Commentary on Political Economy

Tuesday 23 April 2024


The US and China’s Newfound Friendship Can’t Last

Secretary of State Blinken is off to Beijing to keep a delicate balance, but four issues are set to tip the relationship back into high tension.

Have a safe trip.
Have a safe trip. Photographer: Mark Schiefelbein/AFP/Getty Images


Ukraine burns and the Middle East simmers, but the Western Pacific appears relatively placid. There hasn’t been a major crisis in US-China relations since the spy balloon fracas of early 2023. Officials in Washington hope the calm will carry on through the 2024 election. Secretary of State Antony Blinken is in China this week, as part of a drumbeat of high-level diplomacy. There, he’ll face four key issues that could send tensions spiraling once again.

In August 2022, a crisis over Taiwan brought fears of a devastating conflict. In early 2023, Balloongate shut down the dialogue that had begun when Presidents Xi Jinping and Joe Biden met in Bali two months before. Since then, however, the relationship has found a bottom.

Xi and Biden had their second in-person meeting — a businesslike affair outside San Francisco — last November and reconnected over the phone in early April. National Security Adviser Jake Sullivan has carried out a sustained, substantive dialogue with his Chinese counterpart, Wang Yi. Communication has improved at all levels; there are green shoots of cooperation on issues like stemming the flow of fentanyl into the US.

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Meanwhile, US policy hasn’t gotten dramatically softer, as some commentators — and American officials — had feared. Washington continues to strengthen its matrix of alliances, most recently by improving joint security ties with the Philippines and Japan. Biden’s team announced restrictions on US investment in China’s high-tech sector last summer. Washington is now eyeing measures targeting everything from electric vehicles to TikTok.

Biden still hopes that personal diplomacy with Xi can transform the relationship. But his advisers have apparently convinced him that this diplomacy is only politically saleable if he doesn’t give away the store to Beijing.

Blinken is in China to sustain this balance: He will argue that Beijing and Washington have a shared responsibility to manage a fraught coexistence. With other vital regions convulsed by violence, the Biden administration would be perfectly pleased to get through 2024 without a Sino-American crisis. Several tough issues stand in the way.

The most explosive is Taiwan, where Lai Ching-te won the presidential election in January and will be inaugurated in May. Beijing loathes Lai and fears that he will move Taiwan closer to independence. Washington worries that China will scold Taiwan for choosing Lai, through economic or military coercion.

US officials are presumably warning Beijing that doing so invites harsher American punishment, just as the August 2022 crisis prefigured far-reaching restrictions to keep China from accessing the world’s most sophisticated computer chips. But China’s concerns about Taiwan’s political trajectory, and its region-transforming military buildup, make a volatile mix.

Second, and only slightly less worrying, is the South China Sea. Twenty-five years ago, the Philippines deliberately ran aground an obsolete ship, the Sierra Madre, on Second Thomas Shoal, an obscure and disputed reef. Filipino forces are stationed inside the wreck, and China is trying to push them out.

The Chinese Coast Guard has rammed vessels sent to resupply the Sierra Madre; it has sprayed them with water cannons and blinded them with lasers. If Beijing tries to drag the ship off the reef, or if it sinks vessels or kills personnel involved in the resupply effort, it might bring the US-Philippines defense treaty into play, and lead to a Sino-American showdown.

Third is the escalating tech war. The US has tried to bring predictability to that conflict by warning China about the restrictions it means to impose. But those bans cover vital sectors of the modern economy — advanced computing, artificial intelligence, clean energy — and their scope is steadily expanding.

Chinese officials allege that the US is waging a strangulation campaign, even as Beijing races to dominate key industries and reap the resulting geopolitical leverage. The combination of insecurity and interdependence is making the global economy a battleground, in a way that polite diplomacy can’t disguise.

Finally, there is Ukraine. Washington has consistently warned China not to sell Russia weapons. But that red line is now irrelevant.

The US didn’t realize how efficiently the axis of autocrats would support Russia. North Korea and Iran have provided Moscow with drones, missiles and artillery shells it needs on the battlefield, while China sells the machine tools, computer chips and other components required to revive its sanctioned defense industry.

The resulting surge in Russian defense production has astonished US officials. So Blinken will press Beijing harder, perhaps threatening to sanction Chinese banks in hopes of compelling them to pull back from this trade.

Maybe all these issues can be managed. China would prefer not to pay a higher strategic price for Russian President Vladimir Putin’s war, optimists in Washington argue; it knows better than to commit aggressive acts that will make it a target in America’s presidential elections. But that’s placing a lot of faith in the stability of an inherently unstable relationship.

Any one of these issues could spoil the superficially improved mood in Sino-American affairs. Cumulatively, they are a warning about just how viciously competitive that interaction remains.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Hal Brands is a Bloomberg Opinion columnist and the Henry Kissinger Distinguished Professor at Johns Hopkins University’s School of Advanced International Studies.
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Xi Wants a Central Bank That Looks a Lot Like the Fed

Imitation is the sincerest form of flattery. And smart statecraft.



Great powers need formidable central banks and remarks from Xi Jinping suggest he considers China’s financial machinery is not quite up to scratch. The president sounds like he's looking to give the People's Bank of China some of the tools that will allow it to more closely resemble the Federal Reserve. The question is, which Fed?

Xi has done much to consolidate power in his office and enhance the already giant footprint of the central government. So it's unlikely that he wants the PBOC to set borrowing costs independently and release reams of projections — and sometimes jarring commentary — into the public domain, some of which may be contrary to the ruling Communist Party’s message. Nor is Beijing likely to look favorably on a decision-making process that allows for some vocal opposition on key decisions, as has often happened on the Federal Open Market Committee. No way that flies in China.

There's more to policy than nudging an interest rate around by a quarter point or 50 basis points as the Fed, the European Central Bank and Bank of England typically do. Economic slumps, or the prospect of deflation, can trigger massive purchases of bonds known as quantitative easing. The Fed and its cohort went down this route after the meltdown of 2007-2009, and in response to the collapse in growth during the pandemic's early stages. Japan is an old hand at the practice. China has eschewed this approach despite a disappointing recovery.

The prospect that might be about to change caused brief excitement among traders in March when a previously unreleased portion from a Xi speech in October became public. The cause for the short-lived elation: Xi's cryptic comments that the PBOC should increase the buying and selling of bonds in its open-market operations, something commonplace among central banks but more rare in China.

The remarks were initially interpreted to mean China might be about to engage in its own form of QE. That's probably wide of the mark. The authority is rightly criticized for its reluctance to be more assertive in providing stimulus. This month, the bank again passed on juicing the economy. The PBOC's main rate, at 2.5%, provides plenty of room for reductions — should Beijing choose to. Besides, Xi mentioned the acquisition and sale of bonds. QE involves only the former.

The leader was perhaps expressing a desire for technical changes to how the PBOC goes about its daily business, according to David Qu and Chang Shu of Bloomberg Economics. The trading of treasury bonds is a normal part of managing liquidity for most central banks, they wrote in a report, though not used in China for about two decades. The bank has preferred to use reserve requirements — the level of funds banks must set aside — and more short-to-medium term securities. Viewed from a perspective of fine-tuning, this would mean being less of an outlier. (The finance ministry backed Xi’s call for more bond transactions, according to an article in the People’s Daily on Tuesday.)

To what end? Fully developed market operations, including the use of long-term bonds, wouldn't just make it look more like a modern monetary authority, it would help the PBOC drive a sense of national purpose in China. One of the hallmarks of central banks is their ability to bankroll and assist national financing in challenging times. Right now, the important global reserve isn't a commodity like gold, silver or bronze. That lodestar is the US Treasury note. The wellspring of demand is, at least partly, a byproduct of having an advanced central bank, namely the Fed, one of whose purposes was to forge liquid national markets out of a rudimentary system that belied — and constrained — the country's industrial power. Those deep capital markets have enabled the US to be the global lender of last resort and make the dollar indispensable.

Possession of this singular reserve asset and a commitment to broadly maintain its value, via an inflation targeting central bank, gives the US a real edge. China doesn't have anything that comes close: Even its much-publicized expansion of lending to emerging markets is mostly done in dollars. An important function of the state, at various times in history, is to raise emergency finance, Joshua R. Hendrickson, a professor at the University of Mississippi, said in a paper last month. What he calls “the Treasury Standard,” which followed the Bretton Woods system of fixed-exchange rates, gives the US the ability to engage in unprecedented levels of fund raising in times of crisis. This can be a mixed blessing.

The standard’s “continued existence is in the interest of the US government and its foreign policy,” Hendrickson wrote. “I would expect the US to take steps to maintain the status quo, even in ways that might otherwise be unexpected.” A challenge to the system’s continued existence “is an inherent fragility...caused by the fact that the global reserve asset is a debt instrument of the US.”

Just because Xi wants a muscular central bank doesn't mean he's anticipating upheaval, much less bracing for a fight. But a lender of last resort that’s ready for prime time is a vital part of statecraft, one where the US has a clear lead. The Chinese president’s aspirations are entirely understandable. Let’s get ready for a Fed with Chinese characteristics.

More From Bloomberg Opinion:

Want more Bloomberg Opinion? Terminal readers head to OPIN <GO>. Or you can subscribe to our daily newsletter.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor for economics at Bloomberg News.
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