Over the last couple months, China has had record-breaking problems with pollution.  This past January, Beijing’s air pollution (PM 2.5) readings reached 886µg/m3, far surpassing the Environmental Protection Agency and the World Health Organization’s standards for acceptable air quality. In fact, pollution has become so bad that some Chinese experts have said it is worse than SARS.

But for all the attention air pollution has received, it’s quite likely that water scarcity will prove to be China’s more vexing problem. Fortunately, the government is taking proactive steps to help prevent a water crisis.

China faces a pressing shortage of usable water. The China Daily reports that over 400 cities have a deficiency of water while 110 of them face serious shortages of water. The problem is exacerbated by water pollution, which further reduces the availability of usable water. As Elizabeth Economy has noted, “Up to 40 percent of China’s rivers were seriously polluted and 20 percent were so polluted their water quality was rated too toxic even to come into contact with.”

China’s water shortage has the potential to disrupt its development and worsen existing social tensions. It also constrains Beijing’s ability to exploit certain opportunities like shale gas.

But the Chinese government is cognizant of the challenge and is actively seeking to address it. In its most recent  Five Year Plan (2011-2015), for example, the government pledges to “reverse the trend of ecological degradation from the grassroots by implementing major ecological restoration and bolstering natural forest conservation and reforestation.” It also promises to address “desertification and soil petrification” while preserving grasslands and wetlands. The plan says the government will “accelerate the establishment of ecological compensation mechanisms and the protection of major ecologically functional areas” and will “reinforce water and soil conservation by promoting sand consolidation.”

This isn’t merely hollow rhetoric. Forest Trends, a global non-profit, published a recent report focusing on investments in watershed projects around the world that found that China accounted for 61 of 205 active watershed investment programs in 2011, second only to the U.S.’ 67 active projects. In terms of dollars amount China is likely ahead of the U.S. As the report explains: “China represents the lion’s share of reported payments [worldwide] as the country’s leadership has increased funding for ‘eco-compensation’ mechanisms and placed eco-compensation in a key role in the most recent national Five-Year Plan.”  

In fact, China’s growing investment in watershed projects has helped keep global levels of investment steady despite declines in other areas of the world. As Forest Trends notes, China’s aggregate investment in ecological infrastructure has “more than offset falling investments in ecological infrastructure in North and Latin America, traditionally global leaders in funding watershed protection.”

China’s eco-compensation strategy reaches into all echelons of Chinese society, with the report noting that the government has focused on “compensation and cooperation between government bodies and households, communities, and other arms of government” to address problems stemming from ecological degradation. That being said, much of China’s water scarcity policies aim in part to offset rising social disparities that economic development has created, while also fostering more sustainable development.

A good example is the construction of three additional reservoirs on the Yellow River. The reservoirs – Guxian, Qikou, and Heishanxia – will be built over the next two decades and, once completed, will help improve “water and silt control, flood prevention, water and soil erosion prevention, water resource allocation and utilization, water resource and water ecology protection, and the drainage areas’ comprehensive management.” The director of the Yellow River Conservancy Commission of the Ministry Water Resources, Chen Xiaojing, has noted optimistically that, “The development, protection and management of the Yellow River will have strategic significance for the promotion of China’s sustainable development and environmental protection efforts.”

Another project currently underway in Zhuhai City, Guangdong province requires that polluters pay compensation directly to the victims of their activities. According to the Forest Trends report, this program was implemented to help those living in the area to more easily benefit from Guangdong’s “economic reforms, industrialization, and the results of modernization.”  In 2009, the city reserved US$106 million for the Zhuhai City Drinking Water Source Protection Area Support and Incentive Instrument program, which provides “health insurance for 108,000 rural residents in the drinking water source areas as non-cash compensation for foregone livelihood benefits.”

Thus, there are important socioeconomic benefits to these ecological investments, in addition to protecting important water resources. Forest Trends, for instance, “tracked 54 programs that report explicit social objectives, exhibiting a variety of social goals” and found that “nearly half of these are in China, where eco-compensation can be considered in part a rural welfare support program to more evenly distribute benefits of economic growth to poorer regions of the country.”

The report also mentions that such investments can help contribute to community development, by improving incomes and food security while reducing income inequality. As this underscores, addressing water security can translate into greater social stability in rural China. After all, along with local land grabs many rural protests stem from water scarcity and pollution issues.

Thus, addressing water security can boost government legitimacy while also helping advance key objectives of the Chinese government, including accelerating the pace of urbanization. As China Daily notes, “It may be costly to include water conservation, the protection of drinking water sources, the effective treatment of sewage and efficient use of treated water as well as the collection of rainwater in urban planning, but it will be even more costly when we realize a decade later that the lack of water threatens our existence and we have to make up for what we failed to do 10 years earlier.” 

Elleka Watts is an editorial assistant at The Diplomat.

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!

During his trip to India Premier Li Keqiang published an op-ed in The Hindu calling for a “Handshake Across the Himalayas,” as the headline put it. While in India Li pledged to narrow the trade deficit between the two countries and said his time in the country helped expand “strategic trust.” As always, how these powers get along in the weeks and months after a high-level visit will be more telling than what was said at the visit. For what it’s worth, the vast majority of Indians (83 percent) view China as a security threat while 63 percent of Indians want to expand ties with Beijing, according to a new poll by the Lowy Institute. Li is off to Pakistan followed by stops in Europe. For more on his trip, check out these posts from earlier this week.

Chinese artist and political activist Ai Weiwei has a wide-ranging interview with Playboy (link is to interviewer’s personal web page) and a new music video about his 2011 detention, officially cementing his rock star status in the Western world. Meanwhile, human rights activist and blind lawyer Chen Guangcheng called out British Prime Minister David Cameron this week for what Chen said was his reluctance to offend Chinese leaders. Chen was in London accepting an award from the British parliament. Kerry Brown discussed the current tensions in the UK-Chinese relationship earlier this month.

Chinese students studying at University of Pennsylvania are demanding an apology from U.S. Vice President Joe Biden over a comment he made during his commencement address at the university. Biden reportedly said that China cannot “think different” or “breathe free” during that address. One student told South China Morning Post that “It was a humiliating experience,” and asked “And how can a graduation speech be this political?”

Goldman Sachs sold the last of its shares in the Industrial and Commercial Bank of China (ICBC), another sign of growing concern over the health of China’s banks. For more on that subject, check out Eve Carey’s article earlier this week on China Power. Meanwhile, China Finance 40 Forum called for opening up the financial system when it met on May 19. As a side note, some of China’s biggest tech companies like WeChat and China Mobile are registering strong growth. That’s a good thing, as Chinese leaders continue to express reluctance on the possibility of a stimulus package. Ross Garnaut sees hope for one still, however.

A new report out this week, U.S.-China 2022: Economic Relations in the Next 10 Years, looks at the bilateral economic relationship through the next decade. The report was sponsored by the China-United States Exchange Foundation. Among its conclusions is that China’s middle class will triple over the next 10 years. This should give Presidents Xi and Obama something to talk about when they meet in California next month in what China’s media is emphasizing is an “unofficial” trip that Xi is taking on his way back from stops in Latin America. At an Asia Society event for the report’s release, however, Henry Kissinger hailed the upcoming leaders’ summit as potentially a “seminal event.”

Kim Jong-Un has dispatched a high-level envoy to China soon after North Korea released a Chinese fishing boat and its crew it had held for two weeks. Meanwhile, South Korean President Park Geun-hye will visit China in late June, with the dates June 26-28 being floated by South Korean news sources.

China is a better friend to Pacific Island countries than the United States, says Samoan Prime Minister Tuilaepa. Certainly, the emerging giant’s growing presence in the region has captured the public imagination. But politicians and officials in Australia and the United States are not quite as enthusiastic about that as the Samoan prime minister appears to be.

Indeed, in 2011, then Secretary of State Hillary Clinton described the United States as being in competition with China in the Pacific Islands, and led a resurgence of US commitments to the region. Clinton adopted more conciliatory language when she attended the Pacific Islands Forum Leaders’ meeting in the Cook Islands in 2012, but she also reminded Island states of the history, values and goals the United States shared with them. The Australian government has long called for more transparency around Chinese aid to the Pacific Islands and sought unsuccessfully to persuade China to join the Cairns Compact for Strengthening Development Cooperation in the region. The Australian Defence White Paper 2013 described the growing reach and influence of “Asian nations” (read China) in the Pacific Islands as a challenge and cautioned that Australia’s contributions may be balanced by support and assistance given by “others” (again, read China) in the future.

Although its presence in the Pacific Islands is not new, it is China’s interests in the region in the last five years that have provoked most unease in the capitals of the region’s established international partners. It is tempting for these partners to adopt the popular threat narrative so frequently invoked in debate about China’s role in the wider Asia-Pacific to interpret its rise in the Pacific Islands but this would be wrong.

To understand China’s ambitions in the Pacific Islands we should look not at what American, Australian, Japanese and Pacific Island officials and analysts think are China’s hidden intentions, but at what China is actually doing.

The actual extent of the three main elements of China’s engagement with the region - trade and investment, aid, and diplomatic and military ties – is not consistent with the argument that China presents a geo-strategic threat to Western influence in the Pacific Islands.

China’s trade with the Pacific Islands has increased sevenfold over a decade. Its total bilateral trade with the region of $2 billion is, however, still only one third that of the region’s largest bilateral trading partner, Australia. Chinese companies are particularly visible because they are usually involved in major construction projects in the region. But they are competing with, not dominating, an increasingly crowded business environment that includes investors from Asian as well as Western nations. Chinese investment does not nearly approach the 16.2 billion Australian dollars ($15.8 billion) Canberra invests in Papua New Guinea and it is US company Exxon Mobil that boasts the biggest single investment in the region – the $19 billion LNG project in Papua New Guinea.

China’s aid to the Pacific Islands has been lauded by Pacific Island leaders as more flexible than that provided by traditional donors. It may be popular but a comparison of China’s aid of $850 million over the period 2006 to 2011 (a five-year aggregate is the most accurate measure of China’s non-traditional aid) with the contributions of the region’s other major donors shows China is only the region’s fifth largest aid donor, behind Australia, the United States, New Zealand, and Japan. China, which devotes a tiny 4 per cent of its global aid program to Pacific Island countries, is unlikely to challenge the region’s leading donor, Australia, which spent $4.8 billion over 5 years. Even if a reported new $1 billion soft loan assistance package from China is made available to Pacific Island countries, this will likely be spent over a number of years.

There is little evidence to suggest that China’s diplomats are any more successful in persuading Pacific Island countries to align with China’s international positions than those from other countries who leverage aid commitments in efforts to obtain support for votes in the United Nations and elsewhere. China’s military assistance to the region is limited to the provision of uniforms, non-lethal equipment and refurbishment of barracks for the region’s three defence forces in Fiji, Papua New Guinea and Tonga. This pales into insignificance compared with the AU$183 million Australia spends on defence cooperation with the region and on securing Australia’s neighbourhood.

It is Chinese business interests that are really driving China’s rising influence in the Pacific Islands and they present a massive opportunity for Island countries, once remote from the global center of economic gravity. But the Island states need to manage the risks of a rapid rise of economic interest from China, which include a lack of capacity to repay loans and potential resentment towards investors who do not provide sufficient jobs or benefits to rural communities. Less suspicion and more cooperation from the region’s traditional partners would help.

Jenny Hayward-Jones is the Myer Foundation Melanesia Program Director at the Lowy Institute for International Policy and author of a new Lowy Institute Analysis, Big Enough for All of Us: Geo-Strategic Competition in the Pacific Islands.

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).