204) China: again on the spot...

Transcrevo parte do boletim diário (de 3 de fevereiro de 2006) do G7 Group, um grupo de consultoria que representa o pensamento e os interesses do establishment americano interessado em política e economia internacionais. Ele não tem vínculos com o governo, apenas com os interesses econômicos dominantes na sociedade americana.

Chinese Politics -- Assessing Geopolitical Challenges

As we kick off the Chinese lunar new year of the dog (actually fire dog), the continuing political turmoil in the Middle East and escalation of the Iran nuclear program have clouded the geopolitical risk horizon. But from China's perspective, there have been some positive developments in the Sino-US relationship. Last September, Robert Zoellick, US undersecretary of State, addressed China as a "stakeholder" of the US and encouraged it to be a responsible one. In our opinion, this view has been positively received by the Chinese government, although it's also well understood that there is a price to pay for this "high hat" (compliment). With that in mind, let's review China's policies on a variety of geopolitical issues that affect the financial markets:

- Iran nuclear program. China was caught in a dilemma - it wants to be seen as a responsible and rising power by the US and EU in supporting nuclear nonproliferation, while trying to maintain a good relationship with Iran to protect its commercial interests (energy supply) and security interests (cooperation to rein in Islamic separatists in Xingjiang). The situation is extremely fluid. As of a few days ago, some progress in de-escalating the situation was achieved through a consensus among the five permanent members of the UN Security Council to report (note: not refer) the case to the Council. It's not surprising that China agreed to report the case to the Council, since it did so before when handling the N. Korea nuke crisis. Any decision on the formal referral won't happen until a scheduled IAEA meeting on Mar. 6. With the IAEA reporting finding documentation on the fabrication of nuclear weapons components at Iranian facilities, the level of tension has risen again. As of today, Iran warned of retaliation should its case be referred to the Council.

China hopes that the diplomatic window from now to early March will allow not only negotiation between the EU-3 and Iran, but real progress as well, and it advocates resolving the issue within the IAEA framework (rather than though sanctions, which the US may support). But make no mistake here, in contrast to what some political analysts have argued, China, just like the US, does not want to see Iran develop nuclear weapons. That said, China holds the view that peaceful utilization of nuclear power is Iran's legitimate right and should be respected, provided that Iran strictly complies with the NPT, since it is a treaty member. As such, China has welcomed Russia's proposal to enrich uranium in Russia on behalf of Iran - at the end of the day, those nuclear reactors are Russian's products and Russia should be the main broker for Iran in reaching a deal. From China's perspective, the best scenario would be for Iran to agree to Russia's compromise proposal soon.

- Cross-Strait relations. Direct confrontation should be less of a concern in 2006 because Chen Shuibian, the incumbent Taiwanese leader, wasn't and perhaps will not be given a mandate by Taiwanese voters to escalate.
However, that didn't prevent him from making provocative comments in his New Year and Chinese New Year speeches, including porposing scrapping the reunification guideline, drafting a new constitution and bidding for a UN seat in the name of Taiwan. China decided not to rise to this bait, and these talks failed to stir up much reaction from Beijing. Since mainland China passed the "Anti-Secession Law" last March, it has become less sensitive to Chen's provocative rhetoric. Interestingly, the US, apparently tired of Chen's brinksmanship, responded immediately by reiterating its long-standing "one China" policy and opposition to any change in the status quo by each side.

After the ruling DPP party's defeat in last December's county-level elections, Chen wasted no time in consolidating his power, for fear of being a lame-duck for the rest of his term. He has named his confidantes to positions in the cabinet and as chairman of the party. Moreover, it appears to us that Chen's cross-Strait policy stance shifted to woo the hard-core pro-independent fundamentalists of the DPP, a strategy to secure his legacy post-2008 and reposition the party for coming municipal elections in Taipei and Kaoshiong. China sees him as weakened considerably, but still in a position to cause trouble, though less than before last December. Overall, as both China and the US share an interest in maintaining the status quo across the Strait, and because the opposition KMT party now controls the congress and most counties, Chen's confrontational words won't carry much weight and may backfire.

- North Korea. No matter how unpopular Kim Jong-il is in western counties, he is respected by the Chinese government. Kim's nine day "secret" trip to China followed almost the same route as former President Deng Xiaoping's southern trip in 1992, a trip which jumpstarted China's opening-up and reform process. China hoped the whole experience would be mind-opening for Kim and that it could produce some change to his strategic thinking about N. Korea's future. (Recall that Kim criticized China's reform efforts as "revisionism" not long ago.)
From China's perspective, the western media, having focused on how closely China controlled information about the trip, largely failed to appreciate China's efforts to convince Kim to take a different approach to managing his country's economy. China recognizes that Kim and the N. Korea regime have their dignity, so it is careful in its criticism, especially in public. China is optimistic that the fifth round of six-party talks is not far off. Moreover, there is some expectation that N. Korea may speed up experimenting with market mechanisms, in addition to opening up the long-existing kiosk capitalism experiment.

Bottom Line: From China's perspective, there has been progress on some geo-political issues where the US and China have common interests: Iran nukes, cross-Strait tensions, and North Korea. There is no final resolution to any of these, but the working together has been productive.