660 { China’s Quest
trade and financial system on which China’s rise was premised. In exchange
for helping Washington deal with al-Qaeda, Beijing secured US designation
of the East Turkistan Islamic Movement (ETIM) as a terrorist group. This
brought into play against that ethnic Uighur group all the antiterrorist meas-
ures agreed to by Beijing and Washington. Many people outside of China
were sympathetic to the Uighur struggle in Xinjiang and critical of China’s
sometimes heavy-handed methods of dealing with people it charged as
“ETIM splittists.” But China rejected “double standards” for the antiterrorist
struggle, and Washington acceded to Beijing’s demand. By working with the
United States on these common interests, Beijing recast the strategic context
of the vital relation with the United States. For the first time since the end of
the Cold War, the PRC and the United States were partners in struggle against
a common foe, terrorism. A decade later, as the United States ended its wars
in Iraq and Afghanistan and “pivoted” to Asia, tensions in PRC-US relations
would again mount.The US Financial Crisis and Beijing’s Probing of US Capacity
and WillThe financial crisis that began unfolding in the United States in 2007 led
many in China to conclude that the extremely severe crisis had sapped US
capability and will and made Washington far needier of Chinese cooperation
in the economic area, and had, therefore, significantly altered the balance
between Beijing and Washington. Beginning with the bursting of a housing
bubble, the crisis spread to the US financial sector via rotten mortgages held
by many financial institutions, hit businesses who lacked liquidity, and be-
came a full-scale overall recession by September 2008. By October 2009,
unemployment in the United States had risen to 10 percent. GDP growth
collapsed, reaching a low of negative 8.9 percent in the last quarter of 2008.
Overall growth for 2008 to 2012 was an anemic 1.7 percent. The United States
was in deep economic crisis. US government debt spiraled up as tax reve-
nues fell with reduced business activity and huge government expenditures
for bailouts of large but deeply indebted firms, stimulus spending, and vastly
expanded unemployment and welfare payments. National debt as a percent
of GDP rose from 40 percent at the end of 2008 to 63 percent by the end of
2010—the highest levels of indebtedness since World War II. Mounting US
government debt was partially covered by foreign purchases of US Treasury
bonds. The PRC was one of the major purchasers of those US debt bonds. If
China stopped buying US Treasuries, interest rates would rise greatly, fur-
ther slowing investment and recovery. By late 2009, the financial crisis had
spread to Europe. There a property bubble, bank bailouts, and unsustainable
levels of government debt led to the potential bankruptcy of several national