March 10, 2004
China Strong, China Weak, China in Transition
My take on the PRC’s current overall condition and standing in East Asia and beyond
- Why we are paying attention to China.
Great civilizations are always subjects of fascination. All are dynamic. China has
had periods of stasis, as well as revolution. Five thousand years of history lays
legitimate claim to our interest. China’s current transition holds a particular
attraction for many reasons: because of the size and ambition of the enterprise;
because many of the objectives of the transition are up front and clearly articulated;
because its political leadership, the Chinese Communist Party, believes that it will
continue to control. both policy setting and tools for its implementation; because of
China’s potential to become major power, with global implications.
There can be little doubt that in our lifetime, we will see China become the principal
economic, political, and military power in East Asia. The world is a big place
however, and doesn’t stand still, so it will take two or three generations for China to
become a global power, in the sense of a grand juxtaposition of political, economic,
cultural and military power. The interim process of growth and expansion is
transforming enough as it is. That is the principal reason we are paying attention.
This transfom1ation has begun to affect Canada. It is changing the geopolitical map
in North Asia, Southeast Asia, Central Asia and, yet early days, South Asia. It can
be argued that the positive effects of this change, at the moment, far outweigh the
negatives. The longer term is anybody’s guess.
At present, China’s foreign policies reflect the objective strengths and weaknesses
that it brings to the international table, as well as those that it keeps behind its
borders. Both sets are significant to the region, to Canada and to the world, and
both sets shape how China deals with all ofus.
We will first address the strengths, then the weaknesses.
CHINA’S STRENGTHS
- Economic growth
We would not be giving China the attention that it is getting were it not for its
immense ( earth-shaking, really) economic growth and transformation. It is not only
that the 2003 numbers are impressive, it is that they reflect growth rates that have
been in place for a generation. Since 1979, overall GDP growth has averaged 9.
4%. Last year it was 9. 1 %. At $1 .4T, China is now the world’s 6th largest
economy. Growth is lead by domestic and foreign investment. With 40% in gross
savings, fixed capital formation increased by 26. 7% last year. FDI reached its
vitesse de croisiere in 1993 when annual flows surpassed $30B, and in 1995 when
stock reached $1 00B. Last year, $53B in FDI entered China, for a total stock
estimated at $503B. (To compare, Canada has attracted an average of USD $33
billion/per year in FDI over the last 5 years. )
The resulting foreign invested enterprises account for over half of China’s exports
and imports. Exports rose 35% in 2003, to $438B, imports grew 40%, to $413B.
China is now the world’s 4th largest trading nation. US trade dependence on China
rose from 3% a decade ago, to 11 % last year; Japan has gone from 2% to 8%. It
has become the second importer of oil, after the United States, and the largest
importer of iron ore, copper, fertilizer, nickel and copper.
Chinese per capita GDP doubled in the frrst ten years of reform (’78 to ’87), and
then took only 9 years to double again (’87 to ’96). In 1978, primary industry
accounted for 28% of GDP, and the tertiary, services sector was 24%. today, the
situation is reversed, with primary at 15% and services at one third of the economy.
Manufacturing has held stead at about half of economic output.
Not including, Hong Kong’s foreign exchange reserves (USD $118 billion), China’s
own FX holdings are now $403 billion (a $100 billion dollar increase in 2003 ), the
second highest in the world, behind Japan ($7 41 bilJion). China may have
purchased as much as $75 billion in US Government bonds last year.
Et cetera.
The Chinese Communist Party and its principal executing agency, the Chinese
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government, have made economic development its primary objective. “Yi jingji
jianshe wei zhongxin”, as the speeches and propaganda put it: economic
development as the core objective. The numbers tell only part of the story. A look
at the underlying policies over the last 25 years shows that, while errors have been
made, huge difficulties have also been surmounted. The track record is there for all
to see, viz. the skylines of Shanghai, Guangzhou, Beijing, Dalian, Wenzhou,
Hanzhou, Chongqing, Suzhou, etj’en passe. As long as one doesn’t look too
closely behind the achievements – and most people outside China don’t – the
numbers speak for themselves. We ’11 come to the story behind the story in a
moment. - Geopolitical weight
China commands a diplomatic premium. It does so because the size of its economy
is now a closer reflection of the country’s huge population and breadth. The
premium is also due to the reality that growth has increasingly intertwined its fate
with that of the G3, and the level of interaction appears to be headed inexorably
upward. It shows, in the minds of smaller players, the possibility of countering a
potentially hegemonic USA. It has chosen to exercise a very activist diplomatic
agenda. It can demonstrate great skill in setting its priorities and sticking to them.
It has been in the process, over the last few months, of redefining its core foreign
policy principles, moving beyond the Five Principles of Peaceful Coexistence (1954)
which had heretofore provided the ideological bedrock of foreign relations, towards
an equally theoreticaJ (remember: Marxists must be theoreticians first) but
comprehensible framework for promoting engagement and prosperity, peace and
security, themes echoed by Premier Wen in Ottawa in December. The framework
speaks of ‘constantly increasing common ground’ and promises ‘a China that never
seeks hegemony for itself, which will make fresh contributions to Asia’s
rejuvenation and renewal ‘. It promotes globalization, asserting that ‘ the world also
needs Asia for prosperity and progress’.
These declarations are about as credible as our famous ‘pillars’. What matters is
the pragmatic, not to say dramatic, reversal of policies, from the Maoist mix of
revolutionary ideology, autarchy and realpolitik of the 50s, 60s and 70s, to broadbased
and largely successful engagement with the USA, Europe and China’s
neighbours in the 1990s and into this century.
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The economic imperative still commands. It is the ‘ne plus ultra’ objective that
trumps all others ( except, importantly, for Taiwan), and underpins the search for
legitimacy of the CCP. Economic relations in their specifics, viz. market access,
MOUs on standards, FX arrangements, R&D collaboration, resource deals, even
FT As now carry equal weight, in all policy statements and declarations, to the
hardy perennials of enhanced political relations and the One China Policy.
But China’s strengths go beyond theoretical constructs, ringing declarations and
economic achievements. The point is that China’s diplomatic skills are also a very
significant part of China’s visibility in the global commons.
To illustrate: consistent with its pragmatic and focussed approach to priorities,
China is systematically constructing partner relationships on its periphery, the
historical locus primus of its foreign policy. It is also the region that must make the
greatest adjustments to China’s rising importance. China’s neighbours need to be
reassured that opportunities outweigh the threats, be they economic or in matters of
security. In these respects as well, China can legitimately claim considerable
success.
Koreas China leads the USA, Japan, ROK and Russia in the management of
negotiations with universally acclaimed bad-boy DPRK in the process of
denuclearization of the Korean Peninsula, a role that is thrust upon it by the need to
stabilize it’s North.east frontier. Arguably, China controls as many levers as have
the US and ROK. It has – so far – very skilfully managed immensely complex set of
competing priorities.
Russia China and Russia signed a Good-neighbourly Treaty of Friendship and
Cooperation in 2001, and followed up with Jiang-Putin Joint Statement in 2002 that
has restructured the major aspects of their political, economic and security relations.
Among other things, these recognized the settlement of outstanding border issues;
“understandings” on Taiwan in exchange for condemnation ofUigur independence
activists; faci}jtation of border trade; market access and foreign exchange
mechanisms; promotion of crude oil and natural gas pipelines (although the
Japanese have undercut China on the fonner, with the ‘ Angarsk-Nakhodka’ pipeline
threatening to replace ‘Angarsk-Daqing’ as the preferred route). Russia accepts the
presence of one hundred to two hundred thousand Chinese in its Far East (Irkutsk
has 20,000 PRC citizens), a small price to pay for becoming China’s principal
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supplier of relatively sophisticated weaponry, including Sovremeny class destroyers,
SU30 fighter aircraft and Kilo class submarines.
Mongolia President Hu strengthened relations with Mongolia late last year through
balancing its economic dominance by extending $300M in loans. China could
become, by 2005, Mongolia’s largest source of ODA. It is already its largest trading
and investment partner.
Central Asia The Shanghai Cooperation Organization has grown from its 1996
origins to become, since 2001, the major Chinese vehicle for promoting cooperation
with Central Asia. What had initially been a means for addressing border disputes
and security in the post-Soviet era has grown to include broad economic objectives.
A summit held in Moscow in May 2003, followed by a meeting of Premiers in
Shanghai in September have given the SCO its essential political blessings. Offices
have been opened in Beijing (the Secretariat, as well as economic issues) and in
Bishkek, Kyrgyzstan (anti-terrorism center). On energy, progress is being made on
the Sino-Kazakh oil pipeline which will link the Caspian city of Atyrau to Chfoa’s
Western Xinjiang province, and ultimately provide 3.Sm barrels per day of crude.
Chinese state oil companies have invested in the Azerbaijan’s Pirsaat and Azeri oil
fields. Turkmenistan’s leader Saparmurat Niyazov has accorded China preferential
treatment on natural gas development, including the construction of a gas pipeline,
also to Xinj iang.
India China has directed a steady shift of emphasis from long-standing relations
with Pakistan towards increased collaboration with India. Beyond the succession
of high level visits and plethora of declarations is also real progress on outstanding
border issues – the second round of border talks were concluded in January. India
maintains 40% of its forward troop deployment on the India-China border.
Resolution of the border issues will free substantial forces for dealing with Pakistan
and Kashmir. China also aims at neutralizing US influence in India. Trade with
India will surpass $10B this year.
ASEAN Since 1997, China has signed agreements with each of the ASEAN
countries aimed at developing sound bilateral relations. In 2000, China proposed
an ASEAN/China FTA. A framework agreement was signed in Phnom Penh in - China and ASEAN have also signed an agreement against the use of force in
the settlement of dispute in the South China Sea, as well as an agreement on nonMarch
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traditional security threats. In 2003, China acceded to the ASEAN Treaty of Amity
and Cooperation. Most of the A SEAN countries are in surplus in their trade with
China. ASEAN trade with China has grown rapidly on the strength of increased
integration, a process that will be further accelerated as the FTA provisions are
negotiated and take effect.
China’s diplomatic sldlls however are less obvious with respect to relations with
Japan. China has not developed a strategy that can overcome the twin realities of
the highly politicized historical legacy of Japan’s invasion of China in the 1930s and
l 940s, and the uncertain but powerful course of Han nationalism, a force which
even the Communist Party cannot fully control. Thus, the steady stream of
reminders of the past – Yasukuni – or insults – Japanese sex parties in Zhuhai on the
date of the Marco Polo Bridge incident; insensitive Japanese student skits in Xian;
exploding mustard gas canisters in the former Manchuria – added to the knowledge
that other such incidents are only going to continue to arise – overwhelm an
otherwise strong relationship based on trade – over $100B in 2003, and development
cooperation ($1 B per year), not to speak of tourism, students and other people to
people exchanges. They also impede progress on outstanding issues such as
Senkaku/Diaoyutai, or lead to serious competition on such issues as energy from
Russia. Koizumi is the only senior national leader who has not yet undertaken an
official visit to China, and no Chinese leader President or Premier has visited Japan
since 2000.
The weight and significance of economic size and diplomatic skill cannot be
underestimated in explaining China’s rise to pre-eminence. They a1so create a
virtuous circle which provide the wherewithal to develop other strengths, and
increase the benefits of global interaction.
But these alone do not provide China with the kind of power that underpins global
security or shapes international institutions. Imagine the distance we are from a
world where the Chinese navy provides the security for the Straits of Malacca,
where the Shanghai Stock Exchange sets the trends in global securities markets,
where the global audience for the Golden Rooster Awards is greater than that for
the Oscars, where the yuan becomes one of the world’s three reserve currencies, or
the public declarations ofNGOs and human rights groups hail China as a model for
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democratic development, and we can see what a distance China. has to traverse
before becoming a real competitor to the US or EU.
As it happens, the Clunese are the first to point to the limits of their power.
CHINA’S WEAKNESSES
Tellingly, China itself believes that power must be “comprehensive”, if it is going to
shape geopolitical realities and international institutions to meet its ends. China
has, historically, under so-called “scientific socialism”, analysed the components of
national power under the rubric of”comprehensive national power”. There is an
actual algorithm to calculate this. It is used to determine where China is vis-a-vis
other countries.
Comprehensive national power consists of:
- material or hard power (natural resources, economics, scientific and
technology, and military power); - spirit or soft power (politics, foreign affairs, culture and education);
- co-ordinated power (leadership organisatfon, command, management, and coordination
of national development); - environmental power (international, natural and domestic).
Clearly, China does not yet possess, nor consider that it possesses the
comprehensive power that is its stated objective. Its weakness, rather, are many.
- Military Weakness China has not inconsiderable strengths: manpower – 2.4
million under arms, including 1.6 million in the ground forces, 417,000 in air force
and 230,000 in the navy. This does not include over 1 million in the reserves.
There is little difficulty in recruiting from an unemployed peasantry. It has the
necessary political will – the CCP is assiduous in indoctrination of the PLA. The
PLA is explicitly an army of the party and not a national am1y as it takes pains to
confirm in regular briefings to foreign visitors. Jiang Zemin still heads the Central
Military Commission, to which he brings all of his prestige and connections.
However, to cite American sources, the sole credible long-range power projection
assets in PLA inventory consist of ICBMs ( 17+ ), IRBMs ( 46), SLBMs (aboard
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one Xia nuclear boat and a dozen conventional boats); SRBMs (4+), tracking
systems and phased array radars. In addition, it possesses a current arsenal of
between 410 and 440 missiles, mostly aimed at Taiwan, to which it is adding about
50 new more lethal missiles annually. The PLAN has few moden1 ships and very
limited force projection capacity, but it must be noted that the navy is modernising
the most rapidly and many new modem destroyers and frigates are under
construction. On the land and in the air, it has a wide array of conventional tanks
(8,200) and aircraft (5,400). Many of these are obsolescent and ineffective against a
modern force. Moreover, if they cannot get to where they are required, it matter
little bow many are in hangars.
Furthermore, Chinese capability to develop, produce and integrate sophisticated
military systems is limited and likely to remain so for at least a decade. The desire
to accelerate the capability is clear and the General Equipment Department is
focussing on it but success has been hampered by the rigid hierarchal and
centralised command structure of the military. Foreign acquisition offset but fall
short of compensating for these weaknesses. Generally speaking Chinese defence
industries have a poor record of providing the PLA what they need. That having
been said, signs of more effective design, integration, production and procurement
approaches and systems are evident.
The current reliance on Russia for design, production, repair and maintenance of
ships, submarines and fighter aircraft is significant, but Russia is not transferring the
means of production for weapons systems and end use items or even key component
parts. Moreover, the Russians are clearly not selling th.e top of the line equipment
to the Chinese. Military collaboration with China is viewed in Russian military
circles as a way to obtain hard currency and to keep its own production and
research facilities operating. It is unlikely that the Chinese can rely only on Russia
exclusively. Significant diplomatic and financial effort has be.en expended on
accessing other sources. China’s need for Western technology is profound and all
efforts are been used to obtain access – fair or foul.
Finally, compare the Chinese military to its putative adversaries in the
neighbourhood.
Japan: 242,600 active forces, and a navy having 16 subs, nine destroyers, 48
frigates etc. All important Japanese equipment is relatively new and top rate.
ROK; 560,000 ground forces; 60,000 navy, including 14 subs, one destroyer, 33
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frigates etc. The mflitary is relatively well equipped.
Taiwan: 376,000 plus 1,660,000 active reserves. The capability of the Taiwan
military is limited because of its awkward command and control system and even
now vestiges of the old KMT secrecy.
USA: it retains, in the vicinity of China, in the order of 100,000 troops at all times,
including at bases in Guam, Japan, ROK, and Singapore. Operationally the forces
in the Asia-Pacific belong to P ACOM, one of five US integrated commands,
headquartered in Hawaii. The P ACOM forces are largely naval and air with a good
proportion of the troops providing facilities and equipment thus facilitating force
protection and sustainment. The US has a proven record of deploying and
sustaining troops anywhere in the world: their powerful carrier battle groups, air
forces and effective command and control capability have a demonstrated force
projection capability that cannot currently be matched.
Thus, China does not yet possess and will not for the 15 to 20 yea.rs, according to
some US studies, power projection capabilities that will make it overwhelmingly
dominant in East Asia. In addition, its transition to a modem fighting force is
limited because of its central focus on the Taiwan situation. - Economic weaknesses
China’s macro-economic growth may be the sum of micro-economic development,
but the speed of this development bas created distortions that limit the China’s
potential, at least in the short to medium term. This argument is elaborated in the
separate paper – Globalization and China’s Reforms, which makes the foUowing
points:
While the 1990s offered an international environment that was at once non-threatening and
favorable to China’s rapid economic expansion, the coming decade will be more difficult,
for reasons more clearly associated with domestic bottlenecks than unforeseen (and
unpredictable) international developments. In order to sustain growth in an increasingly
competitive environment, China will have to refonn more profoundly its economic system,
by allowing increased transparency, open domestic markets, stronger regulatory institutions
and possibly a political system more open to competition.
To illustrate: China has become a powerhouse producer of white goods and
consumer electronics, reminiscent of the development strategies of Japan, Korea and
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the Southeast Asian Tigers. China is reaping the benefits of implementing an FDI
favourable environment, in a country whose consumer market may grow to
spectacular proportions. It has essentially a bottomless pool of inexpensive labour,
including well educated young adults coming onto the labour markets. Chinese
producers benefit from modest R&D subsidies, and there are ( declining) subsidies
for exports, in the form of VAT rebates.
But China has many significant weaknesses that will take time to overcome. For
examples:
- it does not yet possess a supportive financial infrastructure (Chinese banks do not
invest in innovation; foreign banks are forbidden to do so; capital markets are
primitive); - the patent base is not yet developed (a RAND survey noted that China registered
195 technology patents last year, vs. 86,610 in the US, in the same sector); –
management and marketing skills are very weak; - Chinese brands do not provide a margin of profitability (Sony used to say that their
brand allowed them to add 25% to their sales price in North America); - IP protection is poor to non-existent. Et cetera.
These problems are fundamental and structural. Many require the evolution of
adversarial systems such as a truly independent legal system, an institution with
which the CCP does not now wish to contenance.
More to the point, the list above indicates clearly where Canadian and foreign firms
will find their strengths: in management, distribution, quality, access to capital etc.
- Social and political weaknesses
The authoritarian power of the CCP may create the impression that, domestically,
China is strong, but in many ways it is weak.
- there are immense gaps in standard of living between the Eastern and
Western parts of the country (Beijing’s per capital GDP is 9 tin1es that of
Guizhou); between the urban rich ($4,000 per capita) and the rural poor (two
hundred million Chinese live on less than $1 per day); - the CCP relies on Lenirusm, authoritarianism, lack of transparency and a. free
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press; it has little vision for the future other than what it borrows from abroad
on matters of governance, and the firm insistence on its own survival, at a
time when what the country needs is openness, rule of law, and democracy
for participation in growth and development; - there is an over reliance on coercion and the security estab1ishment;
- the risks to growth are many: on probability curve, they include paralysis that
comes from policy disputes within the Party; lack of public faith in banking
system, and its attendant fallout;
CONCLUDING THOUGHTS
A macro view of China is fine, as far as it goes, but this does not address the
significant issue of relative power and the balance of interests. It is also necessary to
step back and reflect briefly on the implications of the state of China’s existing
power on Canadian interests.
These are many, and include the geopolitical (the security of Canada’s interests in
the Pacific); non-traditional threats (health, environment and international crime);
economic (3rd largest trading partner by 2005, if not sooner; potentially large source
of investment, particularly in energy and resources; largest source of students for
our educational institutions); demographic (largest source of immigrants).
Thus, in the objective calculus of these things, relations with China can already
serve or disserve our national objectives, in very many ways. The conundrum we
face is that of all of our bilateral relations, to wit, managing what are always
different levels of strength and variegated interests. We now have a smaller
economy than that of China. They are ahead of us in total international trade. We
appear, on the surface, to be a demandeur on more issues that those that the Chine
seek from us. We could conclude that our policies should therefore be guided by the
notion that we are weaker than even today’s China.
That would be a mistake, because the reality is different. We enjoy an incomparably
superior system of governance. We have a more sophisticated industrial and
commercial base. We possess a value system that will survive much longer than
‘ Marxism-Leninism, Mao Zedong Theory, Deng Xiaoping Thought and the Three
Represents’. We have “arrived” in ways that our Chinese friends can only dream of.
AU this argues for the continuing pursuit of a foreign policy of self-confidence. At
the risk of ending this on too pithy a note: beyond doubt, China is of growing
significance, but Canada, in most ways that matter, is already there.