With incredible growth of 9.5% in the second quarter of 2005 appears to have convinced China to loosen its currency from the dollar to help cool rampant growth in factories and real estate. Speculators say the yuan is undervalued by 40%.
But it would appear this move is merely symbolic to the US and more connected to self-interest is in question. China has not entered the yuan in the free market. It’s allowing to float only .3 % per day. China made a controlled adjustment to the value of its currency by increasing its value only 2%. Each day, China will decide to increase or decrease the yuan value depending on its own needs. This is very unlikely to address significantly the current trade imbalance with the US. A trade war is still possible, though perhaps delayed.
Low cost goods from China can be credited for keeping inflation down while Chinese investors buying US Treasury securities have kept mortgage rates down. If the Chinese economy were to slow significantly, it could trigger a global slowdown and lead to major disruptions in key US industries dependent on Chinese imports and components. The US economy has become largely dependent on the success of the Chinese.
LA Times
"Until recently, we were not very dependent on China at all," said Edward Gresser, a former Clinton administration trade official and analyst with the Progressive Policy Institute, a Democratic think tank. "Now, we're relying heavily on China as a source of finance for our growth and our budget deficit."
With so much at stake in its dealings with China, the United States must walk a tightrope — encouraging China to move forward with economic and political reforms without triggering a costly confrontation. Striking that balance won't be easy. China has made no secret of its desires to become a major player in key strategic industries such as semiconductors or defense, which would directly challenge the leadership of American firms.
Meanwhile, China remains an authoritarian, one-party state whose legitimacy depends on delivering jobs and economic growth. Those who paint China as an economic goliath underestimate the serious challenges that its leadership faces, experts said. Double-digit economic growth has raised millions out of poverty, but it has also put huge strains on water and energy resources and created new tensions between the rich and poor. Push too hard, experts warn, and the country's stability could be at risk. The rising tensions over China were evident Wednesday as American critics of the Asian nation said at a congressional hearing that a bid by China's state-run CNOOC Ltd. to buy U.S. oil producer Unocal Corp. was part of an effort to severely limit U.S. influence in Asia and overtake America economically and politically.
[...]
But Gerald Curtis, an expert on Japan at Columbia University, fears that the rising emotions in Washington and China's relative inexperience in global diplomacy could escalate the trade conflicts. "This is brand new stuff for China, and the danger of their overreacting, misinterpreting or drawing the worst possible conclusions about American attitudes toward China are very real," he said.
If China fails to significantly increase the value of the yuan relative to the dollar, the threat of trade sanctions may return. The vote from a 27% tariff on Chinese goods has been delayed until this fall by Congress.
Meanwhile, with the US spending unprecedented borrowed cash from other countries, increasingly, this money is coming from China giving China the ability to force up interest rates and squeeze the US economy. What can the US possibly gain from such an arrangement? The cheap interest is certainly a temporary state of affairs. The farther in debt the US becomes, the more damage to the US economy when the interest rated correction comes. Then at the same time interest rates go up, the world economy will hit a major slowdown. All the inflated bubbles in the US economy will likely burst. The American worker will feel the major pinch in holding overvalued mortgages for their homes.
While the US has been preoccupied by Afghanistan and Iraq, China has quickly become the second biggest consumer of oil and India has stepped up to fill American technology jobs. The world economy is now largely driven by Chinese products and American deficit spending. China is investing billions all over the world in long-term oil production. Countries like Canada, Algeria, Uzbekistan, Saudi Arabia, UAE, and virtually all of OPEC. Most of these countries have been traditional US sources, but they have rolled out the red carpet for Chinese diplomats, surveyors and engineers. The cash poor Americans don’t have much to offer compared to the Chinese, who are willing to pay top dollar for future consideration and influence. Plus, China has established a strategic alliance with Russia, Iran, and virtually all of Central Asia in what appears to have good prospects of pushing the US out of this oil rich region where it has been meddling in the established governments. China has been cozying up to Venezuela, Sudan, and African sources of oil.
Washington's war on terrorism and other foreign policy priorities have distracted them from the world economy.
LA Times
â€We're still trying to get a handle on what's happened on our watch," said a senior State Department official who asked not to be identified because he was not authorized to speak on the record. "More work needs to be done on this."
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China's aggressive search is putting it in growing competition with the United States, the world's largest oil consumer. Some observers even warn of a possible showdown between the two economic giants. "The Bush administration's attitude toward China at the moment is to look for ways to work with them, but I don't know how sustainable this policy is going to be," said Gal Luft, executive director of the Washington-based Institute for the Analysis of Global Security, a conservative think tank. "At the end of the day, you've got two very large consumers competing over the same sandbox. Sooner or later the Chinese are going to run out of places they can look for oil."
China says wealthy countries need to adapt. It notes that those countries have been the largest energy users for a century despite accounting for just 15% of world population. It also insists that its appetite for foreign oil does not challenge U.S. interests or global stability. "China was never, is not and will not pose a threat to world energy supplies," Ma Kai, China's energy chief, said in Beijing.
Still, U.S. concerns over China's recent forays grew last month after CNOOC Ltd., which is 71% owned by state-controlled China National Offshore Oil Corp., made an unsolicited $18.5-billion bid for El Segundo-based Unocal Corp. The House of Representatives passed a nonbinding resolution two weeks ago opposing the deal on national security grounds, prompting an angry response from Beijing. "We demand that the U.S. Congress correct its mistaken ways of politicizing economic and trade issues," the Foreign Ministry said in a statement.
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U.S. officials stress that they have no intention of blocking China's search for oil. "We're not going to go across the globe trying to head off China every time we see them going after natural resources," said the State Department official. Karen Harbert, assistant secretary of Energy for policy and international affairs, says Beijing's quest does not pose a "threat to U.S. interests or a threat to U.S. companies." But it is expected to figure prominently in a U.S.-China dialogue scheduled for this month, led on the U.S. side by Deputy Secretary of State Robert B. Zoellick.
U.S. officials say China's reliance on energy from far-flung sources has led it to seek political stability in some regions and safety on the high seas — goals that dovetail with Washington's. Harbert said the administration was stepping up efforts to work with China, other major energy consumers and oil-producing nations to ease supply problems.
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But although officials in both countries emphasize coordination, some analysts say China's hunt for oil could lead to a clash with the United States. "The competition for oil could lead to armed conflict, particularly with China," Milton Copulos, president of the conservative National Defense Council Foundation, told a House hearing on global energy in March. "Lest this statement seem alarmist or farfetched, I would note that the Chinese are, for the first time, developing a blue-water navy capable of operating beyond their shores." Defense Secretary Donald H. Rumsfeld echoed those concerns when he addressed a recent Asian security conference in Singapore. He said that China's military expenditures placed it first in Asia and third in the world, and added: "Since no nation threatens China, one must wonder: Why this growing investment?"
Some critics fear that, as its global clout grows, China will begin challenging the U.S. for military influence in Asia, a scenario Beijing rejects. Analysts say China's crash program to expand its navy is aimed largely at building a credible threat that would deter Taiwan from declaring independence. Some add that a secondary aim is to expand its presence in the Strait of Malacca, the pirate-infested bottleneck off Malaysia through which more than 60% of its oil imports flow. Beijing says it has neither the will nor the ability to challenge the U.S. militarily and only wants to develop peacefully. But the U.S. and China's neighbors worry that Beijing, if faced with shortages, could use its military to grab oil-rich marine fields. Tensions have flared with Japan over mineral rights in disputed islands in the East China Sea. China has used gunboats to force Japanese seismic ships out of the area. And analysts say a Chinese submarine caught on the Japanese side last year was testing Tokyo's vigilance in the resource-rich area.
Meanwhile, contrary to consistent reassurance to the west, China has steered an increasingly aggressive course in its dealings with Japan. One might argue that the Chinese reaction to the recent changing of Japan’s history books on the topic of WWII amounted to the government whipping up a war fever towards Japan. Now competition for the oil and gas fields in the East China Sea has led to military moves of Japanese and Chinese troops onto various islands near the northern coast of Taiwan. Japan and China have embarked on a decade long military build-up. China’s new President Hu Jintao has told its military to “prepare for war.â€
Recently the war of words have escalated again between China and Japan since Japan has let contracts to drill in an area of East China Sea claimed by both.
"Japan's move could lead to confrontation with China." China's pleas with Tokyo to back off on the exploration had "fallen on deaf ears," the [China Daily] said. "Japan has strayed from the path of dialogue. If a confrontation were to result, the blame would sit firmly with Japan," it said.
GlobalSecurity.org
Beijing is attempting to build a navy able to operate effectively in Asia, where China’s most vital maritime interests lie. These include sovereignty claims, including the land features and associated water areas of the Diaoyu Tai (or Senkaku Islands).
A major China-Japan military conflict seems improbable. In 2003 bilateral trade between China and Japan reached an all-time high of $120 billion. However, with continued robust growth in China's economy and resultant energy requirements, the discovery of greater oil reserves than previously thought in the Senkaku (Diaoyu) Islands could enflame the century-old dispute with Japan over sovereignty of these territories. Conservative politics in Japan and a rising nationalist tide in China could further polarize the parties. Both China and Japan would probably realize that their best interests lay in avoiding military conflict, so this should be a limiting factor to a violent resolution. However, Ian Bremmer, President of the Eurasia Group and a senior fellow at the World Policy Institute., notes the politics of escalation on both sides [International Herald Tribune, May 20, 2005].
When all the economics says avoid conflict, why would the Chinese be so aggressive it their moves towards Japan? The fact is China has a restive population and China's leadership has good reason to be concerned about demonstrations becoming a revolution.
GlobalSecurity.org
"Last year, there were reportedly some 47,000 demonstrations in China. Nearly all took place outside Shanghai and Beijing and were aimed at local - not central - authorities. China's provincial officials therefore have good reason to capitalize on anti-Japanese sentiment and to channel growing social discontent toward Tokyo. ... Local officials are now competing against one another to over-supply China with nationalist fury at Japan.
Meanwhile, Japan has its own reasons for stoking war fever. Since WWII, the Japanese electorate has been decidedly pacifistic and has opposed its leadership from mounting anything more than a token defensive force for fear of stoking Japanese nationalism. Japan however has had significant concerns about the aggressiveness of North Korea and China as well as a desire to participate in the war on terror. And naturally, there are political motivations as well.
GlobalSecurity.org
"The faction within the ruling Liberal Democratic Party loyal to the party's secretary general, Shinzo Abe, is positioning itself for a post-Koizumi era in Japanese politics. They've discovered that reinvigorating Japanese nationalism at China's expense is an effective way of containing the growing popularity of the opposition Democratic Party of Japan and a lot easier than tackling economic reform.
"China-bashing is simply a winning formula in Japanese domestic politics. That's part of why Japan has now expressed a clear interest in Taiwan's security, pushed the envelope on territorial disputes with Beijing, and aligned its position on North Korea's nuclear program more closely with Washington's."
China has unprecedented military exercises with Russia that some have called a “practice†invasion of Taiwan.
The US is raising the red flag about China’s military moves by releasing a report on their development and intent.
New York Times
China is modernizing its military and emphasizing preparations "to fight and win short-duration, high-intensity conflicts" over Taiwan, the Pentagon said Tuesday with the release of its annual report on Chinese military power. With military spending that has grown by double digit rates since the mid-1990's, China "appears focused on preventing Taiwan independence or trying to compel Taiwan to negotiate a settlement on Beijing's terms," the report said.
This political and military pressure on Taiwan may run counter to American national security interests - and to American calls for a peaceful, negotiated resolution of the Taiwan question. But China has not yet built the military power to have full confidence it can achieve its political objectives regarding Taiwan. Beijing's conventional forces also are not deemed capable of threatening American territory, as "China's ability to project conventional military power beyond its periphery remains limited," the report stated.
However:
AP - TBO.com
Most recently, a Chinese general said Beijing might respond with nuclear weapons if the United States attacked China in a conflict over Taiwan.
Offering what he called his personal view, Maj. Gen. Zhu Chenghu, a dean at China's National Defense University, said July 15 that if the Americans "draw their missiles and position-guided ammunition into the target zone on China's territory, I think we will have to respond with nuclear weapons."
China is very concerned about world opinions now that it’s a global economic power. by calling the embassy in Beijing on the carpet. They were quite concerned that the annual Department of Defense report on China's military spending may be two to three times higher than the officially reported figure. China’s defense was self-reported at $26 billion last year, a fraction of the US budget. With economic concerns and restive population, China is destined to walk a very thin line between war and economic development. If push comes to shove, if China believes its losing control of its population, I believe they will choose war to deflect anger away from itself, vent the anger of its population, purge itself of an overpopulation of young males, and solidify its long-term economic prospects.
It seems to me that the prospects of a new world war, one that is very likely nuclear, looms larger than it has in at least a decade. At this point in time, the strongest factor against WWIII, is the growing interdependence of world economies. Even now, conflict is not in the US or China’s best interest.
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