Giles Chance, professor at Guanghua School of Management at Peking University

Q: In the book, you mention a change from the G7 to the G20 – but there are some who say that ultimately the power lies in the G2, just China and the US.
 
A: Yes, and that’s a good point. I think that America is certainly trying to play it that way, but I don’t think that the Chinese would see it as a new world government. I think that they would see it as weakening their position by becoming overly dependent upon America. Also, I think they see themselves traditionally as the link between the rich world and the poor world. China is economically very important, but it also has the largest population of poor people – apart from India – in the world. Getting back to 1949, for many years, most Western developed countries didn’t recognize China. America only recognized China and set up an embassy here in 1979. Most Western countries – with the exception of Sweden and Britain – didn’t recognize China until a long time after the revolution. So China had to make friends with other people, and Mao went to the third world, and that’s still very much a part of Chinese history and Chinese diplomacy. So they would feel that a one-to-one relationship with America limits their options. America might see it as the way forward, but I don’t think China does.
 
Q: You also discuss China’s relationship with the developing world. How do you see China’s spending to develop Africa as changing that relationship, and China’s position as a global power?
 
A: I think it’s very significant, because the economic effect of China’s involvement since 2000 on Africa, Latin America, and other emerging countries has been very significant. I think I talk in the book, for example, about Chile, which is a big copper producer. China, for the past 10 years or so, has been buying increasing amounts of copper from Chile and developed special trading agreements with Chile and other Latin American countries. The impact on the Chilean balance of payments – simply because of the Chinese demand for copper – has turned a significant trade deficit into a very large trade surplus, something like US$6 billion. It made a huge difference for the country, and that’s an example of the benefits of China’s involvement with some of these relatively small countries. You have a very large economy buying a lot of resources – it has a huge impact. I think that it’s a very significant shift away from the developed world towards China at the moment, both in Africa and in Latin America.
 
Q: How are the current American calls for protectionism and accusations of Chinese dumping going to affect the relationship between China and the US?
 
A: I think that America’s really looking to develop its trade to try to get its economy moving. I think it’s a very difficult situation for the Americans to be in – there could be some trouble ahead. I think that the Chinese, particularly in the last year or so, are not going to be told what to do by anyone in the West, particularly by the Americans, and I think the Chinese government is playing to extremely strong nationalist feelings within China that they shouldn’t be pushed around by the Americans or by anybody else. It’s a difficult and potentially volatile situation that should be handled very carefully on both sides, but I think it could get quite serious.
 
Q: How serious?
 
A: One would think that the mutual dependence was so great between China and America in all sorts of ways. For example, China depends on America’s blue water navy, its ocean-going aircraft carriers, to defend Chinese vessels carrying oil from the Middle East to China, not to mention Japan as well. And of course, America depends on China’s cooperation in central Asia for its security. America needs China to buy its debt. And then there are a whole host of other interrelationships, which are very important. I would think the importance of a relationship between America and China should be sufficient to try and persuade both sides to try and find a way through this, but both sides have to take a constructive view. And I think it will probably turn out okay.  We’ve had spats in the past and usually self-interest on both sides has seen us through them.
 
Q: The issue with the blue water navy plays into a larger phenomenon where China has said it will develop naval bases near Somalia to potentially play a greater role in protecting these sea routes. Could this mean less dependence on the US?
 
A: I think that China wants to become independent of American military and naval support for its trade. They’ve been exploring overland routes rather than relying on water-borne trade between China and Europe. China’s involved in two separate initiatives to ship by rail from Western China through what used to be the silk routes, all the way to Europe. They’ve also set up a string of relationships through Southern Asia all the way through the Middle East, which I think they refer to as the “String of Pearls.” They’ve got deals, for example, with Bangladesh and with other countries, to take over and operate ports where they can base Chinese vessels to act as a defensive mechanism. I think the Chinese are very actively looking to strike themselves as independent from reliance on American naval strength in the Pacific.
 
Q: Economists within the Chinese government have called for a single 10% revaluation of the renminbi. Is this China saying, “We’re not going to have the US tell us what to do, but we will find our own reasons to make economic decisions”?
 
A: I think there are strong arguments for liberalizing the currency, the strongest one being that by linking its currency directly to the US dollar, China loses control over interest rates, and in a potentially overheating economy, they increasingly need to gain control over their own interest rate policy. You can’t control your currency and your interest rates at the same time. You have to let one go. You can either choose to control your interest rates and let your currency float, or you peg your currency to something, in which case you lose control over your interest rates.
 
Q: But you can still have that as long as you control capital flows. China has maintained some level of interest rate control with a pegged currency because it controls its capital account…
 
A: Well, it does and it doesn’t. I think that it likes to think that it controls its capital account, but there are very significant inflows and outflows of capital in and out of China. There are lots of ways of getting around it. If you look at the central bank accounts, and see the errors and omissions in each year, that is, the numbers that they can’t account for, they are pretty large – US$50-100 million. These are explained by inflows and outflows of capital into and out of China that are outside of the official system, and they have been going on for years. In theory, they do control the capital account, but in practice they know they don’t really. There are lots of inflows that come into the Chinese economy illegally that are encouraged by higher interest rates plus the prospect of renminbi appreciation. What you say is technically true, but in practice I don’t think it is, which I think brings you back to my point – liberalizing the currency. The greater the size of these unofficial flows back and forth into and out of the renminbi, the stronger the case for liberalizing the currency.
 
Q: What was the most interesting thing you learned while writing the book?
 
A: The extent to which China has penetrated the rest of the world in the last 10 years, the extent of Chinese diplomatic efforts and the depth and the subtlety with which they’ve gone about their diplomatic initiatives. It’s only actually when you research and start looking at the details that you realize what’s been happening in the past 10 years.