War by Other Means

by Robert D Blackwill

  61. Shih Hsiu-chuah, “Analysts See China behind Gambia Loss,” Taipei Times, November 17, 2013; Eva Dou, “Gambia Cuts Taiwan Ties, Raising Stakes with China,” Wall Street Journal, November 15, 2013.

  62. Shannon Tiezzi, “Why Taiwan’s Allies are Flocking to Beijing,” Diplomat, November 19, 2013.

  63. “The One-China Principle and the Taiwan Issue,” Government of the People’s Republic of China, Taiwan Affairs Office and the Information Office of the State Council, 2000.

  64. The degree of RMB undervaluation is always more art than science for economists, requiring triangulating between several imperfect summary statistics. IMF estimates for 2014 suggest the RMB is moderately undervalued by 5–10 percent, compared to a level consistent with fundamentals and desired policies. Subsequent IMF estimates, released in May 2015, suggested that the RMB is no longer undervalued; however, these findings came prior to large scale devaluations that China undertook during the summer of 2015. Another favored measure of currency restraint, China’s current account surplus, has come down substantially since its 2007 peaks, but the most recent IMF forecasts expect it to widen again over the next twelve to twenty-four months. International Monetary Fund, “People’s Republic of China: Staff Report for the 2014 Article IV Consultation,” IMF Country Report No. 14/235, July 2014.

  65. Arvind Subramanian, “The Inevitable Superpower: Why China’s Dominance Is a Sure Thing,” Foreign Affairs, September/October 2011.

  66. Ibid.

  67. Alan Wheatley, “Introduction,” in The Power of Currencies and the Currencies of Power, ed. Alan Wheatley (New York: Routledge, 2013), 13.

  68. Sebastian Mallaby and Olin Wethington, “The Future of the Yuan,” Foreign Affairs, January/February 2012.

  69. Ibid.

  70. These remarks trace historical precedents of the rise of other currencies, namely the dollar (from 1913 to 1945), the deutsche mark (from 1973 to 1990), and the rise of the yen (from 1978 to 1991). For additional analysis, see Jeffrey Frankel, “Historical Precedents for Internationalization of the RMB,” Council on Foreign Relations, November 2011.

  71. Fred Bergsten, “The Dollar and the Deficits: How Washington Can Prevent the Next Crisis,” Foreign Affairs 88, no. 6 (November/December 2009).

  72. Chang Shu, Dong He, and Xiaoqiang Cheng, “One Currency, Two Markets: The Renminbi’s Growing Influence in Asia-Pacific,” Bank of International Settlements, BIS Working Paper No. 446, April 2014.

  73. “The renminbi internationalisation project could even be a tool to help force through tricky reforms at home by opening the country’s capital account. The recently announced equity market link-up between Shanghai and Hong Kong is a significant step in that process, allowing investors from all over the world to buy Chinese assets without a license for the first time.” Josh Noble, “Grand Global Ambitions for Renminbi Sow Domestic Risk,” Financial Times, September 30, 2014. Also see James Kynge, “Emerging Markets Eye Renminbi Trading Alternative to Dollar,” Financial Times, September 30, 2014.

  74. Chinese scholars do not seem to shy away from this point. Dr. Zha Xiaogang, research fellow at the Shanghai Institutes for International Studies, made this point in public remarks at a fall 2012 conference on the RMB organized by the International Institute of Strategic Studies, saying, “On the geopolitics/geoeconomics side, the internationalization of renminbi, especially in East Asia, will strengthen China’s economic links with its neighbors and its influence on regional economic and financial cooperation (intraregional trade, Asian regional capital markets, crisis prevention and management), which is critical for stability in China’s backyard.” Zha Xiaogang, “Currencies of Power and the Power of Currencies: The Geopolitics of Currencies, Reserves and the Global Financial System,” IISS Seminar, October 2, 2012, https://www.iiss.org/-/media/Images/Events/conferences%20from%20import/seminars/papers/69658.pdf.

  75. Shu, He, and Cheng, “One Currency, Two Markets.”

  76. Andrew Batson, “China Takes Aim at Dollar,” Wall Street Journal, March 24, 2009.

  77. Shawn Donnan, “IMF Staff Say Renminbi Should Join Elite SDR Basket of Currencies,” Financial Times, November 13, 2015.

  78. Josh Noble, “Grand Global Ambitions for Renminbi Sow Domestic Risks,” Financial Times, September 30, 2014.

  79. “If implemented successfully, internationalization efforts will reduce the domestic political tension as the level of real taxation falls sharply over time. Despite wishful thinking in the West, this will likely help to consolidate the CCP’s power rather than ushering in democratization.” Di Dongsheng, “The Renminbi’s Rise and Chinese Politics,” in The Power of Currencies and Currencies of Power.

  80. Ibid.

  81. Ibid.

  82. Some within China’s leadership ranks have suggested that ending U.S. dominance of the monetary system is “as important as New China’s becoming a nuclear power.” Jiang Yong quoted in Geoff Dyer, David Pilling, and Henry Sender, “A Strategy to Straddle the Planet,” Financial Times, January 17, 2011.

  83. “Taiwan Eyes Currency Swap Pact with China,” Focus Taiwan, November 11, 2013; “Taiwan’s Yuan Deposits Down in July on Mainland Woes,” China Post, August 19, 2015. http://www.chinapost.com.tw/taiwan/business/2015/08/19/443620/Taiwans-yuan.htm.

  84. “Taiwan Eyes Currency Swap Pact with China.”

  85. Di, “The Renminbi’s Rise and Chinese Politics.”

  86. Henny Sender, “Iran Accepts Renminbi for Oil,” Financial Times, May 5, 2012. This article explains the move to begin settling the transactions in renminbi rather than U.S. dollars as “partly … a consequence of U.S. sanctions aimed at limiting [Iran’s] nuclear program,” and quotes sources describing how, “as a result of U.S. pressure, domestic [Chinese] banks … stopped dealing with Iran. Instead … much of the money is transferred to Tehran through Russian banks, which take large commissions on the transactions.”

  87. See, e.g., Jack Farchy and Kathrin Hille, “Russian Companies Prepare to Pay for Trade in Renminbi,” Financial Times, June 8, 2014.

  88. Bernard O’Connor, “Market-Economy Status for China Is Not Automatic,” Centre for Economic Policy Research, November 27, 2011, http://www.voxeu.org/article/china-market-economy.

  89. Chris Gelken, “When Is a Market Economy Not a Market Economy?,” Asia Times Online, June 5, 2004; Cassandra Sweet and Ryan Tracy, “Solar Firms Seek Duties in China Dumping Case,” Wall Street Journal, October 20, 2011.

  90. Nicola Casarnini, “China’s Geoeconomic Strategy: China’s Approach to US Debt and the Eurozone Crisis,” LSE Ideas SR012, London School of Economics, 2012.

  91. As three such examples, an August 2007 article in the Telegraph cited interviews with officials from two leading Chinese government think tanks who reportedly stated that China had the power to make the dollar collapse (if it chose to do so) by liquidating large portions of its U.S. Treasury securities holdings if the United States imposed trade sanctions to force an appreciation of the RMB, and that the threat to do so could be used as a “bargaining chip.” See Ambrose Evans Pritchard, “China Threatens Nuclear Option of Dollar Sales,” Telegraph, August 7, 2007. Second, according to August 2010 reports by Reuters and the New York Times, Chinese army Major General Luo Yuan, in an interview with Xinhua, stated that Beijing could “attack by oblique means and stealthy feints” to make its point in Washington. Luo continued, “For example, we could sanction them using economic means, such as dumping some U.S. government bonds.” See, e.g., Chris Buckley, “China PLA Officers Urge Economic Punch Against U.S.” Reuters, February 9, 2010. Finally, Ding Gang, a senior editor with China’s People’s Daily, wrote in an editorial in August 2011 that China should directly link the amount of U.S. Treasury holdings with U.S. arms sales to Taiwan, stating that “now is the time for China to use its ‘financial weapon’ to teach the United States a lesson if it moves forward with a plan to sell arms to Taiwan. In fact, China has never wanted to use its holdings of U.S. debt as a weapon. It is the United States that is forcin
g it to do so … to defend itself when facing threats to China’s sovereignty.” “China Must Punish U.S. for Taiwan Arm Sales with ‘Financial Weapon,’ ” People’s Daily, August 8, 2011.

  92. Wayne M. Morrison and Mark Labonte, “China’s Holdings of U.S. Securities: Implications for the U.S. Economy,” Congressional Research Service, August 19, 2013. For a dissenting view, see Benn Steil and Paul Swartz, “Dangers of U.S. Debt in Foreign Hands,” Council on Foreign Relations, June 14, 2010.

  93. Henny Sender, “China to Stick with U.S. Bonds,” Financial Times, February 11, 2009.

  94. David Singh Grewal, “What Keynes Warned about Globalization,” Seminar 601 (March 2009): 54–59.

  95. “Don’t Take Peaceful Approach for Granted,” editorial, Global Times, October 25, 2011.

  96. John Murray, Bank of Canada, remarks to the Peterson Institute, April 2, 2013, transcript available at www.piie.com/publications/papers/transcript-20130402-3.pdf.

  97. Jonathan Kirshner, “Bringing Them All Back Home: Dollar Diminution and U.S. Power,” Washington Quarterly 36, no. 3 (Summer 2013): 41.

  98. As New York Times reporter Keith Bradsher explained the growing spread between two-year and ten-year Treasuries: “China has been buying more Treasury bills, with a maturity of a year or less, than Treasuries with longer maturities.” Bradsher, “China Becomes More Picky about Debt,” New York Times, May 20, 2009.

  99. In late May 2009, the spread between two-year and ten-year bond yields widened to a record 2.75 percentage points. According to some, Beijing’s public questioning (together with other factors) tempered market enthusiasm about the Fed’s quantitative easing program and about the general economic outlook. See Alester Bull, “Federal Reserve Puzzled by Yield Curve Steepening,” Reuters, May 31, 2009. The yield on the ten-year Treasury note rose even further in subsequent days, touching a yield of 3.67 percent. See “Treasuries—U.S. 10-Year Note Falls Point as Selloff Deepens,” Alibaba.com, June 4, 2009, http://news.alibaba.com/article/detail/markets/100113817-1-treasuries-us-10-year-note-falls-point.html.

  100. Beginning around 2000, states such as China, Japan, and Korea began acquiring so many U.S. Treasuries that when the U.S. Federal Reserve raised interest rates in 2004–2005 in an attempt to cool the U.S. economy, their efforts had no upward, cooling impact on the prices of long-term bonds, including mortgage securities. In effect, China, Japan, and others proved themselves price-insensitive demanders of U.S. Treasury bills, actually increasing their purchases as bond prices went up—and thereby interfering with a fundamental channel through which the United States executes monetary policy. This phenomenon, labeled the “great conundrum,” remains the subject of intensive exchange among economists. Speaking at a G20 event in France in 2011, Federal Reserve chairman Ben Bernanke pointed to a role for net capital inflows in pushing longer-term interest rates below macroeconomic fundamentals. “Why was the United States, a mature economy, the recipient of net capital inflows that rose to as much as 6 percent of its gross domestic product prior to the financial crisis? A significant portion of these capital inflows reflected a broader phenomenon that, in the past, I have dubbed the global saving glut. Over the past 15 years or so, for reasons on which I have elaborated in earlier remarks, many emerging market economies have run large, sustained current account surpluses and thus have become exporters of capital to the advanced economies, especially the United States. These inflows exacerbated the U.S. current account deficit and were also a factor pushing U.S. and global longer-term interest rates below levels suggested by expected short-term rates and other macroeconomic fundamentals.” Full transcript available at www.federalreserve.gov/newsevents/speech/bernanke20110218a.htm. Daniel Thornton, in “Greenspan’s Conundrum and the Fed’s Ability to Affect Long-Term Yields,” Research Division, Federal Reserve Bank of St. Louis, Working Paper 2012-036A, September 2012, takes issue with the traditional explanation—that global savings glut is to blame for the great conundrum—advanced by Ben Bernanke (prior to his appointment as chairman of the Federal Reserve) as well as by others. But Daniel O. Beltran, Maxwell Kretchmer, Jaime Marquez, and Charles P. Thomas, “Foreign Holdings of U.S. Treasuries and U.S. Treasury Yields,” Board of Governors of the Federal Reserve System, International Finance Discussion Paper No. 1041, January 2012, argues the opposite case: “Longer-term bond yields are increasingly determined in international markets. This calls into question the ability of central banks to influence longer-term interest rates by the setting of short-term rates. For example, Greenspan … was concerned about the failure of the longer-term interest rates to rise after the Fed began tightening monetary policy starting in mid-2004. During this period, foreign purchases of Treasury notes and bonds were particularly strong and some studies … found evidence that these purchases contributed to lower bond yields. Such a decoupling of long-term interest rates from the short-term interest rate, which is set by the monetary authority, has important implications for the effectiveness of monetary policy. In addition, unexpected shifts in foreign demand for U.S. Treasuries could cloud the signals extracted from movements in long-term interest rates.” For a more accessible synopsis of this issue, see Chris Isidore, “Interest Rates: The New Conundrum” CNN Money, February 25, 2008.

  101. In the words of Robert D. Kaplan, “China’s hunger for natural resources … means that Beijing will take substantial risks to secure them.” “The Geography of Chinese Power,” Foreign Affairs, May/June 2010. See recent examples of Chinese strategic geoeconomic endeavors in Central Asia: “China Courts Central Asia,” Diplomat, October 4, 2013, and “China Is Pivoting to Central Asia—but Is Washington Paying Attention?,” Atlantic, October 28, 2013.

  102. Jeff Himmelman, “A Game of Shark and Minnow,” New York Times Magazine, October 27, 2013.

  103. Recent Chinese energy deals throughout Central Asia could, for instance, lessen over time China’s concern that the United States could use its superior naval power to enforce a sea blockade. Jane Perlez and Bree Feng, “China Gains New Friends in Its Quest for Energy,” New York Times, September 23, 2013.

  104. Morena Skalamera, “Pipeline Pivot: Why Russia and China Are Poised to Make Energy History,” Belfer Center for Science and International Affairs, Harvard University, May 2014.

  105. “China Pivots towards Central Asia,” International Affairs News Weekly, November 9, 2013.

  106. Brian Spegele and Wayne Ma, “For China Boss, Deep-Water Rigs Are a ‘Strategic Weapon,’ ” Wall Street Journal, August 29, 2012.

  107. Jane Perlez and Keith Bradsher, “In High Seas, China Moves Unilaterally,” New York Times, May 9, 2013.

  108. Ibid.

  109. Ibid.

  110. “Philippines Aims to Drill in South China Sea,” Voice of America, January 24, 2013; “Filipino-UK Firm to Drill for Gas in Disputed Sea,” Associated Press, September 26, 2014.

  111. Simon Hall, Edward Welsch, and Ryan Dezember, “China Push in Canada Is Biggest Foreign Buy,” Wall Street Journal, July 24, 2012; Euan Rocha, “CNOOC Closes $15.1 Billion Acquisition of Canada’s Nexen,” Reuters, February 25, 2013; “Oilsands Investment from China Shrinks after Nexen Deal,” CBC News, May 2, 2014.

  112. “Beijing Steps Up Effort to Diversify FX Reserves,” Reuters, January 13, 2013; “China to Use Forex Reserves to Finance Overseas Investment Deals,” Bloomberg Business, January 14, 2013.

  113. See George Chen, “Central Bank Eyes New Agency for Forex Investment,” South China Morning Post, August 7, 2013.

  114. According to August 2013 press reports, People’s Bank of China governor Zhou Xiaochuan “has assigned a division head of the foreign exchange regulator to lead a team to study the plan .… The new agency would be in addition to the China Investment Corp., the nation’s sovereign wealth fund, and may report to the central bank directly.” “China’s PBOC May Plan FOREX Unit, South China Post Says,” Bloomberg Business, August 6, 2013. Beyond searching for higher returns, such a move is also intended to broaden foreign exchange reserves beyond
the U.S. dollar, tapping more instead into the euro, the Japanese yen, the British pound, and others.

  115. Gabriel Wildau, “China Backs Up Silk Road Ambitions with $63bn Capital Injection,” Financial Times, April 20, 2015.

  116. Martin Wolf, “In the Grip of a Great Convergence,” Financial Times, January 4, 2011.

  117. Ibid.

  118. These two goals are often referred to as the “centennial goals” in China. Broadly, the Chinese strive to “complete the building of a moderately prosperous society and become a modern socialist country that is prosperous, strong, democratic, culturally advanced, and harmonious.” Robert Lawrence Kuhn, “Xi Jinping’s Chinese Dream,” International Herald Tribune, June 5, 2013; Chen Yonglong and Xue Junyin, “A Proper Path Will Help China through Its Growing Pains,” China-U.S. Focus, April 26, 2013.

  119. One of the longest-running sticking points in the negotiations centered on whether China would receive equity stakes in the “upstream” projects that would be sourcing much of the gas for the deal. China will receive equity under the terms agreed in May 2014, reflecting how bargaining power shifted toward Beijing as the negotiations wore on. This shift is the result of several factors, especially sharp increases in gas supplies globally, and a desire by Moscow to diversify its own customer base, as European purchasers signal seriousness on reducing their dependence on Russian gas.

  120. In May 2014, Beijing and Moscow signed an agreement for Russia to export 38 billion cubic meters of natural gas annually, a little more than half of the 65 billion cubic meters of natural gas that is expected to flow annually from Turkmenistan to China by 2020. See Abdujalil Abdurasulov, “China’s growing demand for Turkmenistan’s gas,” BBC News, November 20, 2014; and Meghan L. O’Sullivan, “New China-Russia Gas Pact Is No Big Deal,” Bloomberg View, November 14, 2014.

  121. Marat Gurt, “China Secures Larger Turkmen Gas Supplies,” Reuters, September 3, 2013.