China Dodges Economic Superhero Image

Friday, 18 Dec 2009 10:06 AM

 

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After blasting to recovery from the global financial crisis, China will enter next year wrestling with unwelcome expectations for it to shoulder a bigger role in insulating the world economy against more turmoil.

China is set to overtake Japan as the world's second-biggest economy in 2010, and calls are likely to grow for it to cash in more of its accumulated wealth and influence to address trade imbalances, currency friction and diplomatic disputes.

Yet while some see China as a super-power confidently limbering up for a sprint to the lead, its leaders see it as facing domestic and external risks that demand cautious plodding.

In the traditional Chinese calendar, next year is the year of the tiger. But expect Beijing to keep behaving in economic diplomacy like this year's talismanic animal, the ox: steady, sometimes frustratingly so for some, and resistant to prodding.

"We don't want to be treated as a superpower or global leader, but on specific issues, such as international financial reform, China will choose to be more active next year and beyond," said Chu Shulong, an international relations professor at Tsinghua University in Beijing, who recently led a study of Beijing's global policy options.

"This ambivalence in Chinese foreign policy will continue for a long time."
In trade, especially, China is likely to be increasingly on the defensive next year, with its stable exchange rate policy arousing rancor and, potentially, retaliatory tariffs.

China's trade surplus, which shrank by 30 percent over the past year as global demand shriveled, could ignite diplomatic tensions if it rebounds with faster U.S. and European growth.

"That's going to fuel real trade tensions, if the trade surplus goes up again," said Michael Pettis, a senior associate at Carnegie Endowment for International Peace, based in Beijing.

"I don't see much chance that we'll be able to avoid that."

Trade disputes from steel to shoes have already piled up in just the past three months. The pipeline of U.S. complaints alleging unfair Chinese trade practices points to a bigger docket of cases next year, something Beijing fears.

"Trade protectionism will again rear its head, leading to frequent disputes and friction between China and many trade partners," Liu Youfa, vice-head of the China Institute of International Studies, a think-tank under the Foreign Ministry, wrote this week in Outlook Weekly, a Chinese magazine.

China's worries sit awkwardly with heady pride about its rising stature.

If its recovery stays strong, China "will remain the locomotive of world economic growth," a commentary in the overseas edition of the official People's Daily said on Friday.

But critics contend that China's strength has come at the expense of others.

Its share of the overall global trade surplus has nearly doubled this year, even if its own surplus has shrunk -- giving ammunition to those who say that its export-friendly policies have robbed other countries of jobs.

When U.S. President Barack Obama visited Beijing in November, Chinese Premier Wen Jiabao tried to reassure him that China was not seeking a trade surplus.

Such words will find few takers in Washington while China keeps the yuan more or less frozen in place against the dollar, as it has done since global financial turmoil deepened in mid-2008.

Beijing risks growing friction with Washington, where prominent senators have asked for an investigation into whether the yuan policy is a form of subsidy that would justify tariffs on Chinese imports.

If China moves on the yuan in 2010, however, it will be for domestic reasons, and Beijing's main concern will remain protecting jobs by cushioning its battered exporters.

The ruling Communist Party sees stoking employment and income growth as crucial to maintaining control, and market expectations are of only 1.9 percent appreciation in the next 12 months.

"For that reason, we continue to think authorities will move quite slowly on appreciation," Fitch Ratings analyst James McCormack said. "It's going to be an on-going issue for policymakers here right through the medium term."

Those same cautious instincts, however, mean Chinese policy-makers are unlikely to launch fresh rhetorical assaults on the U.S. dollar and Washington's financial failings that may win public applause but threaten to undermine Beijing's own vast foreign exchange assets.

Earlier this year, China's central bank floated broad ideas to eventually shift from reliance on the dollar as the primary global reserve currency.

Since then, however, policy-makers have gone quiet about those ideas and signaled that the dollar will remain their mainstay for a long time to come.

"China favors international financial system reform, but those reforms revolve around the U.S. dollar and so China wants only gradual changes," said Chu, the Beijing professor.

"We eventually want to reduce the role of the U.S. dollar, but not so fast that we damage our own assets."

© 2014 Thomson/Reuters. All rights reserved.

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