Rules of engagement

PUBLISHED : Tuesday, 01 January, 2008, 12:00am
UPDATED : Tuesday, 01 January, 2008, 12:00am

American officials arrived in Beijing early last month for another round of US Treasury Secretary Henry Paulson's strategic economic dialogue. But instead of a Christmas present breakthrough for the Bush administration, it was more like getting a mince pie in the face. Vice-Premier Wu Yi - China's iron lady - kicked off the discussions on December 11 by verbally thrashing Mr Paulson's delegation. In her opening statement she blamed its members for bringing 'disharmonious notes' into trade. That is a strong statement coming from President Hu Jintao's normally cautious, celestial 'harmonious society'.

Central bank governor Zhou Xiaochuan was a bit more subtle in his approach. Receiving the delegation, Mr Zhou explained with a soft grin to a nonplussed Mr Paulson that the difference between Beijing's approach to financial reform, and that sought by Washington and Wall Street, is as huge as the gulf between Chinese and western medicines. Yes, western medicine can cure sickness quickly after it strikes, but it carries serious side effects, explained Mr Zhou. Chinese medicine, by contrast, is free of side effects and can prevent problems arising if administered long enough in advance. This warning against shock therapy in financial reform was not what Mr Paulson had expected.

Here is a brief negotiators' checklist of the gives and takes involved in strategic dialogue issues. First, China is challenged by the spread of Americanisation - US market forces and access by its media - which threatens to change national values and clone Chinese into American consumers. It is already happening, so there isn't much to negotiate there: it's a done deal.

Second, the safety of food and other products is a massive problem for the mainland's leaders. They cannot get their rules and regulations implemented at local levels, where corrupt officials defy the central government so as to continue their rackets. So the Chinese suffer as much as westerners from faulty products, which will cost the mainland's health care system dearly in the years ahead. But everyone in Beijing is too short-term in their thinking to care about this. So, expect to hear promises across the board, but wait to see if anything can be implemented in practice.

Third is energy and the environment. China and America compete for precious resources, and it may one day bring them into terrible conflict, with global repercussions, if alternative energy sources are not developed fast enough - non-polluting ones, for that matter.

Fourth, the value of the yuan will continue to top the strategic dialogue agenda. China will relax controls on its currency at its own pace. In a way, this issue - which heats up during US election years - is just a way of pressuring Beijing to open its financial markets.

With its US$1.5 trillion in foreign exchange reserves, the mainland has outgrown its status as a centre for cheap labour and outsourced manufacturing. South Asia looks infinitely more attractive as the next economic focal point. What everyone in Washington and Europe wants is China's cash invested in their capital markets and financial products. And this is the whole point of Mr Paulson's strategic dialogue.

To engage China's huge reserves in international financial markets would allow America and Europe to share in the wealth they have helped to create on the mainland, and to use this to underwrite their own growth.

Moreover, this has huge security implications ultimately for America and, more seriously, for China. That is why Ms Wu warned Washington not to 'politicise' trade.

So Mr Paulson's agenda is to coax mainland China's financial markets out from behind their Great Wall of protectionism and intra-state-owned nepotism, to play the financial game the way Wall Street wants. That means according to their rules, not China's. But the 'iron lady' has made the point that it isn't going to happen too quickly, or too soon.

Laurence Brahm is a political economist, author, and founder of Shambhala Foundation