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China Might Have Over-Reached Itself

Irwin M. Stelzer

There are times when seemingly unrelated anecdotes are more revealing than reams of data. This just might be one of those times, when it comes to U.S. relations with China, China’s economic future, and the geopolitics of Chinese economic expansion.

Start with the political scene in America. First, the Democratic-controlled senate overwhelmingly passes a bill that would require the U.S. to respond to China’s undervaluation of its currency by imposing significant tariffs on Chinese goods, and a majority of members of the House of Representatives promise to do the same if their leaders bring the bill to the floor for a vote. Then Mitt Romney, the leading contender for the Republican presidential nomination, uses one of the endless debates among prospective Republican candidates to announce that if elected he would name China a currency manipulator, complain to the World Trade Organization, and impose tariffs on any made-in-China goods that rely on stolen intellectual property.

Then President Obama decides to use his swing through Asia to warn China to “follow the rules,” allow its currency to appreciate more rapidly, and respect intellectual property rights. And this time he seems to offer more than talk. For one thing, he has set about crafting an Asian trade bloc, the Trans-Pacific Partnership, that doesn’t include China. This, on top of a new trade agreement with South Korea. It is a long way from the general agreement at the Asia-Pacific Economic Cooperation summit in Honolulu to a new free-trade zone, but this is theĀ first tangible reaction to its trade policies that the Chinese regime has confronted.

Early indications are that the nation’s current rulers find this challenge unsettling. China’s assistant foreign minister, Wu Hailong, characterized U.S. expectations for a trans-Pacific partnership as “too high,” beyond the reach of many Asian countries, and the president’s agenda as “too ambitious.” And Chinese authorities complained about not having been invited to the negotiations in Honolulu, to which Michael Froman, White House adviser for international economic affairs, responded that the new partnership “is not something one gets invited to. It’s something one aspires to” if one plays by the rules of fair trade.

China’s new rulers, destined to take over next year, and reputed to have close ties with the nation’s increasingly assertive military, will also have to confront the fact that Mr. Obama has decided China’s challenge to U.S. military supremacy in the Pacific can no longer be ignored, and need not be, now the wars in Iraq and Afghanistan are ramping down.

Mr. Obama is using a speech tomorrow during his stopover in Australia, America’s most consistent ally in the post-WWII period, to announce a phased-in increase in America’s permanent military presence in Australia, a step-up in joint exercises with Australian naval forces, and increased access of U.S. naval vessels and aircraft to the port at Darwin, which is beyond the reach of Chinese missiles.

U.S. officials have been passing the word that the objects of the exercise are to react to the recent launch of China’s first aircraft carrier and its development of the Dong-Feng 21D “carrier killer” missile capable of sinking any aircraft carriers in the region; increase American influence in the South China Sea, much of which China claims as sovereign territory; and reassure allies in Asia that the U.S. will retain a strong presence in the region to counter a rising Chinese military presence. China may just be paying the price of ignoring Teddy Roosevelt’s dictum—speak softly and carry a big stick—by speaking belligerently to its neighbors and the U.S.

Equally important are the problems China seems to be running into at home. Its export-led growth has left its consumers with less to show for their hard work than they would wish: parents can’t afford to buy their children the toys they manufacture for export to America. Polls suggest widespread discontent, especially among farmers upset at land grabs by local officials. Not that the current level of discontent is likely to result in an overthrow of a regime that knows how to stomp on dissenters, but neither can it be ignored.

In order to pop a property bubble and damp inflation, the government has tightened credit, driving property prices down by something like 20%-30%. Families that bought condo units before the credit crunch have rioted as discounts offered to new buyers push down prices, wiping out earlier buyers’ equity. And owners of small businesses are finding it necessary to turn to what is essentially a black market in finance as loans available from banks decline and the growth of the money supply slows.

Such credit as is available is gobbled up by state-run enterprises. Ian Bremmer and Nouriel Roubini, respectively president of the Eurasia Group and a professor at New York University, pointed out in The Wall Street Journal last week that 39 of the 42 Chinese companies listed among the Fortune 500 are state-owned, and three-quarters of China’s 100 largest publicly traded companies are state-controlled. This distorts the flow of capital and bank credit, and allows inefficient enterprises to load banks with their dicey IOUs. Meanwhile, local governments, overburdened with infrastructure projects, are raising taxes at three times the rate of increase in gross domestic product, just as exports to Europe are hit by the euro-zone crisis.

None of this is to say that China is on the verge of precipitous decline. But it does seem that its days of what President Obama called “gaming the system” may be coming to an end.

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