Battling two Chinas for supremacy

Despite the lovefest carefully choreographed by China‘s increasingly sophisticated image makers last week, the United States is engaged in a high-stakes battle for economic and military supremacy in Asia and elsewhere. That battle is more complicated than the casual observer might imagine. There is a growing sense among many Asia- and China-watchers that the U.S. is engaged in a historic contest with not one, but two Chinas.

On one hand, U.S. officials are sparring with China‘s civilian government over economic issues: currency manipulation, balance of trade and market access. On the other, military and diplomatic officials are shadowboxing with China‘s military establishment. Both groups of Chinese officials are as prickly and thin-skinned as ever – as the civilian government’s outrage over the Nobel Peace Prize awarded to dissident Liu Xiaobo and the military’s tantrum over U.S. arms sales to Taiwan demonstrate – and they are also progressively more assertive.

Last year, China emerged as the second-largest economy in the world on the back of 10.3 percent growth in gross domestic product (GDP), which expanded to around $5.88 trillion. That’s 40 percent of U.S. GDP, estimated at $14.62 trillion by the International Monetary Fund.

China has relied heavily on the United States for its economic expansion, benefiting from investment, trade and the transfer of intellectual know-how. The United States and its allies – including Taiwan – account for eight of China‘s top-10 investors. In 2009, they contributed $25 billion in job-generating investment. The other two top-10 investors are Hong Kong and Macau, former Western colonies that have reverted to China‘s control.

Hong Kong is the largest “foreign” investor by far – at $54 billion. Experts agree that most of this money actually originates in Taiwan and courses through Hong Kong. If true, this means that China is not only substantially dependent on democratic Western and Asian democracies for capital, but especially dependent on its “rebel province,” Taiwan, which relies on the United States to protect its democratic and economic freedoms.

In 2010, the U.S. trade deficit with China increased from $226 billion in 2009 to $252 billion. The United States is China‘s No. 1 trading partner, and Japan is its second. Other than Hong Kong, democratic economies round out China‘s top-10 trading partners. Except for Singapore and Malaysia, all have a robust free press. These factors make China highly dependent economically on economies characterized by political freedoms China overtly disdains.

These economies are also China‘s richest source of intellectual property. Accordingly, China is developing a high-tech economy that competes with them. Many technology companies have set up research centers in China to capitalize on the output of the nation’s vast educational infrastructure, including tech-industry icons Intel and Applied Materials. IBM set up its first research facility in China in 1995. Other industries are also represented. General Electric and General Motors are major research investors.

Notwithstanding Chinese President Hu Jintao‘s charm offensive during his just-concluded state visit, China‘s civilian leaders seem oblivious to the contribution democratic economies have made to its economic prosperity. Instead, they regularly bemoan the $1.2 trillion in Treasury bonds China holds, which they say contribute to the strength of the U.S. currency. Yet they are also quick to criticize U.S. monetary authorities for the weakness of the dollar.

China‘s military officers have recommended dumping the bonds, perhaps in a bid to weaken defense spending at a time when the U.S. military is stretched dangerously thin. Such an argument not only undermines civilian authority in China, it also demonstrates the belligerency that has increasingly characterized its military. A recent sign of divergence with China‘s civilian government included the surprise test flight on the fifth-generation J-20 stealth fighter. Reports suggest Mr. Hu was unaware of the flight test.

Although China reportedly spends just 1.4 percent of GDP on defense spending – the United States spends less than 5 percent, while fighting two wars – the military is building an aircraft carrier, continues to refine and expand its ballistic-missile forces, and is thought to be developing an anti-carrier missile designed to destroy U.S. carriers in the South China Sea. During U.S. Secretary of Defense Robert M. Gates’ visit to China two weeks ago, his counterpart, Gen. Liang Guanglie, told him flatly that another arms sale to Taiwan would be followed by another cut in ties between the two militaries.

The challenge for the United States is to communicate to China that the time for a more equitable economic relationship has arrived for the second-largest economy in the world. China‘s increasingly assertive military is a tougher issue – and a dangerous one. Beijing must understand that China and the United States share economic and military interests in Asia. The U.S. understands that. Both Chinas must, too.

Michael Alan Hamlin, managing director of TeamAsia, a consultancy based in Manila, Philippines.

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