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Clayton Reeves
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Clayton has been an avid follower of world economics and investments for more than fifteen years. He possesses strong value based investment convictions, but also realizes the material impact that macro events and market momentum have on portfolio return. Mr. Reeves focuses on global... More
  • China’s Expansion of Power 0 comments
    Dec 9, 2010 8:03 PM
    The Nobel Peace Prize ceremony offers an excellent opportunity to look at the variety of ways that China has changed over the last few years.  When it first became clear that China would become a world power (in large part thanks to massive population and production advantages), there was a focus on a peaceful rise.  China, it was said, studied history and vowed to avoid the mistakes of arrogant countries like Germany that wanted too much power, too soon.  However, recently there has been more focus on the interests of China in preserving growth and stability internally, with less care for the rest of the world.  I think it would serve the Western nations well to revisit the prognostication that China has good intentions.

    First, let us take a look at the impending Nobel Peace Prize ceremony and the wider implications it has for the world in general.  It has been widely documented that Liu Xiaobo will not attend the Nobel Peace Prize ceremony on December 10th.  The wife of Liu has also been placed under house arrest since three days after the award was announced and will remain there until after the award is distributed.  This will only be the fifth time that the winner was prevented from attending for political reasons, and only the second time that a family member will not be present.  As this is being written, CNN is inaccessible to most users on the mainland.  Nineteen countries will boycott the awards this year, almost double that of two years ago, which in itself is indicative of the growing power of China.

    Long have human rights advocates clamored for increased social reform to keep pace with the vigorous economic growth in China.  However, these calls are increasingly met with internet blocks, jail sentences and angry accusations of Western meddling as opposed to any real philosophical exchange.  Those countries that may have once pushed an agenda are becoming more hesitant in the face of a China that now uses every power in their arsenal to squeeze anyone seen as consorting with the West (see Japan, rare earths).  Geir Lundestad, the director of the Nobel Institute said that:

    China is becoming more important in international politics, and a dwindling number are willing to criticize the parts of the country’s policies that deserve criticism.

    People are letting this political chess match serve as a microcosm for relations with China in general.  As China’s clout grows, so too does their boldness in asserting themselves in the Eastern sphere.  The PLA has been building a very powerful Navy, and China seems reluctant to speak on a united Korea if it will be seen as working on American terms.  China still makes their decisions primarily to benefit China, and considers foreign interests to be a distant second place.  The recent meeting with North Korea notwithstanding, China seems less comfortable with using their new found power to help stabilize their side of the planet through foreign policy.

    They are acting with the confidence of a stage hand without realizing they’ve gotten a leading role.  If they accept this role and the confidence it instills, then they will stop seeing things through the paranoid eyes they wear today.  Right now, China suspects everything is a Western plot to undermine their influence.  As a result, they are becoming bristly and defensive, and in doing so, are pushing away those nearest to them (see Japan, India).  When these neighbors, made uneasy by trade sanctions and military showboating, begin conversations with the United States, China sees this as even more Western meddling.  This vicious cycle continue.  You can see that the political polarity of socialism and democracy have begun testing the idea that a communist country can share power peacefully alongside a democratic one.

    China’s hubris and introspective strategy is pervasive, crossing the boundaries of politics into economics.  China doesn’t offer the most reliable numbers in the world, but this wouldn’t be an issue if China wasn’t such a big fish.  A new study from the IMF indicates that a sustained 1% increase in China’s GDP translates to a 0.4% increase in world GDP.  The IMF said that:

    A few decades ago, China’s expansion influenced growth only in neighboring countries; it now affects growth all over the world.

    That makes the difference between 8% and 11% growth a very big one indeed.  One of the main problems is that the numbers China releases are shrouded in secrecy and get very little external visibility.  It doesn’t take much of a leap to imagine China molding their numbers for their own interest. 

    Take, for example, the fact that China has grown at 10% for years upon years with very little to no inflation.  There was a report put out last month by Xu Qiyuan that accused the government of shaving inflation by as much as 7%!  People in mainland China are seeing prices increase, and many warn of an impending asset bubble.  Yet, there is no talk from government officials of inflation as a major concern.  I would warn that the housing and commodity markets in China are in very real danger of becoming pop-able.  It is impossible to tell who is correct without having access to the wealth of data… which is why I encourage everyone to take information from Beijing with a shaker full of salt.

    There is a growing debate in Beijing over whether the best course of action is to treat Washington with eternal enmity, or work with them as a partner in preserving world stability.  These talks between hawks and doves are not likely to come to any resolution soon.  However, China needs to assert themselves in the role of a world leader and not a petulant child if they hope to gain respect.  The result of cooperation would not lead to a better world for everyone else, but also a better situation for the people whose interests China chooses to so fervently protect: the Chinese themselves.  Fear from trade sanctions and naval exercises can only go so far in keeping neighbors in line; it will take true political maturity for China to begin to wield its new found power in a way that will benefit most.



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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