A China that says "no" casts economic shadows

BEIJING (Reuters) - A deepening chill in the Chinese political atmosphere is as deadening as the harsh winter weather that has been gripping the capital. For global economic policy-making, that could magnify friction on everything from trade to exchange rates and global warming.

In areas as diverse as Internet security and human rights, China has staked out a hard line that is increasingly putting it at odds with the international community.

Beijing’s virtual snub of talks in New York on Saturday on Iran’s nuclear program was just the latest example of what many China watchers see as a growing assertion of its self-interest.

One Western political leader, according to an associate, said after Beijing took the lead in blocking a deal at last month’s Copenhagen climate talks, he had not expected China to be throwing its weight around in such a way for another 10 to 15 years.

Some diplomats bluntly say China is becoming arrogant.

“There is a fundamental change unfolding in the way China sees itself relating to the outside world,” said Manu Bhaskaran with Centennial Asia Advisors, a strategic advisory firm, in Singapore.


Some trace the change to the run-up to the 2008 Olympics, when China closed ranks in a display of nationalist fervor after protesters angry at Beijing’s policy in Tibet disrupted the relay of the Olympic torch in Britain, France and the United States.

The global financial meltdown has further buttressed China’s confidence. Whereas the West suffered a deep recession because of reckless bankers and feckless regulators, China escaped with barely a scratch.

As such, stability obsessed Beijing is in no mood to take lessons about the merits of unfettered markets, as U.S. President Barack Obama and top EU officials discovered in November when they pressed China to let the yuan rise.

The role of the state in restoring China’s blistering growth has further emboldened the central government and state-owned enterprises, whose influence has grown at the expense of private and foreign companies.

Overseas businessmen are aghast over recent rules to promote technological innovation that they say blatantly discriminate in favor of national champions.

Political maneuvering ahead of leadership changes at the top of the ruling Communist Party in two years’ time is also hardening Beijing’s stance, some analysts believe.

Making what could be construed as concessions to the outside world is not generally a passport to promotion in China.

Bhaskaran sees things differently: “I think this change goes beyond the jockeying for position ahead of the handover of power in 2012. It reflects the very real shift in the balance of power in the world.”

According to this line of thinking, China can afford to be more assertive because it sees the United States stretched militarily and weakened financially; Japan in irreversible decline; and Europe unable to get its act together.


In such circumstances, there is a risk of policy missteps if China is perceived by its partners as digging in its heels, potentially ushering in a cycle of tit-for-tat retaliation and resentment.

Take trade. The temptation to blame China for “stealing” American jobs can only grow if U.S. unemployment remains in double digits.

“Recent calls in editorial pages for a campaign of tariff retaliation against China’s exchange-rate policy are setting a worrisome tone for trade relations in 2010, and the fact of the U.S. midterm congressional elections in November likely will keep ‘fair trade’ a live political issue - and market risk - for the duration of the year,” said Michael Kurtz, head of Asian equity strategy at Macquarie in Shanghai, in a report.

Or take the recent cyber-attacks on Google GOOG.O in China, the latest episode in a long-running battle for control of the Internet.

Eurasia Group, a New York based political risk consultancy, said the incident could cause the U.S. business community to turn sour on China, eroding an important support base for Beijing.

“The globe is looking at China as the world’s first major economy to recover from the financial crisis and expectations of the ensuing responsibilities that Beijing should be picking up as a result of their new-found stature are growing very rapidly,” said Nick Consonery, a Eurasia Group analyst.

However, Beijing does not look ready to take up the leadership role being thrust upon it, Consonery said.

“The fundamental driver -- and you can talk about this for the currency and especially for climate change -- is that Beijing is simply not going to be willing to sacrifice any of its domestic growth or domestic political and economic stability goals for any kind of global agreement or cooperation,” he said.


Some other China watchers dismiss the idea that policy is being hijacked by nationalist hardliners.

“China’s economic integration globally has been steadily increasing. That leaves them more dependent on good relationships, both economically and politically, but it also means they’re going to run into more headaches and conflicts,” said one analyst, who declined to be identified because of the sensitivity of the issue.

Largely, he said, the problems were being managed satisfactorily: there was every chance that Beijing would resume the yuan’s appreciation, frozen since mid-2008; China had handled nearly all trade spats disputes according to World Trade Organization rules; and China boosted its net purchases of U.S. Treasury securities last year -- hardly the hallmark of a country looking to pick a fight.

“That said, the Chinese government’s management of the perceptions of all these things has been pretty bad. So the really interesting issue is whether the perception is much worse than the reality and what does that mean in the U.S. political context,” the analyst said.

Editing by Mathew Veedon