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governments—unless averted by massive financial transfers from less prof-
ligate members of the European Union, a situation that became known as
Europe’s sovereign debt crisis. The entire Western, capitalist world was in
deep economic crisis—the worst since the 1930s.
China’s economy remained strong by contrast. China’s exports were hurt
by the fall in consumption by developed countries, but the fall was limited
by cheap renminbi and large government subsidies. China’s overall economy
continued to grow, unlike the economies of North America and Europe.
China’s annual GDP growth reached a low point of 6.2 percent growth in the
second quarter of 2009, but rebounded to an average 10.2 percent in 2008, 7.5
percent in 2009, and 10.63 percent in 2010. Beijing responded to the crisis by
providing massive spending for vast public works projects—high-speed rail-
ways, highways, dams, and power plants—to bolster demand. Chinese banks
and giant companies did not go bankrupt unless the government authorized
it. Although burdened with levels of debt unsustainable in a genuine mar-
ket economy, Chinese state-owned enterprises were sustained by infusions
of capital from state banks. Beijing also accelerated efforts to grow China’s
domestic demand by acceding to demands for wage increases by workers in
east coast factories, improving the social welfare net for rural residents, and
accelerating the pace of urbanization. In short, while Western capitalism
descended into crisis, China’s economic model seemed vindicated.
Chinese analysts concluded from the deep US crisis that the relative posi-
tions of the United States and the PRC had significantly changed. China was
now in a much stronger position.^41 The United States needed China to con-
tinue purchasing US Treasury bonds—the principal instrument for financing
the US federal debt. An article by the vice president of the Shanghai Institute
of International Studies, Chen Dongxiao, published in the February 2010
issue of the influential journal Qiu Shi (Seek truth), for example, attributed
the excellent PRC-US relations that existed in 2009 during the first year of the
Obama administration (discussed below) to “structural” aspects leading the
two powers to adjust to one another’s strategic interests. The main driver was
the growth of China’s international influence and power and a parallel dim-
inution of US power and hegemony. The global financial crisis and the wars
in Iraq and Afghanistan had thrown the United States into decline, forcing it
to undertake a defensive strategic adjustment. Accordingly a “new generation
leader,” Obama, had emerged, looking for partners and seeking cooperation
and support everywhere. In particular, the United States was compelled to
rely on China to deal with its financial crisis (by purchasing US Treasury
bonds). In order to secure China’s support, Obama had announced a policy of
“not containing China” and playing down human rights differences between
China and the United States. The United States was still strong and China
weak, Chen acknowledged, but recent shifts had allowed China to seize the
initiative in the relationship.^42