Trump’s love-in with China has far to run

The Sunday Telegraph - Money & Business - - Business - LIAM HAL­LI­GAN Fol­low Liam on Twit­ter @liamhal­li­gan

IT was a “very, very great hon­our”, said Don­ald Trump, to visit Xi Jin­ping last week. The US pres­i­dent watched a “mag­nif­i­cent” mil­i­tary dis­play in Bei­jing – all stiff-legged march­ing and eight-can­non salutes – be­fore “an ab­so­lutely ter­rific din­ner”.

Dur­ing his 2016 elec­tion cam­paign, Trump com­pared China’s trade prac­tices to “rape” and “the great­est theft in the his­tory of the world”. Now, he says Sino-amer­i­can relations are “great”. Some por­tray Trump’s new af­fec­tion for Xi as a sign of Amer­ica’s strength. Oth­ers say he is bow­ing be­fore, to echo The Econ­o­mist, “the world’s most pow­er­ful man”. How­ever you look at it, whether the diplo­matic mood mu­sic is nasty or nice, China and Amer­ica are clearly now vy­ing for global hege­mony.

The US is still the big­ger econ­omy in dol­lar terms – weigh­ing in at $18,600bn, com­pared to China’s $11,200bn. Ad­just­ing for liv­ing stan­dards, though, or “pur­chas­ing power par­ity”, China has been in top spot since 2015.

Pres­i­dent Xi com­mands the big­ger army – boast­ing 2.5m ac­tive per­son­nel, rather than 1.5m in the US. But Amer­ica spends $650bn (£495bn) a year on de­fence – out­strip­ping China four­fold. And, cru­cially, the US has over 5,000 nu­clear war­heads and 19 air­craft car­ri­ers, com­pared to 300 Chi­nese nukes and just two air­craft car­ri­ers, the sec­ond launched ear­lier this year.

While Trump is buf­feted by pol­i­tics, though – of­ten un­able to get his way in Con­gress – Xi is a dic­ta­tor, so can broadly do what he wants. That’s why China’s leader is some­times viewed as more pow­er­ful. And Xi, in par­tic­u­lar, has sought to con­sol­i­date his grip, re­mov­ing ri­vals un­der the guise of an anti-cor­rup­tion pro­gramme.

Last month, he even wrote him­self into the Chi­nese con­sti­tu­tion, invit­ing com­par­i­son with Mao Ze­dong. As such, Xi is un­doubt­edly China’s most pow­er­ful leader in a gen­er­a­tion.

Trump has re­sponded warmly, call­ing Xi “the King of China”. He has also be­come more emol­lient on trade. In­stead of lash­ing out, as he did on the cam­paign trail, blam­ing China for “steal­ing Amer­i­can jobs”, Trump has praised his hosts for de­pre­ci­at­ing their cur­rency to gain com­pet­i­tive ex­port ad­van­tage. “Who can blame a coun­try for tak­ing ad­van­tage of an­other coun­try for the ben­e­fit of its cit­i­zens?” gushed Trump, as Xi looked on smil­ing. “I give China great credit,” he added, blam­ing Amer­ica’s mas­sive $347bn trade deficit with China on pre­vi­ous US gov­ern­ments.

Trump also avoided dis­com­fort­ing Xi. Three pre­vi­ous US pres­i­dents pub­licly raised hu­man rights is­sues and de­manded the Chi­nese premier take ques­tions along­side him from in­de­pen­dent jour­nal­ists. Not this time.

Trump sup­port­ers would say his ap­proach has yielded re­sults. Some $250bn in Us-chi­nese busi­ness deals were signed dur­ing the trip. When it comes to North Korea, too, there were signs of progress. In July, Py­ongyang con­ducted two mis­sile tests prov­ing that the Amer­i­can heart­land was within reach of its nu­clear weapons. In re­sponse, the US flew two B-1 bombers over the Korean penin­sula, with Trump di­rect­ing his ire at Bei­jing. “I am very dis­ap­pointed in China,” he tweeted. “They do NOTH­ING for us

with North Korea, just talk. We will no longer al­low this to con­tinue.”

Since Trump be­gan his Chi­nese charm of­fen­sive, Xi has gone fur­ther than ever in sanc­tion­ing North Korea and back­ing the Us-led pres­sure cam­paign. Cru­cially, China has signed new UN Se­cu­rity Coun­cil sanc­tions against Py­ongyang, but only af­ter the White House de­layed launch­ing an in­ves­ti­ga­tion into al­leged Chi­nese in­tel­lec­tual prop­erty theft.

China poses many threats, of course. There is much un­cer­tainty sur­round­ing Xi’s abil­ity to de­liver as an eco­nomic re­former. Will he fi­nally lib­er­alise China’s semi-closed fi­nan­cial mar­kets, while deal­ing with ex­ces­sive lever­age and a bloated shadow bank­ing sys­tem? Chi­nese growth has av­er­aged an as­ton­ish­ing 9pc a year for four decades – and is on course for a still punchy 7pc this year. But if China’s old guard re­asserts its mus­cle un­der Xi, stymy­ing re­form, dou­bling down on debt, state pa­tron­age and pol­icy dis­tor­tion, we could see a sys­temic cri­sis. Such is China’s size, and its links to global trade, that a sharp cap­i­tal out­flow and a plung­ing yuan would de­liver a se­ri­ous jolt to global mar­kets.

Trump seems to have cal­cu­lated that China’s large bi­lat­eral trade sur­plus with the US gives Bei­jing an in­cen­tive to bar­gain. Wash­ing­ton is ex­tremely vul­ner­a­ble, though, to a Chi­nese re­tort against US cor­po­rates do­ing busi­ness in China.

Xi could also ini­ti­ate fur­ther de­pre­ci­a­tion, turn­ing the com­pet­i­tive screw, or – much worse – start un­load­ing, or threat­en­ing to un­load, China’s vast hold­ings of US Trea­suries. Amer­ica is the world’s most in­debted coun­try and China is its big­gest cred­i­tor. An ag­gres­sive move in global bond mar­kets and Bei­jing could send yields on US debt spi­ralling, threat­en­ing Amer­ica’s re­cov­ery.

The emerg­ing mar­kets now ac­count for 55pc of world econ­omy and ris­ing. As China forges ever-closer ties with In­dia, Rus­sia and across Africa, it is tak­ing on a global lead­er­ship role. China – and the economies across south and cen­tral Asia associated with its One Belt, One Road ini­tia­tive – will ac­count for a mas­sive 46pc of global growth over the next five years, ac­cord­ing to the econ­o­mist John Ross. The US and EU num­bers are, re­spec­tively, 24pc and 10pc.

The four largest emerg­ing mar­kets con­trol be­tween them an es­ti­mated $4,150bn of for­eign ex­change re­serves, much of it held in the form of the IOUS of Western gov­ern­ments. G7 na­tions con­trol just $2,100bn of such re­serves, fall­ing below $900bn with­out Ja­pan. The weight of global growth and raw eco­nomic power is shift­ing east­wards. Trump’s new con­cil­ia­tory ap­proach to China is rais­ing Western eye­brows. But there’s plenty more to come.

‘China and Amer­ica are clearly now vy­ing for global hege­mony’

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