China holds the levers of the world economy

As Chinese President Hu Jintao prepares to visit New York for this week's UN summit, there appears to be anxiety in Washington over China's rapid rise. "Many US commentators are comparing China's rise to that of Japan early last century, the last time an Asian power seriously entered the big-power ranks," writes Hamish McDonald. With billions of dollars' worth of foreign reserves, increasing economic and military relations with other major world players, Beijing is certainly broadening its reach. However, writes McDonald, "China is far behind the US in economic and military power, and dependent on America for its economic modernization." Regardless, the perception remains: "China seems to be holding the levers of the world economy," he says. – YaleGlobal

Hail to the Chief
Suddenly, China holds the levers of the world economy – and Washington is worried

Hamish McDonald
The Sydney Morning Herald, 13 September 2005

WANG Xiaoyun is the face of China that fascinates and alarms the United States. A mathematics professor at Beijing's elite Tsinghua University, she recently startled US security circles by breaking a key US Government data encryption formula called SHA-1.
In the arcane world of high-level encryption and code breaking, SHA-1 is an algorithm for creating what is known as a "hash" - a single number representing a larger body of information. Wang's work exposed an unsuspected weakness in what was thought an almost unbreakable code.
Although Washington is increasingly worried by purposeful hacking into its secret databases that originates in China, Wang is no electronic spy, and wanted to present her findings to a meeting of US cryptographers in California last month.
But despite applying weeks in advance, Wang couldn't get a US visa in time to attend; nor could eight of the nine other Chinese researchers who applied. An associate, also Chinese but living in the US, presented her paper.
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Wang, however, is not making too much of it. "What has been reported [in The New York Times and in scientific circles] was enough," she said this week. "If the chance comes again I'd like to go - exchanges between scholars like this are necessary."
The visa problems for Chinese scientists reflects growing unease in Washington about the speed with which China is growing, the penetration of its companies into technology, and what seems like the steady closing of the military capability lead enjoyed by the US armed forces.
This and many other aspects of China's rise, like the economic penetration of Latin America, is the uneasy background to this week's visit to New York by the Chinese President and Communist Party chief, Hu Jintao.
Suddenly, China seems to be holding the levers of the world economy. With foreign reserves of $US711 billion ($920 billion), it holds nearly $US500 billion in US treasury bonds and other American securities. It is one of the leaders among the Asian industrial countries that keep the US housing and consumer boom going by providing the US Federal Reserve chairman, Alan Greenspan, with the liquidity for his soft-interest rate policy. A switch of Chinese foreign reserves to euros or yen - or a big revaluation of its yuan to encourage domestic spending - could force up US interest rates, bring the spending party to an end, and scupper the Republican Party's chances of staying in the White House after 2008.
General Motors is making 40 per cent of its worldwide profits in China, while it and other US firms have put $US42 billion into factories and other investments there so far this decade. Entire corporate boards of global giant companies ranging from Time Warner to BHP Billiton have been touring China to survey opportunities.
Following a cave-in by their counterparts at the European Union, US commerce officials are still trying to negotiate a deal to moderate Chinese clothing imports that threaten 600,000 jobs in the US textile sector, following a surge released by the lifting of World Trade Organization quotas at the start of the year. This year, the US is facing a $US225 billion trade deficit with China.
In July a bid by the oil company Chevron for the world's ninth-biggest oil producer, Unocal, was aced by a $US18.5 billion offer by China National Offshore Oil Corp, partly backed by cheap finance provided by reserve-rich Beijing. That bid was dropped on August 2 after Chevron whipped up alarm in the US Congress. The Chinese corporation went on to snap up a Canadian firm with sizeable oil assets in Kazakhstan, albeit a much smaller buy.
Meanwhile, Latin America's latest populist challenger to US hegemony in its hemisphere, Venezuela's President, Hugo Chavez, is riding high on China's underwriting of his plans to double oil production to 5.1 million barrels a day by 2012. Swathes of Brazil are devoted to growing soya beans for China, while its iron ore mines are expanding to fill ships heading to China through a Panama Canal partly run by a Beijing-favoured Hong Kong tycoon, Li Ka-shing.
Last month, Chinese and Russian armed forces held war games in the Yellow Sea based on a scenario similar to an attack on a US-defended Taiwan, testing some of the high-tech equipment Moscow is offering to sell. At a Black Sea resort this week, Chinese generals agreed to buy 38 transport and tanker planes for $US1.8 billion.
Reports in US right-wing publications say US intelligence agencies are being berated in secret government reports for missing key developments in the upgrading of China's huge military, some based on secret US technology stolen by Chinese agents. The FBI is said to be focusing on a technology-collection operation mounted by Chinese front companies and researchers in the US, while in an operation codenamed Titan Rain it is said to be countering a Chinese hacking ring that is vacuuming thousands of secret files out of US government databases.
In December, China will sit at a new East Asian leaders' summit in Kuala Lumpur, at which Japan and late invitees India, Australia and New Zealand will be the main political counterbalances to a region increasingly under Beijing's sway - and even these countries are looking more and more to China for their trade growth.
In the perception put by the former CIA director James Woolsey to a congressional committee in July: "China is pursuing a national strategy of domination of the energy markets and strategic dominance of the western Pacific."
Many US commentators are comparing China's rise to that of Japan early last century, the last time an Asian power seriously entered the big-power ranks. "Could Asia's past also be its future?" asked Daniel Twining, a former adviser to the US senator John McCain, in a recent Financial Times commentary.
The wary approach adopted towards China by the US and other Western powers contrasts with their increasingly warm embrace of India. Its Prime Minister, Manmohan Singh, got a full state welcome in July including a White House banquet - rare in the Bush tenure - and a promise of nuclear and other technology because of India's trustworthiness. The British Prime Minister, Tony Blair, this week went from a business-like call in Beijing on to New Delhi, where he announced a historic partnership between the EU and India, followed by a $US1.5 billion sale of French submarines to the Indian Navy.
Beijing insists the distrust is misplaced. Hu's message to Americans will be that "China is a force for peace and China's development is peaceful in nature", says He Yafei, the Chinese Foreign Ministry's chief of North American affairs.
The limited ambit of China's ambitions has been asserted in the latest edition of the influential US journal Foreign Affairs by one of its top strategists, Wang Jisi, head of international studies at Peking University and Beijing's Central Party School, where the Communist Party's up-and-coming cadres are groomed.
Despite a "love-hate" fixation with the US among many Chinese, China is far behind the US in economic and military power, and dependent on America for its economic modernization, Wang says. Though US influence had been "tainted" by blunders like Iraq, giving China more scope, "it would be foolhardy, however, for Beijing to challenge directly the international order and the institutions favoured by the Western world - and indeed such a challenge is unlikely".
Many experts on the Chinese economy also say the syndrome of China financing America's deficits is more likely to be broken on the US side. China's corrupt banks and moribund sharemarkets cannot divert reserves into efficient domestic investments. July's token revaluation of the yuan, by 2.1 per cent, and its peg to a murky currency basket that still seems 90 per cent based on the US dollar, shows the reluctance of China's communists to risk a domestic recession that could weaken the party's grip.
"My money says the US could survive a disruption in the dependency relationship much more easily than could China," says Michael Pettis, professor of finance in Peking University's management school.
Other China watchers put a different slant to bids like China National Offshore's tilt for Unocal. Rather than an extension of Chinese communist power into the petrol tanks of America, it was an attempt by the Chinese firm to break free of Beijing's grip and turn itself into a multinational. For its own part, Beijing is putting more into its spin in Washington to stave off a backlash and give itself more time for fast growth.
Its huge Washington embassy of 150 diplomats, soon to move to a glittering new building designed by the Chinese-American architect I.M. Pei, is headed by the urbane Zhou Wenzhong, British-educated one-time interpreter for the late supremo Deng Xiaoping, and a former ambassador to Australia. Like his counterpart in Canberra, Fu Ying, he hops quickly into controversies about China with modest comments.
After the recent Russian-Chinese war games, for example, Zhou said China's military was still "basically semi-mechanised … let alone information-based". About 10 of his staff work directly on liaison with congressmen, under the savvy counsellor Su Ge, a former academic, and the embassy employs top lobbying firm Hogan & Hartson and top law firms like McDermott, Will & Emory.
Their efforts are augmented by the Chinese fixers, many of them former classmates of Beijing's top cadres, employed on multimillion-dollar packages by US investment banks to cement share floats and corporate acquisitions yielding huge success fees.
Behind that, China has a natural lobby in US big business. About 60 per cent of China's exports are produced by foreign-controlled firms, many American. In high-tech and patented areas, it's 80 per cent, and most of the profits are reaped offshore by patent and brand owners. "No wonder foreign capitalists are among the most enthusiastic cheerleaders of China's rise," says Fei-Ling Wang, a China specialist at the Georgia Institute of Technology.
Source:The Sydney Morning Herald Rights:Copyright © 2005 The Sydney Morning Herald