China’s economic pride


HONG KONG — In international business and finance, no less than in politics, diplomacy, defense and control of tiny strategic islands and islets in the seas around it, China is showing an increasingly assertive tendency with the clear message that it will not allow itself to be pushed around by anyone.

The last few weeks have seen the imprisonment of two high-profile foreign business executives of Chinese origin on dubious charges of stealing “state secrets” along with growing grumbles that Beijing is putting up unfair hurdles for foreigners seeking to do good business in China.

Peter Loescher, head of industrial conglomerate Siemens, and Jurgen Hambrecht, CEO of chemical maker BASF, had the temerity to challenge Premier Wen Jiabao himself in public about what they claimed was the deteriorating business climate. The two companies together have investments of more than 9 billion euro and employ 36,000 people in China.

The German CEOs were members of the official delegation visiting China with German Chancellor Angela Merkel, underscoring the strength of foreign business unhappiness about how unfairly tough China is becoming.

They are not alone. Steve Ballmer of Microsoft spoke out again recently about rampant piracy of intellectual property in China and declared that “China is a less interesting market to us than India, than Indonesia.” Jeffrey Immelt, CEO of GE, was also vociferous, albeit at a private dinner in Italy.

Grumbles of computer and software companies are particularly strong. The market research company IDC found that four out of five software applications running on personal computers in China have been stolen, not paid for, and the commercial value of stolen PC software doubled between 2005 and 2009.

Both the American Chamber of Commerce in China and its European counterpart have expressed concern about China’s worsening business climate for foreign companies. Their worries include policies of “indigenous innovation,” favoring Chinese companies in bidding for government contracts and requiring foreign companies to transfer their latest technology to China. In its annual survey of how countries rank for ease of doing business, the World Bank group rated China 89th among 183 economies this year, a fall of three places.

These developments take the battle away from merely financial issues, which have preoccupied policymakers in Washington and Beijing for at least two years, and into the wider economic sphere.

The United States is already worried about China’s grip on the American economy because of Beijing’s large holdings of U.S. debt instruments. Brad Setser, then at the Council of Foreign Relations and now in President Barack Obama’s economic team warned that “political might is often linked to financial might, and a debtor’s capacity to project military power hinges on the support of its creditors.” When he was running for president, Obama said, “It’s pretty hard to have a tough negotiation when the Chinese are our bankers.”

In practice, China’s leverage has proved more problematic. The U.S. has significant monopsony power in issuance of the world’s liquid assets: The dollar accounts for more than 60 percent of global reserves and U.S. debt is perceived to be a safe haven compared with other options. The U.S. and China are in a dance of mutual dependence over Washington’s heavy debts and Beijing’s massive holdings of them.

Beijing has several times tried to diversify and got caught, either through unwise timing or risky decisions. Over the past few months, the rise in the euro is thought to be due to Beijing’s attempts to diversify its foreign exchange holdings.

China is clearly frustrated. People’s Bank governor Zhou Xiaochuan advocated a new world reserve currency, but ran up against the practical considerations of the dollar’s domination.

Gao Xiqing, the head of the China Investment Corporation, expressed unhappiness with American attitudes: “(The U.S. economy) is built on the support, the gratuitous support, of a lot of countries. So why don’t you come over and, I won’t say kowtow, but at least be nice to the countries that lend you money.”

Dagong International Credit Rating Co.’s announcement last month of its own sovereign credit ratings challenging the old U.S. agencies was politically inspired. Dagong downgraded the U.S. from its cherished AAA rating and awarded it AA, two notches lower. After this chutzpah, Dagong did not award China the top AAA grade, but still thumbed its nose at the old order by rating China AA+, one grade above the U.S.

Guan Jianzhong, Dagong’s chairman, launched a tirade against the U.S. rating agencies for bringing “the entire U.S. financial system to the verge of collapse, causing huge damage to the U.S. and its strategic interests.” But Dagong’s own rating system is neither as scientific nor as accurate as it claims.

Less noticed were recent comments about China’s dirty float of its currency. Zhou Qiren, a member of the monetary policy committee of the People’s Bank, said the decision to allow the renminbi to fluctuate more flexibly against the U.S. dollar should have been taken “much earlier.” Having a fixed rate against the dollar for two years had been a huge burden for China, he claimed. If China’s exports slowed, then the People’s Bank would allow the currency to fall against the U.S. dollar. Zhou’s concern was to maintain China’s exporting juggernaut.

In the two months since China announced a more flexible currency regime, the renminbi has appreciated by just 0.7 percent against the dollar, though leading U.S. economists and increasingly vociferous politicians would like to see a 25 to 40 percent appreciation. According to The Economist’s “Big Mac” index, the currency is undervalued by a whopping 48 percent, since a Big Mac in the US costs $3.73, but in China only $1.95.

What should be of concern is Beijing’s continuing preoccupation with increasing its exports — thereby adding to its immense piles of foreign exchange reserves. As World Trade Organization Director General Pascal Lamy said, “Of course, everyone can increase exports — if imports also grow.”

Beijing should be thinking of spreading the benefits of rapid growth more widely, which means increasing imports and seeing its trade surplus continue to fall. This would help ordinary Chinese gain the benefits of their hard work and help lift the global economy.

Premier Wen’s response to the German criticisms was to tell them to “calm down.” He denied that the welcome mat had been taken away. “There is an allegation that China’s investment environment is worsening. I think that’s untrue.”

In an editorial comment, the Xinhua news agency added that Wen’s reply might have been undiplomatic, but was “the right and no-nonsense answer” to detractors of China.

Should the rest of the world tremble at China’s assertiveness? Maybe not immediately, but there should be concern that Beijing is pursuing a nationalistic policy that may clash with the demands on it as a global power — with responsibilities as well as rights regarding the development of the international economy.

Kevin Rafferty is editor in chief of PlainWords Media, a consortium of journalists tracking the political economy of development issues.