US World Leadership More Important than Improving Economy?

Senior Colonel Liu Mingfu who wants China to replace US as number one militarily in the world

People’s Bank of China Governor Zhou Xiaochuan addresses delegates at the UK-China Financial Forum at Lancaster House, in London June 18, 2014.
Credit: Reuters/Sang Tan/Pool

US President Obama, though has erred in military strategy and diplomacy, is correct in seeing the great potential of US economic growth from Xi Jinping’s reform.

China’s Xi Jinping is of the same mind. He knows well maintaining satisfactory Sino-US economic relations will not only bring huge economic benefits to both China and the US, but also help Xi accomplish his reform that will facilitate the realization of his Chinese dream.

The problem is that there are now quite powerful conservatives in the US who regard maintaining US world leadership is much more important than improving US economy. They believe that American people do not mind tightening their belts to allow US government to incur lots of military expenditures in arms race and military confrontation with China and military aids to Japan, Vietnam and the Philippines.

Chinese people, however, suffered more than 3 decades of poverty and starvation. Having been much better off, they certainly do not want to tighten their belts for arms race with the US. However, there are still lots of Maoists in China who uphold Mao’s sinocentric idea. It is typically reflected in the popularity of Maoist Senior Colonel Liu Mingfu’s book “China’s Dream: Major Power Thinking and Strategic Posture in a Post-American Era” that wants China to replace the US militarily as number one in the world.

Chinese reformists oppose Liu’s idea and banned reprint of Liu’s book after it was quickly sold out.

In order to reduce conservatives’ resistance to his reform, Xi took over Liu’s Chinese dream and turned it into the dream for the rejuvenation of Chinese nation. To please the conservatives, he has included in his Chinese dream making China militarily strong, but he has repeated times and again reformists’ promise that China will never pursue world hegemony, i.e. China will never replace the US as world leader.

In order to make China militarily strong to avoid a repetition of China’s misery of being bullied by foreign power for a century in the past, China has begun an arms race with the US since the US switched its focus to Asia by its pivot to Asia.

I pointed out in my post “Chinese Military’s Unlimited Budget” on May 17, 2014 that China has spent more funds in its arms race with the US. I said in the post:

How much Chinese military is actually spending? I can safely say, it spends more than US military as proved by the large number of expensive projects it is carrying out.

China is implementing an expensive lunar program, from which the PLA (Chinese military) has drawn the technology of its anti-satellite (ASAT) technology, including hitting a satellite, rendezvousing with a satellite to blind it with spray, capturing a satellite by the robotic arm of Chinese anti-satellite satellite and destroying the internal chip of a satellite with electromagnetic pulse weapon, its ASAT defense capability (the ASAT quick response capability), airospaceplanes such as Shenlong drone and J-28 space-air fighter, HGV (hypersonic glide vehicle) and anti-ICBM missile.

For its air force, it is developing quite a few stealth aircrafts including J-20, J-31 stealth fighter jets and J-18 VTOL stealth fighter jet, and the most advanced AEW&C able to detect stealth fighters and long-range strategic stealth bomber.

For its navy, it is producing the most advanced nuclear and conventional submarines, lots of advanced 052D Aegis destroyers and 056 frigates and huge 081 and 071 landing platform docks, which may serve as aircraft carriers if Chine has successfully developed its J-18 VTOL fighter jets.

Chinese military has all the projects US military has and quite a few projects that the US does not have.

However, unlike the US there is no need for Chinese people to tighten their belts for the arms race. In my post “China’s Mystic Super New Material for Aircraft, Spacecraft Graphene” on May 31, 2014, I pointed out China’s abundant funds for weapon development:

China’s tax income grows rapidly along with its economic growth. In addition, there is the income from state-owned enterprises at Chinese government’s disposal. Moreover, lots of corrupt officials’ assets have been confiscated in the anti-corruption campaign while the mass line campaign has greatly reduced government spending. The funds allocated to the military rise as a result of the increase in income and decrease in spending.

Let me give you an example. Before the mass line campaign, a quite rich province spent three times its budget due to construction of luxurious government offices and official housing and provision of luxurious cars, banquets and travels abroad for officials. Since the campaign, such luxuries are strictly forbidden and the province has to reduce spending within its budget. Lots of funds thus saved can be used for military spending.

Obama is certainly wise in attaching importance to economy in dealing with US relations with China. If the US fails to exploit the opportunity from the tremendous growth of China’s consumption market resulting from the reform to achieve economic growth, it will lose its world leadership to emerging economies in the long run. China is not the only country the US has to contain.

Xi Jinping is wise enough to overcome conservatives’ opposition to his thorough reform. He includes in his Chinese dream making China militarily strong that conservatives earnestly want. China’s recent economic slowdown proves that without further reform, China will not able to maintain economic growth to provide enough funds for weapon development. As a result, conservatives have to support Xi’s reform.

Will Obama and the next four US presidents (Xi is expected to rule China for 2 decades) be able to overcome conservatives’ hindrance to US economic growth?

There will be too much uncertainty in this fast changing world if the US fails to maintain its economic superiority. For example, if Russia succeeds in establishing a Russia-China-Indea alliance to challenge the US, US leadership will soon be in question.

China is indeed trying hard to please the US for good relations with the US. Reuters’ report “China agrees to reduce FX intervention ‘as conditions permit’” proves that.

Diplomatically, China shall try to improve its relation with Japan as its disputes with Japan does not involve much interest but tension with Japan will affect Chinese economy as Japan is China’s important trade partner.

China’s conflict with Japan is indeed mostly related to historical enmity, which both countries shall put behind them and look forward.

China’s dispute with Vietnam and the Philippines involve great economic interests. China certainly shall not make any concession as it raises claim long ago and the US did not oppose for many years the Republic of China’s claim.

If China has improved its relations with Japan and maintain good relations with Taiwan, US conservatives will have much less grounds for opposition to good US-China relations. That is the correct strategy that China has to adopt in spite of the surge of nationalism at home.

The following is the full text of Reuters’ report on China’s promise related to the exchange rate of Chinese currency:

China agrees to reduce FX intervention ‘as conditions permit’

U.S. and Chinese leaders have agreed that China will reduce its intervention in the currency market when conditions are ripe, reaching an understanding on a prickly issue that has hurt ties between the world’s two biggest economies for years.

China’s Central Bank Governor Zhou Xiaochuan said on the sidelines of annual high-level talks between the two nations that China will “significantly” reduce its yuan intervention when some prerequisites are met. He did not give further details.

Analysts said Zhou’s unusual candour about China’s currency intervention, which was echoed earlier on Wednesday by the Chinese finance minister, suggested that China may be ready to let the yuan rise again once its economy stabilises.

Indeed, U.S. Treasury Secretary Jack Lew told reporters at the end of talks on Thursday that China was committed to reducing its interference with the yuan, “as conditions permit”. China will also increase the transparency of its currency policy, he said, describing the agreements as “major” changes.

“The direction of our reforms is clear: we hope that the exchange rate can be kept basically stable, at a reasonable and balanced level through reforms,” Zhou said at a briefing on the sidelines of the two-day Strategic and Economic Dialogue.

“At the same time, we will allow market supply-and-demand to play a bigger role in determining the exchange rate, expand the floating range of the exchange rate, and increase the exchange rate’s flexibility.”

“This means that as the goals are being achieved and when conditions are ready, the central bank will significantly reduce its intervention in the foreign-exchange market.”

The value of the yuan has long strained bilateral relations between China and the United States. In June, the International Monetary Fund judged the currency to be “moderately undervalued”.

U.S. officials say China deliberately holds down its currency to boost its exports, an accusation China denies.

Instead, Chinese authorities weld their currency policy to the idea of stability, a stance that analysts say stems from China’s fear of reliving Japan’s experience in the 1980s, when a sharp rise in the yen hobbled the Japanese economy.

The yuan has fallen 2.4 percent so far this year as China’s economic growth ground to an 18-month low in the first quarter. There are signs that activity is picking up again, though not as quickly as some had hoped.

“It feels like there was a fairly concrete discussion this time,” said Louis Kuijs, an economist at RBS Bank in Hong Kong. “This is not just a repetition of the policy line that lay on the policy shelf.

“I think in the eyes of Beijing, once the concerns of economic growth are convincingly removed, there would be less resistance to letting the exchange rate appreciate.”

WATCH THE NEXT FEW MONTHS

As had been the case in recent years, the yuan was a matter of contention at this year’s Sino-U.S. talks. Lew told his counterparts from the start that a move to a market-determined exchange rate was a “crucial step” for China.

In response, Chinese Finance Minister Lou Jiwei said on Wednesday that Washington constantly raises the issue of whether Beijing can stop its yuan intervention. But Lou said it was difficult for China to be hands off given its unsteady economy and abnormal capital inflows.

Whether Thursday’s agreement will be supported by action remains to be seen, a point noted by Lew who said he will be monitoring the renminbi’s exchange rate in coming months.

“The experience of the next few months will tell us a lot about what the real impact is,” he said.

Statements issued by both governments at the end of Thursday said policymakers on both sides agreed to avoid “competitive devaluation” of their currencies under a broader G20 deal.

The ninth-most traded currency in the world, the yuan is kept on a tight leash by China compared with its peers. The central bank sets a midpoint value every day, from which the yuan is allowed to rise or fall 2 percent in the spot market.

Before the yuan’s retreat this year, China had denied it was intervening in the currency market. The central bank repeatedly said that it had ceased its interventions, and that the yuan was near its equilibrium level, even though traders said they still saw the central bank buying or selling the yuan on the market through state banks.

“China is sending a clearer message: it’s unlikely for China to completely stop (yuan) intervention under the managed float regime,” said Zhang Yongjun, a senior economist at China Centre for International Economic Exchange, a well-connected think tank in Beijing.

China’s Central Bank Governor Zhou also signalled that it was not feasible for Chinese authorities to remain entirely on the sidelines of the foreign exchange market.

“If short-term market volatility or speculative forces are too big, we should take appropriate measures,” he said in reference to gyrations in the foreign exchange market.

Apart from the yuan, the two sides agreed to try to wrap up talks on a bilateral investment treaty by the end of the year, and begin more contentious negotiations over a “negative list” of sectors that are off-limits to U.S. investment.

Washington wants to narrow the list to open up access to more areas of China’s strictly controlled economy, a process it argues will help drive China’s economic reforms.

China acceded as well to allowing U.S. firms that are being investigated by its anti-trust regulators to contest evidence presented against them by Chinese agencies.

The U.S. business community had pushed Washington to add China’s antitrust regime to the agenda, as companies had privately voiced concerns that Beijing was using its anti-monopoly law to drive industrial policy.

Source: Reuters “China agrees to reduce FX intervention ‘as conditions permit’”

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