January 30, 2010 / 6:13 AM / 7 years ago

Scenarios: How could China hit back at U.S.?

BEIJING (Reuters) - China warned on Saturday that Washington's announcement of arms sales to Taiwan would seriously damage cooperation between the two global powers.

Beijing has not said how it may retaliate. Here are some of the steps it could take.

Military Ties

The most likely and immediate consequence will be that China again freezes military ties with the United States, which had been thawing since 2009, as the Obama administration sought to expand contacts between the Pentagon and the People's Liberation Army.

Those contacts, especially any high-level military visits, are likely to be on hold for months to come.

Economic Ties

China has the world's biggest pile of foreign currency reserves, much of it held in U.S. treasury debt. China held $798.9 billion in U.S. Treasuries at end-October, displacing Japan in September 2008 as the largest foreign holder.

But China has shown no sign of trying to use that stake to punish the United States. Doing so, or even hinting that it could, would alarm global financial markets and push down the value of the dollar, thus dragging down the value of China's dollar-denominated assets.

Diplomatic Cooperation

A more likely option is that China downgrades cooperating with the United States on diplomatic disputes that Beijing treats as less urgent than Washington.

One candidate here would be Iran. The United States and other Western powers are preparing to push for a fresh United Nations Security Council resolution imposing additional sanctions on Iran over its nuclear activities.

As a permanent member of the Security Council, China has the power to veto any resolution, and it has never been a supporter of strong sanctions against Iran, a major oil supplier. Now Beijing could drag its feet even more.

Bilateral Dialogue

China could also slow, downgrade or postpone talks with the United States spanning issues such as human rights and trade.

Both sides are due to hold a high-level "strategic dialogue" on political and economic issues later this year. So far preparations have been moving forward with no hint, at least yet, of those talks being stymied.

The Obama administration is preparing a global summit on nuclear arms issues for April. China could also use that event to voice its anger. So far Beijing has not publicly said which of its leaders, if any, will attend that summit.

Google Dispute

Internet search giant Google Inc's threat last month to quit China over hacking has so far been met in Beijing with a fairly low-key response, even as state media has lambasted the United States and the company.

The Taiwan arms sale could complicate efforts to resolve that dispute by making China less accommodating and taking a harder line.

China's Detente With Taiwan

China is unlikely to saber rattle at Taiwan and throw off-track a detente process which has gathered pace since Ma Ying-jeou because the island's president in 2008.

But Beijing could slow down talks on a broad-ranging free trade agreement with Taiwan, seen as key to boosting the island's economic fortunes, hard hit by the global downturn.

The arms sale is also a timely reminder that despite warming cross-Strait ties, political and military suspicions remain deep-rooted.

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