23
Oct
The lavish red-carpet treatment afforded to Chinese President Xi Jinping in London this week has reopened the debate about how the West should deal with the rise of a more powerful and assertive China. Just how much pressure should be placed on Beijing to play by international norms of trade and finance when there are so many deals on the table?
This dilemma is illustrated by the contrasting approach in engagement between the U.K. and the U.S.
This past week has seen the British government extolling a new “golden” era of relations as it courts Chinese inward investment and closer financial ties. A state-owned Chinese company has been allowed to take a large stake in a new nuclear plant in England, while London has been promised it will be the premier Western financial center for yuan GBPCNY, +0.0634% trading. This week China launched its first yuan denominated sovereign bond issue in London. The U.K. also says it has led the world including yuan in its foreign-exchange reserves.
The approach of the U.S. has been noticeably more cautious. While the U.K. was the first major Western country to sign up to China’s new Asian Infrastructure Investment Bank, the U.S. opted not to participate. After the bank got some 57 nations to sign up, it was widely seen as a diplomatic coup by Beijing.
Also read: Stiglitz on America’s childish opposition to Asian infrastructure bank
A divergence on approach to trade relations can also be seen. In contrast to the U.K.’s eager courting of Chinese investment, the U.S. has placed much more emphasis on combatting cyber attacks, the theft of intellectual property or pushing the Chinese to allow the yuan’s USDCNY, -0.0142% value to be market determined.
Indeed, the Trans-Pacific Partnership (TPP), which has been strongly supported by President Barack Obama, has been interpreted by many to be specifically focused on containing China, as it is been noticeably excluded.
But what it also does is incentivize Beijing to sign up to a set of fair-play rules of trade for the 21st century, if one day its wants to join. The TPP aims to establish enforceable labor standards, environmental protections and to curb unfair advantages of state-owned enterprises as well as requiring signatories to embrace the rule of law and democratic norms.
While it might look as if these are just the type of requirements that make it impossible for Communist-led China to join, the party has promised similar reforms itself in the past, whether or not it meant it.
Inclusion in the TPP might just give China the external trade incentive to move on stalled domestic reform.
Meanwhile in the stampede by the U.K. for Chinese investment, it is worth having a reminder of the realities of doing business with a Communist one-party state, for all its alluring commercial clout.
The party that Xi leads is now in its 66th year of rule and in that period has developed its own unique model of mercantilist-driven, state capitalism. Not only does the state dominate banking and most industries, the ruling party has embedded itself across these commercial operations, thus enabling it to maintain control over the country’s economic apparatus and ensure self-preservation for its 88 million members.
Although in this period China has become the world’s second-largest economy, it has also spawned multiple problems, from environmental degradation, corruption, product safety crises, to mounting social unrest.
State capitalism has also left China with a weak enterprise system and opaque banking industry where, due to the uncertain distinction between state, private business and regulators, bad debts are rarely recognized. Similar to the yuan, China’s bad loans are not marked to market, while Chinese continue to move their capital offshore.
At the very least, these realities mean extra vigilance is needed when Beijing exports its brand of capitalism overseas and lobbies to change the established norms of trade.
One of China’s key aims is to use commerce such as its “One Belt One Road” project to accelerate the internationalization of the yuan and gain its acceptance as a reserve currency by central banks around the world.
Yet while China has done much to internationalize the yuan, its efforts to open its capital account and allow its currency to be market determined are much less impressive. Beijing still operates currency controls and has still to develop a bond market that is able to price risk.
The yuan was not included by the International Monetary Fund in its special drawing rights earlier this year as some expected, in part because it fails to meet basic conditions.
There is an obvious risk in helping the yuan find a shortcut to reserve status based on an assumption that China will eventually liberalize. Indeed, some argue an open capital account and acceptance of market forces is simply incompatible with China’s existing political system, as to embrace reform the Communist Party would have to give up control.
The U.S. approach of dealing with the current Chinese leadership looks much more sensible than the U.K.’s Reserve currency status and trade deals should come when China has produced meaningful reform, not just promised to.
Source: http://www.marketwatch.com/story/britain-too-eager-to-woo-china-cautious-us-approach-is-better-2015-10-22