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20/01/2011 | Chinese State Visit to U.S. Highlights Shifting Bilateral Dynamics

Global Insight Staff

China's President Hu Jintao arrived in the U.S. capital yesterday for a full state visit, providing an opportunity to gauge the fast-evolving relationship between the two economic and geopolitical giants.

 

IHS Global Insight Perspective

Significance: There have been many bilateral encounters between the two countries' leaders, but this visit is being given the full state pomp and will see the signing of numerous commercial accords.

Implications: China's rapid economic ascent and huge holdings of U.S. debt are fuelling insecurity in the latter country, as well as tensions between those who advocate closer co-operation and those who advocate greater protectionism.

Outlook: Although President Barack Obama has been known to take a tough line on certain issues with China, his guiding principle appears to be pragmatism; the summit is consequently unlikely to see significant tension.

Gauging Relations

U.S.-Chinese relations are now a global preoccupation given the latter's rapid economic ascent. This week sees the United States roll out the red carpet for China's President Hu Jintao, who is granted a rare state dinner tonight. This is only the third such event President Barack Obama has hosted during his two-plus years in office. The visit provides an opportunity for the two countries to put a gloss on relations which are often fraught. Sharp disagreements continue over issues such as China's currency policy, U.S. monetary policy, trade disputes, and human rights, but these will almost certainly be played down. It is clear in any case that U.S. leverage over China is steadily diminishing as their economies become increasingly interdependent and as China's diplomatic and military clout grows. The United States needs Chinese help in many of its foreign policy objectives, including curbing Iran's nuclear drive, preventing conflict on the Korean peninsula, and securing peace in Sudan. Little concrete progress is expected in these areas; instead the progress will mainly be seen along a more practical, commercial vein. The raft of energy deals announced this week between the countries is described in some detail below. In other sectors, U.S. and Chinese firms are similarly pushing for greater access to the respective markets. The U.S. administration has argued that it will only grant greater access for Chinese firms if there are reciprocal measures on China's part. Hu will meet with the U.S.-China Business Council tomorrow to discuss such issues, and during his stop in Chicago he will visit a Chinese-owned auto parts plant.

Energy Co-Operation a Key Focus

The state visit has been accompanied by the signing of a host of energy co-operation deals between U.S. and Chinese companies, fundamentally aimed at promoting technology development in clean energy sectors.

• Perhaps the most significant deal is a joint venture (JV) established between China's largest coal company, Shenhua Energy, and U.S. electricity giant General Electric (GE). This establishes a JV company to sell industrial coal-gasification technology licences in China. For GE, collaboration with Shenhua promises expanded access to the Chinese market, which—with its large coal reserves and rapidly increasing gas demand—is an attractive investment location. Politically, coal gasification is a useful area in which to collaborate. The sector allows energy-hungry China to more efficiently use its domestic coal base, mitigating its hunger for reserves overseas. The technologies support China's efforts to reduce its reliance on burning coal for power generation. Development of the sector provides commercial opportunities for U.S. companies and supports U.S. efforts to temper China's emissions growth.

• American Electric Power Co. (AEP) has signed two more deals during the visit. The first is with China Huaneng Group—the country's largest electricity generator. The agreement allows the U.S. firm to evaluate carbon capture and storage (CCS) technology developed by Huaneng Group. The Chinese company has already launched pilot CCS projects in Beijing and Shanghai, and AEP is keen to assess their commercial effectiveness. AEP's second agreement is with China's largest power-transmission company, State Grid Corp. of China, and envisages joint evaluation of power transmission and distribution technologies. This should potentially support both countries' efforts to develop "smart grid" transmission networks, which use digital technologies to save energy, reduce costs, and improve reliability.

• China Power Investment Corp. and Alcoa Inc. are looking to collaborate on wind and solar projects, and in the development of state-of-the-art aluminium smelters in China, although no specific projects have been announced. Alcoa Inc. might be eyeing China's aluminium sector through the deal, but might also be seeking to use renewable generation technologies to lower its dependence on carbon-dioxide emitting forms of generation for aluminium smelting. Development of renewable generation facilities linked to smelting facilities could reduce associated costs in future, if China's carbon tax plan reaches fruition by 2012.

• Three U.S. companies—Duke Energy Corp., AES China, a subsidiary of AES Corp., and UPC Management—also entered into clean or renewable energy agreements with companies from China.

• Finally, Westinghouse Electric Co. stated that it has signed a two-year extension of a co-operation agreement with China State Nuclear Power Technology Corp. for continued deployment of its third-generation AP1000 reactor. Westinghouse will provide service and maintenance for the reactor, but the agreement also covers technology and strategic investments.

Outlook and Implications

This is likely to be the last state visit by Hu to the United States, with a power transition getting under way in China that will culminate with a new president in 2013. This shift will probably affect the tone of bilateral relations, but the process is gradual and the two sides have plenty of time to adapt. Hu's imminent departure has arguably weakened his influence, another reason why the summit is unlikely to see significant progress, or fireworks.

The raft of agreements signed between U.S. and Chinese companies support two main aims. The first is to advance technologies that improve energy-sector efficiency and environmental performance. Being the two largest carbon-dioxide emitters in the world both China and the United States are under pressure to put their economies on a cleaner energy footing. Their willingness to collaborate in this field underlines the pragmatic aspect of the U.S.-China energy relationship. This pragmatic element is partly due to the second aim of the agreements—to provide commercial opportunities for U.S. and Chinese companies in two of the world's largest energy markets. Interestingly, the agreements suggest that the technology flow in the energy sector is becoming less one-sided, with Chinese companies—like China Huaneng Group—also providing technologies to U.S. companies. This is testament to how quickly China is overcoming technical challenges in the energy sector, a fact which might be worrying to the United States. The agreements signed cannot completely mask the difficulties in the energy relationship between the two countries. In September 2010, the United Steelworkers filed a petition claiming that China had ignored international trade agreements when developing clean energy technologies. China's unwillingness to let international companies participate directly in its first offshore wind farm tender and in the country's fledgling shale gas bidding round has probably built upon U.S. grievances over China's protectionist tendencies. These grievances go to the heart of the complex and thorny issue of to what extent China should be allowed to utilise its low labour costs, undervalued currency, and revenues to increase its economic competitiveness, which is unlikely to be resolved soon. Nevertheless, the mutually beneficial energy agreements signed today are a signal of hope that energy co-operation between the two countries—a vital platform for tackling the larger emissions problem—remains intact.

Global Insight (Reino Unido)

 


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