The Beijing consensus is to keep quiet

The China model

In the West people worry that developing countries want to copy “the China model”. Such talk makes people in China uncomfortable

CHINESE officials said the opening of the World Expo in Shanghai on April 30th would be simple and frugal. It wasn’t. The display of fireworks, laser beams, fountains and dancers rivalled the extravagance of Beijing’s Olympic ceremonies in 2008. The government’s urge to show off Chinese dynamism proved irresistible. For many, the razzmatazz lit up the China model for all the world to admire.

The multi-billion-dollar expo embodies this supposed model, which has won China many admirers in developing countries and beyond. A survey by the Pew Research Centre, an American polling organisation, found that 85% of Nigerians viewed China favourably last year (compared with 79% in 2008), as did 50% of Americans (up from 39% in 2008) and 26% of Japanese (up from 14%, see chart). China’s ability to organise the largest ever World Expo, including a massive upgrade to Shanghai’s infrastructure, with an apparent minimum of the bickering that plagues democracies, is part of what dazzles.

Scholars and officials in China itself, however, are divided over whether there is a China model (or “Beijing consensus” as it was dubbed in 2004 by Joshua Cooper Ramo, an American consultant, playing on the idea of a declining “Washington consensus”), and if so what the model is and whether it is wise to talk about it. The Communist Party is diffident about laying claim to any development model that other countries might copy. Official websites widely noted a report by a pro-Party newspaper in Hong Kong, Ta Kung Pao, calling the expo “a display platform for the China model”. But Chinese leaders avoid using the term and in public describe the expo in less China-centred language.

Not so China’s publishing industry, which in recent months has been cashing in on an upsurge of debate in China about the notion of a China model (one-party rule, an eclectic approach to free markets and a big role for state enterprise being among its commonly identified ingredients). In November a prominent Party-run publisher produced a 630-page tome titled “China Model: A New Development Model from the Sixty Years of the People’s Republic”. In January came the more modest “China Model: Experiences and Difficulties”. Another China-model book was launched in April and debated at an expo-related forum in Shanghai. Its enthusiastic authors include Zhao Qizheng, a former top Party propaganda official, and John Naisbitt, an American futurologist.

Western publishers have been no less enthused by China’s continued rapid growth. The most recent entry in the field is “The Beijing Consensus, How China’s Authoritarian Model Will Dominate the Twenty-First Century” by Stefan Halper, an American academic. Mr Halper, who has served as an official in various Republican administrations, argues that “just as globalisation is shrinking the world, China is shrinking the West” by quietly limiting the projection of its values.

But despite China’s status as “the world’s largest billboard advertisement for the new alternative” of going capitalist and staying autocratic, Party leaders are, as Mr Halper describes it, gripped by a fear of losing control and of China descending into chaos. It is this fear, he says, that is a driving force behind China’s worrying external behaviour. Party rule, the argument runs, depends on economic growth, which in turn depends on resources supplied by unsavoury countries. Politicians in Africa in fact rarely talk about following a “Beijing consensus”. But they love the flow of aid from China that comes without Western lectures about governance and human rights.

The same fear makes Chinese leaders reluctant to wax lyrical about a China model. They are acutely aware of American sensitivity to any talk suggesting the emergence of a rival power and ideology—and conflict with America could wreck China’s economic growth.

In 2003 Chinese officials began talking of the country’s “peaceful rise”, only to drop the term a few months later amid worries that even the word “rise” would upset the flighty Americans. Zhao Qizheng, the former propaganda official, writes that he prefers “China case” to “China model”. Li Junru, a senior Party theorist, said in December that talk of a China model was “very dangerous” because complacency might set in that would sap enthusiasm for further reforms.

Some Chinese lament that this is already happening. Political reform, which the late architect of China’s developmental model, Deng Xiaoping, once argued was essential for economic liberalisation, has barely progressed since he crushed the Tiananmen Square protests in 1989. Liu Yawei of the Carter Centre, an American human-rights group wrote last month that efforts by Chinese scholars to promote the idea of a China model have become “so intense and effective” that political reform has been “swept aside”.

Chinese leaders’ fear of chaos suggests they themselves are not convinced that they have found the right path. Talk of a model is made all the harder by the stability-threatening problems that breakneck growth engenders, from environmental destruction to rampant corruption and a growing gap between rich and poor. One of China’s more outspoken media organisations, Caixin, this week published an article by Joseph Nye, an American academic. In it Mr Nye writes of the risks posed by China’s uncertain political trajectory. “Generations change, power often creates hubris and appetites sometimes grow with eating,” he says.

One Western diplomat, using the term made famous by Mr Nye, describes the expo as a “competition between soft powers”. But if China’s soft power is in the ascendant and America’s declining—as many Chinese commentators write—the event, which is due to end on October 31st, hardly shows it. True, China succeeded in persuading a record number of countries to take part. But visitor turnout has been far lower than organisers had anticipated. And queues outside America’s dour pavilion have been among the longest.


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Hu, Wen—what, why and how

China’s prime minister Wen Jiabao praises Hu Yaobang, a former Communist Party chief

ON APRIL 15th the arcane and neglected art of reading China’s political tea leaves suddenly surged back into fashion. The Communist Party’s turgid broadsheet, the People’s Daily, published an article on the top of its second page by the prime minister, Wen Jiabao. Its glowing praise for Hu Yaobang, a politically incorrect former party chief whose death triggered the Tiananmen Square protests 21 years ago, struck a remarkably liberal note.

Hu’s death on April 15th 1989 prompted thousands of students to take to the streets in mourning. They bore aloft pictures of the late leader, who though still a member of the ruling Politburo when he died had been forced to resign as the party’s general secretary two years earlier for being too soft on dissent. Because Hu had not been fully purged, the party had no choice but to hold an elaborate funeral for him. This provided cover for the students, who soon switched their attention to demands for democratic reform.

Since the bloody suppression of the protests, Hu has been referred to sparingly by Chinese officials; and the liberalism with which he was associated has also been permitted only sparingly. Of late, it has been notably absent, as the party cracks down on human-rights activists, tightens controls on the internet and frets about unrest in Tibet and Xinjiang. Yet China’s leaders are preparing for a change of guard in 2012-13. Mr Wen will be stepping down. Could it be that, having established China as a global economic power, he and his colleagues are at last thinking of trying to make it politically more respectable?

Hu’s reputation has sometimes been used in arguments about the direction of the country. In an exception to the general rule that he has been neglected by his successors, a symposium was held in the Great Hall of the People in Beijing in November 2005 to mark the 90th anniversary of his birth. It was widely interpreted as an attempt by President Hu Jintao to boost his own public standing by allowing open tributes to his still-popular namesake. A speech by China’s then vice-president, Zeng Qinghong, lavished praise on Hu Yaobang’s career as one of the Communist state’s revolutionary founders, tactfully avoiding mention of his dethronement.

But by and large the leadership has ignored Hu Yaobang’s death. Last year’s 20th anniversary of the Tiananmen movement made officials especially nervous of anything that might revive memories of that period. Even though the milestone passed with little more than token attempts inside China to observe it, the authorities have yet to ease their grip. Last December a prominent dissident, Liu Xiaobo, was jailed for 11 years for “inciting subversion”.

This made the appearance of Mr Wen’s more than 3,000-character essay especially striking. Unlike Mr Zeng’s formal-sounding 2005 speech, Mr Wen’s article marked the first time since 1989 that a top leader has been willing to write of a personal connection with the former party chief. It recalls a trip he made with Hu in 1986 to a rural area of the poor southern province of Guizhou. “Every time I think back on this, Comrade Yaobang’s sincere, magnanimous and amiable expression keeps appearing before my eyes. Cherished feelings stored in my heart for all these years swell up like a tide, and it takes a long time for me to calm down,” Mr Wen wrote.

A few other official newspapers also published reminiscences, this time apparently less restrained than in 2005, when the party’s propaganda bureau responded furiously to a liberal magazine’s articles related to the anniversary. Thousands of Chinese internet users have praised these latest pieces in online forums.

But hope that Hu’s partial rehabilitation might lead to any reassessment of the Tiananmen Square protests will certainly be dashed. Hu’s political views have been notable for their absence in the recent articles, suggesting that only his affable character is open for discussion. This is a safe topic for Mr Wen, who prides himself on the same man-of-the-people quality that his article praised in Hu. From anecdotal evidence, it appears Mr Wen enjoys some popularity for his caring image—it has been on display again with his visit to the epicentre of an earthquake on April 14th in Qinghai Province on the Tibetan plateau that killed more than 2,000 people.

Tea-leaf readers are divided over what, if any, further political message might have been intended. Few believe Mr Wen would have published such an article without consulting his colleagues. But there is a school of thought that Mr Wen, feeling that his own political career is drawing to an end (he is due to step down in 2013, if not before, as will President Hu), is trying to signal a yearning for political reforms which have not been pursued more vigorously. President Hu has kept silent on Hu Yaobang, but both he and Mr Wen owe earlier promotions to the late leader. In his article, Mr Wen revealed that he had visited Hu Yaobang’s home every year since his death, a gesture that readers would interpret as showing considerable loyalty.

Bao Tong, who was a top aide to the late Zhao Ziyang, Mr Hu’s equally liberal successor, believes there could be an ultra-subtle message in the party’s re-embrace of Hu. Officials—he points out—like to encourage the idea that Zhao helped topple Hu (though Mr Bao says he did not). Far from being a sign of yearning for reform, support for Hu could indicate repudiation of Zhao, about whom reminiscences remain strongly discouraged. Zhao was thoroughly purged after Tiananmen and died under house arrest five years ago.

Mr Wen’s article, however, does hint strongly at a huge problem in China’s political system. It describes how Hu instructed Mr Wen to sneak out of an official guesthouse and visit a village under cover of darkness, to find out what peasants were really thinking. “Remember, do not inform the local government”, Hu was quoted as saying. A quarter of a century later, Chinese leaders remain almost as prone to deception by their underlings.


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China Convicts Itself

Beijing needs to commit to the global economy

China tactfully reminds the world every once in a while that its specialty is masquerading weakness as strength.

In convicting iron-ore salesman and naturalized Australian citizen Stern Hu of bribery and stealing commercial secrets this week, China passed a verdict sure to frighten but not a verdict that anyone in the world would actually trust. A solitary Australian consular official was permitted to witness only part of the largely secret trial; the only publicly disclosed piece of evidence appears to be a written statement by Du Shuanghua, owner of a private steel mill, saying he paid off one of Mr. Hu’s colleagues.

Rio Tinto, one of the few Western companies to earn billions out of China, was quick to write off its employee. The Australian government is having a harder time endorsing the verdict, prompting the predictable caterwaul from China.

China unloading what it would like to get cheaper.

Let’s recall, the reason for an open courtroom is not just to make sure justice is done, but to make sure a verdict will be believed and lend credibility to the government that issues it.

The reason to have a free media, and even to put up with Google, is so people can know when their government is lying to them, which in turn is conducive to people being prepared to believe their government when it’s telling them the truth.

Weakness masquerading as strength is also key to understanding the most dangerous issue in U.S.-China relations today—China’s controversial currency peg and the false prize of its $2 trillion in accumulated dollar reserves.

The problem isn’t that China ties its yuan to the dollar. The problem is that it never let the full consequences of this choice flow through to domestic prices, wages and patterns of investment and employment.

Perhaps the pithiest summary came from whoever said that the real trouble with China is that one Chinese won’t lend to another to buy a house unless he’s buying it in the U.S.

Exactly. Tens of billions of Chinese-owned dollars rolled into Fannie and Freddie to support a U.S. housing boom. Meanwhile, at home, the world’s second biggest economy has yet to develop a real banking system or debt market, or any way for consumers to leverage China’s huge savings to improve their standard of living.

Writ small, China’s ore wars are emblematic of the same lopsided development agenda. Beijing has been trying somehow to turn its rickety and overmanned steel industry into leverage over international ore prices. China has been trying for two years to defy market realities and force Rio and its major competitors to deliver supplies at a steep discount to the international price created by China’s own explosive and volatile demand.

Not the least of Rio’s offenses was that it refused to go along. Rio sold a growing share of ore at spot market prices to the all-too-willing buyers among mainland steelmakers. Whatever the truth of the bribery charges, this actually reduced the opportunity for corruption—but then maybe that was Rio’s real sin, since well-connected mainlanders apparently had been getting rich reselling their ore allocations to unapproved buyers at huge markups.

Had China opened up its economy at a pace commensurate with its exports and accumulation of dollars, a solution would have revealed itself: import more steel. Many of the world’s steelmakers use domestic ore or scrap. Unlike China’s, they aren’t captive to an internationally traded raw material controlled by three big sellers.

This week, two of the three, Brazil’s Vale and Australia’s BHP, persuaded major Japanese, South Korean and Chinese steelmakers to accept quarterly ore repricings, with price hikes of nearly 100% above last year. Even with the Stern Hu verdict in hand, Beijing can’t hope to hold back this tide.

Nor can it hold back forever those in the U.S. who want to use China’s currency policy as an excuse to start a trade war, joined by some who apparently want to blame China for the failure of their tax-and-spend nostrums to lift the U.S. economy to a sustainable recovery.

See, we can masquerade weakness as strength too. But Washington can’t make China see a light its leaders don’t want to see. How much better to adopt a policy of real strength at home, beginning with domestic U.S. reforms that do what the word actually implies: justify confidence in our own economic future.

When Moody’s threatened to downgrade the U.S. credit rating recently, it said a prime concern was a loss of faith in Washington’s ability to get spending under control and protect growth. Moody’s didn’t mention China.

Holman Jenkins, Wall Street Journal


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The Rules in China

After a Chinese court sentenced four executives of Australian mining company Rio Tinto to lengthy prison terms for bribery and stealing commercial secrets yesterday, Canberra was quick to respond. Foreign Minister Stephen Smith pointedly stated, “As China emerges into the global economy, the international business community needs to understand with certainty what the rules are in China.”

In the eight months since Australian citizen Stern Hu and his Chinese colleagues Wang Yong, Ge Minqiang and Liu Caikui were arrested, we’ve learned a great deal about the lack of certainty and rules not only in China, but also in the global commodities trade. Some of that is China’s fault, but hardly all of it. The Australian government and Rio Tinto must share the blame for lack of transparency and failing to play by the rules.

Foreign media coverage of the arrests and trial has focused on whether the Chinese authorities pursued this case for political reasons. Remember that early last year, cash-starved Rio Tinto angered China by inviting Aluminum Corp. of China, or Chinalco, to take a $19.5 billion equity stake and then backing out of the deal under a combination of shareholder, government and public pressure. Rio was also driving a tough bargain in iron-ore price negotiations with Chinese buyers. Many observers speculated that the four executives were pawns in a high stakes game of tit-for-tat orchestrated from Beijing.

Certainly the timing of the case makes such suspicions inevitable. But the reality is probably more complicated. The Chinese justice system may be manifestly unfair, and once it gains momentum a guilty verdict is a foregone conclusion. Yet Rio itself put forces in motion that led to four men losing their freedom.

It all started with the boom in the global iron-ore market in the early 2000s. That’s when China’s steel industry embarked on a massive expansion of capacity, turning the trade in ore from a buyer’s market to a seller’s market. China’s large state-owned steelmakers bought at the benchmark price negotiated by Japanese and Korean mills, while smaller firms had to pay the higher spot price. This created an incentive for arbitrage and corruption, but unfortunately both the Chinese government and the mining companies were slow to take account of this in their internal controls.

As demand soared, the benchmark and market prices for iron ore diverged and the system came under increasing stress. In 2008, the Brazilian mining giant Vale negotiated a new benchmark price, only to see its two Australian rivals, BHP Billiton and Rio Tinto, refuse to follow it. Vale reacted by tearing up its agreed benchmark price and renegotiating with producers who were over a barrel.

Then Rio Tinto also began to back out of its contracts, for instance by invoking clauses in contracts to hold back 10% of deliveries, which could then be resold at the spot price. Since Rio was facing a hostile takeover bid from BHP, the company’s managers pushed especially hard for every last dollar at the expense of their trading partners to show that they could deliver higher returns for shareholders.

Rio’s Mr. Hu himself acknowledged the problem. In 2008, after Rio negotiated a 87% price increase, Australian reporter John Garnaut interviewed him: “He said he had no qualms with driving as hard a bargain as he could on price. But he had misgivings about whether Rio Tinto should risk its integrity in China by claiming ‘force majeure’ to wriggle out of long-term contracts to chase higher prices elsewhere. ‘We acted in accordance with the letter of the contracts, but not the spirit,’ he said.”

This weakening of the bonds of contract naturally infuriated Chinese steelmakers. So when the economic crisis hit at the end of 2008 and demand for iron ore evaporated, it was payback time. Enjoying a buyer’s market again, the Chinese firms simply walked away from contracts.

The turnabout didn’t last long. Beijing’s massive fiscal stimulus program quickly revived demand for steel by the middle of 2009, and the Australians were able to start raising prices again. Negotiations over new iron-ore benchmark prices were particularly acrimonious, given the bad blood created over the past couple years. And that was the state of play when Mr. Hu and his colleagues were arrested on July 5, 2009.

One past participant in the iron-ore business, who insists on anonymity because of the sensitivities on both sides, believes that the investigation into the Rio Tinto executives was ongoing for many months before the arrests, meaning they were not directly related to the Chinalco fiasco or the ongoing price negotiations. The authorities likely started sniffing around as a result of a tip-off from someone on the Chinese side of the industry. The ill will created by the whipsawing prices and huge losses suffered by some firms supplied plenty of motivation for someone to drop the dime on Rio.

And some dirt was found. Rio Tinto has severed its relationship with the executives, saying they engaged in “deplorable behavior,” effectively accepting the verdict that they were taking kickbacks from steelmakers to arrange preferential access to iron ore. The charges of stealing commercial secrets are much more murky, as evidenced by the fact that they were heard in a totally sealed courtroom, but these too probably originated from lower down the ladder of officialdom, rather than a Beijing-led witch-hunt against Rio Tinto.

The bosses in Australia made the mistake of leaving their Chinese executives in place for too long with too little supervision. But the bigger mistake was destroying the trust of the handshake deals made with Chinese partners in the quest for a little extra margin. That is bad practice anywhere, but especially in China.

Chinalco has not held a grudge against Rio for the failed equity deal. The two companies continue to negotiate joint projects in countries like Mongolia and Guinea. The State Council’s own post-mortem report on the affair is relatively kind to Rio and admits that the Chinese side could have handled the deal better.

However, the government of Prime Minister Kevin Rudd does not come off so well. Treasurer Wayne Swan ran scared from public perceptions of being too soft on China and politicized the approval process for Chinese investments, making it clear that the Chinalco deal would not go through and future acquisitions in the natural resources industry would face strict limitations. The lack of transparency and hostility toward China came as a complete surprise to Beijing and has created lasting tension between the two countries.

It was bad luck that around the same time, Xinjiang dissident Rebiya Kadeer was invited to Australia and Canberra issued a defense white paper that singled out China as a potential threat around which to base future strategy. From Beijing’s perspective these all suggested that Australia was turning hostile and there was no certainty about the rules for Chinese companies doing business there. Had this not happened, it’s possible that greater leniency would have been shown to the four Rio Tinto executives.

Everyone doing business in China should be clear by now on the rules—there is no rule of law. Deals can be done on the basis of mutual trust, which creates some level of certainty. The four Rio Tinto executives may be guilty of corruption, but the real reason they are in prison is because that trust broke down.

Mr. Restall is a member of the editorial board of The Wall Street Journal.


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The Arrogance of China’s Leadership

Masters of the World

China’s confidence has been fuelled by surging economic growth, even during the crisis.

The West hopes that China’s growing prosperity will also lead to political liberalization. But the reverse is likely to be true. The Communist Party’s increasing confidence means China is set to become more of a troublemaker on the international stage, and more brutal in its crackdown on dissidents.

China’s Communist Party is omnipotent. It can move mountains, as it did when it built the world’s largest hydroelectric plant on the Yangtze River. It can build the world’s highest railway line, as it proved when it constructed the rail link to the Tibetan capital of Lhasa.

It can even organize reincarnations, something it achieved when it anointed a man who is loyal to Beijing as Tibet’s second-highest spiritual leader, or Panchen Lama — a particularly impressive feat for an atheistic party which regards religion as a corrupting opium of the people. The Communist Party bosses briefly turned spiritual in order to get their man in place as successor to the Dalai Lama, 74. But the Dalai Lama has chosen his own spiritual deputy. And he’s also thinking about selecting a woman to be his reincarnation, he told SPIEGEL. Besides, he doesn’t want to do Beijing the favour of dying anytime soon.

Last Thursday, US President Barack Obama shook hands with the Tibetan Nobel Peace Prize winner in the White House. It’s something his predecessors had also done, as had the French and German government leaders. Usually Beijing just responded to such meetings by uttering the usual protests. The Communist Party’s complaints against US arms shipments to Taiwan have been similarly muted in the past because it was well aware that US presidents are bound by law to help Taiwan.

But it’s different this time. Beijing reacted with uncommonly vocal fury to the latest Dalai Lama meeting and Washington’s new Taiwan arms deal, and has threatened consequences. Companies like Boeing might be excluded from Chinese deals, and bilateral talks among military officials have been cancelled.

Self-Confidence Bordering on Arrogance

There’s a new ice age between Beijing and Washington, between the two centers that many already see welded together as Chimerica, a new “G-2” global power. What has got into China?

For a start, the Chinese government is brimming with a self-confidence bordering on arrogance. The Chinese see themselves as the winners of the global economic crisis. The country generated economic growth of around 9 percent in 2009 while the Russian economy shrank by 7.9 percent, the EU by 4.2 percent and the US by 2.7 percent. China overtook Germany to become the world’s leading exporter and extended its lead as the country with the largest foreign currency reserves.

The Communist Party leaders are taking delight in citing glowing forecasts for their country’s economic outlook. American Nobel economics laureate Robert Fogel, for example, is predicting that in 2040, China will account for 40 percent of global economic output, compared with just 14 percent for the US. “This is what economic hegemony will look like,” says Fogel.

While some in the US think they can manage China’s ascent to a global power, China is dreaming of “arranging” America’s decline. And in this context the West should bid farewell to its cherished notion that China’s economic progress will lead to political liberalization and turn it into a responsible partner on the world stage. The reverse is likely to be the case.

Troublemaker on the World Stage

Beijing is currently playing the provocative troublemaker, both at the climate conference in Copenhagen in December and in the UN Security Council, where it is likely to stand alone in resisting a new round of tough sanctions against Iran.

Economic experts say the Chinese currency is undervalued by 25 to 40 percent and that this is artificially lowering the price of exported Chinese products. But China’s leaders aren’t considering revaluing the yuan. They are ignoring Obama’s complaints about the exchange rate with the same nonchalance they showed when they dispatched lower-ranking officials to negotiate with him in Copenhagen.

China think it can afford to behave in this way. In Africa and Asia, Beijing’s authoritarianism is regarded as a successful model worth copying.

At home, the Communist Party is intensifying its brutal methods. It allowed an apparently mentally unstable British drug smuggler to be executed, and Liu Xiaobo, a respected civil rights activist who only exercised his right to free speech, was sentenced to an outrageous 11 years in jail.

Minorities striving for autonomy like the Uighurs and Tibetans are ruthlessly oppressed. A resurgent Han nationalism has replaced all other ideologies as the cement holding society together.

Beijing’s leaders are behaving like the masters of the world, as aloof as if they could walk on water. The Dalai Lama says he prays every night for the enlightenment of the Chinese. He dreams of the rebirth of Chinese virtues like modesty and a sense of proportion. He can dream on.


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China’s Tibet Pique

Beijing’s anger is likely to backfire.

Much ado has been made about President Obama’s chat with the Dalai Lama last week and the response from Beijing. “The U.S. act grossly interfered in China’s internal affairs . . . and seriously damaged the Sino-U.S. ties,” said a Chinese government spokesman, but the barrage reveals more about China than it does about U.S. policy toward Tibet.

Beijing believes it can browbeat other nations into ignoring its human-rights violations in Tibet, regularly retaliating after European leaders meet with the Dalai Lama. It has cancelled a 2008 trade summit because of a planned meeting with Nicolas Sarkozy and turned away U.S. warships from Hong Kong after the Dalai Lama received the Congressional gold medal.

The fist-shaking has yielded short-term benefits for Beijing. Mr. Obama postponed his meeting with the Tibetan leader until after his November trip to China, and his Administration has dealt with Chinese human-rights abuses in whispers. Leaders in Australia, New Zealand and other democracies have also declined to meet the Dalai Lama in recent years. All this has given China a freer hand to pursue its crackdown on Tibetan dissent, which started in earnest after the 2008 Lhasa riots.

Yet China’s tough stance will only draw more attention to the Tibetan cause. “Free Tibet” groups abound in France, Britain and other free nations. In the U.S. last week, the Dalai Lama was awarded a medal from the National Endowment for Democracy. He will spend the rest of this week addressing audiences at sold-out talks.

Much of the reason Tibet touches such a raw nerve in Beijing is that the unrest there goes to the heart of the Communist Party’s lack of democratic legitimacy. The more the Party attempts to impose its will—on Lhasa and on those who dare to meet with its most famous son—the less legitimate its rule will seem, and the more support the Dalai Lama will receive around the world.

Editorial, Wall Street Journal


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China Has a Plan, America Doesn’t

Chimerica’s Monetary Management

Lender and borrower: Chinese President Hu Jintao (L) and US President Barack Obama

America has been squandering money it borrowed from the Chinese. Instead of criticizing China’s monetary policy, US President Barack Obama should acknowledge the financial skill being displayed by the new world power and learn a few useful lessons.

Everyone knows that it is important to have friends. But in politics it is just as important to have enemies. Being united against a common foe can be more than helpful.

So it may come as no surprise that the embattled US president, Barack Obama, is continuing where his predecessor George W. Bush left off: complaining about the Chinese. Obama recently said China’s monetary policy was hurting the US job market. That strikes a chord with Americans. It’s even true. But it doesn’t make any difference.

The US is the world’s biggest debtor and therefore not in the best position to get its way with the People’s Republic of China. Of each dollar that Obama wants to spend in 2010, over 30 cents are borrowed. And a large part of the loan comes from ChinaIt might be smarter for the US to stop with the reproaches and to learn from the Chinese instead. When compared to the Americans, their financial situation is more than rosy. And their monetary policy is highly sophisticated.

The Days of Cheap Money are Over

The Chinese don’t borrow, they save. And they do this with the kind of dedication with which the Americans spend. An ordinary Chinese person puts 40 percent of his or her salary into their bank account, while an ordinary American saves at most 3 percent. The People’s Bank of China has hoarded over $2 trillion in currency reserves. America meanwhile has a small dollar reserve and an XXL-sized budget deficit which currently stands at just under $14 trillion.

China is gently putting a stop to the expansionary monetary policy that helped to stabilize the fragile monetary system during the financial crisis. The government has increased interest rates and forced private commercial banks to hold larger reserves. It is withdrawing the liquidity it pumped into the market. The days of cheap money are ending.

America can’t yet bring itself to end its debt-financed anti-crisis policy. The Federal Reserve is still lending money at close to zero interest. It is devoting billions of dollars to shoring up the real estate market. It’s an attempt to buy the recovery now and pay for it later.

On the international stage, China’s monetary policy officials are givers, not takers. They are starting to issue government debt abroad, even though the country doesn’t need to borrow any money. But many states, for example Brazil, India and Russia, are happy to have an alternative to the US bond market. They buy Chinese bonds, and the Chinese in turn use this money to buy Russian, Indian and Brazilian bonds. This has created a second monetary circuit alongside the dollar.

This won’t replace the dollar as a global currency in the foreseeable future, but it will help to prepare the ground for its replacement. Xiao Gang, the chairman of the board of directors of the Bank of China, said last summer: “The time has come to internationalize the yuan.”

China Becoming a Mini World Bank

America by contrast is self-absorbed with its monetary policy. It has ignored warnings of rising inflation and a new asset price bubble — and in doing so is isolating itself, also from the Europeans. In the meantime, China is forging new alliances.

The People’s Republic has quietly been taking stakes in virtually all the world’s regional development banks. Like a mini-World Bank, China has been helping to shore up financially troubled countries in Latin America, Africa and Asia. It has also increased its stake in the International Monetary Fund, by $50 billion. Chinese monetary experts, not Chinese soldiers, have been driving the nation’s expansion — silently and efficiently.

The oil business is the foundation of the dollar’s hegemony. The oil-producing states do some $2.2 trillion dollars’ worth of business each year in the US currency. Larry Summers, Obama’s top economic adviser, once compared the dollar to the English language in terms of its importance to international trade.

But China, a huge consumer of oil, is already discussing alternative means of payment with its suppliers. It would like to pay in yuan. The oil states wouldn’t be able to use that currency worldwide, but they could make purchases in China. That, by contrast, would be like learning Mandarin.

China is talking down the dollar to serve its own interests. When the dollar depreciates against the euro and the yen, the yuan declines as well, because the Chinese currency is pegged to the dollar. And the declining yuan helps boost Chinese exports to Europe and elsewhere in Asia.

China now sells significantly more goods in Europe than it does in America. Rarely has a government used the instruments of state monetary policy in such a calculated way. Obama is complaining, China keeps on growing and we’re all confused.

The economics textbooks never imagined a planned economy that was also run so cleverly. The world of planned economies is “a completely paralyzed, artificially distorted, pseudo-order incapable of reaction,” Ludwig Erhard, the former German chancellor and economy minister widely credited with engineering Germany’s post-war economic miracle, once said. It would “collapse like a pack of cards.”

If he were alive today, Erhard would definitely change his mind, given Asia’s successes. That’s because China has a plan, and America apparently doesn’t.

Gabor Steingart, Der Spiegel


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