The China Crisis -- the Radar Screen Blip May Linger

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04/09 00:01 The China Crisis -- the Radar Screen Blip May Linger: Art Pine By Art Pine

Washington, April 9 (Bloomberg) -- The crisis over the emergency landing of a U.S. spy plane on China's Hainan Island is apt to leave a lasting stain on U.S.-Chinese economic relations even if it soon fades from America's diplomatic radar screens.

Beijing's detainment of 24 American crew members already has enraged members of Congress, sparked proposals for new economic sanctions, and threatened to derail China's entry into the World Trade Organization.

``More important, the crisis has set off warning bells for American investors,'' said Roger Kubarych, a former Federal Reserve strategist now with the Council on Foreign Relations. ``It has raised the country-risk factor for China 10-fold.''

The issue is critical. Much of China's growth these days depends on foreign direct investment. Businesses around the world invested $40.8 billion in China last year; one-tenth of that came from the U.S. If that investment ebbed very significantly, China's economy could falter.

The U.S. also bought $101.1 billion worth of China's exports in 2000. While sanctions wouldn't likely block it all, they could crimp U.S. imports of some key Chinese goods. Delay in China's entry into the WTO could hurt investment, too.

Dust-Ups Before

Beijing has survived serious dust-ups with the U.S. before: The 1999 allegations that China stole U.S. satellite technology didn't dissuade Congress from granting it normal trade relations later. Neither did China's firing missiles near Taiwan in 1996.

``It's too early to tell'' whether this face-off will do any permanent damage, said Jonathan D. Hill, a country-risk specialist for The PNC Financial Services Group, Inc., in Pittsburgh. ``We'll have to see how flexible they will be.''

Nevertheless, Kubarych says there are some important new elements this time around that raise fundamental questions about who really is in control in Beijing these days and underscore how easily such crises can still erupt between the U.S. and China.

Unlike the disputes over satellite technology and missile- firings, this one has revealed a split between the party leadership and the military that threatens to stymie some of the economic progress that China has made in recent years.

``Unfortunately, this has come at the very moment that companies were encouraged by China's entry into the WTO and were making plans to expand,'' said Kevin Nealer, a China expert at the Scowcroft Group, a Republican-oriented consulting firm.

``This will remind them that there are fundamentals to the relationship which are still open questions,'' he said.

Stirring Passions

To top that off, the latest dispute has centered on an issue that stirs more basic passions both in Congress and in the American public -- the detaining of American service personnel in what critics have already likened to a hostage-taking situation.

``Remember the reaction in the U.S. when the Iranians took our embassy personnel as hostages (in 1979)?'' says Harald B. Malmgren, a Washington trade specialist and country-risk strategist. ``People still haven't forgotten that.''

The U.S. reaction so far has been relatively muted, primarily to avoid provoking the Chinese even more while negotiations on release of the air crew continued. Both the administration and key lawmakers have held their tongues.

Nevertheless, congressional analysts say the incident already has bolstered prospects for those opposed to renewing normal trade relations with China -- to the point where approval no longer is a sure thing, as it was just two weeks ago.

Warnings From Congress

Several key lawmakers from both parties have already begun warning that Congress might soon be forced to consider legislation designed to step up the pressure on China, from suspending WTO talks to imposing new sanctions.

Nor is President George W. Bush expected to remain muted indefinitely. China's refusal to release the U.S. aircrew immediately now seems certain to affect Bush's decision, due on April 24, whether to sell more sophisticated weapons to Taiwan.

If China escalated the crisis -- by putting the plane's pilot on trial or by detaining the air crew longer, the administration would step up its own response significantly, analysts said.

Attention isn't entirely on focused on China. Investors are also watching how the Bush administration itself handles the latest crisis and its aftermath, says Alan Stoga, head of Zemi Communications, LLC, a Wall Street investment advisory firm.

``There are broad and deep tensions within the Bush administration between the pro-business right and the hard right,'' Stoga said. ``This crisis clearly will set the tone for how the U.S. deals with the Chinese over the next few years.''

There's no doubt that the past week's experience has made Bush and his top aides more wary. They're more suspicious of the Chinese than they were before, and even less likely than they were to lavish benefits on China as their predecessors were.

The images from the latest crisis and the detainment of the U.S. aircrew are likely to stick in the American psyche -- and that of investors -- for some time to come, Malmgren asserts.

``It has reminded everyone that this (China) is an inherently hostile country,'' he said. ``It has done great damage.''

http://quote.bloomberg.com/fgcgi.cgi?ptitle=Latest%20Columns&touch=1&s1=blk&tp=ad_topright_bbco&T=markets_fgcgi_content99.ht&s2=blk&bt=blk&s=AOtEz.xSyVGhlIENo



-- Martin Thompson (mthom1927@aol.com), April 09, 2001


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