What Does 2014 Hold for US-Chinese Relationships? Michael Wilson Assesses the Prospects

Welcome to the Year of the Horse, which started on 31st January. “Energetic, bright, warm-hearted, intelligent and able”, says the calendar about this year’s animal. Well, it’ll make a change from the outgoing year of the snake – “silent, intelligent, jealous, determined” – oh, and good with money, apparently. (Ah well, you can’t get every detail right….)

If horoscopes were worth taking seriously, you’d say that the Horse probably augurs better than most. And that wouldn’t be a bad starting point for a country that has just staged one of the most sensible economic regenerations in some time. Last November’s Communist Party plenum agreed to ditch the headlong growth splurge in search of exports, in favour of a new emphasis on domestic consumer development that will make the Chinese people more affluent without sinking the country in foreign debt.


That, at least, is the idea – and very good it sounds too. Whether it will work out well for investors is another matter, of course, because you can’t have failed to notice that it’s been ten years since the hectic 8-10% growth of the Chinese economy has been anything like mirrored by the stock market. Price/earnings ratios in Shanghai have dropped from 40 or more to a very affordable 8 or 10 – and yet Chinese funds are still losing ground.

Obama’s Problem

That’s a conundrum which continues to caution us against believing that what’s good for a country is good for foreign investors. And it’s a warning that also carries some weight in terms of foreign relations. In this of all years, while so much is going well for the Asian giant, China is likely to present the United States with some questions that Washington is obviously finding it hard to understand, let alone to answer.

Xenophobia aside, it’s tempting to say that the Obama administration struggles to understand the Asian superpower. And, at times, whether it properly understands the Chinese culture at all. Rather, China is seen in purely functional and political terms – its size, its defensive trade policies, and its tendency to manipulate its currency in ways that seem calculated to annoy Washington.


You couldn’t split a hair between Republicans and Democrats when it comes to their suspicion of the Chinese and their currency – and that’s a political problem for Barack Obama as he tries to address an emerging situation that probably brings more opportunities than threats. Hardly anybody in Washington speaks Mandarin, or even Cantonese. Actually, nor does the new US ambassador to China, Max Baucus – unlike nearly all of his predecessors since 1981, who have tended to be fluent in the language.

The Investment Balance Tips

What’s now certain, though, is that China is now the world’s second largest economy, with a GDP of around $9 trillion a year – America’s comes to around $14 trillion. And that China will overtake the US sometime between 2020 and 2030, depending on who you believe.

And, increasingly, that China is stepping up its foreign direct investment – not just into mineral-producing continents like Africa or Latin America, but also into North America itself.


China’s positive role in Washington’s job creation effort isn’t just a matter of America finally reclaiming all the millions of jobs that were ‘offshored’ to cheaper Chinese manufacturing in the early noughties, but which are now returning to America as China’s manufacturing wage costs have risen. It’s also that Chinese money is employing Americans on their own soil. That’s a geopolitical issue that neither the press nor the politicians seem able to tackle head-on.

Deficit Day

But there’s another reason why China is about the hit the headlines again. On the 15th January the US debt ceiling came up for renegotiation – again…. – and the same old cries resurfaced about how unreasonable it seems that Beijing should hold the dollar – and with it America’s credibility – in its hands.

That’s a fact, by the way, not just a gripe. China now holds almost $1.3 trillion of US government debt – more than the whole of Western Europe, and slightly more than Japan, which has a mere trillion. And that matters.


On the negative side, it matters because China has the power (theoretically) to put the skids under the dollar by selling off its dollars any time it feels like it. And indeed, that’s what it has effectively talked about doing during the last few years, as it’s called for the creation of a new global reserve currency in which the greenback would have a much lower weighting.

On the positive side, though, China’s own fate is much more closely tied to the US economy because of its dollar exposure. Who’d want to rubbish the US currency if you’d got the equivalent of three months’ GDP tied up in it?



Currency Manipulation

Look behind the causes of this situation – the massive trade surpluses from Beijing –  and some slightly less straightforward untruths start to emerge. China didn’t just get to where it is now by exporting the goods that America wanted at a price that America wanted to pay. According to trade hawks on both sides of the Republican/Democrat divide, the Chinese leadership have spent the last thirty years playing dirty with the exchange rate.

Up to a point, the criticism is justified. Like many other emerging Asian nations, China has kept its currency deliberately cheap so as to beef up its export industries and suck in foreign cash. Instead of a freely floating currency, the renminbi is a ‘dirty float’ which is artificially managed by the central bank.

And the various levels of currency controls, combined with a rigged local market for gold, have distorted the situation pretty badly. One of the reasons for this year’s bitcoin mania is that Chinese consumers are using bitcoins to get their renminbi savings past the state forex controls and out into the global mainstream.



Dim Sum

It says a certain amount America has never really got the hang of China’s rise to economic prominence. The world’s richest nation – geographically self-contained, disciplined, principled, and now self-sufficient in oil – has not had to accustom itself to the presence of such a superpower since the days of Russia and the Cold War. The fact that Beijing is toting money rather than missiles doesn’t really alter the fact that the urge to communicate doesn’t go very deep.

It doesn’t help matters that Chinese is a difficult language to learn, for businessmen as well as politicians of course – and that, accordingly,  would-be exporters tend to find themselves 100% dependent on the linguistic goodwill of their interlocutors. (Not a good position from which to start a hard bargaining session.) Or that Chinese business protocols are everything that American ones are not – polite, sensitive to every nuance, and painfully slooooooooow. Business negotiations can, and do, take years to complete.


Nor is it exactly fortuitous that the largest Chinese companies tend to have big government stakes, which means that their will can often be bent toward whatever the local or national authorities want. And that standards of clarity and probity in business circles can leave a lot to be desired. Not for nothing do the most successful China fund managers place their entire trust in the experience of local Chinese investment specialists who know their way around the maze of protocols and official double-speak.

Defence Issues

And then there are the Senkaku islands, known to the Chinese as the Diaoyu Islands, which are claimed by Japan, China and also Taiwan – and which have famously given rise to military flyovers, exclusion zones and much baring of diplomatic teeth especially since the possible presence of oil was detected in the late 1960s. Japan denies that there is any dispute – the islands, it says, are Japanese and that’s that. But America, tied as it is to its historical defence of the Japanese and Taiwanese causes, is faced with no option but to stick up for Tokyo and Taipei even though it would rather get on with Beijing’s leadership.

All of which ties in rather ominously with the steady rise of China’s Pacific fleet, which now includes the People’s Republic’s very first aircraft carrier. (Actually an unfinished cast-off from the Ukrainian navy, but who’s counting?) Add to that a space programme which now has the undisputed ability to place a missile anywhere on earth – or indeed on the moon –


Not forgetting the Chinese space project, which has given China a military capability that would be a lot more comfortable if it weren’t also using its naval influence on Senkaku. Still, at least America can comfort itself with the thought that Beijing is plainly getting cheesed off with its North Korean protégé.

So far China has stopped (just) short of open warnings to Pyongyang, but the recent arrest and execution of General Jang was seen as a red rag to the Chinese leadership because it had hoped that the General might become a conduit for a gentler and more democratic style. Its displeasure about President Kim Jong Un is becoming increasing palpable – consider, for instance, that it has yet to invite him to Beijing, whereas South Korea’s Park Geun-Hye is a welcome guest there.



The Emerging Markets

It isn’t just Africa that’s teeming with Chinese technicians and railway engineers, all intent on building up warm relationships with countries that have been largely overlooked by the United States, and where the prospect of signing much-needed mineral contracts represents a powerful incentive.

In Latin America too, Chinese business and diplomatic approaches have been finding a warm welcome from politicians who have become wary of Washington since quantitative easing kicked their own currencies into a vortex of instability that hurt Brazil quite badly. But then, it’s the minerals argument that defines everything else.

And understandably so. The UN Conference on Trade and Development (Unctad) reports that exports from Latin America to China tripled between 2000 and 2007 – and by 2011 the total trade volume had reached $130 billion, according to Chinese sources –second only to the region’s trade with the United States itself. China’s direct investment in Latin America is reported to have increased from 621 million US dollars in 2001 to 44 billion US dollars in 2010.

Brazil, Mexico, Colombia, Chile, Argentina and Peru have been only too eager to accept China’s offers of infrastructural development at Beijing’s expense – although Mexico and Brazil are both starting to worry that the state of Chinese influence may have gone too far for comfort. Less bothered about this are Venezuela, Cuba, Bolivia – and a host of other ‘usual suspects’ who would once have flocked to the Soviet Union’s eager embrace.


Barack and Xi

We could go on, but time and page space wait for no man. President Obama has got off to a good start with President Xi Jinping, who took up the job only last March, and, all being well, it should be possible for the two great countries to rub along peacefully and profitably in the Year of the Horse. That, of course, is subject to two caveats:

One, that the twin headaches facing the country – the foreign deficit and the tapering off of quantitative easing – can be achieved without damaging either economy excessively. Or, more to the point, pushing up the dollar so that the renminbi weakens to the point where it starts to bother US exporters again.

And two, that the Chinese leadership itself can carry through its own economic reforms without experiencing political trouble at home that might place America in a difficult ethical and moral position.

So we’re back to the Horse. “Energetic, bright, warm-hearted, intelligent and able?” That’ll do nicely.

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