Global Crisis

Scramble to adjust to a new reality

Posted on Wednesday, October 27, 2010

By Geoff Dyer
Published: October 27 2010
Financial Times
If a global financial meltdown can be said to have a winner, then that would be China. Its economy has rebounded rapidly after the government responded to the crisis quickly and in size. While many developed countries are still wilting, China is expanding its reach and influence in all sorts of new and important ways.
Yet as the dust settles, China’s post-crisis strategy is raising questions. While Beijing has taken advantage of many new openings, observers both inside and outside the country argue that the government is making a number of missteps that could damage its interests down the line.
One of the most powerful trends to emerge from the crisis is a renewed effort to reduce economic dependence on western economies.
The collapse in Chinese exports in the autumn of 2008, which led to tens of thousands of factory jobs being lost, was a traumatic experience for the authorities and it encouraged them to step up existing plans to diversify the country’s economic ties.
The result has been an intensification of links with a host of developing countries around the world.
In one example, China has been an increasingly important partner for Brazil over the past decade, as its demand for commodities has increased. Yet not only did it become Brazil’s biggest trading partner last year, it is also set to be the biggest direct investor in the country this year, after a string of deals have been announced in steel, ports, manufacturing and agriculture. Similar stories can be told in central Asia, south-east Asia or parts of Africa.
The result is the prospect of a new cycle of global growth that is led by both Chinese trade and investment, but which also sidesteps much of the developed world.
The country has abundant financial liquidity, which is being made available for investments in infrastructure and industry in a growing range of developed countries. And it also has companies that can provide machinery and other capital goods at costs that make some of these projects financially viable.
For instance, China is now helping to finance and provide equipment for rail projects in Argentina, Turkey, Iran and Ukraine.
“This is a deliberate hedging strategy to reduce economic dependence on the west,” says Ian Bremmer, president of the Eurasia consultancy.
While Chinese investment in parts of the developing world is being stepped up, the authorities are also accelerating plans to expand the international use of the renminbi. For instance, the government has started to allow certain investors to buy renminbi bonds issued in the domestic capital market and some Asian central banks have already started to buy such instruments.
Although the authorities want carefully to control the process, it could lead to a rapid expansion in the use of the Chinese currency in trade in a way that would eventually start to challenge some of the role played by the US dollar.
Yet while China may be extending its influence as never before, it is also finding itself involved in an increasing number of diplomatic disputes.
Last month alone, the country has been in arguments: over its exchange rate; about a series of disputed islands in the South China Sea and the East China Sea; and concerning the award of this year’s Nobel Peace Prize to Liu Xiaobo, a jailed dissident.
A country whose influence and importance are rising so quickly is bound to find itself in new diplomatic stand-offs, yet for some analysts, the recent series of tensions between China and the rest of the world appear to be rooted in misjudgments by Beijing.
In the aftermath of the Asian financial crisis in 1997, China spent the following decade conducting what was often called a “charm offensive” in the region, signing trade and investment deals and settling border disputes. The underlying rationale was that China’s leaders saw good relations with their Asian neighbours as a cornerstone of the expansion of the Chinese economy.
However, over the past couple of years, many of those relations have become frayed. In the South China Sea, a number of south-east Asian countries complain that Beijing is taking a more aggressive strategy in pursuing its claims on the Paracel and Spratly Islands, which are also claimed in full or part by Vietnam, Taiwan, the Philippines, Malaysia and Brunei.
Meanwhile, the Japanese government is licking its wounds after a bruising diplomatic stand-off with Beijing over another set of disputed islands in the East China Sea, which was sparked by Japanese coast guards arresting the captain of a Chinese fishing boat.
The new frictions do not end there. In India, there are complaints that China has been stirring tensions in Kashmir, while the South Korean government has been angered by Beijing’s refusal to condemn its North Korean ally over the bombing of a South Korean warship in March.
Washington has taken advantage of these tensions to reassert its position in Asia, announcing in June that it views the South China Sea as an important strategic interest and offering to act as a mediator in the dispute.
Beijing complains that the US is interfering in issues that are not of its concern, but the worrying reality for the Chinese government is that countries such as Vietnam and Singapore have been quietly lobbying the US to get more involved.
And while the new Japanese government talked about forging a much closer alliance with China after it took office last year, support for such ideas has waned, especially after the dispute over the Chinese fishing boat.
Some observers in China fear the recent disagreements could encourage a strategic alliance to contain the country. “If we take a long-term view, it is clear that we have to be very careful with our dealings with our neighbours,” says Shi Yinhong, an international relations professor at Renmin University in Beijing.
The Nobel Prize for Liu Xiaobo, which has infuriated the leadership and is seen in many quarters as a calculated insult to China, also stemmed from what many observers see as a panicked reaction by Beijing. Mr Liu was arrested days before the launch of Charter 08, a pro-democracy manifesto that was eventually signed by several thousand people. Yet it was not just Mr Liu’s supporters but also many officials who were surprised when he was later sentenced to 11 years in jail after being convicted of subversion, an unusually long sentence by recent Chinese standards.
Now that he has been awarded a Nobel Prize, sparking wider interest in his ideas among young Chinese, the risk for the Chinese authorities is that he becomes a rallying point for a democracy movement.
“The party is behaving more assertively abroad, but is showing signs of insecurity at home,” says David Shambaugh, a China expert at George Washington University in the US.
China’s rise over the past two years has been so rapid that it has been thrust into a whole series of new roles.
Both Beijing and many other capitals around the world are scrambling to adjust to this new reality.

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