Edited Transcript of Katy Anderson s Interview with Professor Lanxin Xiang, Professor of International History and Politics Katy: I m speaking with Professor Lanxin Xiang, Professor of International History and Politics at the Graduate Institute of International and Development Studies. Hello. Xiang: Hi. Katy: It s been a long winter for US-China relations but we may be glimpsing signs of spring. Speaking at the end of the nuclear security summit in Washington, US President Barack Obama has diffused some of the confrontation we ve been seeing in recent times, specifically over economic interdependency. Let s start though with some of the broader issues that have affected this relationship of G2. Could you give us an overview Professor? Xiang: Thank you very much. You have mentioned G2. I think it s very interesting you start with that because that has been a very new concept which the American government invented. In the broader context of the China-US relationship, the problem is that both sides are still struggling to define the nature of the relationship. The American side, as the superpower, the world s only superpower, has more at stake in defining this relationship. China is more passive in this context. Americans have tried to work out a key concept in defining the relationship since at least 2005. I m trying to explain the evolution of G2 as a concept. The first idea was Robert Zoellick s concept treating China for the first time at that time, September 2005 as what he called a responsible stakeholder. Now that s the beginning of that process of evolution leading towards our G2 concept today. The Chinese initially reacted very enthusiastically because this is at least an indication that the United States considers China as an important partner. This was the first signal. But unfortunately China quickly lost interest in that concept because they realised this is the language used in a gambling house. The implications of Zoellick s concept of responsible stakeholder really says the United States still owns the casino but they are willing to give China a high table to play. See? That s the underlying meaning of that concept and China then lost interest. Then the United States tried to find other concepts, tried to accommodate China. Eventually they came up with this G2. G2 started in 2008, I think. Fred Bergsten of the Peterson Institute first raised the question from an economics point of view. He s the first person who began to talk about interdependency. And then followed by a British Professor at Harvard University Niall Ferguson and he ended up creating a term Chimerica (or China/America) a Chimerica concept. Then followed Obama s leading foreign policy advisor Zbigniew Brzezinski. He officially announced in Beijing that the United States is interested in this informal G2. The basis of that concept is how to accommodate China into the existing, i.e. West dominated, international system. Katy: Visiting Beijing in 2009, US President Barak Obama suggested establishing the G2. What was the cause of that offer not being accepted? Xiang: Well Chinese leaders are very polite at the beginning listening to what Obama says. President Hu Jintao did not say China does not like G2. But it took the Prime Minister, the Premier of China Wen Jiabao, until the next day to have a conversation with President Obama. He officially announced that China does not like G2. So in that sense, China officially rejected G2 as a concept of mutual engagement. Now the reason the Chinese made
this decision is first of all the concept is unrealistic. The world is too complex. We cannot rely on two countries to run international affairs. Secondly, the Chinese were suspicious that there is a plot, a conspiracy behind the concept to prematurely impose more responsibilities on China. At the time, China was not ready yet. So this is the reason the Chinese did not like G2. And then the Obama administration was not happy. Very quickly there followed the opinion that the US thinks this is an irresponsible attitude from China not to play a role the United States would like to see and the US starts more provocative policies immediately afterwards Taiwan arms sales, a Dalai Lama meeting, the anti-dumping tariffs, climate change issues the clash in Copenhagen, and of course the Iran question and many other issues followed one after another. This is how the winter of the relationship really evolved. Katy: Let s look at those issues one by one if you don t mind saying a few words about each. Let s start with the arms sales to Taiwan. Could you explain some of the issues surrounding that? Xiang: Well, this is an old problem. United States policy towards Taiwan is based on a principle called strategic ambiguity, which essentially says the United States reserves its right to react if there is a military conflict in the Taiwan Strait. Therefore the United States policy is based on the concept of maintaining regional strategic stability. Once they believe that the balance is not maintained (that means China has more firepower than Taiwan) they would use that as an excuse to sell weapons to Taiwan. And of course there is an economic background the US desperately needs to sell more weapons to create jobs. Katy: Thanks so these weapons worth $6.4 billion, could you tell us what they were? Xiang: Well, essentially these are defensive weapons, including a new missile defense system, and including some more advanced military ships, navy ships. There are also other weapons systems which are essentially designed for coastal defense. Katy: Thank you. So how did China react to that sale? Xiang: China always thinks this is interference in Chinese internal affairs. You re selling weapons to a part of China (that Beijing thinks is part of China) for the purpose of fighting against the People s Republic itself. So they never accept this as being a legitimate move. Then of course the complication here is that the United States also has an internal domestic law called the Taiwan Relations Act, a congressional act which authorises this kind of activity. So the US Government, it depends on who is in power, but usually they would take that as a legal base for selling weapons to Taiwan. So the Chinese have no real trump cards to play against the United States, except making some noises, diplomatic protests. But this time of course the language is tougher because they are thinking that since they hold US debts they have more economic power. So the reactions are different from the past, in tone at least. Katy: Could we then interpret the sale of bonds worth over $34 billion as a direct reaction to the weapons sale? Xiang: I am sure the Chinese government is interested in reducing bonds, American debt holdings, first of all for economic reasons. The central banking system began to realise they had made a mistake and purchased too much of it. Katy: Why would that happen? Xiang: Well, I think first of all Chinese central banking elite as a group do not really understand monetary politics at the international level. These are technocrats. These are
people who mostly trained in the West, the United States in particular. These are the economics majors in American universities. They are maybe one of the most liberal sectors of the Chinese elite who still believe in the Washington consensus, neo-liberal economic theories, believing it s necessary to de-link monetary policy from politics. Therefore they think it s purely a market operation, simply because the dollar, at least before the financial crisis, was the most profitable and the safest asset. But when the financial crisis came, they began to realise it s not safe and certainly it s not even profitable because the interest rates are so low. And then of course we are seeing the American government running a huge deficit. That also means the dollar value itself will go down. There will be inflation so the Chinese debt holdings could be inflated away by the American misbehavior. So they have an economic reason now to reduce as much as they can. Then I m sure there is also a political consideration but that s less of an issue. I don t think the central bank had that capacity of thinking in political economy rather than in pure economic terms. Katy: Thank you very much. That s very clear. So holdings of course are still significant in China. Its stockpile of US bonds reduced to a mere $755 billion. Xiang: Still number one in the world. Katy: Is it? I understood that Japan for the first time is the number one holder of US bonds with $769 billion. Xiang: No, I think the US Treasury modified this figure. In this case China is still number one, yes. Katy: OK, thanks for clarifying that, which leads us onto another economic issue, the revaluation of the Yuan. Could you give us the benefit of your wisdom there? Xiang: That has been the issue being debated in the last few years. The Chinese renminbi had for a while, up until the financial crisis, appreciated almost 20 percent. Then the financial crisis came and the Chinese decided the priority is to maintain the renminbi stability, mainly for domestic reasons, but also certainly to have an eye on the future revival of Chinese export trade. I think the real dispute between the United States and China is not so much the appreciation of the Yuan, which can actually help America create a lot of jobs. Even Americans, the experts, agree. Maybe less than 10,000 jobs if the Chinese let s say appreciate by another 20 percent. That s not the issue. The real issue is that the United States at this stage, the Obama administration, are trying to start a kind of revisionism of instant history. That is the original argument the whole world would agree that the economic crisis came from the United States. It s a US crisis that s spread around the world. Now, who is responsible for that? There was no doubt in 2008 and 2009. But now of course they are trying to impose a large part of that responsibility on other countries and China is the chosen target. The argument being because the Chinese currency is so low it creates what they call global international trade imbalance which encouraged the American overspending and eventually caused the sub-prime crisis. So it is the kind of argument the Chinese can never accept. This revisionism is politically oriented. For Obama it s important for the mid-term elections coming this year and for the next presidential election he has to devise something, some country to blame. At least this is from the Chinese point of view. So the Chinese position has been consistent. Now, if China decides to revalue the Yuan, it has to be determined more by domestic economic situation such as inflation pressure or a housing bubble or some other reasons. It s not going to be directly under pressure by the US government. This is the Chinese reaction.
Katy: You ve clearly explained the Chinese position and their perception of the US position. What is the real position? Because the US is importing a lot of Chinese goods. Xiang: Right. There is no doubt the Chinese trade with the US is overwhelmingly in favor of the China side. And of course the US/China trade deficit has been a nagging problem for a number of years. But if you look at China trade in the global system, we re more or less in balance. Last month actually we had a major deficit beginning to start, $6.7 billion. This is the last figure at the global level vis-à-vis China. So that would indicate something very important that is to say China is over dependent on the US market, which is not a wise policy. Now, did the Chinese government realise that? Yes, they did because during the most recent government conferences in Beijing the main theme was called Structural Transformation. In other words we are going to radically readjust the Chinese economic system, radically reducing dependence on the US market, increasing the relationship with other parts of the world including Europe and Japan and the other third world countries. Then the other side of the structural change which was proposed is to greatly increase domestic consumption. Now, this has been China s problem so far. That is the rapid growth of GDP at the expense of the very slow growth of domestic spending. It does not mean the Chinese don t have any money. We have a lot of cultural reasons heavy savings rates. Chinese usually save 45 percent of their disposable income. So now the government is trying to devise some policies to stimulate, to encourage them to spend. And our stimulant plans CNY 4 trillion the stimulus plans are mostly on infrastructure building like high speed trains, superhighways and structural building. In the long run it s going to increase the speed of economic transactions between inland China and the coast area. Now the key thing I think most foreigners do not see, when they go through China they see Shanghai, Beijing, then they say this is incredible. But if you go inland of course like the place we saw with the latest earthquake, in those places, personal income is so low they are not even accessible with a good transportation system. So we have a huge imbalance between the coastal area and the inland area. This is where the structural change is going to take place. So this is what the Chinese are thinking when and how we are going to revalue the Yuan next time. Katy: Of course a lot of that infrastructure building is driven by energy. Fifteen percent of the country s energy comes from Iran. Could you talk to us about the relationship between China and Iran and how that has affected US-Sino relations? Xiang: Yes, China had a very large economic stake in Iran. The main problem with China relying on the Iran oil supply is that the other parts of the Middle East are not considered very reliable strategically because the relationship between China and the United States has not been built on mutual trust. So in that sense China had very little alternative but to look for the oil resources, energy resources, in any place they can get their hands on: Africa, Latin America, the Middle East and so on. But Iran has been a major supplier. There is no doubt about that. So the relationship has been very good. But on the other hand, I think that the dilemma that China is really facing is a terrible dilemma about the Iranian regime vis-à-vis the international non-proliferation issue. The Chinese were put in a very difficult position because China signed the Pact, the Test Ban Treaty and so on. And China has no specific interest in promoting anyone to have nuclear weapons in any case. But for China the dilemma is that the Chinese perceive that the Americans adopt a double standard, which makes China feel it is very difficult to support this argument of allowing Israel to have nuclear weapons, without any problem, allowing India to have it, even signing a nuclear pact with India, and then denying the Iranians having it. Now not necessarily for weapons, the Iranians never have never said they are going to do a weapons system. So it s very difficult for the Chinese to make a real decision here. On the Iran issue, the Chinese always prefer to hide behind the Russians. As long as the Russians take the front seat, China is happy to be behind it. But now Moscow is becoming more active in supporting the Western view on the Iran question. China is beginning to feel quite isolated. So I think on that issue China has to collaborate to
some extent. They would prefer to find any alternative to more severe sanctions or military action against Iran. They were striving for that but if it doesn t work they will probably offer some tepid support for qualified sanctions, in a sense to water down the more severe package of sanctions that the United States would propose in the next few weeks. But it is a difficult question for China yes. Katy: Finally the American government has used the Google issue [of cyber attacks] in a political way. Could you comment on that? Xiang: You see when the Obama administration came to power at the beginning, the first few months, the American government attitude is we should tone down the traditional attack on China s human rights issue because freedom of speech, human rights, they all link together. In other words, the United States prefers not to start another ideological war with China. This is what Hilary Clinton clearly stated early 2009. Her famous quote is You don t attack human rights and those issues on your banker all the time. You will probably have a negative effect in any case because you own their money. So, for a while Beijing thought this is good pragmatic policy. They can live with that. They would prefer it. Beijing always prefers a kind of quiet approach, like Japan, like the EU does with China. Now they have regular human rights dialogues but they are never sensationalised. Now the American habit is every year the State Department has a human rights report naming each country in a public fashion. So the Chinese thought for a while that the Americans changed that attitude therefore we can still talk about human rights. But then the Google issue came remember this is after Obama s visit, after the Chinese rejected G2 so everything should be put in that context, of American frustration. So when Google threatened to pull out very quickly, Hilary Clinton made a major speech in which she publically denounced the Chinese government, basically saying this is a government operation, hacking against the Google Gmail accounts when they don t even have much evidence. Even today they still don t have strong evidence indicating that is the case. Yes maybe some hackers in a private setting, some science buck who loved to do that in some university that s possible. But so far they haven t provided any hard evidence. But they decide to politicise at a very high level. So this is why the Chinese resent it so much. Now having said that I m not saying the Chinese censorship itself should be commended. As a Chinese professor working in a Western setting where freedom of speech is easily accessible of course I don t necessarily agree with a severe censorship system there. But that is another issue we need to address. But in this particular instance I think it s unnecessarily politicised by the United States. Katy: To sum up we started by discussing this long winter. Do we see signs of spring in US- Sino relations? Xiang: Not really. I think I remain more pessimistic. It depends on the next step on how they define their relationship. Now so far both sides haven t got a clue how to define the relationship. After this conflict, yes China decided not to continue this very tough stand against the United States and the US also made some concessions in diplomatic and other fields. But the problem remains. We don t know yet. It depends on the next US move, the currency manipulation report, if they re going to issue it. Another possibility would be the end of the year of selling F16 fighter jets to Taiwan which was not part of the $6.4 billion package, but that would be the most sensitive issue. Because the F16 is a fighter jet, it s not necessarily a defensive weapons system. So we don t know yet. I think we need to find another concept to engage each other. If you want me to summarize I think the most interesting idea is in the last edition of Time Magazine. The cover story and a long article was written by Joshua Ramo, who is my friend and who is also Managing Director for Kissinger Associates in New York. In this article, he created a new term and he preferred to call it coevolution. Co-evolution of Sino-US relationship first of all implies the United States should
forget about the concept of how to accommodate China into a Westerndominated system. Therefore they should start a fresh background, treating China as it is and more or less in an equal sense starting real engagement, real strategic dialogue. But so far I have not seen any signs the US government is going to adopt this kind of thinking. Katy: Thank you very much. Xiang: Thank you.