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China pushes regional domination
By Sushil Seth
Sunday, Aug 01, 2010, Page 8
China is flexing its muscles to assert its power on a range
of issues. One of the most interesting and significant of these moves was the
downgrading of US Treasury bonds from the top AAA rating to AA with a negative
outlook, by China¡¦s Dagong Global Credit Rating agency.
This is China¡¦s first foray into rating the credit worthiness of other
countries. China believes that the existing international credit rating system
(involving agencies like Moody¡¦s, Standard & Poor¡¦s and Fitch) has not worked
well.
Dagong chairman Guan Jianzhong (Ãö«Ø¤¤) reportedly said: ¡§The essential reason for
the global financial crisis and the Greek crisis is that the current
international rating system cannot truly reflect repayment ability.¡¨
By downgrading the US Treasury bonds and assessing other countries¡¦ economic
credentials (for instance, Japan, Britain and France have low AA- ratings),
China is setting itself up as the alternative ¡X if not the only ¡X economic
powerhouse.
If China were to follow the logic of its own Dagong agency, it would stop
investing in US Treasury bonds and might even start winding down its
considerable investments in US bonds. This would be very destabilizing for the
global economy, and damaging to China¡¦s US denominated investments.
The important question is: What leads China (while Dagong is privately owned,
nothing of this significance happens in China without the government¡¦s
authorization) to believe that it can do a better job of credit rating than the
existing agencies?
The assumption here is that China has a strong economy with virtually no
sovereign credit risk. However, if China were an open and transparent country,
it would have to be concerned about its economic vulnerability on two counts.
First, China¡¦s total debt ¡X central, regional and local authorities, as well as
other government entities ¡X is estimated by some experts to be close to 100
percent of its GDP. Assuming this figure is accurate, or close to reality,
China¡¦s credit worthiness is as flaky as the most indebted countries in the
world.
Any country that rates its debt at 20 percent, when the real figure could be so
much higher, cannot be trusted with rating the sovereign credit risk of other
countries.
This should also apply to Western credit agencies because their track record of
failing to predict the recent global economic crisis, as well as the Asian
crises of 1997 and 1998 and the bursting of the dotcom bubble in 2000, is pretty
terrible.
In the agencies¡¦ case, though, they did not officially speak for any
governments. In China¡¦s case, despite Dagong¡¦s claim of independence, it is not
believable. For instance, Dagong¡¦s report was announced at the headquarters of
China¡¦s official Xinhua news agency.
Second, in the last year, China experienced phenomenal growth in lending by its
banks and other agencies. By one estimate, in the first half of last year,
Chinese bank lending was 28 percent higher than official figures.
More and more loans have been repackaged into investment products, not unlike
the subprime mortgage products.
As Bloomberg¡¦s William Pesek wrote: ¡§Repackaging loans and moving them off
balance sheets is exactly what got corporate America into trouble and almost
killed Wall Street.¡¨
¡§Such practices raise the odds that China is paving the way for a wave of bad
debts,¡¨ he added.
China¡¦s economy seems to combine the elements of both the US¡¦ and Japan¡¦s
economic malaise of phenomenal credit growth and emerging bubbles in real estate
and stock markets. In other words, setting up a credit rating agency does not
make China a superpower.
However, China is not only challenging the US on the economic front, but
regarding issues of territorial and maritime sovereignty. For instance, in the
1990s, China passed domestic legislation claiming the South China Sea as its
territorial waters.
At that time it looked like an ambit claim that was still subject to peaceful
negotiations with its Asian neighbors who have rival claims. Now, China has
proclaimed that the South China Sea is part of its ¡§core national interests¡¨ and
beyond any negotiation.
This means China will be able restrict and control traffic through the South
China Sea ¡X one-third of all global commercial shipping passing through it. In
this way, China is not only claiming sovereignty, but also challenging the
dominance of the US Navy.
However; the US response is as timid as could be, with US Assistant Secretary of
State Kurt Campbell emphasizing the importance of dialogue, ¡§not just with
China, but with our friends in South East Asia, to ensure that we fully support
the 2002 process between China and South East Asian states to deal with any
outstanding issues through diplomacy.¡¨
China certainly signaled that it does not have any intention of pursuing
diplomacy when it defined the South China Sea as its ¡§core national interest.¡¨
At the same time, China has reacted strongly to the joint US-South Korean naval
exercises in the waters around South Korea. Coming after the sinking of the
South Korean naval ship Cheonan by North Korea, these exercises are a warning to
Pyongyang that the US remains committed to the defense of South Korea.
Chinese Foreign Ministry spokesman Qin Gang (¯³è) had earlier warned that China
was ¡§firmly¡¨ opposed to any foreign warships or aircraft conducting activities
undermining China¡¦s security in the Yellow Sea and China¡¦s coastal waters.
However, China is unwilling to exercise its leverage on Pyongyang to draw it
back from its brinkmanship. Indeed, North Korea is ratcheting up its rhetoric by
warning of a ¡§physical response¡¨ to new US sanctions.
US Secretary of State, Hillary Rodham Clinton said at the recent ASEAN Regional
Forum gathering in Hanoi that, ¡§peaceful resolution of the issues on the Korean
Peninsula will be possible only if North Korea fundamentally changes its
behavior.¡¨
That does not look like it is happening soon, if at all, while China looks the
other way. North Korea¡¦s belligerence, as well as China¡¦s assertive claims to
maritime areas in the South China Sea and elsewhere, is causing great concern in
Japan. The US is also worried about China¡¦s expansive claims to regional waters,
now backed up with its blue-water fleet.
A Japanese government panel has reportedly recommended deploying more of its
armed forces in coastal areas where Chinese naval traffic has increased.
The panel also recommends a more active role for Japan in its alliance with the
US. The report, as quoted in the Yomiuri Shimbun, says: ¡§From the viewpoint of
strengthening the Japan-US alliance, there should be political will ¡K to allow
[Japanese forces] to attack missiles bound for the United States.¡¨
In other words, the recommendation is for the further strengthening and
tightening of the US-Japan security relationship.
China is pursuing a policy of laying claim to as much of the Asia-Pacific region
(whether as sovereign territory or a sphere of influence) because it can get
away with it. Most of its neighbors, even when they dispute China¡¦s claims, are
not inclined to stand up to Beijing because of its growing power.
The US seems to have lost its bravado. China wants to push the US out of the
Asia-Pacific region and if the US does not take a stand on issues like the South
China Sea, it might find itself pushed out of the region.
At present, the US has two loyal allies in the region ¡X Japan and Australia. In
the case of Japan, unless the US asserts its regional role and presence, Tokyo
might feel abandoned and start adjusting itself to a China-dominated region.
As for Australia, its medium and long-term future looks like it will serve as
China¡¦s quarry, with Beijing eventually able to dictate Canberra¡¦s policies.
Sushil Seth is a writer based in Australia.
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