China’s banking system is reaching high highs, but has the potential to see very low lows. On a high note, last month, China’s Industrial and Commercial Bank of China (ICBC) took the top spot on the Forbes Global 2000 list, which weights sales, profits, assets, and market value to determine the world’s biggest public companies.  In 2012, ICBC had US$37.8 billion in profits and $2.8 trillion in assets. Additionally, in the first quarter of 2013, China’s banks made excellent profits: ICBC’s profits were just over US$11 billion, up 12 percent from 2012’s first quarter, but slower than that period’s 14 percent increase.  Agricultural Bank of China had a net profit for the first quarter that was $7.58 billion, up 8.2%, but down from 2012’s 28% first quarter rise.

However, as Xinhua reported this month, there are dangers lurking: non-performing loans reached nearly $85 billion in the first quarter of 2013, creating an NPL ratio of 0.96 percent, slightly up from the previous quarter, and the sixth straight quarter of increases since the end of 2011.  Bad debt rose in all lender categories, such as regional and state-owned banks. Additionally, overdue loans, a precursor to non-performing loans, are also increasing; by mid-2012, the top 10 lenders had 489 billion yuan (nearly $80 billion) in outstanding overdue loans, up from 112.9 billion yuan ($18.4 billion) in the beginning of 2012. In April, the China Banking Regulatory Commission said that non-performing loans and “increased risk in some areas and industries” means that the banking industry “still faces severe risks.”

One of the most salient features of the Chinese banking system moving forward is the prevalence of shadow banking.  Shadow banking plays an important role in the future health of China’s banking system, and falls loosely into two categories: non-banks offering financial services, such as trust entities, and banks that offer off-balance sheet products (to avoid regulation and underwriting requirements), such as wealth management products (WMPs). A new report by Moody’s notes that the volume of shadow banking has increased 67 percent over the past two years, reaching US$4.7 trillion by the end of 2012, a staggering 55 percent of China’s gross domestic product. Shadow banking has blossomed in a period of restricted credit and artificially low interest rates as an option for those that cannot get loans through regular channels and for those that want a higher return on investments, thus becoming a very useful tool for the Chinese economy by giving small, new and non-state owned entities access to credit.  Loans from shadow banking sources have kept the economy going by allowing projects to continue and helping entities service existing debt. In the case of WMPs, Reuters notes that the central government has allowed them to continue growing because it provides a channel for investors to get higher returns, sparking consumption, and is a “backdoor way to liberalize interest rates.” 

However, shadow banking can also inflate the asset bubble and exacerbate unbalanced investment in overheated sectors such as the real estate market. WMPs are one such tool that has exploded on the scene:  in 2012, the top 10 commercial banks issued US$1.24 trillion in wealth management products, a rise of 68 percent from the year before. WMPs are sometimes backed by high-risk projects that can go belly-up or projects with a long maturity, creating a mismatch with short maturity WMPs and making it difficult for banks to pay investors.

According to Bloomberg, shadow banking played a role in Moody’s recent decision to lower China’s credit rating to stable from positive. As for the impact of shadow banking on the banking system as a whole, the Moody’s report noted, “Given the substantial scale and growth of shadow banking activities in China, we are doubtful of the banks’ ability to isolate themselves from a significant increase in defaults in the shadow banking domain.”  However, the company notes that while shadow banking creates “excessive financial leverage,” the real impact on banks will “depend on the amount and timing of losses and how they are allocated,” information that is difficult to know because of “the lack of transparency and fast-evolving nature of shadow banking in China.”

Banks are vulnerable because of their own shadow banking products and by the products they back that are issued by other entities.  In December, several WMPs failed to make payments to investors, sparking small protests and bringing the faults of WMPs into the spotlight.  WMPs can be akin to Ponzi schemes, in that sales of new products allow the banks to pay returns on existing products. Many WMPs also involve fund pooling, which helps banks hide risks and provide the promised payouts for WMPs, but carries significant risks in that it is backed by bonds that may not be mature or may have declined in value, creating a liquidity risk.

The government has taken some steps to address the issue of shadow banking and the stability of the banking system as a whole.  Last October, Xiao Gang, then-Chairman of the Board of Directors, Bank of China and now (significantly) head of the China Securities Regulatory Commission, discussed shadow banking in a China Daily editorial. He said, “In order to prevent China's financial systemic or regional risks from happening, it is imperative to pay more attention to shadow banking and to enhance supervision over shadow banking activities.... It must be tackled with care and sufficient flexibility, but it must be tackled nonetheless.”

There is subtlety in the government’s handling of shadow banking, representing an understanding of the delicate balancing act needed to allow shadow banking to fulfill its necessary role in the economy while minimizing its risks. Potential and imminent reforms include: required disclosures about off-balance sheet investment products, required registration of wealth management products, and a potential hard cap on the quantity of investment products.

At the April Boao Forum, George Soros noted: "The rapid growth of shadow banking has some disturbing similarities with the subprime-mortgage market in the US that caused the financial crisis of 2007-2008," and cautioned “if the American experience is any guide, the authorities have a couple of years to bring shadow banking under control.....it's of utmost importance that the authorities should succeed. Not only for China, but also for the world."

As for other problem areas in banking, the China Banking Regulatory Commission (CBRC) said that they would move to reduce the volume of non-performing loans and deal with outstanding bad loans by debt restructuring.  In May, the China Foreign Exchange Trade System (CFETS) closed a loophole in banks’ use of fund pooling for wealth management products, requiring more stringent checks on underlying assets.  As a result of a CBRC directive to cap wealth management investment and slower growth, Moody’s expects that the growth rate of assets in shadow banking will fall to 20 percent from last year’s 30 percent.

As for the overall future health of the banking system, Forbes has noted: "Most analysts don't expect a banking crisis in China, but rising defaults and shrinking loan profitability are serious threats to the country's banking system.” 

The latent risks in the Chinese banking system (including growing liabilities) and the emergence of “black market” solutions for economic issues suggests the need for banking reform. Indeed, it is an oft-discussed oft-argued topic among China watchers and Chinese officials alike. On a very general note, a recent report by the Chinese Academy of Social Sciences (CASS) had a number of suggestions for reforming the banking system, including liberalizing the interest rate regime and creating a unified bond market to provide more investment opportunities.

Chinese Premier Li Keqiang has started his first overseas trip since the change in government in March. Li will cover four countries through May 27 with visits that will focus heavily on economic issues.

His first stop is India, where he is meeting with Indian President Pranab Mukherjee and Prime Minister Manmohan Singh, while also attending a China-India Business Cooperation Summit where he will deliver a keynote speech.

Although some believe that the premier’s time in India will be overshadowed by the recent border incident, the charm offensive China launched ahead of the trip has sought to minimize the chances of that happening. It just may work.

Although the border issue will be discussed, both sides have a strong interest in ensuring the trip goes off smoothly, which is why there has been such intense diplomacy after China’s forces withdrew from their position on the border.

Both sides will be seeking to play up the economic aspect of the trip. Bilateral trade between India and China has skyrocketed to US$66 billion last year, but remains highly imbalanced with India running a US$29 billion deficit with China. India has called on China to address this issue, which Beijing has pledged to do. On Thursday, Vice Commerce Minister Jiang Yaoping said this effort would continue on this trip, with Li expected to bring an investment promotion mission and one of the biggest ever business delegations with him.

The investment mission and business delegation will follow Li to his next stop in Pakistan, where he is scheduled to meet both the outgoing and incoming Presidents of Pakistan, Asif Ali Zardari and Muhammad Nawaz Sharif, respectively. The trip is mostly symbolic for how soon after the election a senior level Chinese delegation will be in Islamabad, but China has said that three intergovernmental agreements on economic and trade cooperation will also be signed during the trip.

After leaving Pakistan, Li will head to Europe for stops in Switzerland and Germany. In many ways Chinese-EU ties have been robust under President Xi Jinping and Premier Li, with China signing its first free trade agreement with a European state, hosting two European heads of states and the EU foreign policy chief, and gaining permanent observer status at the Arctic Council, all of which may help expand Chinese-EU trade considerably in the future.

Yet there have also been a number of irritants in China’s relationships with individual European nations and increasingly the EU as a whole. In the former category is the ongoing spate between China and the United Kingdom (still part of Europe, for now anyway) over Prime Minister David Cameron’s meeting with the Dalai Lama. More problematic from China’s perspective is the increasing scrutiny its trade practices are being given by the EU, with Brussels threatening trade sanctions against China’s solar and telecommunication companies as part of anti-dumping and anti-subsidy legislation.

These issues may well find themselves on the backburner while Li is in Switzerland and Germany. In the former country, Premier Li will meet with President Ueli Maurer and other officials in what China’s Foreign Ministry has said will be an effort to establish bilateral ties that are “a model of friendly exchanges between countries with different social systems.” Bureaucratic jargon aside, discussions will likely focus on concluding a free trade agreement that both sides said was close to being signed following the ninth round of negotiations held last week.

In Germany, the Chinese premier expects to meet with President Joachim Gauck and Chancellor Angela Merkel, as well as give a speech to a business luncheon as part of Li’s effort to increase ties with non-governmental groups inside Germany. After the meeting with Merkel the two leaders plan to announce the “year of languages” between the two countries, a new initiative aimed at boosting the study of each other’s languages.

Vice Foreign Minister Song Tao placed a high premium on ties with Germany during a press conference on Li’s trip that was held on Thursday.

"China-Germany relations are at the forefront of China-Europe relations, featuring the most frequent high-level contacts and the most effective dialogue mechanisms," Song said, according to Chinese media reports.

According to China’s Vice Commerce Minister, Jiang Yaoping, China’s trade with Germany last year accounted for nearly 30 percent of its trade with the entire EU. The two countries’ economies are increasingly complementary as the export-reliant German economy seeks to open up markets outside of Europe and Chinese leaders seek to transition to a consumption economy.  

The new Chinese leadership took office in early March. In the two months since, Chinese President Xi Jinping, Vice President Li Yuanchao, Yang Jiechi, State Councilor in charge of managing foreign affairs, and Foreign Minister Wang Yi have all taken their first trips abroad. Meanwhile, Premier Li Keqiang will soon making his own first official overseas visit. Looking at the itineraries, it seems clear that the basic orientation of the new government’s diplomacy is to focus on China’s neighbors while reaching out to emerging countries in Asia, Africa and Latin America.

Diverse itineraries

Within a week following the end of the two sessions (the National People's Congress and the Chinese People’s Political Consultative Conference) of the general election on March 17, new President Xi Jinping took his inaugural trip abroad, with Russia as his first stop, followed by three African countries, Tanzania, South Africa and the Republic of the Congo. Xi also attended the BRICS summit with his counterparts from Brazil, Russia, India and South Africa.

Foreign Minister Wang Yi accompanied Xi on this trip, continuing the tradition of China's new foreign minister visiting Africa first. In May, Wang Yi has also travelled to four Southeast Asian countries, Thailand, Indonesia, Brunei and Singapore, in what the official media is calling his “first visit”, suggesting the importance China is placing on neighborhood diplomacy.

Vice President Li Yuanchao is rarely involved in foreign affairs, but is currently in South America. Xinhua News Agency reports that Li will spend a week in Venezuela and Argentina. This is his first visit in his new role, and it is noteworthy for that reason. Meanwhile, Yang Jiechi, whose brief actually is foreign affairs, is in Mongolia.

According to Indian media reports, Premier Li Keqiang will pay his first visit to India, Pakistan, Switzerland and Germany. Although none of this has been publicly confirmed by official Chinese sources*, India’s foreign minister hinted that the trip to India at least was a "certainty" during his own recent visit to China.

Neighborhood stability, emerging market outreach

China's foreign policy is managed by the Central Foreign Affairs Leading Group. Within this group, the key players are the president, the premier, the state councilor and the minister of foreign affairs. As such, the destinations of their first forays overseas are revealing. Media reports have noted that Li Yuanchao—the standing member managing the Hong Kong and Macao Affairs—has also shouldered some diplomatic functions, reflecting an increased emphasis on diplomacy by the new Chinese government.

Many of these inaugural trips involve China’s neighbors: Russia, Southeast Asia, Mongolia, India and Pakistan. Beijing has always considered the nations that surround it as the starting point for its diplomacy, and repeatedly refers to a policy in pursuit of an "amicable, secure and prosperous neighborhood". With China engaged in territorial disputes with several Southeast Asian countries and with India, these first visits can help not only to attenuate doubts and confusion, but also reflect China’s continued emphasis on peaceful coexistence. Meanwhile, relations with Russia, Pakistan and Mongolia are already relatively sound, and visits to these countries simply seek to strengthen traditional friendships.

Africa and South America are rapidly joining Asia as the “new engines” of international politics and economics. The fact that these regions have been top destinations for the Chinese leaderships shows that Beijing is looking to combine neighborhood stability with outreach to its fellow emerging nations.

If the media is right, and Li Keqiang’s first trip includes Switzerland and Germany, then this inaugural round of Chinese diplomacy can be considered balanced and comprehensive. In other words, focus on the emerging world without ignoring relations with developed countries.

It’s interesting to compare these first trips by the Chinese leadership with the initial itineraries of their U.S. counterparts. In his first overseas visits after his re-election last year, Barack Obama visited Southeast Asia, the Middle East and Latin America, while Secretary of State John Kerry went to Europe, East Asia and the Middle East. In fact, John Kerry has visited the Middle East three times in rapid success, which together with Obama's own travel there, suggests that the oil-rich region remains a top priority for U.S. diplomacy.

*Update: In fact, now it has.

“The champion of the developing world” has become a common reference to describe China over the last decade. China is both a developing country itself but also one of the largest world economies, putting it in a unique position to represent the interests of its developing world brethren.  As the Asian country grows in economic strength, its ability to give voice to developing world issues grows commensurately, especially in international forums.  At least this is the common refrain among Chinese leaders.

In practice, this narrative mischaracterizes the relationship between China’s economic rise and international voice opportunities for developing countries.  A closer examination of trade relationships and foreign policy consequences shows, not that Beijing has come to endorse the interests of its partners, but that its trade partners converge with Beijing. 

In particular, we find that the more countries in Africa and Latin America trade with China, the more likely they are to align with the Asian country on one of its main foreign policy issues: non-intervention with respect to human rights. Every year, the United Nations General Assembly holds country-specific resolutions on human rights, and invariably Beijing votes against condemning violations, invoking the principle of self determination.

Increasingly, African and Latin American countries that have growing trade ties with China have begun to abstain or vote against resolutions they would have typically supported. This change in behavior can be quite remarkable for countries with a long-standing tradition of promoting human rights, such as Costa Rica.

That developing countries would be inclined to side with China rather than the other way around is surprising in some ways.  China has famously touted its “no strings attached” approach on commercial relations. This way of doing business comes in stark contrast to the conditions imposed by Western countries, the International Monetary Fund, or the World Bank. When dealing with them, developing countries have to worry about a number of conditions, including democracy, human rights, and labor provisions in trade agreements, governance oversight in foreign aid, and economic stringency in loans.

The obvious benefit would be that China’s engagement is not only risk free, but also devoid of any colonial impetus. Mutual economic benefit would be the main driver of the relationship.

To be sure, China may not have a purposeful plan to bring their trade partners into alignment on foreign policy questions.  Even if unintentional, however, this “gravitational effect” has a sound economic basis.  Developing countries in Africa and Latin America are comparatively much more dependent on China than China is on these countries.  In a ten year period, for example, Sudan’s trade with China rose from 1 to 10% of its Gross Domestic Product. That pattern is even starker in a country like Angola, for which trade with China represented 25% of its GDP in 2006.  While China certainly needs access to the resources in these countries, the individual countries are far less important to China than China is to these countries.  The asymmetry in needs gives China a bargaining advantage that translates into foreign policy outcomes even if not by explicit design.

Whether by design or not, the convergence with China’s foreign policy goals is important on at least two levels.  First, developing countries in Africa and Latin America may be lulled by the prospect of partnering with a country such as China that does not have an explicit political agenda, as did the United States and Soviet Union during the Cold War, but this appears to be an illusion.  Whether this reaches the level of “new colonialism” as former Secretary of State Hillary Clinton referred to it remains to be seen, but the economic asymmetries that undergird the relationship make that prospect more likely. 

A second set of implications deals with the United States. During the same period in which China’s trade with Africa and Latin America and foreign policy convergence have increased, the United States and China have actually diverged in their overall UNGA voting behavior.  This suggests something of a zero sum dynamic in which China’s growing trade relations make it easier to attract allies in international forums while US influence is diminishing.  

Taken together, these trends call for greater engagement on behalf of the United States in the developing world. Since the September 2001 attacks, Washington has dealt with Africa and Latin America through benign neglect and shifted its attention elsewhere. If foreign policy alignment does follow from tighter commercial relations, the US ought to reinvigorate its trade and diplomatic agenda as an important means of projecting influence abroad.

Sarah E. Kreps is Assistant Professor of Government at Cornell University and author of Coalitions of Convenience: United States Military Operations After the Cold War (Oxford University Press 2011). Gustavo A. Flores-Macías is Assistant Professor of Government at Cornell University and author of After Neoliberalism? The Left and Economic Reforms in Latin America (Oxford University Press 2012). They are the authors of "The Foreign Policy Consequences of Aid: China’s Commercial Relations with Africa and Latin America, 1992–2006," which appears in the most recent issue of the Journal of Politics. 

Beijing has responded to Japan’s recent nationalization of the disputed Diaoyu/Senkaku islands, with activities on the ground (or water) designed to undermine Japan’s de-facto control of the islands. Beijing’s actions were rightly captured as “reactive assertiveness” by an International Crisis Group report, where “[China] exploits perceived provocations in disputed areas by other countries to take strong countermeasures to change the status quo in its favor.”

By inducing costs on the ground, Beijing’s goal is to make Tokyo recognize the existence of the dispute and agree to negotiate. However, this “reactive assertive” approach makes flawed calculations of risks and gains.

Beijing does have some logical reasons to pursue this course. One, inaction would be difficult to reconcile with boiling domestic nationalism. Two, Japan’s control of the islands does not give Tokyo any motive to recognize the existence of the dispute, much less the willingness to negotiate. Unless China gains some leverage vis-à-vis Japan, chances are thin that this issue will ever even reach the negotiating table. Three, Japan’s initial provocation may have inflamed China, but it offered Beijing the chance to retaliate by challenging Japan’s de-facto control of the islands while still claiming the moral high ground. Four, the economic ties between China and Japan, as well as U.S. interests, seem strong enough to keep potential armed conflicts at bay. To the extent that the U.S. is involved, its interests in these tiny, uninhabited rocks are marginal. Although its security treaty obligations with Japan bind it to action should the islands be attacked, the U.S. will attempt to deter the use of force. Finally, a strong and consistent response would effectively showcase to China’s other disputants, in the South China Sea for example, its resolve to defend its position in territorial disputes.   

However, logical reasoning also supports strong countervailing arguments. First, the risk of military conflict is uncomfortably high. Chinese and Japanese ships are frequenting the disputed areas on a daily basis. It only takes one firebrand soldier or one miscalculation by a local commander to beget unpredictable escalation.

Second, while forces for peace exist in both China and Japan, so too do beneficiaries of conflict. Certainly any hostilities would play into the hands of Prime Minister Shinzo Abe and his right-wing coterie, as they try to push through an agenda to revise the Peace Constitution.

According to a May 3 Nihon Keizai Shimbun newspaper/TV Tokyo poll, only 28 percent of respondents object to constitutional amendments – the lowest level of opposition in the eight years of the poll. However, among the 56 percent supporting amendments, only 30 percent favor changing Article 9 of the Constitution, which renounces war as a sovereign right.

So while a significant number of Japanese support amending the Constitution, far fewer are willing to abandon its pacifist safeguard. Hyperbolizing Japan’s militarist trend, Beijing’s “reactive assertive” response risks alienating the very segment of the Japanese public least likely to view China as an enemy. Any clash on the high seas could tip public sentiment in Japan in favor a constitutional amendment, with irreversible repercussions for the security landscape in East Asia.

Third, the U.S. may have only a marginal interest in the islands themselves, but its interest in the issue is real. The U.S. will be obliged to stand by Japan in the event of an attack, not only because of its treaty obligations, but also for the sake of the alliance, which has significant implications for U.S. interests in the Asia-Pacific.

Fourth, an assertive approach, however reactive, will further stoke regional fears of bullying by China. The power asymmetry between smaller Asian countries and a big, rising China is Asia’s new reality. It is only natural for smaller Asian countries to be uncertain about China’s intentions. An assertive Beijing appears oblivious to this asymmetry. Its resolve to defend its territory is already assumed, and need not be stressed by bellicose statements or muscle flexing. Therefore, “showcasing” its resolve through the Diaoyu/Senkaku issue will only reaffirm fears of a bullying China and deteriorate China’s surrounding security environment in the long run.

Beijing’s proponents of the “reactive assertive” approach have relied on logical, but incomplete, reasoning. The adventurists have carried the day with their claims so far that should accidents happen on the sea, escalation could be contained, and that Tokyo has no interest of its own in escalating the conflict. Without any clear guarantee of the truth of such premises, Beijing’s actions constitute a dangerous gamble at best. Senior leaders in Zhongnanhai should carefully recalculate if they are genuinely willing to take on the risks in the slim hope of simply getting Japan to negotiate the disputed islands.

Yaping Wang is Program Manager, Asia Program, at the Carnegie Endowment for International Peace.

Every week, The Diplomat’s editorial team scours the web to find the best material on all things China. From Beijing’s relations with its neighbors and growing military might, to a rapidly evolving economy and amazing arts and culture, we present a diverse grouping of articles for your reading pleasure.

Here are our top picks for this week. What did we miss? Want to share an important article with other readers? Please submit your links in the comment box below!

The CCP has dismissed Liu Tienan, deputy director of the powerful economic planning body, the National Development and Reform Commission (NDRC), from his ministry-level position over his “suspected involvement in serious disciplinary violations.” China’s media first announced Liu was under investigation on Sunday after allegations being made against him by a former mistress appeared on social media starting in last November. Chinese President Xi Jinping has launched an anti-gaffe campaign that he promised would target both “flies” and big “tigers.”

Using the county-level city Leiyang, Hunan Province as a test case, the Economic Observer explores how urbanization is changing smaller cities in China.

The Information Office of the State Council released a white paper on Tuesday on the human rights situation in China in 2012. Here’s the full text, via Xinhua.

The People’s Daily quotes experts as saying that the yuan’s appreciation is reaching its upper limits, noting that “On Friday the central parity rate of the yuan hit 6.2016 against the US dollar after advancing to a record high of 6.1925 in the previous day. So far, the yuan's central parity has strengthened 881 basis points this year, while last year it gained 146 points.”

The world’s largest credit card company, Visa, hopes to begin a yuan-denominated business in China after Chinese regulators issue new guidelines for foreign companies to enter the domestic credit market.

China’s special envoy to the Middle East, Wu Sike, published an op-ed in U.S.-China Focus on Tuesday entitled “Leave Room For China in the Middle East Peace Process.” Last week, Chinese President Xi Jinping emphasized that China would like to take on a greater role in solving the Israeli-Palestinian conflict while Israeli Prime Minister Benjamin Netanyahu and Palestinian President Mahmoud Abbas were visiting China.

China was one of six nations granted observer status at the Arctic Council during the body’s biennial meeting on Wednesday. The others were India, Italy, Japan, Singapore and South Korea.

One of China's most beloved authors, Lao She's, private art collection was auctioned off on Saturday for US$27 million, the International Herald Tribune reports.

Human Rights Watch released a new report on Tuesday calling on the Chinese government to do more to protect the rights of prostitutes in China. Based on interviews with numerous women who work in the industry, the 51-page report “documents abuses by the police against female sex workers in Beijing, including torture, beatings, physical assaults, arbitrary detentions, and fines, as well as a failure to investigate crimes against sex workers by clients, bosses, and state agents.” The report also notes that many of the women working in the industry are rural migrants.

In 2009, the Rudd government in Australia issued the first White Paper on Defense for almost a decade. The line on China in that was stark: “The pace, scope and structure of China's military modernization have the potential to give its neighbors cause for concern if not carefully explained.” The report also noted that “there is likely to be a question in the minds of regional states about the long-term strategic purpose of [China’s] force development plans, particularly as the modernization appears potentially to be beyond the scope of what would be required for a conflict over Taiwan.”

Only four years later, and the new White Paper issued by the Australian government of Julia Gillard has a very different tone. “Australia welcomes China’s rise,” it states, “not just because of the social and economic benefits it has brought China’s people, but also in recognition of the benefits that it has delivered to states around the globe.”

How can one account for the journey from the first 2009 statement and the second a few years later? What has changed? In many ways, evidence of Chinese assertiveness is greater now than it was back then. Not only has China continued to press its case strongly on the Senkaku/Diaoyu islands, but Chinese academics, have started to even express interests in sovereignty concerning Okinawa. In view of this, why the positive note of the latest paper?

Some have been acidly critical in the latest more benign stance. Writing in the Sydney Morning Herald, John Garnaut, one of the most gifted journalists currently covering China wrote: “The Gillard white paper talks the language of benign friendship and, simultaneously, reflects a retreat in the face of formidable Chinese power.” But perhaps another view might be that the latest paper is far more pragmatic than the 2009 one. And if there is one thing that can be attributed safely to the leaders in Beijing, and to those that most successfully engage with them, it is pragmatism.

The difference between 2009 to 2013 maps out a space which has been far more full of fear than most observers might think. Australian has, since the 1980s, been contemplating an economic future in which it is more profoundly part of Asia. By 2013, this had already happened. The traditional business links with Europe and America have been overtaken by a situation now where China has become the largest trade partner, and its investments in the country, while still proportionally small, are rising fast. Strategically, though, things are more complicated. The schizophrenic nature of these White Papers testifies to this.

For China’s economic clout also translates into political influence as well. It has many more sticks and carrots to hold out for those it wishes to influence than ever before. The potential costs of irritating or clashing with China on issues have risen. And the differences in the political systems between Australia and China can’t be fudged. Decision-making dynamics, governance and participation in decision-making in both places are very different.  This is a hard place to be in for a country like Australia where the economic links are now becoming so deeply integrated with China.

In 2009, the Rudd government adopted a more strident tone, and had a more antagonistic relation with China. Under Gillard, the strategy is more to deal with the challenges through harmony, win-win and a vision of cooperation. This debate in Australia is highly unlikely to end here. The White Papers are evidence of a profound underlying debate within the soul of this country about how it deals with a historic transition where a developing country for the first time is becoming one of the great engines of global growth. Having a strategy that alienates and antagonizes is going to be tough. But wholly dispelling the concerns and fears is also unlikely to work. The likelihood is that this debate will get harder in the years ahead, and the White Papers will appear way more frequently than they did in the past.

Kerry Brown is Executive Director of the China Studies Centre at the University of Sydney, and Professor of Chinese Politics. He was previously Head of the Asia Programme at Chatham House. He leads the Europe China Research and Advice Network (ECRAN) funded by the European Union (www.euecran.eu).

Northeast Asia is one of the most complex, fragile regions in the global security landscape. The regional security dilemma is concentrated and intensive, and is generated by a complex and tangled mix of historical issues, ideological factors and disputes over real interests.

Consider the region’s recent history, which features more than its share of turmoil and strife. The ruptures have left Northeast Asia with lingering issues such as territorial disputes between China and Japan and South Korea and Japan, and division on the Korean Peninsula. Japanese attitudes towards history are among the core variables that influence its relations with China and South Korea. Recently, members of Japan’s Cabinet paid a visit to the Yasukuni Shrine, arousing strong protests from China, South Korea and other Asian countries. Clearly, historical factors have important and obvious impacts on the current political landscape in Northeast Asia.

As do ideological factors. The Cold War was in part the struggle of competing ideologies between the United States and the Soviet Union. But this struggle has outlived the Cold War. The current security tensions in Northeast Asia are still exacerbated by a Cold War mentality and its manifestation in the U.S. alliance system in Asia. To some degree, the strong U.S. presence in the region contributes to the increased security dilemma. Take the North Korean nuclear crisis, which Pyongyang claims is driven by the absence of a guarantee of its national security. For North Korea, a reliable nuclear deterrent is an effective means of safeguarding its own national security. Essentially, the key to the North Korean nuclear issue is still the lack of safety and security.

Third, there are disputes involving real interests among major Northeast Asia countries. Most entail core interests of territorial sovereignty, which narrows the scope for coordination among the nations involved. Nationalist sentiment in these countries runs high, especially on issues of sovereignty. As modern nations, these states see serving the interests and aspirations of their peoples as an important source of legitimacy. For this reason, decision makers tend to be heavily influenced by public emotions, which may lead to irrational policies. Meanwhile, a number of countries in Northeast Asia have faced economic difficulties in the wake of the global financial crisis. In some cases, political parties have resorted to inciting nationalist sentiment against neighboring countries, to the detriment of relations within the region.

Given these factors, a multifacted approach is needed to resolve the security dilemma in Northeast Asia. First, the countries involved should squarely confront their histories, even as they look to the future. All countries should of course calmly rethink the lessons of the past, but this is particularly important for a country that has caused immense suffering among the people of Asia within its modern history.

Building on this, the region should then turn its attention to the future, go forward and work together to build a long-term, stable security mechanism. To a larger extent, dealing with the historical issues that exist between Northeast Asian countries, including factual disputes and issues of mentalities, is the first step toward a new security relationship among Northeast Asian countries.

Second, we must dispense with a Cold War mentality and seek mutual assured security (MAS). Whether in theory or in practice, the zero-sum approach of the Cold War has been proven to be obsolete. The policies of power against power are not conducive to regional stability and prosperity; rather, common, cooperative, and collective security based on a commitment to MAS are the most useful means for keeping the peace within the region. Any actor wanting to bolster its own security at the expense of another's, pursuing so-called absolute security, is bound to find it counterproductive.

Third, we must strengthen multi-level exchanges, reducing the risk of miscalculation. At present, the academic community has formed a basic consensus, namely on the lack of a Northeast Asia security mechanism, which is largely reflected in the absence of any effective, comprehensive, institutional exchange mechanism among Northeast Asian countries. As a result, the risk of strategic misjudgment increases, especially at times of crisis. Therefore, to build a Northeast Asia security mechanism, we first need to create institutionalized channels of communication, at both non-governmental and government levels. Mutual understanding and trust between peoples is the most reliable guarantee of harmonious relations between nations.

Finally, but most importantly, Sino-U.S. relations must be strengthened, with greater cooperation. On one level, Northeast Asian security involves many actors, but Sino-U.S. relations are key, with the regional outlook very much linked to the status of the relationship between the two powers. Thus, the nature and form of Sino-U.S. relations have become critical variables for Northeast Asian security. But it runs both ways. In other words, the state of security in Northeast Asia influences the state of Sino-U.S. relations. Boosting cooperation in Northeast Asia therefore offers an excellent opportunity and an important platform to cultivate a new kind of relationship between China and the United States.

Chen Jimin, Ph.D is an Assistant Research Fellow for the Institute for International and Strategic Studies at the Party School of Central Committee of C.P.C

Although much of the current attention on China has focused on domestic and regional issues, recent days have offered a number of reminders that Beijing itself is still very much committed to gradually reshaping the global economic order.

Some recent activity has involved international institutions. For instance, the Financial Times reported this week that China is spearheading an effort at the World Bank to eliminate its Doing Business report, which ranks national economies according to indicators like transparency, regulations, and the ease of starting a company. It would be a mistake to attribute this simply to China’s desire to avoid the unwanted publicity that comes with being ranked 91st in the report.

Rather, China’s opposition stems from a deeper hostility to the dominance of liberal economics. As the report’s critics often charge, a country’s ranking is largely a reflection of how much it confirms with classical economic liberalism. Although a small gesture in itself, discrediting the report will help chip away at the general consensus among international powers that liberal economic models are superior to all competitors. Since China doesn’t have a liberal economic model, it has a vested interest in eroding the international norm on the issue.

Another sign of China’s global economic (and partly political) diplomacy comes from French Foreign Minister Laurent Fabius. While in Hong Kong this week, Fabius told reporters that when he accompanied French President François Hollande on the latter’s recent trip to Beijing, "the Chinese president told us that the hope of China is to be able to preside over the G20 summit in 2016.” This came in addition to Xi and Hollande agreeing to work towards the “democratization” of the international system.

The elevation of the G20 in the early days of the financial crisis was a potent symbol of the democratization of the international economy. However, its limited effectiveness has led many to dismiss it entirely. By expressing an interest in hosting the body’s summit, China is signaling to other powers that it continues to place great importance on the G20. Given China’s growing international clout, this will lead other nations to calculate that they too should place importance on the international forum, with the general expectation that it will come to supplement some of the post-WWII international bodies.

Another way China is hoping to democratize the international order is by launching a new global crediting ratings agency to compete with the big 3 U.S.-based companies. That is exactly what Dagong Global Credit Rating Co Ltd, China’s largest credit agency, will attempt to do next month in Hong Kong when it opens a joint venture with a Russian and an American company under the name Universal Credit Rating Group (UCRG).

As Dagong Chairman Guan Jianzhong, who will also be chairman of UCRG told China Daily this week, “We hope that UCRG will bring a new perspective to the current ratings landscape and help build a new credit rankings system.” Guan even went so far as to predict it will take the joint venture six years to do so.

Sean Egan, the president of Egan-Jones, the American partner in UCRG, elaborated further, telling China Daily, “The current system is New York-centered. UCRG will bring the perspective of China and Russia to the table.”

Perhaps the most important aspect of democratizing the global economic order will be eliminating the dollar’s global hegemony. In recent years, China has been involved in a multitude of efforts to promote the yuan as an international currency. Recently, China signed currency swap agreements with both Australia and Brazil, and one it signed earlier with Pakistan went into effect.

One of the primary obstacles to the yuan going global, however, is that Beijing regulates it so extensively. Notably, the State Council announced after a meeting this week that it will soon announce a plan this year to begin removing some of the current restrictions on the flow of the yuan and interest rates.

Bloomberg News quoted one former Chinese regulatory official as saying of the move: “The general principle of the opening-up is to be gradual, starting from long-term investment to short-term capital flows and from a quota-management system to a free flow of money.”

Thus, like the other efforts listed above, China’s plan for deregulating its currency seeks to gradually democratize the global economic order in ways favorable to China itself. In doing so, Beijing is showing a level of responsibility that some rising European nations have lacked, even as it, like every other rising power before it, seeks to take advantage of its growing power.

Moreover, as has already been seen throughout the world, a China that is more actively involved in the global economy will in many ways benefit people worldwide. Although some in the West will be alarmed by China’s growing clout, Beijing is likely to continue to have global support on many of its efforts throughout the world.

Every week, The Diplomat’s editorial team scours the web to find the best material on all things China. From Beijing’s relations with its neighbors and growing military might, to a rapidly evolving economy and amazing arts and culture, we present a diverse grouping of articles for your reading pleasure.

Here are our top picks for this week. What did we miss? Want to share an important article with other readers? Please submit your links in the comment box below!

China May Not Overtake America This Century After All (Telegraph)  - "Doubts are growing about whether China can pass the U.S. to become the world's biggest economy this century amid warnings that the country’s 30-year miracle is nearing exhaustion."

Obama Faces New Strategic Opportunity (China/U.S. Focus) - "The dawn of the global financial crisis has reshaped the global landscape. Now, the United States faces a strategic decision to either embrace peace and development or continue to seek hegemonic superiority. As Wang Yusheng points out, embracing this new opportunity is key for stability in the international community."

China: Public Opinion Behind Article on Okinawa (NHK) - "The Chinese government says domestic public opinion is behind a newspaper commentary questioning Japan's sovereignty over its southernmost prefecture Okinawa."

The Great Sino-Indian Alpine Tent Party of 2013 (Foreign Policy) -  "China's latest border squabble with India might seem trivial, but the consequences could set Asia on edge."

China Dips a Toe Into Middle East Peace (New York Times) - "Back-to-back visits from the Palestinian and Israeli leaders hinted that China had given some thought to playing a more energetic, if very limited, role as mediator.