China and its Discontents

The Global Times published an op-ed yesterday that “offered support” for the actions of Chinese activists landing on the Diaoyu Islands, but to my relief stated clearly that “Chinese need to be clear that China cannot retrieve the Islands now. This would mean a large-scale war, which is not in China’s interests,” and that declining to send PLAN ships to escort activists to the Diaoyu Islands does not indicate China’s weakness.

This rhetoric stands in sharp contrast to the overly nationalistic op-ed published a month ago (that I also commented on around the same time), which called on China to challenge Japan’s sovereignty over Okinawa as a psychological ploy to capture the Diaoyu Islands. It is encouraging that Chinese state media is explicitly acknowledging that going to war (of whatever magnitude) over a few piddling pieces of rock is not in their national interests.

I can only hope that they will extend this message to also include the various islands and shoals in the South China Sea. Certainly the strategic calculus is mostly the same–conflict with either Japan or any of the states surrounding the South China Sea would not only severely disrupt trade and shipping, but would also inevitably involve the United States.

According to the Financial Times, the Global Times recently published an editorial calling for the Chinese government to revisit the sovereignty of Okinawa as part of the ongoing Senkaku/Diaoyu Islands dispute between Japan and China. China might have good strategic reasons for wanting an independent Okinawa given that the U.S. based nuclear missiles at Okinawa during the Cold War, which were aimed at Beijing and Shanghai (before the U.S. was aware of the Sino-Soviet Split). But the nationalists referred to in the FT article neglect the strategic dimension for the historical, justifying their position instead on the fact that Okinawa was a Chinese tributary state in the 15th Century.

Of course, this is just one instance in which China has used historical artifacts to justify its claims in the many territorial clashes it has with its neighbors. Perhaps the best known instance of this tactic is China’s nine-dash line claim of sovereignty over nearly the entirety of the South China Sea. China’s justification of the nine-dash line is an exercise in studied ambiguity. The territory within the line was first claimed only in 1947 by the then Nationalist government. The PRC continued the Nationalist argument in two ways: 1) Claiming the entire South China Sea and all islands therein using terms such as “sovereign” or “historic” waters that are unsupported by the UN Convention on the Law of the Sea (UNCLOS), and 2) Claiming the islands themselves as a basis to claim jurisdiction over territorial waters and exclusive economic zones (EEZ) around those islands, even though EEZs cannot be claimed around islands which support no human habitation or economic activity (which includes most of the islands in question, many of which are little more than bare rocks). China’s extralegal claims not only complicate access rights to fishing and resource extraction, but could also impede the freedom of navigation for the U.S. Navy and others.

China’s claims are dubious on a number of other grounds. To begin with, China’s borders have varied wildly over the course of millennia, and its territorial claims have changed in a much shorter timeframe. As Peter Dutton at the U.S. Naval War College notes, China, Vietnam, the Philippines, and Malaysia have historically all shared access to the South China Sea. Furthermore, even if Beijing’s argument concerning history and tributary states were to stand, China is hardly the only country to have lost former territories over the course of time—most European countries once ruled over areas far beyond their current borders. In this context, China’s claims are no different than modern-day Great Britain laying claim to France because of the House of Plantagenet, or Spain claiming nearly all of Latin America because of its colonial past. Indeed, according to Beijing’s logic, Mongolia can claim the Chinese homeland as its own.

Returning to the Global Times op-ed (which appears to have only been published in Chinese, not English), it is clear that the editorial is mainly about the Diaoyu Islands, not Okinawa. The op-ed proclaims: “In China’s struggle over the Diaoyu Islands problem, Japan does not have any hope of winning. China has sufficient resources and means, and enough official and public will to confront Japan over the Diaoyu Islands,” continuing with a four-point bulletin on how to do so (which includes increasing China’s naval presence in the area and enlisting the help of the Taiwanese). And then at the very end, the editorial mentions “revisit[ing] Okinawan sovereignty”—but it seems like the author (Hu Xijin, perhaps?) only really means for it to be a psychological ploy to “curb Japan’s attitude over the Diaoyu Islands.

But this is all your average, every-day kind of talk among nationalists in China. What was really surprising was the final conclusion: “Of course, China does not have to actively make life difficult for Japan and squeeze China and Japan into a confrontation at the point of a bull’s horn. China doesn’t need Japan to be friendly—it only has to play out the results of its chess game with Japan, and be bold enough to use its strength to bring Japan to its senses…After a few rounds, Japan will reconsider its proper behavior.”

Chinese nationalists can’t possibly believe this. Calling for irrational and provocative military action is one thing—but expecting Japan and probably the rest of the Western Pacific to react as tributary states of yore? This is a serious misappraisal of the intentions of those countries involved with China in territorial disputes. This sort of thinking, if anyone in power actually believes it, will not only detonate what little cooperation on territorial disputes that still exists, but might actually lead to military conflict. This sort of hubris isn’t unique to China—it seems pretty similar to the Bush administration’s prediction that the Iraqis would ‘greet us as liberators’ in 2003. But it didn’t belong in any government’s rhetoric then and it doesn’t now.

The driving force behind the U.S. deficits and China’s surpluses lies not in exchange rates but in structural factors that built up over time. Three factors largely explain the emergence of China’s trade surpluses: surging U.S. consumption that fueled import demand, maturation of the East Asian production sharing network centered on China, and ratcheting up of China’s savings rates.

The story of the origins of the decline in U.S. household savings rates which was then exacerbated by growing fiscal deficits and together led to the excessive demand for imports is well known and still unresolved. This part of the story has little to do with China, but reflects the political gridlock in Washington.

Yukon Huang, of the Carnegie Endowment and former country director at the World Bank, writes at The Diplomat that the U.S. “must get over” the renminbi. While it is true that China gets the low-added value side of the production chain, and that if counted properly, our trade deficits with Japan, South Korea, et al would be much higher, I think he discounts the role of Chinese state policy in perpetuating the trade deficit. The Chinese, in effect, have subsidized our consumption: all dollars that flow into export businesses must by law be surrendered to the People’s Bank of China, which then invests it right back into U.S. treasuries because it doesn’t know how to spend its money fast enough (there are already questions about the quality of the infrastructure investments China has made). This is one of the primary reasons why the Chinese savings rate is so high–because it’s Chinese state policy. Sure, the average consumer has a high savings rate because of the volatility of the Chinese market (no social security/safety net, very few safe investments so much of those savings flows into real estate or low-interest savings accounts that don’t keep up with inflation–financial market liberalization is a topic for another day). But state-enforced savings far outweigh consumer savings. This investment in Treasury bonds, in turn, aids the U.S. in taking out more debt, and ultimately, for U.S. consumers to buy more things. It’s a vicious cycle of consumption.

Huang does give the right solution, however: increased Chinese consumption. But again, he seems to think this is mostly solved by individual consumers buying more things. He does suggest the Chinese state do one thing: relax the hukou residency permit rules, so that migrant workers can feel more secure in spending more money. This is all well and good (the Chinese hukou system is draconian; the lack of labor mobility is a huge drag on the Chinese economy), but the Chinese state can do a lot more: by spending more of the money it puts into Treasury bonds! If it’s having trouble disbursing the money in the form of infrastructure investments, fine! Use it to create a viable social safety net and universal healthcare! Pay school teachers more! Invest in the Chinese people, rather than trying to build the next big infrastructure monstrosity that will fall apart in five years anyway.