Welcome to Issue 13 of U.S.–China Week. Today, the first item is a short commentary, as promised last week, on the implications for U.S.–China relations of China’s recent stock market chaos. The remainder of this edition is abbreviated to keep this “analysis brief” true to form.
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Stock markets play a secondary role in U.S.–China economic ties, but China’s leaders need to reassure U.S. businesses
Experts on China’s economy and stock market disagree on the extent to which the harrowing recent drop in Chinese stocks might represent the beginning of a broader crisis, and on the wisdom and efficacy of government moves to prop up shares. Though a significant economic crisis or collapse in China would have broad consequences for the global economy, and therefore for the United States and bilateral ties, the more pertinent question for U.S.–China relations is whether recent events in the stock market signal a departure from plans for economic reformsannounced in late 2013.
Commentators generally boil down the voluminous reform announcement to one phrase: the “decisive role of the market in allocating resources.” But as Dan Rosen of the Rhodium Group writes: “What Xi’s catchphrase about ‘decisive’ markets meant was not that marketization was done, or ‘Read my lips: no more intervention.’ Rather, he meant that it had to be accomplished over the medium term or China’s growth would fall short, bringing about political, social, and developmental problems. Nothing in the stock market meltdown since mid-June or the series of interventions that followed it changes that reality.”
The Chinese government now faces a crisis of confidence both at home and abroad. U.S. businesses and analysts, however, have long been skeptical of the Chinese government’s intention and ability to implement the reforms. U.S. firms seek the opening to international competition of numerous sectors of the Chinese economy, and have watched closely for progress on reform, which the U.S.–China Business Council tracks quarterly. Before the present stock crisis, U.S. observers were already skeptical as to whether or when reforms would materialize. That skepticism is one factor in a deepening sense that China’s market is and will continue to be stacked against U.S. firms—including through trade secret theft attributed to China. Because of that perception, U.S. businesses are no longer a dependable constituency in favor of friendly bilateral ties. Government intervention in the stock market only deepened skepticism that reforms are coming to turn the tide.
At a time when military and strategic analysts in both countries see a potential for a new rivalry, stable U.S.–China relations depend on thriving economic ties and interdependence. The Chinese government must restore trust in its management and its intention to reform.
Investors around the world seem to believe Chinese stocks are still a good investment—maybe even a bargain at depressed prices. But a recovery of stock prices will not recover confidence in China’s economic reform intentions. To reduce potential damage to U.S.–China ties, China’s government should: cut the rhetoric blaming foreign interests for Chinese problems; emphasize job-creating Chinese investment in the United States, such as a new auto plant in South Carolina; concretely reassure U.S. businesses that national security and cybersecurity legislation will not close them out of China; and visibly spend political capital pushing reforms that will lead to a strong U.S.–China bilateral investment treaty.
New Asia officials enter Obama administration; Top military nominee questioned on China
Abe Denmark, until recently of the National Bureau of Asian Research’s Washington office, has been named as the next deputy assistant secretary of defense for East Asia, replacing David Helvey. Taiwanese media greeted the news and labeled Denmark “pro-Taiwan.” / Ely Ratner, an analyst at the Center for a New American Security, was named as a new deputy national security adviser to Vice President Joe Biden, making him one of the top Asia advisers at the White House. / Gen. Joseph Dunford, President Barack Obama’s nominee to chair the Joint Chiefs of Staff, named Russiaas the greatest threat to the United States and was at pains to be balanced about China: “‘It doesn’t mean we view China as an enemy,’ he explained. ‘But … as somebody in uniform, I get paid to look at both somebody’s intent and their capability,’ he said. ‘So when I look at Chinese capabilities relative to our interest in the Pacific, I’d have to consider China as an area of concern for security—again, as distinct from a threat.’”
ANALYSIS: Does the new Asia appointments, alongside the departure of Evan Medeiros from the White House, signal a cleaning of house and a new Asia policy shift? Probably not. Personnel often reshuffle toward the end of an administration as weary veterans seek rest and private sector employment. In Ratner’s case, a position might have opened with Jeff Prescott’s move to Mideast policy. Denmark’s new position, while significant, is one of several key roles in the Pentagon.
SOUTH CHINA SEA
Envisioning a resolution of the competing claims in the South China Sea
While the Permanent Court of Arbitration in The Hague took up the question of its own jurisdiction in a Philippine legal challenge of China’s claims in the South China Sea, retired U.S. Rear Admiral Michael McDevitt offered a vision for a negotiated settlement of conflicting claims among the Philippines, Vietnam, Malaysia, and Brunei as a precursor to negotiations between ASEAN and China. / Meanwhile, Vietnam’s Communist Party leader payed a historic visit to Obama at the White House.
ANALYSIS: Realistic scenarios for a peaceful future in the South China Sea include negotiation, not just legal wrangling and shows of strength. McDevitt’s proposal is an elaboration of Michael Swaine’s earlier argument that “Washington should stop opposing bilateral talks between claimants, including China-Vietnam, China-Philippines and China-Malaysia, and try to broker bilateral settlements between Vietnam and the Philippines and Vietnam and Malaysia so as to reduce differences between claimants to the bilateral level with China.”
ABOUT U.S.–CHINA WEEK
U.S.–China Week is a weekly news and analysis brief that covers important developments in U.S.–China relations and features especially insightful or influential new policy analysis.
Graham Webster is a senior research scholar, lecturer, and senior fellow of The China Center at Yale Law School, where he specializes in U.S.–China diplomatic, security, and economic relations through research and Track II dialogues. A full bio is available here.
Disclaimer: Opinions expressed here are my own (and I reserve the right to change my mind).