By Emma Graham-Harrison
BEIJING, Aug 2: China is pulling past the global economic downturn with robust growth, but this has generated new risks and concerns over trade imbalances, currency policy and the overheating of the domestic economy.
Following is a summary of the key risks for China:
– CURRENCY AND TRADE DISPUTES
A June announcement that Beijing would allow more flexibility in its yuan currency caused a brief let-up in pressure on one of the most sensitive issues in the bilateral relationship.
But there is now mounting anger in the United States about the slow rate of appreciation of the yuan, which had been tightly pegged against the dollar for two years. Analysts have always said Beijing is likely to sanction only a very gradual rise.
With both countries still worried about growth, there is also room for disputes over trade protectionism or China’s currency policy to flare up again. U.S. lawmakers have scheduled a hearing for Sept. 15 to consider whether government action is needed to address China’s exchange rate policy.
Rising disquiet about Chinese trade policy in the United States could be exacerbated by broader tensions over Tibet and Taiwan and now the South China Sea, and inflamed by rhetoric in the run-up to U.S. Congressional elections in November.
Foreign investors are worried about the country’s “indigenous innovation” rules for government procurement, which they say favour domestic producers. Beijing says it treats foreign firms fairly and modified draft regulations to address their concerns.
What to watch:
— The speed of the yuan’s climb. Economists expect a cumulative rise of 2.4 percent against the dollar by the end of the year. Would that be enough to disarm U.S. critics?
— The rhetoric from Washington and Beijing. Both sides want to avoid any serious economic dispute but also protect domestic industry and maintain popular support at home. Signs Congress is gaining more influence over U.S. policy, or that retaliatory trade measures could expand, would unsettle markets.
— The debate in China. A top-down political system limits outright clashes between officials and ministries with rival views on the currency, but tracking public comments can provide useful hints on the direction of policy.
– SOUTH CHINA SEA
Relations between Washington and Beijing had improved after a tense start to the year, but a recent spat over the South China Sea risks rekindling tensions.
China made clear earlier this year it had put the issue of its sovereignty over the South China Sea on a list of “core” national security interests including Tibet and Taiwan — leaving little or no flexibility in negotiations.
The United States appears to have responded by strengthening support for rival claimants to parts of the sea, an area potentially rich in energy and key for shipping which has long been dogged by a web of sensitive territorial claims.
China was furious after the United States and several other nations launched the first ever substantive discussion of the issue at Asia’s top security forum in July.
Beijing had kept the South China Sea off the agenda of the ASEAN Regional Forum (ARF) for a decade and a half.
Beijing insists that the disputes — serious enough to have sparked sometimes deadly naval clashes — should only be handled on a one-on-one basis. Some describe the strategy as “divide and conquer” because China is by far the most powerful claimant.
The decades-old disputes are with Brunei, Malaysia, Taiwan, the Philippines, and Vietnam. China claims the majority of the sea based on what it says is historic ownership of small, often uninhabited islands.
For Washington, staking out a position on the South China Sea dispute is a gamble. It allows the Pentagon to reassert U.S. influence in a distant but vital area. However, it does so with no clearly defined goal and is up against a resolute and patient Beijing.
What to watch:
— China pressuring foreign resource firms not to work in disputed waters under contracts with other claimants.
— Potential standoffs with U.S. ships and spy planes, or clashes between Chinese forces and militaries of other claimants.
— More Chinese military drills in disputed waters.
— More public Chinese discussion of the South China Sea as a “core” interest, underlining a more aggressive approach.
– LABOUR UNREST AND SOCIAL STABILITY
China has been hit by a series of strikes in recent weeks, especially in its southern manufacturing region, at factories making everything from car parts to air conditioners. Most have ended with substantial wage increases for workers.
Wider discontent among an estimated 150 million pool of migrant workers could potentially undermine government authority or erode the country’s competitiveness as a low-cost factory hub.
But the unrest also fits with one of Beijing’s main economic agendas — trying to boost domestic consumption and narrow the yawning rich-poor gap, by lifting the share of national income taken home by workers.
China’s Communist Party has so far maintained general authority and control. Outbreaks of discontent have remained brief and localised, and authorities have been toying with bringing usually toothless official unions into negotiations.
But with the Party treating social stability as a crucial issue, even limited challenges to the Party’s control can produce outsized policy reactions. If Beijing feels strikes are getting out of its broad control, expect a rapid crackdown.
Simmering tensions about land seizures and forced eviction remain another flashpoint, with several suicides by desperate homeowners in recent months stoking public anger. The government has laid out new rights for home and land owners, although it is yet to be seen whether they will be respected on the ground.
Ethnic tensions in Tibet and Xinjiang have distracted the central government and drawn international concern, but have not seriously threatened national stability.
What to watch:
— Emergence of any regional- or national-level protest movements. So far, protests have tended to be organised at individual factories or directed at local officials. Strict controls make it difficult to form organised national movements, but the internet played a role in spreading labour unrest as workers read about successful activism in other plants.
— Signs that urban public concerns about inflation and housing costs are congealing into broader discontent.
– FEARS OF SLOWDOWN
After worries about a housing bubble and unsustainable levels of local government debt in the first half of the year, some investors now fear that government efforts to take the market off the boil could have a chilling impact on economy.
China’s vast manufacturing sector cooled further last month as the government kept its foot on the credit brakes and held firm in its efforts to deter real estate speculation.
The official purchasing managers’ index (PMI) fell to a 17-month low in July of 51.2 from 52.1 in June.
But China’s growth is underpinned by rising incomes and vast infrastructure spending.
So while over-tightening has been a problem before, most economists expect a slew of more experienced policymakers to guide the economy to growth of around 9 percent this year.
So far, there has been only a mild correction in the property sector in response to the tightening campaign, and Beijing has indicated that it is determined to keep its foot down until prices drop to a more reasonable level.
The issue is of particular concern because economic growth is the Communist Party’s main tool for ensuring stability and legitimising its rule.
What to watch:
— Hints from officials or state media that Beijing might step back from tightening policies and allow looser real estate and lending conditions again. Easing the grip on these sectors would rekindle concerns about a housing bubble and bad debt, but lessen fears of a sharp tightening of the economy.
— Government data on everything from housing to factory output and prices, although sometimes flawed, offers the best indication of underlying economic trends.
– TENSIONS OVER NORTH KOREA
Northeast Asian ties have been put to the test by the sinking in March of a South Korean warship, with the loss of 46 lives.
Seoul, Tokyo and Washington blame Pyongyang. China, secretive North Korea’s only major ally, has refused to join the chorus of condemnation and says only that it is still assessing Seoul’s investigation into the sinking.
The United Nations Security Council last month condemned the attack but did not directly blame the North.
Beijing is wary of abandoning its unstable neighbour, fearing loss of influence. Ultimately it wants to avoid a collapse of the government of Kim Jong-il, which could send hundreds of thousands of refugees flooding across its border and remove a buffer against the U.S. troops stationed in South Korea.
China’s relations with its near neighbours are at risk, and the U.S. has stressed the importance of a strong response to the “act of aggression”, while Obama has suggested Beijing is hiding from the risks posed by North Korea.
China and the U.S. have however narrowed their differences over how to contain Iran’s nuclear ambitions, with Beijing supporting a new round of United Nations sanctions.
What to watch:
— China’s eventual response to South Korea’s report. If China remains reluctant to press Pyongyang, ties with other neighbours could suffer, as well as progress on other issues that require Seoul and Tokyo to work with Beijing.
— Beijing and Pyongyang seem keen to revive six-party talks on denuclearisation, in limbo since 2007. But Seoul and Washington have said Pyongyang must admit responsibility for the Cheonan incident before they will return to the table.
— Any signs of further belligerence from North Korea, which threatened to begin a “sacred war” against the United States and South Korea in response to military drills by the allies. (Editing by Andrew Marshall)
