China's first good stretch of foreign affairs news in several months was capped
by a climb-down by Japan - and an endorsement by billionaire financier and
philanthropist George Soros.
Soros, who has devoted much of his fortune to promoting the replacement of
single-party authoritarian regimes like China's with multi-party democratic
governments, used the occasion of accepting the award of "Globalist of the
Year" in Toronto to address the current state of play in China. According to
the Globe and Mail:
Mr Soros even went so far as to say that at times
China wields more power than the US because of the political gridlock in
Washington. "Today China has not only a more vigorous economy, but actually a
better functioning government than the United States." 
immediate occasion for Soros' reflections was the depressing
character of the US mid-term elections - literally depressing, in that the
hopes of the US and world economy for further American economic stimulus were
dashed by the resounding setback to the political fortunes of President Barack
Obama and the Democratic Party.
The outlook for American politics is two years of determined Republican
opposition to fiscal stimulus, perhaps motivated less by loyalty to Republican
party precepts of low taxes and reduced deficits than by the desire to ensure
that Obama is unable to enter his re-election cycle with any legislative or
The Obama administration appears to have staked its hopes on the natural
recovery of the American economy, and the hope that "quantitative easing" - an
influx of US$600 billion of money creation in the next few months - will either
have a genuine positive impact or at the very least allow the president to
claim to have done something to improve matters through executive action even
though the Republican majority in the House of Representatives had tied his
America's quiet abandonment of fiscal stimulus - its role as customer of last
resort in the global economy - is behind the rapid if temporary deflation in
the perception of US power. Quantitative easing is merely a symptom - but a
symptom indicating that matters have gone south rather quickly.
In the financial markets, the truism is "Never bet against the Fed". But this
week the bond market did exactly that, slashing yields on debt in the
expectation that quantitative easing, instead of driving down interest rates as
intended, would stoke the inflationary fires.
Overseas, US quantitative easing was seen as a de facto dollar devaluation.
When coupled with the abandonment of further direct fiscal stimulus and Obama's
stated goal of doubling US exports within five years, it appeared that America
was getting out of the business of buying things. With remarkable speed, our
allies such as Germany, Japan and South Korea - all of whom maintain trade
surpluses with the US - began to regard the US as their competitor.
In a quick turnaround that gratified China - which had borne the brunt of
Western displeasure over the contribution of its undervalued currency to global
imbalances - the perception that America was showing the white flag as the
world's economic leader became the main story.
The Chinese media smugly picked up on a Reuters story observing that the Group
of 20 (G-20) summit in Seoul was looking more like G19+1, with (some
exaggeration) 19 nations lined up against the United States and its
quantitative-easing policy. 
The perception that the United States would be unable to handle its political
and economic challenges in the traditional superpower manner translated into
sagging American clout with disconcerting speed.
Erstwhile "best friend forever" President Lee Myung-bak decided to play
political hardball on the "cars 'n' cows" (automotive emission standards and
beef imports), thereby denying Obama the opportunity to return from the G-20
summit with a concluded free-trade agreement with South Korea.
At the same time, international solicitude toward China - which, with the US on
the stimulus sidelines, is the world's best hope for increased,
recession-beating demand - increased markedly.
With the world focused on Chinese purchasing power, China's efforts to manage
its runaway growth and keep a cap on inflation are now a matter of global
concern. The price of cabbage in Beijing now has repercussions on Wall Street.
When China announced a spike in inflation owing to accelerating food prices,
the Dow Jones Industrial Average promptly dropped 178 points.
The facade of the US-led united front of Asian democracies against China's rise
also showed cracks.
It is somewhat remarkable how rapidly the strategic importance of containing
China militarily faded - and the attraction of cozying up to Beijing as a
business partner increased - when it became possible that the reassuring might
of the aircraft carrier USS George Washington would not be buttressed by
the shiploads of American greenbacks that underpinned the export economies of
Japan and South Korea.
In a development that probably excited considerable satisfaction in Beijing,
Japan is apparently leaning toward the position that the intangible
psychological benefits of Foreign Minister Seiji Maehara's pro-US/China-hawk
policy are outweighed by the practical need to make sure that Japan's faltering
economy remains hitched to the Chinese growth locomotive.
Maehara had industriously developed three areas of friction with China that
provided agreeable synergies between his political and policy ambitions and the
US desire to "return to Asia" as the protector of smaller neighboring nations
spooked by China's rise: the collision of a Chinese trawler with two Japanese
Coast Guard (JCG) vessels off Diaoyutai/Senkaku on September 7; the kerfuffle
over hiccups in Chinese exports of rare earth; and the looming dispute over
Chinese exploitation of gas reserves from the Chunxiao field.
Given the growing sense of estrangement and mistrust between China and Japan,
Maehara was able to make considerable hay with the collisions between the Minjinyu
5179 and the JCG vessels Mizuni and Yonakuni on September
7. While still minister in charge of transportation (and the coast guard),
Maehara overrode the objections of moderates in the cabinet to insist that the
captain of the Minjinyu, Zhan Qixiong, be detained for trial under
Japanese law instead of resolving the issue through diplomatic back-and-forth.
The Chinese government objected, retaliated by arresting four Japanese
businessmen in Shijiazhuang on rather dubious grounds, and looked on as Western
opinion framed the issue as one of Chinese over-reaction instead of focusing on
the confrontational tactics of the JCG (whose close-sailing tactics had
resulted in the sinking of a Taiwanese sports fishing boat in 2008) and
A member of the JCG leaked video footage of the encounter recorded by the JCG
onto Youtube, providing ample grist for the mill of armchair admirals both in
China and Japan. 
The footage clearly shows Captain Zhan plunking both vessels. However, the
matter seems less a matter of kamikaze insanity than Zhan's determination to
slink off with his ill-gotten (based on Japanese control of the waters around
Senkakus) catch, given the limitations of his vessel (which can make less than
half the speed of the JCG vessels).
When a JCG vessel tries to herd him in one direction, his tactic appears to be
to try to veer across its stern in order to get behind and beyond it - or, less
commendably, sail obliquely at his antagonist in a game of chicken and count on
the JCG using its superior speed and maneuverability to get out of the way.
Apparently, this cat-and-mouse pattern of harassment and defiance unfolded over
several hours until some combination of calculation, impatience, and
incompetence on one or both sides caused the collisions.
The Chinese government has not addressed the content of the video in detail,
apparently unwilling to have its national honor leaning on the rather slender
reed of Zhan's seamanship. For Maehara, the video has been the gift that keeps
on giving, keeping the issue alive in the court of Japanese public opinion on
his terms - even as Prime Minister Naoto Kan takes the heat for the decision to
release Zhan in response to Chinese pressure, and for the flailing response to
the video leak.
Maehara doubled down on the issue of rare earth exports.
In order to express its displeasure with Maehara - and to highlight the
importance of smooth economic relations between China and Japan - the Chinese
government apparently decided to tighten up enforcement of its rare-earth
export regime, which counts Japan as a significant market and is, in ordinary
operation, riddled with quota evasion and outright smuggling.
Although the international business press was remarkably clear on the relative
insignificance of the Chinese move given the clear, long-standing trends in
Chinese policy and domestic consumption and the reviving world production of
rare earths, Maehara and US Secretary of State Hillary Clinton rather cleverly
and opportunistically spun this situation for the benefit of the general media
to a condemnation of China for exploiting its monopoly on a strategic material
to mount a sneak attack on the world's defense and green industries.
Apparently, Maehara intended to up the ante once again by accusing China of
shenanigans in the Chunxiao offshore oil and gas field (which Japan identifies
as the Shirabaka field), an area of ongoing Sino-Japanese friction.
On September 18, as the trawler drama unfolded, Maehara announced that Japan
would "take countermeasures" if it turned out that a shipment of "unknown
equipment" to a Chinese oil platform at Chunxiao presaged Chinese drilling. 
Chunxiao is, by any interpretation, within China's exclusive economic zone.
However, according to Japan's interpretation of the boundary, it is only four
kilometers from Japanese waters. Therefore, there exists the possibility that,
by exploiting the field, China would be "drinking Japan's milkshake", that is,
extracting hydrocarbons from a reservoir that crossed over to Japan's side of
In 2008, Japan and China agreed in principle to "cooperate" in development of
the field (the term "joint development" was anathema to the Chinese, since it
implied Chinese sovereignty over the field was diluted). Thanks to the overall
cooling in Sino-Japanese relations, the Chinese have been footdragging on
negotiating details of the agreement.
While China has been active in other areas of the East China Sea, it has
apparently respected the agreement to the extent that it has not begun
production at Chunxiao unilaterally.
However, on the Chinese side there is perhaps a low level of commitment to
going forward with cooperative development, except in the context of favorable
Sino-Japanese diplomatic relations. Given Maehara's confrontational attitude,
there might have been temptation on the Chinese side to yank Japan's chain on
Chunxiao with a provocative shipment of "unknown equipment", though there is no
evidence that the Chinese have actually begun to drill there.
Despite the inevitable prediction that the field holds Kuwait-sized reserves of
vital strategic and economic interest to Japan, Chunxiao is a Chinese play. The
main output of the field will apparently be natural gas, which can only be
transported to Ningbo using an existing pipeline built with Japanese and Asian
Development Bank assistance to serve neighboring Chinese fields. Building a
1,600-kilometer pipeline across the Okinawa Trench to bring Chunxiao gas to
Japan is simply not an option. 
Therefore, there are few effective "counter-measures" available to Maehara. He
could drill test-wells on the Japanese side that, presumably, could do little
more than flare natural gas into the atmosphere to spite the Chinese and lower
the pressure in the reservoir. Or he could send a survey vessel to collect data
in order to strengthen the Japanese case that the reservoirs on the two sides
of the line are contiguous. Or he could file a legal case under the
International Law of the Sea treaty.
Since participation of Japanese energy companies in Chunxiao was entirely
dependent on Chinese good offices, it would have been counter-productive in an
economic sense to escalate the dispute. Geopolitically, perhaps another matter.
However, whatever strategy Maehara had for Chunxiao did not bear fruit. He
seems to have seriously overstepped during the Association of Southeast Asian
Nations (ASEAN) meeting in Hanoi at the end of October.
The Chinese media had been sniping at Maehara by name, asserting that he was
better suited to the post of defense minister (ie, managing the security
relationship with the US) than foreign minister (managing the diplomatic and
economic relationship with China).
It was clear that China was passing messages to the Japanese government and
business that Maehara should be reined in for the sake of good relations with
At Hanoi, China put its objections in concrete form by stalling on a
head-of-state meeting between Kan and Chinese Premier Wen Jiabao. Maehara
apparently tried to finesse the issue by making nice in a meeting with his
Chinese opposite number, Yang Jiechi, and then announcing pre-emptively to the
press that: a) the meeting was on, and b) discussions on Chunxiao had been
Agence France-Presse (AFP) reported:
The prospects appeared good after
Japanese Foreign Minister Seiji Maehara met with his China counterpart early on
Friday, saying they had agreed to improve ties and that the two-way summit
would "probably take place in Hanoi".
Maehara had said earlier that in an important step, he and his Chinese
counterpart Yang Jiechi had agreed to resume negotiations over the development
of a disputed gas field in the East China Sea.
"We agreed that we will make efforts to improve the ties between Japan and
China and press forward the strategic, mutually beneficial relationship. The
Chinese side also agreed on it," Maehara told reporters.
"We also agreed that we will resume the negotiations on the gas field
development in the East China Sea," he said. 
definitely did not help his position by abandoning the Hanoi meet to jet to
Hawaii for a meeting with Clinton that culminated in a joint press conference
featuring an explicit, public statement by Clinton that the Diaoyutai/Senkaku
Islands were covered by the US-Japan Treaty of Mutual Cooperation and