Unhelpful tensions

China’s commercial engagement with the outside world is becoming increasingly stressed. However hard it tries to emphasize that its rise is "peaceful"and contributes to global well-being, it cannot escape the fact that frictions are rising and policy responses all the more complex.

That is hardly surprising given the depth of global recession and the unprecedented speed and power of China’s appearance as a major trading nation over the previous 15 years. Nor is it surprising given that China’s system of government and commercial culture are so very different from those of its major trading partners.

One of the central features of this difference is the inter-linkage in China between the party, government and most major and some minor corporate entities. This means that when foreign businessmen suffer at the hands of domestic entities using corrupted court officials to gain improper advantages they see the government itself as accountable.

A similar occurrence in India or Brazil is put down to the corruption of individuals, not to the state itself.

When such things happen at, for example, the municipal level in China, there is little in the way of foreign repercussions. It is viewed as part of normal commercial risk. But when the companies concerned are state-owned, centrally controlled enterprises, the issue becomes more serious and may be viewed as reflecting the position of the state itself, even if only by default. 

Lack of faith

Undermining perceptions of trustworthiness may matter little in the immediate commercial sphere, but it surely does if China – and its currency – is to play a significant role in international finance.

Trust is the most important single ingredient of financial systems. The fact that trust in the US has been undermined by the collapses of the past 18 months does not mean that China can simply assume that its combination of size, foreign reserves and trading status will propel its financial future. Trust in willingness to put principles and rules before short-term national political or commercial advantage is also a key to foreign acceptance of China’s role.

It is easy for India and Brazil and others to agree with China that the US dollar’s role needs to be reduced. Likewise it is easy for them to resist developed-world calls for internationally agreed limits on carbon emissions, which impede their economic growth. However, agreeing among themselves to take positive action on these issues is much more difficult and requires levels of trust that are so far lacking.

Nor will it be easy to build them. The sort of clash of interests which has pitted Rio Tinto of Australia against mainland companies could equally well have happened to a Brazilian enterprise. As for India, the rapid growth in trade with China has been much reported. But in the background tensions are simmering between Beijing and New Delhi: Chinese exports of manufactured goods are partially responsible for the trade growth and this is an area in which India aspires to be competitive.

Transparency matters

The renminbi can emerge as a major trading currency. But it must happen naturally, unforced by official policies and nationalist grandstanding, and promoted by trust in the maturity of its financial institutions. It is also important to reject pressure from well-connected state enterprises to put short-term corporate or national interests before long-term goal of making China a respected pillar of the international trade and financial system.

At the same time, for good technical reasons China has to go into overall balance of payments deficit on a large scale, and finance that through the acquisition by foreigners of Chinese debt. There is little reason why that cannot happen, but it requires willingness – from the politicians in Beijing and foreign countries who would have to place long term-trust in China’s debt instruments.

Meanwhile, for the medium term there remains the problem of the US trade deficit. Any recovery in the world economy will be short lived if trade imbalances return to former levels. And yet a situation in which US household savings rise from near zero to 10% of GDP is something big exporters like China have still to come to terms with. The adjustment, when it comes, is likely to be painful.

Thus the financial crisis may be nearly mended, but the trade frictions arising from re-balancing are likely to increase.