What Are The Chinese Thinking?

China’s bid to buy U.S. oil company Unocal has sparked quite a bit of debate about the Red Dragon’s intentions and what the proper U.S. policy towards this growing giant should be. Many in congress and across the country claim that China is seeking to buy up America little by little, especially our strategic assets such as oil and other natural resources. Congress has for now blocked the Unocal takeover, but it is China’s response to this interference that is most interesting.

Rather than simply expressing regret over the decision or urging congress to reconsider, the Chinese government issued the following statement (italics added): “We demand that the U.S. Congress correct its mistaken ways of politicizing economic and trade issues and stop interfering in the normal commercial exchanges between enterprises of the two countries. CNOOC's bid to take over the U.S. Unocal company is a normal commercial activity between enterprises and should not fall victim to political interference.”

This is extremely strong language coming from a still developing country, directed towards the world’s biggest superpower. The Chinese were very careful not to mince words or sound timid. Many see this as simply a minor feud between two countries that otherwise have pretty good relations and whose economies are enormously interconnected and co-dependent. If this is the case then it probably is not that big of a deal. I believe however, that this statement reveals some very important things about China’s motives and about the future of the global, geo-political landscape.

The U.S. runs huge annual trade deficits with China which translate into Chinese surpluses. Because we buy so many Chinese goods, but we sell so little to the Chinese, they are left holding large amounts of American dollars. Normally this type of situation is somewhat self-correcting over time, but we aren’t exactly dealing with a textbook case of trade deficits and surpluses here. There are several distorting factors at work to keep these imbalances going such as China’s currency peg to the dollar and the fact that the dollar is the world’s reserve currency.

In international transactions between any two countries, it is not uncommon to use dollars as the medium of exchange. China has been able to capitalize on this. Rather than having to buy American made goods or pour dollars into the foreign exchange markets to get back other currencies, they can use these dollars to buy Canadian mining companies, Arab oil supplies, natural gas from Australia, and food from South America. Also, since America doesn’t manufacture very many consumer goods to sell to the Chinese, they can use their dollars instead to buy American firms. What this amounts to for the Chinese is trading large amounts of cheap, consumer products for controlling interest in capital-intensive, industrial companies around the world.

I believe China’s plan is to gradually America-proof its economy. China realizes that the almost exclusively export driven growth they have seen in recent years is not sustainable in the long run, especially when they are selling their exports to people who are deeply in debt and can’t pay up. It is merely a stepping stone toward world hegemony and toward developing a powerful, self-sustaining economy driven by domestic demand. While economists are proclaiming the danger of current trade imbalances and wondering what the Chinese are going to do with all those dollars, China is busy buying up resources and Western companies and striking deals with everyone they can. It is a strategy that has and will continue to pay off nicely for them.

Meanwhile here at home, the U.S. is busy playing the blame game. American politicians are ready to blame the Chinese for just about everything from currency manipulation and unfair trading practices, to property rights violations and trying to steal our natural resources. This type of anti-Chinese sentiment has been steadily building in Washington and we’re beginning to see a flurry of protectionist proposals surfacing in the House. I believe that governments of both countries realize the inherent instability of the current situation and are beginning to react to the changes they see coming.

It seems that America is setting China up to take much of the blame for a possible economic downturn which at this point is probably inevitable given the gargantuan fiscal imbalances and market distortions existent here in America and Europe. These imbalances have also spilled out into the rest of the world and constitute a destabilizing force on the global economy. China sees this slowdown coming too and I’m sure they will have no trouble finding scapegoats to blame once it does, but at the same time they are pursuing a steady course that they hope will allow them to recover quickly.

China is not simply looking into the future to try and predict what the world will look like ten years from now. They are actively attempting to mold it more to their liking. They plan to surpass the United States as the world’s premiere economic and military superpower, and they want to do it soon. The timing and probability of this happening is of course unknowable, but the fiery Chinese response to the Unocal decision speaks volumes about how China views itself. They have essentially said to America, “We are not afraid of you. Stop interfering in our business, or else...”

Now is the time for the Chinese to start making bold moves, while they’re still flush with American money that has yet to lose much of its purchasing power and while America is bogged down in ridiculous and expensive foreign conflicts with no end in sight. If they do, it will have broad implications with regards to global prosperity, international trade, the investment landscape, and the situation in the Taiwan Strait. Regardless of what actually happens over the next several years one thing is certain, China is a major player in world events and it knows it.

The days when Europe and America humiliated the Chinese, bossed them around and told them what they could and could not do are over. When China denied Britain certain trade privileges in the mid 1800's, Britain responded by attacking the Chinese and forcing them into submission. The Chinese have not forgotten what was done to them by foreign, imperialist powers over the past two centuries. They are making sure that it will not happen again. In fact, I think they would like very much to turn the tables on the West. America should be wary of making enemies with China. The time is fast approaching when doing so could be very damaging both economically and militarily. Is Unocal really a matter of national security? Is China a threat to the American way of life? Maybe. In any case, it wouldn’t hurt to start learning a little Chinese.