China is facing intensifying political and economic disputes with Japan, the United States and the European Union. Meanwhile, the outlook for the global economy is decidedly grim, with the International Monetary Fund forecasting a prolonged recession in Europe and severe budgetary woes in the US.
At this crucial juncture, China's leadership is exploring avenues for leveraging the country's growing economic clout into geopolitical gains. If used wisely and consistently, China's economic power could be a powerful instrument for advancing its foreign-policy goals. The government's push to use financial capabilities to further diplomatic objectives will have dramatic effects on the international system.
On Wednesday, the Ministry of Foreign Affairs announced the establishment of the Department of International Economic Affairs. Zhu Caihua, vice-dean of China Foreign Affairs University's School of International Economy, very candidly stated the goals of the new Department: "China's soaring economic strength enables it to provide due assistance to developing countries and the European Union hit by the debt crisis. These moves also give China more say and flexibility in foreign relations."  Zhu went on to state that this new department would be tasked with handling "economic disputes with political backgrounds".
The establishment this department is a sign that the leadership is increasingly aware of the strategic implications of China's expanding economy and immense foreign-currency reserves. The government is seeking to exploit directly its growing financial and economic clout for increased geopolitical authority and flexibility.
The world should take notice - Beijing has publicly signaled the ability and the willingness to link access to vital Chinese loans and markets with the overall aims of its foreign policy.
That China is a major force to reckon with in international finance is nothing new - in recent years it has lent more money to poor nations than did the World Bank.  What is new is China's open willingness to link economic goals with geopolitical objectives. As Europe and the US face a prolonged economic crisis, China's leadership is feeling confident that the country's new position in the global financial hierarchy will pay geopolitical dividends.
Areas of trade, areas of contention
The timing of this announcement is extremely meaningful. Currently, China is coming under increased political and economic pressure from three major rivals (and trade partners) - Japan, the US, and the EU.
The dispute between China and Japan over the Diaoyu/Senkaku Islands is having pronounced economic effects in both nations. Popular calls for a Chinese boycott of Japanese goods have gained serious traction. Toyota's Chinese sales were down 40% from a year earlier in September.  Tens of thousands of seats on flights between the two countries have been cancelled, leading to the suspension of some routes. Dozens of Japanese companies have been expelled from the Western China International Trade Fair.
The Chinese government has already publicly stated an ability to punish the Japanese government economically for the purchase of the disputed islands from their private owner. Last month, an article in the Communist Party-run People's Daily, "Consider sanctions against Japan", warned: "Japan's economy will suffer severely if China were to impose sanctions on it. China's loss would be relatively less."
This threat is based on objective reality - China is still a relatively underdeveloped economy with huge potential for internal growth, while Japan has suffered from two decades of economic stagnation. China's willingness to use economic threats to further its territorial claims is a significant aspect of the current dispute.
The new Department of International Economic Affairs may find itself busy dealing with the US as well as Japan. The domestic politics of the United States will have important implications for China's emerging economic diplomacy.
A recent report from the Congressional Intelligence Committee has warned US corporations not to do business with the Chinese telecommunication companies Huawei and ZTE. Instead of finding a specific instance of wrongdoing, the report warned of the potential for future trouble. Mike Rogers, chairman of the committee, warned: "As this report shows, we have serious concerns about Huawei and ZTE, and their connection to the Communist government of China. China is known to be the major perpetrator of cyber-espionage, and Huawei and ZTE failed to alleviate serious concerns throughout this important investigation. American businesses should use other vendors." 
The US presidential race has additional repercussions for China's international trade. Both incumbent President Barack Obama and his challenger Mitt Romney have played the tough-on-China card for votes. Obama recently blocked the installation of Chinese-made wind turbines on the Oregon coast over concerns of the potential for spying on a nearby military base.  This was the first time a president had prevented a foreign investment deal since 1990.
Meanwhile Romney has come out with his most forceful criticism of China to date, saying it has "taken advantage of our laxity in enforcing fair trade ... We will not allow them to keep taking our jobs."  Romney has accused the Chinese government of manipulating its currency to compete unfairly with foreign manufacturers, and has promised officially to declare China a currency manipulator - a move that could lead to economic sanctions - on his first day in office.
China is facing further economic heat in the European theater. The EU has started an anti-dumping investigation of Chinese solar panels. This could threaten billions of euros in Chinese exports to Europe.
Economics as politics by other means
China not only faces economic difficulties from potential US and EU sanctions, but also long-term political challenges from these Western powers. The United States' strategic pivot toward Asia is seen as a direct threat to China's regional security. Meanwhile, both the US and the EU regularly involve themselves in China's domestic politics. Beijing views Western support for pro-reform political activists as aggressive interference in China's internal affairs.
As China faces political and economic pressure from other major powers, the leadership is examining means to counter this pressure. Economic leverage - if used correctly - could be an excellent tool for promoting Beijing's current foreign-policy objectives.
China's potential for economic growth is still much greater than that of any of its major rivals, even in the midst of a relative slowdown. The Chinese economy is highly dependent on trade with the US, Japan and the EU, but they are even more dependent on access to China's manufacturing capability and expanding domestic markets. Furthermore, these comparatively wealthy nations are also highly dependent on Chinese purchases of their government debt.
Economic warfare is a double-edged sword. Japanese companies have been hurting more than Chinese businesses in the recent standoff, but both sides will be negatively affected by a reduction in trade. All contenders stand to lose in a trade war - but China less so than its rivals. Its growth and liquidity mean it has more room to maneuver than its potential opponents in any economic confrontation.
If sufficiently pressured, China may engage in economic brinksmanship to secure its interests.
The EU and the US face debt crises, while China holds roughly US$3 trillion in foreign-currency reserves. The balance of financial power should be obvious to all sides. By forming the Department of International Economic Affairs, the government is signaling an awareness of its ability to use China's economic strength as a foreign-policy tool.
This new department will use financial means to defend the leadership's core interests: access to foreign markets, territorial integrity, and the Communist Party of China's monopoly on political power. The government may not been keen on bailing out Europe if European governments continue to bankroll Chinese dissidents. Beijing may be even less keen on lending to Washington the funds needed to expand America's military presence in Asia.
The formation of the Department of International Economic Affairs is an important step in formalizing the use of China's economic power as an instrument in diplomatic disputes. As China continues to develop economically, its leadership has little interest in starting costly confrontations. China will only use economic leverage to retaliate for sanctions, or to secure its core interests. Its financial weapons are likely to remain sheathed so long as other nations do not directly threaten the Chinese economy or the main policy objectives of the Chinese government.
1. China boosts economic diplomacy, China Daily, Oct 10, 2012.
2. China loans more money than World Bank - report, BBC News, Jan 18, 2011.
3. China-Japan island row disrupts trade, Irish Times, Oct 9, 2012.
4. Stay Away from Huawei and ZTE: US Congress Committee, Business Standard, Oct 10, 2012.
5. Obama blocks Chinese wind farms in Oregon over security, Hindustan Times, Sep 29, 2012.
6. China gaining fast on US, says Mitt Romney, Economic Times, Oct 11, 2012.
Brendan P O'Reilly is a China-based writer and educator from Seattle. He is author of The Transcendent Harmony.