No use China crying poor

FT.com

To fly from New York to Beijing, as I did this week, is to enter a looking-glass world. Eight o'clock in the morning becomes the same time in the evening. One transfers from a country aggrieved at China to one aggrieved at the US.

The latest cause of tension is the dispute about rare earths filed at the World Trade Organisation by the US, Japan and the EU. The US president insisted with a flourish that China should not be "allowed to break the rules” by imposing quotas on the export of such minerals.

The case is a sideshow to the big challenge facing China – to shift from being the low-wage producer of manufactured goods to a developed economy with a vibrant, open consumer market. But it shows how the credibility it gained from its 'Made in China' policy over the past three decades has expired.

It needs to seize the next opportunity, not just to engage with the world but to lead it. The benefits of insisting it is a developing nation that is too poor to play a leading role in institutions such as the WTO, or fully to open its economy to global competition, are diminishing and the risks are evident.

China has plenty of arguments on its side. The hostility it faces for taking the jobs from other countries is a sign of how efficiently it did what they wanted in the first place – provide access to a low-wage workforce. It has steadily engaged with institutions such as the WTO and the Group of 20 to a degree unthinkable under Mao Zedong. But Mao's dictum was to "seek truth from facts” and the fact is that China isn't trusted and has brought some of this distrust on itself.

I observed the rare earths dispute from an unusual venue – the Central Party School of the Chinese Communist party, which was founded by Mao himself in 1933. The school is where senior party officials are trained in ideology and how to run the country. The fact that it was co-hosting a seminar on China's development with Wilton Park, the conference agency of the UK Foreign Office, speaks volumes about China's greater openness to the world.

Although China may overtake the US as the world's largest economy by 2020, Chinese officials emphasise that its people are still poor and, as a developing country, it cannot play a leading role in global development. As one official puts it: "China is a big country but it falls short of the capabilities required to be a leader.”

I find this implausible. The existence of the school shows how carefully China trains and nurtures its governing elite – far more so than most countries. They have plenty of domestic challenges but they could also turn their minds to corralling the WTO and G20 if they wished.

More likely, they see tactical advantages to sticking to the line that China is a developing nation. It gains more time to comply with WTO requirements and it does not risk provoking the US and others further by taking a public stand.

It is too late for that. China is the primary trading partner for many countries and is crucial to any WTO effort to navigate past the stalled Doha round. A display of false modesty about its influence prolongs the delay and encourages disputes.

China has plenty to gain by assuming a leadership role, apart from respect. If, for example, it permitted multinationals to compete more equally with state-owned enterprises, it could ease some of the current tensions. It would also be, in Wen Jiabao's phrase, a "win-win”.

China's state owned enterprises dominate many industries, aided by access to soft loans, free land and official backing. "They cannot lose and you cannot win. You are not permitted to beat them,” says Derek Scissors, a senior research fellow at the Heritage Foundation in Washington.

China's aim in its latest five-year plan is to shift from low-value manufacturing to more sophisticated goods and services. The simplest way to do that is to encourage competition and to permit foreign-owned companies to set up locally. That would alter the structure of the economy and educate a generation of Chinese managers.

It would mean a loss of central control but China showed its willingness to take such radical steps before, in its initial round of economic reforms under Deng Xiaoping. The question now is whether it gets trapped in a defensive posture or seizes the lead again.

Copyright The Financial Times Limited 2012.