Page 1 of 2 Hardened features of a soft war
By Francesco Sisci
The body language on TV looked different. When US President Barack Obama met
Chinese Premier Wen Jiabao for the East Asia summit in Bali, Obama was relaxed, smiling and almost smug. Wen was conversely trying to force the conversation and striving to look jovial and unconcerned. It was a very different setting from the summit of two years earlier when both Obama and his Chinese counterpart Hu Jintao seemed to be on pins and needles.
Back then, Obama was more worried while Hu was glacial.
These could just be false appearances. The reality behind the facades is that
two years ago the United States was reaching out to China, setting aside old
concerns about human rights. Now the US has a stated policy of encirclement of
China and demands progress on human rights. [1] That is, Washington requires
political reforms from Beijing. However, Obama was not insulting or
confrontational with the Chinese government or people. He argued suavely that
those reforms would be beneficial to the Chinese people, and thus he managed to
drive a potential wedge between the government and the people, suggesting that
he would side with the latter. Yet he had no intention to do so and he was
still, for now, ready to engage the Chinese government.
In any event, the US is reaching out even to old foes such as Myanmar, which
will be visited shortly by US Secretary of State Hillary Rodham Clinton. This
could serve two purposes: It could suggest to Beijing that if it changes its
attitude, Washington will also change, and it could get Myanmar on its side in
case of more difficult confrontations. That could be why Obama announced that
the US would cut military expenditures everywhere but in Asia.
It is a paradigm shift in bilateral ties between the US and China.
For decades, there was a general idea in Washington that economic reforms in
China would take care of and move forward political reforms, and all of this
would bring the two countries together. Or there was a geopolitical
confrontational attitude with China, exemplified in 2001 at the beginning of
the George W Bush presidency, when the US seemed poised to rein in China per
se, as a geopolitical adversary irrespective of its political system. Both
attitudes did not differentiate between the Chinese people and government and
in fact pushed the government and people closer to each other. This, in turn,
was making it more difficult for the US to take on China. Now it may be
different: The US is ready to engage the Chinese government as long as it toes
the line, otherwise Washington is ready to side with the Chinese people, and
possibly help organize China's neighbors against Beijing.
It is a change of vision in Asian politics, almost an ideological shift. The
basis for this is in the evolution of regional politics and economics.
The 1997 crisis and opportunity
The Asian financial crisis in 1997 was an important exemplification of a
possible new paradigm for ties between China and the rest of Asia. The crisis
started in Thailand in July 1997 and was stopped by China about a year later.
China managed to do so through a mix of financial and administrative
interventions. Speculation was threatening to force the devaluation of Hong
Kong's currency after the former British colony was returned to Beijing's
authority on July 1 of that year, but Beijing resisted because the Hong Kong
dollar is held to a fixed exchange rate with the US dollar - a situation quite
different from the peg holding other Asian currencies. The Hong Kong
authorities hold deposits in the US dollar equivalent to the value of Hong Kong
dollars in circulation, so if pressured, local authorities could just stop
using the local currency and switch to US dollars almost without changing price
tags. Moreover, China promised to intervene with its reserves, then already
quite mighty, in support of the beleaguered currency.
In this way, China saved itself by averting a financial collapse that was
hitting the rest of Asia and that in a few years changed the political
landscape of the region. But at the same time, China also prevented a cycle of
competitive devaluations in the region that could have sunk local economies for
decades. China, in other words, was able to align its interests and those of
the region, and this created a new political role for the country as some kind
of savior of Asia. Moreover, it was almost the first experiment in regional
leadership. The financial crisis also hit Japan, then the world's
second-largest economy and the undisputed regional economic powerhouse, very
hard. Yet Japan's markets crashed and the yen fell, while only China, whose
currency was not freely tradable, stood up to the global speculative waves.
This proved that China was the new lighthouse of the region, and it also proved
the wisdom of China's strategy vis-a-vis Japan. Japan had caved to US pressures
and revalued its currency during the previous decade. The positive effect for
this revaluation was short-lived for Japan, as the country in the late 1980s
slowly moved into an economic slump that was still there in 1998 when the
financial crisis hit Tokyo.
Conversely, Beijing refused to devalue its currency, the yuan, in 1997; it had
refused earlier to make it freely tradable; and after the crisis, it shelved
plans to make it tradable around the year 2000. In sum, China resisted all
pressures from the West to follow their economic advice. China stuck to its
guns and was successful, unlike Japan, which listened to the US and failed.
This coincided with early criticism of the role of Washington and the
International Monetary Fund (IMF) in the Asian crisis. Both were soon accused
by some Western economists of having fueled the crisis with wrong prescriptions
and wrong interventions.
The whole predicament created an objective moral authority for China in the
region, and this authority was mainly due to China's economic czar Zhu Rongji.
When in 1999 he proposed that Association of Southeast Asian Nations (ASEAN)
member states shelve disputes in the South China Sea and launch concerted and
cooperative development of the area, he could do so thanks to a moral authority
his country and he himself had recently gained over other regional competitors
and over the US. America's intervention in Asia in particular was under a
shadow of doubt because it had vetoed the intervention of an Asian Monetary
Fund the previous year and had supported an IMF intervention that had
multiplied the effects of the financial crisis on the real economy.
This Chinese role helped China in the region and vis-a-vis Southeast Asian
countries during the next decade. Southeast Asian countries started receiving a
growing portion of Chinese foreign investments and attention just at the time
when US and European investment was overall shrinking in the region, as the
West was sucked into the new campaigns in Iraq and Afghanistan. Those drew
enormous amounts of money out of the US economy, repaying Americans only with
new scary bombs and threats in return.
For China, it looked like the best of times, yet those times came to an end
with the 2008 financial crisis.
China's undervalued currency hits Asia
One effect of the financial
crisis that was and possibly still is misunderstood and ignored in China is the
indirect pressures of monetary contradictions between China and its Asian
neighbors, which hit each other's exports differently.
Long before the most recent crisis - and in fact, shortly after the Asian
financial crisis - the mainstream financial discourse switched horses on
China's yuan. Although it had thought and argued that the yuan was overvalued,
it later started arguing that the yuan was in fact undervalued. In a way, the
very fact that China had successfully staved off the 1998 attacks and that
economists had argued against the overvaluation of the yuan started lending
credit to the belief that the yuan was possibly overvalued. This credence was
reaffirmed by the empirical observations of the fast and steady increase of
reserves, trade surplus, and productivity - all elements considered clear
indicators of an overvaluation of the Chinese currency.
In recognition of this, on July 21, 2005, China de-pegged the yuan from the US
dollar and introduced bands of fluctuations of 3%. Yet this was considered too
little in many foreign countries, and China concentrated its political efforts
on addressing accusations from the US in this respect while basically ignoring
the fact that Asian countries were possibly even unhappier about the
undervalued yuan.
This feeling was reinforced when in 2008 China reintroduced the fixed peg with
the dollar for a couple of years after the outbreak of the US financial crisis.
This peg and its limited fluctuations were hitting US industries, which were
unable to compete with the cheap Chinese imports, but they were also hitting
Southeast Asian export industries, which were not yet fully recovered from the
Asian financial crisis. Weaker Asian neighbors could not navigate a difficult
and delicate polemic with China on currencies, and China ignored their plight
and the fact that these countries had been quietly complaining about the
undervalued yuan to the US.
Then the issue of the undervalued yuan had two negative political aspects for
China: One, it created attrition with the US, and this was very apparent; and
two, it created attrition with trade competitors and in particular with
neighboring trade competitors, whose exports were so similar to Chinese
exports. With the neighboring competitors again there were two aspects: First,
China ignored their plight, and their export share was under growing pressure
from Chinese industries. Second, China only looked at the powerful US as an
interlocutor, and gave a sense that the neighbors would not be treated with
equal dignity by China. Investment from China came pouring into Asian
neighbors, partly compensating for the local difficulties, but that further
complicated the picture, as it could crowd out local investments.
In sum, looking at China's intervention in the Asian financial crisis a decade
earlier, was it a disaster in disguise? Or was it simply the swing of a
pendulum, as ASEAN countries had to lean on China against the then-overbearing
US and now have to lean on the US against now-overbearing China?
China simply did not recognize this context, which is of fundamental importance
to grasp the complexities of the dispute in the South China Sea that flared up
in 2010. Here the US intervened in the dispute, arguing that as part of the
main international sea lanes, the South China Sea was of international
interest. Therefore, Hillary Clinton offered that the US mediate in the
dispute.
This pronouncement was enough to create immense trouble for China -
internationally, and thus internally - turning the issue in some kind of second
Taiwan, the island under the US protective umbrella, de facto independent,
still formally part of one China.
The offer of mediation by itself was a declaration that the Chinese offer made
a decade before by Zhu Rongji had been shattered. It affirmed that China was
not able to deal with its immediate neighbors by itself, and it needed the
United States to get involved its businesses. It further cast a powerful doubt
on the possession of the islands, as the US mediation, while warmly welcomed by
other neighbors, implicitly meant China had to give up some of its claims on
the sea.
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