Election-year politics are driving new wedges into the increasingly distrustful relationship between the world’s two largest economies.
Events over the weekend gave Republican candidate Mitt Romney another chance to goad the Obama administration over its China policy, which is becoming more confrontational in response to Romney’s attacks. In recent months, the presumptive nominee has essentially accused Obama of being soft on China while pledging to beef up the U.S.’s naval presence in the western Pacific. Romney has also branded China as a serial currency manipulator and trade violator.
Now human rights have surged to the forefront. Last week, Chen Guangchen, a blind dissident who has protested China’s family planning policies, disappeared, perhaps into the U.S. embassy, where he may have sought shelter to avoid his ongoing house arrest.
“This event points to the broader issue of human rights in China,” Romney said in a statement issued from his campaign headquarters. “Any serious U.S. policy toward China must confront the facts of the Chinese government’s denial of political liberties, its one-child policy, and other violations of human rights.”
The incident comes on the eve of a long-planned bilateral meeting between Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner with their Chinese counterparts. Several hundred lower-ranking officials will be joining the meetings, dubbed the Strategic and Economic Dialogue, which kick off Thursday.
With the U.S. planning to take tougher stances on a broad range of issues, the administration rushed one of the state department’s top-ranking diplomats, Kurt M. Campbell, to Beijing make sure the Chen’s surprise disappearance didn’t undermine the talks. Given the imminent changeover in China’s top leadership, no major breakthroughs are expected.
A number of recent signals pointed to an election-year shift by the administration. The White House late last week sent a letter to Capitol Hill backing sales of new F-16 jets to Taiwan, a move that China’s lame duck leadership is certain to view as provocative.
As recently as mid-February, the administration had agreed to sell Taiwan modernization kits for existing F-16s, not new jets that would expand its fleet. Writing Sunday in the Asian Wall Street Journal, Rupert Hammond-Chambers, president of the U.S.-China Business Council, said the earlier policy would have grounded half the Taiwanese fleet during the modernization effort, leaving “a sizable hole in Taiwan and North Asia’s security.”
Geithner, meanwhile, used a speech at San Francisco’s Commonwealth Club last week to lay out a more aggressive liberalization strategy for China’s economy. He will push China to follow through on promises to break up its state-run banks and lift the caps on domestic interest rates, which are below the rate of inflation. “Raising the ceiling on deposit rates will allow Chinese households to earn a higher return on their savings, both increasing their income and reducing their need to save, thus increasing their ability to consume goods and services, including from the United States,” he said.
Geithner also slammed government subsidies to state-owned enterprises, which include cheap land, underpriced natural resources and cheap credit. “If China’s state enterprises want to be treated like commercial enterprises by the rest of the world, they need to act more like commercial enterprises, including by paying market-based dividends to their shareholders and making their corporate governance and finances less opaque,” he said.
China will undergo its own political transition this year, with President Hu Jintao and Premier Wen Jiabao stepping down at the fall congress of the Chinese Communist Party. Vice President Xi Jinping, who toured the U.S. and met with Obama in February, is expected to assume the top spot.
China has been making some liberalization noises in advance of the transition. In a nationally-broadcast speech in early April, Wen blasted China’s state-run banks as a “monopoly” that earned exorbitant profits at the expense of Chinese savers. “To break up the monopoly, we must allow private capital to flow into the finance sector,” he said. China’s central bank also announced it would allow its currency, the renminbi or yuan, to float within a limited range on a daily basis.
While that could lead to a more rapid appreciation of the yuan, which would make U.S. exports to China cheaper and Chinese exports to the U.S. more expensive, the announcement has left some analysts wondering about the actual intent of China’s central bankers. “If they don’t want it to change, they can set (the range) at the same place every day,” said Nicholas Lardy, who closely follows China’s economy at the Peterson Institute for International Economics. “To judge its significance, we’ll have to wait several months and see what they do.”
A recent paper by leading scholars in both countries entitled “Addressing U.S.-China Strategic Distrust” warned that there was a growing mood in both countries that the relationship could turn antagonistic in the next 15 years. China increasingly sees the U.S. as a declining power whose divisive politics make it incapable of dealing with its sluggish economic recovery and huge deficit. On the other side of the Pacific, there’s growing distrust about China’s increasing military expenditures, its strategic moves to control natural resources and its rampant theft of intellectual property.
One factor keeps the two countries in an uneasy embrace. The U.S. has grown dependent on China to finance its massive deficits.
The Treasury Department late Monday released its latest survey of foreign holders of U.S. securities. China, as of last June, was the nation’s largest creditor with $1.6 trillion of the U.S.’s $7.7 trillion in long-term debt that is held by foreigners. Japan was the next largest creditor with $1.2 trillion in government bonds.