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China’s change of heart

Abusing its economic power for diplomatic purposes is the ultimate unlevel playing field.
Nov 02,2017
Beijing has made a stunning volte-face. It looked like it would never get over Seoul going against its will and deploying the Terminal High Altitude Area Defense (Thaad) antimissile system. When four additional launchers were deployed early last month to make the U.S. missile defense unit complete, Beijing’s mouthpiece the Global Times called the missile shield a “malignant tumor” that would undermine regional peace.

Then the freeze suddenly melted away in the wake of the 19th National Congress of the Communist Party of China in October. On Tuesday, the two countries jointly announced they were “normalizing” relations without pinpointing Thaad as the source of their tension. Their leaders will even hold a summit next week.

What led to Beijing’s sudden change of heart? It didn’t budge even when U.S. Secretary of State Rex Tillerson urged China to refrain from “inappropriate and troubling” economic retaliations against South Korea during a visit to Seoul in March.

Beijing ultimately realized that its actions did more damage than good to its national interests. I was in a breakfast forum in Seoul last week. The speaker was Zhao Jinping, a director of the State Council’s Development Research Center. He summed up Chinese President Xi Jinping’s three-hour-long address at the opening of the National Congress that endorsed his own second five-year term. The keystone of Beijing’s policy for the next five years is to reinvigorate a Chinese economy losing steam, through liberalization and further opening up to the world. Beijing will re-examine regulations in order to spur foreign direct investment and exports. China owes much of its rapid economic growth to foreign enterprises. Until 2011, foreign companies were responsible for more than half of China’s outbound shipments.

But over the last decade, foreign investment in China shriveled. Foreign direct investment, which grew 22 percent in 2010, fell by 8.1 percent last year. China has become nervier after U.S. President Donald Trump warned of punitive actions on U.S. companies making investments and increasing hiring in China or anywhere else instead of in the United States. Zhao called the move “investment protectionism.”

Beijing also fears its colossal economy could fall into the so-called middle-income trap as seen in other fast-emerging economies like Brazil and Thailand. China’s growth has been fizzling out in recent years. The economy grew 6.7 percent year-on-year in 2016 compared with 14.2 percent in 2007.

Xi vowed to further open the world’s second-largest economy and be more inviting and friendly to foreign investors. Zhao said Beijing would offer the same research and development subsidies it gives to Chinese companies to foreign entities.

The sudden withdrawal of retaliatory actions toward Korea Inc. should be interpreted in the context of China’s new opening policy. Korea is the third-largest foreign investor in China, accounting for 2.9 percent of its total foreign capital investment, followed by Japan’s 2.4 percent and a 1.6 percent share held by the United States. The two largest sources are Chinese capital from Hong Kong and Singapore. Korea, then, is China’s largest non-Chinese capital investor. China’s new policy to reinvigorate foreign investment requires Beijing to mend ties with Seoul. This explains the abrupt reconciliatory gesture towards Korea.

Regardless of the turnaround, we must never forget how ruthlessly China treated Korean companies — even as they were its biggest non-Chinese investors. It forced Lotte Group, which has operations in 19 countries, to close its Lotte Mart grocery stores across China.

Its economic retaliations on Korea painted China as a bully abusing its economic power for diplomatic purposes. That’s the ultimate definition of an unlevel playing field. No foreign entity would be willing to invest in China no matter what incentives it offers or how open it vows to become. China will sink deeper into the middle-income trap if economic matters are determined by its political whims. That’s not how an economic power in the modern age behaves — or thrives.

JoongAng Ilbo, Nov. 1, Page 30

*The author is an editorial writer of the JoongAng Ilbo.

Nam Jeong-ho