China’s president, Hu Jintao, is about to make a state visit to Washington, D.C., hard on the heels of a statement by Liang Guanglie, his defense minister, that “in the next five years our military will push forward preparations for military conflicts in every strategic direction.” Not quite Nikita Khrushchev’s “We will bury you,” but close enough to give President Barack Obama good reason to reset our overall policy toward the Chinese regime.
Hu knows better: Trade, overseas investment and currency manipulation are all war by other means, are all about the place of nations in the world, and a key part of the “strategic direction” in which he is taking his country.
The U.S., meanwhile, continues its historic policies. Free trade. Reliance on the World Trade Organization to settle disputes. Occasional public complaints about China’s persistent undervaluation of its currency, but refusal to declare the regime a currency manipulator. And conferences, conferences, conferences. All very 20th century.
China is doing something different. The Communist regime sees trade policy as merely one strategic weapon in a war aimed at overtaking the U.S. as the world’s pre-eminent economic and military power. Undervaluation of the renminbi is necessary to keep China’s export machine running at full tilt to create jobs for the millions who are moving from the country to the nation’s cities.
Lacking democratic legitimacy, the regime claims the loyalty, or at least the submission, of its people principally through its ability to provide jobs and a rising standard of living — especially important now since at the end of this year Hu, the paramount leader and general secretary of the Communist Party, retires in favor of Xi Jinping. The last thing Hu wants is a transition marred by social unrest.
The Chinese know that at some point they will have to allow the renminbi to appreciate by more than the token amount of recent months if inflation is to be avoided and its people allowed some of the benefits of the greater purchasing power of a more valuable currency. But by then they will have accomplished two longstanding objectives. First, their vaults will be stuffed with an even larger hoard of American IOUs, enough to give them an important influence over U.S. foreign policy.
“How do you deal toughly with your banker?” Secretary of State Hillary Clinton asked then-Australian Prime Minister Kevin Rudd last year. Clinton, of course, was expressing the widely held fear in policy circles that China might decide to dump U.S. Treasury bills and dollars on the market, driving their value down and interest rates up. That would bring our economic recovery to a screeching halt — or worse. Yes, the value of China’s dollar-denominated assets would decline, but if a broader geopolitical objective were served, that would merely be a cost to include in the military budget.
Second, by the time they are forced to allow the renminbi to appreciate significantly, the Chinese will have copied enough American and Western technology to be less in need of an undervalued currency — they will have made-in-China products, subsidized if necessary, that can dominate world markets even if their currency more closely approximates its market value.
China’s leaders know the exports that have been filling Walmart shelves are becoming cheaper to make in other countries. So the idea is to replace them with more technologically sophisticated products. Every deal to allow a foreign company to tap China’s vast market comes with a requirement that it turn over technology. The initial orders satisfy American executives, their eyes focused on the next quarterly or analyst’s report. The Chinese, their eyes focused on 2020 and beyond, know they can continue duplicating the factories and techniques and dispense with the American capitalists.
Irwin M. Stelzer is a contributing editor to The Weekly Standard and director of economic policy studies at the Hudson Institute.