It appears China may have diplomatically over-reached regarding Taiwan and is now suffering the consequences. The New York Times over the past week has had several good articles looking at China from an economic, military and diplomatic perspective.
China has been experiencing a tremendous infrastructure expansion that has played a large part in her growth. Joseph Kahn in the NYT writes:
"The Communications Ministry announced in January that it planned to pave a further 53,000 miles of intercity highways and urban ring roads within 30 years at a cost of $250 billion. Total mileage is expected to overtake the American Interstate system, the world's biggest, around 2020.
The spending has transformed China's landscape, adding roads, bridges, subways and ports - as well as factories, mines, steel mills and power plants - that could provide the foundation for double-digit growth far into the future.
But to an extent that is alarming some Chinese and Western economists, such investment itself is a main driver of China's economy, which grew at a 9.5 percent pace last year. The investment binge, like any bubble, could produce unneeded factories and underused highways and power plants, weakening the country's already shaky financial system.
"If China keeps relying on cheap capital to generate growth, sooner or later it will face a major crisis," said Xu Xiaonian, an economist at the China Europe International Business School in Shanghai. "Right now, the economy is afflicted by the curse of diminishing returns."
The article goes on to suggest that 45% of China's GDP growth is attributable to infrastructure. "Mr. Xu [an economist with the China Europe International Business School] said the economic payoff from these huge investments had fallen sharply. He estimates that 15 years ago, China generated 50 cents of growth for each dollar it invested in fixed assets - roads, subways, and steel mills and the like. That return has fallen to about 20 cents for each dollar invested, he says." This compares with 15% of the United State's GDP growth coming from similar projects.
China may overproduce, especially because of its centralized economy, and not be able to sustain its current growth rate or utilize all of its existing capacity. High inflation could become an problem for the Chinese government. As a side note, China's growth has probably decreased inflation here at home according to The Economist:
"A study by economists at America's Federal Reserve estimates that cheaper imports from China have lowered inflation in America by an annual average of 0.1-0.3 percentage points in recent years. Another study by Dresdner Kleinwort Wasserstein, which allows for the price-reducing effects of Chinese competition on all producers, reckons that China may have brought down America's inflation rate by almost a full percentage point."
China's growth rate was 9.5% for last year. The Chinese government believes it needs to maintain 7% growth rates to handle the influx of rural labor to urban markets, according to the above NYT article. However, the US, Japan and South Korea never exceeded the 40% investment in infrastructure. China could end up shaving half of its economic growth if it reduced its infrastructure spending to reduce over-capacity. The problem is the Chinese system of government lends itself, from its central planning system and lack of representation, to encourage large, inefficient projects to stimulate growth. It will be difficult, as it often is with US transportation bills, to slow the pork-style projects.
While North Korea simmers with a crazed dictator bent on expanding his nuclear arsenal and blackmailing all countries within missile range for fuel, food and money, China refuses to publicly step in. According to Joel Brinkley of the NYT:
"Chinese government leaders have offered Secretary of State Condoleezza Rice no assurances that they will step up pressure on North Korea to return to nuclear disarmament talks, senior officials traveling with her said Monday."
The Chinese diplomatic position is summed up as not having a great deal of influence with North Korea, even though they are their largest trading partner:
"Some local analysts say that Chinese leaders may be more worried about the possibility that the reclusive North Korean regime might suddenly collapse, or that the United States might decide to strike militarily, than they are by the possibility that the North has a small number of so-far untested nuclear warheads.
This leads into a major diplomatic overreach for the Chinese.
The officials said the Chinese repeated the explanation they have often given: that they do not have as much influence with North Korea as is widely believed, an assertion that many American and foreign officials say they discount. But this time, the officials said, the Chinese also expressed their own frustrations with the North Koreans' recent behavior.
The Chinese also urge the United States to offer "flexibility" to North Korea, an official said. "Flexibility" is regarded as code for offering incentives or concessions to the North Koreans. South Korea has also offered that view in the past.
If the Chinese want an increasing presence of importance and respect on the international stage, reducing tension on the Korean Peninsula and reining in North Korea is a fundamental test. The more the US fears for its security because of North Korea, the more involved the US will be in Asian politics and in structuring and strengthening Asian alliances (see DEL here and here for Japan related and here for India related), all of which the Chinese would prefer not to happen.
However, the domestic politics that led to the Chinese Anti-Secession Bill aimed at Taiwan (see DEL here) are now backfiring with China's relations with Europe, which has been bending over backward to expand relations to increase trade.
The United States and the countries of the EU have had a military embargo on selling arms to China since the Tiananmen Square massacre in 1989. This has been a stain for the Chinese and it has been a top policy to get the ban lifted. Jacques Chirac, the happy exporter to undemocratic regimes, has been eager to lift the ban and is supported by the United Kingdom as well as other European nations.
The bold language of the Anti-Secession Bill that codifies that China has the right to use "non-peaceful means" to unify Taiwan with China gave even the French a bit of heartburn.
Joseph Kahn writes again in a different NYT piece titled "Europe's Shift on Embargo Places Taiwan at Center Stage":
"Reports of a shift in European plans to lift an arms embargo on China have sent a sobering message to China's new leadership, underscoring the sensitivity of its Taiwan policy and the continued dominance of the United States, Chinese analysts say.
American and European officials said this week that the European Union might now delay its plan to lift the embargo, imposed after China's crackdown on democracy protests in 1989, until next year at the earliest, dealing a blow to one of China's major foreign policy goals.
European diplomats cited China's newly adopted anti-secession law and intense American opposition to easing restraints on weapons sales to explain the shift. The Chinese law adopted this month threatens military action if Taiwan pursues formal independence from the mainland."
The Chinese rush to codify its right to invade Taiwan will actually reduce the potential for the weapons systems that they will need to counter an American defense. Fortunately, the US held firm and pushed Europe away from making such a foolish decision when it is America and not the EU (can't this be said for every major global region) that defends the Pacific. President Bush lobbied the Europeans well on his trip to Europe and Secretary Rice assisted in spreading the message.
"'I think the leadership anticipated that they would get a strong reaction from the parties most directly concerned, like Taiwan and the United States,' said Shi Yinhong, a foreign policy expert in Beijing. "But I'm not so sure they anticipated second- and third-degree reactions, as from Europe. So I think to an extent this comes as a surprise."
Just a few weeks ago, Beijing seemed close to achieving its ambition of removing the embargo, which it views as inappropriate for a country of its rising stature. After persistent Chinese diplomacy, France, Germany, Britain and other European countries all signaled their willingness to remove the embargo by this summer.
But sentiment shifted after President Bush visited Europe in February, where he lobbied against the lifting of the embargo while also backing a highly restrictive code of conduct on arms sales to replace it. Congress has appeared ready to increase the stakes, threatening to punish any European companies that sell arms to China and seek defense business in the United States."
It may only prove a temporary setback as the United Kingdom will give up its presidency of the EU within 6 months, giving France another opportunity to push lifting the ban again.
It has not been a good month for the Chinese on moving their strategic objectives forward.