President Obama has finally selected his ambassador to China—and not a moment too soon. Because Ambassador-designate Jim Huntsman was a rumored GOP presidential candidate for 2012, most of the press reaction has been about the domestic political ramifications of the pick. This inside-the-Beltway focus overlooks a minor fact: Huntsman is about to become the point man for the most important bilateral relationship in the world.
The Chinese government has not been sitting idly by while the Obama administration has gotten into gear. Put another way, there has been chaos under heaven, and Beijing's situation is excellent. Over the past two months, Beijing has made a series of moves that could be interpreted as a challenge to the American-led economic and financial order. In March, Prime Minister Wen Jiabao explicitly voiced concerns about the direction of U.S. fiscal policy at his annual press conference. Later in March, China's central bank governor, Zhou Xiaochuan, argued that the costs of relying on the dollar as the world's reserve currency now exceeded its benefits. He proposed the creation of "a super-sovereign reserve currency" patterned after the IMF's Special Drawing Rights (SDRs) as a way to diversify away from the dollar. At the G20 summit in London, Wen seemed to advance that goal with an agreement to expand IMF lending in SDRs by up to $250 billion. In what the Financial Times claimed was an effort to diversify away from the dollar, China has doubled its gold holdings over the past five years. In an effort to promote greater global use of the yuan, the People's Bank of China initiated $95 billion of bilateral currency swaps with countries as diverse as Belarus, Malaysia and Argentina. China also strongly supported expanding the Chang Mai Initiative, a burgeoning ASEAN+3 arrangement of currency swaps. According to the Financial Times, Brazil is in preliminary negotiations with China to eliminate the use of the dollar from their bilateral trade.
Beijing's flurry of activity is starting to make Americans jittery. Foreign-policy heavyweights are furiously debating the virtues and dangers of developing a new "G2" with China. Congressman Mark Kirk recently warned a group of Chinese-Americans that "China has canceled America's credit card." Economist Nouriel Roubini told The Washington Post that "already in a month [China has] done more than in the last 10 years." But surely the United States could pressure Beijing to change these policies? China watcher Nicholas Lardy soberly concluded, "We have no leverage."
Should Obama and Huntsman be jittery about China? Not really. Break this down into what happens in the long term versus the short term. Over the long run, China will eventually approach the United States in terms of relative power and influence. This is not terribly surprising, however. Both private- and public-sector analysts have been making this prediction in recent years. Indeed, the rise of China is a key theme that runs through the National Intelligence Council's Global Trends 2025 report. For now, however, China's GDP is still less than half that of America's. It will be some time before Beijing catches up to Washington.
As for the short term, most of China's actions have actually been quite modest in scope. Chinese officials acknowledge that the dollar will remain the reserve currency for quite some time. China's currency swaps are microscopic when compared to the trillions in assets and goods that are traded in dollars. Some of the stories have been hyped beyond the actual data. The doubling of China's gold reserves, for example, does not demonstrate diversification away from the dollar. Since the total value of China's foreign-exchange reserves has increased 10-fold during the same time period, the percentage of its total reserves in gold has fallen to 2 percent. Beijing has actually diversified away from gold.
If these moves do not amount to much, then why all the hubbub? To be blunt, America is out of practice at dealing with an independent source of national power. For two decades the United States has been the undisputed global hegemon. For the 40 years before that, America was the leader of the free world. As a result, American thinkers and policymakers have become accustomed to having all policy decisions of consequence go through Washington. Our current generation of leaders and thinkers are simply unprepared for the idea of other countries taking the lead in matters of the global economic order.
Most of China's recent actions do not constitute a real threat to the United States; indeed, to the extent that China helps to boost the economies of the Pacific Rim, they are contributing a public good. Obama—and Hunstman—need to make the mental adjustment to a rising China, welcoming many of China's policy initiatives while pushing back at those that threaten American core interests. If they can make this cognitive leap, then Sino-American relations can proceed on the basis of shared interests rather than mutual fears.