s Middle Kingdom syndrome

By S.P.SETH

China has been firing salvoes in all directions, asserting its sovereignty/power over South China Sea, East Asia Sea and Yellow Sea, and as far away as the Antarctica.

According to Wei Wenliang, who heads China’s Antarctic program: with China’s increased scientific and maritime capability, it is now equipped to “shoulder responsibility” to administer the region.

As in the regional seas where other countries have competing claims, China will have to contend with quite a few countries about their respective claims in the Antarctica.

But closer to the region, it is a much more serious matter. For instance, China-Japan scuffle over their disputed sovereignty in East China Sea, where a Chinese fishing trawler collided with a Japanese patrol boat and its captain detained, created quite a serious crisis in their bilateral relationship.

The subsequent release of the captain, followed by a meeting between premiers of the two countries on the sidelines of an international conference, has calmed things down a bit, but the potential for a flare up is always there.

Even though Japan’s wartime record generally weighs against it in the region, it would appear that this time China’s reaction appeared to be a bit over the top, threatening “consequences” and what not.

Kosuke Takahashi of the Jane’s Defense Weekly, who follows these matters closely, has said, “If you look at the editorials in Southeast Asia and the US in major newspapers, you can see China overreacted.”

Expanding on it, he added, “South Korea also has issues with China over the Socotra Rock. The Philippines and Vietnam have territorial issues with China. Those countries look at the Chinese reaction and they are worried.”

China has been virtually telling its regional neighbors that they have no option but to lump China’s claims of sovereignty. As Dr Malcolm Cook of the Lowy Institute, an Australian think tank, has said, “It’s certainly given an example of China’s actions that don’t fit a ‘peaceful rise’ narrative…”

This is creating a new nexus between the United States and Southeast Asian countries, worried about China’s assertive sovereignty claims, with no provision for peaceful resolution of disputed issues. This is particularly reflected in closer strategic relations between the US and Vietnam, and renewal of military ties with Indonesia.

At another level, China is facing intense pressure from the United States and Western Europe in trade matters, particularly its undervalued currency.

Even though there is a reluctance in official quarters to brand it as “manipulation of currency” to give China a trade advantage in flooding the world with its cheap goods and accumulating vast currency reserves from trade imbalances, there is no ambiguity in the message about the need for China to revalue its currency.

This is starkly reflected in the US House of Representatives’ recent legislation to enable the US to impose retaliatory counter measures against China. The US Congress has been exercised over this issue for a long time, and, finally, the House has acted on this. The Senate still has to take up the issue. It will do so after the mid-term elections in November.

And it is high time too, according to the New York columnist and Nobel laureate, Professor Paul Krugman. In his recent column, he writes: “Diplomacy on China’s currency has gone nowhere, and will continue going nowhere unless backed by the threat of retaliation.”

He adds, “The hype about trade war is unjustified—and, anyway, there are worse things than trade conflict. In a time of mass unemployment [in the US], made worse by China’s predatory currency policy, the possibility of a few new tariffs should be way down on the list of worries.”

China’s response is contradictory. At one level they say that their currency value has nothing to do with China’s trade surpluses.

At the same time, Premier Wen Jiabao has reportedly said, “We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs.” In other words, China’s undervalued currency is a hidden export subsidy for China’s exports.

At the official level, the US is trying to hose down the danger of a looming trade war, while keeping up the pressure on China for a significant appreciation of its currency.

According to Timothy Geithner, US Treasury Secretary, “We’re not going to have a trade war. We’re not going to have currency wars.”

(Geithner might not think so but even IMF is worried about it, with different countries seeking export advantage through a possible bout of competitive devaluation of their currencies.)

He believes, though, that it is in China’s “own interest to allow its currency to appreciate in response to market forces.”

Will China do it significantly? Doesn’t look like. In other words, political, strategic and economic factors are converging to make for uncomfortable times ahead.

Europe too is worried about China’s undervalued currency. Beijing, though, is working to wean away Europe from a united front with the United States. Both the US and Europe have trade deficits with China.

Premier Wen Jiabao was recently in Europe on a charm offensive. He maintained China’s position on its currency value; arguing that his country needed rapid growth to pull millions of its people out of poverty.

But he assured that China would help maintain euro’s value by buying European bonds to help them refinance their struggling economies.

Speaking in Greece, during a one-week tour of Europe, he said, “I have made it clear that China supports a stable euro.” He added, “We will not reduce our holdings of European bonds in our foreign exchange portfolio.”

The choice of Athens as the starting point of his recent European tour, and remarks about supporting euro, is significant as China recently entered into a wide-ranging set of agreements for economic cooperation between the two countries.

Like Greece, which is in considerable trouble because of its indebtedness, the message is also meant for other similarly placed European economies like Portugal, Spain and Ireland to create closer economic links with China.

As some of the weaker economies in euro zone are struggling to keep afloat, China’s assurance on buying euro bonds will be a welcome relief.

At the same time, it might distract them somewhat from the issue of China’s undervalued currency, where the US is much more concerned because of its huge recurring trade deficit with China. The seemingly united front between the United States and Europe might, therefore, be susceptible to Chinese machinations.

At the same time, China’s increased investments in European bonds will give it even greater leverage over Europe, as it becomes beholden to China’s extended credit line, and a web of new and expanded economic linkages.

Even Europe’s largest economy, Germany, is increasingly becoming dependent on China for its exports. Anthony Faiola recently reported in the Washington Post that, “China passed the US last year as the No I overseas market for big-ticket German machinery, with titans from Siemens to Volkswagen—which so far this year has sold 1.3m cars in China, five times as many as it has in the US…”

However, it is not smooth sailing for China. Its provocative assertion of regional dominance is worrying its neighbors. And its under-valued currency is creating global fear of currency wars.

China needs two things to solidify its great power status. First, it needs a decade or more to consolidate and strengthen its position. Its recent loud declarations to be the master of the Asia-Pacific region were premature.

The United States still remains the world’s strongest military power. And even with its myriad economic problems, it still is the world’s largest economy and China’s major export market.

Second, and more importantly: without corresponding political reforms with wider popular representation and accountability, China’s economic edifice is built on very weak foundations subject to social and political eruptions.

Witness, for instance, China’s hysterical reaction to the awarding of Noble Peace Prize to Liu Xiaobo, who is languishing in jail for his advocacy of human rights and democracy in China.