Chinese Military Spending, the US and the exchange rate

Interesting post by Robert Reich on China's announcement that it is to increase military spending by 18% to $45bn.

Robert Reich makes much of the timing of this announcement that coincided with the visit of Treasury Secretary Hank Paulson. I am not so sure.

What is perhaps more surprising is that whilst China is planning to spend $45bn this pales into insignificance compared to the US military spending of $600bn. China has some way to go to catch up.

The conclusion also proposes a link between this announcement and China's current exchange rate policy. The logic is fine but I think this may be pushing it somewhat.

Why China Announces Military Buildup the Same Week Paulson Visits

China announced this week that it’s planning to increase military spending 18 percent this year this year – its largest military boost in almost a decade – to $45 billion, making it one of the largest defense spenders in the world. That’s not much when compared to America’s military budget of more than $600 billion this year, but it’s large enough – and following so closely on the heels of China’s successful test of an anti-satellite missile – as to spook the Pentagon. What’s going on?

One clue is that China’s announcement of its military buildup comes the same week Treasury Secretary Hank Paulson is scheduled to visit, presumably to continue pressing China to raise the value of its currency in light of the huge and growing trade imbalance with America.

You see, for China, economic security and military security go hand in hand. Both are part of the same strategy to make China a superpower. Maintaining its current 10 percent yearly growth rate necessitates reliable supplies of oil, natural gas, and other raw materials from all over the world; as well as the latest technologies. And China also needs growing export markets to absorb its increasing production, and provide jobs to the tens of millions of its people migrating from the countryside.

All this, in China’s view, necessitates being able to play power politics with both Middle-East and Russian oil producers, when and if tensions arise over energy supplies. And China needs to be able to flex its muscle with Japan, Europe, and America in the competition for energy and other critical raw materials – as well as continue to have access to technologies these nations possess. And it needs to keep its access to these hugely important markets.

Power politics in today’s world doesn’t require the direct exercise of military power so much as the capacity to pressure other major powers indirectly – for example, credibly threatening to use force against Taiwan, or selling advanced weapons systems to oil-rich or raw-materials-rich developing nations, or, in the case of North Korea, becoming the source of food and weapons.

Sound familiar? China is not inventing this strategy of combining economic power with military power. It’s following in the footsteps of the nation that wrote the play book on how it’s done – the United States.

That’s why China’s military announcement was timed to coincide with Hank Paulson’s visit. Some in the U.S. think China has been able to buck American pressure to revalue China's currency because China is becoming our major creditor. Not true. America's indebtedness to China gives the U.S. huge leverage over China -- if we allowed the dollar to fall, China would lose a bundle. No, the real reason China has been able to hold the line against American pressure is China's growing influence around the world. Its military strategy is a part of this, and it's why Paulson’s economic mission will get nowhere.