Stephen King: Sartorial diplomacy won't be enough as the Chinese grow more confident

The US borrowed too much and invested it in real estate, but many US policymakers are keen to blame China

Click to follow

When Mr Hu went to Washington, he was greeted by a family that decided to wear red.

Barack wore a red tie, Michelle wore a red dress and Sasha wore red trousers. Even Hillary, Barack's specialist on all things foreign, chose to wear a red jacket.

Yes, the Chinese were in town and, in their honour, the US President and his nearest and dearest decided to honour Hu Jintao not by waving little Chinese flags but, instead, by taking Chinese flags and turning them into items of clothing (or so it seemed).

Unfortunately, this sartorial outreach programme was undone by comments (subsequently retracted) from Democrat Senator Harry Reid suggesting that Mr Hu, the Chinese President, was a dictator. Who said diplomacy was easy?

At the end of Mr Hu's trip, the usual trade deals were signed: the Chinese will buy a few more Boeings (they would have done anyway) and they're going to end up with an awful lot of soybeans.

Yet, following Mr Hu's return home, the tensions between the "old" and "new" superpowers will inevitably build. While China and the US are hugely dependent on each other, leaders in both countries know that it could all-too-easily end in tears.

Take the simplest issues. Even though the US economy has been convalescing for a while following the near-total meltdown a couple of years ago, American unemployment is still astonishingly high.

While the US arguably has only itself to blame – it borrowed too much money and chose to invest the proceeds in foolish real estate ventures – many American policymakers are keen to blame the Chinese. Their argument is simple.

China has a large and growing trade surplus with the US which, in the view of the Americans, is most likely caused by Beijing's deliberate attempts to undervalue China's currency, the renminbi, against the dollar through continuous intervention in the foreign exchange markets.

By doing so, Chinese exports end up too cheap, leaving the American economy flooded with goods "Made in China" and many Americans without a job. It's a seductive view, but is it really right? Chinese workers are paid one-tenth or one-twentieth of their American counterparts and yet they often work in some of the world's most efficient factories (in many cases, owned or supported by American companies).

The renminbi would have to climb to an implausible degree to put this imbalance right. Or, put another way, the dollar would have to collapse, leading to global financial distress beyond the imagination of even the most dismal of dismal scientists.

And, in the US, it's too often forgotten that America's trade deficit has to be funded. You can't over-consume without someone lending you the money in the first place.

As China's trade surplus with the US has grown, so has America's dependency on loans from China to fuel all its additional consumption.

Some Americans recognise this financial reality. Hillary Clinton, in conversation with the then Australian Prime Minister Kevin Rudd on 24 March 2009, asked: "How do you deal toughly with your banker?" (according, that is, to the WikiLeaks website). Many, however, choose to turn a blind eye, preferring instead to fan the flames of protectionist rhetoric.

During last week's discussions, much was made of the need for the renminbi to become an international currency in its own right. Neither side would disagree with this observation, but that simply reflects the vacuity of standard diplomatic language.

Whereas the Americans would prefer to see an instantaneous and substantial rise in the renminbi, the Chinese ideally want to progress at a more serene pace, fearful that sudden movements could destabilise the fragile ecosystem otherwise known as China's desire for continued social stability.

In any case, the internationalisation of the renminbi is not just a story about enhanced currency flexibility against the dollar.

As countries in Asia, Africa and Latin America increasingly regard China, and not the US, as the nation that will have the biggest influence on their own economic prospects, the increasingly widespread use of the renminbi as an international currency will only serve to emphasise how China's "soft power" is spreading all over the world and how US soft power is in retreat.

Although now the world's second biggest economy, China still is a poor nation. Beijing and Shanghai may be thoroughly glitzy cities these days, but incomes per capita across the country as a whole are a tiny fraction of those in the US and the UK.

As poor countries expand, they need to stake bigger and bigger claims on the world's scarce resources: the roads, railways, bridges, airports, hospitals and schools we take for granted in the developed world are still in the process of being built in China and other less-developed nations.

It's no surprise, then, that China's rapid rate of economic expansion has turned it into the world's biggest consumer of a range of different metals while making it a pivotal influence in the world's energy and grain markets.

Many of these raw materials have to be imported. To secure its own future, China is now intent on strengthening its political and economic relationships with countries elsewhere in the world. China is now Africa's biggest export market. In Brazil, businessmen and women are nowadays a lot more interested in opportunities in China than in opportunities either in the US or in other parts of Latin America.

But China can only do so much with soft power. Like any other superpower, it also needs to strengthen its military credentials to ensure that its friends, rivals and enemies are aware of its now-extended global reach. That's why China is now in the aircraft carrier business.

Underneath all this is a puzzle that will doubtless tease both the Chinese and the Americans in the years to come. As a nation, the US exists only because of the colonial activities of Europeans who went in search of new worlds to feed their appetite for power and riches. The industrial revolution had to be fed and nourished somehow.

Colonisation seemed to provide the answer, even if the indigenous populations in the conquered lands were never asked the question. As China industrialises, how will it manage to feed and nourish itself in a world where colonisation is mostly frowned upon?

There are no easy answers. The best that can be said is that, despite all the handshakes and smiles last week, there are only uneasy relationships, a reflection of our collective dependence on ultimately scarce resources.

A few years ago on a visit to San Francisco, I gazed across the rooftops of Chinatown and looked at the flags fluttering in the breeze: American, Hong Kong and Taiwanese, but no Chinese flags.

I returned to San Francisco last year: this time, all I could see was a sea of red punctuated by a few yellow stars. National pride is re-emerging among the Chinese diaspora. It's not just the Obamas who are wearing red: a nation and its widely distributed people are beginning to recognise that the 21st Century belongs to them.

And as the Chinese become more confident in staking their claims, the US will have to make room for this hitherto-dormant superpower. It will take more than wearing a red tie to do so.

Stephen King is managing director of economics at HSBC