Factbox: How China’s anger could hurt ties with the U.S.

BEIJING (BestGrowthStock) – China has threatened to punish the United States for plans to sell some $6.4 billion of arms to Taiwan, the disputed island that Beijing calls its own.

Here is how China’s anger is likely, and unlikely, to be felt:

MILITARY TIES

China has said it will curtail military contacts with the United States, returning to a freeze imposed in 2008 after the Bush administration flagged the arms sale to Taiwan.

China’s official Xinhua news agency said a planned visit to China by U.S. Defense Secretary Robert Gates later this year will be shelved, as will talks between the Chinese People’s Liberation Army Chief of General Staff, Chen Bingde, and the Chairman of the U.S. Joint Chiefs of Staff, Mike Mullen. Mutual visits by Chinese and U.S. navy ships will also be affected, said the report.

Some analysts have also said Beijing might stage more missile tests to demonstrate its anger and resolve.

COMMERCIAL SANCTIONS

China has said that U.S. companies involved in selling arms to Taiwan will face “corresponding sanctions,” breaking with Beijing’s long-standing reluctance to use formal sanctions in international disputes.

The vague warning did not specify when any sanctions would take effect, but companies that could be affected include Sikorsky Aircraft Corp, a unit of United Technologies Corp; Lockheed Martin Corp; Raytheon Co; and McDonnell Douglas, a unit of Boeing Co.

Beijing could face challenges that any such sanctions violate commitments to open trade it has made as a member of the World Trade Organization. In response, it could argue the sanctions are a legitimate act to protect national security.

Even without formal penalties, however, Chinese officials can — and have — informally shown their anger with foreign governments and businesses through decisions on tenders, contracts and deals.

ECONOMIC AND CURRENCY TIES

China is the world’s third-biggest economy, behind Japan and the United States, and holds foreign exchange reserves worth $2.4 trillion.

Analysts have estimated about two-thirds of those reserves are invested in U.S. dollar-denominated assets.

China is the single biggest holder of U.S. Treasuries, owning at least $776.4 billion of U.S. government debt at the end of June 2009, according to statistics from Washington.

But there have been no signs Beijing will use broader trade penalties or its dollar holdings to punish Washington.

Doing that would jeopardize the value of China’s own dollar assets and alarm investors. Beijing appears too focused on shoring up economic growth to risk such steps.

INTERNATIONAL COOPERATION

China has said cooperation with the United States in addressing regional and international problems will inevitably be affected by the dispute.

The Chinese Foreign Ministry did not spell out what issues could be affected, and the government is likely to make its anger felt in oblique ways, such as delaying or downgrading talks, rather than through substantive policy reversals.

Washington has looked for stronger Chinese support over several international worries, chiefly the nuclear ambitions of Iran and North Korea.

China is a permanent member of the United Nations Security Council, and so has the power to veto any proposed resolutions. Its rising influence and status as the world’s biggest developing country also give it clout over issues such as climate change and international financial reforms.

BILATERAL DIPLOMACY

China’s Foreign Ministry has canceled one scheduled meeting between senior Chinese and U.S. officials, a vice-minister level meeting on strategic security, arms control and nuclear non-proliferation.

Other bilateral talks are also likely to be curtailed or downgraded. Those could include a dialogue on human rights that President Barack Obama and President Hu Jintao agreed to during their summit in November.

It is less clear whether China will show its anger by delaying, shifting or downgrading regular Joint Commission on Commerce and Trade (JCCT) talks scheduled for later in the year, or the higher-level Strategic and Economic Dialogue due to be held in Beijing around mid-year.

Washington officials were recently in Beijing to discuss preparations for those two meetings, and Chinese President Hu is expected to visit the United States later this year.

Beijing and Washington also have ongoing working-level discussions on issues such as trade, product standards and customs issues.

PUBLIC OPINION

Chinese media and Internet sites have already echoed with public anger about the proposed arms sales, which were widely reported — along with Beijing’s angry reaction — on state television news.

In a 2008 poll of Chinese public views of the United States by the Chinese Academy of Social Sciences, 46 percent of respondents said the Taiwan issue was the biggest problem in China-U.S. relations — by far the most popular response.

Public anger over the arms sales has already produced calls for boycotts of American companies and products. Similar protests against French, Japanese and U.S. companies in past years have erupted and then quickly petered out with little lasting effect on their sales in China.

China’s ruling Communist Party exercises heavy control over the media and citizens, and when it signals it wants to ease strains with Washington, overt public anger is likely to die down quickly.

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(Editing by Ken Wills)

Factbox: How China’s anger could hurt ties with the U.S.