Beijing flexes its economic muscle

In international business and finance, no less than in politics, diplomacy, defence, and questions of control of tiny strategic islands and islets in the seas around it, Beijing is showing an increasingly assertive tendency with the clear message that it will not allow itself to be pushed around by anyone.

The past few weeks have seen not just the imprisonment of two high-profile foreign business executives of Chinese origin on dubious charges of stealing 'state secrets' but also increasing foreign grumbles that Beijing is putting up unfair hurdles, making it more difficult for foreigners to do good business in China.

Peter Loescher, head of industrial conglomerate Siemens, and Juergen Hambrecht, chief executive of chemical maker BASF, had the temerity to challenge Premier Wen Jiabao himself in public about what they claimed was the deteriorating business climate.

The two companies together have investments of more than Euro9 billion (HK$90.3 billion) and employ 36,000 people in China. The fact that the Siemens and BASF chief executives were part of the official delegation visiting China with German Chancellor Angela Merkel only underscores how strongly the foreign business community feels.

They are not alone in complaining about how unfairly tough China is becoming. Steve Ballmer of Microsoft Corp spoke out again recently about rampant piracy of intellectual property in China and declared that 'China is a less interesting market to us than India ... than Indonesia'. Jeffrey Immelt, chief executive of General Electric, was also vociferous, albeit at a private dinner in Italy.

Grumbles of computer and software companies are particularly strong. Market research company IDC found that four out of five software applications running on personal computers in China have been stolen, not paid for. Between 2005 and 2009, foreign software developers complain, the commercial value of stolen personal computer software doubled to US$7.6 billion, about half owed to developers in the United States.

Both the American Chamber of Commerce in China and the European Chamber of Commerce in China have issued reports expressing concerns about a worsening business climate for foreign companies. Their worries include Beijing's new policies of 'indigenous innovation', which favours local companies in bidding for government contracts and requires foreign companies to transfer their latest technology to China.

In its annual survey of how countries rank for ease of doing business, the World Bank group rated China in 89th position among 183 economies this year, a fall of three places.

These developments take the area of battle away from the merely financial, which has preoccupied policymakers in Washington and Beijing for at least two years, and into the wider economic sphere.

People in high places have expressed worries about China's grip on the American economy because of Beijing's large holdings of US debt instruments. Brad Setser, then at the Council of Foreign Relations and now in President Barack Obama's economic team, warned that 'political might is often linked to financial might, and a debtor's capacity to project military power hinges on the support of its creditors'.

When he was running for president, Obama said: 'It's pretty hard to have a tough negotiation when the Chinese are our bankers.'

In practice, China's leverage has proved more problematic. For China to be able to deploy its holdings against the US would risk the 'nuclear option' of dumping assets on the open market and watching their value plummet.

The US has significant monopsony power in issuance of liquid assets: the US dollar accounts for more than 60 per cent of global reserves and US debt is perceived to be a safe haven compared with all the alternatives. This means the US and China are in a dance of mutual dependence over Washington's heavy debts and Beijing's massive holdings of them.

Beijing has several times tried to diversify and got caught, either through unwise timing or risky decisions. Even in the past few months, the rise in the euro is thought to be because of Beijing's attempts to diversify its foreign exchange earnings.

Beijing is clearly frustrated and unhappy about being unable to lead the dance. The head of the People's Bank of China, Zhou Xiaochuan, advocated a new world reserve currency, but ran up against the practical considerations of the dollar's domination. Gao Xiqing, the head of China Investment Corp, expressed unhappiness about American attitudes, declaring that '[the US economy] is built on the support, the gratuitous support, of a lot of countries. So why don't you come over and ... I won't say kowtow, but at least be nice to the countries that lend you money?'

Given these frustrations, Dagong International Credit Rating's announcement this month of its own sovereign credit ratings as a challenge to the traditional US agencies was politically inspired. Dagong downgraded the US from its cherished AAA rating and awarded it only an AA rating, two notches below.

Modestly, after this chutzpah challenge, Dagong did not award China the top AAA grade, but in a neat thumbing its nose at the changing economic powers rated China at AA-plus, one grade above the US.

Dagong chairman Guan Jianzhong launched a tirade against the US rating agencies for bringing 'the entire US financial system to the verge of collapse, causing huge damage to the US and its strategic interests', but, as Professor Michael Pettis noted in yesterday's South China Morning Post, Dagong's own rating system is neither as scientific nor as accurate as it claims.

Premier Wen's response to the German criticism, meanwhile, was to tell them to 'calm down'. 'Currently, there is an allegation that China's investment environment is worsening. I think it is untrue,' he said.

PC piracy

This is the value in US dollars of pirated software applications running on personal computers in China: $7.6b