Chinese Provocations Considered

by Patrick Brennan

In a Corner post last night, Michael Auslin had an astute take on the rising tensions between China and Japan over control of a group of islands in the East China Sea: Various maritime provocations have coincided with protests outside the Japanese embassy in Beijing and boycotts of Japanese products. Today, the Telegraph’s Ambrose Evans-Pritchard has an interesting report on another form the conflict could take, with China threatening new economic measures:

Jin Baisong from the Chinese Academy of International Trade — a branch of the commerce ministry — said China should use its power as Japan’s biggest creditor with $230bn (£141bn) of bonds to “impose sanctions on Japan in the most effective manner” and bring Tokyo’s festering fiscal crisis to a head.

Writing in the Communist Party newspaper China Daily, Mr Jin called on China to invoke the “security exception” rule under the World Trade Organisation to punish Japan, rejecting arguments that a trade war between the two Pacific giants would be mutually destructive.

Separately, the Hong Kong Economic Journal reported that China is drawing up plans to cut off Japan’s supplies of rare earth metals needed for hi-tech industry.

The warnings came as anti-Japanese protests spread to 85 cities across China, forcing Japanese companies to shutter factories and suspend operations.

Fitch Ratings threatened to downgrade a clutch of Japanese exporters if the clash drags on. It warned that Nissan is heavily at risk with 26pc of its global car sales in China, followed by Honda with 20pc. Sharp and Panasonic both have major exposure. Japan’s exports to China were $74bn in the first half of this year. Bilateral trade reached $345bn last year.

Mr Jin said China can afford to sacrifice its “low-value-added” exports to Japan at a small cost. By contrast, Japan relies on Chinese demand to keep its economy afloat and stave off “irreversible” decline. “It’s clear that China can deal a heavy blow to the Japanese economy without hurting itself too much,” he said.

Jin’s comments, of course, don’t necessarily reflect the potential plans of the Chinese government, but they are interesting nonetheless; the very popular argument that China “owns” the U.S. because they hold a huge chunk of our debt is basically true of Japan too. With China holding $1 trillion of our $16 trillion debt, we owe more to the Heavenly Kingdom than Japan does ($230 billion out of $13 trillion), but if China were willing to dump their holdings of either country’s debt, it would probably be enough to harm the nation’s fiscal standing. Jin admits, however, the crucial point that such a move would come at a significant cost to China’s economy (which it, now more than in recent years, may not be able to absorb), and the costs would be even more significant in the event that they try a fire sale of U.S. Treasury debt (our share of China’s exports are two-and-a-half times Japan’s). The U.S.’s debt is also denominated in the world’s reserve currency and the U.S.-treasury market is the world’s largest debt market, meaning that the damage to us would be less than it would be to Japan.

The Department of Defense concluded in a recent report (which its title page informs us cost only $4,500, a.k.a. Pentagon for “free”) that China’s holdings of U.S. treasuries do not represent a security threat to the U.S. for similar reasons: The cost to China’s economy would be too great by comparison to the damage dealt to the U.S. Indeed, the report also notes that there’s no evidence that at any point so far, Chinese holdings of U.S. debt have shifted in reaction to changes in the political relationship. Thus, they conclude that we don’t need to worry about China attempting such a thing, but in a time of Chinese political instability, such unreasonable ideas are floated, and the damage done to the U.S. would not be negligible.

Just in case, we’re apparently hedging our bets by playing nice:

U.S. Defense Secretary Leon Panetta told Chinese troops Wednesday that Washington’s new strategic military shift toward Asia is not meant to contain the rise of China. Panetta’s comments to young officers at a Chinese military academy in Beijing are one of Washington’s most direct statements yet about the intentions of its “pivot” toward the region.

“Our re-balance toward the Asia-Pacific region is not an attempt to contain China,” said Panetta.  “It is an attempt to engage China and expand its role in the Asia-Pacific. It’s about creating a new model in the relationship of our two Pacific powers. It’s about renewing and revitalizing our role in a part of the world that is rapidly becoming more critical to our economic, diplomatic, and security interests.”

This after Chinese protesters (who have generally been state-sanctioned) attacked U.S. ambassador Gary Locke’s car yesterday as he entered the embassy in Beijing.

The Corner

The one and only.