The Australian

By Paul Kelly

With Joe Hockey in Beijing this week for the China-led Asian Infrastructure Investment Bank formalities — where Australia is a major shareholder and the US sits on the sidelines — the world is being told China intends to be a rule maker in the global system.

Two great tensions in Australia’s policy are now on display — it is deepening economic engagement in Chinese-sponsored institutions while its strategic analysts in private are convinced a tougher line is necessary against China’s regional assertions and tactics.

This is a challenge for Australian policy without precedent. Whether these two potentially contradictory strands in our national outlook can be reconciled depends on forces largely beyond our control.

With former US deputy secretary of state and past World Bank president Bob Zoellick in the country this week, it is helpful to recall Zoellick’s influential 2005 speech calling on China “to become a responsible stakeholder” in the international system.

In just a decade China, while still cautious, signals that it will not merely accommodate the existing system and rules as a responsible stakeholder. It will now begin to make its own rules.

The enduring issue remains: how will China use its influence? There is a new discussion in the region articulated by former Indonesian finance minister Sri Mulyani Indrawati, managing director of the World Bank Group: “The rest of the world now wants to know: who sets the rules of the game in Asia?” Her answer: it is “not yet clear”. But some things are clear: no “single country, single institution or single type of leadership” will dominate.

The reality in Asia is existing US primacy will be eroded, the US and China over time will share power but that will necessitate a degree of consensus from other regional nations. The extent of China’s success is highlighted by comparisons with Japan.

After the Asian financial crisis in the late 1990s, Japan tried to generate support for an Asian monetary fund but the idea failed to get traction, due to Japan’s flawed diplomacy and US opposition.

Veteran Japanese analyst Yoichi Funabashi puts the decisive question: “Why was Japan unable to achieve what China now has within reach, namely establishing a large-scale regional architecture that has attracted so many countries across the world?” His answer is Japan failed to “think big” with a strategic vision for shaping the regional order while China has been forming a more comprehensive Asian strategy, creating the AIIB and moving to internationalise its currency.

In the Financial Times, Zoellick called the Obama administration’s opposition to the AIIB a “strategic mistake”. Highlighting his gulf with Obama, Zoellick said “losing fights does not build confidence”. He argued the AIIB should be welcomed and, significantly, that it could be mobilised to strengthen the global financial system that the US created post-war. Hockey expects the US and Japan will sign up to the bank.

Tony Abbott, a pro-American leader, has publicly lamented the defective nature of the Obama administration’s campaign against the AIIB. Senior cabinet ministers evaluated at length the competing pressures — to stick with the US and stay out of the bank, or ride with China’s momentum. In the end it was a no-brainer, with Australia currently positioned as the sixth largest shareholder.

Yet China’s campaign to sell the region on a common economic destiny and infrastructure projects has failed singularly to reassure the region on the strategic front. The overall trend is towards deterioration and hardening of attitudes, despite tactical ploys and fluctuations. The focus is China’s effort to advance its maritime interest and redefine norms in the South China Sea.

A recent Lowy Institute paper by Linda Jakobson and Rory Medcalf says “mistrust is growing” in the region where “an intense propaganda war now rages” over the legitimacy of China’s objectives and methods.

China wants to control the seas to defend its interests yet Japan, Vietnam and The Philippines instead “see coercion, assertiveness and a destabilising attempt to control contested waters”.

The core issue is how and where China manifests its rising military power. Regional nations, alarmed about China, are strengthening their security ties with the US and with each other. This is often calling hedging but it is becoming deterrence. Yet everything depends on the judgment and willpower of the US.

Lowy Institute director Michael Fullilove says close US allies, such as Australia and Britain, should “speak clearly” to the Obama administration to ensure its rebalance to Asia is maintained. Fullilove says Western policy towards China is “a mix of engaging and hedging”, but the Obama administration has failed to get the balance right.

His argument is that US opposition to the AIIB was “too much hedging and not enough engaging” while in other strategic areas Obama “has been too quick to engage and too slow to hedge”. It’s a neat point but a lethal critique: Obama is strong where he should be engaging and engaging where he should be strong.

After the recent Australia–UK dialogue on developments in Asia, the head of the British side, the Ditchley Foundation’s director John Holmes, said both Australia and Britain “have the ambition to influence American as well as Chinese thinking”.

He stressed, however, that they were realistic about their ability “to move the dial very far by ourselves”. Holmes said the chief concerns were China’s “occasional assertiveness”, the need for “a rules-based and law-based approach to territorial disputes” and ensuring Washington-Beijing ties did not spill into confrontation.

Australian strategic assessments about China these days are anchored in a tough realpolitik. Our view is China’s ultimate objective is strategic pre-eminence in the region, that it will seek to create over time new networks and institutions to advance this cause, that it has no interest in any imminent conflict with the US and, ­finally, that for some time it will be Janus-faced, reflecting its own ambivalence — sometimes the responsible stakeholder, sometimes overthrowing the status quo.

As the Jakobson–Medcalf paper says: “The United States, its allies and partners will want to deter what they perceive as Chinese coercion against one of their number or efforts to challenge what they define as a rules-based regional order.” That’s true. But the lesson, of course, is China can have its own view of the rules and the system.

This article was originally published in The Australian