China’s Economic Expansionism

China Premier Wen Jiabao deliver the Report on...

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Throughout history, generals have tended to prepare for the next war by fighting the last one, failing to take into account the fact that circumstances seldom remain constant.

In this vein, a top U.S. defense official recently warned that China’s military buildup is “potentially destabilizing” in the Pacific. Michael Schiffer, the deputy assistant secretary of defense for East Asia, made this comment at a news briefing about a report, titled “Military and Security Developments Involving the People’s Republic of China 2011,” that is submitted every year to Congress. While Pentagon officials may be pre-occupied with China’s military expansion, I’ve never regarded China as a military threat, particularly when the country has another, peaceful way to extend its influence throughout the world — by using its cash!

In a report prepared by the Financial Times, the newspaper found that two Chinese state-controlled banks have lent more to developing countries than the World Bank. According to the report, the China Development Bank (CDB) and the China Export Import Bank made loans totaling $110 billion to governments and companies in developing countries in 2009 and 2010. During the same period, the World Bank issued loans of just over $100 billion.

The CDB and the China Export Import Bank are “policy banks” that have a mandate to use China’s financial resources to further the country’s national interest. One of CDB’s specific tasks is use its resources to alleviate bottlenecks in the supply of raw materials for the Chinese economy. In the aftermath of the global economic crisis, Chinese banks made loans to producers of raw materials when it was difficult for them to attract financing from other sources. In addition to securing much needed raw materials, the CDB also uses loans to open up foreign markets for Chinese companies.

Just as the global financial crisis provided China with an opportunity to extend its influence throughout emerging markets, the European economic crisis is now providing China with another such opportunity, this time in developed markets. Speaking at the opening of the World Economic Forum in Dalian, China last week, Premier Wen Jiabao called on European countries to put their “own houses in order” before asking China for a bail-out. Mr. Wen also caused a bit of a stir by publicly linking Chinese investments with long-standing political demands.

Mr. Wen made clear that China was not about to purchase sovereign debt without seeing anything in return. He said Europe needed to take “bold steps” in order to receive Chinese help, the first of which is to formally grant China full “market economy” status (MES). Many regarded Premier Wen’s remarks as a message that there could be a trade-off between China offering help and the EU granting China MES.

Recent months have seen an increase in European Union (EU) trade remedy cases targeting China. The European debt crisis may lead to increased trade friction and hurt China’s exports, Shen Danyang, Ministry of Commerce spokesman, said on Tuesday. In mid-September, the EU imposed anti-dumping duties ranging from 26.3 percent to 69.7 percent on imports of ceramic tiles from China. “As the debt crisis worsens … trade friction will grow,” Shen told a news conference.

Shen also said that China is disappointed that it has not been recognized as a market economy under world trade rules by the EU, despite the rapid economic transformation that has occurred in the country. Recognizing China as a market economy has long been a key demand from Beijing and would allow Chinese companies to avoid or mitigate many trade disputes. European officials have argued that China does not meet the criteria of a market economy, and strong opposition from some countries make it unlikely that the EU will grant China this status soon, that is, of course, unless they want to receive China’s financial support.

In June 2010, China de-pegged the renminbi from the U.S. dollar. At that time, the euro was trading at 1.2 to the greenback. Since then, despite the well publicized, looming financial crisis in Europe, the euro has appreciated by more than 13 percent against the dollar. Apart from the loose money policy being followed by the Federal Reserve System, there can only be one reason for this appreciation in the face of such negative news: China. The EU represents a market for Chinese goods that is approximately the same size as that of the United States, and China has a strong vested interest in an economically healthy EU. Look for China to play an increasingly greater role in solving the European financial crisis in the months ahead.

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