Monday, June 16, 2008

China’s Grand Strategy: From Rule-taker to Rule-maker?

Here is the concluding section of my last paper. A paper which garnered a measly 69 percent - a credit. Either my professor did not understand what I wrote or she's afraid my implications may be right.

Belatedly, US officials have noted the country's financial insecurity vis-a-vis China. "We are so dependent upon decisions made in other countries' capitals" says Senator Hillary Clinton. In a discussion she had with a retired general, she was given the nightmare scenario of the PRC finally invading Taiwan with the US unable to defend the island because Beijing might well say "Fine. You do that, we will dump your dollars. We will flood the market. We will not buy any more of your debt (Mason 2008)."

The United States-China Economic and Security Review Commission cites as issues of concern China's trade surplus with the US. As of November 2007 this was at $163.8 billion. Its foreign currency reserves is at $1.43 trillion, 70 percent (or 1 trillion) of which are invested in dollar denominated assets, mostly in US sovereign and corporate bonds (USSC 2007).

As the US domestic economy falls into recession, China will have saved more than enough for the rainy days coming ahead and may be better able to weather the economic storm in its primary export market. The PRC will also have enough foreign reserves to continue importing vital commodities such as crude oil. And as the US dollar continues to fall in value, China may well decide to unload its holdings to switch to more stable currencies, such as the Euro. Various Chinese officials have already said as much (Fallows 2008). Because Chinese business interests are also state interests, any pronouncements of such kind are always treated as political threats. Former World Bank chief economist and US Treasury Secretary Larry Summers has used the term 'balance of financial terror' echoing the nuclear stand-off between the Soviets and the US during the Cold War (Fallows 2008). If China does decide to unload its US dollars en masse, will it be shooting its own foot? In turn, how will the US react?

Due to the credit crunch brought on by the sub-prime crisis, Chinese financial institutions have also been taking advantage of the 'fire sale' in the heart of the American financial capital, acquiring shares in long-standing US financial institutions such as Blackstone and Morgan Stanley (Straszheim 2007). Meanwhile, the collapse of Bear Sterns, with which China’s Citic Securities had cross-investment deals to the tune of $1 billion, has been a learning experience for Chinese players to tread more cautiously. Nevertheless, China’s financial instruments will continue its global expansion (Zhao 2008).

In September last year, the PRC created the China Investment Corporation (CIC) to further venture into the weird, wired world of global capital markets. This new economic policy arm will take charge of China's gargantuan foreign currency reserves. European and American politicians have already expressed worry that the CIC will purchase shares in other countries’ sensitive industrial sectors - and may be used as political leverage in the future. The CIC’s chief risk officer quickly allayed any such suspicions by saying that “The claim that sovereign-wealth funds are causing threats to state security and economic security is groundless…We don't need outsiders to come tell us how we should act (WSJ 2008).”

Given such patterns it is apparent that China is well on its way to flexing its financial muscles and has been successful at playing the high finance game. One would think that the PRC has been taking pointers from Samuel Huntington’s Clash of Civilisations – that the path to global leadership and power entails owning and operating the international banking system, controlling hard currencies and dominating international capital markets (2002).

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