For Chinese Premier Wen Jiabao and his advisers, early December surely felt like a propitious time for a Washington debut. Wen's visit would come about a year after he and President Hu Jintao took over China, winning widespread praise for their relaxed style, which contrasted so sharply with the imperial air of former Communist leaders. With China's economy booming and the country swelling with pride from its first manned space flight, it seemed a safe bet that Wen would be welcomed as representative of a changed, more confident China.
Unfortunately for Wen, some last-minute additions to the script have made the timing of his Dec. 8 arrival far less auspicious. In mid-November, following the release of figures showing the trade deficit with China soaring, the U.S. announced quotas on Chinese-made apparel and duties on Chinese TVs. And on Nov. 23, Beijing's favorite candidates lost by a landslide to pro-democracy rivals in municipal elections in Hong Kong.
For all of China's newfound swagger, the country still faces a host of problems that could easily trip up its new leaders. Before leaving Beijing, Wen professed to be shocked by Washington's quotas, and China called off a trade mission that was supposed to place high-profile orders in the U.S. But Wen couldn't do much beyond making a handful of symbolic gestures. When it comes to negotiating with the U.S., "clearly, China doesn't have a whole lot of leverage," says economist Fred Hu, managing director of Goldman Sachs (GS ), Hong Kong.
Consider the highly charged issue of jobs. George W. Bush imposed the quotas -- on items like bras and bathrobes -- to shore up support from voters worried about manufacturing jobs moving to China. But Wen can't afford a trade war: He faces an unemployment problem that makes Bush's seem puny. In the U.S., 2.7 million manufacturing jobs have disappeared since October, 2000. China loses that many every year simply as a result of the restructuring of its state-owned enterprises.
Likewise, China's massive $54 billion trade surplus with the U.S. masks a big weakness: Beijing's soaring deficit with Asian trading partners Japan, Taiwan, and Korea. For instance, First International Computer Inc., a Taiwanese producer of PCs and their components, with $3 billion in sales last year, now makes half of its desktop computers in China and almost all of its motherboards there. "High-volume production has shifted to China," confirms FIC Vice-President John Villejo. But while exports are surging, half of China's top 40 exporters are foreign-owned, and many of the parts used by such manufacturers are imported.
Then there's the issue of China's undervalued currency. Wen will probably get an earful from Bush on the yuan, in part because the Administration wants to show voters it's getting serious about the trade deficit. Wen will almost certainly stand firm. China's leaders like the weak currency, which helps exports. But it may also be setting the country up for a crisis. The cheap currency has fueled a surge in lending in China. That could lead to overinvestment. Letting the yuan rise and relaxing currency controls would provide an escape valve by encouraging capital to flow out of China. The weak yuan "is clearly attracting speculative capital," warns Tim Condon, chief economist for Asia at ING Financial Markets.
Wen's woes aren't merely economic. Sparks are again flying between Beijing and Taipei. Following the disappointing Hong Kong election returns, China must win over voters before next year's poll to pick a new city legislature, lest the anticommunist democrats gain control. That, frets political scientist Michael E. DeGolyer, could provoke a backlash from China's old guard. "If that faction gets dominance," says DeGolyer, a professor at Hong Kong Baptist University, "then we have a real problem." As if Wen Jiabao didn't have enough problems already.
By Bruce Einhorn