there has been a lot of gnashing of teeth and worrying about China recently, based on, if I don’t forget anything:

– China holding a growing quantity of T-Bills and dollar reserves (US$609.9 billion at the end of 2004, up 51.3 percent from a year ago

– China becoming the factory for the world, undercutting everybody and threatening standards of living around the globe, especially in rich countries that are losing completely their manufacturing capacity and jobs, and thus their independence

– China beginning to play oil games in Iran, Venezuela, Russia, even Canada and threatening US long term supplies

– meanwhile, the US is busily spending the taxes of today’s citizens and their kids in an increasingly futile war in Iraq, while cutting taxes to the rich and squeezing the middle classes.

Guess what? China is currently scared to death of the US. They see themselves as being in an unpleasantly weak position, much worse than the US.

So, who’s right? Both, maybe?

Take a look at it from China’s perspective:

On the energy front

– China has gone from being largely self-sufficient to being the second biggest oil consumer (5.5 mb/d, after the US with close to 20 mb/d) and soon, the second biggest importer of oil (BBC article, 1.8 mbd, vs 11.8 mbd for the US)

– more worrying, they have no stable suppliers nearby like Europe does (Russia, despite its instability, can only export its oil to continental Europe by pipe or to "internal" seas like the Baltic or the Mediterranean) – Indonesia has become a net importer (and is thinking of dropping out of OPEC), Russia has decided against building a direct pipeline to China and chosen instead a pipeline to the Pacific which will be accessible to other buyers; the Middle East, well, is the Middle East, and they face stiff competition on the market from Japan.

– even worse, from their perspective, they have little physical control over their lines of supply. Oil from the Middle East or Australia has to go through choke points like the Hormuz Straits or the Malacca Straits which are either in highly unstable regions, controlled by the US Navy or both.

Their strong economic growth (9% or so in recent years) generates a similarly strong growth of energy demand and, in current circumstances, an even larger increase of net imports. This evolution appears to have taken the Chinese by surprise, and they are engaging in a wide-ranging, but sometimes still awkward, diplomatic push to create or improve relations with oil producers in all regions of the world (including, as linked to above, in the Americas). Their most likely suppliers in the future will be Russia, Kazakhstan (thanks to the pipeline they are trying to build) and the Middle East, not easy partners to deal with for them either…

On the electricity side, the country has had trouble keeping up with strong demand growth in recent years, despite gigantic projects like the controversial Three Gorges project or development of nuclear plants (see my last two Eurokos diaries for recent news on that topic). Most of the production is coming from coal-fired plants, which creates problems of its own:

– railways are horribly congested (according to some estimates, 80% of railway capacity goes to coal transport already)
– air pollution is horrendous (7 of the 10 most polluted cities in the world are in China) and it is becoming a worldwide problem – it is estimated that a significant – and growing – portion of world mercury pollution in the air comes form Chinese coal-fired plants (30% in the US, for instance).

– things are going to get worse: according to the official planning agency, China’s installed capacity is set to grow from 380 GW today to 2400 GW in 2020 – that requires the equivalent of building 10 nuclear reactors per month…

On the economic front

– while most of the debate in the US is about the trade deficit with China (more than USD 150 billion in 2004, with Chinese exports to the US running at 6 times the value of US exports to China) and the corresponding pressure to devaluate the renminbi against the dollar to reduce China’s price advantage, the Chinese see that their trade, on the whole, is almost balanced, with a much smaller surplus with Europe and a large deficit with Asia almost compensating for the giant surplus with the US – and they see no real need to revalue their currency on pure economic grounds (the desire not to piss off their biggest client may push them to do something, but this is another issue).

– while their 9% growth sounds downright giddy to us, it is absolutely necessary to absorb the huge influx of population from the rural areas to the booming urban/industrial regions (one worker in 6 – 115 million – is currently a migrant) without generating too much social tension, the nightmare for the regime which knows that only large scale domestic unrest can weaken it. Any slowdown in growth, whether from inflation, shortages of electricity, oil or other commodities (China currently consumes almost half of the world’s cement and more than 60% of construction cranes) creates real political risks for the leadership of the country and, more to the point, risks of large scale domestic turmoil.

– this growing dependency on imports for many kinds of goods and commodities is creating totally new problems for the Chinese. They must learn to engage the rest of the world (after a long period of relative passivity, except on very specific issues like Taiwan or North Korea), and to do it in a position where they do not hold all the cards

– the countries that have the resources that China needs are not necessarily those that are in the sphere of influence of China, or need anything Chinese, or have Chinese diasporas to help create links; and they most certainly have stronger relations with the USA (also quite often a major importer of the same commodities) or with the former European colonial powers. Thus again, the necessity to make the country more visible on the world stage, and to acknowledge co-dependencies or dependency, i.e. weakness, which is not pleasant when you have a traditional Great Power approach to international diplomacy.

On the diplomatic front

This new task for their diplomacy comes at a time when the Chinese already have to juggle many balls in a complex diplomatic ballet:

– Taiwan and Hong Kong are very specific issues for China that take out a lot of their attention on the world stage and their relentless determination not to have Taiwan recognized as another independent country by any one else, reduces their ability to get other things from other countries,

– North Korea, of course, is a headache for everyone (especially now that it has officially admitted to having nuclear bombs…), including the Chinese…

– their many-years-long campaign to join the WTO has also required a lot of efforts and full – and by necessity constructive – engagement with the US and the EU which held most of the cards: remember the previously yearly exercise by the US to decide whether China deserved to get the "Most Favored Nation" (i.e. normal) trading status…

– trade negotiations (like those accompanying the recent lifting of the textile quotas which is expected to lead to a Chinese domination of the sector worldwide) are also a permanent fixture of a country whose trade is marked by either strong surpluses (the US, Europe to a lesser extent) or large deficits (Asia, commodity exporters like Australia or the Middle East)

– they are now lobbying the European Union to give up its (mostly symbolic) ban on export of weapons (see this long Financial Times article today on that topic) – a ban put in place in 1989 after the Tienanmen events and which puts them together with a couple of other countries around the world, like Burma or Zimbabwe, thus giving them a "pariah" status which they resent a lot. I cannot write much about the military situation of the country, but it certainly feels weak on the Navy side, which it is trying to build up quickly, starting from a fairly small base. In any case, it is not ready for any kind of confrontation with the US at this point in time.

What comes out of this is that China is rushing towards several walls at the same time, and we’re standing either on the wall or just behind, so it’s not clear who will get hurt most…

– the growing demand for resources is soon going to bring China in conflict with pretty much around the world, starting with the most profligate consumer of all, the US. Expect strong price rises, and more or less open conflicts to try and control access to these resources;

– the pace of growth itself seems difficult to sustain much longer in view of the scale of the Chinese economy today – that growth has a worldwide impact – on commodity prices as indicated above, trade patterns, reserves, currency movements, and jobs everywhere and issues of scarcity are going to come to the fore and limit that growth. This will lead to havoc internally (the economic migrants) and externally (tensions over resources, pollution, shipping lanes, etc…).

– expect China to play a much more visible role on the world scene, pretty much against their desires because it is likely that they will be embroiled in many different conflicts or contentious issues.

So anyway, while the US have squandered theirs get ready for the Chinese curse ("may you live in interesting times…")