Chinese premier Wen Jiabao?s combative riposte at the conclusion of the National People?s Congress to US demands for revaluing the renminbi is an ominous sign of the widening chasm between the world?s two most dominant powers. While no one expected China and the US to sail along smoothly after the advent of the Obama administration, the bitterness in tone and intent on both sides has crept up so strongly in the past several months that the future beckons nothing but adversarial relations.
On Sunday, Wen refuted US and European complaints that the yuan has been artificially depressed to boost Chinese exports and struck a defiant pitch that external pressure on the issue was unwarranted and ?unhelpful?. The timing of this rebuff by the Chinese Communist Party?s (CCP) bosses is explained by the fact that the US Treasury is under duress from American industry and legislators to list China as a country that manipulates its currency in a semi-annual departmental report due on April 15. Should China be named in this category, the consequence is likely to be the imposition of fresh tariff or non-tariff barriers to Chinese exports by US congressional acts. Beijing has basically fired a preemptive salvo through Wen, daring the Obama administration to succumb to domestic clamour.
One of the central arguments that Wen presented for keeping the yuan ?stable? (it has been confined to a narrow band around 6.83 to a dollar since July 2008) is that this benefits global economic recovery. The implication is that China is leading the world economy out of the woods by logging high economic growth rates of over 8% per annum at the current fixed yuan rate and that this momentum should not be derailed by catcalls from Washington and Brussels.
While it is disputable whether China?s rise to the world?s number one exporting powerhouse (trumping Germany) and its resilient economic growth benefit the entire global economy, there is no question that tinkering with the renminbi has protected the CCP?s domestic political agenda of containing social unrest.
A ?magic? 8% economic growth threshold is officially held to be the CCP?s insurance policy against mass unemployment and anti-systemic rioting. The Chinese state?s elite managers are aware of the brutality and fear underpinning their rule and aggressively pursue this 8% figure for their own survival in power. If an artificially depressed currency is an unavoidable policy instrument to keep the CCP?s head above water, it will be resorted to without hesitation.
The refrain before and after Wen?s recent retorts is that ?reform? of the yuan exchange rate will be dictated solely by China?s domestic compulsions. This refers to both the political needs of the CCP and apprehensions of overheating in the Chinese economy. Should there be a situation in which interest rate and bank lending restrictions do not suffice for preventing bubbles, then and only then will China appreciate the renminbi. Wen?s message is that the Americans and Europeans can kick up as many storms in teacups as they wish, but that the CCP is the master of its own destiny and will act in its own self-interest.
While lesser powers would hesitate to openly warn the US to mind its own business, China believes that it is entitled to do so, thanks to impressive economic and military clout as well as a hand on the American jugular vein by holding close to $900 billion of US Treasury securities. Wen counter-attacked on the renminbi value controversy by raising concerns about the dollar?s weakness, with the corollary threat that China is worried about the safety of its assets in dollar denomination.
The Chinese state-run media has built up a case that doubts about the long-term health of the dollar owe not just to the shambolic state of the American economy, but extend to the deliberate weakening of the dollar by Washington to promote US exports. This version is the exact mirror image of the American grouse against the yuan?s value. Wen?s warning that even a slight ?fluctuation? in the dollar will impact Chinese assets is turning-of-the-tables blackmail from a creditor to a debtor. The CCP is conveying that it holds big aces and can hurt the national credibility of the US if it keeps harping on the yuan?s revaluation. The Chinese are obviously watchful of assessments by credit rating agencies that the US is getting closer to losing its vaunted AAA status. Beijing knows that it can precipitate this fall, should the Americans ratchet up worsening bilateral relations.
The same crafty chutzpah is evident in China?s latest reminder that exit-mode Google has to ?obey government rules? and ?respect Chinese law? even if it quits the country. China?s commerce ministry has informed Google that it ?will have to go through a procedure? before decamping and that it cannot unilaterally drop censorship on its search engines prior to leaving. Beijing insists on absolute control over foreign investment regulations and will give no quarters, even if the party to the dispute is an IT colossus.
China?s decision to come out firing all cylinders on multiple fronts seems to be part of a larger policy shift arrived at by the CCP that it is time to translate the country?s heavier weight into no-nonsense dealings with peers. This is why Wen also counter-punched at the US for ?mysteriously? not inviting him to a last- minute summit-saving meeting on climate change in Copenhagen last December.
Will China cross the line of tough-talking and begin sabre-rattling, muscle-flexing and war-making with other great powers to carve out a larger sphere of influence in the multipolar world order? All concerned actors, including India, must anticipate in advance and adequately prepare for such a regressive scenario.
The author is associate professor of world politics at the OP Jindal Global University