Stanford Politics

Chinese President Xi Jinping’s state visit to the United States comes at a time of concern about numerous important issues that include cyber-espionage, conflicts in the South China Sea and worries over China’s flagging growth rate. Despite recent protests in Seattle against the Chinese leader, it still remains of utmost importance for the US-China relationship to flourish and feature “mutual respect and win-win cooperation.” It is in the global (including American) interest for China to succeed as a nation, at least for the reason that China is no longer a self-contained economy; what happens to China will undoubtedly have ramifications for the rest of the world.

The World’s Growth Engine

China is currently the world’s growth engine — and everyone knows it. It’s clearly reflected in the financial markets; the Chinese stock market crash earlier this year resulted in the collapse of commodity prices, and sent the stock indices of many markets tumbling. Unfortunately for other countries, this is a harbinger of things to come: as China transitions from investment and export-led growth to a model dependent on consumption and innovation, Chinese demand for imported raw materials like iron ore and manufacturing technology is slowing. The slowdown in China’s demand for certain imported materials hampers export industries in countries like Brazil and Australia, which in turn may cascade, indirectly resulting in the slowdown of advanced economies. Should China’s economy falter, the economic repercussions for the US and other world economies would be frightening.

Such a slowdown in the world economy, although somewhat expected, would also have serious political implications, as unemployment increases and social tensions rise. Even more worrisome for the state of international relations, domestic economic issues are often catalysts for foreign conflict. In the case of US-China relations, political tensions have further increased following recent events, such as last month’s devaluation of the RMB. Politicians and economists in the US have been quick to denounce the move, accusing China of purposely undervaluing its currency to boost its exports (in turn harming the competitiveness of US exports), despite the International Monetary Fund’s statement earlier this year that China’s currency “is no longer undervalued.” Furthermore, conflicting perspectives on cybersecurity and maritime territorial disputes in the South China Sea have strained Sino-American relations, making China-bashing new hobby for American politicians ahead of the 2016 elections. Republican candidate Donald Trump even ventured to say that the United States shouldn’t give President Xi a state dinner during his visit to Washington, declaring that if it were up to Trump, Xi would get “a McDonald’s hamburger” instead. While the hawkish, even boorish rhetoric of American politicians is alarming, it reflects the real political tension between China and the US.

An Economic Power Play

Another source of political tension between the two great powers would be the recent emergence of the Chinese-led Asian Infrastructure Investment Bank (AIIB). When the United Kingdom announced earlier this year that it would join the AIIB, the US condemned the UK’s “constant accommodation” of China. Other countries, including Australia, Germany and Russia, have also since joined the AIIB, which makes for a grand total of 57 Prospective Founding Members. Just a decade ago, the thought of a Chinese-led multilateral bank emerging to challenge the existing Bretton Woods institutions would have been inconceivable; now, it seems inevitable.

To understand the inevitability of the AIIB, we have to realize that low-wage countries in Asia and Central Africa are in need of capital investment. According to the Asian Development Bank, there is a need for $8 trillion worth of infrastructure investment in poor Asian countries alone. At this point in time, the Western world has neither the financial resources nor the intention to invest heavily in less-developed economies; China, on the other hand, has massive excess capacity in its construction and materials industry. It is only natural that China should take the lead in providing the flow of capital to relatively capital-poor countries, and the emergence of a multilateral bank with widespread international participation would help assure lending standards. The economic benefits of an institution like the AIIB are evident: Chinese-led investments into less-developed countries will help generate demand in the global economy, benefitting everyone in the long term.

Perhaps even more significant are the geopolitical reasons behind the creation of the AIIB. As seen from the Obama administration’s rebalance to Asia, a geopolitical contest is brewing in the area. Through the AIIB, China has shown that it is willing and able to cooperate with other countries to set up financial institutions that challenge US monetary dominance, ultimately lessening US hegemony. Americans are aware of these geopolitical implications; despite the relatively small size of the AIIB in comparison to similar institutions like the IMF or World Bank, its emergence and international embrace elicited agitated responses from the US. According to former Treasury Secretary Larry Summers, the birth of the AIIB could “be remembered as the moment the US lost its role as the underwriter of the global economic system.”

This is likely an exaggeration, but one thing is for sure — with the rise of developing nations like China and India, we are gradually moving from a unipolar world to a multipolar world. In the face of geopolitical uncertainty, relations between emerging economies and the established advanced economies are increasingly tense and uncertain. As the incumbent world superpower, it is only natural that the US should be wary of the expansion of Chinese influence.

The aversion to Chinese power is more than just mere sentiment; the belief in the value of antagonism in the form of checking Chinese expansion and anti-free market practices is widely held, especially in the West. But, Americans should be wary of the knee-jerk reaction to oppose China; it is far more beneficial to work with the Middle Kingdom than oppose it. Checking Chinese expansion would, perhaps counter-intuitively, be better accomplished without a show of antagonism. It would be more rewarding for the US to join the AIIB and be involved in regional efforts, instead of outrightly denouncing it and refusing to participate at all. This way, the US can cooperate with China and avoid the potential repercussions of a hostile Middle Kingdom, without relinquishing too much of their influence in Asia.

Going Forward

On the 70th anniversary of the end of World War II earlier this month, Russian President Vladimir Putin attended the military parade in Beijing, walking side by side with President Xi. This sends the subtle but serious message to the US that China and Russia are prepared to work together, should the West go too far in obstructing their progress. Worse, the Russian economy is in the doldrums — and with the economic sanctions that Western countries have imposed on Russia, it may not take much to push Putin over the edge. Although a Russian-Chinese military alliance would be fraught with mutual distrust, such an alliance would open up the terrifying possibility of a global military conflict, so it becomes apparent that it is in Western interests to collaborate with China. According to billionaire investor George Soros, “should the external conflict escalate into military confrontation with an ally of the US such as Japan, it is not an exaggeration to say that we would be on the threshold of a third world war.”

China has shown that it will not be bullied; the devaluation of the Chinese currency came only a week after the IMF said they would postpone the decision to add the RMB to its Special Drawing Rights (SDR) reserve currency basket and harmed other export industries. This was China’s way of indicating that the West has much to lose in excluding China from the international financial system. China is intent on getting the RMB included in the SDR basket, not only to gain influence in the world, but also to use financial liberalization as a means to greater economic growth. It is only to be expected that the US government, which holds veto rights in the IMF, is unwilling to allow the RMB to become a rival to the dollar as a global reserve currency.

US resistance against Chinese inclusion has only increased with last month’s RMB devaluation, with some calling it an anti-free market practice that harms American companies and steals middle-class jobs. On the contrary, China maintains that the devaluation is actually a free-market reform measure to rectify “relatively large deviation” between the RMB’s spot rate in the market and the Chinese central bank’s daily midpoint fixing. Whichever is the case, it still remains that there is a fundamental ideological difference between the US and China’s attitude towards free-markets and what constitutes the ideal economic system. While China hopes to move towards freer markets, it still believes in maintaining tight state control in certain domains. The US, on the other hand, is a much more capitalist economy. These fundamental differences in ideology likely won’t be resolved in the near future, and US antagonism towards China will definitely not help mitigate the problem. Following this argument, it would be unwise for the US to continue resisting the addition of the RMB to the SDR basket; anti-China antagonism will only drive the Middle Kingdom to carry out more drastic actions (like the devaluation of the RMB) in retaliation.

Contrary to the general perception that the US is always at cross purposes with China, the conflict between Sino-American interests is not necessarily zero-sum. As former US Treasury secretary Henry Paulson (who is chairing a CEO roundtable during President Xi’s visit) argues, Americans should root for China to succeed because it is in the self-interest of the US to do so. It would be unwise to exclude China from the international system, because China is no longer an insular economy cut off from the rest of the world. The performance of the Chinese economy clearly affects global growth prospects, from South America to Southeast Asia.

Going forward, it would be in everyone’s interests for the RMB to be included in the SDR basket, and for the US to work with China. It’s not going to be easy, but if the US intends to cooperate with China without relinquishing too much of their influence in East Asia, it may well be a good idea for them to join institutions like the AIIB, rather than censure them. The US government’s attitude towards President Xi’s visit will very much set the tone of Sino-American relations for the next few decades. Let us hope for the best, as the political developments of this next month may just determine the future course of world history.

---

Ruru Hoong, a freshman studying economics, is a staff writer at Stanford Political Journal.