The spectacle of a China-US trade war raised its head again last month when Paul Geithner, President `Obama’s nominee for the post of Treasury Secretary, told the Senate’s finance committee in a written response to questions, that “President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency.” Mr Obama would “use aggressively all the diplomatic avenues open to him to seek change in China’s currency practices”, he added.

True, Mr Geithner - whose nomination was later endorsed by the committee - was careful to leave himself room for manoeuvre on the key question of whether the US would formally deignate China as a currency manipulator, which under US legislation, would entail retaliatory measures.

"The question is how and when to broach the subject in order to do more good than harm," Geithner said in his written answers. He stressed that the Obama administration was looking forward to a productive economic dialogue with the Chinese government on a number of short- and long-term issues, and "the yuan is certainly an important piece of that discussion."
However he also added that "given the crisis, the immediate focus needs to be on the broader issue of stabilizing domestic demand in China and the U.S..,"

Geithner’s remark was promptly condemned by Chinese offficials. Su Ning, vice-governor of the Peoples Bank of China, called Geithner’s remarks misleading and “out of keeping with the facts,” and said they could sidetrack efforts to manage the global financial crisis.

Other less official Chinese commentators were prepared to make allowances for Geithner’s comments as [ur=http://news.xinhuanet.com/english/2009-01/24/content_10710897.htm">aimed at winning Senate approval But the incident did focus attention yet again on the prospects for US-China economic co-operation under the new Administration.

The outcome could be crucial for the world economy, and particularly for Africa. Many African countries that benefited in the past from the world-wide boom in commodity prices, as well as being able to use China’s increasing African involvement to improve their infrastructure and increase their space for manoeuvre internationally.

Despite recent price falls, the hope must be that China’s and America’s recovery packages together will help to turn the tide.

A US-China trade war on the other hand could beggar both countries, intensify the global slump much as trade wars did in the 1930s, and drive commodity prices even lower. With the US relying on China to continue buying US Treasury bonds, and China dependent on a strong dollar for the value of its massive reserves, the assumption must still be that neither party will want to rock the boat - though it was surprising to see Geithner who, as this column pointed out two weeks ago, normally has a reputation for level-headedness, being the one to play the trade war card.

But is there any truth to the claim that China is driving down its currency to expand export markets? In fact China has been appreciating its currency in recent years, and the recent halt in that process in relation to the dollar has been due more to the dollar’s rise, while the Yuan has continued to rise against most other currencies. As Philip Bowring pointed out in the International Herald Tribune;

On a trade-weighted basis, China's currency has appreciated by about 10 percent since August.
There is little evidence that China manipulates specifically to help exporters or sustain a trade surplus. Its desire to move closer to the U.S. dollar rather than simply follow a trade-weighted basket is a natural outcome of the denomination of most of its trade in dollars. Beijing's reluctance to moderate appreciation of the yuan against the dollar is also natural because it creates losses for China's central bank - whose assets are in dollars and liabilities are in yuan.’

More significant in the long run than this war of words over China’s exchange rate may prove to be the little-publicised announcement last week that China’s cabinet had approved a trial programme allowing its currency to be used in trade deals between selected provinces and their overseas trading partners.

The trial is modest, initially affecting deals by the Pearl River Delta and Yangtze River Delta provinces with Hong Kong and Macao, as well as between the Guangxi Zhuang autonomous region, Yunnan province and ASEAN (Association of Southeast Asian Nations) countries.
But the headline in the official English-language China Daily made the implications clear; Program helps make yuan a world currency.

The report went on to spell out the possible implications;

‘The small step could be a big stride in China's currency history. China is finally making a substantive step forward, after a raft of moderate currency policies, on the road to develop the renminbi into an international currency, a step partly driven by the ongoing global financial turmoil.

‘The move seems to have only limited impact on some regions, involving capital flow of no more than several hundred billion yuan. But ...If the new scheme proves successful it will yield several positive results. The yuan may grow into a major currency in China's neighbouring areas and eventually rise to an international currency on par with the greenback, euro, Japanese yen and Swiss franc.

‘It promotes establishing an East Asia trade zone and helps reduce foreign exchange risks. The relatively stable yuan will help lower costs and manage risk caused by exchange rate fluctuations of such currencies as the dollar and euro’.

Meanwhile China’s $586 billion economic stimulus program is likely to add 1 to 3 percent to its economic growth this year, according to Dong Tao, a China economist at Credit Suisse. The American program is likely to add close to 3 percent to the United States’ growth, he predicts.

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‘Banks already seem to be following Beijing’s orders: total lending surged by 19% in the year to December. China is one of the few large economies whose banking system has not been crippled by the global credit crunch. Andy Rothman, also at CLSA, argues that “in China, there is only a credit crunch when the political leadership wants one”. He believes the economy will revive by midyear and achieve GDP growth of close to 8% for 2009 as a whole.’

And there may be more to come. Premier Wen Jiabao, in a rare interview with the Financial Times during his London visit, revealed that Beijing was considering further economic stimulus measures beyond those already announced. ‘We may take further new, timely and decisive measures...’ he told the interviewer.

But how will China’s response to the global crisis affect Africa? A new report from the That long-term interest remains intact despite a worldwide economic slump that has hit China's exports to wealthy countries and a sharp decline in African mineral shipments to China’.

However he does concede that the global slowdown ‘has led some Chinese businesses to close operations in Africa and prompted a rethinking of some of the multibillion-dollar deals that blazed a trail across the continent’.

One likely explanation is that smaller private firms, with a more short-term perspective and a more direct response to market pressures, have been pulling out of mining operations as commodity prices have fallen, while larger enterprises especially those which are state-owned or responsive to government influence, will take a longer-term view.

Thompson quotes the verdict of David Shinn, a former U.S. ambassador to Ethiopia and Burkina Faso who teaches at George Washington University's Elliott School of International Affairs; ‘China is in Africa for the long term, and strategically’.

One area in which China, and other Asian investors, may actually have an increased interest as a result of the global downturn is investment in infrastructure. The Financial Times reported on 27 January that Asian and Middle East backers, thought to include China, have offered to fund a 1,300km pipeline needed to exploit Uganda’s Albert Basin oilfield.

Asian governments, the oil company points out, are seeking outlets for surplus steel, idle engineers, and uninvested cash.

In a further example of Asian interest in investing in Africa’s infrastructure, India has extended its largest-ever loan to a single country in the form of a US$166.33 million line of credit to Ethiopia to fund sugar development projects.

Chinese and other Asian bargain hunters could also come to the rescue of industries closing as a result of the global downturn. One possible example could be Zambia’s Luanshya copper mine, which on the continent’.

Africa is not the only continent where Chinese investors are seeing the opportunity to snap up resources. The Financial Times has reported that ‘China is being welcomed as a saviour for a growing number of cash-strapped junior Australian mining companies in a reversal of the wary reception that greeted many of the country’s state-backed enterprises during the mining boom years....The deals highlight China’s desire to secure its long-term resource supplies, and the country’s role as a “white knight” in an era when it is difficult for fledgling miners to secure funds for large projects [Australian miners warm to ‘white knight’ January 26th]. And on 1 Feb it added, reporting on Chinalco’s talks on acquiring assets from RTZ, that ‘Although economic growth in China has slowed in the past six months, Chinalco’s close links to the Chinese government means it is taking a more long-term, strategic view of the commodities markets and is keen to secure supplies now while prices are relatively low’.

But this is far from unalloyed good news for Africa, as the example of Zambia’s Chambishi mine shows. Where assets are acquired from bankruptcy by investors - of whatever nationality - who believe they can make them pay where others failed, the business is certain to be under great pressure to cut corners where issues such as employment rights or environmental standards are concerned.

There are also reports of increased supplies of Chinese-made arms entering Africa - not as some observers have speculated, as part of some sinister military strategy, but as commercial sweeteners. As one defence specialist reports;

‘Increasing quantities of China-made military equipment have been finding their way to Africa, traded for oil, mineral resources and even fishing rights. Zambia has used its copper resources to pay China in a number of military deals, for instance, and Kenya has been negotiating with China to trade fishing rights for arms’.

As always, there is the risk that in hard economic times governments and citizens will be under pressure to cut corners on justice and environmental issues. In working together to counter this danger, Africa’s CSOs should remember, as the trade war issue shows, that China is concerned for its international image, and that elements of Chinese civil society and government will be concerned to see that Chinese firms abroad comply with China’s own laws and declared policies.

But even so as China navigates through world recession and tries to balance the risks with opportunities, the Year of the Ox will be a tough up hill battle for most economies that benefited from Beijing’s spectacular domestic growth. And while China may see partnerships with northern actors, like the UK, to help assuage the impact of the financial crisis on its African activities, it will be significant for African CSOs to also add their own voice to how these partnerships will affect their struggles for justice. Therefore, the Year of the Ox, is as much as about markets and the private sector finding resilience as it for Africa’s social justice movements meeting the challenge of monitoring of how China and other actors affects the daily livelihoods of Africa’s citizenry either through increased investments or a gradual disinvestment. This is definitely the point of departure for African CSOs to mobilise around when President Hu Jintao embarks on [email protected] or comment online at http://www.pambazuka.org/