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Inside Asia: Uneasy Path to Leadership for China

January 19, 2010

By ALAN WHEATLEY
Published: January 18, 2010

BEIJING - A deepening chill in the Chinese political atmosphere is as
deadening as the harsh winter weather that has been gripping the capital.
For global economic policy making, that could magnify friction on everything
from trade to exchange rates and global warming.

In areas as diverse as Internet security and human rights, China has staked
out a hard line that is increasingly putting it at odds with the
international community.

Beijing's virtual snub of talks in New York on Saturday on the Iranian
nuclear program was just the latest example of what many China watchers see
as a growing assertion of China's self-interest.

One Western political leader, according to an associate, said after Beijing
took the lead in blocking a deal at the climate talks in Copenhagen that he
had not expected China to be throwing its weight around in such a way for
another 10 to 15 years.

"There is a fundamental change unfolding in the way China sees itself
relating to the outside world," said Manu Bhaskaran with Centennial Asia
Advisors, a strategic advisory company, in Singapore.

Some trace the change to the time leading up to the 2008 Olympics, when
China closed ranks in a display of nationalist fervor after protesters angry
at Beijing's policy in Tibet disrupted the relay of the Olympic torch in
Britain, France and the United States.

The global financial meltdown has further buttressed Chinese confidence.
Whereas the West suffered a deep recession because of reckless bankers and
feckless regulators, China escaped with barely a scratch.

As such, Beijing, which is obsessed with stability, is in no mood to take
lessons about the merits of unfettered markets, as President Barack Obama
and top E.U. officials discovered in November when they pressed China to let
the renminbi rise.

The role of the state in restoring China's blistering growth has further
emboldened the central government and state-owned enterprises, whose
influence has grown at the expense of private and foreign companies.

Overseas businessmen are aghast over recent rules to promote technological
innovation that they say blatantly discriminate in favor of national
champions.

Political maneuvering ahead of leadership changes at the top of the ruling
Communist Party in two years is also hardening Beijing's stance, some
analysts say.

Making what can be construed as concessions to the outside world is not
generally a passport to promotion in China.

Mr. Bhaskaran sees things differently.

"I think this change goes beyond the jockeying for position ahead of the
handover of power in 2012. It reflects the very real shift in the balance of
power in the world," he said.

According to this line of thinking, China can afford to be more assertive
because it sees the United States stretched militarily and weakened
financially; Japan in irreversible decline; and Europe unable to get its act
together.

In such circumstances, there is a risk of policy missteps if China is
perceived by its partners as digging in its heels, potentially ushering in a
cycle of tit-for-tat retaliation and resentment.

Take trade. The temptation to blame China for "stealing" American jobs can
only grow if U.S. unemployment remains in double digits.

Michael Kurtz, head of Asian equity strategy at Macquarie in Shanghai, said
in a report, "Recent calls in editorial pages for a campaign of tariff
retaliation against China's exchange-rate policy are setting a worrisome
tone for trade relations in 2010, and the fact of the U.S. midterm
congressional elections in November likely will keep 'fair trade' a live
political issue - and market risk - for the duration of the year."

Or take the recent cyberattacks on Google in China, the latest episode in a
long-running battle for control of the Internet.

Eurasia Group, a political risk consulting firm based in New York, said the
incident could cause the U.S. business community to turn sour on China,
eroding an important support base for Beijing.

"The globe is looking at China as the world's first major economy to recover
from the financial crisis, and expectations of the ensuing responsibilities
that Beijing should be picking up as a result of their new-found stature are
growing very rapidly," said Nick Consonery, an analyst with Eurasia Group.

However, Beijing does not look ready to take up the leadership role that is
being thrust upon it, Mr. Consonery said.

"The fundamental driver - and you can talk about this for the currency and
especially for climate change - is that Beijing is simply not going to be
willing to sacrifice any of its domestic growth or domestic political and
economic stability goals for any kind of global agreement or cooperation,"
he said.

Some other China watchers dismiss the idea that policy is being hijacked by
nationalist hard-liners.

"China's economic integration globally has been steadily increasing. That
leaves them more dependent on good relationships, both economically and
politically, but it also means they're going to run into more headaches and
conflicts," said one analyst, who declined to be identified because of the
sensitivity of the issue.

He said the problems were being managed mostly satisfactorily: There was
every chance that Beijing would resume the renminbi's appreciation, frozen
since mid-2008; China had handled nearly all trade disputes according to
World Trade Organization rules; and China increased its net purchases of
U.S. Treasury securities last year - hardly the hallmark of a country
looking to pick a fight.

"That said, the Chinese government's management of the perceptions of all
these things has been pretty bad. So the really interesting issue is whether
the perception is much worse than the reality and what does that mean in the
U.S. political context," the analyst said.

Alan Wheatley is a Reuters columnist.
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