By Ambrose Evans-Pritchard
China has succumbed to hubris. It has mistaken the soft diplomacy of Barack Obama for weakness, mistaken the US credit crisis for decline, and mistaken its own mercantilist bubble for ascendancy. There are echoes of Anglo-German spats before the First World War, when Wilhelmine Berlin so badly misjudged the strategic balance of power and overplayed its hand.
Within a month the US Treasury must rule whether China is a “currency manipulator,” triggering sanctions under US law. This has been finessed before, but we are in a new world now with America’s U6 unemployment at 16.8 percent.
“It’s going to be really hard for them yet again to fudge on the obvious fact that China is manipulating. Without a credible threat, we’re not going to get anywhere,” said Paul Krugman, this year’s Nobel economist.
China’s premier Wen Jiabao is defiant.
“I don’t think the yuan is undervalued. We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency,” he said yesterday. Once again he demanded that the US takes “concrete steps to reassure investors” over the safety of US assets.
“Some say China has got more arrogant and tough. Some put forward the theory of China’s so-called triumphalism. My conscience is untainted despite slanders from outside,” he said.
Days earlier the State Council accusing America of serial villainy. “In the US, civil and political rights of citizens are severely restricted and violated by the government. Workers’ rights are seriously violated,” it said.
“The US with its strong military power has pursued hegemony in the world, trampling upon the sovereignty of other countries and trespassing their human rights,” it said.
“At a time when the world is suffering a serious human rights disaster caused by the U.S. subprime crisis-induced global financial crisis, the U.S. government revels in accusing other countries.”
And so forth.
Is the Politiburo smoking weed?
I let others discuss the rights and wrongs of this, itself a response to the US report card on China. Clearly, Beijing is in denial about is own part in the global imbalances behind the credit crisis, specifically by running structural trade surpluses, and driving down long rates through dollar and euro bond purchases. No doubt the West has made a hash of things, but the Chinese view of events is twisted to the point of delusional.
What interests me is Beijing’s willingness to up the ante. It has vowed sanctions against any US firm that takes part in a $6.4 billion weapons contract for Taiwan, a threat to ban Boeing from China, and a new level of escalation in the Taiwan dispute.
In Copenhagen Wen Jiabao sent an underling to negotiate with Mr Obama in what was intended to be — and taken to be — a humiliation. The US president put his foot down, saying, “I don’t want to mess around with this anymore.” That sums up White House feelings toward China today.
We have talked ourselves into believing that China is already a hyper-power. It may become one; it is not one yet. China is ringed by states — Japan, Korea, Vietnam, India — that are American allies when push comes to shove. It faces a prickly Russia on its 4,000-kilometer border, where Chinese migrants are itching for Lebensraum across the Amur. Emerging Asia, Brazil, Egypt, and Europe are all irked by China’s yuan-rigged export dumping.
Michael Pettis from Beijing University argues that China’s reserves of $2.4 trillion — arguably $3 trillion — are a sign of weakness, not strength. Only twice before in modern history has a country has amassed such a stash equal 5 to 6 percent of global GDP: the US in the 1920s, and Japan in the 1980s. Each time preceeded depression.
The reserves cannot be used internally to support China’s economy. They are dead weight, beyond any level needed for macro-credibility. Indeed, they are the ultimate indictment of China’s dysfunctional strategy, which is to buy $30 billion to $40 billion of foreign bonds every month to hold down the yuan, refusing to let the economy adjust to trade realities. The result is over-investment in plant, flooding the world with goods at wafer-thin export margins. China’s over-capacity in steel is now greater than Europe’s output.
This is catching up with China in any case. Professor Victor Shuh from Northerwestern University warns that the 8,000 financing vehicles used by China’s local governments to stretch credit limits have built up debts and commitments of $3.5 trillion, mostly linked to infrastructure. He says the banks may require a bailout nearing half a trillion dollars.
As America’s creditor — owner of some $1.4 billion of US Treasuries, agency bonds, and US instruments — China can exert leverage. But this is not what it seems. If the Politburo deploys its illusiory power, Washington can pull the plug on China’s export economy instantly by shutting markets. Who holds whom to ransom?
Any attempt to retaliate by triggering a US bond crisis would rebound against China, and could be stopped — in extremis — by capital controls. Roosevelt changed the rules in 1933. Such things happen. The China-US relationship is no doubt symbiotic, but a clash would not be “mutual assured destruction” as often claimed. Washington would win.
Contrary to myth, the slide to protectionism after the 1930 Smoot-Hawley Tariff Act did not cause the Depression. Trade contracted more slowly in the 1930s than this time. The Smoot-Hawley lesson is that tariffs have asymmetrical effects. They devastate surplus countries, then America. Deficit Britain did well by retreating into Imperial Preference.
Barack Obama has never exalted free trade. This orthodoxy is in any case under threat in the West. His top economic adviser Larry Summers let drop in Davos that free trade arguments no longer hold when dealing with “mercantilist” powers. Adam Smith recognized this too, despite efforts by free trade ultras to appropriate him for their cause.
China’s trasformation has been remarkable since Deng Xiaoping unleashed capitalism, but as ex-diplomat George Walden writes in “China: a Wolf in the World?” you cannot feel at ease with a regime that still covers up Mao’s murderous nihilism. Walden reminds us too that China has never forgiven the humilations inflicted by the West when the two civilizations collided in the 19th Century, and intends to exact revenge. Handle with care.