Financial Cold War. James A. Fok
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pricing mechanisms, monetary reforms to rein in runaway inflation, and privatisation of some of the sprawling state-owned enterprises (SOEs). He also successfully negotiated China's entry into the WTO, spurring a surge in foreign investment and exports.
Throughout this period, China's record on human rights was a recurring theme in the dialogue between the two countries. In part, this reflected public opinion in the US and its commitment to liberal democratic values. In part, it also served as a useful pretext when the US needed leverage in negotiations on other matters. Taiwan's continuous transformation into an ever more vibrant liberal democracy presented problems for both sides.
US actions in other parts of the world in the post-Cold War period significantly coloured China's views about US foreign policy. A number of events heightened insecurity among China's leadership. During the 1991 Gulf War, the ease with which US-led forces overran Saddam Hussein's army – then the fourth largest in the world – shocked China's military leaders.7 It highlighted the backwardness and vulnerability of the People's Liberation Army (PLA). Their insecurity was reinforced by Bill Clinton's decision to send two aircraft carriers to Taiwan during the Taiwan Strait crisis in 1996.8 China had become a net importer of crude oil that year. With 80 percent of China's oil imports passing through the narrow waterway connecting the Indian Ocean and the South China Sea, known as the Malacca Strait,9 American dominance of the sea lanes in close proximity to China posed a threat that key supplies would be cut off in the event of conflict. This focused the Chinese leadership's minds on maritime security.
The US-instigated North Atlantic Treaty Organisation (NATO) bombings of Yugoslav troops during the Kosovo War in 1999 also set a worrying precedent for China's leadership, who had strenuously opposed the action alongside Russia as interference in the internal affairs of another sovereign country. The pretext of humanitarian intervention, given continuous US attacks on China's human rights record, was a cause for serious concern to the CCP. The Bush Administration's pursuit of an invasion of Iraq in 2003 further compounded insecurities. The Chinese leadership saw little option other than to pursue comprehensive military modernisation as economic growth provided the financial means.
During the 1997 Asian Financial Crisis, in contrast to other countries in the region, China resisted devaluing the renminbi. It was hoped that currency stability would demonstrate China's financial discipline and help maintain confidence in its economy, but it also served to bolster regional economic stability. As its balance of payments surplus, particularly versus the US, surged after the turn of the millennium, China then drew heavy criticism from US policymakers for holding down the value of its currency. China's manufacturing growth contrasted with a decline in America's manufacturing capacity and it became easy to blame China for the loss of American jobs. However, on closer inspection of China's manufacturing exports, the picture becomes rather less clear cut.
A high proportion of China's exports is in the processing trade and contains high import content. One estimate shows that, of the 7.4 percent GDP growth that China saw in 2014, consumption and investment accounted for 3.8 percent and 3.0 percent, respectively, meaning that net exports only contributed 0.6 percent to China's GDP growth that year.10 What is more, by 2018, although China's trade surplus with the US had reached $419 billion, its trade with the rest of the world was roughly balanced. That is to say that, while China has a huge balance of payments surplus versus the US, this is offset by a deficit that it is running with other nations and territories, including raw material exporters such as Australia and Brazil; and suppliers of intermediate goods and components, such as Korea and Taiwan.11 The US balance of payments deficit versus China is therefore more accurately depicted as a deficit that the US is running against the rest the world.
This deficit can be explained partly by America's comparative advantage in high technology, where core research and design are carried out in the US, while lower value manufacturing and assembly have been offshored to lower cost locations. Apple is a classic example of this. A China-assembled iPad that is sold in the US for $499 generates only around $8 for Chinese labour.12 In contrast, the Chinese market has generated huge profits for American companies such as Boeing, Nike, Starbucks and Disney.13
That is not to say that the US does not have valid grievances against China in areas of trade and financial policy. Foreign businesses operating in China have long complained that Chinese government policies discriminate against them, citing lack of regulatory transparency; inadequate protection of intellectual property; difficulty obtaining local licenses; and limited protections for their commercial secrets. There is a strong case that there is indeed a highly uneven playing field for foreign businesses in China.14 Given China's high level of domestic savings, there is also a legitimate complaint about the asymmetry between the relative ease of foreign investment into China's capital markets and the still-limited channels for foreign companies to raise capital from Chinese investors.
Many of these issues arise from the fact that China continues to feature a relatively overbearing state. This and continuing shortcomings in the transparency and consistency of the legal and regulatory system are problems that China's growing population of private businessmen and entrepreneurs also increasingly chafe against. The strength of Hong Kong's IPO market provides a good illustration of this. HKEX has been the top IPO venue globally in five of the 10 years up to the end of 2020, with Mainland Chinese companies accounting for 85 percent of the funds raised over that period.15 Although Chinese businesses seeking to raise money from public markets would reap far higher valuations by listing in Shanghai (上海) or Shenzhen (深圳),16 many private businessmen still prefer to IPO their companies in Hong Kong. The reasons for this include Hong Kong's relatively reliable legal and regulatory system; the ability for them to raise funds in a currency that is easily convertible; and the desire to protect their wealth from the Chinese authorities by moving part of it offshore.
The Chinese government is not unaware of the many problems and has been pursuing gradual reforms. Many of these reforms have been market-oriented and have better aligned China's practices with international norms, including the lowering of barriers to capital flows between China and international markets. However, given the flaws in the US financial and economic model highlighted by the GFC, many in China's leadership have become even more sceptical than before about US free market ideology. To successfully bring about further financial and economic reforms now, the case needs to be stronger than in the past. US coercion has had some impact but is likely to be met with continual resistance. Ultimately, it is likely that domestic forces will be the most effective in pushing the Chinese government towards change.
In the aftermath of the GFC, Chinese officials have no doubt displayed some level of conceit and a greater degree of assertiveness in their interactions with other countries.17 Following President's Xi Jinping's (习近平) coming to power in 2012, China has also stepped up the scale of its international ambitions, notably through the Belt and Road Initiative (BRI, 一带一路), a grand infrastructure development strategy encompassing a large number of developing countries and trading partners. China's Made in China 2025 (中国制造 2025) strategy also seeks to upgrade China's industrial base from low value export manufactures to high technology value products and services. To a great extent, these initiatives are a far-sighted recognition, triggered by the GFC, that China cannot indefinitely depend on growth in exports to Western markets in light of the structural economic headwinds that those countries