Why China is so reasonable
Shanghai, Shanghai CHINA : Investors look at a display of a new housing estate at a property exhibitiion in Shanghai 09 June 2006.` China’s outstanding bank loans surged 15.97 percent year-on-year in the first five months of the year, further stoking concerns about overheating in the economy and the government issued stiffer controls on the property sector, with ramped up downpayments for home purchases and higher capital gains taxes, along with tighter restrictions on the building of luxury homes.` AFP PHOTO/Mark RALSTON

By Gwynne Dyer

Last month, China’s trade surplus was $13 billion. That’s over $150 billion a year. So why does China still keep its head down and go along with almost everything that the "international community" (also known as "the West") proposes? You can even bomb the Chinese embassy in Belgrade (by mistake, of course). They just smile and suck it up.

One reason is that China’s trade surplus is big, but it isn’t really all that impressive given the size of the country. $150 billion a year in a country of 1.3 billion people is an annual trade surplus per capita of about $120. That’s not wealth beyond the dreams of avarice. It’s not even enough to justify giving up the day job. And it really does not threaten to upset the entire global economy, despite what some people will tell you.

The situation is complicated by the fact that China runs a truly enormous trade surplus with the United States, which causes great angst in America. That is partly counter-balanced by hefty Chinese trade deficits with most of the countries in South-East Asia, the Middle East and Africa from which it buys its raw materials, but it is true that China is racking up a huge surplus in its trade with the United States — while America is recording the largest trade deficit that any country has ever had: over $700 billion this year, if current trends persist.

So China is the next superpower and America is the next Spain, right? You can make a good living writing that sort of twaddle, but no. China is not going to turn into a superpower, though it will certainly be one of the leading world powers one or two decades from now. And the American economy is not going to collapse, although it will no longer dominate the world. The main loss America suffers will be a somewhat diminished sense of its own importance.

Some of the statistics of Chinese growth are very impressive, like the fact that automobile production rose 21.6 percent in China last year while car plants were shutting down because of over-capacity all across the West. What the Chinese leadership sees, however, is an economy in which far too large a share of production and of employment still depends on foreign investment and foreign customers. The domestic consumer market that would finally make the Chinese economic miracle self-sustaining and irreversible is gradually coming into existence, but it will probably be fifteen years before it becomes the main source of demand for Chinese goods.

So in the meantime, China must not do anything that would disrupt the flow of inward investment and outbound goods. They talk in Beijing of the "fifteen-year window" that is China’s one shot at becoming a fully developed country, and keeping that window open requires a tranquil international environment. It requires, above all, good relations with the United States and Japan, so China bends over backwards to avoid major confrontations with them.

There are a few red lines for China, as for any country: formal independence for Taiwan, for example. But Beijing isn’t going to bring down the US economy by dumping the mountain of US dollars it holds, because it needs American consumers to go on buying Chinese goods. And it isn’t going to use its growing wealth to expand militarily, despite all the excited talk about the Chinese "military build-up" in the United States. There is no profit in that.

And what about the fabled exchange rate, the under-valued Chinese currency which allegedly lets China steal jobs from the older industrialised countries? The renminbi really is under-valued, probably by as much as forty percent, but it isn’t the main reason for China’s success, nor is Beijing going to be forced to revalue it according to somebody else’s timetable.

We have been here before. Back in the mid-1980s, it was Japan that was allegedly going to take over the planet. The Japanese economy had been growing at around ten percent a year for three decades, and the Japanese were starting to buy up significant chunks of American industry and real estate, and various pundits were predicting that the heavens would shortly fall. The Japanese yen was seriously undervalued, too, and the experts decided that that was the problem.

So they fixed it. The finance ministers of the major industrialised powers got together in New York and said publicly that the US dollar was too high (the famous Plaza Pact). Their declared lack of faith in the dollar was a self-fulfilling prophecy: it duly fell against the yen, Japanese exports became less competitive — and Japan went into fifteen-year period of low or no growth from which it is only now emerging. Problem solved.

But that isn’t going to happen in this case, because an under-valued currency is only a small part of China’s competitive advantage. In the 1980s, Japanese wages were already in the same range as American wages; China’s real edge is a relatively well-educated workforce that will work for about one-tenth of American wages. You could revalue the renminbi by forty percent tomorrow, and most existing and planned foreign investments in China would still make money.

In other words, there is no need to panic. Things are likely to continue down the present track for quite a while yet.