China's meteoric rise causes economic conflict with West

Last Updated 27 January 2010, 16:49 IST

China is no longer emerging. It has emerged — sooner and more assertively than had been expected before the wrenching global financial crisis, which badly damaged all the established industrial powers, from the United States to Europe and Japan.
These days, the renminbi is frozen at an undervalued level, and internet controls are stricter than ever.

The severe recession has fast-forwarded history, catapulting an unprepared world into a period of uneasy cohabitation between the US, the No 1 economy, and its eventual successor.

“China is the West’s greatest hope and greatest fear,” said Kristin Forbes, a former member of the White House Council of Economic Advisers and one of hundreds of top officials and executives flocking to Davos, the winter resort for the annual World Economic Forum, which is taking place Wednesday through Sunday.
“No one was quite ready for how fast China has emerged,” said Kristin, a professor at the Massachusetts Institute of Technology.

For the first time, economists point to Chinese spending — not the US consumer — as the key to a global recovery. China’s gross domestic product could overtake that of the US within a decade, one report predicted this month, while others speculated about when the renminbi might start to challenge the dollar as the world’s reserve currency.
And as developing countries everywhere look for a recipe for faster growth and greater stability than that offered by the now-tattered ‘Washington consensus’ of open markets, floating currencies and free elections, there is growing talk about a ‘Beijing consensus’.
China’s rise will be on prominent display in Davos this week, with the biggest Chinese delegation in the World Economic Forum’s history. The local Chinese restaurant has been fully booked since early January. The 54 Chinese officials and executives were expected not only to rub shoulders here but also, as one put it bluntly, to ‘go shopping.’
When the US was snapping at the heels of the British empire, the global hegemon of the early 20th century, the situation caused plenty of friction, even though both countries spoke the same language, shared similar cultures and were liberal democracies.
China, in contrast, is a Confucian- Communist-capitalist hybrid under the umbrella of a one-party state that has so far resisted giving greater political freedom to a growing middle class. Now its ascendancy is about to set off what many officials and experts see as a backlash on both sides of the Pacific.

“It’s not surprising that China’s remarkable economic rise would be unsettling to some,” said Pascal Lamy, the director general of the World Trade Organisation.
So far, the backlash against China has been largely rhetorical. Stephen Roach, the Asia chairman of Morgan Stanley, counts 45 anti-China legislative measures introduced in the US Congress between 2005 and 2007. None passed.

That could change, as tricky midterm elections loom in the US and politicians there and in Europe become more outspoken in blaming China’s currency peg to the dollar, which gives its industries a competitive edge, for rising joblessness at home.

Some targeted tariffs have been imposed in recent months. Washington has penalised imports of Chinese tyres and coated paper products. Both the US and the European Union are restricting Chinese steel.
The standoff with Google has illustrated the difficulties foreign business faces in China. It has also starkly raised the question of who will have the upper hand in future negotiations.

“The operating environment is tougher than ever for western companies,” said James McGregor, head of the government relations committee of the American Chamber of Commerce in China. “But unlike Google, most western companies also need China more than ever.”

China is the biggest recipient of foreign direct investment in the world: 450 of the Fortune 500 companies have business presences there, and many of those still reeling at home are doing brisk business in China. “GM is hurting anywhere else, but here things are quite profitable,” McGregor said.

Some suggest that China’s lack of democracy is an advantage in making unpopular but necessary changes. “It is more challenging for democratic systems because every day they come under public pressure and every short period they have to go back to the polls,” said Victor Chu, chairman of First Eastern Investment Group in Hong Kong, the largest direct investment firm in China. “China is lucky to have the ability to make long-term strategic decisions and then execute them clinically.”

With China’s rising clout, the West has less leverage over Beijing. When China was seeking to join the WTO a decade ago, it accepted compromises to US and European demands. At climate talks last month in Copenhagen, however, China blocked a comprehensive deal and refused to go beyond its earlier promises. Portrayed as a deal breaker in the western media, at home it was celebrated as the country that stopped the West from imposing its terms on developing countries, Chu said.

Some say Chinese officials are using their country’s $2.4 trillion in foreign currency reserves as a bargaining chip, knowing that any hint of reducing those reserves would rattle currency markets.

“As China is emerging on the global stage with unprecedented power and influence,” said David Shambaugh, a professor of political science and international affairs at George Washington University who is in China as a Fulbright scholar, “it is not proving to be the global partner the US and EU seek.”

In the world of power politics, that is not particularly surprising. Like many western countries, China will act only when it is in its interest.

Chu of First Eastern Investment said he expected China to resume a gradual appreciation of the renminbi later this year, not because Washington was lobbying for it but because signs of inflationary pressure and bubbles in the Chinese credit and housing markets were mounting. This month, the Chinese authorities raised interest rates and moved to curtail bank loans.

Kenneth Rogoff, an economics professor at Harvard University who just spent two weeks in China, warns that the country will face its share of economic troubles in the years ahead. But that will not change the underlying trend, he said.
While China remains much poorer than the advanced industrial powers of the West on a per-capita basis, its rapid growth should enable it to pass Japan this year as the world’s second-largest economy.

(Published 27 January 2010, 16:49 IST)

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