U.S. Grows More Dependent on China

Global crisis makes U.S. More Dependent on China Than Ever.

ByGabor Steingart and Wieland Wagner
November 12, 2009, 6:41 AM

Nov. 12, 2009 — -- The scientists at the National University of Defense Technology in Changsha, China, had plenty to celebrate: They had developed a supercomputer that could perform more than a quadrillion calculations per second.

The announcement, released just in time for US President Barack Obama's visit to China this weekend, had symbolic value: With their new computer, dubbed "Tianhe" ("Milky Way"), the Chinese claim they will be the first country to become a direct rival to the superpower.

China is bursting with self-confidence. The new world power sees itself as a winner in the financial crisis, with its economy growing by an impressive 9 percent in the third quarter, while the economies of the West struggle to recover from a deep recession. And while the Americans are focused on their own problems, China is expanding its influence, both in Asia and among resource-rich African countries.

China's leaders are challenging the Americans more and more aggressively, not least to demonstrate to their own population of 1.3 billion how far the country has progressed under their leadership.

In an article in the party organ of the People's Liberation Army, Air Force General Xu Qiliang announced China's plans to expense its defense capabilities deep into space in the future. By the mid-21st century, the general predicted, the People's Republic will have become a world power, and its air force will be required to defend the country against many kinds of threats.

Thirty years after the two major powers established diplomatic relations, the bilateral balance is now shifting in China's favor. When Obama arrives in Beijing this weekend as part of his first Asian tour since taking office, the Chinese will expect him to behave far more modestly than his predecessor. The president is unlikely to disappoint his hosts.

Judging by what his advisors have indicated in recent weeks, Obama will not inundate the Chinese with demands. The vision of a nuclear weapons-free world will have to wait. The calls for binding climate protection goals will only be mentioned quietly, if they are mentioned at all. The American will continue to press Beijing to revalue its currency, the yuan, but only at the expert level. Rarely has the superpower been this mild-mannered.

Obama describes his foreign policy as a new age of cooperation. He is seeking to develop a relationship with a Chinese leadership that he needs more than it needs him. About two-thirds of China's foreign currency reserves are denominated in dollars. Any abrupt shift on the part of Beijing would threaten the stability of the US currency. Cheap imported Chinese goods help push up the American standard of living and minimize the risks of inflation.

Washington has been particularly enthusiastic about China's economic stimulus programs: the Chinese launched the world's biggest investment program after the start of the financial crisis. Without their spirited course of action, the world economy could very well have imploded. Beijing's stimulus program amounted to about 13 percent of Chinese gross domestic product, making it almost twice as large as the US program and close to five times the size of its German equivalent. Obama's economic team has been deeply impressed by the success of China's stimulus policy.

The discussion that has begun in China over curbing government spending and tightening liquidity is happening too early for Obama's taste. When he visits Beijing, he will try to encourage the Chinese to continue playing their role as the principal driver of the world economy.

Meanwhile, the Americans see Europe moving from the passenger's seat to the back seat in terms of the US's international partners. It was former President George W. Bush who upgraded the Chinese by launching a G-20 summit process to combat the financial crisis, rather than leaving it up to the G-8 member states, as the German Chancellery would have liked him to do.

'Peace, Progress and Prosperity'

Obama is continuing this course of realignment. If, from the American perspective, there is anything resembling a tentative world government, it does not consist of either the United Nations in New York or the G-8. In Obama's opinion, the G-20 is the key forum.

Next to the United States, China is the most important G-20 member, and the Americans are treating it with appropriate deference. When she became US secretary of state, Hillary Clinton's first foreign trip was to Asia, to pay her respects to the new world power. "The United States is committed to pursuing a positive, cooperative relationship with China, one that we believe is important for the future peace, progress, and prosperity for both countries and for the world," she gushed.

Obama agrees with Clinton completely. "The relationship between the United States and China will shape the 21st century," he said in the summer. Sources close to Obama talk -- half seriously, half jokingly -- about a G-2 group of the world's two most important countries. In a recent opinion piece in the Wall Street Journal, Treasury Secretary Timothy Geithner and Secretary of State Clinton wrote: "Few global problems can be solved by the US or China alone."

Europe's importance has declined, primarily because the importance of Asian nations has increased. According to a new study by the European Council on Foreign Relations, Europeans believe that shared values and a common history are sufficient to ensure their permanent place at America's side, and they see themselves as the "natural partners" of the United States. But they are mistaken, the study concludes, because America's policies are defined mainly by its interests.

Washington's interest in China is primarily economic. The People's Republic, established 60 years ago, and with which the United States had no official relations for 30 years, is of central importance to the country's well-being today. China is the US's most important creditor. The Chinese hold more than a quarter of all US treasury securities, and as a result China's foreign currency reserves have increased to $2 trillion (€1.35 trillion). China is also the US's most important supplier of goods. Nowadays, the American way of life is "made in China," because the key elements of American manufacturing -- from furniture to televisions to the computer industry -- have been outsourced to the Middle Kingdom.

As a rising economic power, China is even playing a key role in the reorganization of the American auto industry. General Motors recently sold its Hummer SUV brand to a Chinese company that hardly anyone in the West had even heard of before.

The company is called Sichuan Tengzhong Heavy Industrial Machinery. At its plant near Chengdu, a burgeoning commercial hub, the company's proud slogan is prominently displayed on a sign printed in yellow characters: "Let the World Imitate Us!"

When the name Hummer is mentioned in Chengdu, it comes with a feeling of collective satisfaction. A huge gas guzzler that America can no longer afford but that still has plenty of admirers in China, the Hummer represents the wasteful side of the American way of life. For the workers at the Chengdu plant, the acquisition symbolizes a much longed for victory over the crisis-shaken United States.

Despite their mutual dependence and their new partnership, the two powers remain what they have always been: rivals.

Ideologically speaking, the Americans are already on the defensive. For decades, they preached their model of an unbridled market economy as the only engine of peace and prosperity worldwide. But now US-style capitalism is experiencing what is probably its toughest test.

Meanwhile, the newly self-confident People's Republic is betting on the strength of its authoritarian state-controlled economy. And now China's mercantile approach to business even has its fans in Western governments and banking centers.

China is also continually expanding its political influence. Africa is indebted to the People's Republic as a major customer for its natural resources, and the Arab oil states are also enthusiastically reviving age-old trading routes with the Asian giant. Even Latin America is in the process of switching sides. China is now the key trading partner of Brazil, the largest economy on the continent. In many world capitals, a handshake with Beijing is worth more than strategic dialogues with Washington.

The United States is still the richest and militarily most powerful country in the world, but this is partly as a result of help from the Chinese. The two countries are locked together in a sort of community of fate. "We are truly going to rise or fall together," Secretary of State Hillary Clinton said during her visit to China in February.

More and More

America consumes what China produces. That, at least until now, was the basic law of globalization. The system worked without a hitch for decades. Fired up by various stock market and real estate booms, the Americans kept buying more and more each year, more clothing, toys, iPods and flat-screen TVs. Most of these products came from China.

But this cycle hasn't been working properly since mid-2008, when a blockage occurred in China's most important market. The American consumer, up until then the pillar of the world economy, discovered a virtue he had never even dreamed of before: saving money.

Suddenly the crisis hit China, whose economy had been oriented almost completely toward the United States. In Dongguan, home to one low-wage factory after the next, entire neighborhoods have died out. "We have lost a third of our orders," says Li Zhaoyuan, who owns Dongguan Singyan, a company that makes metal parts. He has laid off 40 percent of his workforce.

The remaining workers sit at outdated machines on the two floors of the plant, punching and pressing pieces of metal into objects like fishhooks and housings for Motorola mobile phones. "We used to work 24 hours a day," says Li, "but now one eight-hour shift is enough." He doesn't believe that American consumers will soon be buying Chinese products as enthusiastically as they did before the crisis. He prefers to follow the advice of the strategists in Beijing, namely to focus on new markets in Asia, the Middle East and Africa.

Since the crisis began, tens of thousands of companies have gone out of business in the southern province of Guangdong alone. According to official figures, up to 25 million migrant workers throughout China temporarily lost their jobs. But the Guangdong economy is now growing at a rate of 9 percent again, and the entire country is expected to meet the party's 8 percent growth target this year. The ruling Communists see 8 percent growth (the number eight is considered lucky in China) as the minimum they need to secure their hold on power.

All this growth can be attributed to the government's massive economic stimulus program, which has enabled China's state capitalists to transform the country into an enormous construction site. In Guangdong, for example, an airport is now being expanded and a nuclear power plant is under construction. At the same time, the government is stimulating sales of appliances like television sets and refrigerators with its subsidies. Using similar methods, the government is likely to see to it that China surpasses the United States as the world's largest market for automobiles.

More or less in response to orders from above, state-owned banks have begun issuing new loans, leading to a 150-percent increase in lending compared with 2008. Many company bosses are diverting the money to buy houses and land, or to play the stock market. Prices on the Shanghai Stock Exchange have climbed by more than 70 percent since the beginning of the year. Liu Mingkang, the head of the China Banking Regulatory Commission, is already warning his fellow Chinese against "financial risks" and the development of bubbles in real estate markets.

Large state-owned companies, in particular, have expanded as a result of the collective stimulus campaign. But China's frugal 1.3 billion people have a long way to go before they are affluent enough to replace Western populations as the main consumers of the country's products. This is why the government has been propping up exports to such a massive degree. In September alone, exports declined by 15 percent over the same month in the previous year.

To keep prices on the global market artificially low for its shoes, T-shirts and computers, in July 2008 China began taking steps once again to ensure that its currency, the yuan, remains de facto pegged to the dollar. In doing so, however, China is accumulating bigger and bigger foreign currency reserves. To prop up the artificial exchange rate, the Chinese central bank has to siphon off massive dollar sums from the market.

Through its promotion of exports, China is doing more than just expanding the existing imbalances. The rising economic power is also risking serious trade conflicts with the United States. However, Washington, because of its strong interest in good relations with Beijing, is currently reluctant to officially denounce China as a "currency manipulator."

Nevertheless, as the world saw in September, trouble can easily erupt between the two countries. To protect US manufacturers against cheap Chinese tire imports, the otherwise docile Obama approved the imposition of punitive duties of up to 35 percent.

The Chinese promptly threatened to impose retaliatory duties on imported American chickens and auto parts. They recently imposed punitive duties against certain synthetic fiber imports from the United States and Europe. In return, Uncle Sam imposed provisional anti-dumping tariffs on Chinese steel.

Danger of Friction

Obama and his host, President Hu Jintao, who is also the general secretary of the Chinese Communist Party's central committee, are determined not to allow such friction to overshadow their summit. The United States is hoping to exact concessions from the Chinese on issues like climate change. Conversely, it will take China years to disconnect itself from the American consumer market.

In the spring, Zhou Xiaochuan, the governor of the Chinese central bank, forcefully argued that the US dollar be replaced as the dominant reserve currency in the long term by a new, artificial world currency. But as long as their yuan is not even freely convertible, the Chinese have no choice but to invest in the dollar.

At the same time, public pressure is building on both sides to demonstrate strength on trade issues. In the United States, generous government bailouts for half-defunct Wall Street firms turned into an acid test. Many became bitter over the fact that the bankers responsible for the crisis were being bailed out, while millions of Americans have lost their jobs, houses and retirement savings. The funds from Obama's $787 billion economic stimulus package are only gradually trickling down into local projects to stimulate growth.

The shopping spree the Chinese have planned could also trigger resentment, as they prepare to buy up American high-tech companies in a big way. To ensure that everything goes smoothly, Beijing's Ministry of Commerce posted a guide to Chinese investment in the United States on the Internet this summer.

In the more than 100-page document, the Chinese bureaucrats advise would-be investors to make tactical adjustments to conform to practices in capitalist America. They even include tips on how to behave, suggesting, for example, that women should wear skirts to work, rather than jeans. Chinese buyers are also advised to brace themselves for objections coming from the unions, to take things slowly, pay regular visits to the offices of relevant members of Congress and maintain good relationships with journalists -- and not to slurp while eating soup.

But not everything that leads to economic success can be planned and decreed from above. The People's Republic has yet to produce brilliant entrepreneurs like Henry Ford or Steve Jobs, nor has it come up with any global brands. The West, particularly the United States, is still ahead of China when it comes to creativity.

Besides, it is not at all certain that China's upward progression to the top will be as inexorable as it seems today. Indeed, there is a long list of possible setbacks. Economists see recent developments as a "China bubble" that could burst very soon, and Beijing could also face intensified ethnic conflicts such as those involving the Uighurs and Tibetans, while social unrest could shake the country to its core.

There is no evidence of such doubts in Chengdu, a city of 11 million people located 1,800 kilometers from Shanghai. The skeletons of new office towers are popping up everywhere, and streets are being torn up to build a new subway system.

Chengdu is the home of Sichuan Tengzhong, the new owner of the Hummer brand. Global brands from Motorola to SAP are developing new products there, and Intel is moving its Chinese production facilities from Shanghai to the city -- partly because wages in Chengdu are generally 50 percent lower.

If the Chinese have their way, Chengdu will be the next Silicon Valley. The local software industry already employs 80,000 people, a number that is expected to at least double within the next three years.

From his office on the 10th floor of a modern glass office tower, Xu Liming has a view of the city's high-tech park, an 87-square-kilometer (34-square-mile) zone. He is one of the administrators of the park, one of the tens of thousands of efficient economic managers one encounters in China today. He is passionate about China and the party, but he has also mastered the jargon of the Western investors who are constantly coming to see him.

Xu has been busier than ever since the global economic crisis began. His job is to speed up the pace of China's acquisition of cutting-edge technology. And Xu knows how best to convince Western corporate executives to produce in Chengdu instead of at home.

Air pollution? We are working on this problem very intensively, he says. A Western-style hospital? Already planned, he says. Start-up funding? Our government banks take a professional and flexible approach to examining loans, he promises. Transportation? We can deliver goods anywhere in the world within 24 hours, he says, and we are also building a second, larger runway at our airport.

China's West, says Xu, is a growth market that no one can ignore anymore. "The global crisis is our big chance."

Translated from the German by Christopher Sultan

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