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Chinese President Hu Jintao's Meeting with President Obama

Speakers: Elizabeth C. Economy, C.V. Starr Senior Fellow and Director for Asia Studies, Council on Foreign Relations, and Steven Dunaway, Adjunct Senior Fellow for International Economics, Council on Foreign Relations, and Author, "Global Imbalances and the Financial Crisis"
Presider: John Pomfret, Adjunct Senior Fellow for China Studies, Council on Foreign Relations
January 19, 2011

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OPERATOR:  I would now like to turn the conference over to John Pomfret.  Sir, please begin.

JOHN POMFRET:  Hi, everybody, and welcome to the conference.  I'd hope -- now I'd like to turn -- sort of start by asking both Steve and Liz a first question to get the conference going.  And that's basically on the U.S. policy towards China.  Hu Jintao is coming to the United States for his second and probably last summit with President Obama, and he comes to the States at a time of friction in the U.S.-China relations.  And I'd like to get Steve and Liz's perspective on sort of the course of the U.S.-China relations so far and whether the Obama administration, in their perspective, has changed its tone and even its policy in dealing with China over the last two years since they've been in office.

ELIZABETH C. ECONOMY:  Okay.  Steve, do you want to start off, or --

STEVEN DUNAWAY:  Oh, okay.  Well, on the -- on the economic side, you know, the basic issues have kind of remained the same.  You know, right now the indigenous innovation policy in China, intellectual property rights, and of course the exchange rate are the three key issues.  And at least the intellectual property rights and the exchange rate are old and long-standing issues.  And I think there's increasing frustration, particularly on the exchange rate issue, with the pace at which the Chinese had advanced.  And that has been reflected, I think, in a -- in a toughening of the stance of the -- of the administration over the past two years.

It was first displayed, I guess, in the tire case back in 2009 when duties were imposed on Chinese tires.  And it's continued since then.  And I think Secretary Geithner's speech last week kind of summarized pretty well, you know, what -- the key frustrations and that, you know, foremost on the economic front is the problem with the exchange rate.

ECONOMY:  Okay, I think in moving -- sort of expanding out into the political and security realms, I think there's been a pretty significant shift actually, John, in the way that the U.S. is approaching China now.  I think at the outset of the Obama administration there was a lot of hope about potentially expanding the U.S.-China relationship from what had taken place during the Bush years, raising it to a new level.  And I think there was this sense that if we simply extended our hand, that the Chinese would put their hand in it and together we would begin to sketch out the future of how, together, we could address, you know, all the global challenges that confront our two countries and the rest of the world.

But I think that, frankly, beginning with President Obama's meeting with President Hu Jintao in Beijing over a year ago, and then moving to Copenhagen and a number of events over the course of 2010 -- you know, the Google and Chinese cyberhacking; and the, you know, disputes in the South China Sea, the way that China has dealt with the other claimants to the disputed territory; its, you know, reflexive sort of protection, defense of North Korea's aggression, obviously its dealings with Japan, and then, I think, culminating in, you know, how the foreign ministry tirade against the Nobel committee for awarding Chinese political activist Liu Xiaobo at the Nobel Peace Prize -- I think all of these events have caused a kind of reappraisal of, you know, what China is ready to be in terms of a global power and the kind of stance the United States needs to take in order to work with China.  I think as Steve pointed out, it's reflected in Secretary Geithner's speech, in Secretary Clinton's speech and, I think, in the remarks made by Secretary Gates there's a much more realistic sense of what's going to be needed to bring China around to work cooperatively with the U.S.

POMFRET:  Thank you.

Are there any questions from our participants?

OPERATOR:   At this time we will open the floor for questions.  (Gives queuing instructions.)

Our first question comes from Greg Robb from marketwatch.com.

QUESTIONER:  Good morning.  I'd like to ask about the currency issue just for -- I got the sense from Treasury Secretary Geithner's comments where he's talking about you can't just look at the exchange rate alone, you have to kind of factor in inflation and somehow the U.S. was -- is sort of not -- was, you know, taking a step back in -- on the currency issue and, you know, sort of saying that it's appreciated by 10 percent when you do that.  And is that (near ?) -- but you seem that -- to say that they're frustrated.  I don't know.  Could you square that circle somehow?

DUNAWAY:  Sure.  I guess -- I guess you could look at his remarks two ways.  And one is the way -- the way that you suggested.  The other is a lot of what he was saying in that portion of his speech was to try to convince the Chinese that if they're concerned about inflation, then allowing the exchange rate to appreciate is a good way to deal with it.

Plus, you just have this -- the basic facts of life in economics, that you're going to get currency appreciation in one of two ways eventually.  Either it's going to come by you allowing the nominal exchange rate to move or by inflation -- inflation rising in your country, and so the real exchange rate changes that way as well.  And you're better off with a nominal exchange rate move than with the real exchange rate move.

You know, if the -- I guess the other aspect of it is that if you look at it carefully, the real appreciation of China's currency hasn't been as great as the secretary suggested.  The Consumer Price Index is not a really good indicator for Chinese competitiveness, because most of the inflation that's occurred in China thus far has been predominately food prices, and those things don't have a big impact on production, production costs, at least in the -- at least in the near term.

So that if you look at the CPI in China excluding -- excluding food, you see that the rate of increase there is only about 1 -- between 1 to 2 percent.  So the appreciation is more in line with the nominal appreciation than it is the real.

The other thing is, if you look at -- the BLS compiles a series on import prices of Chinese goods.  And that's only increasing at a 3-1/2 percent.  So the price of Chinese goods, at least in the United States, is rising less than the rate of -- the annual rate of appreciation in the exchange rate.  So, you know, there's still a lot of room for problems.  And the secretary did say that the expectation was to see an increase faster than 6 percent, even, in the exchange rate.

QUESTIONER:  Could I follow up?  So you think they're going to press Hu this weekend for more on the exchange rate?

DUNAWAY:  Yeah, I think so.  I think so.

OPERATOR:  Thank you.  Our next question comes from Chandrakant Pancholi from Overseas India.

QUESTIONER:  Hi.  Just staying on the exchange rate, since -- I'm Chandrakant Pancholi from Overseas India Weekly.  Just staying on the exchange rate, we are talking since several years and requesting them to get adjustment.  Are we going to take some sanctions?  Because it presently looks like it will be just talking and there will be minor adjustments will be there.

And the second question I want to raise about territorial ambition of China, because it is going to expand.  On Himalayan borders, there are small kingdoms, like Bhutan.  Nepal is gone.  Tibet was gone long time ago.  And there is -- on Pakistan side, they are occupying some part of Kashmir.  And India is not (a match ?).  Can we somehow arm Japan, let's say, on the other side to help a territorial balance there?

DUNAWAY:  Okay, well I'll start with the exchange rate question, and then Liz can take the second one.

The problem is, is you're already starting to see, you know, some sanctions, as you put it, in terms of there's a rise in various types of trade actions, both anti-dumping and countervailing duty transactions -- actions on a bilateral basis, and cases filed in the WTO against China.  And that kind of thing has picked up considerably over the past couple of years.  And there's the possibility that it could get worse.

Now, the hope is that the Chinese will see that, you know, even from their own point of view, it's clearly in their own best interest to allow the exchange rate to appreciation more rapidly as part of, and an essential part, of this rebalancing of their economy away from heavy dependence upon exports for growth.

So we would hope that there will be accommodation by the -- (inaudible) -- flexibility in the exchange rate.  Otherwise, the expectation would be, yeah, there would be more in terms of trade policy actions.  And, you know, things could play out between the U.S. and China very similar to what occurred with Japan back in the 1980s.  And that was not really an advantage in the long run, as well as in the short run, to both countries at that time.

QUESTIONER:  Just, though, one thing.  China is our banker, also, right?  Because it is financing our Treasury bills and Treasury bonds particularly.

DUNAWAY:  Yeah, but that's --

QUESTIONER:  (Inaudible) -- they already started moving out.

DUNAWAY:  No, they haven't started moving out.  The Chinese have no choice.  If they want to continue to build up substantial amounts of reserves, they have no place to put the money but in the U.S.  And on top of it, they cannot dump U.S. assets without creating a tremendous problem for themselves.  For the U.S., it has no effect at the end of the day, because if the Chinese don't buy, someone else does, maybe at a higher rate, and maybe in the short term to prevent any liquidity disruptions, the Federal Reserve steps in, as it's already doing, and buys Treasury securities to keep the market going.

So this idea that Chinese dumping of U.S. assets would create a big disruption in the (U.S. ?), it's not -- it's not really something that you would expect to have a significant impact.

ECONOMY:  Okay.  With regard to the question of, you know, Chinese sort of territorial ambitions and the potential for Japan to take a much more active role, I think there are two separate issues, really, and the first is, you know, what are Chinese territorial ambitions?  And I think, you know, we've begun to see just in the past year or so a much louder voice emanating from Chinese military, in particular from Chinese -- People's Liberation Army Navy, talking about China's more expansive security interests.  So we've moved in the past two years from a sense that China has a, you know, near seas defense to now what they call a far coastal defense.  And they make this argument largely as a means of saying:  We need to protect our economic interests, which now extend to Africa, you know, obviously through Southeast Asia, Latin America.

So I think there's one sense of sort of a growing a sense of China's role -- its military role and security role globally, and then I think the territorial disputes which we saw flare up this past summer, certainly with regard to the South China Sea and also Japan, the East China Sea.

So I think there is a sense that China's military is increasingly, you know, sowing its oats, flexing its muscles, trying to see, you know, what it can do and where it can go.

With regard to Japan, I know Japan did issue, you know, new defense guidelines just, you know, at the end of this past year, at the end of 2010, and the Chinese responded.  So the Japanese talked about making their Self-Defense Forces more mobile, right, more flexible.  And the Chinese respond and say, you know, what's the point of this?  (Chuckles.)  The Chinese were quite concerned when the Japanese started to talk about shifting around their Self-Defense Forces.

But they are still Self-Defense Forces, and in order for Japan to become a more -- you know, a -- sort of a larger military security player, not simply really relying on the umbrella of U.S. security, would require, I think, a very substantial debate within Japan about rearming Japan.  And I think, you know, there has been periodically -- over the past decade or so these kinds of discussions have popped up, and as China's military continues to sort of demonstrate a little more assertiveness, I think those discussions in Japan will become more lively and more heated and more urgent.  But I think right now it's really an issue of Japan's domestic policy whether or not it chooses to rearm itself in a significant way and move past its sort of Self-Defense Forces.

QUESTIONER:  About Taiwan, just one more --

POMFRET:  Sure.

QUESTIONER:  -- about Taiwan, is it our policy -- do you think that we are going to defend Taiwan -- (inaudible) -- or are we going to be out of it?  Because it is already gone.  Because I was talking with -- a few years back I was talking with a general who had -- a commander of our Pacific Fleet was -- who has retired, and he said that we cannot defend Taiwan, because if one Chinese missile hits our fleet, 3,000 soldiers will be lost, and how am I going to show my face in the United States?

So do you think we have a comprehensive policy of defending Taiwan, or we are not going to do it?

And just last one:  Are we doing something -- how do you think that China can become a democracy?

ECONOMY:  (Chuckles.)

QUESTIONER:  Are you trying anything --

ECONOMY:  (Chuckling.)  Okay, these are -- these are big questions (that you're asking ?).

DUNAWAY:  (Chuckling.)  They're large questions, yes.

ECONOMY:  Okay, let me just answer quickly.

Look, we have a policy called the Taiwan Relations Act, which commits the United States to maintain for the defense of Taiwan, right?  So it commits us to provide for the adequate defense of Taiwan, and we do that largely through our arms sales and through some assistance in training and coordination with the Taiwanese military.

You know, I think our goal, frankly, has been, you know, over the past decades and will continue to be to seek, you know, a peaceful resolution in the dispute between Taiwan and the mainland.  And I think that they have made a lot of progress, actually, in the past few years, you know, toward at least, you know, sort of lessening the heated rhetoric, and certainly economic ties have taken a significant jump in just the past year and a half or so.

So I think, you know, the signs, frankly, point in a positive direction.  We do have this Taiwan Relations Act, though, that does commit us to maintain for the defense of Taiwan.  So I think there's an element there that -- you know, that we are committed by our law.

As far as the democracy in China is concerned, you know, there are many forces that are pushing for political reform within China.  And, you know, one of them is currently sitting in jail, right, Liu Xiaobo, the Nobel Peace Prize winner.  I think, you know, change is coming in ways that perhaps were not entirely expected, right, through the Internet, the use of the Internet, which I see as a(n) almost virtual political system at this point, right.  There's, you know, Internet justice, where people go after corrupt officials, where judicial decisions are reversed because of Internet campaigns.  There are kind of iconic figures on the Internet, you know, with blogs, who talk about the need for greater political reform.

I think, you know, the Internet is proving to be a vehicle for transparency, right, where information goes across that not necessarily the government is releasing, but people get access to it and it's available to people throughout the country.

So I think, you know, there are changes afoot in China that push -- are pushing for political reform, but, you know, they're moving slowly.  And I think the central government and the standing committee of the Politburo have been very reluctant over the past eight years, since Hu Jintao took power, to really advance the cause of substantial political reform.

OPERATOR:  Thank you.  Our next question comes from Song Wong Yang (sp) from Radio Free Asia.

QUESTIONER:  Thanks.  On North Korea, first, what's the difference position between the United States and China on North Korea issue now?  And second one is what kind of agreement can be made on North Korea issue do you expect on this summit?  And finally, I mean, do you think after the summit six-party talks can be resumed relatively soon, do you expect?  That's all.  Thank you.

ECONOMY:  Well, you know, one of the positive notes that the U.S. and China have been sort of touting in the past several weeks has been increased cooperation between the United States on this issue of North Korea.  It seems to me that the breakthrough came primarily after Bill Richardson made his trip.  But then, soon thereafter we began hearing that China indeed was pressing North Korea to, you know, stop its kind of aggressive and assertive actions.

At the same time, you know, it's not clear to me exactly what substantive steps forward the United States and China are making with regard to North Korea.  North Korea has said -- has made some noises about allowing the, you know, IAEA inspectors back in and, you know, sort of taking some steps to moving toward the resumption of the six-party talks. So I think we'll have to wait to see what the reality is of this U.S.-China cooperation and, you know, whether we're going to get North Korea to take the steps necessary that I think South Korea and the United States both, and Japan, all want to see North Korea take before we're willing to sit down to the six-party talks.

It's clear China was willing to have six-party talks resume even before North Korea did anything.  But I think the -- you know, the other -- Japan, South Korea and the United States are not willing to simply take North Korea's word for it any more.

I'd also just point out that there seems to be some -- you know, some movement of Chinese troops into an area where the Chinese are developing port facilities in North Korea, too.  And this is sort of interesting, and I think we'll have to wait to see what the implications of this might be.  Ostensibly, they're going in to protect Chinese civilian interests, right, and economic interests, but it's not clear to me why they would need to be posted there.  So I think that's a new little wrinkle in the situation that bears watching.

DUNAWAY:  And we don't really know from whom are they being protected.

ECONOMY:  Right.  (Laughs.)

DUNAWAY:  Just sort of an open question.  It's an interesting thing the Chinese would do at this moment.

OPERATOR:  Thank you.  Our next question comes from Ralph Winnie, from the Diplomatic Courier.

QUESTIONER:  Yes, thank you.  What do you think the Chinese feel is the greatest impediment for Chinese companies that are trying to do business in the U.S.?  And what is the emerging Chinese attitude towards the U.S. as an investment partner?

DUNAWAY:  Well, I guess the -- you know, it goes back to, you know, some of the -- some of the past deals that have not gone well.  That -- you know, as -- in China there are certain less -- (audio break) -- that are relatively sensitive, and so investment in those areas would be questionable.  You had the recent circumstances with Huawei and its purchase of some telecommunications firms and the sale of their telecommunications equipment in the United States.

So there's still some serious national security questions involved, and that, I think, has a big influence on -- at least in certain areas of the U.S. economy -- influence on whether or not Chinese investment will be allowed in.

POMFRET:  Can I make just an addition to that?  I think Steve is absolutely correct that on some of these deals there's a real concern among the Chinese.  And a lot of the bad press that was surrounding the CNOOC deal when they attempted to buy Unocal, and also Huawei when it tried to buy 3Com.

But that said, Chinese investment in the States is now up to around 11.7 billion bucks, and it's jumped about 80 percent from 2008 until -- to the end of 2010.  And you see an increasing number of Chinese delegations coming to the -- America sort of on buying missions, not to buy American goods, but they want to buy American companies.

About -- an estimated about 10,000 Americans are currently employed by firms owned by China in the United States.  So there's a sense among people who are following this and advising the Chinese that there's a real interest, both among state-owned companies and also among private companies, Chinese companies, of buying into the America -- especially now because a lot of the American assets are distressed.  So they can get a good deal.

But you definitely have a sense that that investment is actually going to begin to increase.  So there's a lot of optimism but, you know, there's been optimism before.  But still, it's been interesting -- over the last two years it's gone up about 80 percent.

ECONOMY:  And of course, I think, John, you may even have written on this.  I think along with that optimism is some concern, right?  Because there is a little bit of worry that in fact, yes, they're going to come and buy these U.S. companies and then they're going to take whatever technology is useful and close down the firms.  So --

MR.      :  Well, that's exactly right.  I mean --

ECONOMY:  That's the -- that's the little (coda ?), which brings it back around -- (chuckles) -- to what Steve was talking about in a way as well.

MR.     :  Right.

ECONOMY:  So I think it's just -- I think there's just -- there is concern, I think --

MR.     :  Yeah.

ECONOMY:  -- as well as the optimism.

POMFRET:  An example is actually one of the biggest deals last year, which was CNOOC.  Again, they returned to America, and they bought into this shale gas technology, shale oil technology operation in Texas.  And the concern is that CNOOC is basically going to get the American technology, going to use it, obviously, to produce shale oil down in Texas, but then they're going to take it around the world and compete with American companies in pushing shale -- shale oil and shale gas technology and fracking technology elsewhere.

So that's -- it has sort of a double-edged sword.  Chesapeake needed the 1-billion-some-odd dollars to actually get the project going, but the tit-for-tat is that they're going to actually have to give up their technology to CNOOC.  And CNOOC is in the business of -- it's in the oil and gas business.  It's probably going to be a competitor.

So like Elizabeth said, there's definitely a sort of double-edged sword here.

OPERATOR:  Thank you.

Our next question comes from Steve Collinson from AFP.

QUESTIONER:  Thanks.  Could you talk a little bit about what the Chinese could get from this summit that would allow them to walk away and say this was a success?  Is it, you know, just about face and prestige, or there's some sort of concrete concessions they want to get from the U.S.?

And this will likely be Hu's last big visit, the first and last big state visit to the United States.  Could you sort of hazard a guess of how history might judge his tenure as it relates to U.S.-China relations, please?

ECONOMY:  Sure.  Let me take a first crack at that.  I think that what you suggest is essentially that the optics matter most for the Chinese at this point.  And I think that's probably right.  You know, much has been made of past gaffes when President Hu came to visit, and so they're eager, of course, to avoid, you know, any sort of embarrassment.

I think they're excited at the prospect -- you know, they have the smaller dinner with President Obama; they have the state dinner.  They have basically everything they've asked for in terms of providing viewers back in China with the sense that President Hu Jintao and China have arrived and, you know, are sitting side by side with the U.S. president on, you know, equal footing, equal standing.

In terms of concrete sort of gains, you know, the Chinese, of course, have their own wish list of things that they want.  You know, they want sort of --  you know, the barriers to the export of high tech products to be, you know, reduced, if not eliminated.  They want, you know, a kind of acknowledgment yet again of Chinese sovereignty over Taiwan and the sort of Tibet issue and the Dalai Lama and China's core interest, you know, recognition and respect for China's core interests.

And I think they want and are certainly making a lot of noise about getting reassurance about the stability of the U.S. dollar and the strength of the U.S. dollar.  And so I think there's, you know, sort of a new third issue that they are bringing to the table.  You know, I think after that, of course, you know, they're going to stake out their interests.  We're going to stake out our interests and I think both sides want to see some progress.  We've made some progress on the margins, it seems, with North Korea, with climate change, you know, on Iran.

And I think, you know, President Hu Jintao wants this relationship to be stable, as does President Obama, and he wants to leave Washington and Chicago with the sense that he and President Obama have set the relationship on a positive course.  You know, even if we're not going to sketch out the future of the world together, I think he wants to leave the United States, you know, with a positive sense for both the people in China and the people here.

So that's my sort of general sense for, you know, what the Chinese want to get out of this summit.  And he's come out swinging strong, you know, so I think, you know, comments about the U.S. dollar and, you know, this being the era, you know, this being the era, you know, the century of the U.S. dollar is over, et cetera -- I think he's trying to enter from a position of strength.

DUNAWAY:  If you look at -- look at Secretary Geithner's comments to, you know, on the economic side, you know, he did kind of -- he mentioned the possibility of reconsideration of some of the restraints on high tech exports.  And he also acknowledged an old Chinese criticism that the U.S. is trying to blame China for a lot of its own problems by saying, you know, the U.S. needed to do things on its own in addition to the problem with China.

 

So I guess the one area in which the Chinese might be able to claim that there is a big gain would be if out of this there would come some quid pro quo between, say, exchange rate, exchange rate appreciation and some loosening on the restrictions on high tech exports.  The other big prize that the Chinese want is market economy status and I don't think that's going to happen, and that hasn't even been discussed.

OPERATOR:  Thank you. (Gives operating instructions).

Our next question is from Andrea Marder (sp) from -- (inaudible) -- newspaper.

QUESTIONER:  Yes.  Hi.  I'd like you to elaborate a little bit if you could on the development of the attitude of the Obama government about China, which is considered to have been -- become more -- becoming more assertive over the last month as opposed to in the beginning of his administration.  And also if you think the change in the leadership of Congress will make much of a difference in terms of public pressure against China.

ECONOMY:  Well, again, I think, you know, at the outset the Obama administration believed that it could make substantial progress with China on addressing sort of the full range of global challenges, whether we're talking about proliferation or, you know, global climate change or on bilateral issues, you know, currency, if it were willing to, you know, extend its hand and China, similarly, would extend its hand.  And I think that they quickly discovered that that wasn't going to work, and I think, in part, of course, you know, this took place, the Obama administration entered, you know, at a moment of great U.S. financial, you know, crisis.  And I think the global financial crisis further gave the Chinese leaders and foreign policy analysts a sense that the U.S. was in decline and, you know, for some, that the moment for China was now and so they ought to seize the moment.

And so I think there was sort of -- as the United States seemed to be receding, China seemed to be expanding.

And then, again, as I mentioned, I think, you know, with what I would term a series of Chinese missteps in this calculation, some of them of their own making, some simply in response to events, you know, that challenged them, I think, the United States gained a kind of unexpected lift over the course of 2010.  And I think there was also a new appreciation within the Obama administration that being nice to China wasn't the answer, that in fact, Chinese respect strength, and that in order to make progress with China, yes, of course, we need to engage.  We need to have dialogue.  We need to work through issues, you know, with the Chinese.  But at the same time, perhaps greater -- greater gains are made when we work with our allies, whether they're in Europe on trade and business issues or in Asia on security issues or even in the Middle East, you know, Iran, that we need to bring other partners into play, and that China is much more likely to make progress on issues when we can demonstrate that this isn't simply the United States trying to push China into a corner, but when China realizes that a number of other countries and of its own partners want a different policy from China.

So I think that all of this taken together is responsible for, I think, what is pretty clearly a -- it's not tougher or assertive, let's just say more frank U.S. set of remarks in advance of President Hu's visit to the U.S.

OPERATOR:  Thank you.  Our next question comes from Richard Wolf from USA Today.

QUESTIONER:  Yeah.  Thanks for taking my question and thanks for doing this call.

Human rights hasn't come up yet, really, in this conversation.  So can you talk a little bit about what you expect there -- (audio break) -- address that.

ECONOMY:  I'm sorry.  You kept going in and out.

QUESTIONER:  I'm sorry.  Human rights, the fact that it's obviously going to come up, both in terms of discussions between the presidents and the broader group, but also probably at a press conference tomorrow.  What do you expect there just in general, if you can talk about that a little bit.  And then given everything you said about how China has sort of behaved over the past couple of years, is there any thought that the Obama administration is reaching out too far, doing too much through the optics of this state visit and that that could backfire if they don't get some sort of concessions on any of these fronts, on any of these issues during the next couple of days?  I know National Security Adviser Donilon was trying to basically lower expectations in terms of specific deliverables out of this.

So if there are not specific deliverables and yet the United States has given the Chinese all of the optics, as you say, that they want, what are we doing if not sort of going back to our earlier pattern of offering a hand and not necessarily getting much back?

ECONOMY:  Okay.  So on the human rights issue, I think, you know, President Obama has sort of, I think, began to set the stage by meeting with several Americans who worked very actively on human rights issues, you know, in advance of President Hu Jintao's, you know, trip here.  And so I think he was trying to indicate that human rights was going to be, you know, part, very much part of his dialogue with President Hu Jintao.  I think Secretary of State Clinton made it very clear throughout her remarks the centrality of human rights, you know, not only in terms of the U.S.-China relationship and China's role globally, but also, I think, you know, in terms of China's own behavior with its own people.  And that this -- that advancement in terms of political reform and human rights, you know, needed to be an essential part of China's transformation into a global power.

In terms of, you know, how and where it's brought up during the course of President Obama's meeting with President Hu Jintao, you know, he'll certainly raise it.  I'm confident he's going to raise the issue of the Liu Xiaobo, how could he not -- you know, two Nobel Peace Prize winners.  And as you mentioned, I think it will come up -- come up in the press conference, and I think, you know, President Obama will have a much easier time addressing this issue than President Hu Jintao will.  And I think that in and of itself sends a message, you know, to the Chinese leadership and to the Chinese people at home that, you know, we have not forgotten about human rights.  And so I think that that's -- those are the ways in which it will come up.  You know, is there going to be some sort of substantive change that emerges in terms of Chinese human rights practices as a result of this summit meeting?

I think clearly not, and in fact, you know, unfortunately, the days of at least releasing fix or six political prisoners in advance of the summit are clearly over.  It happened for some time.  Nonetheless, I think it's important to raise and to raise it again in the context of both individual rights and also in the context of, you know, transparency and official accountability in the rule of law as underpinning, you know, all of, you know, China's ability to participate fully as a responsible partner to address all of the global challenges.

That was a very long answer, but I hope it got at what you were asking.

Now, just quickly in terms of whether or not the U.S. is reaching too far out with all of this, I think that, you know, it's possible but -- and much will hinge on sort of what happens in the press conference and the public commentary throughout.  I think, again, you know, the administration has tried to set the stage that we're going to be tough, you know, in all of these remarks leading up to the summit and then it will just depend on, you know, what comes out of the press conference and how the administration tries to spin things throughout, whether it's a constant refrain of we're being tough, we're expressing our interests and our stakes in this relationship or, you know, whether they somehow get a free pass and let the optics take precedence.  But I just don't think that's going to happen this time.

OPERATOR:  Thank you.  Our next question comes from Christina Bergmann from German International Radio.

QUESTIONER:  Hello.  Thanks for doing this call.  My question is how much influence does the Chinese President Hu Jintao still have?  He's supposed to leave next year, and also if we think of what happened during Secretary Gates's visit that Hu Jintao obviously was not even aware of the military testing of the stealth fighter.

So how long-lasting is whatever President Obama and President Hu Jintao agree upon?

Thank you.

ECONOMY:  Well, I'll say a few words and then maybe, John, you want to say something, too.  But you know it's my impression that there was much ado about nothing when it came to this stealth fighter.  I had two Ministry of Defense officials come by my office, you know, purely by chance in the wake of the test, and they both said President Hu Jintao was well aware of this test.  He is the chairman of the Central Military Commission.  The test had been long in the works.  There was no surprise here.

So, you know, the idea that somehow the PLA is running amok, you know, outside of whatever it is that President Hu Jintao, you know, knows or approves of, you know, it may be a misguided one and, frankly, I think some of the media that had surrounded this idea, not specifically on this instance, which I think was clouded, but just in general that somehow President Hu Jintao does not hold the reins, you know, of power, doesn't seem to me to be based on any real evidence at least that I can see.  You know, clearly, there are divisions between the leadership; you can see it when Premier Wen Jiabao makes his speeches and how different they are from when President Hu Jintao makes his speeches, even the way they talk about the Chinese economy is quite different.

So I think there are differences and divisions, but I don't think that President Hu Jintao is not still standing at the center of Chinese policymaking.  And yes, he's moving into a lame duck, you know, position.  But he's been quite conservative and quite tough for the past eight years.  It doesn't seem to me that he's given away much of the store, so that we should expect that the next generation of leaders, you know, has to take a step back from where President Hu Jintao was to reclaim somehow what President Hu lost in his dealings with the United States.  In fact, I think we can only hope for the opposite that, you know, Xi Jinping and Li Keqiang and the rest of the new standing committee of the Politburo, you know, find more areas of, you know, agreement and common cause with the United States.

POMFRET:  If I could just add a little bit.  I think that it's tough to figure out who is running the show in China because it's such a black box.  But I think that one thing is clear over the course over the last seven or eight years is that China's bureaucracy -- and by that I mean the PLA, but also the Ministry of Commerce and other agencies of the government, state-owned companies, et cetera -- have become a lot more powerful and a lot more willing to openly lobby for their policies, sort of favored policies, and that's something that you have seen.  I don't know whether this speaks to Hu Jintao's weakness or not, it probably doesn't.

But it's just as China becomes sort of a different society, and in a way a more pluralistic society, you're getting a lot of Chinese actors participating in the making of both domestic policy but also in foreign policy as well.  And that's confusing to Americans who are generally used to dealing -- not necessarily one-stop shopping in China, but it's just a lot more confusing.

And I think you're going to see that continue as Chinese Ministry of Commerce, the Bank of -- the People's Bank of China, the PLA and other actors battle it out for policy priorities that their bureaucracies might have.

DUNAWAY:  One of the things is you have to keep in mind the transition and the change in leadership doesn't come until March of 2013.  So this is -- it's two more years that Hu Jintao is going to be in office.  And he has a big say in who gets promoted to some of the senior positions in the government.  So he still will continue to carry a lot of influence.

OPERATOR:  Thank you.  Our next question comes from Jamila Trindle from Dow Jones Newswires.

QUESTIONER:  Hi.  Thanks so much for taking my question.  I'm just going on that what is the legacy of Hu Jintao, what is going to be the impression or the legacy of this meeting and in -- within the -- to the U.S. audience, do you think, in terms of -- I mean, the Chinese leaders aren't always as concerned with how news plays in the U.S. as they are with their -- of course, with their domestic audience.

But in this context, coming into this particular political environment, what do you think -- how do you think his visit and his visit to Chicago and the contracts and the deals that he's brought along -- how -- what will the effect of that be, do you think?

ECONOMY:  Well, quite frankly, I think a lot of that is going to depend on how all of you play it, right, because I think the media plays an enormous role in shaping U.S. public opinion in the wake of this kind of visit.

And, you know, I've been struck, as I've -- you know, read a number of newspapers just in the lead-up to the visit, sort of the vastly different tones, you know, that are taken about, you know, Hu Jintao coming in in this enormous position of strength and the U.S. is still in decline; or, you know, they're sort of on equal footing; or is the United States going to get anything that it wants.

And I think that, again, part of it will depend on how the administration, you know, conducts itself throughout this visit, whether it continues to maintain a strong tone.  I think earlier, the reporter from USA Today made the point that National Security Adviser Donilon very much tried to downplay the sense that there are going to be any deliverables.

And so, you know, if we're willing to take that as the starting point with this kind of very low expectation, then I think that the visit could play relatively well.  But if there's an expectation that we're going to have breakthroughs on the set of issues or something, then I think it's not going to play well.

But I think, you know, in -- you know, smart bet, frankly, is if you look across the full range of issues that we're going to be negotiating or discussing over the next several days, none of them lends itself to a big breakthrough or a big announcement, right.  All of them or many of them have to do with implementation, you know, of things that have already been agreed to.

You know, if we're talking about intellectual property rights or, you know, reducing trade and investment barriers in China; or, you know, other kinds of things, a lot of these things -- making progress on climate change -- a lot of these things have to do with taking the next steps forward rather than some big announcement of change, except, as Steve suggested, something on like -- an announcement of market access, market economy status rather; or an announcement, you know, that China's going to, you know, allow its currency to appreciate by 15 percent over the next year and a half.  These things are not going to happen.

So I think, again, much of it is just going to depend on how the media decides to relate the story of the visit.

OPERATOR:Thank you.  Our next question comes from Ewen MacAskill from The Guardian.

QUESTIONER:  Hello.  Hi.  It's Ewen MacAskill from The Guardian.  I'm doing a piece for tomorrow's paper on the contrast between the -- this visit and the last state visit 13 years ago and what has changed.  I know it's a broad question, but I just want to see what you think are the fundamental differences this time around?

ECONOMY:  Thirteen years ago?

QUESTIONER:  Yeah.

ECONOMY:  Mm-hmm.  (Affirmative.)  Okay.  Well, I'll say a few things, and then, you know, Steve and John clearly both should feel free to weigh in.  But I think, you know, we're in fundamentally different positions than we were at 13 years ago, right.  I think the global financial crisis has sort of changed the landscape in terms of, you know, China's economy relative to the size of, you know, the United States's economy.

MR.     :  Yeah.

ECONOMY:  China's made enormous progress in terms of its global reach, you know, over the past 13 years -- simply didn't exist in the same way, its investments and resources and -- abroad.  I think the Chinese military's in a fundamentally different position than it was 13 years ago.

And I think, in general, the strength of China, the rise of China, you know, has progressed to a degree that, you know, perhaps none of us completely appreciated 13 years ago.  And to think that, you know, the president of China would come to the president of the U.S. talking about the state of the U.S. dollar I think is, you know, striking --

MR.     :  Yes.

ECONOMY:  -- and a fundamental difference.  So those are a couple things that I would toss out.

MR.      :  Yes.

DUNAWAY:  I think Liz has hit on the key ones.  You know, 13 years ago China was kind of an awful (ren ?) as the -- as an economy, now it's the number two in the -- economy in the world; it's the largest exporting country in the world.  So there's been those dramatic changes.

With the financial crisis, yes, the Chinese now have new boldness on the world -- on the world scene.  And -- but in turn, I think that's created a problem for them.  The Chinese are taking away from the crisis some bad lessons.  And there's some significant steps back within China towards more central control, both on the industrial side and particularly in the financial sector.  And those are things that are going to come back to haunt China later, I think.

OPERATOR:  Thank you.

Our next question comes from Gary Feuerberg from The Epoch Times.

QUESTIONER:  Hello.  My question was on human rights and its already been asked, so I'll have to pass.  Thank you.

(Pause.)

OPERATOR:  Gary, are you there?

QUEsTIONER:  Yes.  Can you hear me?

ECONOMY:  He passed.  He passed.

QUESTIONER:  I said I was going to ask a question on human rights but the question's already been asked.  Thank you.

OPERATOR:  Okay.

Our next question is from Sarah Jacob (ph).

QUESTIONER:  Hi.  Clearly there are a lot of bilateral issues that the U.S. and China have to resolve over the next two days, but I'm just interested in knowing whether it's possible that Pakistan will feature at all anywhere in the talks.  Because the Af-Pak policy is clearly a quagmire the U.S. is stuck in, and perhaps there's a role for China to play and an opportunity for China to establish itself as an international, responsible global player.

ECONOMY:  I don't know whether the issue is going to be raised.  I think it well could be.  I think it's certainly been raised in the past.  The United States has expressed some interest in having China play a more active role in terms of, you know, possibly opening up its borders for, you know, supply lines, its Afghanistan-China border for supply lines, even possibly providing some troops or at least, you know, targeted aid and -- for reconstruction.

 

I think the Chinese have been, by and large, reluctant to engage more deeply politically, while at the same time, you know, looking to take advantage of some economic opportunities within Afghanistan under the sort of protective sort of, you know, supervision of the U.S. troops.  So I think China believes that it probably has struck a reasonable balance for where it wants to be with regard to Afghanistan right now.

So I don't know whether it's going to be raised.  I believe it might be.  But I wouldn't expect this to be an area of much deeper, greater cooperation in the near future.

OPERATOR:  Thank you.  Our next question comes from -- (name and organization inaudible).

QUESTIONER:  Good morning.  Thank you for being on this call.

Let me ask you about human rights once more just to follow up.  I understand that the Chinese are unlikely to change their behavior when it comes to human rights, but do you see any chance of a meaningful dialogue within the two leaders, other than, you know, just repeating their monologues -- President Obama raising the question of human rights and President Hu saying that yes, the Nobel Prize winner is indeed a criminal under Chinese law, and he should be kept in jail as such?  As -- and nobody's business is to interfere in Chinese matters?  Thank you.

ECONOMY:  You know, again, I'll open this door to my colleagues on the call -- (chuckles) -- but I don't see the potential for meaningful dialogue between Presidents Hu and President Obama on this particular issue.  I think we've seen very little evidence over the past eight years that Hu Jintao has an interest or willingness to discuss these issues.  Maybe, you know, we would have had better luck if, you know, President Obama was sitting across from Premier Wen Jiabao, I think who has indicated some -- (laughs) -- interest in these issues.

MR.     :  Right.

ECONOMY:  But I myself have not seen any indication that President Hu Jintao has a kind of politically progressive, human-rights-oriented bone in his body.

QUESTIONER:  Thank you.

ECONOMY:  I don't know, John or Steve, do you want to say something on this?  I mean --

DUNAWAY:  I think that, actually, on a lot of issues, you know, it's just looking for significant dialogue with China.  And it's often frustrated -- not just in human rights, even on the North Korea question, although it seems that that has progressed a little bit.  But still, if you look at Secretary Gates's trip to China, basically everywhere he went in China, he said, we really need to have serious, in-depth dialogue about significant strategic issues.  But it doesn't seem like the Chinese are that interested in even that level of engagement on something that is not as potentially inflammatory as human rights for the Chinese.

OPERATOR:  Thank you.  Our next question comes from Li Huy Liu (ph) from Voice of America.

QUESTIONER:  Hello?  Yes, thank you for taking the question.  And my first question is, China is talking about the policy -- the fact that the central U.S. dollar policy is outdated.  So that's what Hu Jintao said.  So do you think China has the strength to back its renminbi as the international policy?  And the second question is, how do you think the internal social instability inside China would affect its future role played in the world?  Thank you.

DUNAWAY:  Well, on your first question, the answer's simple.  If China is willing to freely float its rate and make it fully convertible, then certainly it could take on a role as a reserve currency.  But China's not interested in that now.

A lot of the discussion about the role of the dollar is, in essence, smoke to distract attention from China's exchange-rate policy.  As I wrote in a -- in a -- in a -- in a Council special report two years ago, you know, there's three basic problems in the international financial system.  One is the reserve currencies.  And a reserve currency country can delay for a long period of time adjustment in this balance of payments.  But equally important, and probably more important, is the problem where you have currencies -- or countries facing currencies that have upward pressure on them, and that they can resist that appreciation for very long periods of time.  And that creates big problems in the international financial system.

So by emphasizing the problem with the U.S.'s reserve currency, you know, China's tried to effectively use that to deflect attention from what I think is the more important problem in terms of its reluctance to allow the -- its exchange rate to appreciate.

The other part of this is, China now has roughly $2.9 trillion US in reserves, and they face the possibility of a significant capital loss on those reserves if the renminbi appreciates vis-a-vis the dollar.  And so some of this discussion about alternative reserve assets, of new reserve assets is intended to try to basically bail China out, that to the extent that if someone wants to take part of -- or the Chinese can convince someone or some organization to take part of this exchange risk from their -- that they face on their reserve assets, they'd be very happy for someone to step up and do that.

OPERATOR:  Okay --

QUESTIONER:  Do you think -- I'm sorry.  Do you think China is trying to challenge the U.S. position in the world?  Or is it -- what it's implying is to try to forge a mutual central currency policy?

DUNAWAY:  Well, you know, the point is that, you know, as I say, I think it's more of a distraction, to try to divert attention, and because the point at the end of the day in terms of a reserve asset is it's not something that's created.  At the end of the day, it's chosen by the markets, in terms of what currency offers the facilities that are needed in terms of trade, in terms of financing, in terms of being able to create assets where reserves can be parked for a period of time.  It's to fill the needs of a reserve asset.  A reserve asset has to be -- has to be liquid, and it also has to be that you can -- you can exchange it for foreign exchange and when you sell it in the market you don't -- you don't encounter a substantial capital loss.

And there's basically only one market, one market in the world, that really fulfills that role, and that's the market for U.S. Treasurys.  And until other markets develop, until, you know, China were to, as I said, make its currency convertible, open up its domestic financial markets and those financial markets develop -- only at that point would the renminbi reach the potential status that it, too, could be a reserve currency.

ECONOMY:  Okay, I'll just make a quick point, because I think we're just about out of time.  On the issue of whether China's instability affects its ability to be a global leader, I think, you know, China's shown a remarkable ability to, you know, contain, you know, something over a hundred thousand protests a year, like putting out fires.

I think the greater challenge to China now is coming from two sources.  One through the Internet, right, so you can have a public opinion poll on North Korea where the majority of people say:  We don't think that our policy on North Korea is the right one.

And I think this, you know, is going to grow.  This kind of influence of sort of the broader civil-society pressure on the Chinese government is going to grow via the Internet.  I think the bureaucratic interests -- the openness with which bureaucratic interests are now willing to sort of stake out their positions, as John discussed earlier, I think is another source of sort of challenge for the Chinese government.

But I think overall the real challenge for China as a -- as a global leader that comes out of its domestic political system is this lack of good governance; you know, a lack of rule of law, a lack of transparency and a lack of official accountability.  Because these things, first of all, are exported when China goes abroad and does business throughout Africa and Southeast Asia and Latin America.  And we've seen many instances where, you know, local citizens in these countries don't like Chinese practices.  And again, they limit the ability of China to be a responsible partner, you know, to address issues like intellectual property rights, protection or climate change.  You must have these sort of essential building blocks of good governance, and they don't have them yet; which means they cannot be yet the kind of responsible partner that I think they want to be and we certainly want them to be.

OPERATOR:  Thank you.  There are no further questions at this time.

POMFRET:  Great.

DUNAWAY:  Okay.

POMFRET:  Thank you very much, everybody.  Appreciate it.

DUNAWAY:  All right.  Thank you, John, for moderating.

POMFRET:  Such as it was.  (Laughs.)

DUNAWAY:  (Laughs.)

POMFRET:  Thanks, Liz.  Thanks, Steve.

DUNAWAY:  Okay, you're welcome.

ECONOMY:  Thank you.

DUNAWAY:  Thanks, Liz.  'Bye.

OPERATOR:  Thank you, ladies and gentlemen.  This concludes today's conference.

 

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