China's President Hu Jintao conducted a high-profile visit to the United States in late January 2011, during which he discussed economics, security, and climate change with President Barack Obama. Speaking with Radio Free Europe/Radio Liberty, Thomas Fingar stressed the importance of Washington and Beijing finding common ground for cooperation on crucial global issues.

Despite all of the rhetoric, it is clear from the numbers that China's ascendency has not been at the expense of the United States.

-Thomas Fingar

China unquestionably occupies a significant place in the world's U.S.-led economic and political system. Will it continue to participate in the system that it has benefited from and contributed to, adapting its policies and practices in order to do so? Or, will it attempt to overturn the current system at some point in an effort to gain global dominance? Thomas Fingar, the Oksenberg/Rohlen Distinguished Fellow at Stanford University's Freeman Spogli Institute for International Studies, will address these core questions in a new research project, arguing that the situation is neither so polarized, nor so simplistic. Former chairman of the National Intelligence Council, Fingar takes an empirical approach to his research, examining whether there have been recurring patterns to China's involvement in the global order; what drives, shapes, and constrains Chinese initiatives; and how others have responded to Chinese actions.

Fingar asserts that there have been patterns to China's participation in international economics and politics over the past 30 years, including a pendular quality to the U.S.-China relationship. According to him, relations between the two countries were largely instrumental during the Cold War era when the United States was at odds with the Soviet Union and China was undergoing a period of self strengthening. U.S.-China relations cooled following the Tiananmen Square incident, the timing of which coincided roughly with the fall of the Soviet Union. Trust between the two countries deteriorated as China displayed its more authoritarian side, and the United States responded with sanctions that did not significantly impede China's economic growth, but did change the relationship in ways that still shape perceptions of one another.

Economics are now the primary focal point of discussions about U.S.-China relations, with a negative light frequently cast on China. "Despite all of the rhetoric, it is clear from the numbers that China's ascendency has not been at the expense of the United States," states Fingar. Trade with China, in fact, creates jobs in the United States, but trade-related jobs are dispersed and therefore not clearly visible. "They are not concentrated in a place where a factory closed, often for reasons that that have nothing to do with China," says Fingar, "but the pain and the political impact is local. I would predict that when our economy turns around, the pendulum will swing further back in a less-worried, less-critical direction."

While China has a legal system and has adopted many international standards, Fingar asserts that "it is still not a society governed by law," and that it in fact does not always measure up to global or even to its own standards. He cites China's record of undesirable practices and issues, such as currency manipulation, government corruption, and intellectual property violation, which complicate and confuse understanding of its involvement in the global system.

Fingar does not believe that the U.S.-China relationship will ever return to the "honeymoon" era of the Cold War, but he says, "The swings of the pendulum and the perturbations in the relationship are less intense and of shorter duration; that is the pattern." Quoting Anne-Marie Slaughter, director of policy planning at the U.S. Department of State, Fingar suggests that the best vision for the global order is "a world in which there are more partnerships and fewer alliances." He cautions against disregarding important, long-time alliances, such as the U.S.-Korea relationship. He notes, however, the crucial fact that alliances assume that there is an adversary, which can marginalize and threaten regional neighbors, such as China, or put allies in the uncomfortable position of having to choose between siding with a neighbor or a distant ally. "We must find a way so that no one has to choose," says Fingar.

On January 6, Fingar outlined the primary points of his new research project at a public lecture co-sponsored by the Stanford China Program and the Center for East Asian Studies, part of the China in the World series. He will also lead Stanford students through an examination of related key issues and questions in "China on the World Stage" (IPS 246), a course that he is teaching during the current winter quarter.

While Shanghai and Hong Kong are often viewed as the financial centers of China, Beijing, the capital, is in reality where all financial decisions are made-decisions that affect the country's banking system and overall financial structure, which has implications on a global level. Carl Walter, a managing director of JPMorgan China, spoke at a Stanford China Program seminar on November 1 about the frequent changes in China's banking system since 1949 and the cost of these reforms within and outside of China.

China's banking system is currently controlled by the Ministry of Finance (MOF), which has competed at several points with the People's Bank of China (PBOC) for influence within the state bureacracy. During the Cultural Revolution period, MOF first moved to the fore of China's banking system, merging together the until-then separate PBOC and Bank of China (BOC) and eliminating all other banks. With China's "Open Door" economic reforms of 1978, the banks were again separated, with PBOC having oversight for three commercial banks and MOF for two, including BOC. In 1994, authority for all commercial banks, such as BOC and the Agricultural Bank of China (ABC), moved to PBOC and MOF took control of three newly established policy banks, such as China Development Bank and the Agricultural Development Bank. Premier Zhu Rongji drove these and all other banking reforms until 2003.

Major bank restructuring has taken place since 1998, the big four banks were re-capitalized, problem loans spun off into four "bad" banks and the international accounting system adopted in preparation for international share offering on both domestic and international markets. All four banks successfully raised capital internationally and domestically over the past five years. Two large sovereign wealth fund-like entities came into being-Huijin, controlled by PBOC, and China Investment Corporation (CIC), operated under MOF- that were used to hold the Chinese state ownership of these banks.  The year that it was established in 2007, CIC acquired Huijin and MOF thereby indirectly gained control of all of the banks under PBOC.

The greatly increased level of bank capital achieved through restructuring and recapitalization was eroded, however, due to the enormous growth of loans in 2009 so that China now is faced with raising virtually the same amount of capital again, stated Walter. Everyone is paying the price, including international and domestic equity investors, who are being diluted, and China's own government, which to avoid dilution, must buy new shares at high market prices. The values of these shares, moreover, may be inflated due to the techniques used earlier to remove bad loans from their balance sheets. This has left banks exposed to these now worthless portfolios. To that extent, international accounting firms and market regulators put their reputations on the line when they support capital raising by the banks internationally. In short, the politics and economics of China's bank reforms and the struggles to control the banks have been internationalized.

Walter suggested that China is trapped with a banking system that is suited to the country's political system, but not to its economy. His forthcoming book, Red Capitalism: The Fragile Financial Foundations of China's Extraordinary Rise, co-authored with Fraser J.T. Howie, examines this issue and the recent history of China's financial system in depth.