China's economic might empowers Hu on return visit

Since his last visit, China has become the world's second-largest economy. Its auto market is now the biggest. Its ranks of Internet users exceed the entire U.S. population.

January 20, 2011 05:40 pm | Updated November 28, 2021 09:43 pm IST - WASHINGTON

President Barack Obama and China's President Hu Jintao during a state arrival ceremony, Wednesday, Jan. 19, 2011, on the South Lawn of the White House in Washington. (AP Photo/Charles Dharapak)

President Barack Obama and China's President Hu Jintao during a state arrival ceremony, Wednesday, Jan. 19, 2011, on the South Lawn of the White House in Washington. (AP Photo/Charles Dharapak)

Chinese President Hu Jintao's bargaining power has strengthened since he last visited Washington in 2006. He can credit China?s explosive growth, coupled with economic misfortunes in the United States.

Mr. Hu has now shown little inclination to bow to the U.S. on issues from China's currency to its support of North Korea.

Since his last visit, China has become the world's second-largest economy. Its auto market is now the biggest. Its ranks of Internet users exceed the entire U.S. population.

Over the same time, the U.S. has shed five-million jobs, suffered a grave financial crisis and seen its unemployment rate double.

A tale of two divergent economies

'China punches harder than it did in economic and political terms,' says Charles Freeman, a China specialist at the Centre for Strategic and International Studies in Washington. 'There's no mood in China to be particularly concessionary to the United States.'

That's a sharp contrast to China's approach during Mr. Hu's last visit in 2006. Back then, it was willing to concede 'that the United States was without a doubt the big dog,' Freeman says. Now, within China, 'there's a very active debate about what China's international role should be and whether they should seize the day.'

China's rising influence is evident even in the dining arrangements for Mr. Hu's visit - President Barack Obama gave Mr. Hu the lavish state dinner that President George W. Bush denied him in 2006.

"The U.S. needs China to help deal with all the challenges it faces," says Yuan Peng, director of the Institute of American Studies at the government's China Institutes of Contemporary International Relations.

The financial crisis and the Great Recession helped shift the economic balance between the two nations. When Mr. Hu visited in April 2006, the U.S. economy was enjoying its 19th straight quarter of growth. The housing market had caught fire. Any notion that the U.S. financial system risked collapse seemed far-fetched.

China rebounds from global recession

Yet it was China that managed to rebound from the global recession with scarcely a dent. By contrast, the United States has struggled to invigorate an economy marred by slow job creation and high unemployment.

The U.S. economy is still more than twice the size of China's. But the gap is narrowing. The U.S. economy rose about 16 percent from 2005 to 2010. China?s more than doubled, according to the International Monetary Fund.

On Thursday, China reported that its economy grew a sizzling 10.3 percent in 2010. By comparison, the U.S. economy is believed to have grown less than 3 percent last year.

Surging growth has transformed Chinese living standards, especially in major cities. Citizens there enjoy better homes, schools and high technology.

And the collective appetite of 1.3 billion Chinese has turned the nation into a ravenous growth market. The value of imports nearly doubled between 2005 and last year to $1.4 trillion.

That purchasing power has helped give China sway over foreign companies in fields ranging from processed food to high-speed rail. China has pressured those companies to turn over their technology as the price of admission to Chinese markets.

China deposed the United States in 2009 as the world?s biggest auto market (ranked by the number of vehicles sold). It requires foreign automakers to forge joint ventures with Chinese partners if they want to reach Chinese buyers. Those partnerships are helping Chinese auto companies expand abroad.

'Companies realize that the future of their global business depends on being able to operate and capture domestic Chinese market share,' said Michael Klibaner, head of research for Jones Lang LaSalle Shanghai.

China has been using its wealth to expand its influence around the globe. Beijing lent $110 billion to poor countries in 2009 and 2010 - outstripping the World Bank's $100 billion, according to data gathered by the Financial Times.

Bigger voice at World Bank and IMF

China has also acquired a bigger voice at the World Bank and International Monetary Fund. As a result, it's gained a leading role in efforts to restructure the global financial system.

Emboldened by its success, Beijing is pushing back at Washington on a range of contentious issues. In climate talks, for instance, it's pledged to rein in China's greenhouse gas emissions but has rejected binding limits or a system to monitor its output.

China, one of five permanent U.N. Security Council members with veto power, has put aside its traditional reluctance to become involved in global affairs. It's joined Russia, for example, in resisting Western pressure to sanction Iran over its nuclear programme.

Beijing also has frustrated Washington by refusing to leverage its role as a supplier of food and fuel to North Korea to force Pyongyang to stop provocative behaviour. North Korea has rattled its neighbours and Western nations by pursuing a nuclear weapons programme, sinking a South Korean warship and shelling a South Korean island.

Since Mr. Hu's last visit, the Chinese have more than doubled their holdings of U.S. Treasury debt to nearly $896 billion. When Mr. Hu visited Washington five years ago, Japan was the Number 1 buyer of U.S. Treasury debt.

Leading financier of U.S. budget deficits

China's role as the leading financier of U.S. budget deficits has played to its interests. Beijing is unlikely, for instance, to move as fast as Washington would like to let the value of the Chinese currency, the yuan, rise freely.

The U.S. complains that China keeps its currency artificially low to give Chinese exporters an unfair edge. A weak yuan makes Chinese products cheaper in the United States and U.S. products costlier in China.

U.S. lawmakers are threatening to impose penalties on China if it continues to keep its currency low. But China could retaliate against trade sanctions merely by buying less Treasury debt.

"If they simply reduce this year's purchase of Treasury bonds and buy a few more euro bonds, that's going to force interest rates up in the United States," says Richard Drobnick, director of the University of Southern California's Centre for International Business Education and Research.

"And if they do it abruptly, because they're mad at us, we could go into recession again," Mr. Drobnick says. "You shouldn't argue with your banker."

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