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Getting China just right
Getting China just right
Paul Evans
October 20, 2008
Source: Globe and Mail

Though rarely seen during the election campaign, Canadians have China on their minds. China is no longer “over there,” but a daily part of our economic lives. Surveys conducted by the Asia Pacific Foundation and others reveal that Canadians sense the power shift under way across the Pacific and have mixed feelings about the opportunities and threats that come with it.

The current financial crisis underscores the significance of China's new global role in unmistakable ways. And it underlines the policy problem that the new Harper government will have to handle more adeptly than it did in its first term.

Part of the financial story is how closely China's economy is linked to the American. It is the number two trading partner of the United States (and of Canada). Far from being decoupled from America's economic fortunes, the consequences of the American financial meltdown are significant for China. Stock prices have fallen further in Shanghai than on Wall Street. Property prices are also falling faster. Its financial institutions have suffered enormous losses if only because about 60% of its $1.8-trillion in foreign reserves are in U.S. dollar assets. And about half of China's fund management companies are joint ventures with foreign institutions that are hemorrhaging at home. Exports to the U.S. are slowing and China's growth rate is expected to fall to single digits this year and next.

The other part of the story is that China is not just affected by the meltdown; it has a major role in how it plays out. When America sneezes, China, like Canada, catches a cold. The difference is that China is now in a position to prescribe the medicine and help build the hospital where the patients will be treated.

China continues to prop up the U.S. dollar by maintaining its stock of U.S. treasuries. Chinese companies will eventually find a role in recapitalizing financial companies in the U.S. when the price is right and security of investment value guaranteed.

China's biggest role is keeping its economic engine running and increasing domestic and regional consumption to dampen the recession. It has dropped domestic interest rates. And, more significantly, it is increasing consumption of goods and services from its East Asian neighbours. China already has eclipsed the U.S. as the biggest customer of exports from Japan and Korea.

All of this does not signal the end of American economic dominance or the ascendance of capitalism Chinese-style. But we can expect that the arrangements and institutions that come into play will reflect the new realities of global economic power and Chinese interests and perspectives. It may be premature to predict the emergence of a G2 as the architecture of the future, yet the G8 already seems a relic of an earlier era.

This is a financial drama playing out on a geopolitical stage. If the Bretton Woods system is to be reinvented as British Prime Minister Gordon Brown proposes, is it farfetched to hold the meetings in a quiet Chinese location?

For Canadians, the stakes are much bigger than slumping commodity prices, bilateral trade numbers, and reduced container flows. “Cool politics, warm economics” as our approach to China has hit a dead end. Canada needs China far more than the reverse. In perilous times, both countries have a common interest in keeping markets open, beating back protectionism and dampening the global recession.

What can Prime Minister Stephen Harper and his government do? A prime ministerial visit, already announced, can do more to re-establish a constructive tone than a dozen ministerial missions. To be successful the visit will need to be accompanied by some creative thinking and bold gestures.

First, make the ambassadorship in Beijing, like Washington, a political appointment of a very senior person affiliated with the current government.

Second, phase out the official development assistance program in China and replace it with a new institution for Canada-China policy partnerships in areas including human rights and environment, but also including human security, financial systems, and product safety.

Third, deepen the approach to promoting human rights and good governance by working with Chinese partners on a range of social justice issues that include political rights, but also social and economic ones.

Fourth, develop a strategy that connects Canada to the new East Asian regionalism in the same way Canada supported similar processes in Europe a half century earlier.

Fifth, help small- and medium-sized Canadian companies succeed in Asia through better preparation and new instruments including trading companies.

Sixth, clarify the foreign investment rules as quickly as possible to create a favourable environment for major new plays, including in energy.

Seventh, expand the Gateway concept beyond transportation infrastructure and into building Gateway economies in Canada that link North America to global Asia.

In responding to the economic crisis, we need an Asia policy with China at its centre as much as we need immediate remedial action at home.

Paul Evans is a professor in the Liu Institute for Global Issues at the University of British Columbia.

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