TCS Daily

Hu Jintao's Grande Latte

By Rowan Callick - April 12, 2006 12:00 AM

You can tell something's up. The DVD stores within walking distance of the US embassy in Beijing have recently been forced to replace the latest Hollywood products, available for $US 1 or so each, with back catalogue material from Russian or Swedish directors.

Beijing is preparing meticulously for President Hu Jintao's arrival in Seattle, at the start of his first, crucial visit to the US as China's top leader. And it is keen to leave as little room as possible for being lectured during the visit on protecting intellectual property rights, on the trade imbalance, or on the value of the currency.

The overall setting is one of rising Chinese international leverage, and diminishing influence in Asia of a distracted America. But the biggest focus will be on the economic relationship between the two, as protectionist shadows lengthen in Washington. Commerce Secretary Carlos Gutierrez said in Beijing recently that a sustained rise in US protectionism could have a "devastating" effect on the Chinese economy.

From the perspective of US trade unionists and their political representatives, China is stealing American jobs by holding down the value of its currency, the yuan, and by a host of government measures to protect its own industries, many of which remain state owned.

From China's point of view, it is supplying low cost goods that American consumers love to buy -- with Wal-Mart China's sixth biggest export market, if it were a country -- while also saving some 40 per cent of its own gross domestic product, lending it back to those same American consumers. It has recently overtaken Japan to become the holder of the world's biggest foreign reserves, $US 854 billion, most of which are held in the US.

China's government also likes to point out that 58 percent of its exports are made by foreign firms, including virtually every leading American corporation, and that the margins that stay in China are becoming wafer thin. In comparison, Chinese companies are having a challenging time gaining access to the US, they increasingly complain, citing especially the way the China National Offshore Oil Corporation bid for Unocal was effectively shut out.

And where is globalization taking its biggest toll? It would be hard to go past the 100 million workers in Chinese state-owned enterprises who have been shaken out of their jobs and are scrambling to find ways to survive in a tough state whose minimal welfare services are mostly user-pays.

China, which modestly revalued last July by 2.1 per cent, could appreciate its currency by 25 percent or more, but it would only make a marginal difference to its global competitiveness -- which depends far more on other areas of advantage that stem, of course, from labor costs.

China's urbane Commerce Minister Bo Xilai said on Tuesday (April 11) that the pattern of industrial production has changed in Asia. Today, most countries send components to China for assembly and export. He said that as a result, "the US trade deficit with Japan and South Korea has transferred to China to a large extent." The overall American deficit with Asia hasn't changed massively, but it has shifted within Asia to China, which accounted in 2005 for 26 per cent of the USA's trade deficit. China has a growing trade deficit with most of its Asian neighbours who consign parts there - well over $US 20 billion in all.

The targets in Beijing's sights from the Hu visit include:

  • Ensuring American firms keep investing in China, and American consumers keep buying Chinese goods, while also trying to inch the door open on Chinese corporate investments in the US;

  • Gaining further public backing from President George Bush over Taiwan, whose President, Chen Shui-bian, Beijing has cast as a dangerous maverick;

  • Encouraging a degree of separation between Washington and Tokyo, by stressing the unacceptability throughout Asia of Prime Minister Junichiro Koizumi's visits to the Yasukuni shrine where war criminals are honored, and by pointing to Beijing's own determination to revitalize its Japan relations once Koizumi retires in September;

  • Convincing Americans that China is becoming a responsible and heavyweight international partner in handling issues ranging from North Korea to Iran, and is especially sound on the war on terror;

  • Stressing the dangers to the whole economy, including its demand for American goods and services, of too rapidly freeing up the currency in advance of completion of banking reform, with World Trade Organization (WTO) accession requiring the opening of new doors to global banks next January 1;

  • Downplaying China's defense ambitions despite its 14.7 per cent budget rise this year;

  • Setting the scene for a Beijing Olympics in two years that will confirm China's place as the dominant power in Asia, while letting Washington know that it remains a welcome presence in the region; and

  • Sending the signal back to the Chinese audience via strategically managed set-pieces, that President Hu is now perceived as a global player on a par with the US President, and that China's prestige is at an all-time high.

China has been working hard to provide a setting where at least some of its goals stand a chance.

Starting the visit in Seattle provides an opportunity to Buy American in the biggest way by contracting for some Boeing aircraft, while Bill Gates, an admirer of China, will play host at Microsoft to President Hu, who will provide some comforting bromides on intellectual property.

China has been trying to mold, in advance, the mood of the visit by going on a buying spree. Vice Premier Wu Yi, the most senior woman in the Chinese administration, has been leading a delegation of 200 businesspeople to the west coast, to Tennessee and to Washington, to sign up contracts expected to total $US 15 billion for American goods and services.

A separate trade delegation of 30 has also been in the US, signing up agreements to buy soy bean and poultry.

And the revival of the Japanese economy takes a little of the pressure off China as the major source of international growth.

Much has changed since the last top Chinese leader, Jiang Zemin, went to Washington. Few informed commentators doubt China's capacity to maintain its economic growth for the long haul. And few expect China's government structure to change significantly, even in the midterm.

Hong Kong-based analyst Willy Lam, a senior fellow at the Jamestown Foundation, says: "What is quite certain is that the life-long Chinese Communist Party apparatchik (Hu Jintao) will only implement those changes that will not exacerbate the already alarming state of social instability in China.

"Nor will he entertain liberalization measures that will cut into the longevity of the party's much-touted status as 'perennial ruling party.'"

Rowan Callick is the Beijing based China correspondent of The Australian newspaper.


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