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11/11/2009

To keep prices on the global market artificially low for its shoes, T-shirts and computers, in July 2008 China began taking steps once again to ensure that its currency, the yuan, remains de facto pegged to the dollar. In doing so, however, China is accumulating bigger and bigger foreign currency reserves. To prop up the artificial exchange rate, the Chinese central bank has to siphon off massive dollar sums from the market.

Through its promotion of exports, China is doing more than just expanding the existing imbalances. The rising economic power is also risking serious trade conflicts with the United States. However, Washington, because of its strong interest in good relations with Beijing, is currently reluctant to officially denounce China as a "currency manipulator."

Nevertheless, as the world saw in September, trouble can easily erupt between the two countries. To protect US manufacturers against cheap Chinese tire imports, the otherwise docile Obama approved the imposition of punitive duties of up to 35 percent.

The Chinese promptly threatened to impose retaliatory duties on imported American chickens and auto parts. They recently imposed punitive duties against certain synthetic fiber imports from the United States and Europe. In return, Uncle Sam imposed provisional anti-dumping tariffs on Chinese steel.

Danger of Friction

Obama and his host, President Hu Jintao, who is also the general secretary of the Chinese Communist Party's central committee, are determined not to allow such friction to overshadow their summit. The United States is hoping to exact concessions from the Chinese on issues like climate change. Conversely, it will take China years to disconnect itself from the American consumer market.

In the spring, Zhou Xiaochuan, the governor of the Chinese central bank, forcefully argued that the US dollar be replaced as the dominant reserve currency in the long term by a new, artificial world currency. But as long as their yuan is not even freely convertible, the Chinese have no choice but to invest in the dollar.

At the same time, public pressure is building on both sides to demonstrate strength on trade issues. In the United States, generous government bailouts for half-defunct Wall Street firms turned into an acid test. Many became bitter over the fact that the bankers responsible for the crisis were being bailed out, while millions of Americans have lost their jobs, houses and retirement savings. The funds from Obama's $787 billion economic stimulus package are only gradually trickling down into local projects to stimulate growth.

The shopping spree the Chinese have planned could also trigger resentment, as they prepare to buy up American high-tech companies in a big way. To ensure that everything goes smoothly, Beijing's Ministry of Commerce posted a guide to Chinese investment in the United States on the Internet this summer.

Don't Slurp

In the more than 100-page document, the Chinese bureaucrats advise would-be investors to make tactical adjustments to conform to practices in capitalist America. They even include tips on how to behave, suggesting, for example, that women should wear skirts to work, rather than jeans. Chinese buyers are also advised to brace themselves for objections coming from the unions, to take things slowly, pay regular visits to the offices of relevant members of Congress and maintain good relationships with journalists -- and not to slurp while eating soup.

But not everything that leads to economic success can be planned and decreed from above. The People's Republic has yet to produce brilliant entrepreneurs like Henry Ford or Steve Jobs, nor has it come up with any global brands. The West, particularly the United States, is still ahead of China when it comes to creativity.

Besides, it is not at all certain that China's upward progression to the top will be as inexorable as it seems today. Indeed, there is a long list of possible setbacks. Economists see recent developments as a "China bubble" that could burst very soon, and Beijing could also face intensified ethnic conflicts such as those involving the Uighurs and Tibetans, while social unrest could shake the country to its core.

Mastering the Jargon

There is no evidence of such doubts in Chengdu, a city of 11 million people located 1,800 kilometers from Shanghai. The skeletons of new office towers are popping up everywhere, and streets are being torn up to build a new subway system.

Chengdu is the home of Sichuan Tengzhong, the new owner of the Hummer brand. Global brands from Motorola to SAP are developing new products there, and Intel is moving its Chinese production facilities from Shanghai to the city -- partly because wages in Chengdu are generally 50 percent lower.

If the Chinese have their way, Chengdu will be the next Silicon Valley. The local software industry already employs 80,000 people, a number that is expected to at least double within the next three years.

From his office on the 10th floor of a modern glass office tower, Xu Liming has a view of the city's high-tech park, an 87-square-kilometer (34-square-mile) zone. He is one of the administrators of the park, one of the tens of thousands of efficient economic managers one encounters in China today. He is passionate about China and the party, but he has also mastered the jargon of the Western investors who are constantly coming to see him.

Xu has been busier than ever since the global economic crisis began. His job is to speed up the pace of China's acquisition of cutting-edge technology. And Xu knows how best to convince Western corporate executives to produce in Chengdu instead of at home.

Air pollution? We are working on this problem very intensively, he says. A Western-style hospital? Already planned, he says. Start-up funding? Our government banks take a professional and flexible approach to examining loans, he promises. Transportation? We can deliver goods anywhere in the world within 24 hours, he says, and we are also building a second, larger runway at our airport.

China's West, says Xu, is a growth market that no one can ignore anymore. "The global crisis is our big chance."

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• Part 1: Global Crisis Makes US More Dependent on China than Ever
• Part 2: 'Let the World Imitate Us!'
• Part 3: The Risk of Trade Wars