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were able to draw on lessons learned from the West. They also paid close attention to developments in Russia in the years following the fall of communism, as well as to Japan's slump into economic stagnation following the end of the Japanese economic miracle. The resulting improvement in living standards for the Chinese population was unprecedented in history, with hundreds of millions of people being lifted from extreme poverty into the middle class within a generation.

The economic policies China has pursued since the 1990s have led to growth that has far exceeded the expectations of their original architects. Following its accession to the World Trade Organisation (WTO) in 2001, China's export growth accelerated rapidly, and the country became the factory of the world. For some in the developed West, this provided great benefits, including low inflation, access to reasonably priced consumer goods and, increasingly, a huge new market for goods and services. For others, competition from China has led to displacement, wage stagnation and unemployment. Some, including many in the US, argue that China has engaged in unfair trade practices, such as suppressing the value of its currency to make its exports more competitive.⁵ Others argue that it is America's high cost structure that has made its exports uncompetitive, so it has only itself to blame.⁶ The truth, as is often the case, lies somewhere in the middle.

It is not unreasonable for China's leadership to pursue policies that improve the Chinese people's standard of living. The path that China followed was not substantially different to that followed by Japan and West Germany during their post-WW2 recoveries. In this regard, the CCP has done a pretty good job. As China's prosperity has increased, the government has tightened environmental codes and raised minimum wages. These are hardly the actions of a government that is pursuing a narrowly mercantilist trade agenda. At the same time, as trade and other imbalances grew, China's leadership was not proactive enough in addressing other countries’ concerns. Escalating tensions were exacerbated by the 2008 Global Financial Crisis (GFC) and its aftermath.

Legacy of the GFC

      The 2008 GFC was a watershed event in post-WW2 history. Its significance lies not in the crisis itself, which shared a pattern with countless other financial crises, but in its causes and consequences, as well as a major turning point that it marked.

      The ostensible causes of the GFC were the excesses that had been allowed to build up in the US subprime mortgage market. It was a story of greed, hubris, regulatory failures and policy missteps. However, casting a broader eye over the history of the build-up of these excesses, it becomes apparent that the origins of the GFC lay in structural imbalances that had built up in the global financial system over many decades. These are explored in more detail in Chapter 3.

      The consequences of the GFC have been far-reaching and, whether we are conscious of them or not, they will continue to impact societies around the world economically, politically and diplomatically for a long time to come.

      First, the direct financial impact of the crisis was devastating to a huge number of people. Livelihoods, security and community all suffered. Faith in a financial and social system that had promised stability and prosperity for decades was shattered. And we have yet to identify a system to replace it.

      Second, although America had already done much to undermine the legitimacy of its global leadership through unilateralist and aggressive post-Cold War international policies, the GFC brought issues into much sharper focus. Other countries began to question the status quo of the global order and it became a spur to action. Reduced willingness to follow America's lead has complicated and slowed down the process of decision making on matters of global importance. The pursuit by other countries of alternatives to US-dominated international organisations has also generated diplomatic tensions.

Third, policy actions during and subsequent to the crisis have, for the most part, treated the symptoms rather than the root causes of the disease. Regulatory reforms have made the banking system less vulnerable to financial shocks. However, more fundamental underlying problems have not been tackled. Continued reliance on monetary policy and market self-correction mechanisms has failed to revitalise key parts of the economy. In addition, the prolonged application of some treatments, such as extraordinarily low interest rates, have contributed to a widening wealth gap. This, in turn, has stoked greater societal tensions.

      Fourth, as these domestic and international tensions have simmered, we have witnessed a descent into more populist and nationalistic politics in many countries. This is spreading tensions and conflicts across many spheres.

      Looking back at the crisis and events since, it is also clear that the GFC marked a major turning point in Sino-US relations. The illusion of American omnipotence was shattered, and China's own self confidence increased. This increased China's willingness to challenge the US where it felt its own interests were at stake and ushered in a more assertive attitude in the conduct of its international affairs.

      The focus of this book is the escalation in tensions between the US and China. There is a severe risk that a misdiagnosis of key sources of tensions will lead to the wrong treatments being applied, allowing conflicts to spread and become more aggravated. It is therefore critical to carefully examine the history of the Sino-US relationship, including its financial dimensions, to correctly identify the key issues that must be addressed.

Modern History of Sino-US Relations

      After the CCP came to power in 1949, a rift opened between the US and China along the ideological lines of capitalism versus communism. As the Cold War got under way, the US applied the same strategy of ‘containment’ towards China that it employed with the Soviet Union. For three decades, the US did not officially recognise the People's Republic of China (PRC) and sought to limit its influence in and recognition by the outside world. For its part, China treated the US as a strategic enemy and sought to spread communist revolution in Southeast Asia, threatening US interests. The countries stood on opposing sides in two wars: in Korea (1950–1953) and in Vietnam (1955–1975).

The impetus for the thaw in relations that started with Henry Kissinger's secret visit to China in 1971 was their common desire to counterbalance the threat from the Soviet Union. It was a relationship based not on common ideals, but on a common enemy. The eventual normalisation in relations that came in 1978 left open the important question of the future of Taiwan. However, vast US military superiority meant that there was little immediate prospect that differences over the territory would boil over. Moreover, Deng Xiaoping was preoccupied with economic reforms after the ravages of decades of civil strife.

      As the threat from the Soviet Union declined during the 1980s, both because of Mikhail Gorbachev's rise to power in 1985 and due to the implosion of communism itself, the basis of the Sino-US relationship evolved into one of commerce and trade. Trade was mutually beneficial in many ways, and China's economic reforms transformed the lives of most of the Chinese people for the better. However, the two countries’ social and political models remained poles apart. In 1989, a wave of protests erupted in China, calling for faster political reforms. The violent suppression of these became a flashpoint in Sino-US relations, since the CCP's actions offended American sensibilities over human rights and democracy.

      In retrospect, comparing China's trajectory to that of Russia in the years since, it is hard to argue that a different course of action at that time would have resulted in a better outcome for the Chinese population as a whole. Reforms of the size and scope that China was pursuing had created significant internal conflicts both within the CCP leadership and across wider society. Deng's historic Southern Tour (南巡) in 1992 signalled his continued commitment to economic reforms. This was critical in overcoming internal opposition within the CCP and broader society to continuing reforms. George H.W. Bush took the decision not to leave China ostracised and out in the cold and, with the skilled stewardship of Zhu Rongji (朱镕基) – first as vice premier, then as premier – huge leaps forward were made in China's economic transformation. These included

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