China Is Carrying a Small Stick
There’s a reason it hasn’t followed through on so many of its blistering threats of economic retaliation against the U.S.
China has flexed its muscles in the tussle over Chinese video-swapping app TikTok, using new export controls to complicate plans to sell the company’s U.S. operations to American investors. A proposed deal between TikTok’s Beijing-based parent, Bytedance Ltd., and Oracle Corp. now hangs on the verdict of Chinese regulators.
But the TikTok case is also something of an exception. As China’s relations with the U.S. deteriorate, Beijing has shown it is often incapable of following through on its blistering threats of retaliation. And for that, China’s leaders have no one to blame but themselves.
One of the hallmarks of a superpower is an ability to project power and influence events and policies far from its own shores. China still lacks the tools to do that in any sustained way. Whereas the U.S., for instance, has long capitalized on the dollar’s indispensability to impose its will on individuals, companies and other nations, China has no similar means of extending its reach.
That weakness effectively lost China its recent tit-for-tat sanctions spat with the U.S. After the Trump administration imposed sanctions on Chinese officials involved in the abuse of minority Uighurs and the crackdown on democracy advocates in Hong Kong, the Chinese government tried to retaliate against Republican Senators Marco Rubio and Ted Cruz, among others in the U.S. Unless the targeted Americans wandered into Chinese jurisdiction or happened to own Chinese assets, however, China’s unspecified penalties would be largely symbolic. By contrast, Chinese banks have been placed in the humiliating position of enforcing U.S. sanctions against China’s own officials because of their continued need for dollar financing.
Part of China’s handicap is a legacy of history: The U.S. dollar has been so dominant for so long that replacing it has proven practically impossible. But the glacial pace of financial reform on the mainland is also a factor. Because China’s policymakers won’t allow the yuan to move freely around the world and still massage its value, the currency’s appeal in global trade and finance remains constrained. In 2019, the dollar featured on one side of 88% of foreign exchange trades globally; the yuan, a mere 4%.
China’s strict controls on capital flows and foreign investors compound the problem by curtailing access to and demand for Chinese assets. That makes it far less likely an American official such as Rubio might hold yuan-denominated investments that could be targeted. By contrast, the more open U.S. economic system has been a magnet for Chinese money. Chinese have been the top buyers of American residential real estate for eight consecutive years.
China’s dollar dependence even forces Beijing to shore up the economic stability of its adversary. Despite renewed rumblings about reducing its trillion-dollar stash of U.S. Treasuries, China is virtually certain not to follow through. Not only does it lack other options for storing its dollars, selling the Treasuries would undermine the value of its holdings, destabilize global bond and currency markets, and thus risk China’s own wealth.
Here again, years of bad economic policies — suppressing domestic consumption, controlling its currency and amassing external surpluses — have constrained China. Having made only limited progress in the long-awaited shift to a consumption-led growth model, a resurgence of those surpluses will likely add to China’s dollar stockpile, ensnaring Beijing even further.
Treasuries aren’t the only potential weapon China has had to keep sheathed. Officials have repeatedly threatened to blacklist American firms in response to U.S. prohibitions on telecom giant Huawei Technologies Co. Access to its large and lucrative market is China’s greatest leverage and such a step could indeed inflict some damage on U.S. companies with significant sales in China.
That list, however, has never materialized. Nor has Beijing ditched the “phase one” trade deal it inked with the U.S. in January or disrupted the extensive supply chains of American brands and retailers in the country.
That’s largely because China is still a middle-income economy, playing catch-up in technology; it requires the products U.S. firms sell and the jobs they create. China’s leaders know they’ve tied their legitimacy to elevated growth targets and thriving employment. Especially now, with the world economy battered by the Covid-19 pandemic, the government can’t risk further economic disruption.
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