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China expands its economic 'gravitational force' amid US retreat

Push for free trade and global yuan offer peek into a Beijing-led future

Chinese President Xi Jinping and other officials attended a virtual Asia-Pacific Economic Cooperation summit Nov. 20, at which Xi said he would consider joining the TPP.   © Kyodo

TOKYO -- It was as if Chinese President Xi Jinping made a slam dunk, perfectly timed to take advantage of the presidential transition in the U.S.

On Nov. 20, Xi said that China would "favorably consider" joining the Trans-Pacific Partnership -- an 11-member trade pact including Japan and Australia. Just days before, China and 14 other countries had signed the Regional Comprehensive Economic Partnership, creating the world's largest free trade bloc.

Xi's enthusiasm toward the TPP in addition to RCEP delivered a blow to U.S. President Donald Trump, whose administration has sought to isolate China from the international community. Xi's comment invoked concern that, at least when it comes to trade, Washington may be more at risk of isolation than Beijing.

A look at the global economy supports these concerns. The U.S. accounted for 24.5% of the world's gross domestic product in 2019, compared with China's 16.4%. But the 15 RCEP members combined accounted for 29.6%, outpacing the U.S.

China is by far the largest economy within RCEP. It produced 55.5% of the bloc's total GDP last year, compared with 19.6% for second-ranked Japan.

Now officially known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the TPP originally was intended to curb China's massive influence on the global economy and trade. Japan hopes that in cooperation with Australia, it can attract the U.K. as a new member, and even have U.S. President-elect Joe Biden reverse the decision by Trump to exit the framework.

But Biden's top diplomatic priority is mending Washington's ties with Europe. And with the number of U.S. Senate seats up for grabs in the 2022 midterm elections in the country's Rust and Corn belts -- areas with heavy opposition to the TPP -- the Biden administration could hesitate to embrace the trade deal.

Xi's comment takes advantage of this vacuum. Though China faces high hurdles to joining the TPP, like reforming its state-owned enterprises, Beijing's openness to the deal likely will be welcomed by many of the pact's members.

The 19 countries, which are part of RCEP or the TPP, or both, account for 33.6% of the world's GDP. If the Biden administration decides it cannot compete on its own, the U.S. may end up giving in to Chinese demands on trade.

Once focused on expanding exports, China now looks to attract resources from all across the world to become an indispensable link in global supply chains. China will become a "gravitational force" in global resources, Xi told the Central Committee for Financial and Economic Affairs back on April 10.

But when it comes to food and the real economy, Xi has made clear that his guiding principle is "China first." He also has said that China's state-owned enterprises must not be rejected or weakened.

China is eager to take a leading role not only in creating trade and investment rules, but also in terms of currency. Still, the yuan made up just 2.02% of all global foreign reserves as of the end of June -- a fraction of the dollar's 61.9%.

As long as China itself uses the dollar to trade and settle payments, the U.S. could use the currency as a tool in financial sanctions. Washington froze assets of key Hong Kong officials this year in response to the political situation there. It also theoretically could lock China out of dollar-denominated settlements.

Beijing is working strategically to increase the yuan's use in international trade. China is bolstering domestic consumption, which increases imports that are paid for in yuan. RCEP presents an excellent opportunity to advance this strategy, especially given China's central role in the bloc. More regional financial institutions in Japan could start direct trading between the yen and the yuan, bypassing the dollar.

The dollar remains the currency of choice for international settlements. But even in this area, digital currencies are changing the game. China's deep interest in issuing a digital yuan relates partly to finding an easy-to-use alternative for international settlements.

China alleges that the U.S. did as it pleased during its time as an economic hegemon. Though the argument is not without merit, Beijing itself is guilty of bullying other countries through economic statecraft. When Australia questioned China's responsibility over the coronavirus pandemic and the political crackdown in Hong Kong, Beijing responded by imposing a string of trade sanctions on Canberra.

China also is pursuing new, opaque trade rules that confound partners -- like a law taking effect Tuesday that lets the Chinese government ban exports to protect its national security and interests.

Japan's trade and investment ties with China could suffer if Beijing needs to approve Japanese exports of items that contain Chinese components, for example. And little clarity exists regarding which final destinations are on the blacklist, or what penalties violators could face. As the law covers exports tied not only to national security but also to China's interests, Beijing appears to be seeking protection for its industries.

China's Commerce Ministry unveiled a draft of the law in June 2017, so it was not intended as retaliation against American trade sanctions. Major business lobbies in Japan, the U.S. and Europe repeatedly urged China to reconsider, but their calls fell on deaf ears -- a possible indicator of what rule-making in a China-led world could look like.

Concerns over China's approach to its financial sector are rising as well. Ant Group, the financial arm of e-commerce platform Alibaba Group Holding, was forced to suspend its initial public offering in Shanghai and Hong Kong at the last minute, at Xi's behest. Alibaba co-founder Jack Ma reportedly angered Xi by criticizing China's financial regulations.

China has emerged as an economic superpower thanks to its massive purchasing power and financial influence. But the influence of the Chinese Communist Party and the military over the nation's companies and market presents risks for neighbors.

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