Candidates Debate Rise of China; China Debates Reform

Monday night's presidential debate will include a 10-minute segment on “the rise of China and tomorrow's world.” Expect harsh word from Mitt Romney about trade practices, the value of the renminbi , Chinese financing of the deficit and the need to increase military spending to strengthen the “pivot to Asia.”

Mr. Romney may be right to complain about China's structural trade barriers and intellectual property violations. The question is whether he is willing to undermine the World Trade Organization, through which the United States has won several victories against China, upend the global trading order and drive up prices for many of the goods Americans consume.

A TRADE WAR BETWEEN THE UNITED STATES AND CHINA would also arguably harm many of the allies with whom the United States is working to execute the “pivot to Asia.” Those countries may take China's side in a trade war, as two scholars from the Peterson Institute for Institutional Economics rec ently warned:

U.S. leaders would do well to note that for probably the first time since the second world war the dollar bloc in east Asia has been displaced. In its wake a currency bloc based on China's renminbi is emerging… Chinese shenanigans in relation to politics and security have repelled these countries into America's embrace, reflected most vividly in the latter's pivot-to-Asia strategy. The old saying is that politics trumps in the short run but economics wins in the long run.

Both tickets have ties to China. President Obama's half-brother has been a long-time resident of China, M. Romney's Chinese financial interests are well documented, and Paul D. Ryan's brother is a Cargill executive in Shanghai.

President Obama has pursued a China policy that is broadly consistent with those followed by both Republican and Democratic administrations, and supported by most of the United States business community, for the last 30 year s. If elected, Mr. Romney is unlikely to change that policy.

In his 2007 book “The China Fantasy” (Viking), James Mann criticized the argument that trade and engagement would bring liberalization and eventual democracy to China. Mr. Mann foresaw a situation in which China “becomes fully integrated into the world's economy, yet it remains also entirely undemocratic.”

That may be the crucial challenge for the United States from the rise of China, and one that America's elite has helped create over the last several decades. The United States has much less leverage against China than most Americans think, and the best way for America to respond to China's rise is not to lash out but to get our own house in order.

CHINA'S PRESUMPTIVE NEXT PRESIDENT, Xi Jinping, may wish his economy were the juggernaut many Americans think it is. He will inherit an economy in desperate need of reform and rebalancing. As discussed in an earlier China Insider, Mr. Xi and his advisers are aware of China's challenges.

China's growth rate in the third quarter slowed, as expected, to 7.4 percent. Other economic data came in ahead of estimates, leading to contradictory conclusions from financial analysts.

Goldman Sachs Asset Management's chairman, Jim O'Neill, has raved about the skill of Chinese policymakers and believes China's may have engineered a “soft landing.”

Other analysts were not so impressed and questioned whether China might have overstated its growth:

The growth rebound is too good to be true,” said Li Wei, an economist at Standard Chartered in Shanghai. “Maybe the political agenda has played a role. If you are going to hold a board meeting of course you want to report a decent number. It's understandable.

It looks premature to conclude that China's economy has avoided a hard landing, but the bearish sentiment toward China may be shifting as we approach the 18th Party Congress. Expectations that Mr. Xi will move quickly to project confidence and commitment to reform are increasing.

Reuters has learned that Mr. Xi is seeking an ambitious economic reform agenda and canvassing advisers nationwide for ideas. The New York Times reported on Monday that Mr. Xi might be working on a reform agenda that goes beyond economics. And Chinese state media has recently run a series of articles calling for continued reform. That said, any political reform will not be toward liberal, Western democracy, and we should avoid the trap of looking for “China's Gorbachev”.

Hu Jintao was thought to be a reformer too, although 10 years ago there was not the sense of impending crisis among the elite that there is today. The obstacles to deepening reform are significant, substantive changes will take time, and Mr. Xi and his administration may well fail, but there is at least a little more hope for change in Beijing than I have sensed in a long time.

Calling for the coming crash of China may be popular, but predicting the coming muddle-through is probably more accurate.