Playing favourites
Like emperor Nero playing on his lyre while Rome burns, the mainland's army of hothead nationalists seems intent on using Japan's arrest of a Chinese trawler captain near the disputed Diaoyu Islands to start a new Sino-Japanese war. At the same time, their outrage over the joint US-South Korean naval exercises in the Yellow Sea has given the People's Liberation Army the justification to flex its own muscles in a pointless display of mainland machismo.
But the indignant patriots are missing the fact that the far more important economic war between China and the rest of the world is reaching the boiling point. And unlike the Diaoyu Islands, this is not a conflict where the mainland can play the guilt card to justify its position. On the contrary, the West is growing increasingly impatient with Beijing. They have good reason to because, nine years after the mainland joined the World Trade Organisation, it continues to believe it can play by its own protectionist rules rather than by those that govern the global economy.
After backing away from labelling Beijing a currency manipulator in April, Washington's dissatisfaction with the failure of the renminbi to rise has resulted in the Obama administration hardening its rhetoric in recent days. The US Congress is also becoming more and more bellicose about the way an undervalued yuan continues to boost the mainland's exports, at the expense of the US manufacturing sector. There is no sympathy on Capitol Hill for the Chinese Communist Party's need to maintain economic growth to ensure stability and its ultimate survival.
At the same time, foreign companies operating on the mainland are becoming unusually vocal about the lack of a level playing field when it comes to competing with domestic firms. So vociferous are the complaints from the likes of General Electric, Microsoft and Siemens that Premier Wen Jiabao was forced to defend Beijing's policies at last week's World Economic Forum in Tianjin . He insisted that foreign companies were treated the same as local ones, and that protecting intellectual property rights (IPR) - a key bone of contention - was a high priority.
Wen highlighted the increase in foreign direct investment (FDI) - up over 18 per cent in the first eight months of this year from the same period in 2009 - as proof that the mainland remains an attractive destination for overseas businesses. The head of the FDI department of the Ministry of Commerce said the same thing two days later, when he told foreign firms to stop whingeing about unfair treatment. And if that message wasn't clear enough, the Development Research Centre, a State Council think tank, pointed to Beijing's huge reserves of US Treasury bonds and said Washington would be the loser in any Sino-US trade war.
Yet, like so many of the statistics that emerge from Beijing, the FDI figures do not tell the whole story. Many analysts believe that as much as 60 per cent of the FDI flowing into the mainland is a result of the overseas branches of state-owned companies repatriating cash via Hong Kong. Much of the rest comes from Taiwan. Europe's contribution to the mainland's FDI is a paltry 3 per cent, according to the head of the European Union Chamber of Commerce in China.
Beijing is on thin ice, too, when it claims that foreign firms are treated equally or that it is stepping up its protection of IPR. Local companies are not subject to the same stringent tax enforcement as overseas ones, and they enjoy preferential policies on everything from the cost of electricity to the chance to pitch for government contracts. And if the IPR laws were being applied as strictly as Beijing claims they are, why would Steve Ballmer, Microsoft's chief executive, say in May that Microsoft saw its Asian future in India and Indonesia, because IPR is protected better there?
The losses Microsoft sustains through software piracy on the mainland, he said, renders any potential acquisitions of local firms unprofitable - a statement that should send shudders down the spines of the politburo.
With rising wages already causing some overseas firms to relocate, more will surely exit the mainland if the business environment continues to be so loaded in favour of domestic companies.
Nor can Beijing rely on its stash of US Treasury bonds to save it. Threatening to sell them in any future trade war is just empty bluster: if it does, then the dollar will weaken, which is precisely what Washington wants to boost its exports. At a time when the rest of the world is struggling out of recession, the mainland's tactics of insulating itself from the ebbs and flows of the global economy are no longer sustainable.
Beijing may soon learn the hard way that playing by the same rules as everyone else will benefit it more in the long term than short-term protectionism.
David Eimer is a Beijing-based journalist
