Turning The Other Cheek

If jaw-jaw is preferable to war-war, and it usually is, especially in trade and economic conflicts, the latest round of the China-U.S. talks under the aegis of the Strategic and Economic Dialogue just concluded in Washington can be deemed a success. The low pre-meeting expectations that nothing very much would be achieved were readily met, but the main point of the discussions is to get everyone around a table and the contentious issues on it. Taking them off is low on the agenda, if expressions of intent to do so is not.

That was the case with what is being touted as the main achievements of this round, improved market access for both sides. Beijing said it would disentangle policies designed to encourage domestic innovation from government procurement, a promise it has made before, and rewrite its procurement rules to be less discriminatory towards domestic firms. It also promised to look into making its occasional crackdowns on intellectual-property theft more permanent, and check officials weren’t using pirated software. As ever, proof of the pudding will be in the implementation.

In return, Beijing asked for more access to the American market for its companies, and particularly to relax Washington’s high-tech export controls, whose security reviews repeatedly snag proposed Chinese acquisitions in the U.S. It wants Washington to be more transparent about its whole process. Commerce secretary Chen Deming rather mischievously said “In this area, I regard the United States as my teacher and since my teacher is asking me to be open and transparent and fair, I certainly would also ask my teacher to do the same to me.”

Not so much jaw-jaw as cheek-cheek.

Generals Join China-U.S. Strategic Dialogue

No doubt the yuan will grab the headlines–and provide the showboating opportunity for U.S. legislators–at the latest round of Beijing and Washington’s biannual bilateral talks, due to be held in Washington on Monday and Tuesday, but it is the inclusion of senior military figures in the Strategic and Economic Dialogue for the first time that strikes this Bystander as most significant.

The modernization of the PLA is being watched warily in Washington (and beyond), while the PLA’s strengthening voice at a time of leadership transition has been accompanied by some more strident projections of regional power and given succor to more nationalistic voices in the country. Including the military in the framework of a dialogue intended to manage bilateral friction points, is no bad thing. As former U.S. president Lyndon Johnson famously said about FBI director J Edgar Hoover, “it’s probably better to have him inside the tent pissing out, than outside the tent pissing in.”

As for continuing business, Washington will continue to find itself pushing on a door ajar as far as the yuan’s appreciation is concerned. The U.S. will encounter greater resistance to its pressure for more liberalization of China’s financial system. Beijing will call for the roadblocks to be removed that are preventing China’s giant state-owned companies from investing in U.S. industrial and financial companies. In return Washington will raise its belief that China’s government procurement and support for “indigenous innovation” makes it difficult for U.S. companies to compete in China.

Criticism by Beijing about Washington’s budget mess and by Washington about Beijing’s current crackdown on dissent will be carefully measured, particularly in public. In private both sides will want to deflect the issues into generalities, knowing both are domestic issues beyond solving in two days of international discussion.

Strategic And Economic Diaologue: Bigger Not Necessarily Better

Is the Strategic and Economic Dialogue between Beijing and Washington still working? As each round gets ever larger, it doesn’t seem necessarily to generate more success.

The intent of the semi-annual high level talks is to coordinate and contain the many big issues that comprise the increasingly complex China-U.S. relationship. Regular discussion is certainly better than none and at the working officials level understanding has certainly been improved even if the process remains cumbersome. But the most recent set didn’t have much by way of policy accomplishments and were dominated by two external issues: North Korea and the euro crisis.

The two sides do not seem to have made any substantive progress on the first one, the only one of the pair that the two countries could directly effect. In Washington, now in election season (as if it ever isn’t) that only reinforces the doubts of the effectiveness of the talks caused by the lack of progress on the currency issue.

China and U.S. Sit On Opposite Ends Of Global Economic See-Saw

The latest round of the Strategic and Economic Dialogue with the U.S. is done. Goodwill and common purpose expressed in public: China will boost domestic demand and the U.S. will toughen its financial reform. Whatever.

In private, Beijing was forthright in expressing well-rehearsed concerns about the dollar’s value and America’s deficits. And there remains deep differences on climate change, where the China-India axis is the developing fault line of global geopolitics. But there is more to unite two pragmatic administrations in Beijing and Washington than to divide them. They are the two powers on the opposite ends of the global imbalances see-saw.

China And The U.S.: The Pressing Issues For The Clinton Visit

The first foreign trip by new U.S. President Barack Obama’s secretary of state, Hillary Clinton, will be a swing through Beijing, Tokyo, Seoul and Jakarta. This underscores the importance of Asia to U.S. foreign policy, as if it could be anything else, especially in the current global economic slowdown.

The trip will force a clarity to the Obama administration’s China policy that has been lacking so far, especially the murkiness over currency manipulation remarks by Obama’s Treasury secretary Tim Geithner during his confirmation hearing and some of the protectionist tinge to the debate in Congress over the U.S. economic stimulus bill.

There are four immediate short-term Sino-American issues that will form the backdrop to Clinton’s visit to Beijing:

First, the level of the yuan. Obama called President Hu Jintao after Geithner’s remarks to reassure him that no preemptory action was likely. We are still of the view that the remarks were an intended testing of the water by the new U.S. administration, but it can push this topic down the road until mid-May when it is next formally required to report to the U.S. Congress on China’s currency policy. Meantime, China has made it clear that the yuan isn’t going anywhere from current levels for as long as the economy is slowing as it is.

Second, the Uighurs in Guantanamo Bay prison. Obama has ordered Gitmo closed down in a year. The 17 Uighurs there have already been cleared for release but are being held for fear they would be tortured if returned to China. The U.S. can’t find third-party countries to take them, and Beijing is again insisting they be returned to China. Human rights took a back seat in the Bush administration’s priorities; it will move further forward in the Obama’s administration’s, though probably not as far forward as climate change.

Third, the strategic economic dialogue initiated by the Bush administration, and led by former Treasury secretary Hank Paulson. Obama’s team has not indicated whether it will continue the process, or at least in the same form. One likely change would be to combine the Treasury-led talks with a parallel but lower-level set on political and security issues conducted by foreign ministry officials, but have them headed up by foreign minister Yang Jiechi and Clinton, or, even more likely, the two countries’ vice-presidents, Xi Jinping and Joe Biden. These could be periodically capped by a G2 summit involving Hu and Obama.

Finally, the new U.S. ambassador to Beijing. If Japan, as seems likely, gets a heavyweight (Joseph Nye, a former Defense Department official under President Clinton, now at Harvard, is the oddsmakers’ favorite) then China will need (and merits) the same. One name being mentioned is John Thornton, a wealthy and close backer of Obama’s and who was chairman of Goldman Sachs Asia during the Asian financial crisis in 1998-99. He is currently a professor at Tsinghua University in Beijing.

If Thornton is appointed and the vice-presidents take over the two countries’ strategic dialogue, it would signal that the U.S.’s China policy is being set more in the White House than the State Department.

Wang Tells Paulson That The U.S. Has To Look After China’s Interests There

A curious turn of phrase from Vice-Premier Wang Qishan during his opening speech at the latest bilateral strategic economic talks with his American counterpart U.S. Treasury Secretary Hank Paulson:

”I hope the United States will take all necessary measures to stabilize its economy and financial markets as soon as possible and to ensure the security of Chinese investments and interests in the United States.”  (fuller reports from Xinhua here).

The first half of that is straightforward enough and could have come from any recent meeting of international leaders from the G-7 up. But to what does the second half refer? Investments by state agencies such as China Investment Corp. and state-controlled banks and other enterprises which have been battered by the fall in global equity markets? We noted yesterday that CIC had lost $6 billion on its stakes in two U.S. financial firms, Morgan Stanley and the Blackstone Group.

Or was Wang referring to the 60% of China’s $2 trillion of reserves that are held in dollar assets? A substantial share of those are U.S. Treasury bonds and debt issued by troubled U.S. mortgage lenders Freddie Mac and Fannie Mae, both now effectively under U.S. government control.

It is no secret that some top officials have been worried for a while that the dollar’s decline was eroding the value of those holdings and questioning whether it made sense for China to continue to increase them. Not that the dabbling in equity markets by way of diversification and to juice yields to offset that has necessarily turned out well in the circumstances (see CIC above).

However, with the U.S. having to fund an expensive bailout, and China being one of the primary surplus countries that will have to provide the cash, the internal debate about growing China’s dollar-denominated reserves will continue. China has little choice but to continue to fund America’s deficits if it wants to avoid global recession, but it also wants to avoid throwing good money after bad. One sign of its willingness to get tougher with the U.S. over this is its willingness to let the yuan depreciate against the dollar over recent weeks, a move that helps China’s exporters even though it reverses Beijing’s compliance with the U.S.’s long standing pressure to get the yuan to rise against the dollar and to stop being what its American critics, including President-elect Barack Obama, have called a currency manipulator.

Slowly Spreading Jam

The latest Strategic Economic Dialogue meeting between China and the U.S. has concluded with a long study list for the two governments and few parting gifts from Beijing in the form of more financial markets opening.

Foreign firms will be allowed to invest again in domestic securities companies, though a cap of a maximum 33.3% stake will stay in place for a while. However, Beijing said as long ago as May that it would resume licensing securities joint ventures later this year after a two-year hiatus. Foreign banks and other companies that do business in China will also be allowed to issue debt and equity in the domestic markets if the capital raised is to be used for expanding their Chinese businesses.

What the Americans didn’t get was freedom for foreign companies to take bigger stakes in Chinese financial firms and for Chinese-foreign joint ventures to be allowed to undertake a wider range of businesses. That is jam being held back for tomorrow.

In a little dig reminiscent of the product safety row between the two countries, Zhang Xiaoqiang, vice head of the National Development and Reform Commission, China’s top economic planner, called on the U.S. to be more open to Chinese investments and to clarify which parts of the economy were off-limits to foreign investors on national security grounds. Under new U.S. legislation that came into force in October, foreign investments in infrastructure and high-tech and those coming from foreign state-owned enterprises face intensified review. Zhang identified the chemical, medical, mechanical, space and electronic businesses as areas where Chinese companies were interested in investing, but clearly feel they will face discriminatory scrutiny.

Cut!

Not only is Hollywood having to deal with a writers’ strike, now China has halted the import of its films, according to U.S. Commerce Secretary Carlos Gutierrez, who is in China for the biannual bilateral dialogue talks. The Hollywood trade rag Variety reports that the ban will last for 3 months.

Why isn’t clear, and there has been no comment from Chinese officials, even to confirm or deny the ban.. China imposes an import quota of 20 foreign films a year. Foreign films account for nearly half of China’s box-office revenues, which topped $350 million in 2006. (Global box office receipts are $40 billion by way of comparison.)

This year’s quota may just have been filled, as has happened in the past, Gutierrez says. But it may also be tit for tat retaliation against the U.S. for taking China to the World Trade Organization over intellectual property piracy, including of Hollywood films.

Dialogue And Departures

A couple of notes ahead of the U.S.-China chinwag later this week that goes under the rubric of the two countries’ biannual Strategic Economic Dialogue.

The first is that this looks likely to be the last of these meetings for Vice Premier Wu Yi. China’s most powerful woman is due to retire shortly. At 68 she was not reelected to the Central Committee in October. Stepping down from government posts follows as night follows day.

Wu was a proponent of the policy of depoliticizing economic disputes and had been in charge of both the contentious trade talks with the U.S. and with cleaning up the product-safety scandals. She also struck a good working relationship with her U.S. counterpart in these meetings, U.S. Treasury Secretary Hank Paulson.

Paulson, too, could be gone within the year following the 2008 presidential elections in the U.S. Which brings me to the second note: China may be waiting for a change of administration in Washington before doing anything serious about revaluing the yuan, a topic that again is likely to be high on the agenda at this week’s talks.

Nicholas Lardy of Peterson Institute for International Economics raises the point that the Chinese expect the next U.S president to be a Democrat. With the Democrats already controlling a Congress unfriendly to Beijing, Washington is likely to become more hostile to China after the election. So the plan would be to hold back from making an more reforms — or concessions depending on your point of view — and to keep them in Beijing’s back pocket until the tenor of the new regime in Washington is clear.