Putting aside unspoken fiscal issues, the US decision suggests that the post-Cold War order is coming to an end.  The international system in Pacific Asia has changed since 1945, when the US loomed over a Japan in pieces and a China in ferment.  The Maoist revolution and the outbreak of the Korean War transformed Washington’s pre-eminence into a balance of power system divided into US and Soviet led camps.  However, after 1972 an informal anti-Soviet security alliance between the US and China helped shore up American power in the region in the aftermath of the Vietnam War.  (An excellent analysis of that shift came from the pen of international relations theorist Hedley Bull).  The Soviet Union compensated by increasing its Pacific naval capacity prior to collapse in 1991. 

China’s focus on economic development after the events of Tiananmen Square left the US dominant in East Asia through the 1990s.  Beijing was unable or unwilling to challenge the US until about 2001, powerless in its fury at US President Bill Clinton’s 1996 decision to deploy two aircraft carrier groups in response to Chinese missile testing in the Taiwan Straits. However, the rapid development of China’s economy, largely after its accession to the World Trade Organisation in 2001, has changed that dynamic.  Trading prowess and the acquisition of huge foreign exchange reserves have swelled China’s economic importance, while growing military spending has transformed the People’s Liberation Army.  If the 2001 EP3 spy plane incident and the standoff with the USS Impeccable in March 2009 show anything, it is that Beijing has moved away from Deng Xiaoping’s foreign policy adage that it must hide its brightness and bide its time.  In particular, since the 2008 financial crisis, China appears to have pursued a more assertive foreign policy, with notable developments including increased tensions in the South China Sea and, most recently, Beijing’s decision in November 2011 to deploy armed police to northern Thailand.  The new US strategy thus seeks to soothe regional concerns of powerlessness in the face of rising Chinese might.

In some ways, then, the US steps may presage moves away from US preponderance towards a more effective balance of power in East Asia.   A classic view of a balance of power system is one where each power recognises that other players have rights in certain spheres of interest.  The core principle underpinning this approach is one of “co-existence”.  The arrangements in Europe between powers such as Austria-Hungary, Britain, France, Prussia, and Russia between 1815 and the 1860s would constitute such a system, as might the more hostile division of Europe into pro-US and pro-Soviet camps between 1945 and 1989. 

Regional developments appear to support this assertion.  One reason behind the Darwin deployment is that Chinese over-the-horizon capabilities, such as its DF-21D missiles and the J-20 stealth fighter, will have the range to hit nearby US facilities. But not those in Australia.  The US troops there may also come from those already in South Korea and Japan, amounting to a restructuring rather than an expansion of regional forces.  Accordingly, the new policy may amount to de facto recognition of China’s growing clout and even its right to exert influence in its near abroad.  The move could thus contribute to a division of influence in Asia between a pro-US camp comprising maritime states such as Australia, perhaps India, Japan, the Philippines and South Korea, and a pro-Chinese camp composed of continental states such as Cambodia, Laos, Myanmar, North Korea and Pakistan.  In a positive reading, this scenario could evolve into a relatively amicable “concert of Asia” underpinned by strong trading links.  In a more confrontational scenario, it could lead to contest and efforts at containment, although the importance of the US-China trading relationship may for a time prevent the evolution of a new Cold War in Asia. 

However, it is not yet clear that Washington is willing to settle for a regional balance of power based on principles of “coexistence”.  First, the Pentagon is developing an Air-Sea Battle Concept which would seek to counter Chinese efforts to deny US forces regional access.  This doctrine is notably assertive, since it would involve strikes on weapons systems based in mainland China, such as missile sites.  It is worth mentioning in this context that one source of friction between Moscow and Washington in the early Cold War was the US ability to deploy nuclear weapons. In part, this capability prompted the Soviet Union to retain control in Eastern Europe so as to make it harder for US bombers to reach Moscow.  China’s planners may take a comparable view of the Air-Sea Battle Concept and alter policy accordingly. Second, a US presence in Australia would permit easy access to both the Indian and Pacific Oceans, thus facilitating the imposition of a maritime blockade on China.  Turning again to history, it was Japan’s fear of blockade which prompted the invasion of South East Asia in 1941.  China, too, would react to any such threat. Third, the new strategy appears to include US efforts to expand influence on China’s periphery, both in states that have a fraught relationship with China, such as Vietnam, and perhaps now in client states such as Myanmar.  Arguably, one reason for Cold War stability in Europe was US unwillingness to engage in “rollback” of Soviet influence in Germany in 1953 or Hungary in 1956.  Should the US seek to push back Chinese influence in Myanmar or elsewhere, Beijing may react badly.  And finally, in terms of economic restraints, success in implementing the Trans-Pacific Partnership, a new regional trade pact, might make bilateral trade with China less of an inhibition to US strategy.

The new order is emerging, then.  Australia has decided to move closer to the US despite its trading reliance on China.  Other states, such as Myanmar, Thailand, and Vietnam, will seek to hedge, but may in time have to choose one or another side.  As such, places such as Thailand, which is a US treaty partner but could soon have Chinese armed police operating on its territory, will be important barometers for regional relations.  For its part, the US must find a balance between soothing its allies’ fears and not stoking perceptions of containment or even rollback in Beijing.  That will prove difficult, though, and so the prospects of strategic competition between China and America are rising.  

Australia is an intriguing example of the dilemma facing many regional powers.  In the last few years, China has become its most important trading partner, accounting in 2010 for 19.1% of trade (of AUS103 billion), ahead of Japan at 12.3% and the US at 9%.   China took 22.2% of Australian exports in 2010,  worth some AUS64 billion, while Japan took AUS45.7 billion worth of goods. Rates of growth in Chinese trade are also strong, with exports growing by 34% in 2010 compared to 13.4% for trade with Japan.  China was also the third most important source of foreign direct investment into Australia in 2010.  

In short, Australian economic dependence on China is significant and growing.  This situation has good aspects.  Australia ran a large trading surplus with China in 2010, presenting a pleasing contrast to the US or European economies (excepting Germany).  The fiscal windfall has also permitted the government to run counter-cyclical economic policies.  Yet it also has bad aspects, such as an overreliance on commodity exports and a risk of Dutch disease owing to the high price of the Australian dollar.  

This economic relationship is also intensifying the strategic dilemma facing Canberra.  Australia’s main security relationship is with the US, through the 1951 ANZUS Treaty and other strategic commitments.  These links originated in joint efforts to defeat Japan in World War Two, but evolved to see Canberra through the Cold War years and concerns about Indonesia in the 1990s.  The perception of Jakarta as a threat to Australia has faded, though, as that country has democratised.  Most states in South East Asia are now on good terms with Australia, and in any event lack the wherewithal necessary to attack, given the distances involved and Australia’s own military capacity.  Accordingly, the biggest potential threat to regional security now derives from the rise of China and any potential US response to that systemic shift.  It is that change which has prompted Australians to ask questions about the alliance’s merit.  

In this context, in September 2010, Hugh White, a professor at the Australian National University in Canberra, outlined his view of Australia’s strategic dilemma.  White argued that the best outcome for Australia of China’s rise would be US acceptance of Beijing’s new status in a “Concert of Asia”.  White contrasted this benign scenario with any American effort to contain China’s growing influence, which might provoke friction, even war, between the two powers, with major implications for Australian national security.  White then set out a range of policy options, such as retaining close ties with the US, moving towards China in strategic terms, adopting a policy of armed neutrality on a Swiss or Swedish model, and building an alliance with South East Asian states.  He also raised the prospect of fading into a weak neutrality, as New Zealand has done, simply by failing to make a difficult choice.   This debate has revived in the last few weeks as new trade figures have reinforced the scale of Australian reliance on Chinese growth.  

It is hard not to see the debate in Australia as a sign of the weakening of the US led “hub and spoke” or San Francisco (after the US treaty with Japan) system, particularly because the debate has arisen notwithstanding the Obama administration’s much publicised “return to Asia”.    After all, the system is strong but fragile; commentators have long argued that the failure of the US to fulfil its obligations to one party would render the other alliances worthless.  Australia is the southern anchor of the system, and its departure would seriously weaken US ambitions to provide security in East Asia.  

For all the strategic merits of White’s argument, though, they still do not match public opinion in Australia, which looks back to military achievements at Gallipoli in World War One and alongside the US in World War Two.  Australia’s liberal democratic tradition also leaves its public deeply suspicious of Chinese intentions.  Canberra thus remains tied the US by history, as are other US allies such as South Korea, Japan, Taiwan and the Philippines, which comprise the other “spokes”.  Furthermore, China’s increasingly assertive foreign policy has driven these powers closer to the US despite the economic relationships.  

For the moment, then, the “hub and spoke” system is sound.  Yet this debate in Australia highlights the system’s growing vulnerabilities.  Its component parts all hope to avoid choosing between Washington and Beijing, but a sense is growing that sooner or later a choice is inevitable.  Any such move would alter the balance of power in East Asia significantly, with unpredictable consequences.     

Commentators on the crash, which killed about 40 people and injured a further 120, vented their fury on the internet, showing an unusual willingness to criticise the authorities.  Their discussions targeted corruption, epitomised in the February arrest of then Minister for Railways, Liu Zhijun, as well as broader administrative failings, embodied in local officials’ slapdash rescue effort.  People made comparisons with Sichuan’s shoddily built schools, which toppled in a 2008 earthquake.  China’s journalists also showed themselves less willing than ever before to refrain from criticism.  The government appeared wrong-footed, banning discussion days later, with China’s premier Wen Jiabao travelling to the site.  He blamed ill health for his tardy arrival, bowed and promised a “transparent” investigation.  

Wen’s call for transparency is notable, since he sits on the liberal wing of the Chinese Communist Party (CCP), but at first glance it looks misplaced.  Wen’s role in government ends next year, and official media generally ignore or criticise his more liberal statements.  More, no sign has emerged of the CCP moving away from habits of opacity acquired in the 1920s and 1930s, when secrecy was a matter of life and death, traditions hardened by doctrine and years of authoritarian rule. 

Opacity in government also has a venerable history in China.  A longstanding principle of Chinese governance has been that the administration should be visible in public life, even overbearing, but that the actual ruler should live a closeted life.  Thus China’s emperors built imposing palace complexes which dominated city centres, but limited entry to all but a select few.  This tradition seemingly thrives, with the CCP ruling from Zhongnanhai, a (formerly imperial) enclave within central Beijing. 

A further difficulty relates to language.  While the word “transparency” in English has positive connotations, recalling, say, clear but cold running water, the word in Chinese – “tou ming” – is made up of two characters which mean “penetrate”, “pierce”, or “thoroughly” (透) and “clear”, “bright” or “understand” (明).  The word may thus have a more intrusive meaning than its more passive English version, unsettling to those who desire a harmonious society. 

Yet Wen’s liberal stance still has roots in Chinese tradition.  Confucian thinking offers the doctrine of the Mandate of Heaven or “tian ming”.  This doctrine contends that the right to rule derives from heavenly authority and depends on the provision of humane and effective government; the legitimacy of the rulers thus rests in part on the perceptions of the governed.  Should a ruler fail to provide good government, heaven will withdraw its mandate and the ruler will fall to a sanctioned rebellion. 

As such, the mandate of heaven bears some comparison with forms of social contract such as those advocated by the western philosophers John Locke or Jean-Jacques Rousseau.  It is thus arguable that the mandate of heaven could provide a Confucian underpinning to more representative government or even democracy.  In addition, the mandate of heaven amounts to an ineluctable law of politics as played out in Chinese history.  The model is: a ruler comes to power and establishes a new and strong administration; over time, the dynasty wanes as weaker rulers cede influence to corrupt advisers or eunuchs; a rebellion, fuelled by grievances at bad government, breaks out, or an invasion takes place; and the dynasty is replaced.  This perspective bears comparison with communism, which has its own laws of historical process leading to a state of utopian socialism, although the cyclical nature of the Chinese doctrine contrasts with the linear form of Marxism.  China’s citizens, aware and proud of their history, may thus watch events like the crash and ask themselves at what stage of the cycle they sit.  

Theory has limited impact on life, of course, but it does show that transparency and democracy have philosophical underpinnings in the Confucian world.  The political models in Chinese countries demonstrate as much, varying as they do from the noisy but flawed democracy of Taiwan, through the rule of law and relative transparency of Hong Kong, to the faux-liberalism of Singapore and the stolid authoritarianism of mainland China.  In this context, it is intriguing, if mischievous, to ask whether a reunification with Taiwan might propel a real democratisation on the mainland; the Kuomintang could perhaps return to its historical role of offering a political alternative to the CCP.   

A train crash does not amount to the withdrawal of the Mandate of Heaven from China’s communist rulers, nor does corruption demonstrate the morbidity of the existing dynasty.  However, the Wenzhou crash did at the very least underline the difficulties of controlling information in the internet age.  In this context, it could with hindsight be a milestone on the road to greater political freedom in mainland China, although that road as yet looks very long.     

The latest incidents are worth cataloguing.  In late May 2011, the Philippines accused the Chinese government of erecting military facilities on the Iroquois Reef-Amy Douglas Bank, an area located well within the Philippines Exclusive Economic Zone (EEZ).  This action followed moves in March by Chinese vessels near Palawan to harass oil exploration ships operated by the UK-based Forum Energy.  The Vietnamese government then announced in late May that a Chinese fishing boat, joined later by two China Maritime Surveillance Forces vessels, had cut the submarine tow cable of a Talisman Energy ship conducting an oil exploration survey; in June another fishing boat tangled its nets with a similar cable and was chased off by the Vietnamese.  The May incident took place just 120 nautical miles from Vietnam’s coastline, and so nowhere near the disputed Spratly or Paracel Islands.  Hanoi then conducted live fire naval exercises to demonstrate a willingness to fight.  A joint Chinese and Vietnamese naval patrol later in June presaged the dampening of differences.

The incidents prompted a major diplomatic row, overshadowing the end of May meeting of the Shangri-La Dialogue, at which China’s defence minister, Liang Guanglie, stressed that China was maintaining its “peaceful rise”.   Beijing also stated that it would not use force to resolve the issue, but vice foreign minister Cui Tiankai told the US to stay out of the dispute.  Vietnam and the Philippines condemned Chinese actions, and even Singapore has called for clarity from Beijing.  The US is moving ahead with planned exchanges with the Vietnamese navy, which PLA chief Chen Bingde described in mid-July as “extremely inappropriate”.  The US Senate also passed a unanimous resolution in June condemning China’s actions in the Sea.  The row is affecting other issues, with 45 senators currently calling for the sale of F-16 fighter aircraft to Taiwan.  Taipei is a claimant (on the same lines as China) and actually maintains a small garrison on the largest islet of the Spratly chain, Pratas or Itu Abu Island.  
Somnolent since the late 1990s, tensions in the South China Sea have spiked in the last few years partly owing to the end of a Joint Maritime Seismic Survey in 2008 and a return to unilateral oil exploration efforts, and partly because of the 2009 deadline for the filing of claims under the United Nations Convention on the Law of the Sea (UNCLOS).  Tensions rose further in mid-2010, when US Secretary of State Hilary Clinton reacted to alleged Chinese claims that the Sea comprised a “core interest” by announcing that freedom of navigation in the sea was a US national interest.  

That the latest incidents relate to oil exploration is no coincidence.  A longstanding (if unconfirmed) belief is that beneath the South China Sea lie immense reserves of untapped oil and gas.  Some estimates are as high as 213 billion barrels for the whole South China Sea; natural gas reserves may amount to about 900 million trillion cubic feet.  It is worth noting in this context that the main Chinese player in offshore oil and gas development is China National Offshore Oil Corporation (CNOOC), which produced more than 50 million tonnes of oil equivalent in China’s offshore waters in 2010.  CNOOC played a role in the multi-lateral exploration activity which took place under the Joint Maritime Seismic Survey until its termination in 2008, and the company plans to produce about 500,000 barrels per day (bpd) of oil from the South China Sea by 2015, rising to one million bpd by 2020.  In May 2011 CNOOC announced the sale of 19 South China Sea oil blocks to foreign investors (most in the Pearl River Delta region) and took possession of a massive new offshore drilling rig, Offshore Oil 981, which Xinhua stated in June would operate in the disputed sea. 

As such, it is tempting to ask whether current policy relates to CNOOC’s oil exploration efforts.  After all, in July 2008 Chinese diplomats in Washington demanded US energy major Exxon pull out of an exploration contract with PetroVietnam, and exploration work slowed until Manila and the Philippines restarted in late 2010, apparently emboldened by US statements.  It is that which has heightened tensions.  Furthermore, it is China’s Maritime Surveillance Forces which are applying pressure; they operate under the State Council, China’s executive, which tends to focus more on energy issues than other parts of the government.  If correct, such a view may be grounds for cautious optimism; a model for resolution may lie on the border between Japan and China.  Tensions in that dispute intensified with the discovery of a CNOOC drilling platform at the Chunxiao gasfield in 2006.  The Japanese protested, but by June 2008 the two governments had agreed a joint development arrangement.  The accord is not ideal, not least since the Chinese side has yet to implement it and maritime friction is a continuing problem, but it has gone some way to normalise relations. 

A less appealing alternative, though, is that the dispute is a sign of a broader assertiveness in Chinese foreign policy, the structure of which, after all, conspires against the undue influence of CNOOC.  Foreign policy decisions fall to the Politburo Standing Committee (PBSC), which receives input from three core organisations: the Chinese Communist Party (CCP), which controls three important leading groups on foreign affairs, national security and on Taiwan; the State Council, which includes both the foreign ministry and the leading group for energy; and the Central Military Commission (CMC), which is both a leadership group dealing with military affairs and the People’s Liberation Army headquarters.  CNOOC may be able to influence policymaking, then, for instance through the leading group on energy, but only insofar as its claims compete with other concerns.  This view seems plausible as Beijing appears increasingly willing to trample roughshod over the claims of smaller powers, buoyed by its growing military capacity.  Such a stance suggests that China is willing to sacrifice regional goodwill in order to maintain its claims. 

Accordingly, the militarisation of the South China Sea is moving ahead.  Vietnam is buying six Kilo class diesel submarines from Russia, while the Philippines is currently reminding the US of its treaty obligations to the island state (its coast guard receives US support).  Even Singapore has blinked, permitting the basing of two American littoral combat ships in its port, the first US ships to operate on a permanent basis from the city state.  Washington has also stated its determination to “return” to Asia, and is actively courting partners in the region.  China, though, seems unlikely to back away from its current policy.  In this context, the arrival in the Sea of China’s new oil rig may spark the next phase in the crisis, particularly if Vietnam or the Philippines seek to block its deployment and if China acts to protect it. 

A little over a century ago, Joseph Conrad wrote of the South China Sea in his novel, Typhoon:  “Observing the steady fall of the barometer, Captain MacWhirr thought, ‘There’s some dirty weather knocking about.’”  The barometer does seem to be falling. 

It also presents a stern morality tale, since the Greek crisis is ultimately about living beyond one’s means.  Since its adoption of the euro, Greece has had an artificially high exchange rate, encouraging excessive spending.  Greece was not alone.  Spain and Ireland did the same, as did states with separate currencies, such as the UK and US, and this profligacy in turn may have led to the humbling reality of the financial crisis.   

This episode in the financial crisis soap opera seems peculiarly European, and yet it casts light on the role of Asia in the world economy.  In this context, the application of a piece of economic theory – that of factor price equalisation – is illustrative.  Factor price equalisation is a trade theory which suggests that given free trade the prices of core factors such land, capital and labour in different trading states will come to equalise.  If the theory is correct and given that many millions of Chinese and other workers have entered the global labour market, movement towards the equalisation of factor prices should have taken place in the world economy in the last two decades.  

So what actually happened?  First, the massive glut of cheap manufactures in Asia resulted in a real increase in wealth in that region; strong trade figures resulted in capital transfers from rich countries to Asia, often returned as purchases of sovereign debt.  Second, data from economies such as the US suggests that real incomes stagnated in the last decade, hinting at a relative decline in living standards in line with factor price equalisation; certainly manufacturing in the US and elsewhere has struggled to compete with China with jobs losses resulting.  Third, in this context consumers, companies and governments throughout Europe and the US turned to easy credit (subsidised in effect by the recycling of Asia’s surpluses) to pay for perceived needs, such as wars in Iraq, pensions at 50 and healthcare from cradle to grave.  This easy credit disguised the day to day consequences of a transfer of wealth to Asian states and of a relative decline in the price of labour in the purchasing countries.   Finally, the collapse of Lehman Brothers and subsequent financial crisis pulled back the curtain on reality.   

Even those countries with strong current and trade accounts, such as Germany, are no exception to this trend.  In the last decade, Germany’s export strength (particularly in machine goods) has relied on two key premises.  First, Germany has benefitted from its euro membership, since the value of the euro has probably been lower than the deutsche mark would have been; dragged down, as ever, by the likes of Greece.  Second, in 2005 former German Chancellor Gerhard Schroder introduced some employment measures which in effect pushed down German wages. For instance, he created a system whereby workers might sacrifice days at work on an individual basis so that companies did not have to cut jobs.  As such, Germany held down its exchange rate, nominally in terms of the euro and really in terms of wages, thereby responding to the challenge posed by trade in Asian goods.  This could be taken as a movement towards factor price equalisation.  

In the well-balanced world of economic theory, the counterpart of this contention is visible in the much trumpeted rise of China’s yuan and the wage inflation which troubles factory managers in Guangdong province.  That is not to say that these trends of rapid growth and transfer of wealth will necessarily continue.  China, for one, faces severe challenges, in the form of excessive municipal government debt, massive misallocation of capital, a flawed banking system and a tricky prospective transition to increased domestic consumption.  Yet unless it reverts to isolationism or collapses, both unlikely, the pressures inherent in the price of Chinese labour will continue to ripple throughout the world economy.  

The financial crisis, then, is not simply a matter of bank regulation.  It is a symptom of broader changes at work in the world economy.  The European countries and the US must innovate and cut costs in order to maintain competitive advantage.  In its acceptance of this brutal reality, Germany has taken the lead.  Greece, by contrast, is learning the hard way. 

The comments raised fears about Beijing’s continued adherence to the tenets of the 1984 Sino-British Joint Declaration, which set out One Country Two Systems, under which Hong Kong capitalism and individual freedoms remain in place until 2047.  The move also follows other ominous steps: the seemingly unlawful 2008 handover by the Hong Kong government of Tiananmen era dissident, Zhou Yongjun, to the mainland authorities, and the Hong Kong Special Administrative Region (SAR) government’s intervention in a current court case in order to protect a Chinese state owned company.   

Yet while phrases like “brain washing” secure headlines, the reality is more complex.  Hao Tiechuan is Director of the Publicity, Culture and Sports Departments of the Liaison Office of the Central People’s Government in the SAR. What he actually wrote was this:  “Regarding the moral and national education in Hong Kong primary and secondary schools, some people say it amounts to ‘brainwashing’.  But if we look at such systems in Western countries like the United States and France, we will find this kind of ‘necessary brainwashing’ is an international convention.”  Hua is correct; nationalism is an invention of state authorities, in France as much as in China.  Furthermore, Hong Kong’s freedoms are still intact, as the Tiananmen commemoration this coming 4 June will show.

The move is also nothing new.  The introduction of a national education scheme in Hong Kong has been a longstanding aim of the central government. It was accelerated after the 1 July 2003 protests of over one million people (out of a population of about 7.4 million) against the enactment of an anti-subversion law under Article 23 of Hong Kong’s Basic Law.  That protest prompted a retreat from the measure, which would have introduced restrictive powers akin to those on the mainland. In March 2005, the Chief Executive Tung Chee-hwa resigned, followed in December of the same year by the failure of the passage of a constitutional reform package.  The strength of popular opposition also led to an assessment process in Beijing, which in 2007 concluded that a national educational scheme would instil Hong Kong’s future generations with the requisite loyalty to China and a sounder understanding of the One Country Two Systems regime.  

These latest worries are valid, in part because Hong Kong’s circumstances have changed in the last two decades.  Deng Xiaoping’s logic in 1984 for permitting Hong Kong its freedoms was to afford it space to continue as a trading and financial entrepot, thereby contributing to the modernisation of mainland China.  That importance, though, has faded as the mainland’s own economy has grown.  Hong Kong’s relative importance as a financial centre, too, has diminished thanks to increased competition from Shanghai (and even Shenzen), as well as from Singapore.  Hong Kong’s authorities have worsened this situation by relying on the mainland economy and being complacent about the maintenance of competitive standards, as demonstrated by the willingness of its stock market to rely on mainland auditing standards.  

Taiwan was a second reason - and a further source of concern - for allowing the continuation of freedoms in Hong Kong.  Hong Kong and Taiwan share many features; they are both wealthy, capitalist societies that enjoy the rule of law and political pluralism.  As such, Beijing set out a strategy in which Hong Kong would serve as an example of how reunification need not end autonomy or freedom.  The similarities between Hong Kong’s Closer Economic Partnership Agreement (CEPA) and Taiwan’s Economic and Cooperation Framework Agreement (ECFA) suggest that mainland policymakers maintain this comparative perspective.  

Yet a corollary to this parallel track is that the democratic process in Taiwan, with all the complications for reunification that it presents, has influenced Beijing’s approach to Hong Kong’s political future.  The 2012 Taiwanese presidential elections are already threatening some turbulence in cross-Straits relations. The Communist Party is particularly conscious that the National People’s Congress has promised that the 2017 elections for the Chief Executive, and the 2020 elections for the Legislative Council, take place under universal suffrage.   Beijing will want this vote to go its way, and a national education campaign could help it do so.  

It is in this context that Hong Kong might fear for its freedoms.  After all, if China’s economy continues to grow as in the last years, few powers would protest if Hong Kong’s citizens voted willingly for a form of guided democracy.

The events also recalled humanity’s capacity to inflict misfortune on itself.  The tsunami severely damaged the cooling system at the Fukushima Daiichi nuclear power plant, setting off a cascade of nuclear accidents and the release of radiation into the environment.  Fears of contamination prompted the departure of many foreigners from Tokyo; the government has announced that levels in the capital’s tap water are too high for infant consumption.  Most of the capital’s 18 million residents, though, carry on gamely, subject also to disruptions from rolling electricity blackouts and panic buying of certain commodities.   

The economic consequences may be significant.  Early estimates of the cost of rebuilding are about 5% of Japan’s US$5.39 trillion GDP.  Japan’s economy has not been healthy for years, and the earthquake may knock it back into recession.  A new slowdown would harm economies such as Australia, which has about 19% of its exports marked for Japan, as well as Indonesia and the Philippines, with 16% each. Other economies should be fine: only 2% of the EU’s exports go to Japan, 5% of those from US, 6% from South Korea and 8% from China.  The earthquake has also disrupted manufacturing, with delays in production of components affecting industry in China, Singapore, and Taiwan.  Indeed, these disruptions highlight the artificiality of looking at national current account and trade figures in Asia; the region has become one interlinked production belt. 

The earthquake will also have financial consequences.  After the disaster Japan’s stock markets fell about 16%, although intervention by the Bank of Japan staved off collapse.  The yen also rose to its highest level against the US dollar in 25 years, of JPY76.25, fuelled by speculation about the repatriation of funds to pay for reconstruction.  Indeed, Japan remains the world’s largest creditor nation, despite its weak public finances; the private sector holds over USD3 trillion (or about 52% of GDP) in investment overseas.  The recall of funds could curtail demand for foreign debt with higher rates of interest, such as that issued by Australia, Brazil and New Zealand.  This does not seem to have happened yet, though, perhaps because the G7 central banks intervened to bring down the yen.  The question now is whether the big central banks have capped the yen’s price, given their now limited holdings in yen; if so, foreign exchange traders may return to the carry trade – borrowing in a low yielding currency to invest in those offering higher returns, as before the financial crisis in 2007 and 2008.  If not, then the consequences for some states, perhaps including the US, may be more expensive debt.

The currency intervention may also have unintended diplomatic consequences.  China, notwithstanding its US$2.3 trillion in foreign exchange reserves, played no role.  Furthermore, the G7 step contradicts Washington’s longstanding demands that Beijing move towards a more liberal currency regime.  It may thus undermine US clout on the currency issue, further dissipating influence already drained by financial crisis and, as ever, preoccupation with war in the Middle East.  Without a change of model for Chinese economic growth, though, both the pressures over Asia’s production surplus and the risks associated with never ending purchases of US Treasuries could provoke new crises.  

Earthquakes in Japan have also often had political consequences.  The Ansei earthquakes in the 1850s played a key role in transforming society in the aftermath of the 1852 visit by Commodore Perry’s “black ships”, leading Japan into civil war and the Meiji era modernisation.  Then in 1923 the Kanto earthquake ended the moderation of the Taisho era, setting a new path towards authoritarianism, the 1937 invasion of China and war in the Pacific.  The Kanto earthquake played a particular role by diverting capital away from Japanese industry, adding to the appeal of autarchy.  Another political shift took place in 1995 following the Hanshin earthquake.  In the 1970s and 1980s, Japan’s growth had appeared unstoppable, but that ended with a major stock market and property crash in 1992, and subsequent years of deflation.  The destruction of Kobe seemed to dash Japan’s hopes of becoming a superpower, ushering in instead a politics unable to address Japan’s challenges in terms of ageing, decline and fiscal liabilities.  

At a glance, Japan’s politics remains in the Hanshin era.  Prime ministers have come and gone almost every six months, a trend unbroken even by the opposition Democratic Party of Japan (DPJ) taking office in 2009.  The current government under Naoto Kan was close to collapse on the day of the earthquake, and still does not control both houses of parliament, resulting in a “Twisted Diet”.  No signs of political cooperation are discernible; the opposition parties turned down a request to join a government of national unity.  Yet hopes are rising that the earthquake may end this era of drift.  Japan has already moved away from the cronyism of the Liberal Democratic Party (LDP) era.  The current government’s failure to provide adequate aid to the stricken regions and the nuclear crisis are also prompting previously unasked questions about government effectiveness and lethargic public utilities.  This trend should continue, leading to real changes in the political arena.  

One indicator of change may be food.  Agriculture is politically sacrosanct in Japan, whose farmers shelter behind high tariff walls.  However, Tohoku is home to many food brands, and fears of radiation are growing at home and abroad.  Prior to the earthquake Kan had signalled his intentions to bring Japan into the Trans-Pacific Partnership (TPP), a new body championed by small trading states such as New Zealand and Singapore which seeks to reduce both tariffs and non-tariff barriers. The political system may now have be aligned for membership.  Any such move would transform the political economy of Japan and may reignite hope for trade liberalisation in the region.  

Another area to watch will be energy policy, as Japanese people recoil from nuclear power.  A reappraisal may see Japan buying increased quantities of gas from Russia, mining more coal in Hokkaido and of course expanding its reliance on renewable energy sources.   In the shorter term, though, Japan will also need to import larger quantities of oil, much from the Middle East.  Such changes would have many implications, not least for foreign policy, but it is not clear how.  Japan’s shortage of resources prompted both the rampage across Asia in the 1940s as well as the reliance on nuclear energy and commerce of the post war years.      

Of course, the future is murky, and at present, Japan’s stricken people must carry out the dreadful tasks of finding and burying their dead, clearing and rebuilding their towns, and coming to terms with what has happened.  That task is truly tragic, and our hearts go out to them.    

British Red Cross Tsunami appeal

That is, disputes over small islands continue to unsettle the region’s international relations.  The current islands in the spotlight are the remote, wind-blown and chilly Kurile Islands, north of Japan’s Hokkaido and south of Russia’s Sakhalin (made famous by Chekhov in his descriptions of its prisons).  The islands present a prize for nationalists in Tokyo and Moscow, and perhaps for the fishing communities living there. For outsiders, they can be a baffling source of disagreement.  

The latest eruption of this dispute started in November last year, after a visit by President Medvedev, a move he followed up in February 2011 with calls for increased military deployments to the islands.  A range of other actions, though, have charged the atmosphere.  One is a report that Chinese and South Korean companies may cooperate on ventures to develop the Kuriles, an assertion denied by the Chinese.  Another is that Japan’s Chief Cabinet Secretary, Yukio Edano, has announced plans to “virtually visit” the islands, by flying near them.  The row also worsened when Washington issued a statement outlining its long standing position of support for Japanese claims to the islands. In return, the US ambassador in Moscow received a summons for a dressing down.  

East Asia is full of the unfinished business of the Second World War, of which the Kuriles are simply one example.  

Stalin’s Red Army occupied the islands in the twilight of the Second World War and Moscow has hung onto them tenaciously ever since.  When Japan signed the San Francisco Treaty in 1951 ending the War in the Pacific, it renounced claims to the Kuriles, but the Cold War had by then set in and Moscow refused to participate in the accord.  Furthermore, Japanese advocates now claim that at the time Tokyo did not accept that certain islands fell within the Kuriles chain (the islands of Kunashiri, Etorofu, Shikotan and the Habomai rocks in particular). This assertion is subject to dispute by Russian and western experts, but is strongly held in Tokyo.  To further muddy the issue, the US Senate made clear in the treaty ratification process that the US did not accept Soviet sovereignty over the disputed islands.  Washington has since maintained this stance.  

In 1956, Japan and the Soviet Union entered into discussions to formalise a by then overdue peace treaty.  Negotiations included resolution of the Kurile issue, with Moscow handing control of just Shikotan and the Habomais rocks to Tokyo.  Japan was ready to accept an agreement, but the US intervened and pressed Tokyo not to sign a formal peace.  As such, the talks spawned not a treaty but a Soviet-Japanese Joint Declaration, which ended the bilateral state of war but did not resolve the Kuriles dispute.  Indeed, the Joint Declaration stated explicitly that such resolution should only occur in a formal peace treaty.  

The cold war climate and fears in Tokyo and Washington about the Soviet Union’s naval capacity in the Pacific -- particularly after the victory of the Democratic Republic of Vietnam in 1975 left Cam Ranh Bay available to the Soviet fleet -- made resolution of the issue a non-starter until after 1991.  The issue, though, was a low priority through the 1990s and most of the following decade.  In 2006, then President Putin offered Japan Shikotan and the Habomais in exchange for renunciation of its claims to the other islands – in essence the same deal as in 1956 – but the offer came to naught.  The two governments agreed in 2008 to set aside the issue for future generations to resolve (lucky them).  The climate had already started to worsen, though, not least when Japan published guidelines for teachers emphasising its sovereignty over the islands.  Then in 2010, Moscow seemingly decided to raise the temperature with Medvedev’s visit, turning a low level dispute into cause for recalling the Japanese ambassador to Moscow.  Tensions continue to rise.

The immediate question, though, is this: what is it that makes this minor island dispute significant?  

Perhaps the easiest and most obvious assertion is that East Asia can only coalesce effectively after these niggling details are settled.  After all, the European Union only managed to forge unity after disputes such as those over Alsace and Lorraine or Poland found resolution in the realpolitik of the post war period.  And it is arguable that closer political integration is just what Asia in general, and North East Asia in particular (which suffers a lack of effective regional institutions), needs.  After all, picking at the scabs of history is unhealthy. Far better to heal cleanly and prosper.

The second reason is perhaps more intriguing, though.  The suggestion that Chinese companies may play a role in the Kuriles hints at the growing links between Moscow and Beijing, prompting analysts to ask whether an “Axis of Authoritarianism” may come to present a unified front against the US and its allies in East Asia.  

The bilateral relationship between China and Russia is a fascinating, if paradoxical, part of the international relations of East Asia.  The relationship is old – China’s first formal treaty was with Russia in 1689.  It's also complex: Russia played a predatory role in China in the nineteenth century, extracting concessions that it retained until Khruschev gave them up in the 1950s (Stalin cynically held onto Russian rights notwithstanding an alliance signed in 1950 and sealed with blood in Korea).  Bilateral relations, though, worsened after Khruschev’s 1956 Secret Speech denouncing Stalin, and in time the Sino-Soviet split spiraled into military conflict, a development which eased the way for Nixon’s visit to China.  Relations only normalised after 1989. 

Today, much drives the two countries together.  The two sprawling states share authoritarian political cultures, and have taken steps to move beyond their Cold War era enmity, for instance by resolving the Amur River border dispute which led to bloodletting in 1969.  They cooperate in Central Asia, in part under the aegis of the Shanghai Cooperation Organisation, which some analysts (perhaps inappropriately) characterise as an effort to forge a condominium in the region – and one which excludes the US.  Both countries have disputes with neighbouring Japan and oppose US dominance of the international system.  Bilateral trade is also booming, reaching about US$50 billion in 2010, and will increase as Russia expands its delivery of oil and gas products to the energy hungry Chinese market.   Russia is also perceived as an honest broker in its dealings with North Korea -- a stance which has won it plaudits in Beijing -- and has sold piles of arms to China.  Closer ties may also receive a fillip from the promotion of Xi Jingping to the presidency and the post of General Secretary of the Chinese Communist Party (CCP) in 2012.  Xi studied in Russia, and so holds a foreign imprint different from Zhou Enlai and Deng Xiaoping, who both lived in Paris and looked more to the West.  Furthermore, there is the issue of family. Xi’s father, Zhongxun was closely associated with the “Moscow arm” of the CCP, and thus suffered in the purges against Gao Gang in the 1950s and again during the Cultural Revolution.  

Strong bilateral ties serve both states’ national interests.  China gets its oil, Russia its funds.  The strategic benefits are also significant, and it is in this context that rising tensions over the Kuriles are important.  A worsening of the dispute may drive China and Russia closer together.  Indeed, cooperating on the Kuriles would help Moscow and Beijing put pressure on Japan, perhaps by forcing Tokyo to reassess the decision late last year to reorient its defence posture away from its north (Russia) to its south (China).  For China, such a move would suit its more assertive Chinese policy of recent months in the western Pacific.  For the Russian part, the closer relationship would appeal to Russia’s (or Putin’s) vanity by enhancing its role as a great power; closer bilateral ties could make it easier to prevent US initiatives in regions such as Central Asia, or on issues such as Iran or North Korea.   

But the relationship may prove fragile in the longer term.  First of all, many Chinese nationalists consider Russia’s Primorsky Krai to be part of China, since its cession to the Russian Empire came about under two of the “unequal treaties”, those of Aigun in 1858 and Peking in 1860.  The latter reopened the Aigun settlement in the aftermath of the Franco-British intervention in China in the Second Opium War, an episode which saw Lord Elgin’s expedition to Beijing and the burning of the Summer Palace.  Hardly an easy negotiating environment for imperial China and one which now forms part of the country’s “Century of Humiliation”.  This perception may prove hard to manage, because nationalism has been difficult to control since the government implemented a patriotic education campaign in the 1990s in order to bolster CCP legitimacy after the Tiananmen Square episode.  The trade figures also hide a severe imbalance, which renders Russia an exporter of timber, oil and other unfinished commodities and an importer of finished Chinese manufactures.  A further source of tension is the perception (true or otherwise) of Chinese immigration into the Russian Far East; after all, more than 80 million Chinese (and growing) live opposite fewer than 6 million Russians (and falling).  The fear of demographic conquest arises from time to time in Moscow.  Accordingly, strategic considerations may in time drive the two countries apart, not least if Russia comes to fear its increasing dependence on China.

In the interim, though, tensions over the Kuriles remain high, and will help Russia and China find cause to collaborate.  The dispute is unlikely to end in conflict, but observers should be cautious in dismissing the Kurile Islands dispute as a minor one over remote rocks.  After all, as people from Argentina or Britain could confirm, wind-swept, desolate islands have funny ways of getting people’s blood up -- chilly and wind swept, but ours...

Perhaps of most interest for this blog, though, is that events in Egypt have also thrown light on China’s reliance on the US provision of security in the region.  This scenario is ironic given that China is rapidly emerging as a "strategic competitor” to the US. 

China is a major importer of the region’s oil, a situation which renders the country’s economy vulnerable to price shocks, such as those which might derive from regional unrest and associated disruptions in supply. Taking Egypt’s neighbour Saudi Arabia as an example, the kingdom provided about 28% of Chinese oil imports in 2010.  Indeed, China is now a bigger importer of Saudi oil than the US (although not bigger than Japan or South Korea).  The bilateral relationship is also of growing importance; in May 2010 Aramco, the Saudi state owned oil producer, held a board meeting in Beijing, an event symbolising the emergence of a key commercial and diplomatic partnership.  Saudi Arabia seems at present not to have the same difficulties with its underemployed and angry young as Egypt, but the regime’s frailty has become a much repeated truism of Middle Eastern commentaries.  

China’s reliance on Saudi Arabia and the US security system has come about in part owing to Washington’s single minded policy towards Iran.  China sought links with Iran in the 1990s and early years of this century; by 2007 China had become Iran’s pre-eminent partner in the oil business, accounting for about US$50 billion in investment.   However, Washington (and partners such as Israel, France and the UK) pressed Beijing to scale back this involvement owing to concerns about regional security.  China in turn sought to balance its commercial and diplomatic links with Tehran against a broad (if at times grudging) willingness to cooperate with Washington.  Saudi Arabia, whose king has called on the US to cut the head off the Iranian snake, has played a key part in this drama. Indeed, in March 2010, US Secretary of State Hilary Clinton and Secretary of Defense Robert Gates stated in Riyadh that Saudi Arabia was able to supply any of China's Iranian oil requirements.   

A different, if related, aspect of China’s reliance on US favour is that its oil imports depend on the US provision of security in the Middle East and throughout the world’s oceans.  In this context, any movement by Egypt away from Washington may weaken US hegemony, perhaps by raising the risk of a conflict involving Israel or by facilitating Iran’s efforts to expand its influence through proxies such as Hezbollah or Hamas.  In relation to maritime security, the foreign policy community in Beijing has made noises about expanding its definition of core interests to include sea lines of communication, a move which would alleviate this vulnerability.  It has seemingly not yet done so, though, and it does not have the naval capacity to enforce any such policy. 

Strangely, though, this alignment of interests does not necessarily mean that China is a status quo power in the Middle East.  Some figures on Chinese oil consumption are illustrative.  China’s oil consumption rested at about 373 million tonnes in 2008, and will rise to as much as 530 million tonnes by 2015.  China’s oil production is stagnant, though, and so imports are increasing (to about 60% of oil used in 2008).  This increase is dramatic, and derives in great part from demand in the transport sector, because no sustainable alternative to oil as a transport fuel yet exists.  Transport consumed about 14.7% of oil used in 1990, but this share had risen to 41.8% in 2008.  The sector is still expanding rapidly: China overtook the US in car sales in 2009, when its people bought 13.7 million cars (a 50% increase on 2008), rising to 17 million in 2010 and projected to rise to about 19 million in 2011.  As such, demand is sure to rise.

This situation could create an environment pregnant with the risks of misunderstanding.  Washington has already issued statements raising concerns about China’s desire to “lock up” resources in order to ensure energy security.  In this context, China’s increasing importance as a customer for Saudi Arabia may come to strain that state’s relations with its American security guarantor.   Of course, much will relate to US perceptions of China’s engagement with Riyadh, but it is hard to see US planners taking such concerns lightly, unless Beijing and Washington take dramatic steps to build confidence.   Any loss of bilateral confidence might subsequently compel China to take new steps to protect its sea lanes of communication, as perceptions of their vulnerability to interdiction increase, or to develop power projection capabilities in the Middle East.  This situation risks propelling both countries into a confrontational scenario akin to that between Japan and the US in the 1930s (a dispute based primarily on Japanese concerns about lack of access to resources).  

This already delicate situation now also has to contend with a wave of unrest in Egypt which threatens to sweep across the Middle East and risk changing its character for good.  What will follow in the region is hard to predict, but given the difficult relationship between China and the US, it could well make bilateral relations harder to manage.    

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This article draws heavily and gratefully on discussions and papers delivered at the conference ‘Resource Diplomacy under Hegemony’ at the Centre for China’s Transnational Relations at the Hong Kong University of Science and Technology.  Names associated with contributions have been excluded in accordance with Chatham House rules.

The US dollar has been the world’s main, but not sole, reserve currency since at least 1945, when America’s economy (in part thanks to the wholesale destruction of commercial competitors in Europe and Japan) amounted to more than 50% of world GDP (compared to about 23% today).  The dollar’s reserve status has meant that the US has enjoyed a number of benefits, including having a government and corporate sector able to borrow freely in its own currency (thereby eradicating currency risk), paying low interest rates on debt thanks to hefty demand for the US dollar, and taking advantage of something called “seigniorage”. That's the profit accruing to an issuer (or seignior) from the difference in value between the cost of production and the currency’s face value; in current terms, seignorage might be seen as a form of inflation tax.  

The status quo riles Beijing.  China is the foremost governmental holder of the dollar as a reserve currency; it allegedly has USD2 trillion in US treasury bond, out of its total foreign exchange reserves of about USD2.8 trillion.  The US Federal Reserve’s determination to print money, combined with a lack of faith in America's economic recovery has reduced the dollar’s face value and raised concerns about its attractiveness as a store of value.  So the crisis has cost China lots of hard earned lucre, added to which the Chinese elite’s prickly nationalism (and ethic of hard work) surely abhors the rents which lazily fill Uncle Sam’s pockets.  Zhongnanhai, then, wants an alternative international monetary system, as overtly (and undiplomatically) stated by President Hu. 

China has taken steps to reduce the US dollar’s reserve currency status, first by diversifying foreign exchange holdings and so reducing at least its demand for dollars.  Reports have emerged of China’s State Administration of Foreign Exchange (SAFE) divesting itself of dollars and expanding its holdings of other currencies, gold, and assets including equities and debt.  This latter category includes euro denominated debt issues from the governments of Portugal and Greece.  China’s engagement in the stricken European bond markets may have a number of motives. First, it maintains diversified stocks of currencies amongst its reserves. Second, it prevents a further fall in the value of the euro, which would weaken Chinese exports -- a move to compare with the soft lending provided by state owned export banks or insurers, such as the US Exim Bank or the UK’s Export Credit Guarantee Agency, which in effect amounts to a subsidy for exporters. Third, China may wish to bolster as an alternative to the dollar the euro, which since 1999 has been the world’s secondary reserve currency.

Beijing also seems to have a strategy to propel the renminbi to reserve status. In September 2010, the chief executive of Hong Kong Exchanges and Clearing, Charles Li, said he saw the renminbi first emerging as a trade currency (over five to ten years), then becoming a currency of investment (over 10 years), before emerging as a reserve currency (in say 20 years).   Li has a reputation in Hong Kong for close dealings with mainland policymakers; his comments are generally very well informed. 

The process is under way.  In 2004, China allowed the transfer of renminbi into Hong Kong through a daily allowance of RMB20,000 for local residents, resulting in accrued RMB assets in the city of about RMB80 billion by mid-2009.  China then accelerated moves by permitting mainland companies to use the renminbi to settle international trade transactions in July 2009, and has continued this liberalising stance – for instance by allowing companies to move renminbi offshore for investment purposes in early 2011.  Beijing has also since 2009 established a range of bilateral currency swaps with trading partners such as Argentina, Belarus, Hong Kong, Iceland, Indonesia, Malaysia, Pakistan, Russia, Singapore and South Korea; the value of these arrangements was about RMB800 billion (USD121 billion) by the end of 2010.  Fast food chain McDonald’s has launched a bond denominated in the renminbi and trade credits have been offered in renminbi to Indonesian counterparties by the Industrial and Commercial Bank of China. 

China’s actions have prompted an agonised debate about the future of the dollar.  A collapse of its value, resulting in searing increases in interest rates in the US, seemed a possibility at the more alarming moments of the financial crisis.  Perhaps the renminbi was a possible replacement.  Yet with clear-eyed hindsight it was a remote chance then, and remains so now. 

The reason for this sanguine view is that reserve currencies are creatures of reputation, which takes a long time to gain and once won is hard to escape.  Perhaps the most important requirements of a reserve currency are confidence in its value, liquidity, in terms of deep capital markets, and ease of conversion.  These conditions the US dollar can provide like no other coin, contrasting with, say, the Japanese yen, the main competitor of the 1980s but one underpinned by weak capital markets.  The euro comes closer and so is the current secondary reserve currency, accounting for about 25% of states’ foreign exchange reserves (although recent events have cast doubt on its integrity).  The renminbi, by contrast, is in no position to rapidly become a reserve currency because China has a closed capital account, shallow and unpredictable capital markets, and the currency trades weakly overseas, notwithstanding recent steps towards internationalisation.  This situation means that while the renminbi might be used for current account purposes, such as settling bilateral trade, it could not play a role for capital account purposes, such as for portfolio investment and reserve holdings.  

Historical precedents also suggest that shifts in reserve currencies require substantial dislocation.  The British pound was the key reserve currency of choice from about 1815 to 1914, when the globalisation of that era ended in the trenches of Flanders.  The US dollar took on a major role by the second half of the 1920s, although this status was only formalised in the 1940s.  The pound by then had been bled dry: by World War One; debt; overvaluation on the Gold Standard after 1925 and an associated deindustrialisation, before the coup de grace of the Great Depression (itself partly caused by the lack of certainty in the international monetary system); the pound’s final departure from gold in 1931; and World War Two. (Two good writers on this subject are Barry Eichengreen, in Golden Fetters, and Charles Kindleberger in his The World in Depression.)  A similar litany of horrors looks unlikely to beset the US in the near term, notwithstanding the rigours of the recent financial crisis. 

Of more value for Chinese policy makers might be discussion of the "economic war" pursued by President Charles De Gaulle of France in the mid to late 1960s, a comparison made by economist Barry Eichengreen in an excellent recent article.  De Gaulle argued that the difference between the gold peg of USD35 per troy ounce and the currency’s paper value (traded at USD40 per troy ounce in London in 1960) was significant and worsened with the inflationary spending associated with the Vietnam War and President Johnson’s Great Society programme.  Accordingly, he applied for the conversion of some of France’s dollar reserves into gold.  De Gaulle’s policy devolved from the Triffin dilemma, an economic theory which dictates that the issue of an international reserve currency prompts conflict between an issuer’s domestic and international monetary policy.  The issuer must paradoxically run a current account deficit in order to provide liquidity at the same time as running a surplus to maintain confidence in the currency’s value.  De Gaulle’s position now appears astute.  After all, the US did devalue in 1971, when Nixon closed the "gold window" and floated the US dollar as a fiat currency, and the price of gold had climbed to USD180 per troy ounce by 1977 (and about USD1000 today).  The Bretton Woods system collapsed between 1971 and 1973, leading the world into the free floating regimes most developed countries pursue today. 

This comparison is of great value, since the Asian economies now resemble their European counterparts then, by virtue of maintaining a pegged exchange rate and their reliance on export-led growth.  However, the differences are also salient.  In the 1960s, the US needed Cold War allies (or clients), and so subsidising their growth through undervalued exchange rates matched strategic imperative (and indeed was more affordable for a relatively bigger US economy).  Arguably, Nixon’s move should be set in the context of his policies of rapprochement with China and détente with the Soviet Union, thereby rendering US clients less important.  China today, by contrast, is not an ally in the same mold as 1960s West Germany or 1970s Japan. It is an overt competitor, and its peg is damaging to US interests.  A further difference is that the surplus countries did jettison their pegs to the US dollar in the 1970s, thereby helping to rebalance the world economy.  This time China (and other Asian states) wishes to maintain the undervalued nature of its currency since it is reliant on a strong dollar to enrich its export sector.  The US also seems to have limited will to force a change; while Nixon merrily imposed a 10% surcharge on imports to force the shift, Obama is reticent about doing so. 

A further difficulty China faces it that it will not prove easy to recast the international system.  In the 1960s, efforts to expand the use of Special Drawing Rights (SDRs), a financial instrument of the International Monetary Fund (IMF) based on a basket of currencies, failed since most states were unwilling to let the IMF play the role of a de facto global central bank.  The debate on international monetary policy suggests a similar jealousy about national sovereignty reigns today (which even the discussions about the euro, the best contemporary example of pooled economic sovereignty, demonstrate). 

The figures speak for themselves, then.  According to research in 2010 by the Federal Reserve Bank of New York, about 65% of cash holdings of US dollars were outside America in 2010, about two thirds of exchange reserves held by industrialised states were in US dollars, over 80% of foreign exchange transactions used the dollar and 39% of international debt issues were denominated in US dollars.  These numbers take account of the recent financial crisis and loss of faith in the dollar. 

Accordingly, for the moment Beijing can really only hope that its currency becomes more internationalised and respected.  The renminbi will probably, for instance, take its place in the basket of currencies from which the IMF calculates the SDR’s value.  In time, it may also become one of a number of secondary reserve currencies (which might include the dollar and the euro, if it survives) and eventually could even overtake the dollar.  In the near term, though, short of war or catastrophe the renminbi will struggle to replace the dollar.  The greenback will stay preeminent in international money, not least thanks to the most powerful forces in the world of finance: habit and inertia.