The Magazine

Our Broken China Policy

Beijing plays chess; America plays tiddlywinks.

Jan 17, 2011, Vol. 16, No. 17 • By IRWIN M. STELZER
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China’s president, Hu Jintao, is about to make a state visit to Washington, hard on the heels of a statement by Liang -Guanglie, his defense minister, that “in the next five years our military will push forward preparations for military conflicts in every strategic direction.” Not quite Nikita Khrushchev’s “We will bury you,” but close enough to give President Obama good reason to reset our overall policy towards the Chinese regime, including abandoning the outdated notion that trade is only about economics. President Hu knows better: Trade, overseas investment, currency manipulation​—​all, war by other means; all, about the place of nations in the world, a key part of the “strategic direction” in which he is taking his country. 

Our Broken China Policy

The United States, meanwhile, continues its historic policies. Free trade. Reliance on the World Trade Organization to settle disputes. Occasional public complaints about China’s persistent undervaluation of the renminbi, but refusal to declare the regime a currency manipulator. And conferences, conferences, conferences. All very 20th century.

China is doing something altogether different. The Communist regime sees trade policy as merely one strategic weapon in a war aimed at overtaking the United States as the world’s preeminent economic and military power. Undervaluation of the renminbi is necessary to keep China’s export machine running at full tilt to create jobs for the millions who are moving from the country to the nation’s cities. Lacking democratic legitimacy, the regime claims the loyalty, or at least the submission, of its people principally through its ability to provide jobs and a rising standard of living, especially important now since at the end of this year Hu, the paramount leader and general secretary of the Communist party, retires in favor of Xi Jinping. The last thing Hu wants is a transition marred by social unrest. 

The Chinese know that at some point they will have to allow the renminbi to appreciate by more than the token amount of recent months if inflation is to be avoided and its people allowed some of the benefits of the greater purchasing power of a more valuable currency. But by then they will have accomplished two longstanding objectives. First, their vaults will be stuffed with an even larger hoard of American IOUs, enough to give them an important influence over U.S. foreign policy. “How do you deal toughly with your banker?” asked Hillary Clinton of then-prime minister of Australia Kevin Rudd at a -luncheon last year. His answer is not recorded.

Secretary Clinton, of course, was expressing the widely held fear in policy circles that China might decide to dump U.S. Treasuries and dollars on the market, driving their value down and interest rates up. That would bring our economic recovery to a screeching halt​—​or worse. Yes, the value of China’s dollar-denominated assets would decline, but if a broader geopolitical objective were served, that would merely be a cost to include in the military budget. 

Second, by the time they are forced to allow the renminbi to appreciate significantly, the Chinese will have copied enough American and Western technology to be less in need of an undervalued currency​—​they will have made-in-China products, subsidized if necessary, that can dominate world markets even if their currency more closely approximates its market value. 

China’s leaders know that the exports that have been filling Walmart’s shelves are becoming cheaper to make in other countries. So the idea is to replace them with more technologically sophisticated products. Every deal to allow a foreign company to tap China’s vast market comes with a requirement that it turn over technology. The initial orders satisfy American executives, their eyes focused on the next quarterly or analyst’s report. The Chinese, their eyes focused on 2020 and beyond, know that, the technology in hand, they can continue duplicating the factories and techniques and dispense with the American capitalists. 

Chinese policy towards the energy industries provides perhaps the best but far from the only example. Westinghouse Electric recently completed a technology transfer as part of a deal to sell four nuclear plants to China. So, too, with the green energy business. The Chinese agree with President Obama: Solar panels are an increasingly important product and source of jobs. The main raw material is polysilicon, and when its price soared the Chinese poured cash into domestic plants and short-circuited the permitting process so that plants could go from groundbreaking to full production in a bit over a year; in the West that is a multiyear process. Result: China controls half the world market for solar-power equipment. 

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