Analysis: Asia wary of China-U.S. economic cold war

JAKARTA Tue Jun 14, 2011 1:36am EDT

The People's Republic of China flag and the U.S. Stars and Stripes fly along Pennsylvania Avenue near the U.S. Capitol in Washington during Chinese President Hu Jintao's state visit, January 18, 2011. REUTERS/Hyungwon Kang

The People's Republic of China flag and the U.S. Stars and Stripes fly along Pennsylvania Avenue near the U.S. Capitol in Washington during Chinese President Hu Jintao's state visit, January 18, 2011.

Credit: Reuters/Hyungwon Kang

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JAKARTA (Reuters) - The uneasy peace between the United States and China may give way to worsening tensions as their economies cool, and the rest of Asia is watching warily for fear of getting squashed in the middle if the world's two biggest economies clash.

Concern about a breakdown in U.S.-China ties was a common thread running through the World Economic Forum on East Asia in Jakarta, which brought together hundreds of government officials, business leaders and academics.

Lee Hsien Loong, Singapore's prime minister, said the two sides had "avoided a collision so far" over one of the thorniest issues -- the value of China's yuan currency, which the United States wants to see rise more rapidly.

But the list of potential friction zones is getting longer.

"Both countries want to maintain a stable relationship," said Ian Bremmer, the president of New York-based political risk consultancy Eurasia Group.

"Trotsky used to say, 'You may not want war, but sometimes war wants you,'" he added, paraphrasing the Russian revolutionary Leon Trotsky.

The United States and China share a multi-trillion-dollar connection through trade and investment, and the risk of mutually assured destruction has helped to assure civility, if not trust. The debt-laden United States needs China's deep pockets, and China's exporters need American consumers.

Related strains over foreign exchange rates and trade are nothing new, but they were relatively subdued during the financial crisis when the world had bigger problems to solve.

Jaspal Bindra, the Asia CEO for Standard Chartered Bank in Hong Kong, said national considerations were once again taking precedence over international preferences.

"People will just have to live with that," he said.

GETTING IT RIGHT

Both countries face tricky economic policy decisions in the coming months that could expose raw nerves if mishandled. Both face political changes in 2012 that make the choices tougher.

Washington must find some way to shore up shaky growth while lawmakers bicker over budget cuts that look likely to become a centerpiece of the 2012 presidential election campaign.

Beijing needs to temper growth enough to cool inflation without smothering its economy, an even greater imperative ahead next year's leadership handover.

If China clamps down too hard on credit, growth will slow across Asia and perhaps the globe. Go too soft and it could inflate dangerous asset price bubbles.

Likewise, if U.S. political paralysis provokes even a brief debt default this summer, the dollar could slide and global interest rates may spike because U.S. bonds are the benchmark against which other issuers are measured.

But if the U.S. economy takes a sharp turn for the worse, the U.S. Federal Reserve may see no choice but to pump in more money. Asian emerging markets have complained bitterly that the Fed's latest round of bond purchases spawned asset price inflation elsewhere.

Indeed, Singapore's Lee urged the Americans to "put their house in order" to help Asia contain inflation.

Bremmer, the political risk consultant, pointed to two more potential trigger points for U.S.-China conflicts.

First, the old "social contract" between the two countries assumed U.S. companies would share technology in exchange for access to China's vast consumer market. Now, China employs Western technology but impedes foreign access to its market.

Second, he listed the rise of cyber attacks such as those that have hit the International Monetary Fund, Google and others. Google has said the attacks on its email system originated within China, but Beijing denies involvement.

"If you're prosecuting a murder and there's a dead body, the first thing you look for is a motive," Bremmer said. "When you look at Gmail accounts of Chinese dissidents that have been hacked, where's the motive?"

CHOOSING SIDES

The rest of Asia is acutely aware that when giants wrestle, smaller players can get trampled.

"There must be flexibility on both sides because if you don't (have that) then you create more problems for all of us," said Cesar Purisima, secretary of finance for the Philippines, which has close trade ties with both countries.

Purisima said the best protection was ensuring sound policies at home so that small countries can weather any economic storms. Groupings such as ASEAN for Southeast Asian economies can also help smaller players build up a bit more global clout.

Oh Joon, South Korea's ambassador to Singapore, said Asian countries would hate to be forced into choosing sides should the U.S.-China relationship sour.

"They don't want to answer that question," Oh said. "We all have bad memories of the Cold War."

Yang Xiyu, a senior fellow at the China Institute of International Studies, said he remained hopeful China's rise would be peaceful and likened the situation to the rise of the United States in the 19th century.

Like China now, the United States then was a swiftly rising new power, putting up a challenge to existing leaders such as Britain. Those two countries managed to avoid conflict and remain close allies today.

He said the U.S. and Chinese economies were so closely intertwined that if one side tried to hurt the other, both would feel the pain.

"That is what will prevent the U.S.-China relationship from going confrontational," he said.

But ironically, the U.S.-China rebalancing that is considered so vital to global economic stability changes that equation. As China boosts domestic demand and the United States curbs debt, their mutual dependency fades.

That is another reason why Bremmer sees conflict brewing. When asked if the U.S.-China relationship was getting better or worse -- three out of four Asia experts on a panel in Jakarta on Monday said worsening -- Bremmer's answer was unequivocal:

"I'm in the deteriorating camp," he said.

(Reporting by Emily Kaiser; Editing by Neil Chatterjee)

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