These tensions, especially with the US, arise from economic, political and military friction, reflecting a more self-confident China’s greater assertiveness as a rising global power. They were expected to be an important discussion topic at the Western-dominated and China-excluding G-7 finance ministers’ meeting in Canada over the weekend. China showed its growing assertiveness on Thursday by filing a complaint with the World Trade Organization (WTO) against the European Union’s antidumping tariffs on Chinese shoe imports. On Friday, it imposed preliminary antidumping duties on chicken products imported from the US.
At the end of last month, an “indignant” China, miffed by the recently announced “provocative” $6.4 billion US arms sale to Taiwan, had threatened to impose unspecified retaliatory sanctions on four US companies, including Boeing, involved in the sale and also to restrict military exchanges with the US and cooperation on global and regional issues. The Chinese government has also begun to respond more aggressively to criticisms of its widespread censorship of the media, especially the Internet, and other severe restrictions on political freedoms, as revealed in the recent controversies surrounding Google’s cyber attack complaints and the forthcoming meeting of Tibet’s exiled spiritual leader Dalai Lama with US President Barack Obama.
In response to China’s greater assertiveness, which is articulated by the state-controlled English-language China Daily, “China’s Global Newspaper,” the latest Economist’s front page story is titled “Facing up to China.” As expected, China’s challenge to the Western- and especially US-dominated global economic and financial order has become stronger as its economic power has risen absolutely and relatively, but especially after the advent of the US-centered global financial crisis. In an earlier column (“China challenges US dollar’s dominance,” March 30, 2009), I discussed China’s criticism of the global hegemony of the US dollar as the major reserve asset and the proposal to replace it with a super-sovereign currency based on the International Monetary Fund’s (IMF) Special Drawing Rights (SDRs). One perennial source of economic friction, whether the renminbi (RMB), the Chinese currency, is deliberately undervalued by the Chinese government to gain unfair competitive advantage in world trade, heated up again last week after President Obama referred to it in his comments about his administration’s efforts to boost US exports. In quick response, the Chinese government strongly defended its foreign exchange (FX) policies, with the China Daily’s Web site headlining, “China won’t fold on RMB.”
Here is a short list of indicators of China’s global economic ascendancy, which underlies its assertiveness: China is already the world’s second-largest economy in purchasing power parity and is expected to soon become the second-largest at market FX rates. It has the world’s second-largest manufacturing sector, which the Organization for Economic Cooperation and Development (OECD) projects will become the largest by 2014. It is already the world’s largest exporter of goods. China has surpassed the US as the world’s largest auto market. China is the world’s largest gold and steel producer. It holds the world’s largest FX reserves, boosted by chronic current account surpluses. According to the Economist, China has three of the four biggest banks, the two biggest insurance companies and the second-biggest stock market in the world, based on market capitalization.
Amid the rising Sino-Western tensions, the OECD published last Tuesday its comprehensive 236-page Economic Survey of China 2010, its second survey of China. The report assesses the Chinese economy and advises the Chinese government on how China’s major economic challenges can be met. Before its publication, it was discussed by the OECD’s Economic and Development Review Committee and Chinese officials, indicating that it was not objectionable to China’s government. The OECD’s first survey of China, which is not one of the 30 OECD members but has had a working relationship with the OECD across a broad range of activities since 1995, was published in September 2005. The OECD has also issued several working papers on such research topics as Chinese financial sector reforms, labor market conditions, income inequality, social security and health care, on which the latest survey is largely based. They provide rich data and excellent analyses for anyone interested in the Chinese economy.
A comparative reading of the two OECD surveys of China reveals how striking the increasingly market-based Chinese economic transformation, lead by the private sector, has been in the five years between them, in spite of the recent global financial crisis and the Great Recession. I will focus here on the second of the eight chapters that make up the OECD survey. This chapter, titled “Further monetary policy framework reform,” contains a detailed discussion of the contentious Chinese FX rate regime. The OECD report openly criticizes China’s US dollar-pegged FX rate regime, under which the RMB’s gradual (crawling peg) appreciation against the dollar, starting with a revaluation in July 2005, was stopped in July 2008. After enumerating the various macro- and microeconomic costs of that regime, the report advises the Chinese government to relax its FX controls and adopt a more flexible FX rate policy. What is remarkable is that precisely the same criticisms and recommendations when made by Western governments have been consistently and vehemently rejected by the Chinese government. Because the OECD report was vetted by the Chinese government, we must conclude that either the Chinese government does not take the OECD seriously or that it welcomes the criticisms and recommendations when they come from a reputable international organization with no political axe to grind, and not from politicians who publicly accuse and pressure China to please their voters. If the latter is true and Western politicians were to become more diplomatic and circumspect in dealing with China, which still remembers the past humiliation it suffered under centuries-long Western colonialism, then we should not be too surprised if in the near future, the Chinese government announces major FX regime reforms that move the RMB closer to full convertibility based on a more flexible FX rate policy. That would be in the mutual interest of the Chinese and global economies.
