?For most of the past decade we were predicting that in 10 or 20 years China would become the number one super power in the world.
In terms of sheer size, China still has a way to go, but recent events have underlined that over the past two years in many areas the power baton has already passed from the US to China. And in a strange way, Australia is having trouble coming to terms with it.
We see China power emerging in the carbon debate; we see it in geopolitical terms in the Middle East and Korea; and in technology terms we see it in things such as the design of mobile phones. But the biggest change of power is in global finance, where the enormous rise in US and European government debt is accelerating Chinese influence, because China has the money to ease the western borrowing pain.
That rise in global power has dramatically changed China’s internal power structure, so western nations and global markets need to understand that they are dealing with a different China.
In the past 18 months, the Chinese hard liners have increased their influence and we are seeing a much tougher China emerge.
When it comes to China’s power, I will never forget that about 10 years ago, after a long dinner, a Chinese official confided in me that in time, China would control American economic policy via its huge lending to the US. It seemed an after-dinner fantasy at the time, but in 2010 it is much closer to reality. And potentially you can add Europe to the list.
And on another front, the likely failure of the US and Australian joint strike fighter program to produce a competitive aircraft means that by the end of the decade, US air power may no longer dominate the world. That leaves Australia very vulnerable.
Australian Prime Minister Kevin Rudd was one of the first to feel the toughening of China’s attitude after he spoke in mandarin to students at Beijing university about human rights. He was given a verbal dressing down by Chinese leaders.
Since then, the many Chinese nationals who advocated a more flexible approach to human rights have been jailed for lengthy terms.
Yet it is fascinating that the one area of the globe where the Chinese have very little influence is the price of iron ore which is a vital part of their economy – and they don’t like it. That dislike was multiplied when Rio Tinto abandoned its deal with Chinalco. The Chinese hard liners responded by arresting Rio Tinto’s chief iron ore negotiator Stern Hu and three members of his staff. Relations with both BHP and Rio Tinto are not good.
Meanwhile, the US needs China to support its treasury note and bond issues. If China steps back, conditions in the US would deteriorate and we would see a big rise in the cost of money globally. Because of the enormous level of US government debt, the cost of money will probably rise anyway, but China has the ability to reduce the severity.
Yet the US has annoyed China by its sales of arms to Taiwan and the US President seeing the Dalai Lama.
China fired a shot across the US bow when it dumped $US34.2 billion of treasuries last December. As Karen Maley reported, it was the fastest rate of selling in a decade and at the end of 2009, China’s holdings of US government debt stood at $US755.4 billion – a drop of 6% from the peak of $US801.5 billion last May.
China is telling the US to get its finances in order. As 2010 proceeds, we will see just how far the Chinese government will take this toughened attitude, always remembering that they will also suffer if the US gets into trouble. It’s not in their interests to go too far, especially as it will almost certainly cause the US to curb Chinese imports.
In Europe, it is now clear that the European banking system has funded European governments who can’t pay – a European equivalent of the US sub-prime. The consequences for European banking of not saving those countries will be severe – hence the effort to help Greece. But the whole situation will be made much easier of China helps out.
Just as China wants to see the US government take action on its debt, it will require the same action in Europe.
The Chinese hard-liners will dictate their terms. The Dalai Lama visit and the arms sales to Taiwan may come at a price.
This article first appeared on Business Spectator.
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