February 1, 2010 / 9:12 AM / 10 years ago

Factbox: How China's anger could hurt ties with the U.S.

BEIJING (Reuters) - China has threatened to punish the United States for plans to sell some $6.4 billion of arms to Taiwan, the disputed island that Beijing calls its own.

Here is how China’s anger could be felt:

MILITARY TIES

China has said it will curtail military contacts with the United States, returning to a freeze imposed in 2008 after the Bush administration flagged the arms sale to Taiwan.

China’s official Xinhua news agency said a planned visit by U.S. Defense Secretary Robert Gates later this year will be shelved, as will talks between the Chinese People’s Liberation Army Chief of General Staff, Chen Bingde, and the Chairman of the U.S. Joint Chiefs of Staff, Mike Mullen. Mutual visits by Chinese and U.S. navy ships will also be affected, said the report.

Defense contacts between China and the United States have, however, always been limited and so there will be scant effect on U.S. operations. Some analysts have also said Beijing might stage more missile tests to demonstrate its anger.

COMMERCIAL SANCTIONS

China has said that U.S. companies involved in selling arms to Taiwan will face “corresponding sanctions,” breaking with Beijing’s long-standing reluctance to use formal sanctions in international disputes.

The vague warning did not specify when any sanctions would take effect, but companies that could be affected include Sikorsky Aircraft Corp, a unit of United Technologies Corp; Lockheed Martin Corp; Raytheon Co; and McDonnell Douglas, a unit of Boeing Co.

Beijing could face challenges that any such sanctions violate commitments to open trade it has made as a member of the World Trade Organization. In response, it could argue the sanctions are a legitimate act to protect national security.

Even without official penalties, China can informally punish foreign governments and businesses through adverse decisions on tenders, contracts and regulatory disputes.

ECONOMIC AND CURRENCY TIES

China is the world’s third-biggest economy, behind Japan and the United States, and holds foreign exchange reserves worth $2.4 trillion. Economists have estimated about two-thirds of those reserves are invested in U.S. dollar-denominated assets.

While China is the single biggest holder of U.S. Treasuries — owning at least $776.4 billion of U.S. government debt at the end of June 2009, according to statistics — there have been no signs Beijing will use broader trade penalties or its dollar holdings to punish Washington.

Doing that, or even hinting at it, would jeopardize the value of China’s own assets and alarm investors. Beijing appears too focused on shoring up economic growth to risk such steps.

Trading in offshore one-year dollar/yuan non-deliverable forwards on Monday indicated investors foresee a slightly slower appreciation for China’s yuan, with Beijing less willing to heed Washington’s calls for a currency rise.

INTERNATIONAL COOPERATION

China has said cooperation with the United States over regional and international problems will be hurt by the dispute, but the Chinese Foreign Ministry did not spell out what issues could be affected.

The government is likely to show its anger in oblique ways, such as delaying talks or downgrading representation at them, rather than through substantive policy reversals.

Washington has looked for stronger Chinese support over several international worries, chiefly the nuclear ambitions of Iran and North Korea.

China is a permanent member of the United Nations Security Council, and so has the power to veto any proposed resolutions. Its rising influence and status as the world’s biggest developing country also give it clout over issues such as climate change and international financial reforms.

BILATERAL DIPLOMACY

China’s Foreign Ministry has canceled one scheduled meeting between senior Chinese and U.S. officials, a vice-minister level meeting on strategic security, arms control and nuclear non-proliferation.

Other bilateral talks are also likely to be curtailed or downgraded. They could include a dialogue on human rights that President Barack Obama and President Hu Jintao agreed to during their summit in November.

It is less clear whether China will show its anger by delaying, shifting or downgrading regular Joint Commission on Commerce and Trade (JCCT) talks scheduled for later in the year, or the higher-level Strategic and Economic Dialogue due to be held in Beijing around mid-year.

Washington officials were recently in Beijing to discuss preparations for those two meetings, and Chinese President Hu is expected to visit the United States later this year.

PUBLIC OPINION

Chinese media and Internet sites have sounded public anger about the proposed arms sales and the dispute will stoke anti-American sentiment.

In a 2008 poll of Chinese public views of the United States by the Chinese Academy of Social Sciences, 46 percent of respondents said the Taiwan issue was the biggest problem in China-U.S. relations — by far the most popular response.

Public anger over the arms sales has already produced calls for boycotts of American companies and products. Similar protests against French, Japanese and U.S. companies in past years have erupted and then quickly petered out with little lasting effect on their sales in China.

Editing by Ken Wills; Editing by David Fox

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