ECONOMIC RULES MADE IN CHINA

(The Financial Times, 23 August 1995)

Beijing plays the game hard. Washington was warned about the irreparable damage done to bilateral relations by the US visit of Taiwan's president, Lee Teng-hui. Dark hints were made that US commercial interests in China had been seriously compromised and US companies were told privately that their government was behaving unacceptably.

After all that, Boeing is set to beat Airbus to a billion-dollar aircraft order, Ford gets permission for a stake in a Chinese truck builder and the Chinese government is buying authorised versions of Windows 95. For all the bluster, Beijng has a clear sense of its priorities. Establishing a precedent under which the US could punish it commercially for a political action is not one of them.

The common mistake in anticipating Beijing's international responses is to take its more bloody-minded actions as typical of a repressive administration overseen by one of the world's few surviving Communist parties.

There are still issues on which the Chinese government reacts as harshly as it did a decade ago and on which its public pronouncements are coloured by an unreconstructed rhetoric. The arrest of Mr Harry Wu, the human rights activist and US citizen, and his "confession" of alleged errors in a BBC documentary on prison camps is point-scoring of the crudest kind.

But the Chinese leadership has calculated that this ritual punishment can be inflicted without provoking the US to retaliate. Beijing is also confident that it can conduct nuclear tests at Lop Nor without suffering serious economic damage. In response to last week's test, Japan threatened to limit grant aid. China retorted by urging Tokyo to begin a "profound introspection of its historical responsibilities" - in other words: Don't forget the war.

This Chinese reply echoes its commercial strategy. Beijing is asserting that it acts from a position of moral superiority, and its warnings to Washington are also intended to give the impression that China has a commercial superiority - that the US has much more to lose in a brawl with Beijing. US companies are encouraged to lobby on Beijing's behalf in return for a slice of what will be the world's largest market, while Chinese companies are already getting a healthy share of what is now the largest market.

This strategy has worked to China's advantage since the "open door" policy was launched in late 1978. It will come under strain when, as appears likely, the US trade deficit with China surpasses that with Japan some time over the next couple of years. When the two lines cross, US Congress will have an easy target. Then Beijing will no doubt be quick to emphasise that the commercial must be kept separate from the political. In the meantime, as should be, it will be business much as usual. Boeing will get its Air China contracts and Microsoft has more to fear from Chinese software pirates than the Communist party.