The Reasons Behind China’s Words and Deeds

In recent weeks, two events, one military and one economic, have been interpreted as an indication of new aggressiveness on the part of China.

On Sunday, March 8, five Chinese vessels shadowed and then surrounded the USNS Impeccable, a surveillance ship,  approximately 75 miles south of Hainan Island. The Pentagon described the Chinese action as “an apparent coordinated effort to harass” the U.S. crew while it was conducting what the Pentagon called routine operations. The area where the incident occurred is in broadly recognized international waters, but the Chinese have long considered it to be an “exclusive economic area” for its use.

Then last week, Chinese Premier Wen Jiabao expressed his concern about the U.S. government debt that China holds.  Some viewed this as an implicit threat that China might start selling some of its holdings of U.S. treasuries.

Is China really getting more aggressive towards the United States? And if so, why?

Therese Shaheen, the former chairman of the American Institute of Taiwan in Washington D.C. and the chairman of U.S. Asia International, Inc., considers both these  events aggressive, but believes they are weaknesses masquerading as strength.

According to Ms. Shaheen:

Each highlights Chinese vulnerability and deep-seated concern in Beijing. This has implications in foreign capitals everywhere, for the one thing worse than a strong, assertive China may be a weak, assertive China.

The global economic crisis is having a profound impact in China. Defense spending priorities will come into conflict with the need to address years of underinvestment in social spending. The Chinese naval action obscures the fact that China can’t project much power beyond its own shores. The U.S., for all its distractions, has no peer military competitor.

The reason Ms. Shaheen gives for Premier Wen’s statement is interesting:

Mr. Wen’s economic saber rattling also begs closer scrutiny of the underlying weakness that likely prompted it. Most external estimates for China’s 2009 GDP growth hover around 5%, just over half the official 9% rate in 2008. Several economists assessed growth at about 1% in the fourth quarter of 2008.

Rather than indicating a new aggressiveness by China, perhaps China is merely doing what every sovereign nation does— protecting its own interests.

There is no doubt that the global economic crisis is having an impact, but Ms. Shaheen’s comments about China’s economy are at odds with the economic accounts I have read. I haven’t heard a serious China economist argue that China’s growth fell to as low as 1 percent in the fourth quarter, nor is it true that “most” external estimates for China’s GDP growth hover around 5 percent. The World Bank’s latest estimate is 6.5 percent, and reputable economists whom I know give Premier Wen a pretty good shot of achieving China’s goal of 8 percent.

The best explanation for Wen’s comment is most likely the simple one—he is worried. China holds in excess of $700 billion of U.S. government securities and has a strong vested interest in seeing that the underlying value of those investments holds up. The economic measures being put forth by the Obama administration threaten to make them less valuable.

According to the Wall Street Journal:

U.S. debt held by the public has now hit $6.6 trillion — up from $5.3 trillion only a year ago. That doesn’t count the $5.2 trillion or so in outstanding Fannie Mae and Freddie Mac liabilities that we now know also have a taxpayer guarantee. And it doesn’t count the many ways that both the Federal Reserve and Treasury have guaranteed financial assets more broadly — such as $29 billion in Bear Stearns paper, $301 billion in dodgy Citigroup assets, and hundreds of billions in Federal Housing Administration loans.

President Obama’s stimulus plan and new budget will require an additional $3 trillion to $4 trillion in new borrowing over the next two or three years, and that’s if the economy recovers smartly……That’s a lot of T-bills to flog, and the world is taking note.

I agree that China is unlikely to begin a massive selloff of its existing holdings of U.S. securities. That would diminish the value of all of China’s dollar denominated investments and would work against the country’s own interests. But like many others, Premier Wen is wondering who is going to buy all of the new debt that the U.S. plans to issue.

For reasons of diversification, it’s doubtful that China can prudently allocate more of its existing $2 trillion of foreign currency reserves to the United States. And with both foreign direct investment and China’s trade surplus plunging in recent months, China’s foreign currency reserves are unlikely to continue to grow as they have in the past. With the largest investor in the United States on the sidelines as far as new purchases, the only way for President Obama to sell that much additional debt is to lower the price and increase the yields new investors receive. In the process, China’s existing holdings of U.S. government securities will decline in value. That’s why Wen is worried.

As for the naval event, the premise behind Ms. Shaheen’s assertion that China feels vulnerable because it can’t project much power beyond its own shores is questionable at best. In my fifteen years here, I have seen no indication that China wants to project its military power beyond China. The government has a big economic agenda and realizes that every yuan spent on the military is a yuan that can’t be invested in roads, bridges and railways, investments that improve dramatically the country’s productivity.

What I have seen is that China will vigorously defend what it believes rightfully belongs to China. Like the spy plane incident at the beginning of President Bush’s first term, the recent naval event is just another attempt to keep surveillance ships from the United States from getting too close, no more, no less. ( I can’t imagine how the U.S would react if Chinese surveillance ships showed up 75 miles offshore.) Now that China has made its point, this issue will likely fade quickly into the background, just like the spy plane incident.

Whatever its economic position at the time, China’s leaders have been consistent over the years in resisting attempts by others to tell them how to run their country economically or politically. The leadership has also been consistent in protecting the integrity of China’s borders, including Tibet, and in insisting that Taiwan is part of China. The difference today is that China’s economic ascendancy means that its words and actions carry that much more weight.

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