Will the financial crisis make China a superpower?

The 20th century was the century of the United States. Will the 21st century be the one of China?

China is rising. Since its reform policy at the end of the 1970s, China’s economy has been growing at an average rate of 9 per cent annually. China has become the third largest world economy. It overtook the United States as Japan’s largest trading partner in 2004, as India’s in 2008, and as Brazil’s in 2009. China is the largest source of US imports, with which it enjoyed a trade surplus of $266.3 billion in 2008. In the same year, China became the largest foreign owner of American government debt, overtaking Japan.

The financial crisis has further enhanced China’s importance in the world economy. It is said to have about $2 trillion in foreign currency reserves. This huge reserve of US currency contrasts sharply with the US, whose budget deficit is likely to exceed $2 trillion this year.

The Chinese government’s $586 billion stimulus package demonstrated its determination to keep the crisis at bay. The Chinese Premier Wen said in early 2009 that China would introduce a second stimulus package to boost its economy if necessary. The G-20 summit indicated that China is expected to play a bigger role in dealing with the crisis.

Chinese leaders are not only trying to find solutions for the problems that have occurred, but are also interested in finding out why they occurred in the first place, so as to avoid similar problems in the future.

Zhou Xiaochuan, the head of the People’s Bank of China, feels that the flaws in the international monetary system could be dealt with to a certain degree by creating a new world reserve currency. His controversial idea alarmed the Americans, but was quietly welcomed by many Europeans and Asians. Although Zhou’s idea is not to replace the dominant status of the dollar in the near future, it may provoke a revolution in the international monetary system.

Together with China’s rising economic power, China has also steadily increased its military expenditure, with double digit annual growth. It is building its military force into one which matches its rising economic power and which can defend, in particular, its air and sea territory. After many years of discussion among its leaders, China will probably have its first aircraft carrier in the coming years.

As a consequence of its military build up, China has gradually flexed its muscle and become more active. For the first time since the Ming Dynasty, China sent ships to protect its vessels when two of its destroyers and a supply ship were sent to an area off the Somalian coast. China has also carried out several military exercises with other members of the Shanghai Cooperation Organisation.

Since early 2009, there have been several reports that Chinese vessels have harassed alleged American spying ships in the South China Sea. In June, a Chinese submarine accidentally collided with an underwater sonar array towed by an American destroyer which was in the South China Sea to participate in a joint military exercise with ASEAN members.

Most recently, the BRIC (Brazil, Russia, India, China) countries held their first summit meeting. Seeing the international crisis as an opportunity for the international economic and political order to be readjusted, the four countries expressed their ambition and willingness to participate more actively in international affairs. China is undoubtedly the most influential among the four, but the BRIC format can be a good platform for China to bargain with the US and Europe on issues of sustainable development, global warming and world peace and stability.

Some people have postulated that the role of the United States in the global economy is declining, with its position as a world leader being replaced by China. The financial crisis seems to give China a golden opportunity to strengthen this trend. But, while it is undeniable that there is a long term tendency that China is rising, the current financial crisis will not dramatically facilitate China’s rise at the sacrifice of the interests of the United States.

Why not? First of all, the financial crisis is a challenge for both the US and China. The fact that China is the largest owner of US debt only serves to emphasise that the two are in the same boat. Both must accept this major interdependence and coordinate with each other. And like it or not, China will be obliged to continue to buy American debt.

Although the Chinese Premier Wen expressed his concern early this year about the value of the American debt, he knows that if China stopped buying it, its value would drop even more drastically. China needs to help the United States in order to help itself. On the other hand, while China is in search of other currencies as target of investment, it seems that neither euros nor yens are ready to serve as alternatives.

Furthermore, China’s development is led by exports. The drastic decline of demand from the United States, the European Union and Japan due to financial crisis had an immediate impact on Chinese foreign trade - it decreased 25.9 per cent in May 2009 compared to the same period of the previous year. Many export-oriented enterprises have been bankrupted and more than 20 million workers have become jobless.

The financial crisis posed questions to the Chinese government: how to effectively stimulate domestic consumption? How to create jobs for the laid-off workers? How to maintain sustainable development? Beijing faces huge pressure to maintain the 8 per cent growth rate of its GDP, because failure to do so would bring huge social problems. Even if the problems are solved in the short term, the problem of sustainable development in the long run will remain a challenge for the Chinese government.

China will need to address lagging political and social reform in order to build up a comprehensive welfare system which offers its people reasonable social security. Only by removing Chinese people’s concerns about education, medical insurance and pensions can domestic consumption be stimulated effectively. But this will not happen overnight.

Finally and most importantly, China has neither the ambition nor the capability to challenge the leadership of the United States. Compared with the superpower of the US, China is only a regional power. Both the cost and risk are too high for Beijing to commit itself to so many international issues as the US, from Iraq to Afghanistan, from Iran to North Korea.

More power in the world means more responsibility. But China is not yet ready to take on so much international responsibility. China’s top priority is its own economic development. What China cares about most is regional peace and stability. Despite the fact that China is rising, it is incapable of playing the role the United States has been playing in international affairs.

In fact, the economic and political order established by the United States created a favourable environment for China’s development. China jumped on the bandwagon of the US and benefited tremendously from the international system maintained by the US. The benefits Beijing gains will encourage it to stay under the leadership of Washington.

If managed well, China’s both hard power and soft power will further grow after the financial crisis - but the US’ will still be unmatched. What China needs to clarify to the US is that they are not competitors but partners - for both their own interests’ and those of the world.