Red Ink

Dollar faces non- economic challenges, Cutting China-UK research ties a mistake, China: My Country, My people, US primacy replaced, Xi Jinping likes to talk about the nuts and bolts of urban planning

May 30, 2023

UPDATE: Nations must seek to strengthen multilateralism or they will end up embracing economic decoupling. There is no other currency — physical or virtual — able to replace the dollar at the centre of the international monetary system.

Severing ties with Chinese research institutions would be a mistake for the UK’s higher education sector. The relationship between the West and China is of seismic importance. China’s scale, economic importance and growing political, scientific and cultural reach mean that our bonds with the people of that remarkable country are hugely consequential.

I have not tried to enter into arguments or prove my different theses, but I will stand justified or condemned by this book, as Confucius once said of his Spring and Autumn Annals. China is too big a country, and her national life has too many facets, for her not to be open to the most diverse and contradictory interpretations.

Joe Biden’s dash back to Washington to deal with the debt ceiling and domestic politics ahead of regional security could only contrast poorly with Chinese President Xi Jinping presiding over the third China-Central Asian Summit in the Chinese city of Xian.

In 1992 Xi Jinping liked to talk about the nuts and bolts of urban planning: a new airport, a superhighway, more drinking water for residents of this port city along the country's southern coast. Xi said he has gotten where he is on his own ability and popularity. Asked about possible future promotions, he politely deferred to the needs of the party.

The Risks of ‘De-risking’

By Mohamed El-Erian

Nations must seek to strengthen multilateralism or they will end up embracing economic decoupling. For decades, I have argued that the US dollar will maintain its position as the predominant currency in the world economy. This remains the case today. There is no other currency — physical or virtual — able to replace the dollar at the centre of the international monetary system.

However, the global influence of the dollar is facing several non- economic challenges, despite its continued status as the world’s “reserve currency”. This is a consequence of an increasingly fragmented international economic system. National security and geopolitics are supplanting economics in shaping national and international interactions.

Slowly and surely, countries will now be pushed towards choosing between two strikingly divergent paths: collaborate more to strengthen multilateralism and its ruled-based framework, or embrace economic decoupling as an inevitable accompaniment to greater risk mitigation by individual states.

The role of the dollar as a reserve currency has long been supported by three US attributes: its status as the world’s largest economy, the depth and breadth of its financial markets, and the predictability stemming from institutional maturity and respect for the rule of law.

By adopting the dollar as a medium of exchange and as a store of value, other countries have achieved significant efficiency gains while affording the US the ability to enjoy what former French president Valéry Giscard d’Estaing famously described in the 1960s as an “exorbitant privilege” — essentially, greater power to exchange its own currency for goods and services from other countries while having access to a larger pool of low-cost financing.

It is part of an implicit contract: America benefits in return for responsibly managing the system. Yet the latter aspect of the contract has been challenged in the past 15 years by the 2008 global financial crisis that originated in the US and the sudden imposition of trade tariffs in 2017.

While these events shook the dominance of the dollar, they did not fundamentally undermine it due to what can be described as the “cleanest dirty shirt syndrome”: the dollar may not be a pristine reserve currency but it is still considered cleaner than any other currency for this role.

Over the past two years, this situation has become notably trickier because of the US Federal Reserve’s mishandling of the interest rate hiking cycle and the growing emphasis on resilience in economic and business strategies. Rather than seeking to replace the dollar outright, there is now a step up in efforts to build pipes around it in the world’s trading and payment infrastructures.

China has maintained its leading role in this, strengthening initiatives to create new regional and global institutions, expanding the use of its own currency in bilateral payments and lending agreements, and revamping its Belt and Road Initiative. But it is not just China.

The tough sanctions imposed on Russia have helped spur greater country interest in arrangements that bypass the dollar. Additionally, more nations are starting to perceive it as feasible to reduce their reliance on the US currency over time. They are looking at how Russia has reorientated its trade and substituted for the dollar in both its export and import transactions, albeit in cumbersome and costly ways.

In the face of these developments, the US and its allies essentially have two options. They can work collectively to revamp multilateralism in an inclusive manner that secures buy-in from what Goldman Sachs’ Jared Cohen refers to as the “geopolitical swing states”. This would include modernising the governance, representation and operations of the IMF and World Bank.

Or they can choose to accept the short-term costs and uncertainties associated with the decoupling needed to properly de-risk. The notion of “de-risking, not decoupling” advanced last weekend by the G7 may appear appealing, but it is likely to result in an unstable middle ground rather than a viable new equilibrium.

From an economic perspective, a more inclusive multilateralism supported by a robust rule-based system undoubtedly offers greater benefits compared with the alternatives. However, it is increasingly evident that economics no longer holds the reins in driving the process of trade and international finance. There has been a fundamental shift in the relationship between economics on the one hand, and the combined forces of national security, politics and geopolitics on the other.

It is an inversion that now encourages both the de-risking and the decoupling of cross-border supply chains and cross-border payments, and it is one that the secularly weakened multilateral system cannot effectively counter without a new major effort.

Read more here.

UK-China Research Rebalance

By Michael Spence (edited)

What is needed is a thoughtful consideration in the West of how to manage our relationship with China. Such consideration must be balanced, and of late too much of the political and media debate around China has focused only on the negative. It is welcome that James Cleverly, the Foreign Secretary, took this tone in his remarks on 25 April, calling for a relationship with China that is both constructive and robust. This continues a more helpful direction of travel reflected in the Integrated Review Refresh, categorising China as a challenge but not a threat. It is right that we move away from a binary concept of hawks vs doves, and I hope towards a more constructive approach.

There are, of course, very real differences in political values, and in perspectives on some important geopolitical issues, between the UK and the government of China. Significant differences in areas such as human rights and international law are real, and cannot be ignored. Many countries are concerned to understand China’s apparently shifting sense of its position in the world, and an increased level of control over civil society in recent years. Issues such as this must be honestly identified and handled with all integrity, and diplomatic and strategic skill. Real partners challenge one another, especially on issues that go to fundamental values.

These differences do not, however, justify simply cutting all ties with China as this would damage the many beneficial aspects of this relationship that have been carefully nurtured over decades. Ironically, doing so would undermine our very capacity to challenge. It would impinge upon the West’s ability to understand and thereby influence China, integral to preserving and shaping this vital geopolitical relationship. The Prime Minister’s political secretary, James Forsyth, has often said that the West’s level of expertise on Russia 50 years ago was far greater than its knowledge of China in the present day. It is a point well made. It implies the need to create a deeper understanding of, and expertise on, China in order wisely to manage geopolitical and other relations with Chinese people and institutions.

As president and provost of University College London (UCL), I know our higher education sector is an illustrative example. Collaborative research with China is of substantial and growing importance. As a rising research and economic power, China, like the UK, has excellent research institutions. Both countries’ universities can achieve more if they learn from each other, and we get back as much as we give in these relationships.

Of course, for the small number of instances where there are national security risks there should be, and are, tight controls. The UK must remain vigilant in all foreign collaboration in these very specific areas. However, most collaborations are about addressing shared challenges, not gleaning competitive strategic advantage. A great many save lives. Some of UCL’s most impactful collaborations with China have been in health, for example our work with Peking University on the development of treatments to prevent babies suffering from spina bifida. This gives life to the Foreign Secretary’s statement that “no significant global problem – from climate change to pandemic prevention, from economic stability to nuclear proliferation – can be solved without China”. Universities are at the forefront of tackling such challenges, and our engagement with China proves his point. Far from sharing secrets, the results of this research are almost always discoveries that we promote widely, to extend their benefits. This is what UCL and many other institutions do via open access policies, where research findings are made freely available online.

The economic benefit to the UK is also significant. International students are estimated by Universities UK to contribute over £25bn a year to the UK economy. Chinese students account for the largest group of international students in the UK. Contrary to some claims, their presence in the UK helps to fund places for domestic students, rather than restrict them. Countries around the world recognise this, and at a time when our discourse can appear unwelcoming to Chinese students, the UK faces stiff competition from other nations to attract them.

We must continue to work with Chinese partners on pressing global challenges where co-operation is essential, in ways that benefit us all, and which increase our shared intercultural understanding with the Chinese people. For the government, a similar approach would recognise that in some areas there is a justifiable need to be firm with China where its actions conflict with our reasonable interests and values, but that approach should also ensure there is co-operation with China where it is mutually beneficial and necessary.

In all, these matters should not be reduced to a question of hawks vs doves. What is needed is a balanced approach. We should strive towards constructive engagement with China that seeks to maintain the benefits but is aware of the risks, with appropriate measures to manage them. If the UK and the West can embody this approach, we will all be the better for it.

Read more here.

My Country and My People

by Lin Yutang (1935)

In this book I have tried only to communicate my opinions, which I have arrived at after some long and painful thought and reading and introspection. I have not tried to enter into arguments or prove my different theses, but I will stand justified or condemned by this book, as Confucius once said of his Spring and Autumn Annals. China is too big a country, and her national life has too many facets, for her not to be open to the most diverse and contradictory interpretations. And I shall always be able to assist with very convenient material anyone who wishes to hold opposite theses. But truth is truth and will overcome clever human opinions. It is given to man only at rare moments to perceive the truth, and it is these moments of perception that will survive, and not individual opinions. Therefore, the most formidable marshalling of evidence can often lead one to conclusions which are mere learned nonsense. For the presentation of such perceptions, one needs a simpler, which is really a subtler, style. For truth can never be proved; it can only be hinted at.

It is also inevitable that I should offend many writers about China, especially my own countrymen and great patriots. These great patriots—I have nothing to do with them, for their god is not my god, and their patriotism is not my patriot¬ ism. PerhapsItoolovemyowncountry,butItakecaretoconceal it before them, for one may wear the cloak of patriotism to tatters, and in these tatters be paraded through the city streets to death, in China or the rest of the world.

I am able to confess because, unlike these patriots, I am not ashamed of my country. And I can lay bare her troubles because I have not lost hope. China is bigger than her little patriots, and does not require their whitewashing. She will, as she always did, right herself again.

Nor do I write for the patriots of the West. For I fear more their appreciative Quotations from me than the misunder-standings of my countrymen. I write only for the men, of simple common sense, that simple common sense for which ancient China was so distinguished, but which is so rare today. My book can only be understood from this simple point of view. To these people who have not lost their sense of ultimate human values, to them alone I speak. For they alone will understand me.

My thanks are due to Pearl S. Buck who, from the beginning to the end, gave me kind encouragement and who personally read through the entire manuscript before it was sent to the press and edited it, to Mr. Richard J. Walsh who offered valuable criticism while the book was in progress, and to Miss Lillian Peffer, who styled the manuscript, read the proofs and made the index. Acknowledgements are also due to Mrs. Selskar, M. Gunn, Bernardine Szold Fritz and Baroness Ungern- Sternberg, who, sometimes singly and sometimes in chorus, nagged me into writing this book. Lastly, I am indebted to my wife who patiently went through with me the less pleasant aspects of authorship, which only an author’s wife could appreciate.

June, 1935 Shanghai

Download the pdf here.

Orders of Magnitude

By Geoff Raby

US primacy is being replaced by two orders led by Washington and Beijing. Canberra’s job is to make the US understand what has happened. One meeting fell over last week, but another one stood up. Joe Biden’s dash back to Washington to deal with the debt ceiling is not the end of the Quad, and certainly not the end of this period of intense superpower rivalry. But putting domestic politics ahead of regional security could only contrast poorly with Chinese President Xi Jinping presiding over the third China-Central Asian Summit in the Chinese city of Xian. Last week’s meeting was the culmination of a startling shift in China’s diplomatic urgency and activism of recent months.

It also highlights the huge damage Vladimir Putin’s war in Ukraine has done to Russia. This meeting is likely to come to be seen as marking China’s ascendancy over Russia as the dominant influence in Central Asia, ending some 300 years of Russian pre-eminence.

Earlier in the week, with little public attention, China broke with the international isolation of Afghanistan following the return to power of the Taliban in Kabul. In a trilateral meeting with Pakistan – itself a major achievement in view of the hostility between Islamabad and Kabul – China and Pakistan agreed to include Afghanistan in the signature Belt and Road Project – the China-Pakistan Economic Corridor. In doing so, it has also stolen a march on Russia in terms of influence over Afghanistan.

Chinese investment in transport infrastructure and mining may be no more than a trickle to begin with, but any foreign funds will be gratefully received in Kabul in view of the country’s dire economic situation and international isolation. Greater Chinese influence will flow in with the yuan.

Most observers of China tend to be stuck in the rear-vision mirror. Few are yet asking themselves what has gone on in China since Xi’s zero-COVID policy was effectively ditched overnight in December. China also dumped its damaging “wolf warrior” diplomacy, flicked the switch to vaudeville (to channel Paul Keating) and went on an international charm offensive.

These are not ‘blocs’ in the sense that the Cold War had blocks.

On February 24, China announced a 12-point peace plan for Ukraine. While rejected outright by the US and some in Europe and elsewhere closest to the US, Ukraine remained silent.

Ukraine President Volodymyr Zelensky simply noted China’s initiative and acknowledged its constructive efforts to resolve the conflict. Xi followed that by a three-day meeting with Putin in Moscow. An unusually long stop and one that was without more recent effusive declarations of brotherhood.

Recently, Xi and Zelensky held a long telephone conversation. China has now appointed a special envoy to the conflict to shuttle between Kyiv and Moscow.

Beijing would not have expected the leaders of the West to fall over themselves in gratitude with its peace proposal. What it sought was to deal itself into any future settlement of the conflict, to lay down an irresistible marker that it had global interests, and a constructive role to play resolving conflict. This is a step-change in China’s foreign policy.

And then, just as the West was dumping all over China’s peace plan, on March 10, China startled the world by announcing that it had brokered a reconciliation between Saudi Arabia and Iran. In doing so, it revealed its intention to become a major player in Middle East affairs.

As the major importer of Middle East oil, China is well-placed to exert considerable influence. Former key Western allies such as Saudi Arabia are seeking membership of Chinese-led groupings such as the BRICS and the Shanghai Co-operation Organisation, where both India and Pakistan are members.

A long line of world leaders has also been beating a path to Beijing – Brazil, France, the EU, Germany, Malaysia, Singapore and more – and all have sought to make the point that they reject US-China strategic competition and do not intend to be pushed to make a choice.

Some, such as the Malaysian and Brazilian leaders, have been active in promoting de-dollarisation as a hedge against US financial instability and to mitigate potential US influence in the way that financial sanctions have been used against Russia. De-dollarisation seems to be gaining momentum from Latin America to the Middle East and, of course, Russia and Central Asia.

The 14th China-initiated BRICS (Brazil, Russia, India, China, and South Africa) will be held in Johannesburg in August. High on the agenda is a possible BRICS currency. While unachievable, an agreement to conduct more of their bilateral trade in their own currencies is feasible.

For sure, the US has effectively led a unified, massive Western sanctions regime against Russia. But the war in Ukraine continues with still no end in sight. As an unintended consequence, however, the sanctions against Russia have highlighted to many outside the Western fold the urgency to reduce dependence on the US dollar. Indian-Russian trade, which has grown massively since Western sanctions were imposed, is conducted in each other’s currencies.

This, then, is the shape of the new world order. It is with us now. It has emerged exceedingly rapidly. Effectively, it comprises two bounded orders. One with the US at its head, the other with China. These are not “blocs” in the sense that the Cold War had blocks. They are not ideologically based so much as representing different ordering of values and associated forms of social and political organisation. At times states may move between the two, as the Philippines has recently shown.

Nor do they preclude co-operation between bounded orders on the global commons, such as environment. As the Australian Prime Minister and Foreign Minister have so succinctly summarised, our relations with China, the bounded orders will “co-operate where they can and disagree where they must”.

The challenge for Australian foreign policy, then, is to come to grips with the end of US primacy long before the US comes to understand that it has ended.

Read more here.

Post for a 'Princeling'

By Lena H. Sun (1992)

Like many senior managers of China's growing cities, Xi Jinping likes to talk about the nuts and bolts of urban planning: a new airport, a superhighway, more drinking water for residents of this port city along the country's southern coast.

But more than some of his counterparts elsewhere, Xi, who is the Communist Party secretary here, may have a chance of accomplishing such projects because of the network of personal ties available to him as the son of one of China's important party elders.

At age 39, Xi is the top official running Fuzhou, the capital of Fujian Province, and several nearby counties -- an area whose population totals 5.4 million. While many Chinese say he has worked hard to reach his position, there is no doubt that his family background played an important role, Chinese sources said.

His father, Xi Zhongxun, 79, is vice chairman of the National People's Congress, the country's nominal parliament. He is reported to be in poor health but still influential.

Xi is one of a small group of children of top leaders that is widely expected to rise to greater political prominence. Now that senior leader Deng Xiaoping has called for bolder, market-oriented reform and the promotion of talented, younger cadres, officials like Xi are seen as being especially well-positioned to advance further. His experience and outlook provide some insight into this group of young officials often referred to by Chinese as the "princelings" because of their special status.

Tall even by Western standards, Xi dresses like many Chinese men of his generation: black leather jacket, sweater, shirt, and, in wintertime, standard-issue long underwear peeking out from under the cuffs. But as he chatted with a visitor in a private sitting room of a government-run guest house, he seemed considerably more at ease and confident than many Chinese cadres his age.

Settling his long frame comfortably in one of the blue fake-leather armchairs, he offered his guests tea, oranges, watermelon seeds and preserved fruit, a specialty of the south. He consulted no notes as he spewed out figures about the area's growth, investment, and plans to overtake its bustling neighbor to the south, the port city of Xiamen, formerly Amoy, where he was vice mayor. He answered questions about economics, politics and his personal background without hesitation. Several aides took notes. One took pictures.

Xi said China should keep its socialist system, but he repeatedly underscored the overriding importance of economic development, economic reform and the foreign cooperation needed to bring that about.

"We want foreign investment and we want to bring in advanced technology," he said. "We aren't picky about whether you are a large, medium or small company."

Referring to the growing economic interdependence of southern China, Hong Kong and Taiwan, he said, "This area has its own natural economic contacts that will accelerate development."

Because of the area's proximity to Taiwan, most foreign investment is coming from Taiwanese who trace their roots to Fujian -- and from Japanese. But Xi has set up a sister city relationship with Syracuse, N.Y., and is hoping to travel there this year to persuade American business to invest in his city.

Xi's father was a top leader in the northwest before being disgraced during the Cultural Revolution of 1966-76. All seven children were persecuted as well. One daughter died. The younger Xi recalled being locked up "three or four times" when he was 15 because of his father's crimes. Banished to Yenan, the revolutionary base of the party, he had to attend daily "struggle" sessions, where he often was forced to read out denunciations of his father.

"Even if you don't understand, you are forced to understand," he said with a trace of bitterness. "It makes you mature earlier."

For seven years, he worked as a farm laborer, an agricultural technician, tractor-trailer driver, and barefoot doctor. In what he described as an ironic twist, he was elected a local branch party secretary in his last two years.

Just before the Cultural Revolution ended, Xi was allowed to enter prestigious Qinghua University in Beijing, China's most prominent technological school, where he graduated in 1979, at 28, specializing in the petrochemical industry.

He was immediately given a plum assignment, working as the personal assistant to Geng Biao, a vice premier who also served briefly as defense minister. In 1982, Xi was sent to work at the local level, as a party secretary in a poor county in Hebei Province. Eventually he became the vice mayor of Xiamen, where he is credited with pushing that city's economic reform and open-door policies, before arriving in Fuzhou in the spring of 1990.

Xi said he has gotten where he is on his own ability and popularity. Asked about possible future promotions, he politely deferred to the needs of the party.

He pointed to an election in Xiamen a few years ago in which he received all but a handful of votes among several vice mayoral candidates in a secret ballot. "I don't think it's a trend that sons and daughters of the leadership cadres must be leaders, too," he said. "We should follow the procedures to promote cadres. . . . I haven't done a lot of research on this, nor do I have a lot of contacts {with others}. I just do my own work."

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