China US Economic Relations

This is an attempt to look at the economic aspect of US - China relations from a Chinese perspective. This approach may yield interesting insights in the most important economic axis of economic interdependence of the modern world, and generate innovative ideas about how to approach existing and future issues.

Theoretical background
The contemporary phase of US-Chinese relationship characterized by high level of economic interdependence can be analyzed from a realist perspective. Henry Kissinger was working towards a classic “realist” balance of power arrangement by seeking closer relationship with China to counterbalance Soviet influence in Asia after the end of the Vietnam war. In Dr. Kissinger's own words with Nixon they “had ideas for the construction of peace on a global scale”. Consequently it could be argued from a constructivist perspective that this classic 'realist' foreign policy act created a reality that will develop into the most remarkable phenomenon of modern politics the economic interdependence between the world's leading liberal free market democracy and the last explicitly communist state. The impressive rise of the economic exchange between the two countries after the reforms introduced by Deng Xiaoping in 1979 led to the current situation in which they dominate world trade and global economic stability is dependent on their successful development. The management of these relations and the interlinked political and security implications require skillful economic statecraft to resolve the issues bound to arise from the unparallelled scope of the economic interdependence and the structural differences between the communist rule over an economy in transition to free market in the case of China and an economy in transition from the 'laissez-faire ' principles of the Reagan era to increasing calls for more regulation after the global financial crisis of 2008.

Historical Context
The relationship between US and China began to develop in in a new direction after Henry Kissinger approached China and the economic relationship picked up particularly after the reforms of Deng Xio Ping in 1979. Trade with the US has helped China achieve dramatic success in improving the quality of life of the most populous country in the world. Chinese political life has advanced towards more openness, democracy and accountability and the protection of private property has given the opportunity for a prosperous middle class to emerge. At the same time China remains a Communist country ruled by Communist Party which is far even from the notion of something resembling Gorbachev's perestroika, let alone more comprehensive political reforms. The remarkable economic development has been accompanied by extensive environmental damage. Some of the new rich have earned their wealth through corruption and the lack of effective judiciary to deal with the problem is due in part to the CCP opposition to political reform. The livelihood of a large part of the population though better than the starving populations of sub-Saharan Africa is still precariously close to the poverty line. The economic development is based on cheap labor and has yet to show signs of achievement into more technologically advanced areas as Japan, and the Asian Tigers have done.
The US approach to China has ranged from the desire to ensure good relations to alleviate the security threat in the 70s through the remarkable period of the growth of economic relations starting with Deng's reforms and culminating in China gaining the top spot among US trading partners and world wide prominence leading to US uncertainty as to how to treat China: as a rival, an ally or controversial partner-difficult to deal with but impossible to reject.
Floating exchange rage for Chinese currency.
The Chinese government has strongly resisted international pressure led by the US to float Chinese currency. The Chinese complain that now after the financial crisis the problem is not the exchange rate of their currency but the value of the dollar or more correctly not the value but the stability of the dollar which is dependent on the stability of US policy. The above conclusion of the Wang Qing, an economist from Morgan Stanley in Hong Kong make the US government responsible for exchange rates linking their stability with the stability of policy. While a link between policy and currency values may be established it is not that direct. There was no observable policy change when the financial crisis struck in the latter days of the Bush administration. It is more the adequacy of particular policy that may affect the exchange rate. In any case the huge Chinese trade surplus has materialized in US dollars mostly in the form of Treasury bonds.

“We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.” The problem is that The Chinese cannot undertake a massive sellout of US treasury bonds as this will cause their price to fall. But even if they hold them massive US stimulus will mean the US government selling more bonds and the market may demand higher interest rate for them than the interest rate for the bonds the Chinese hold. That scenario will result in a price drop of bonds held by the Chinese. Alternatively if the US government chose to limit the borrowing and respectively the stimulus may mean slower recovery for the US economy which will hurt Chinese exports to the US. Another scenario involves reduced US trade deficit because of the crisis resulting in less Chinese purchases of US bonds. In any case the financial crisis confronts the Chinese leaders with a difficult dilemma. The US sees the solution in encouraging Chinese domestic consumption. The Chinese government sees a solution in decreasing its reliance for its reserves on the US dollar and dependence on US financial policies outside its control, by calling (alongside Russia) for the establishment of an internationally managed reserve currency that will increase the stability of world financial markets and have the added benefit of more freedom for the financial policies of reserve currency polities like the US, the EU and Japan.

2. What China expects from the US

Budget deficit control
Following the financial crisis and the implementation of stimulus measures the primary concern of China is the US government's resolve and ability to bring the budget deficit under control. From the perspective of Chinese national interest their ability to deal with the adverse effects of the global financial crisis depend on the value of their national reserves which is dependent on US policies. Commentators speculate on whether China will continue to buy US securities to and thus finance US government spending. The obvious answer is yes because there is no substitute for US government bonds in terms of secure investment even when taking into account all the pitfalls of using them as financial reserve instruments. A logical consequence of improving trade balance between China and the US will be that China will buy less US securities as it will have less free funds to use for bonds purchases but will use the money gain from export to the US to pay for imports instead. To conclude if China had a financially viable option to switch reserves to other safe haven like IMF Special Drawing Rights or Euro they would have done so and they will not hesitate to do it if it becomes viable in the future. The current calculations though make the US dollar most attractive despite its contradictory position of serving as an international currency but held under US national control. China will continue to keep their national reserves in US dollars and attempt to influence the US government to pursue policies that will prevent the dollar from losing value.

Free trade not rotectionism
The other most important economic statecraft policy issue that China would like to see positively resolved in their relations with the US is how the administration will go about with dealing with protectionist pressures from Congress. China is understandably suspicious on the true US intentions. On one side we have the resolute declarations of president Obama on several G20 meetings warning against the dangers of protectionism and on the other the controversial imposition of tariffs on tires imported from China.

New US financial regulations to prevent crises
China is concerned with the negative impact of the current financial crisis that has exposed their economic vulnerability to events beyond their control. Understandably, China wants to see better regulation to ensure the smooth operation and predictability of the US financial system as the world trade is dependent on its health.

Increased role for China in IMF
At the 20th meeting of the International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund in Istanbul the Deputy Governor of the Central Bank of China Yi Gang made a point for a larger quota for the developing nations and better monitoring abilities for the International Monetary Fund. He accused the IMF of failing to foresee the global financial crisis and blamed this failure on mismanagement stemming from skewed representation in IMF governing bodies. That is a valid Chinese complaint as they have done what was expected from them: efficiently produced goods for export and the financial collapse adversely affected them without warning. That the IMF is in need of structural and administrative reform including quota revision is acknowledged supported by the US government.

Recognition of the status of China as a market economy.
The recognition of China as a market economy affects the way the fair market value of goods is calculated to determine whether the country engages in subsidies or dumping. As China is not recognized as a market economy by its main trading partners the US and the EU they can more easily apply punitive measures against China as was in the latest case of US tariffs on tires imported from China. Theoretically the question has two sides. The first one is can China be considered a market economy? The prevalence of state enterprises and the strict control over the national currency points towards a negative answer. On the other hand the remarkable development of China towards establishing efficient enterprises including private ones successfully working towards ever increasing export capacity points to a conclusion that China is making considerable effort to implent an market driven system. The results of the latest China - US Strategic Dialogue show that there are no insurmountable obstacles on the way of US recognition of China's market economy status which will materialize sooner or later depending on political developments in both countries.

While official Chinese policies may be concerned with the continuing dominance of the Communist Party and Marxist ideology from the Russian (and Yugoslav) experiences suggest that the true interests of the ruling elite may be the more material than ideological centering on the perpetuation of their economic power. The metastasis of corruption feeding on China's economic boom points int that direction Bearing that in mind three scenarios can be discerned for the future development of China. The most desirable, but maybe not the most probable will be the gradual political development of the Chinese society towards democracy following the consolidation of the market principles in the economy. The most dangerous would be a slip backwards under the pressure of economic duress into the oppression and belligerence of the Mao era. The most probable though will be the collapse of the Communist party and transfer of power into the hands of corrupt officials and mafia like structures. US inducement for democratic reforms in China may diffuse the dangers of chaotic collapse of communism and the and the considerable security implications that may cause. Ultimately it can be concluded that there is a convergence of interests between the Chinese Communist Party, the entrepreneurs and the people of China and that leads to peaceful economic development as a way to solve all problems facing modern China. That position can find understanding in the US and the rest of the world because it is in harmony with the long term interests of all countries interested in developing economic relations with China on a win-win basis.