Dick Wilson, citing some recent financial deals, observes a softening of China’s stance

The softening of China’s policy in economic relations with other countries has become remarkably advanced. Examples can be found in Asia, notably in Taiwan, but also in the West. Europe is doing more with China than it used to. And in the case of the United States improvements have arrived in a number of issues where there was disagreement in the past. The issue of oil subsidy has suddenly become more controversial.

There is movement in banking. China’s Industrial and Commercial Bank (ICBC) has been lobbying for more than a year to be allowed to set up branch operations in the US. It has been thwarted in this for more than a year, something which Beijing regards as a move by the Federal Reserve in the political game playing negotiating ploys at the recent Strategic Economic Dialogue in Maryland.

The Americans are also worried about what an ICBC presence in the US would mean for the Chinese sovereign wealth fund, which is the bank’s biggest shareholder. With regard to ICBC, the Americans also worry about money laundering and the lack of transparency.

The biggest single shareholder in both the ICBC and China Construction Bank is Central Huijin Investment Company, which is a government holding company. Washington has affirmed that Huijin would have to comply with US requirements regarding disclosures and limited ability to invest in other US industries.

Chinese leaders now frequently express their concerns about the future of the US dollar. Prime Minister Wen Jiabao confessed to being “deeply worried”, and hoping that the US currency would “stabilise as soon as possible”. He once spelt it out: “What concerns me now is the continuous depreciation of the dollar and when the dollar will hit rock bottom.”

There is pressure on China to quicken the pace of renminbi appreciation (20 percent increase since the dollar peg was abandoned in 2005) at the G8 summit meeting.

From the US dollar to the currencies of China’s other major trading partners, notably the European Union, one can see a shift of focus.

Another development in early July was a Chrysler agreement with Great Wall Motors of China to look into the possibility of sharing distribution networks, components and technology. In fact Chrysler has been talking to several auto makers in China to develop its involvement in that industry.

Chrysler sold more than 30,000 imported and locally produced vehicles in China last year, built in partnership with Beijing Automotive Industry.

The reverse investment was typified in June. China put US$2.5 billion then into the American TPG fund, a private equity. The growing inclination of sovereign wealth funds thus to invest through private equity firms was aimed at avoiding any potential political backlash.

This investment was believed to be the largest commitment made to a private equity firm. That was by the State Administration of Foreign Exchange. Another sovereign wealth fund, China Investment Corporation, was entrusted with investing part of the Mainland’s US$1,600 billion reserves.

The political sensitivity was evident when China’s Securities Regulatory Commission wrote to the US Treasury and accused the Americans of “hostility” to investments controlled by foreign governments.

It is evident that the British financial authorities are seeking to get a head start over New York for influence in China via Chinese private equity.

In June China announced that it would raise petrol and diesel prices by more than 16 percent. The new prices posed a risk of stoking China’s already high inflation.

Hank Paulson, the US Treasury Secretary, had urged the Chinese to cut fuel subsidies.

The Chinese risked bankrupting their state refiners: The weight of subsidies on their budgets was sliding to unsustainable levels. In fact Beijing has been pressed to reduce its oil subsidies, and thereby artificially stimulating oil demand.

The US Treasury Secretary used the meeting for US-China Strategic Economic Dialogue in Annapolis last month to press for a cut of subsidies.

The National Development and Reform Commission has said that petrol and diesel prices would rise by US$145 per tonne. It was part of a move to reflect adjustment of the gap between soaring international crude prices and state-set domestic prices.

The latest decision to increase the government-set retail price of oil and diesel by 17-18 percent was intended to reduce the economic pain of refineries obliged to pay world prices for crude while being unable to charge market rates for the refined fuel which they sell.

One view was that easing of subsidies was overall in support of oil prices. For one thing, China’s refiners would want more crude to run. In the second place, while the price increases seem substantial, drivers in China can probably still afford them.

Gradually, sector by sector and case by case, China’s foreign economic policy is becoming involved with that of other countries. China has the market, foreigners have the technique and experience, so between them they are increasingly able to grab collaboration opportunities as they appear.