Category Archives: China-U.S.

China Cuts Its Holdings Of U.S. Treasuries–Or Not So Much

China cut its net holdings of U.S. Treasuries by 12% in the second half of last year, more than twice as much as previously reported, according to the preliminary annual revision of the U.S.’s monthly Treasury International Capital (TIC) report. And it probably doesn’t mean anything much beyond what we already know.

The new TIC report on major foreign holders of U.S. Treasury securities shows that China’s holdings fell from $1.31 trillion last July to $1.15 trillion in December, with a sharp net sell-off coming in that last month. The TIC monthly numbers had shown a fall from$1.17 trillion to $1.1 trillion over the same period. The annual revisions are considered more accurate than the monthly numbers. They take into account the true origin of buying done through third countries. A new series of monthly numbers introduced in January this year will narrow the accuracy gap, though not close it. (U.S. Treasury note on all this here.)

China buys a lot of U.S. Treasuries through London, and, to a lesser extent other popular custodial centers such as Luxembourg, Belgium, Switzerland and the Caribbean. Once this is taken into consideration, the preliminary June baseline number for its holdings increased to $1.31 trillion from $1.17 trillion. Hence the doubling of the percentage net sell-off in the second half of last year.

A year-on-year comparison paints a different picture: China’s holdings at $1.15 in December 2011 were down less than 1% from $1.16 trillion a year earlier, and might have been higher had there not been a heavy sell off in December last year from November’s holdings of $1.25 trillion. China typically reduces its Treasuries holdings towards the end of a year.

The numbers for the second half of last year were always likely to be closely watched. The political kerfuffle in Washington over the debt ceiling during the autumn put the U.S.’s AAA-credit rating at risk. Also, overseas investors generally were buying higher-yielding U.S. mortgage securities ahead of what was expected to be a further round of quantitative easing by the U.S. Federal Reserve.

There are other factors consistent with a long-term fall in China’s Treasuries holdings, among them a shrinking trade surplus and the gradual rise in the yuan against the dollar. This time round, Beijing has also likely been buying euro-denominated sovereign debt, both to diversify it holdings further (which it has been doing for some time) at fire-sale prices, and to provide some political backstopping for Europe during the euro-debt crisis. The State Administration of Foreign Exchange (SAFE), which manages the country’s foreign exchange reserves, is also pursuing equity investment and a little buying of gold and more of other commodities. When you are sitting on $3.2 trillion in reserves, you have to chase a little yield. The Wall Street Journal calculates that the share of China’s reserves in U.S. securities has fallen to a decade-low 54%.

While SAFE  hasn’t been putting all the extra foreign-exchange reserves that China has been taking in into U.S. dollar denominated assets for a while, more recently, the U.S. Federal Reserve has been buying long-term Treasury bonds as part of its easing program, Operation Twist, as the putative QE3 became. Americans who bleated about their country being in hock to the Chinese, can now bleat about being in hock to their own Federal Reserve–for some an even greater evil. For the rest, China still owns more than $1 trillion of American sovereign debt to get het up about. Nor does China have too many other places to put it.

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Lights. Camera. But How Much More Action For Hollywood In China?

There may be less than meets the eye, and certainly less than the hype, to the trade concessions the U.S. has won for Hollywood from Beijing. The deal raises to 34 from 20 the number of non-Chinese films than can be distributed in China each year, by the device of adding 14 3-D or IMAX films to the base quota. As China has only 2,500 3-D movie screens and 48 IMAX theaters the significant concession is that those 14 will also be allowed in in their 2-D formats, which will be able to be seen on China’s 10,500 conventional cinema screens. The U.S. has 40,000 screens. The U.S. also releases 8,000-9,000 new films a year.

Most of the 20 foreign films a year that have been allowed into China for the past 20 years are American. The three top grossing foreign films in China last year were Transformers 3, Kung Fu Panda 2 and Pirates of the Caribbean: On Stranger Tides. They took $170 million, $98 million and $76 million at the box office respectively. Even more pleasing for Hollywood, under the new deal, its cut on box-office takings will rise to 25% from 13%. Hollywood typically expects a 30% fee on foreign distribution, but with 13% and all the other restrictions having been the rule for China for two decades, this feels like the “very big deal” it is being proclaimed to be in Hollywood, at least for the blessed 34 films.

The American movie industry has long complained about its treatment in the world’s fastest growing movie market. The WTO ruled in 2009 that China’s limits on movie distribution fees was a violation of international trade rules. Beijing has not rushed to come into compliance, and promoting China’s own cultural heritage has become a national priority. Yet even as China tightened restrictions on foreign TV imports, Xi Jinping’s visit to the U.S. allowed the logjam in negotiations over movies to be broken. It was something that China would have have to have done at some point anyway, and is far less expensive than settling the outstanding issues with the U.S. over intellectual property. It would be a brave man, though, to this Bystander’s mind, who would bet that the showing of 14 more Hollywood movies in China each year will dampen the demand for pirated DVDs, a main prop of Hollywood’s argument for increasing the distribution fees.

China is expected to double the number of movie screens it has to 16,000 by 2015. The ones it had took in $2.1 billion at the box office last year. The key question is how much of that will the U.S. movie industry actually get its hands on. Hollywood distributors may soon understand why the old saw, there’s many a slip twixt cup and lip, applies so readily to doing business as a foreign firm in China. We’ve heard of one distributor who gets the house photographed each screening to settle arguments of how many tickets have actually been bought. The right for foreign film distributors to audit box-office sales might turn out to be the most important provisions of the new agreement.

The position is even worse for foreign co-producers operating in China. Some 40 independently produced foreign movies are distributed in China each year outside of the quota system. These independent films don’t get a cut of the box office, but a licence fee based on the film’s budget. It is about a third of the standard international fee. Under the new rules, filmmakers and distributors will be able to negotiate license fees closer to international norms. But the fee is just the beginning of what seems regularly to turn into a nightmare. The China Law Blog has had a series of excellent posts on this subject last year that don’t make pretty reading if you are a would-be film producer.

Why is it so hard for foreign co-producers to get paid? There are three main reasons:

1. There are no trusted intermediaries for film in China. Collection agents, escrow account holders, trustees and the like simply do not exist here in China. The foundations of international film finance are not in place. In itself, that makes you wonder how completion guarantors can underwrite Sino-foreign co-productions.

2. You need to rely on your Chinese co-producer to collect the box office and pay your share to you outside of China. Good luck with that.

3. Even if you are lucky and your Chinese co-producer has some vague intention of paying you, they cannot pay you unless they can show the Chinese tax authorities that income tax has been paid on the gross receipts and that the withholding tax on their payment to you will be deducted. Even then, they will still need State Administration of Foreign Exchange (SAFE) approval before being able to send money overseas. The vast majority of Chinese businesses will not want to do business this way.

We hope that DreamWorks Animation, which has just signed a $300 million joint venture to make movies in China, is a reader.

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Mr Xi Visits America Again

Xi Jinping, the Chinese vice-president the rest of the world is taking to be China’s next president, visits the U.S. this week. It is a land he knows better than apparently the U.S. knows him. Xi is seen above (center, with plastic cup) at a picnic in Muscatine, Iowa 27  years ago with a visiting Hebei provincial agricultural delegation. He will be returning there with great PR fanfare during his latest trip. This Bystander thought it timely to republish a piece we first published last July  looking at Xi and China’s most important leadership transition in the three decades since Deng Xioaping set the party and country on the road of economic reform.

China’s next top leaders will, for the first time, be men born after the Party seized power in 1949. With their ascendancy, modern China will cross a political and demographic Rubicon. Their generation is the great, great grandchild of Mao’s first generation of leaders. Their youth occurred during the Cultural Revolution, when many of their families were purged, but they embraced the Party nevertheless, and many advanced through its ranks by being “redder than red”. They are more worldly than their predecessors, mostly educated at top Chinese universities, more likely than their predecessors to have social science rather than engineering degrees, and be more likely to send their own children to top U.S. and European universities. Their working political life has only known China transforming itself as a rising political and economic power, yet they are as pragmatically committed as their predecessors to the Party’s monopoly on power, if divided over whether the basis for that should be ideological or economic.

The distinction matters. China is at a critical stage of its economic development. It has, self-evidently, developed at great pace through the initial phases of industrialization and urbanization over the past 30 years. Now it must kick on and leap the great wall that has stopped other developing nations completing the transformation to a developed economy.

When per capita income reaches $10,000-12,000 a year (in 2007 dollars), developing economies tend to stop developing without institutional change. China’s annual per capital income is $4,000. At current growth rates that gives it less than a decade–the watch of the new leadership–before it hits the wall. It will need to make deep structural reforms, both economic and political, if it is going to be able to vault it. Regardless of the fact that even if it does clear the wall, China will still be a middle-income country–absolute size of the economy is irrelevant in this respect, even if China passes the U.S. to become the world’s largest economy–no country has yet managed to be both developed and a single-party state.

That sets up a dilemma. If the Party’s legitimacy to monopolistic rule depends on continuing to deliver the economic growth that keeps its citizens getting richer and the country stronger and if China’s rapid economic growth cannot continue beyond a certain point without institutional reform, then managing the role of government in the economy and overcoming state-owned vested interests–in other words reforming itself–becomes the new leadership’s most important concern.

If, on the other hand, the Party’s legitimacy to monopolistic rule rests on an ideology of the mandate of Mao, it will still need to forge a statist economy that can deliver the economic development to ensure social stability and regional clout, and be unable to escape the fact that economic growth cannot continue beyond a certain point without institutional reform to support its move up the arc of development and prevent the ossifying of incumbent interests. So, again, managing the role of government in the economy and arbitrating between state-owned vested interests becomes the new leadership’s most important concern.

China is not only self-evidently non-Western, but it has a self-consciously distinct history, culture and political system, so it could develop a distinct economic system. Chinese exceptionalism is not anymore unreasonable than American exceptionalism. But in that event, the Party will still have to operate and against a back-drop of a globally connected economy in a world that is already wary of China’s perceived mercantilism and rising power and status. Though unlikely, that could make China turn inward and neo-isolationist, relying on its growing internal market and a demographic bias to becoming a deficit country over the next decade, to drive the next stage in its economic development.

For now, there is every indication that China will continue on its present course. Indeed, there is a plan for that. The new leadership will come into position midway though the current five-year plan. Yet what looks from the outside to be a seamless transfer of power from one generation of leadership to the next belies the factional infighting that occurs out of public view.

So far, it is the princelings, the descendants of Mao’s original revolutionary leaders, an elite collective dynasty of some 400 families who hold extensive sway over the Party, army and the economy, that are coming out on top. One of their own, Xi Jinping, born 1953, is emerging as Hu Jintao’s successor as paramount leader, successively taking over from Hu the positions of Party general secretary in 2012, president in 2013 and chairman of the Central Military Commission in 2014. By then the top Party, state and military jobs will again be united in one man, if Xi successfully consolidates over the course of the two-year transition his position as the first ranked in the Politburo’s standing committee, the small group of men, currently nine, that constitute the inner sanctum of the Party’s–and China’s–power.

Xi has outflanked Li Keqiang, the only other post-49er to make it to the Politburo’s standing committee, where he ranks seventh out of nine, one place below Xi, and who was Hu’s protege until Hu bowed to political realities and switched his support to Xi. Li, like Hu rose through the Party’s other leading faction, the Communist Youth League (YCL) whose power base is the party’s grassroots. Princelings dismissively refer to the leaders who come up through the YCL as “sons of shopkeepers.”

Xi rise from provincial official to national leader has been rapid. Cunning, calculating and ambitious Xi plays politics like a chameleon playing poker. He has worked in the countryside and in cities, north and south, in villages and in big cities, giving him a broad network of connections. He is a student of Marxism but not known to be ideological. Though never in the army, he has strong links with the armed forces. His father, General Xi Zhongxun, was a founding father of Mao’s revolution and his wife, Peng Liyuan, is both a celebrity folk singer and a major general in the PLA. He has a reputation for being pro-business (his father was purged by Mao for promoting economic opening and became one of Deng Xiaoping’s key mentors and lieutenants in instituting economic reform, particularly the early experiments in Guangdong and Shenzhen) but he is also famous for being ‘clean’, having cleared up corruption in Fujian in the 1990s and Shanghai in the 2000s, and is disdainful of China’s nouveau riche. He is calm and cautious, and above all seen as a team player–while all the while skillfully climbing a ladder of political patrons.

Though scarcely charismatic, Xi will be a more imposing figure on the world stage than his predecessors (though Hu set a low bar). Physically, he is tall and stocky so photo shoots with other world leaders will play well at home. With a sister in Canada, a brother in Taiwan and a daughter at Harvard in the U.S., to which he has been a visitor since the 1970s, he knows more about the world than the world knows about this plain- if rarely outspoken man who plays his political cards close to his chest–or about what he and his fellow new leaders want to do once they reach the apex of power they have scrabbled so hard to ascend.

As already noted, they will take over half way through the current five-year plan, so their initial path is set. But the next Politburo’s composition (all of its nine members save for Xi and Li are expected to retire in 2012) will also reflect the balance of power between those who believe that maintaining economic growth is necessary to legitimize the Party’s right to monopoly rule, in short the economic reformers, and those who think that legitimacy should be based on ideology, a group for whom the current Maoist nostalgia stands proxy. Many other currents–political, nationalistic, regional and demographic–cut across that divide. Even the princelings are not a monolithic bloc. Factional alliances exist among those who want to develop a more harmonious form of capitalism with a strong safety net, a narrowing of the wealth gap and more environmental protections; those harderliner economic reformers who want to diminish the power of the public sector and open up political reforms to embrace a new propertied class; and the so-called neo-comms, who want to asset China’s global power through cultural diplomacy, military strength and taking a greater role in international institutions.

Who gets promoted from the Politburo to its standing committee, and how they rank, will reveal to some extent how those divides lie and thus how China develops over the next decisive decade. But all are united in preserving the Party’s grip on power.

Footnote: State media have published the transcript of written answers Xi gave to questions from the Washington Post on the eve of his visit to the U.S. His comments on Sino-American relations were mostly pro-forma, including a note of warning sounded to the U.S. over its military stance in the Pacific.

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Iran, Oil and U.S. Sanctions: Beijing’s Complex Response

Beijing may be huffing and puffing about the sanctions Washington imposed last week on state-run Zhuhai Zhenrong Corp. for selling refined petroleum products to Iran, but it can scarcely be surprised.

“Imposing sanctions on a Chinese company based on a domestic (US) law is totally unreasonable and does not conform to the spirit or content of the UN Security Council resolutions about the Iran nuclear issue,” foreign ministry spokesman Liu Weimin says.

But it is what Washington does. Zhuhai Zhenron is one of three firms to be sanctioned in this case. The other two were Singapore’s Kuo Oil and the United Arab Emirates’ FAL Oil. Even though the sanctions on Zhuhai Zhenrong are largely symbolic as it does not do much business in the U.S. they could be considered a warning to some larger Chinese energy firms that do.

The sanctions followed Beijing’s rejection earlier last week of visiting U.S. Treasury Secretary Tim Geithner’s request that China use its economic clout as Iran’s largest oil export market to press Tehran to rein in its nuclear ambitions. Recent tightening of U.S. and EU sanctions won’t mean much if Tehran can still ship lots of oil eastwards. Tehran depends on crude oil exports for 60% of revenues and 80% of its hard currency.

Beijing’s argument was that China depended on Iranian oil for its economic development. Up to a point, but meanwhile, Prime Minister Wen Jiabao is in Saudi Arabia for the signing of an agreement between Sinopec and the Saudi energy giant Aramco to build an oil refinery Yanbu on the Red Sea with the capacity to refine 400,000 barrels of oil a day. Along with Angola, Saudi Arabia is already one of China’s top two suppliers of oil, ahead of Iran, which the number three. Wen would like to be assured China can get more oil from Saudi Arabia if necessary. Qatar and the United Arab Emirates are also on Wen’s itinerary.

Tensions are likely to remain high in the Strait of Hormuz for the foreseeable future. Iran is dependent on a break-even price for oil of $90 a barrel, so tension, if not hostilities, may suit it. Even if China and India follow Japan in reducing their purchases of Iranian oil, and even if that cut was by as much as 25%, Iran will get by. Meanwhile, China will continue to seek alternative sources of oil, and not be too sorry if Washington is diverted from its new geo-political pivot towards the Asia-Pacific region by a reminder of its interests in the MidEast.

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Beijing’s Common Cause With Washington In Myanmar

Myanmar stands as a good example of the cooperation and competition that characterizes the relationship between Beijing and Washington. Much of the commentary on Hillary Clinton’s visit to Myanmar, the first by a U.S. Secretary of State in half a century, has concentrated on how Washington wants to detach Beijing’s hold on Naypyidaw. This is seen as part of a grander plan on the part of the Obama administration to counter China’s growing influence in the region. Yet, to this Bystander, it seems that not only can the U.S. do no more than loosen Beijing’s grip, from tight to firm, but also that is now, on balance, in Beijing’s interest that Myanmar emerges from its international isolation.

That isolation has left China as Myanmar’s largest trade and investment partner. Construction of the Myitsone dam may have been suspended but work on six other Chinese-built dams continues. The road, rail and energy pipeline connections across between Yunnan province and Myanmar’s Bay of Bengal coast are being developed by the day. Chinese companies have a first mover advantage that could be readily exploited if international sanctions on Myanmar are lifted and its population of 60 million is provided with an opportunity to catch up with the economic progress of the rest of Southeast Asia.

Neither U.S. nor Indian firms are in any position to leapfrog Chinese ones in Myanmar, any more than Washington or New Delhi will leap ahead of Beijing politically. The security risk to China’s southwestern reaches is marginal compared to the potential economic and political gains.

Beijing certainly does not want a full-fledged democracy that is in Washington’s pocket on its doorstep. Yet it would not be adverse to a more broad-based government in Naypyidaw that could bring to an end Myanmar’s minority ethnic conflicts. These insurgencies are primarily being fought along the length of the border with Yunnan. China’s commercial interests in extracting Myanmar’s natural resources and sending cheap manufactures in the opposite direction are far better served by peace than strife. As we have noted before, Beijing does not want another flood of refugees from the fighting.

Nor would China be too sorry to see North Korea lose a fast friend and export trans-shipment point in Burma. That would only make Pyongyang more reliant on Beijing, and reduce by one the potential ranks of nuclear armed neighbors.  Meanwhile, Beijing and Naypyidaw are strengthening their military ties. Min Aung Hlaing, the new commander of Myanmar’s armed forces, may have pointedly made his first foreign visit to Vietnam, but he was in Beijing earlier this week to sign a memorandum of understanding with Chen Bingde, his PLA counterpart, to deepen military cooperation. He also met President-Assumptive Xi Jinping. Closer military ties will help China’s naval reach into the strategically important waters of the Indian Ocean.

State media has stuck an uncommonly neutral tone in its coverage of Clinton’s visit to Myanmar, highlighting her promotion of economic reforms and the need for ethnic conflicts to be resolved. Beijing has more common cause with Washington on both those fronts than those looking for a grander geopolitical game imagine.

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U.S. Forces To Australia And Beijing’s Response

This Bystander is shocked, shocked to find that geo-politics is going on in the region!

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China And The U.S. Play Free Trade Chess

Free trade agreements (FTAs) are easier said than done. U.S. President Barack Obama acknowledged as much when announcing an outline agreement to expand the TransPacific Partnership from four to nine as a basis for a regional FTA. There is much detail to be negotiated. It will take years, not months. Many devils must be confronted.

For one, Obama’s domestic opponents are not going to hand him a political and economic victory with a general election barely a year away. Even in the highly unlikely event a final TTP agreement could be reached quickly, a Republican-dominated House of Representatives could block a vote for Congressional approval before the election. Nor are Republicans likely to allow an agreement containing what Obama called ‘high standards’, code for among others environmental and labor protections and local sustainability rights that are an anathema to many of Obama’s opponents.

All those are the quick and dirty domestic political battles. Japan’s decision to join promises a hundred years war. Japan’s new prime minister, Yoshihiko Noda, has risked splitting his party in doing so. He will now need to turn the country’s three most powerful and insular domestic political constituencies, farmers, doctors and the construction industry. Doing so would mean a deep structural change to Japan’s political system. That may be long overdue, but it will not be quick in coming. That alone should not imbue supporters of the expanded TTP FTA with great confidence. Nor should the rapid turnover of recent Japanese prime ministers. Noda is the sixth in five years.

It is already two years since the U.S. applied to join the four-member TTP and started to orchestrate its expansion to nine, including bringing in its two most important treaty partners in the region, South Korea and Japan, as well as regional allies such as Thailand. There have already been nine rounds of TTP expansion negotiations. These are painstaking processes.

The Obama administration’s move was part a a bigger game of FTA chess that it is playing with China for influence in the region. Washington is playing the APEC side of the board while Beijing is playing the ASEAN side. (The side story for those choices is that the Asia-Pacific Economic Community is a group of economies, so can include Taiwan, whereas the Association of South-East Asian Nations comprises countries, so does not. Taipei has expressed interest in joining the TTP FTA, and while Washington has been scrupulously silent on the point, the absence of any outright rejection is being taken in Beijing as unacceptable tacit support.)

Beijing, meanwhile, has been doing what it can to slow up the TTP expansion, and pushing a series of bilateral trade agreement with ASEAN nations and the concepts of regional trade pacts between ASEAN plus three (itself, South Korea and Japan) and ASEAN plus six (adding Australia, New Zealand and India). The U.S. is notable by its absence. Hence Washington’s attempts to involve all the same countries, with the one obvious exception, to much the same purpose but under the aegis of APEC.

This is not necessarily disliked by most Asian countries as it allows them to keep both regional superpowers from being too dominant as they jockey for supremacy. The most extreme example of this is that both China and the U.S. are trying to create trilateral free trade agreements with South Korea and Japan. Two tracks. Double the trouble. And any end game still a long way off.

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Beijing’s Currency Wars Playbook

Beijing will play its usual defense against the moves in the U.S. Senate to twist China’s arm to appreciate its currency against the dollar: vociferous denunciation of Washington for turning protectionist and initiating “trade wars” while patiently waiting out the start of any serious hostilities, calculating that the threat of them will eventually recede.

The denunciation has duly come with Foreign Ministry spokesman, Ma Zhaoxu, saying the bill now in front of the U.S. Senate proposing punitive measures against any country that is shown to be manipulating its currency — for which read China — “seriously violates rules of the World Trade Organization and obstructs China-U.S. trade ties”. He told U.S. Senators to abandon protectionism and stop politicizing economic issues. He also told them to “stop pressuring China through domestic law-making”. Co-ordinated sentiments have been expressed by the central bank and the commerce ministry.

While perhaps nobody outside the U.S. Congress really believes that a sharp revaluation of the yuan on its own will eradicate America’s trade deficit with China or create the new domestic jobs the U.S. is having such trouble generating, Beijing will know that even if the Democratic majority in the U.S. Senate passes the bill, the legislation will likely founder in the Republican controlled House of Representatives. Even if it does not, it is highly unlikely to survive a presidential veto. That is the past pattern of such proposed legislation. Support for this year’s bill appears to be stronger, helped by its narrower provisions and the background of sluggish U.S. growth and joblessness, but the odds remain long that it will become law.

At the very worst from China’s point of view, and the bill does become law, it will be cheaper politically for Beijing to fight any punitive measures through the WTO than it would to be seen to capitulate to foreign pressure. Meanwhile, it can bide its time, letting the gradual appreciation of the yuan that has been underway since June last year (up 7% against the dollar since then and 10% against the euro) ease the U.S. pressure, which is anyway likely to abate after next year’s U.S. elections. Simultaneously, it buys more time for the economy, particularly the export-manufacturing sector, to adapt.

China’s policymakers are quite happy for the yuan to appreciate. It will help them both fight inflation and restructure the economy. They just want do it to their timetable, not Washington’s–and they have the playbook to do that.

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Beijing Happier Than It Says About U.S. Arms Sale To Taiwan

Beijing does not come away badly from Washington’s sale of $5.3 billion-worth of arms to Taipei. Washington backed off including in the deal 66 new F16 C/D fighter jets that Taipei wanted. Taiwan will only get upgrades to its aging F16 A/B fleet, but not the 66 new F16 C/Ds it had requested. That was the price the Obama administration had to pay for keeping relations with Beijing on an even keel. Given the PLA’s modernization, Beijing will be just fine with that. Nor will it be too concerned about the rest of the deal, which includes air-to-air missiles, guided bombs, radar and training.

For all its bluster, Beijing never really thought it could scupper the whole deal. Keeping the military technology gap between the PLA and Taiwan’s armed forces as wide as possible was always its realistic goal in this case. Tick the achieved box. Similarly, possible retaliation, such as suspending military exchanges, as happened in January 2010 after Washington authorized the sale of $6.4 billion-worth of arms to Taiwan, will be hollow threats as doing so would remove the incentive for Washington to show restraint in future sales.

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China’s Rise In The Decade of 9/11

Writing about the anniversary of the 9/11 attacks on the U.S. would normally be outside our purview. Yet, on this 10th anniversary, we are struck by how the biggest gainer in the post-9/11 decade has been China. Over that time, its power has increased more than any nation’s, or non-nation’s, primarily its economic clout but also its diplomatic and political heft.

The attacks on New York and Washington remade the world in many dimensions, and the changes that were bringing about the emergence of developing nations, particularly China and its fellow Brics, were underway before 9/11. Yet they have undoubtedly gained in momentum and conspicuousness since. Washington’s “war on terror” distracted the U.S. from preparing for such a changed world in which its own primacy is lessened, power has become diffused among multiple centers, national interests have fragmented, multilateral institutions lost leadership and the developing world become more able and forceful in setting a global agenda.

That has provided, if not a power vacuum, then a set of circumstances in which Beijing has been able to grow its economy rapidly and to extend its global influence. In the latter years of the 9/11 decade, its economic travails have made it more difficult for America to absorb the extension of its military responsibilities beyond what it could afford. The total cost of the war on terror to the U.S. taxpayer is put at upwards of $4 trillion, while the benefits have accrued to a wider world than just America. That includes China, which, it is still worth remembering, for all its rise over the past decade, is more deeply embedded in the global framework than it was a decade ago, remains happy for Washington to bear the brunt of being global cop, and still depends on the U.S. and Europe for export markets that provide a sizable chunk of its people’s prosperity.

9/11 is a complex event for Beijing. America’s war on terror has been useful in dealing with its Muslim minorities in its western reaches and beyond. Curtailments of civil liberties in Western democracies have similarly been to its advantage more broadly domestically. America’s wars of choice over the past decade have also afforded Beijing diplomatic opportunities in its geopolitical jockeying with Washington, and to play the more internationally engaged role the West has asked of it.

Other consequences of the 9/11 decade have troubled it, notably the Arab Springs, fomented by the Arab youth that al-Qaeda would have hoped to recruit as its jihadists but who put their lives on the line in the cause of democracy against authoritarian governments. Internally, the Party has also struggled to balance the nationalist sentiments emboldened by a belief that the U.S. is wounded with the reformers who see the need for cooperation with America if they are to bring about the internal change China needs to rebalance its economy as its rapid pace of growth starts, inevitably, to slow–with the political challenges to the Party’s legitimacy to rule that that will bring.

We would not argue that China would be on a different development trajectory today had 9/11 not happened. There is a case though, we believe, that it would neither be as far along as it is nor as comfortable with its place in the world.

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