China won't turn the other cheek forever

Longer term, the conviction in the military and among hard liners in the civilian establishment that the US is China’s enemy and seeks to block China’s natural rise will not only become more entrenched and more powerful; it will have consequences. Very experienced and well informed foreign diplomats and observers already warn that the military is in many respects becoming independent of political authorities and some believe that like the Japanese military in the 1930s, China’s military or factions within it could begin to take steps on critical issues that the political authorities could not reverse. Islands could be occupied, flags raised and shots fired.

Certainly any Chinese arguments against massive military build ups will be difficult to win. The evident weakness of China’s position will make it impossible to resist calls for more military spending and an acceleration of the development of China’s maritime capacity.

Many people in China (and elsewhere for that matter) believe that China’s massive holdings of US debt give China great power in the international system. Via Meadia thinks that those ideas are largely wrong and that any efforts to treat those reserves as a political instrument would be more likely to harm China than the United States. After all, a mass sell-off of China’s reserves would drive down the dollar — meaning in the first instance that China would take a massive hit on the value of the securities it was selling, and then that China’s markets in the US and likely also Europe would collapse in the ensuing global economic firestorm. The US would likely emerge from this faster and in better shape than China.

Nevertheless, the belief that China’s foreign reserves are an asset that can somehow be played to win political points is a strong one in China, and there will be great pressure in Beijing to play this card at the first available opportunity. What that might mean in practice is hard to predict, but US diplomats, bankers and strategists will need to keep in mind that China will be looking to weaponize its dollar hoard.