[ Monday | Tuesday | Wednesday | Thursday | Friday | Saturday ] 
Paris, Monday, June 22, 1998

Overrating China Is a Bad American Habit

By Gerald Segal International Herald Tribune 
HONG KONG - Even before President Bill Clinton flies to Xian on Thursday to talk with Chinese leaders, the thin air of summit diplomacy isproducing dangerously giddy thoughts. 

 The most pernicious is that China has joined the top rank of international financial powers and deserves a seat alongside the Group of Seven leading nations because it forced the United States to press Japan to reform its economy and helped drive up the value of the yen. 

 It is helpful that China has not devalued its currency during Asia's current economic crisis, but the notion that China is a ''regional stabilizer'' and a leading economic power is little short of absurd. 

 China has not devalued its currency because of what until now has been a clear calculation of self-interest. Its export industries are highly dependent on imported components and devaluation would have been of limited value. 

 Chinese devaluation would have put immediate pressure on Hong Kong to break the peg of the Hong Kong dollar to the U.S. dollar, thereby seeming to demonstrate less economic competence and concern for Hong Kong's welfare than that shown by the previous British colonial administration. 

 It is also important to recall that China's devaluation in 1995 was an important cause of East Asia's crisis in 1997. So much for China as a selfless regional stabilizer. 

 If China does devalue in due course, it will do so because of fundamental flaws in China's economy, not because Japan has failed to tackle its domestic problems. China's economy was slowing well before the Asian economic crisis and while the yen was far higher. This was the result of a failure of political will in China to address such problems as a banking system that is so deeply mired in bad debt that it makes Japan's banking sector look robust by comparison. 

 China continues to waste about 3 percent of its GDP bailing out rust-belt industries and incompetently run factories in the-state owned sector. 

 Japan makes a convenient scapegoat for China's reform-minded Prime Minister Zhu Rongji, who is struggling to keep his reforms on track. What is remarkable is how many people take excuses for reality, and argue that China deserves to be rewarded for its leadership role. 

It is all the more remarkable when one contemplates how inconsequential China is as an economic power compared with Japan. Little more than 1 percent of the exports of Western countries go to China, and China's economy is about the size of Spain's. Should Spain become a G-7 member? 

 China is a negligible donorof foreign aid, while Japan is No.1. China's contribution to the bailout of Asian currencies is less than 10 percent of Japan's. China is the largest recipient of foreign direct investment in the developing world, but 80 percent of that is from ethnic Chinese living and working outside China, mainly in other parts of Asia. Western investment in China is less than in Brazil. Should Brazil become a G-7 member? 

 There is a long and grand Western tradition of overestimating the importance of China. President Clinton will be keeping good historical company when he comes to the Chinese court and tells the Chinese how important they are. 

 Massaging the ego of your host might be gracious, but it risks upsetting your real allies in Japan, and might even lead to preemptive concessions to a second-rate Chinese power. 


The writer is director of studies at the International Institute for Strategic Studies in London and director of Britain's Pacific Asia Programme. He contributed this comment to the International Herald Tribune.