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CHINA/US: Wealth of Nations Redefined

BEIJING , Jan 7 2009 (IPS) - Chinese and United States leaders have hailed the 30 years of diplomatic relations between the two countries as one of the most defining bilateral ties of the 20th century, but Beijing and Washington are celebrating the anniversary in subdued mood.

U.S. secretary of state Condoleezza Rice has cancelled her planned trip to Beijing to attend the celebrations marking the anniversary in order to deal with the worsening crisis in the Middle East.

John Negroponte, Rice’s deputy, is arriving in her place to represent the U.S. at the event in Beijing this week.

The crisis in Gaza though is just a shadow over the festivities, compared to the serious soul-searching the two sides have been engaging in on the eve of their bilateral ties anniversary.

Given the backdrop of the biggest economic crisis the two sides have experienced since reestablishing relations in 1979, the anniversary has been a time of reckoning for both sides.

“In the short span of 30 years, with the joint efforts of several generations of Chinese leaders, seven U.S. presidents and people in both countries, the ship of China-U.S. relations has forged ahead, come rain or shine,” Dai Bingguo, a Chinese State Councillor, said in a speech released by the state news agency Xinhua this week.

“It has brought tremendous benefits to our two peoples and contributed greatly to world peace and development,” Dai Bingguo said in his speech.

The anniversary celebrates the U.S. decision to switch diplomatic recognition from self-ruled democratic Taiwan to communist mainland China on Jan. 1, 1979. The diplomatic hop was made possible by a groundbreaking visit to Beijing by former U.S. president Richard Nixon in 1972 and a reciprocal visit by Deng Xiaoping to the U.S.

The normalisation of relations coincided with China’s decision to embark on free-market reforms. The Communist Party had decided in December 1978 to endorse small-scale private farming, the first step towards abandoning Mao’s vision of communal agriculture and embracing free market.

No other diplomatic relationship has proved more conducive to China’s emergence as an economic powerhouse than ties with Washington. Today, the two countries are entwined economically and politically to an extent unimaginable when ties were normalised in 1979.

But it is this tight embrace that is now proving the biggest headache for the two nations as they struggle with the economic crisis.

In the earlier stages of China’s economic reform and opening, Beijing was dependent on the U.S. for valuable financial, technological and managerial knowhow. But as the country has developed, domestic capital has displaced foreign funds as the main source for investment.

What is more, armed with the foreign currency earned mainly from low-cost manufacturing exports, China has emerged as the largest creditor of the U.S.

Experts estimate that over the last 10 years, Beijing has invested around one trillion US dollars in dollar-denominated assets. If for whatever reason China decides to sell a portion of these holdings, it would trigger a collapse in the value of the US dollar.

U.S. dependence on China’s lending is regarded by some in America as potentially risky and there is fear that Beijing might decide to use its holdings of U.S. government debt as a bargaining chip in bilateral relations.

But even if not used as an effective political tool, China’s purchases of U.S. debt are a “demonstration of China’s financial leverage,” argue others.

“The U.S. runs the risk that it could need China to add to its foreign exchange reserves more than China actually needs more reserves – an asymmetry that potentially gives China the ability to influence U.S. policy,” Brad Setser, fellow at the U.S. Council on Foreign Relations, wrote in the magazine ‘China Security.’

Already, some Chinese officials have expressed frustration with U.S. economic and financial policies and complained about China’s potential exposure to the weakness of the dollar. Chinese scholars have been even blunter.

Writing in the same magazine, Zha Xiaogang, a researcher at the department of World Economic Studies at the Shanghai Institute for International Studies, warned that China is running out of patience with the U.S.’s lack of “disciplined financial and monetary policy.”

“Washington should no longer expect China to stand at the receiving end, buying treasury bonds despite great fluctuations in the value of the dollar,” he said.

“As America’s largest creditor, China will expect the U.S. to exhaust every means to protect the safety of its investments,” Zha Xiaogang wrote. ”Otherwise, the Chinese public will voice their objection loudly and exert great pressure on Beijing to reverse the policy.”

But, as they gather to celebrate the anniversary, Chinese officials are also fully aware that the two economies are so interlinked that the U.S. needs a helping hand from Chinese capital as much as China needs the U.S. market.

With Americans consuming less, the knock-off on the Chinese economy with its export-driven growth model has become obvious in recent months. About one-third of Chinese exports, including re-exports from Hong Kong, are destined for the U.S. market.

With the collapse of trade, factory closures and layoffs have been spreading rapidly in the country’s export-manufacturing hubs.

Some of the workers have rioted to protests closures and claim unpaid wages. Chinese leaders are terrified that the economic crisis might herald a wave of social unrest for the country, endangering their own grip on power.

Having allowed the yuan to rise a little after 2005, Chinese leaders are now under intense domestic pressure to reverse course and depreciate it. As bankruptcies have multiplied, unemployment has risen rapidly.

Some economists argue that the appreciation of the yuan, urged by the U.S. and other western trading partners, has hurt China’s exports more than the slump in demand caused by the economic recession.

“Since 2005 the value of the yuan has risen nearly 30 percent against the US dollar,” says Zeng Xiangquan, an expert on labour issues at China’s Renmin University. “We would have had to deal with its negative impact on our labour situation even if there was no global recession.”