Thursday, November 23, 2006

New Asian Dragon

China is forging a new hegemony in the Asia Pacific. It is flexing its political and economic power that makes APEC look like a backstreet Mah-jong parlour. This is the real story post the Hanoi round of APEC. President Hu is touring India and Pakistan making new economic and poltical alliances with his neighbours. It is promoting Free Trade.

Long ago China developed what it called the Three World Policy, that it stood between the hegemonic super powers of Russia and the United States. That policy was further developed byDeng Xiaoping who went on to introduce the reforms that began the capitalist reconstruction of modern China.

Hu is following the long road of the Three Worlds Policy towards creating an economic dragon that can confront the United States and its regional political/economic ally Japan.

As R. Taggert Murray points out in the this summers New Left Review, excerpt below, the economic and political might of China now outweighs Japan in influence on the American economy, and within the region. It is now flexing its global power to build a new Asian accord, one that excludes the hegemonic power of the United States, one that is in direct competition with its Imperialist aims.

Imperialism is capitalism, writ large on the face of the globe. China's development from state capitalism to a more market orientated capitalist economy is yet another example of this. Its power in Africa is enormous, as the current Sudanese crisis shows, its expansion in the Asia pacific and its control of much of the United States debt makes it not just a super power but an Imperialist one as well. One that in cooperation with its energy rich neighbour Russia, is capable of flexing world power.

The United States faces the end of its hegemony, the short Empire of the 20th Century. Its military strength sapped in Iraq and Afghanistan. Its failure to contain nuclear weaponry and nuclear power, because it refuses multilateral non proliferation that would include itself. So China steps in to counter balance the nuclear ambitions of America.
India, China plan to expand civilian nuclear cooperation

This has left China today to flex her muscles as a global player this week begining at APEC and now as Hu visits India and Pakistan. The new Hegemon is on the block.

Rising China, India key to true Asian century: Hu

Imparting a global dimension to burgeoning India-China relations, Chinese President Hu Jintao Wednesday said the rise of the two emerging powers is "mutually reinforcing" and is central to not only a new Asian century but to a new world order.

Unveiling a robust vision of the India-China strategic relations, Hu described India and China as "true friends and partners," who are "committed to pursuing long-term friendship" and can work together to "create a bright future for their peoples."

"We both agree that we need to send the world an important message. That is, China and India are true friends and partners," Hu, who is in India on a four-day visit, said in his keynote address at the Vigyan Bhavan convention centre that outlined a template of the India-China relations in the context of an evolving world order.

"To enter into strategic partnership with India is not an expedient. Rather, it's a strategic decision and firm goal of the Chinese government," Hu said, while elaborating on the importance Beijing attaches to developing relations with New Delhi.

Stressing the demographic and economic strengths of India and China which together account for two-fifths of the world's population, Hu said: "The course we chart and the pace of our development have major implications for peace and development in Asia and beyond."

What stood out from Hu's speech was his vision of harmonious society and harmonious world in which the fast-track socio-economic development of India and China can contribute to global peace and security.

"Both China and India are on the fast track of economic and social development, demonstrating to the world the bright future of the two countries and the promise of a revitalised Asia," he said.

"Working hand in hand, China and India will make greater progress in development. This will deliver enormous benefit to the 2.4 billion Chinese and Indian peoples and the people of Asia and the world," Hu, who is coming to India after 22 years, said.

"When China and India achieve development, the world will see a true Asian century," the 63-year-old leader of China stressed.

Hu Urges India And China To Promote Multilateralism

Chinese President Hu Jintao on Wednesday urged India and China to promote multi-polarity in the world order and called for an early solution to the two countries' border dispute.

"We (India and China) should promote multi-polarity in the world and democracy in international relations and work to make the international political and economic order fairer and more equitable," Hu, the first Chinese president to visit India in over a decade, said in a keynote address in New Delhi.

India's Vice President Bhairon Singh Shekhawat was present at the Chinese leader's speech, which focused on the importance of efforts by the Asian giants in advancing multilateralism.

Hu also supported improving India-Pakistan relations, saying his country sought no selfish gains in South Asia and was ready to play a "constructive role" for the peace and development in the sub-continent.

"China welcomes and supports improvement of relations between India and Pakistan. China does not seek any selfish gains in South Asia," Hu said, a day ahead of his visit to Islamabad at the end of a four-day Indian tour.

The Chinese leader's comments are considered significant as they come at a time when US-India ties are at an unprecedented high and mistrust lingers on between the one-time Asian foes, despite booming trade and growing dialogue.

China is suspicious about the US-India relationship which it perceives as a counter-balance to its increasing influence in Asia.

Warming Sino-Indian relationship tells the US that India is not an unconditional ally

Underscoring this change is a new robustness in economic ties. As recently as 2001, two-way trade between India and China was a paltry $3.6 billion, but it nearly doubled in 2004, rising 79 percent from the previous year to $13.6 billion dollars. By 2005 the figure reached $18.7 billion, and is expected to top $20 billion in 2006. The India-China Joint Study Group of Comprehensive Trade and Economic Cooperation predicts enormous growth potential because each country’s respective share of the other’s imports is still so small—both under 5%. And both countries anticipate growth in services trade, the sector in which their bilateral trade has grown faster than the sector has in each country. While some Indian commentators raise concerns about Chinese economic influence--underscored by the recent disqualification of Chinese firms from a mobile tender—this remains a mere blip overridden by economic pragmatism. Today’s talks, for example, between Hu Jintao and Indian Prime Minister Manmohan Singh produced a commitment to double trade from current levels to $40 billion by 2010.

In the past year, India and China have forged a new alliance in the energy sector—one in which both India and China require security for exponentially growing domestic demands. Onetime rivals for control of fields in Angola, Nigeria, Kazakhstan, and Ecuador, India and China agreed in January 2006 to cooperate on overseas acquisitions. The agreement grew out of their co-ownership of a Sudanese field and their cooperative bid for fields in Syria. These joint pursuits are knitting together the interests of Asian state-owned oil and gas behemoths ONGC in India, and CNPC and CNOOC in China. With the rapid growth of these economic ties in areas critical to both countries’ development, the India-China relationship has set off on a completely new path. It is this new course that the US, concerned about a worldwide scramble for energy resources, would be watching carefully.

China-India deal

If Pakistanis needed a reminder that there are no permanent friendships in global politics, the agreement on Tuesday on a 10-point strategy to promote bilateral ties, including the exchange of nuclear technology, between traditional rivals China and India was surely one. It should also serve as a reminder to Islamabad (and should one say to Rawalpindi as well) that in today's world nothing commands more respect internationally than sound economic standing and robust economic growth. The agreement, reached on Chinese President Hu Jintao's current state visit to India, is wide-ranging and apart from nuclear cooperation envisages a significant increase in bilateral trade and a resolve to settle outstanding territorial disputes.

Of course, all this will be some cause for concern for Pakistan, given that it follows a nuclear deal between America and India. The best approach for Islamabad would be to try and resolve all the bilateral disputes that it has with its neighbours, which perhaps explains President Musharraf's eagerness to get on with the peace dialogue with India and his desire to have a "substantive meeting" with Dr Singh. At the same time, Pakistan should seek to augment its financial status and standing in the world and this can only be brought about by a mix of effective social and macroeconomic policies that help achieve GDP growth that is long-term and sustained. That is precisely why both India and China find themselves at positions on the world stage where what they do and what they say is taken seriously by major powers and why other countries want to invest in them and do business with them.

This needs to be taken account of in policymaking and decision-making circles in Pakistan, especially among those who see a policy of permanent conflict or fighting between our neighbours as a fact of life and then use this worst-case scenario to implement spending plans that leave little for the country's social and economic development. The point is that only through economic strength does a nation -- in today's world at least -- become militarily powerful as well.

R. Taggart Murphy: East Asia's Dollars

China’s dollars

How does China’s dogged persistence in holding so much of its national wealth in dollars fit this picture? China needs to create some ten million new jobs a year to forestall politically dangerous unemployment; Chinese leaders are acutely aware that large numbers of idle young men form a most reliable recipe for political disorder. The strategy for creating those jobs involves the steady transfer of production capacity from other countries—principally, the us—to China. The products of China’s factories are mostly sold abroad, again with the us taking by far the biggest share. Virtually everybody—not just the Americans—pays for Chinese exports with dollars; many of which China retains as foreign exchange reserves, largely in the form of us government debt securities; that is, in direct financing of the us government deficit.

For anyone with an eye for numbers, the evidence of this strategy blazes out of China’s balance of payments statistics like flashing lights on a police car. Most countries that run surpluses on current account (trade plus transfers and dividend and interest payments), like Japan, see the money recycled through lending abroad, foreign acquisitions and the like. As its spate of high-profile acquisitions around the world demonstrates, China is certainly recycling some of what it earns from trade to buy mines, companies and oil wells abroad. But more investment flows are coming into China than are leaving it; this is what finances the factories that dot the Chinese landscape and the skyscrapers sprouting everywhere in its cities. Meanwhile, China’s current-account surplus translates into a vast build-up of dollar holdings. Whatever else China’s leaders may think about the United States, they can have no illusions that the dollars they have accumulated can ever be redeemed for anything close to their current nominal values. Suggestions have been made that China redeploy its holdings from us government securities to other instruments that offer higher return—equities, for example, or even non-dollar instruments—and use the resulting income streams to restructure unprofitable, state-run companies. Politically, these companies cannot be closed since they continue to support the livelihood of much of China’s population. At the same time, they form a kind of black hole for Chinese finance, threatening to suck the domestic financial system into a debt-driven implosion unless they can somehow be made at least minimally profitable. [12]

The problem with the suggestion that China finance a restructuring of its state enterprises by selling its dollar hoard is that China has become too big a player. Any attempt to shift large parts of its reserves out of the market for us government debt risks precipitating a us bond-market crash that would carry other markets with it and thereby defeat the purpose. What happened when South Korea’s central bank floated the notion of diversifying its portfolio out of us government securities in February 2005 is a case in point: both the dollar and the us bond market nose-dived, prompting flurries of denials from the Koreans. Korea’s $69 billion holdings of us government securities are less than a tenth of China’s. That leaves China with its present strategy: keep the engines of growth humming with exports on the one hand and a constant flow of foreign investment on the other. If rapid growth goes on long enough, China presumably hopes that the percentage of the country’s total assets tied up in the state-run enterprises will be small enough to be manageable in any slowdown.

China also hopes that, if and when the dollar-centred global financial regime unravels, it will have an economy sufficiently developed to permit the yuan to takes its place among the world’s major currencies without the need for external backing that the country’s dollar reserves currently provide. That will allow it to deal with the collapse in American purchasing power when the us is finally forced to live within its means.
A final reckoning?

Forecasting that collapse is, however, devilishly hard; and there can be no assurance that markets will wait politely until the Chinese financial system is sufficiently robust to cope with the fallout. For markets are jittery everywhere; their fears almost endless. Renewed inflation in the United States, an unseasoned Federal Reserve chairman who has yet to confront his first real crisis, a politically crippled Bush administration, the implosion of the us housing bubble; all on top of spiking commodity prices, the ever-present threat of calamitous disruption to the flow of petroleum by events in the Middle East, the galloping us trade and government deficits, and indeed worries over the Chinese financial system—any one of these, or yet something else, could trigger a panicked flight from the dollar that would overwhelm the ability and willingness of the East Asian central banks to contain the flood.

There is talk in financial circles in Tokyo that the Ministry of Finance has concluded that global imbalances have become too great; that the limits of Japan’s dollar support capability have finally been reached. A real chance exists that Japan will stop throwing good money after bad in the next dollar crisis and sit on its hands. Of course the price would be heavy—once the dollar goes into freefall and the yen breaks past its historical high water mark of ¥79/$1, Japan will be facing the write-off of much of its accumulated dollar hoard and the potential loss of hundreds of thousands of manufacturing jobs. But Japan has learned a great deal during the past fifteen years about coping with and spreading out the pain of job loss; Mikuni Akio has suggested that, finally freed of the deflationary burden of supporting vast pools of idle dollars (idle as far as Japan is concerned), the Japanese economy could find new strength in an era of a super yen. [13] Among other things, the new purchasing power of Japanese households could not only help compensate those facing job loss but could finally provide the elusive shift to an economy driven by vibrant domestic demand rather than exports—the stated goal of Japan’s policy makers for a generation. A case can be made that Japan is in better shape now to deal with the economic fallout of a dollar crisis than it has been at any time in the past twenty years.

The political fallout is another question entirely. The collapse of the dollar will take with it American hegemony; the United States will be hard-pressed to sustain its global military reach in a world where it must earn euros or yen to pay its foreign creditors rather than fob them off with more us government paper. No matter what form it takes, the end of American hegemony will bring the return of the central Japanese political question—the right to rule—with a vengeance; particularly so because it may well be accompanied by serious upheaval in Japan’s most important neighbour. There is no obvious present substitute for the American market in providing the engine of demand to sustain the kind of growth China needs in order to manoeuvre its way past the ever-looming threat of a domestic financial crisis, unless it were to be Japan itself.

Japan’s sole experiment over the past 150 years of going it alone was a disaster. Of course much has changed since then. Scattered flares today shooting up from the right of Japan’s political landscape—the new emphasis on ‘patriotism’ in schools; the growing acceptability of revisionist talk about the war years; the palpable thirst in conservative circles for an assertive foreign policy backed by a strong military—do not begin to add up to the hysteria and intimidation of the 1930s. But, alas, no real sign exists that Tokyo has built the kind of institutional infrastructure capable of charting a wise new course for the country should Japan slip out of the American embrace. That indeed may be the ultimate reason why, in a dollar crisis, Japan will revert to form and step in one more time to salvage a dollar-based international financial order: fear of an inability to cope with what lies beyond. But if Japan chooses to sit on the sidelines, or if its intervention is insufficient to prevent the end of what we have labelled Bretton Woods ii—a real possibility given that today’s imbalances are far greater in both absolute and relative terms than those of the late 70s or late 80s, when Japanese intervention was decisive—Tokyo is likely to find itself having to deal with any manner of unanticipated new realities. These could range from a withdrawal of the us from East Asia, to peremptory demands from Washington that it assume most of the financial burden of a continued American military presence in the region, to political and economic upheavals in China, Taiwan and the Korean peninsula.

Prime Minister Koizumi’s insistence on worshipping at Yasukuni Shrine is a profoundly demoralizing spectacle for anyone hoping that Japan has the political maturity to cope with the turbulence in East Asia that would follow a dollar collapse. It is not so much the act itself—irresponsible and offensive as it is—as what it says about the structural problem with Japan’s politics that has plagued the country since Meiji. Much of the commentary on Yasukuni focuses on its enshrinement of convicted war criminals among the tens of thousands of Japan’s war dead. But what really makes Japan’s neighbours gag is Yasukuni’s visible presence as an unreconstructed remnant of the 1930s apparatus of State Shinto and Emperor-worship. With its museum glorifying Japan’s war on the rest of Asia, Yasukuni is a constant reminder of the potential for another wildly destructive spree in a political culture that still has no institutional mechanism to impose accountability.

Koizumi himself is a case in point. The office of the prime minister is exceptionally weak in Japan; a prime minister must not only be supported but guided by one or another element of the bureaucracy to accomplish almost anything. But the very position itself and its de jure powers allow for wilfulness, particularly when the usual restraints collapse. In this case, the restraint should have come from a Foreign Ministry that in the past had been able to intervene with some of Koizumi’s equally nationalist predecessors. But a demoralized Ministry still reeling from events early in Koizumi’s term has been unable to prevent him from wreaking havoc on Japan’s relations with its nearest neighbours. They cannot halt his stubborn insistence on demonstrating that he is above any outside influence by paying obeisance to the institutional embodiment of the darkest chapter of Japan’s past. Many other elements in Japan’s elite circles, particularly within the business community, are appalled by Koizumi’s intransigence, but they have no way to reach him. And it will be politically difficult for his successor to stop the visits; too many Japanese now would regard this as backing down to foreign pressure. Koizumi has created a problem where none existed: an inevitable loss of face for someone, somewhere, no matter how things turn out—dangerous in a region where such things are taken with great seriousness.

China and Korea see an open provocation. The Yasukuni visits reinforce their suspicion that Japan is, in the last analysis, unpredictable and dangerous. It is of course possible that the collapse of us power in East Asia that would accompany an implosion of dollar markets would focus the minds of power holders in both Tokyo and Beijing, not to mention Seoul, Pyongyang and Taipei, and lead to a reasonable accommodation of competing national interests in creating a durable political, economic and financial order in the region to replace the current export-led dependence on the us market. Alas, neither history nor contemporary realities offer much reassurance.



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