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China's lack of global leadership
Sunday, 29 April 2012 21:53

China has emerged rapidly as a global economic power.  It is the world's leading exporter, with the world's second biggest economy which has been growing by around 10% annually for over three decades.

But curiously China seems neither willing nor able to exert global economic leadership according to Tsinghua University's David Li.

In addition to its "economic power", there are many reasons why China should have an interest in global economic leadership.  China is highly exposed to the global system in many ways, and certainly feels a victim of it.  Indeed, some countries think of China as public enemy number 1!

 

For example, of all the anti-dumping cases brought to the World Trade Organisation this past decade, fully one-quarter of them have been leveled against China.  Management of its exchange rate has been a flashpoint in relations with the US and Europe, but also countries like Brazil, Turkey and Argentina.

China is the world's biggest importer of energy and other resources, and has suffered as the prices of these commodities have risen, while the prices of its exports of manufactured products have fallen.  China is thus keen to reduce its dependence on these imports by improving the energy and resource efficiency.  Hence, China is also committed to reducing its carbon emissions for its own benefit.

China is sitting on $3.3 trillion of foreign exchange reserves whose value is exposed to exchange movements.  65% of these reserves are in $US, 26% in euros, 5% in pounds sterling, and 3% in yen.  In this context, only 10% of China's trade is invoiced in the Chinese RMB.  The other 90% is invoiced in foreign currencies, leaving China exposed to an exchange rate risk.

Increasing amounts of these reserves are now the subject of foreign direct investment in Australia, Africa, Latin America, the US and elsewhere. But this investment provokes great suspicion in certain countries.

Following political tension in the US, the Chinese petroleum company CNOOC had to withdraw its 2005 bid for the American oil company Unocal.  Similar tensions arose in relation to Chinalco's proposed investment in Rio Tinto.  Iceland blocked a Chinese billionaire’s bid to buy 300 square kilometres of wild heathland following concerns that the vast land sale would give Beijing a strategic foothold in the North Atlantic.  And Huawei Technologies, China's largest maker of telephone equipment, was banned from bidding for contracts related to Australia's broadband network due to security concerns.

If China is so exposed to the global system, why doesn't China push to change the system or at the very least play a more active role.  First, although China has many things to gripe about in the global system it is still a great beneficiary of the system of open trade, investment and finance, and it does not want to rock the boat.  When China is criticized, it can just resort to stubborn stone-walling.

Thus, the cautious and stability-oriented China, has not taken an active role at the IMF, World Bank or G20. China has been reluctant to host a G20 summit.  China has not sought the IMF Managing Director job or the World Bank Presidency, or pushed for reform of these organizations.  China never seeks spotlight at the World Economic Forum at Davos.

Chinese leaders are much more preoccupied by domestic rather than international issues.  Domestic stability is vital for the survival of the regime as it navigates its complex transition.  Three decades of rapid growth have reduced poverty and created lots of prosperity, but have also made it more challenging to maintain stability.  Citizens are more educated and independent in their thinking.  Regional disparities in such a vast country pose a challenge for maintaining stability.  And infighting in the Communist Party at this time of leadership change makes the system more brittle.  In this broad context, it is not surprising that the importance of the Minister of Foreign Affairs position has declined since the days of Zhou Enlai, and much of China's talent is attracted to domestic more than international issues.

China also suffers from a lack of talent for asserting itself in international fora.  While Chinese excel at science and maths, they are much weaker at the social sciences and humanities.  Moreover, China does not have the same argumentative cultural tradition as India.  Indian diplomats are very effective at presenting and debating in international fora.  The Chinese are much weaker at arguing their case.  They are trained more to follow orders.  This means that both India (and Russia) have a voice in the international scene that is far greater than their economic weight.

So what can we expect looking ahead?  Chinese leaders will continue to be cautious, emphasizing stability and gradualism.  China will act on a case-by-case basis, in its own way, without a grand plan or philosophy (Indians argue based on principles).  It will also proceed more by deeds rather than words.  But the Chinese government will be increasingly challenged by its own netizens and academics who are becoming more vocal and active.

One issue that Li did not address is China's feisty behavior with its neighbors like Japan, the Philippines and Vietnam in the East and South East China Seas.  China may not be willing to take the lead in the international economic system, but it is certainly most willing to irritate its neighbors.

Why?  It may be in part because Beijing has difficulty controlling the People's Liberation Army which plays its own game.  It may also be in part a game of low-level terrorism to keep the US and its Asian allies off balance.  It may also be the result of almost accidental altercations which escalate rapidly, and which are hard to wind back because of the risk of loss of face.

This behavior is most regrettable because it makes the region perhaps more unstable than if China could assert itself more openly, directly and maturely vis-a-via the US and the rest of the international community.  History shows that small disputes can quickly explode into much larger conflicts.

Reference:

"Is China ready for global economic leadership?" Professor David Daokui Li

http://lowyinstitute.org/


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