The Beijing consensus is to keep quiet

The China model

In the West people worry that developing countries want to copy “the China model”. Such talk makes people in China uncomfortable

CHINESE officials said the opening of the World Expo in Shanghai on April 30th would be simple and frugal. It wasn’t. The display of fireworks, laser beams, fountains and dancers rivalled the extravagance of Beijing’s Olympic ceremonies in 2008. The government’s urge to show off Chinese dynamism proved irresistible. For many, the razzmatazz lit up the China model for all the world to admire.

The multi-billion-dollar expo embodies this supposed model, which has won China many admirers in developing countries and beyond. A survey by the Pew Research Centre, an American polling organisation, found that 85% of Nigerians viewed China favourably last year (compared with 79% in 2008), as did 50% of Americans (up from 39% in 2008) and 26% of Japanese (up from 14%, see chart). China’s ability to organise the largest ever World Expo, including a massive upgrade to Shanghai’s infrastructure, with an apparent minimum of the bickering that plagues democracies, is part of what dazzles.

Scholars and officials in China itself, however, are divided over whether there is a China model (or “Beijing consensus” as it was dubbed in 2004 by Joshua Cooper Ramo, an American consultant, playing on the idea of a declining “Washington consensus”), and if so what the model is and whether it is wise to talk about it. The Communist Party is diffident about laying claim to any development model that other countries might copy. Official websites widely noted a report by a pro-Party newspaper in Hong Kong, Ta Kung Pao, calling the expo “a display platform for the China model”. But Chinese leaders avoid using the term and in public describe the expo in less China-centred language.

Not so China’s publishing industry, which in recent months has been cashing in on an upsurge of debate in China about the notion of a China model (one-party rule, an eclectic approach to free markets and a big role for state enterprise being among its commonly identified ingredients). In November a prominent Party-run publisher produced a 630-page tome titled “China Model: A New Development Model from the Sixty Years of the People’s Republic”. In January came the more modest “China Model: Experiences and Difficulties”. Another China-model book was launched in April and debated at an expo-related forum in Shanghai. Its enthusiastic authors include Zhao Qizheng, a former top Party propaganda official, and John Naisbitt, an American futurologist.

Western publishers have been no less enthused by China’s continued rapid growth. The most recent entry in the field is “The Beijing Consensus, How China’s Authoritarian Model Will Dominate the Twenty-First Century” by Stefan Halper, an American academic. Mr Halper, who has served as an official in various Republican administrations, argues that “just as globalisation is shrinking the world, China is shrinking the West” by quietly limiting the projection of its values.

But despite China’s status as “the world’s largest billboard advertisement for the new alternative” of going capitalist and staying autocratic, Party leaders are, as Mr Halper describes it, gripped by a fear of losing control and of China descending into chaos. It is this fear, he says, that is a driving force behind China’s worrying external behaviour. Party rule, the argument runs, depends on economic growth, which in turn depends on resources supplied by unsavoury countries. Politicians in Africa in fact rarely talk about following a “Beijing consensus”. But they love the flow of aid from China that comes without Western lectures about governance and human rights.

The same fear makes Chinese leaders reluctant to wax lyrical about a China model. They are acutely aware of American sensitivity to any talk suggesting the emergence of a rival power and ideology—and conflict with America could wreck China’s economic growth.

In 2003 Chinese officials began talking of the country’s “peaceful rise”, only to drop the term a few months later amid worries that even the word “rise” would upset the flighty Americans. Zhao Qizheng, the former propaganda official, writes that he prefers “China case” to “China model”. Li Junru, a senior Party theorist, said in December that talk of a China model was “very dangerous” because complacency might set in that would sap enthusiasm for further reforms.

Some Chinese lament that this is already happening. Political reform, which the late architect of China’s developmental model, Deng Xiaoping, once argued was essential for economic liberalisation, has barely progressed since he crushed the Tiananmen Square protests in 1989. Liu Yawei of the Carter Centre, an American human-rights group wrote last month that efforts by Chinese scholars to promote the idea of a China model have become “so intense and effective” that political reform has been “swept aside”.

Chinese leaders’ fear of chaos suggests they themselves are not convinced that they have found the right path. Talk of a model is made all the harder by the stability-threatening problems that breakneck growth engenders, from environmental destruction to rampant corruption and a growing gap between rich and poor. One of China’s more outspoken media organisations, Caixin, this week published an article by Joseph Nye, an American academic. In it Mr Nye writes of the risks posed by China’s uncertain political trajectory. “Generations change, power often creates hubris and appetites sometimes grow with eating,” he says.

One Western diplomat, using the term made famous by Mr Nye, describes the expo as a “competition between soft powers”. But if China’s soft power is in the ascendant and America’s declining—as many Chinese commentators write—the event, which is due to end on October 31st, hardly shows it. True, China succeeded in persuading a record number of countries to take part. But visitor turnout has been far lower than organisers had anticipated. And queues outside America’s dour pavilion have been among the longest.


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Hu, Wen—what, why and how

China’s prime minister Wen Jiabao praises Hu Yaobang, a former Communist Party chief

ON APRIL 15th the arcane and neglected art of reading China’s political tea leaves suddenly surged back into fashion. The Communist Party’s turgid broadsheet, the People’s Daily, published an article on the top of its second page by the prime minister, Wen Jiabao. Its glowing praise for Hu Yaobang, a politically incorrect former party chief whose death triggered the Tiananmen Square protests 21 years ago, struck a remarkably liberal note.

Hu’s death on April 15th 1989 prompted thousands of students to take to the streets in mourning. They bore aloft pictures of the late leader, who though still a member of the ruling Politburo when he died had been forced to resign as the party’s general secretary two years earlier for being too soft on dissent. Because Hu had not been fully purged, the party had no choice but to hold an elaborate funeral for him. This provided cover for the students, who soon switched their attention to demands for democratic reform.

Since the bloody suppression of the protests, Hu has been referred to sparingly by Chinese officials; and the liberalism with which he was associated has also been permitted only sparingly. Of late, it has been notably absent, as the party cracks down on human-rights activists, tightens controls on the internet and frets about unrest in Tibet and Xinjiang. Yet China’s leaders are preparing for a change of guard in 2012-13. Mr Wen will be stepping down. Could it be that, having established China as a global economic power, he and his colleagues are at last thinking of trying to make it politically more respectable?

Hu’s reputation has sometimes been used in arguments about the direction of the country. In an exception to the general rule that he has been neglected by his successors, a symposium was held in the Great Hall of the People in Beijing in November 2005 to mark the 90th anniversary of his birth. It was widely interpreted as an attempt by President Hu Jintao to boost his own public standing by allowing open tributes to his still-popular namesake. A speech by China’s then vice-president, Zeng Qinghong, lavished praise on Hu Yaobang’s career as one of the Communist state’s revolutionary founders, tactfully avoiding mention of his dethronement.

But by and large the leadership has ignored Hu Yaobang’s death. Last year’s 20th anniversary of the Tiananmen movement made officials especially nervous of anything that might revive memories of that period. Even though the milestone passed with little more than token attempts inside China to observe it, the authorities have yet to ease their grip. Last December a prominent dissident, Liu Xiaobo, was jailed for 11 years for “inciting subversion”.

This made the appearance of Mr Wen’s more than 3,000-character essay especially striking. Unlike Mr Zeng’s formal-sounding 2005 speech, Mr Wen’s article marked the first time since 1989 that a top leader has been willing to write of a personal connection with the former party chief. It recalls a trip he made with Hu in 1986 to a rural area of the poor southern province of Guizhou. “Every time I think back on this, Comrade Yaobang’s sincere, magnanimous and amiable expression keeps appearing before my eyes. Cherished feelings stored in my heart for all these years swell up like a tide, and it takes a long time for me to calm down,” Mr Wen wrote.

A few other official newspapers also published reminiscences, this time apparently less restrained than in 2005, when the party’s propaganda bureau responded furiously to a liberal magazine’s articles related to the anniversary. Thousands of Chinese internet users have praised these latest pieces in online forums.

But hope that Hu’s partial rehabilitation might lead to any reassessment of the Tiananmen Square protests will certainly be dashed. Hu’s political views have been notable for their absence in the recent articles, suggesting that only his affable character is open for discussion. This is a safe topic for Mr Wen, who prides himself on the same man-of-the-people quality that his article praised in Hu. From anecdotal evidence, it appears Mr Wen enjoys some popularity for his caring image—it has been on display again with his visit to the epicentre of an earthquake on April 14th in Qinghai Province on the Tibetan plateau that killed more than 2,000 people.

Tea-leaf readers are divided over what, if any, further political message might have been intended. Few believe Mr Wen would have published such an article without consulting his colleagues. But there is a school of thought that Mr Wen, feeling that his own political career is drawing to an end (he is due to step down in 2013, if not before, as will President Hu), is trying to signal a yearning for political reforms which have not been pursued more vigorously. President Hu has kept silent on Hu Yaobang, but both he and Mr Wen owe earlier promotions to the late leader. In his article, Mr Wen revealed that he had visited Hu Yaobang’s home every year since his death, a gesture that readers would interpret as showing considerable loyalty.

Bao Tong, who was a top aide to the late Zhao Ziyang, Mr Hu’s equally liberal successor, believes there could be an ultra-subtle message in the party’s re-embrace of Hu. Officials—he points out—like to encourage the idea that Zhao helped topple Hu (though Mr Bao says he did not). Far from being a sign of yearning for reform, support for Hu could indicate repudiation of Zhao, about whom reminiscences remain strongly discouraged. Zhao was thoroughly purged after Tiananmen and died under house arrest five years ago.

Mr Wen’s article, however, does hint strongly at a huge problem in China’s political system. It describes how Hu instructed Mr Wen to sneak out of an official guesthouse and visit a village under cover of darkness, to find out what peasants were really thinking. “Remember, do not inform the local government”, Hu was quoted as saying. A quarter of a century later, Chinese leaders remain almost as prone to deception by their underlings.


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China Convicts Itself

Beijing needs to commit to the global economy

China tactfully reminds the world every once in a while that its specialty is masquerading weakness as strength.

In convicting iron-ore salesman and naturalized Australian citizen Stern Hu of bribery and stealing commercial secrets this week, China passed a verdict sure to frighten but not a verdict that anyone in the world would actually trust. A solitary Australian consular official was permitted to witness only part of the largely secret trial; the only publicly disclosed piece of evidence appears to be a written statement by Du Shuanghua, owner of a private steel mill, saying he paid off one of Mr. Hu’s colleagues.

Rio Tinto, one of the few Western companies to earn billions out of China, was quick to write off its employee. The Australian government is having a harder time endorsing the verdict, prompting the predictable caterwaul from China.

China unloading what it would like to get cheaper.

Let’s recall, the reason for an open courtroom is not just to make sure justice is done, but to make sure a verdict will be believed and lend credibility to the government that issues it.

The reason to have a free media, and even to put up with Google, is so people can know when their government is lying to them, which in turn is conducive to people being prepared to believe their government when it’s telling them the truth.

Weakness masquerading as strength is also key to understanding the most dangerous issue in U.S.-China relations today—China’s controversial currency peg and the false prize of its $2 trillion in accumulated dollar reserves.

The problem isn’t that China ties its yuan to the dollar. The problem is that it never let the full consequences of this choice flow through to domestic prices, wages and patterns of investment and employment.

Perhaps the pithiest summary came from whoever said that the real trouble with China is that one Chinese won’t lend to another to buy a house unless he’s buying it in the U.S.

Exactly. Tens of billions of Chinese-owned dollars rolled into Fannie and Freddie to support a U.S. housing boom. Meanwhile, at home, the world’s second biggest economy has yet to develop a real banking system or debt market, or any way for consumers to leverage China’s huge savings to improve their standard of living.

Writ small, China’s ore wars are emblematic of the same lopsided development agenda. Beijing has been trying somehow to turn its rickety and overmanned steel industry into leverage over international ore prices. China has been trying for two years to defy market realities and force Rio and its major competitors to deliver supplies at a steep discount to the international price created by China’s own explosive and volatile demand.

Not the least of Rio’s offenses was that it refused to go along. Rio sold a growing share of ore at spot market prices to the all-too-willing buyers among mainland steelmakers. Whatever the truth of the bribery charges, this actually reduced the opportunity for corruption—but then maybe that was Rio’s real sin, since well-connected mainlanders apparently had been getting rich reselling their ore allocations to unapproved buyers at huge markups.

Had China opened up its economy at a pace commensurate with its exports and accumulation of dollars, a solution would have revealed itself: import more steel. Many of the world’s steelmakers use domestic ore or scrap. Unlike China’s, they aren’t captive to an internationally traded raw material controlled by three big sellers.

This week, two of the three, Brazil’s Vale and Australia’s BHP, persuaded major Japanese, South Korean and Chinese steelmakers to accept quarterly ore repricings, with price hikes of nearly 100% above last year. Even with the Stern Hu verdict in hand, Beijing can’t hope to hold back this tide.

Nor can it hold back forever those in the U.S. who want to use China’s currency policy as an excuse to start a trade war, joined by some who apparently want to blame China for the failure of their tax-and-spend nostrums to lift the U.S. economy to a sustainable recovery.

See, we can masquerade weakness as strength too. But Washington can’t make China see a light its leaders don’t want to see. How much better to adopt a policy of real strength at home, beginning with domestic U.S. reforms that do what the word actually implies: justify confidence in our own economic future.

When Moody’s threatened to downgrade the U.S. credit rating recently, it said a prime concern was a loss of faith in Washington’s ability to get spending under control and protect growth. Moody’s didn’t mention China.

Holman Jenkins, Wall Street Journal


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The Rules in China

After a Chinese court sentenced four executives of Australian mining company Rio Tinto to lengthy prison terms for bribery and stealing commercial secrets yesterday, Canberra was quick to respond. Foreign Minister Stephen Smith pointedly stated, “As China emerges into the global economy, the international business community needs to understand with certainty what the rules are in China.”

In the eight months since Australian citizen Stern Hu and his Chinese colleagues Wang Yong, Ge Minqiang and Liu Caikui were arrested, we’ve learned a great deal about the lack of certainty and rules not only in China, but also in the global commodities trade. Some of that is China’s fault, but hardly all of it. The Australian government and Rio Tinto must share the blame for lack of transparency and failing to play by the rules.

Foreign media coverage of the arrests and trial has focused on whether the Chinese authorities pursued this case for political reasons. Remember that early last year, cash-starved Rio Tinto angered China by inviting Aluminum Corp. of China, or Chinalco, to take a $19.5 billion equity stake and then backing out of the deal under a combination of shareholder, government and public pressure. Rio was also driving a tough bargain in iron-ore price negotiations with Chinese buyers. Many observers speculated that the four executives were pawns in a high stakes game of tit-for-tat orchestrated from Beijing.

Certainly the timing of the case makes such suspicions inevitable. But the reality is probably more complicated. The Chinese justice system may be manifestly unfair, and once it gains momentum a guilty verdict is a foregone conclusion. Yet Rio itself put forces in motion that led to four men losing their freedom.

It all started with the boom in the global iron-ore market in the early 2000s. That’s when China’s steel industry embarked on a massive expansion of capacity, turning the trade in ore from a buyer’s market to a seller’s market. China’s large state-owned steelmakers bought at the benchmark price negotiated by Japanese and Korean mills, while smaller firms had to pay the higher spot price. This created an incentive for arbitrage and corruption, but unfortunately both the Chinese government and the mining companies were slow to take account of this in their internal controls.

As demand soared, the benchmark and market prices for iron ore diverged and the system came under increasing stress. In 2008, the Brazilian mining giant Vale negotiated a new benchmark price, only to see its two Australian rivals, BHP Billiton and Rio Tinto, refuse to follow it. Vale reacted by tearing up its agreed benchmark price and renegotiating with producers who were over a barrel.

Then Rio Tinto also began to back out of its contracts, for instance by invoking clauses in contracts to hold back 10% of deliveries, which could then be resold at the spot price. Since Rio was facing a hostile takeover bid from BHP, the company’s managers pushed especially hard for every last dollar at the expense of their trading partners to show that they could deliver higher returns for shareholders.

Rio’s Mr. Hu himself acknowledged the problem. In 2008, after Rio negotiated a 87% price increase, Australian reporter John Garnaut interviewed him: “He said he had no qualms with driving as hard a bargain as he could on price. But he had misgivings about whether Rio Tinto should risk its integrity in China by claiming ‘force majeure’ to wriggle out of long-term contracts to chase higher prices elsewhere. ‘We acted in accordance with the letter of the contracts, but not the spirit,’ he said.”

This weakening of the bonds of contract naturally infuriated Chinese steelmakers. So when the economic crisis hit at the end of 2008 and demand for iron ore evaporated, it was payback time. Enjoying a buyer’s market again, the Chinese firms simply walked away from contracts.

The turnabout didn’t last long. Beijing’s massive fiscal stimulus program quickly revived demand for steel by the middle of 2009, and the Australians were able to start raising prices again. Negotiations over new iron-ore benchmark prices were particularly acrimonious, given the bad blood created over the past couple years. And that was the state of play when Mr. Hu and his colleagues were arrested on July 5, 2009.

One past participant in the iron-ore business, who insists on anonymity because of the sensitivities on both sides, believes that the investigation into the Rio Tinto executives was ongoing for many months before the arrests, meaning they were not directly related to the Chinalco fiasco or the ongoing price negotiations. The authorities likely started sniffing around as a result of a tip-off from someone on the Chinese side of the industry. The ill will created by the whipsawing prices and huge losses suffered by some firms supplied plenty of motivation for someone to drop the dime on Rio.

And some dirt was found. Rio Tinto has severed its relationship with the executives, saying they engaged in “deplorable behavior,” effectively accepting the verdict that they were taking kickbacks from steelmakers to arrange preferential access to iron ore. The charges of stealing commercial secrets are much more murky, as evidenced by the fact that they were heard in a totally sealed courtroom, but these too probably originated from lower down the ladder of officialdom, rather than a Beijing-led witch-hunt against Rio Tinto.

The bosses in Australia made the mistake of leaving their Chinese executives in place for too long with too little supervision. But the bigger mistake was destroying the trust of the handshake deals made with Chinese partners in the quest for a little extra margin. That is bad practice anywhere, but especially in China.

Chinalco has not held a grudge against Rio for the failed equity deal. The two companies continue to negotiate joint projects in countries like Mongolia and Guinea. The State Council’s own post-mortem report on the affair is relatively kind to Rio and admits that the Chinese side could have handled the deal better.

However, the government of Prime Minister Kevin Rudd does not come off so well. Treasurer Wayne Swan ran scared from public perceptions of being too soft on China and politicized the approval process for Chinese investments, making it clear that the Chinalco deal would not go through and future acquisitions in the natural resources industry would face strict limitations. The lack of transparency and hostility toward China came as a complete surprise to Beijing and has created lasting tension between the two countries.

It was bad luck that around the same time, Xinjiang dissident Rebiya Kadeer was invited to Australia and Canberra issued a defense white paper that singled out China as a potential threat around which to base future strategy. From Beijing’s perspective these all suggested that Australia was turning hostile and there was no certainty about the rules for Chinese companies doing business there. Had this not happened, it’s possible that greater leniency would have been shown to the four Rio Tinto executives.

Everyone doing business in China should be clear by now on the rules—there is no rule of law. Deals can be done on the basis of mutual trust, which creates some level of certainty. The four Rio Tinto executives may be guilty of corruption, but the real reason they are in prison is because that trust broke down.

Mr. Restall is a member of the editorial board of The Wall Street Journal.


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The Arrogance of China’s Leadership

Masters of the World

China’s confidence has been fuelled by surging economic growth, even during the crisis.

The West hopes that China’s growing prosperity will also lead to political liberalization. But the reverse is likely to be true. The Communist Party’s increasing confidence means China is set to become more of a troublemaker on the international stage, and more brutal in its crackdown on dissidents.

China’s Communist Party is omnipotent. It can move mountains, as it did when it built the world’s largest hydroelectric plant on the Yangtze River. It can build the world’s highest railway line, as it proved when it constructed the rail link to the Tibetan capital of Lhasa.

It can even organize reincarnations, something it achieved when it anointed a man who is loyal to Beijing as Tibet’s second-highest spiritual leader, or Panchen Lama — a particularly impressive feat for an atheistic party which regards religion as a corrupting opium of the people. The Communist Party bosses briefly turned spiritual in order to get their man in place as successor to the Dalai Lama, 74. But the Dalai Lama has chosen his own spiritual deputy. And he’s also thinking about selecting a woman to be his reincarnation, he told SPIEGEL. Besides, he doesn’t want to do Beijing the favour of dying anytime soon.

Last Thursday, US President Barack Obama shook hands with the Tibetan Nobel Peace Prize winner in the White House. It’s something his predecessors had also done, as had the French and German government leaders. Usually Beijing just responded to such meetings by uttering the usual protests. The Communist Party’s complaints against US arms shipments to Taiwan have been similarly muted in the past because it was well aware that US presidents are bound by law to help Taiwan.

But it’s different this time. Beijing reacted with uncommonly vocal fury to the latest Dalai Lama meeting and Washington’s new Taiwan arms deal, and has threatened consequences. Companies like Boeing might be excluded from Chinese deals, and bilateral talks among military officials have been cancelled.

Self-Confidence Bordering on Arrogance

There’s a new ice age between Beijing and Washington, between the two centers that many already see welded together as Chimerica, a new “G-2″ global power. What has got into China?

For a start, the Chinese government is brimming with a self-confidence bordering on arrogance. The Chinese see themselves as the winners of the global economic crisis. The country generated economic growth of around 9 percent in 2009 while the Russian economy shrank by 7.9 percent, the EU by 4.2 percent and the US by 2.7 percent. China overtook Germany to become the world’s leading exporter and extended its lead as the country with the largest foreign currency reserves.

The Communist Party leaders are taking delight in citing glowing forecasts for their country’s economic outlook. American Nobel economics laureate Robert Fogel, for example, is predicting that in 2040, China will account for 40 percent of global economic output, compared with just 14 percent for the US. “This is what economic hegemony will look like,” says Fogel.

While some in the US think they can manage China’s ascent to a global power, China is dreaming of “arranging” America’s decline. And in this context the West should bid farewell to its cherished notion that China’s economic progress will lead to political liberalization and turn it into a responsible partner on the world stage. The reverse is likely to be the case.

Troublemaker on the World Stage

Beijing is currently playing the provocative troublemaker, both at the climate conference in Copenhagen in December and in the UN Security Council, where it is likely to stand alone in resisting a new round of tough sanctions against Iran.

Economic experts say the Chinese currency is undervalued by 25 to 40 percent and that this is artificially lowering the price of exported Chinese products. But China’s leaders aren’t considering revaluing the yuan. They are ignoring Obama’s complaints about the exchange rate with the same nonchalance they showed when they dispatched lower-ranking officials to negotiate with him in Copenhagen.

China think it can afford to behave in this way. In Africa and Asia, Beijing’s authoritarianism is regarded as a successful model worth copying.

At home, the Communist Party is intensifying its brutal methods. It allowed an apparently mentally unstable British drug smuggler to be executed, and Liu Xiaobo, a respected civil rights activist who only exercised his right to free speech, was sentenced to an outrageous 11 years in jail.

Minorities striving for autonomy like the Uighurs and Tibetans are ruthlessly oppressed. A resurgent Han nationalism has replaced all other ideologies as the cement holding society together.

Beijing’s leaders are behaving like the masters of the world, as aloof as if they could walk on water. The Dalai Lama says he prays every night for the enlightenment of the Chinese. He dreams of the rebirth of Chinese virtues like modesty and a sense of proportion. He can dream on.


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China’s Tibet Pique

Beijing’s anger is likely to backfire.

Much ado has been made about President Obama’s chat with the Dalai Lama last week and the response from Beijing. “The U.S. act grossly interfered in China’s internal affairs . . . and seriously damaged the Sino-U.S. ties,” said a Chinese government spokesman, but the barrage reveals more about China than it does about U.S. policy toward Tibet.

Beijing believes it can browbeat other nations into ignoring its human-rights violations in Tibet, regularly retaliating after European leaders meet with the Dalai Lama. It has cancelled a 2008 trade summit because of a planned meeting with Nicolas Sarkozy and turned away U.S. warships from Hong Kong after the Dalai Lama received the Congressional gold medal.

The fist-shaking has yielded short-term benefits for Beijing. Mr. Obama postponed his meeting with the Tibetan leader until after his November trip to China, and his Administration has dealt with Chinese human-rights abuses in whispers. Leaders in Australia, New Zealand and other democracies have also declined to meet the Dalai Lama in recent years. All this has given China a freer hand to pursue its crackdown on Tibetan dissent, which started in earnest after the 2008 Lhasa riots.

Yet China’s tough stance will only draw more attention to the Tibetan cause. “Free Tibet” groups abound in France, Britain and other free nations. In the U.S. last week, the Dalai Lama was awarded a medal from the National Endowment for Democracy. He will spend the rest of this week addressing audiences at sold-out talks.

Much of the reason Tibet touches such a raw nerve in Beijing is that the unrest there goes to the heart of the Communist Party’s lack of democratic legitimacy. The more the Party attempts to impose its will—on Lhasa and on those who dare to meet with its most famous son—the less legitimate its rule will seem, and the more support the Dalai Lama will receive around the world.

Editorial, Wall Street Journal


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China Has a Plan, America Doesn’t

Chimerica’s Monetary Management

Lender and borrower: Chinese President Hu Jintao (L) and US President Barack Obama

America has been squandering money it borrowed from the Chinese. Instead of criticizing China’s monetary policy, US President Barack Obama should acknowledge the financial skill being displayed by the new world power and learn a few useful lessons.

Everyone knows that it is important to have friends. But in politics it is just as important to have enemies. Being united against a common foe can be more than helpful.

So it may come as no surprise that the embattled US president, Barack Obama, is continuing where his predecessor George W. Bush left off: complaining about the Chinese. Obama recently said China’s monetary policy was hurting the US job market. That strikes a chord with Americans. It’s even true. But it doesn’t make any difference.

The US is the world’s biggest debtor and therefore not in the best position to get its way with the People’s Republic of China. Of each dollar that Obama wants to spend in 2010, over 30 cents are borrowed. And a large part of the loan comes from ChinaIt might be smarter for the US to stop with the reproaches and to learn from the Chinese instead. When compared to the Americans, their financial situation is more than rosy. And their monetary policy is highly sophisticated.

The Days of Cheap Money are Over

The Chinese don’t borrow, they save. And they do this with the kind of dedication with which the Americans spend. An ordinary Chinese person puts 40 percent of his or her salary into their bank account, while an ordinary American saves at most 3 percent. The People’s Bank of China has hoarded over $2 trillion in currency reserves. America meanwhile has a small dollar reserve and an XXL-sized budget deficit which currently stands at just under $14 trillion.

China is gently putting a stop to the expansionary monetary policy that helped to stabilize the fragile monetary system during the financial crisis. The government has increased interest rates and forced private commercial banks to hold larger reserves. It is withdrawing the liquidity it pumped into the market. The days of cheap money are ending.

America can’t yet bring itself to end its debt-financed anti-crisis policy. The Federal Reserve is still lending money at close to zero interest. It is devoting billions of dollars to shoring up the real estate market. It’s an attempt to buy the recovery now and pay for it later.

On the international stage, China’s monetary policy officials are givers, not takers. They are starting to issue government debt abroad, even though the country doesn’t need to borrow any money. But many states, for example Brazil, India and Russia, are happy to have an alternative to the US bond market. They buy Chinese bonds, and the Chinese in turn use this money to buy Russian, Indian and Brazilian bonds. This has created a second monetary circuit alongside the dollar.

This won’t replace the dollar as a global currency in the foreseeable future, but it will help to prepare the ground for its replacement. Xiao Gang, the chairman of the board of directors of the Bank of China, said last summer: “The time has come to internationalize the yuan.”

China Becoming a Mini World Bank

America by contrast is self-absorbed with its monetary policy. It has ignored warnings of rising inflation and a new asset price bubble — and in doing so is isolating itself, also from the Europeans. In the meantime, China is forging new alliances.

The People’s Republic has quietly been taking stakes in virtually all the world’s regional development banks. Like a mini-World Bank, China has been helping to shore up financially troubled countries in Latin America, Africa and Asia. It has also increased its stake in the International Monetary Fund, by $50 billion. Chinese monetary experts, not Chinese soldiers, have been driving the nation’s expansion — silently and efficiently.

The oil business is the foundation of the dollar’s hegemony. The oil-producing states do some $2.2 trillion dollars’ worth of business each year in the US currency. Larry Summers, Obama’s top economic adviser, once compared the dollar to the English language in terms of its importance to international trade.

But China, a huge consumer of oil, is already discussing alternative means of payment with its suppliers. It would like to pay in yuan. The oil states wouldn’t be able to use that currency worldwide, but they could make purchases in China. That, by contrast, would be like learning Mandarin.

China is talking down the dollar to serve its own interests. When the dollar depreciates against the euro and the yen, the yuan declines as well, because the Chinese currency is pegged to the dollar. And the declining yuan helps boost Chinese exports to Europe and elsewhere in Asia.

China now sells significantly more goods in Europe than it does in America. Rarely has a government used the instruments of state monetary policy in such a calculated way. Obama is complaining, China keeps on growing and we’re all confused.

The economics textbooks never imagined a planned economy that was also run so cleverly. The world of planned economies is “a completely paralyzed, artificially distorted, pseudo-order incapable of reaction,” Ludwig Erhard, the former German chancellor and economy minister widely credited with engineering Germany’s post-war economic miracle, once said. It would “collapse like a pack of cards.”

If he were alive today, Erhard would definitely change his mind, given Asia’s successes. That’s because China has a plan, and America apparently doesn’t.

Gabor Steingart, Der Spiegel


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Speaking too softly

Relations between America and China may chill over a meeting with the Dalai Lama

IT IS bound to be a controversial meeting. The Dalai Lama, Tibet’s spiritual leader, goes to Washington, DC, this week and will sit down with President Barack Obama for the first time on Thursday February 18th. American presidents have long been happy to meet the Tibetan leader and to tolerate subsequent angry huffing from China, not least as a means of responding to public concern over human rights without doing anything serious to jeopardise trade or other ties with Beijing.

But in Mr Obama’s case, with China increasingly assertive internationally and the American president perceived in many quarters as cautious, even timid, in foreign policy, the encounter with the Dalai Lama has assumed extra significance. Mr Obama will be studied closely. Human-rights activists will listen with care to the language that the American president uses, straining to hear whether he goes further than merely suggesting more dialogue between Tibetans and the Chinese leadership. Might the president dare to deliver real criticism of repression and human-rights abuses in Tibet?

Kenneth Roth, the head of Human Rights Watch, an activist group in New York, offers a mixed assessment of Mr Obama’s foreign policy so far in its treatment of human rights. He suggests that no other recent American leader has taken such care with his rhetoric, judging how it is received by the rest of the world. But substantial steps too rarely follow Mr Obama’s fine words. The president’s speeches—as in Cairo last year—have helped to set a conciliatory tone for American foreign policy, and to reassure Muslims and others that America is not determined to seek confrontation for the sake of it. Thoughtful comments to African leaders, urging the continent to develop strong and democratic institutions, have also been well received. But Mr Roth sees little evidence of a leader who is prepared then to press reluctant regimes, as for example did Ronald Reagan (and before him, Jimmy Carter) in pushing the Soviet Union to sign up to an international commitment, the Helsinki Final Act, which promoted individual rights.

Mr Obama’s foreign-policy approach of seeking engagement with opponents such as Iran, in an effort to establish dialogue and more effective diplomatic channels, has made it harder for him to beat the human-rights drum loudly. But by failing to speak up about repression, the American leader risks being perceived as weak. His muted reaction to the rigged presidential elections in Iran and the violent repression that followed (and continues) has seemed deferential. His eagerness to “reset” relations with Russia, for example by scrapping a planned anti-missile defence shield in eastern Europe, has coincided with near total silence over the murders of journalists and the clamping down on democracy in that country. It is unclear, in either case, that biting his tongue has brought any gains from the respective regimes.

Particularly troubling has been America’s attitude to China and human rights. After Hillary Clinton’s first visit to China as secretary of state, in February 2009, she announced that concern over human rights should not “interfere” with getting co-operation on other issues such as climate change and the global economy. Human-rights defenders were deflated. Mr Obama then avoided meeting the Dalai Lama when he visited America in September and postponed a scheduled meeting in October, to avoid upsetting the government in China ahead of a presidential visit. During Mr Obama’s subsequent visit to China, he made few and limited comments on human rights. The Chinese government responded by becoming more assertive. It helped to scupper a deal at the Copenhagen summit on climate change in December and snubbed the American president by sending a deputy minister to a crucial meeting. China has generally proven to be increasingly unwilling to co-operate with America, for example over United Nations sanctions against Iran.

The administration, however, may now be toughening up. American rhetoric over Iran has become firmer. On Monday Mrs Clinton warned that a military dictatorship was emerging in Tehran. Relations with China, too, have become frostier, for example over a long-planned (and routine) decision by the American government to sell weapons to Taiwan. Mrs Clinton has also spoken up more forcefully about the need for internet freedom in China, in the wake of sophisticated cyber-attacks on Google that many believe had Chinese government fingerprints on them. This week’s meeting with the Dalai Lama is thus a moment to demonstrate that Mr Obama is ready both to signal his concern for human rights and that his foreign-policy is becoming more assertive.


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Pass impasse

The giant neighbours are more rivals than partners

China and India: Prospects for Peace. By Jonathan Holslag. Columbia University Press; 234 pages; $37.50 and £26.

FOR a book about two countries whose most recent war was five decades ago, “Prospects for Peace” seems a quirky subtitle. Jonathan Holslag, a Brussels-based think-tanker, argues that, since China’s swift and bloody humiliation of India in 1962, the neighbours have “tottered at least five times on the verge of war”. But the last time troops massed on the border was in 1986. Since then the territorial dispute that sparked the war has been “put to one side”. Bilateral trade has boomed, and hundreds of thousands of Indians and Chinese now visit the other country each year, including a succession of senior politicians toasting a beautiful friendship.

As Mr Holslag explains, however, the relationship is still marked as much by unremitting strategic mistrust as by burgeoning co-operation. His contribution to a recent flurry of India-China books attempts to reconcile these contradictory trends. His conclusions are rather unsettling.

Most of the other books on the area concentrate inevitably on the implications of the two countries’ economic rise. The simultaneous emergence into the global economy of two countries containing nearly two-fifths of the world’s people is after all an unprecedented phenomenon. Moreover, China’s dominance of global manufacturing seems matched by India’s arrival as an important provider of information-technology and other services. Mr Holslag quotes Zhu Rongji, a former Chinese prime minister: “You are number one in software. We are number one in hardware…Together we are the world’s number one.” That is India’s misfortune. Hundreds of thousands of Indians work in IT services whereas manufacturing for export provides China with tens of millions of jobs. Mr Holslag predicts that India will challenge China’s role as the world’s manufacturer, but that seems far-fetched.

This complementarity has been accompanied by a number of alliances of convenience, most notably in resisting pressure from the rich world to agree to fixed targets for limiting carbon emissions. There was even an agreement in 2006 to work together to avoid bidding up the prices of energy resources in third countries.

The limited effect of that pact, however, is one reason to believe Mr Holslag’s prognosis of a “fiercer economic rivalry and more aggressive regional diplomacy”. Another is what Lalit Mansingh, a former Indian diplomat, calls “the ghost at the banquet”: China’s increasing diplomatic and military influence in Asia—and India’s fear of it.

As Mr Holslag notes, the defeat in 1962 has left a deep suspicion of China in India’s political, academic and diplomatic circles, which is reflected in public opinion. India claims an area of Chinese-held territory in Kashmir the size of Switzerland, while China claims an area three times larger in what is now Indian Arunachal Pradesh. The border dispute remains unresolved. What had lazily been assumed to be the obvious solution—the status quo, in which each country keeps large swathes of territory claimed by the other—seems, if anything, further away than ever. The political difficulties of selling such a deal in India have long been obvious. But China’s renewed harping on its claim in recent years suggests that it in fact does want more than it already has.

In putting the strategic rivalry at the centre of his analysis, Mr Holslag provides a useful corrective to some of the more starry-eyed visions of a semi-cohesive “Chindia”. He cannot, however, overcome the two biggest difficulties of tackling the subject. One is that both countries are so big and so complex that at times broad-brush simplification of their histories and policies veers into distortion.

The second is that India is full of voluble politicians, academics, diplomats and ordinary people with fiercely held views on China. Across the border, however, fewer Chinese regard India as an issue of immediate importance, and debate on the relationship is far more circumscribed. Cyberspace may be the exception, but it is largely ignored in this account. A consequence of this—and it is something many Indians are painfully aware of—is that Indian policy often appears fragile, contradictory and self-defeating, whereas China’s seems coherent, single-minded and effective. Yet it is hard to imagine that China can have a higher foreign-policy goal in South Asia than keeping relations with India on a fairly even keel. Maybe, for once, it is Chinese policy that is in disarray.


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Dazzled by Asia

When will China lead the world? Don’t hold your breath.

During his trip to Asia in November, Barack Obama seemed strangely mute. Unlike Bill Clinton, who criticized China’s human rights record in front of then-president Jiang Zemin, Obama largely avoided the topic of rights. In Singapore, despite pressure from human rights activists, the president deferred to pressure to not release a statement calling for the freeing of Burmese opposition leader Aung San Suu Kyi. In Japan, the president worked valiantly to massage local sentiments, bowing deeply to Emperor Akihito – and drawing flak back in the United States from conservative critics for appearing weak.

More than any recent American president, Obama displayed deep deference to his Asian counterparts. He did so, in part, because, like many Americans, he has become convinced that this will be Asia’s century, and that the United States must begin to accommodate itself to this stark new geopolitical fact. A recent report by the US National Intelligence Council concluded that the world is witnessing the rise of “major global players similar to the advent of a united Germany in the 19th century and a powerful United States in the early 20th century…[and they] will transform the geopolitical landscape.” Major media outlets covered the president as if he was some kind of Dickensian vagrant, appealing to his increasingly powerful creditors in China for leniency. “Obama’s trip reveals a relationship with a strangely lopsided quality to it,” wrote longtime China specialist Jonathan Fenby, in one typical example of the coverage.

Over the past two years, some of the most important foreign policy thinkers have chronicled America’s decline, and argued that Asia is rising to preeminence. Parag Khanna’s “The Second World: Empires and Influence in the New Global Order” landed on the cover of The New York Times Magazine, while Fareed Zakaria’s “The Post-American World” became a bestseller. Meanwhile, the influential former Singaporean ambassador Kishore Mahbubani, who helped spark the “Asian values” debate of the 1990s, released “The New Asian Hemisphere: The Irresistible Shift of Global Power to the East.” Martin Jacques, a prominent columnist for The Guardian, took the idea one step further. In his book “When China Rules the World,” he contends that China’s rise will have a greater impact on the globe than the emergence of the United States as an international power in the 20th century.

Yet predictions of America’s decline are vastly overstated. Asia is indeed increasing its economic footprint in the world, but it still lags far behind the United States in military might, political and diplomatic influence, and even most measures of economic stability. Asia’s growth, the source of its current strength, also has significant limits – rising inequality, disastrous demographics, and growing unrest that could scupper development. Nationalism in Asia will prevent the region from developing into a European Union-like unified area for the foreseeable future, allowing regional conflicts to continue, and preventing Asia from speaking, more powerfully, with a unified voice.

The future of American power is a vital question. America’s foreign policy choices will be directed by judgments about the United States’ staying power, and how the United States, like Britain before it, should adapt to new powers emerging on the scene. If, as Jacques argues, America’s influence will naturally fade while Asia’s grows, Washington should adopt policies similar to Britain’s in the mid-20th century – ceding influence over large portions of the world while working to ensure that it remains an important player on a few key issues. American leaders would have to radically shift their style, adopting a new humility while selling the US public on a diminished global role, a major comedown for a superpower.

Conversely, if it is not to be Asia’s century, Washington’s strategy would be radically different. No concessions of fading glory: Though the United States might not be the only superpower, it could assume that, for the near future, it would remain the preeminent power, allowing Washington to dictate the terms of everything from climate change negotiations to global talks on nuclear weapons.

The idea of American power giving way to a rising Asia has been building for two decades. In the late 1980s and early 1990s, many in the United States predicted that Japan, which then seemed to have a hyper-charged economy, would rule the world. But Japan’s economy, built on a real estate bubble, imploded, and Japanese leaders never truly matched their economic power with political might; limited by a pacifist constitution, Japan did not fight in the first Gulf War and wound up merely paying the check for much of the battle.

But now China has assumed the mantle. Next year, China will become the world’s second-largest economy, according to a study by the China Policy Institute of the University of Nottingham. The global financial crisis has badly dented the Western model of liberal capitalism, leaving Asia as the world’s growth engine, and main banker – China alone holds some $800 billion in American treasury securities. The chief economist of the Asian Development Bank, a regional organization, declared in September, “Developing Asia is poised to lead the recovery from the worldwide slowdown.” China and India likely will grow by more than 7 percent this year, compared to minimal growth in the West, and other leading Asian nations, like Indonesia and Vietnam, are also predicted to post high growth rates in 2010.

At the recent Copenhagen climate summit, two of Asia’s most powerful leaders, Chinese Premier Wen Jiabao and Indian Prime Minister Manmohan Singh, showed this newfound confidence. Meeting in a back room, they pointedly tried to exclude Obama from their negotiations. Obama ultimately had to burst into the closed-meeting like a kind of diplomatic party crasher.

Asia’s new swagger has caused a crisis of confidence in the West that makes the fear of Japan in the late 1980s look like a mild tremor. In the late 1980s it was only one Asian giant growing powerful, and at that time Europe, newly united after communism, looked boldly to the future. Today many of Asia’s nations are getting stronger, and not one major Western nation can be confident about its future growth.

The belief in Asia’s rise has sparked this mini-industry of books on the Eastern renaissance. In the most apocalyptic of the bunch, such as Jacques’, the authors focus on how Asia’s powers, from China to Malaysia to Singapore, are taking the final step from rising power to global hegemon – using state-directed economic policies to dominate industry after industry, while delivering what Mahbubani calls “modernity” – good governance, growth, and the rule of law, without the messiness of Western liberal democracy. In fact, Mahbubani suggests that this “modernity” ultimately may be more appealing than Western democracy, which has not helped produce growth in Africa, Latin America, or many other democratic regions. Other authors, like Zakaria, focus more on American decline.

Yet there are many good reasons to think that Asia’s rise may turn out to be an illusion. Asia’s growth has built-in stumbling blocks. Demographics, for one. Because of its One Child policy, China’s population is aging rapidly: According to one comprehensive study by the Center for Strategic and International Studies, a Washington think tank, by 2040 China will have at least 400 million elderly, most of whom will have no retirement pensions. This aging poses a severe challenge, since China may not have enough working-age people to support its elderly. In other words, says CSIS, China will grow old before it grows rich, a disastrous combination. Other Asian powers also are aging rapidly – Japan’s population likely will fall from around 130 million today to 90 million in 2055 – or, due to traditional preferences for male children, have a dangerous sex imbalance in which there are far more men than women. This is a scenario likely to destabilize a country, since, at other periods in history when many men could not marry, the unmarried hordes turned to crime or political violence.

Looming political unrest also threatens Asia’s rise. China alone already faces some 90,000 annual “mass incidents,” the name given by Chinese security forces to protests, and this number is likely to grow as income inequality soars and environmental problems add more stresses to society. India, too, faces severe threats. The Naxalites, Maoists operating mostly in eastern India who attack large landowners, businesses, police, and other local officials, have caused the death of at least 800 people last year alone, and have destabilized large portions of eastern India. Other Asian states, too, face looming unrest, from the ongoing insurgency in southern Thailand to the rising racial and religious conflicts in Malaysia.

Also, despite predictions that Asia will eventually integrate, building a European Union-like organization, the region actually seems to be coming apart. Asia has not tamed the menace of nationalism, which Europe and North America largely have put in the past, albeit after two bloody world wars. Even as China and India have cooperated on climate change, on many other issues they are at each other’s throats. Over the past year, both countries have fortified their common border in the Himalayas, claiming overlapping pieces of territory. Meanwhile, Japan is constantly seeking ways to blunt Chinese military power. People in many Asian nations have extremely negative views of their neighbors – even though they maintain positive images of the United States.

More broadly, few Asian leaders have any idea what values, ideas, or histories should hold Asia together. “The argument of an Asian century is fundamentally flawed in that Asia is a Western concept, one that is not widely agreed upon [in Asia],” says Devin Stewart, a Japan specialist at the Carnegie Council for Ethics and International Affairs.

Even as Asia’s miracle seems, on closer inspection, less miraculous, America’s decline has been vastly overstated. To become a global superpower requires economic, political, and military might, and on the last two counts, the United States remains leagues ahead of any Asian rival. Despite boosting defense budgets by 20 percent annually, Asian powers like India, China, or Indonesia will not rival the US military for decades, if ever – only the Pentagon could launch a war in a place like Afghanistan, so far from its homeland. When a tsunami struck South and Southeast Asia five years ago, the region’s nations, including Indonesia, Thailand, and India, had to rely on the US Navy to coordinate relief efforts.

America also has other advantages that will be nearly impossible to remove. With Asian nations still squabbling amongst themselves, many look to the United States as a neutral power broker, a role America plays around the world. German writer and scholar Joseph Joffe calls the United States today the “default power”: No one in the world trusts anyone else to play the global hegemon, so it still falls to Washington.

Even in the economic realm, the United States remains strong. As Zakaria admits, the United States accounted for 32 percent of global output in 1913, 26 percent in 1960, and 26 percent in 2007, remarkably consistent figures. The United States remains atop nearly every ranking of economies according to openness and innovation. While Asia’s centrally planned economies can build infrastructure without worrying about public opposition – China has built impressive networks of airports and highways – they are less successful at nurturing world-beating companies, which thrive on risk-taking and hands-off government. Compared to Intel, Google, or Apple, China’s major companies still are state-linked behemoths that do little innovation of their own. The leading corporations in most other Asian nations (with the exception of Japan and South Korea) also are either giant state-linked firms or trading companies that invest little in innovation. And censorship or tight government controls alienate the most innovative firms – Google is now threatening to pull out of China entirely.

As Asia throws up barriers to immigration, in the United States immigration helps ensure long-term economic vitality. Chinese and Indian immigrants accounted for almost one-quarter of all companies in Silicon Valley, according to research by AnnaLee Saxenian at the University of California-Berkeley. According to the most comprehensive global ranking of universities, compiled by Shanghai Jiao Tong University, American schools, powered by immigrants and flush with cash, dominate the top 100, with Harvard ranked first. Asia has no schools in the top 10.

Most important, the United States is a champion of an idea that has global appeal, and Asia is not. During the opposition protests in Iran, demonstrators look to the United States, not China or Indonesia or even India, to make a statement. In a reversal of the Iranian regime’s rhetoric, some protestors even chant “Death to China” because of Beijing’s support for the repressive government in Tehran. As long as protestors in places like Iran, or Burma or Ukraine, call out for the American president, and not China’s leader or India’s prime minister, the United States will remain the preeminent power.

To be the global hegemon requires military, economic, and political might, but it also means offering a vision for the world. As Mahbubani admits, during Britain’s imperial period, elites in places like Malaya, India, or the Caribbean wanted to study in England, or read British authors and philosophers, because they believed that the ideas Britain had imparted – the rule of law, the Westminster political system, an idea of fair play, a meritocratic civil service, evidence-based scientific exploration – had merit for the entire world. Even men and women who, ultimately, became some of the biggest thorns in Britain’s side, like Jawarhal Nehru, cherished their British studies and their links to British culture.

So, too, since World War II the United States has been, for many foreign publics, the nation looked up to in this way. Even at the worst moments, such as the period after 9/11 in which the Bush administration created the prison at Guantanamo Bay and allowed torture and other questionable tactics, I have rarely met anyone, in any country, who wanted to move to China, or India, or even Japan, rather than the United States. Foreigners may want to spend a few years in China or India or Indonesia, to see the dynamism of these places, but few, if any, have plans to become Chinese, Indian, or Indonesian citizens. Perhaps one day China or Indonesia or India will draw these migrants, who would come seeking the same dreams and openness as they do today in the United States. But it won’t be soon – and it might not even be this century.

Joshua Kurlantzick is a Fellow at the Council on Foreign Relations.


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Facing up to China

Making room for a new superpower should not be confused with giving way to it

FOR six decades now, Taiwan has been where the simmering distrust between China and America most risks boiling over. In 1986 Deng Xiaoping called it the “one obstacle in Sino-US relations”. So there was something almost ritualistic about the Chinese government’s protestations this week that it was shocked, shocked and angered by America’s decision to sell Taiwan $6 billion-worth of weaponry. Under the Taiwan Relations Act, passed in 1979, all American administrations must help arm Taiwan so that it can defend itself. And China, which has never renounced what it says is its right to “reunify” Taiwan by force, feels just as bound to protest when arms deals go through. After a squall briefly roils the waters, relations revert to their usual choppy but unthreatening passage.

With luck, this will happen again. But the squalls are increasing in number, and the world’s most important bilateral relationship is getting stormy. If it goes wrong, historians will no doubt heap much of the blame on China’s aggression; but they will also measure Barack Obama on this issue, perhaps more than any other.

The China ascendancy

As if to highlight the underlying dangers, China has this time gone further than the usual blood-and-thunder warnings and suspension of military contacts. It has threatened sanctions against American firms and the withdrawal of co-operation on international issues. Those threats, if carried out, would damage China’s interests seriously, so its use of them suggests that it hopes it can persuade Mr Obama to buckle—if not on this sale then perhaps on Taiwan’s mooted future purchases of advanced jet-fighters. But the unusual ferocity of the Chinese regime’s response also points to three dangerous undercurrents.

The first is the failure of China’s Taiwan policy. Under the presidency of Ma Ying-jeou, Taiwan’s relations with the mainland have been better than ever before. Travel, trade and tourist links have strengthened. A free-trade agreement is under negotiation. Yet there is little sign of progress towards China’s main goal of “peaceful reunification”. Most Taiwanese want both economic co-operation and de facto independence. A similar failure haunts policy in Tibet, where our correspondent, on a rarely permitted trip to the region, found the attempt to buy Tibetans’ loyalty through the fruits of development apparently futile. As talks between China and the emissaries of the Dalai Lama ended in the usual stalemate this week, China warned Mr Obama against his planned meeting with Tibet’s exiled spiritual leader.

Again, nothing new in that. There is, however, a new self-confidence these days in China’s familiar harangues about anything it deems sovereign. That is the second trend: China, after its successful passage through the financial crisis of late 2008, is more assertive and less tolerant of being thwarted—and not just over its “internal affairs”. From its perceived position of growing economic strength, China has been throwing its weight around. It played a central and largely unhelpful role at the climate-change talks in Copenhagen; it looks as if it will wreck a big-power consensus over Iran’s nuclear programme; it has picked fights in territorial disputes with India, Japan and Vietnam. At gatherings of all sorts, Chinese officials now want to have their say, and expect to be heeded.

This suggests a dangerous third trend. As China has opened its economy since 1978, it has been frantically engaged in catching up with the rich West. That has led to the idea, even among many Chinese, that it would gradually become more “Western”. The slump in the West, however, has undermined that assumption. Many Chinese now feel they have little to learn from the rich world. On the contrary, a “Beijing consensus” has been gaining ground, extolling the virtues of decisive authoritarianism over shilly-shallying democratic debate. In the margins of international conferences such as the recent Davos forum, even American officials mutter despairingly about their own “dysfunctional” political system.

A swing not a seesaw

Two dangers arise from this loss of Western self-confidence. One is of trying to placate China. The delay in Mr Obama’s meeting with the Dalai Lama in order to smooth his visit to China in November gave too much ground, as well as turning an issue of principle into a bargaining chip. America needs to stand firmer. Beefing up the deterrent capacity of Taiwan, which China continues to threaten with hundreds of missiles, is in the interests of peace. Mr Obama should therefore proceed with the arms sales and European governments should back him. If American companies, such as Boeing, lose Chinese custom for political reasons, European firms should not be allowed to supplant them.

On the other hand the West should not be panicked into unnecessary confrontation. Rather than ganging up on China in an effort to “contain” it, the West would do better to get China to take up its share of the burden of global governance. Too often China wants the power due a global giant while shrugging off the responsibilities, saying that it is still a poor country. It must be encouraged to play its part—for instance, on climate change, on Iran and by allowing its currency to appreciate. As the world’s largest exporter, China’s own self-interest lies in a harmonious world order and robust trading system.

It is in the economic field that perhaps the biggest danger lies. Already the Obama administration has shown itself too ready to resort to trade sanctions against China. If China now does the same using a political pretext, while the cheapness of its currency keeps its trade surplus large, it is easy to imagine a clamour in Congress for retaliation met by a further Chinese nationalist backlash. That is why the administration and China’s government need to work together to pre-empt trouble.

Some see confrontation as inevitable when a rising power elbows its way to the top table. But America and China are not just rivals for global influence, they are also mutually dependent economies with everything to gain from co-operation. Nobody will prosper if disagreements become conflicts.


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Blowing hot and cold

China and America

What to make of the latest row between China and America over Taiwan?

IS IT a crisis or just (show) business as usual? With China and America, it can be hard to tell. Almost immediately after the United States said that it intended to sell more than $6 billion-worth of arms to Taiwan, the Chinese went into a spin. They summoned the American ambassador to denounce this interference in China’s “internal affairs” (Taiwan is part of the mainland, says the government in Beijing), threatened to cut off military ties with the United States and said they would impose sanctions on American firms involved in the Taiwan deal.

None of this looks good for the world’s most consequential relationship. From global warming to the sickly world economy to stopping nuclear proliferation in North Korea and Iran, co-operation between the established superpower and the rising one is vital to world stability. Why should either want to jeopardise this relationship?

That question has produced several theories. One is that China’s spritely economy is making it less afraid of conflict with a tiring America, especially when it thinks that “core” interests such as its claim to sovereignty over Taiwan or Tibet are at stake. The other is that America timed the Taiwan arms sale in part to punish China—for its shabby treatment of Barack Obama during last November’s presidential visit to Beijing, for its foot-dragging at December’s Copenhagen climate summit and for its reluctance to support new United Nations sanctions on Iran. Of course, neither theory excludes the other and bits of both may be true. But a third possibility is that there is in fact less to this “crisis” than meets the eye.

America is obliged under the Taiwan Relations Act of 1979 to provide the island with the arms it needs to defend itself. America and China both knew that the United States would announce the package at some time and that China would vehemently oppose it, as it always does. The package includes some sophisticated weapons, such as Black Hawk and Apache helicopters and Harpoon missiles, but it does not include F-16 fighters that the Taiwanese would dearly like. As to the timing, says a senior administration official, “this is one of those issues where the timing is never right.” It certainly would not have been clever to announce the sale immediately before or after last year’s presidential goodwill visit to China.

If America’s announcement was expected, so was the indignant Chinese response. Denunciation and the cancellation of some military-co-operation meetings is in keeping with previous Chinese reactions. A new element this time was the public threat of Chinese sanctions against American firms involved in the Taiwan deal, but most of these have little or no business in China. One big exception is Boeing, which is huge in China. But for that reason it is unlikely that the Chinese will follow up on this particular threat.

If the Taiwan weapons spat blows over, American officials will hail what they nowadays call the more “mature” relationship they have nurtured with China during Mr Obama’s first year. But many tests lie ahead. Some are mainly symbolic, such as a forthcoming meeting between Mr Obama and Tibet’s spiritual leader, the Dalai Lama, which the Americans postponed last year to prevent it souring the president’s China trip. Others are more concrete, such as China’s reluctance to go along with new sanctions on Iran or to respond to America’s pleas to revalue the yuan. A world-shaking falling-out between China and America is always.


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Flowers for a funeral

Google and China

Censorship and hacker attacks provide the epitaph for Google in China

“WE’RE in this for the long haul,” wrote a Google executive four years ago when the company launched a self-censored version of its search engine for the China market. Now Google says it might have to pull out of the country because of alleged attacks by hackers in China on its e-mail service and a tightening of China’s restrictions on free speech on the internet. Its change of heart, as the company rightly points out, could have “far-reaching consequences”.

Google’s “new approach to China”, as the company’s chief legal officer, David Drummond, called it on January 12th on the company’s official blog, will certainly infuriate China’s government. The authorities are sensitive to foreign complaints about internet controls in China. In November, during a visit by President Barack Obama, his obliquely worded criticism of Chinese online censorship was itself censored from official reports. If it does close down in China, Google would be the first big-brand foreign company to do so citing freedom of speech in many years.

Mr Drummond’s blog-posting also contained unusually direct finger-pointing by a foreign multinational at China as a source of hacker attacks. It said that in mid-December Google detected a “highly sophisticated and targeted attack” on its corporate computer systems “originating from China”. It found that at least 20 other large companies from various industries had also been attacked. A primary goal, of the hacking of Google, it said, appeared to be to gain access to the e-mail of Chinese human-rights activists who use Google’s “Gmail” service. The hackers succeeded in partially penetrating two such accounts.

“Third parties” had also, wrote Mr Drummond, “routinely” gained access to the Gmail accounts of dozens of other human-rights advocates in America, Europe and China itself. Unlike the mid-December attack, these breaches appeared to involve “phishing” scams or “malware” on users’ computers rather than direct attacks on Google’s systems. All this, he said, along with attempts over the past year to impose further limits on free speech on the web, had led Google to “review the feasibility” of its Chinese business.

The company has decided to stop censoring the results of its China-based search engine, Mr Drummond said this might result in having to shut down and Google’s offices in China. In the face of much criticism from Western human-rights advocates, Google justified its decision to set up in 2006 by pointing out that China often blocked its uncensored engine, Better to offer a censored service (with warnings to users that results were filtered), the company argued, than nothing at all. China would certainly not allow an uncensored search engine to be based on its territory.

Google’s decision at the time was presumably driven in part by the lure of China’s rapidly expanding internet market. In part because of intermittent blocking of, and the slowness of access to the company’s foreign-based servers, Baidu, a Beijing-based company listed on America’s NASDAQ exchange, dwarfed Google’s share of the search-engine business in China. The launch of did little to dent Baidu’s domination.

Nor has Google’s acquiescence in self-censorship of its searches made China any less wary of its other, uncensored, services. Google’s video-sharing site, YouTube, has been blocked since March, because of footage of Chinese police beating Tibetan monks. Its photo-album site, Picasa Web Albums, suffered the same fate soon after. Access to Google’s blog service, Blogger, has long been intermittent. It is currently unavailable in Beijing.

Google’s frustrations are widely shared. In the build-up to the Beijing Olympics in August 2008, China lifted longstanding blocks on several websites, as it tried to present a more open image to foreign visitors. Since then, controls have been stepped up to unprecedented levels. Internet access in the western region of Xinjiang has been all but cut off since ethnic riots erupted there in July.

The unrest also prompted a shutdown of foreign social-networking sites such as Twitter and Facebook. The role of such sites in protests in Iran, after its stolen elections in June, had already alarmed the government. Its fear of dissent around the 60th anniversary in October of the founding of communist China prompted even greater vigilance against sensitive debate online. But there has been no sign of relaxation since then. In recent weeks the authorities have tightened restrictions on the registration of websites under the .cn domain name (only businesses may apply). A crackdown on internet pornography has led to closer scrutiny by internet service providers of non-porn websites.

In December Yeeyan, a site with translations of articles from foreign newspapers including the Guardian and the New York Times, was closed for several days. It was allowed to reopen after putting tighter controls in place on the publication of politically sensitive pieces. Ecocn, a site offering translations of articles from this newspaper, was also briefly shut down as officials trawled for pornography, but resurfaced unscathed. The volunteers who run this informal operation make translations of sensitive articles available only to users they trust.

The anti-porn drive turned up the heat on Google too. Last year was among several search engines in China accused by the authorities of providing links to pornographic sites. The state-controlled press gave particular prominence to Google’s alleged transgressions, which the company promised to investigate. The Chinese media have also published frequent criticisms in recent months of Google’s alleged violations of Chinese copyrights in its Google Books venture.

In Silicon Valley, its home, Google’s change of tack in China was widely applauded. But some were asking whether it was “more about business than thwarting evil” to quote TechCrunch, a widely read website. Besides pointing to Google’s failure to eat into Baidu’s market share, cynics noted that, whereas, according to Mr Drummond, Google’s revenues in China are “truly immaterial”, its costs are not. It employs about 700 people in China, some of them royally paid engineers, who may now may have to look for other jobs. Hacker attacks and censorship, critics say, are convenient excuses for something Google wanted to do anyway, without appearing to be retreating commercially. Google strongly rejects this interpretation.

In China, however, the government is clearly fearful that the company’s public stand against censorship will be celebrated by many Chinese internet-users. Chinese news accounts of the company’s decision failed to mention the reason for Google’s actions. Chinese web portals buried the story. Many internet-users in China have become adept at finding ways of circumventing China’s blocks on overseas websites, including the installation of “virtual private network” software. Numerous tributes to Google that rapidly appeared on Chinese internet discussion forums, and flowers laid outside Google’s office in Beijing, showed that the attempts at censorship had failed. Few, however, believe the company’s announcement will dissuade China from keeping on trying.


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Not just another fake

China’s economy

The similarities between China today and Japan in the 1980s may look ominous. But China’s boom is unlikely to give way to prolonged slump

CHINA rebounded more swiftly from the global downturn than any other big economy, thanks largely to its enormous monetary and fiscal stimulus. In the year to the fourth quarter of 2009, its real GDP is estimated to have grown by more than 10%. But many sceptics claim that its recovery is built on wobbly foundations. Indeed, they say, China now looks ominously like Japan in the late 1980s before its bubble burst and two lost decades of sluggish growth began. Worse, were China to falter now, while the recovery in rich countries is still fragile, it would be a severe blow not just at home but to the whole of the world economy.

On the face of it, the similarities between China today and bubble-era Japan are worrying. Extraordinarily high saving and an undervalued exchange rate have fuelled rapid export-led growth and the world’s biggest current-account surplus. Chronic overinvestment has, it is argued, resulted in vast excess capacity and falling returns on capital. A flood of bank lending threatens a future surge in bad loans, while markets for shares and property look dangerously frothy.

Just as in the late 1980s, when Japan’s economy was tipped to overtake America’s, China’s strong rebound has led many to proclaim that it will become number one sooner than expected. In contrast, a recent flurry of bearish reports warn that China’s economy could soon implode. James Chanos, a hedge-fund investor (and one of the first analysts to spot that Enron’s profits were pure fiction), says that China is “Dubai times 1,000, or worse”. Another hedge fund, Pivot Capital Management, argues that the chances of a hard landing, with a slump in capital spending and a banking crisis, are increasing.

Scary stuff. However, a close inspection of pessimists’ three main concerns—overvalued asset prices, overinvestment and excessive bank lending—suggests that China’s economy is more robust than they think. Start with asset markets. Chinese share prices are nowhere near as giddy as Japan’s were in the late 1980s. In 1989 Tokyo’s stockmarket had a price-earnings ratio of almost 70; today’s figure for Shanghai A shares is 28, well below its long-run average of 37. Granted, prices jumped by 80% last year, but markets in other large emerging economies went up even more: Brazil, India and Russia rose by an average of 120% in dollar terms. And Chinese profits have rebounded faster than those elsewhere. In the three months to November, industrial profits were 70% higher than a year before.

China’s property market is certainly hot. Prices of new apartments in Beijing and Shanghai leapt by 50-60% during 2009. Some lavish projects have much in common with those in Dubai—notably “The World”, a luxury development in Tianjin, 120km (75 miles) from Beijing, in which homes will be arranged as a map of the world, along with the world’s biggest indoor ski slope and a seven-star hotel.

Average home prices nationally, however, cannot yet be called a bubble. On January 14th the National Development and Reform Commission reported that average prices in 70 cities had climbed by 8% in the year to December, the fastest pace for 18 months; other measures suggest a bigger rise. But this followed a fall in prices in 2008. By most measures average prices have fallen relative to incomes in the past decade (see chart 1).

The most cited evidence of a bubble—and hence of impending collapse—is the ratio of average home prices to average annual household incomes. This is almost ten in China; in most developed economies it is only four or five. However, Tao Wang, an economist at UBS, argues that this rich-world yardstick is misleading. Chinese homebuyers do not have average incomes but come largely from the richest 20-30% of the urban population. Using this group’s average income, the ratio falls to rich-world levels. In Japan the price-income ratio hit 18 in 1990, obliging some buyers to take out 100-year mortgages.

Furthermore, Chinese homes carry much less debt than Japanese properties did 20 years ago. One-quarter of Chinese buyers pay cash. The average mortgage covers only about half of a property’s value. Owner-occupiers must make a minimum deposit of 20%, investors one of 40%. Chinese households’ total debt stands at only 35% of their disposable income, compared with 130% in Japan in 1990.

China’s property boom is being financed mainly by saving, not bank lending. According to Yan Wang, an economist at BCA Research, a Canadian firm, only about one-fifth of the cost of new construction (commercial and residential) is financed by bank lending. Loans to homebuyers and property developers account for only 17% of Chinese banks’ total, against 56% for American banks. A bubble pumped up by saving is much less dangerous than one fuelled by credit. When the market begins to crack, highly leveraged speculators are forced to sell, pushing prices lower, which causes more borrowers to default.

Even if China does not (yet) have a credit-fuelled housing bubble, the fact that property prices in Beijing and Shanghai are beyond the reach of most ordinary people is a serious social problem. The government has not kept its promise to build more low-cost housing, and it is clearly worried about rising prices. In an attempt to thwart speculators, it has reimposed a sales tax on homes sold within five years, has tightened the stricter rules on mortgages for investment properties and is trying to crack down on illegal flows of foreign capital into the property market. The government does not want to come down too hard, as it did in 2007 by cutting off credit, because it needs a lively property sector to support economic recovery. But if it does not tighten policy soon, a full-blown bubble is likely to inflate.

The world’s capital

China’s second apparent point of similarity to Japan is overinvestment. Total fixed investment jumped to an estimated 47% of GDP last year—ten points more than in Japan at its peak. Chinese investment is certainly high: in most developed countries it accounts for around 20% of GDP. But you cannot infer waste from a high investment ratio alone. It is hard to argue that China has added too much to its capital stock when, per person, it has only about 5% of what America or Japan has. China does have excess capacity in some industries, such as steel and cement. But across the economy as a whole, concerns about overinvestment tend to be exaggerated.

Pivot Capital Management points to China’s incremental capital-output ratio (ICOR), which is calculated as annual investment divided by the annual increase in GDP, as evidence of the collapsing efficiency of investment. Pivot argues that in 2009 China’s ICOR was more than double its average in the 1980s and 1990s, implying that it required much more investment to generate an additional unit of output. However, it is misleading to look at the ICOR for a single year. With slower GDP growth, because of a collapse in global demand, the ICOR rose sharply everywhere. The return to investment in terms of growth over a longer period is more informative. Measuring this way, BCA Research finds no significant increase in China’s ICOR over the past three decades.

Mr Chanos has drawn parallels between China and the huge misallocation of resources in the Soviet Union, arguing that China is heading the same way. The best measure of efficiency is total factor productivity (TFP), the increase in output not directly accounted for by extra inputs of capital and labour. If China were as wasteful as Mr Chanos contends, its TFP growth would be negative, as the Soviet Union’s was. Yet over the past two decades China has enjoyed the fastest growth in TFP of any country in the world.

Even in industries which clearly do have excess capacity, China’s critics overstate their case. A recent report by the European Union Chamber of Commerce in China estimates that in early 2009 the steel industry was operating at only 72% of capacity. That was at the depth of the global downturn. Demand has picked up strongly since then. The report claims that the industry’s overcapacity is illustrated by “a startling figure”: in 2008, China’s output of steel per person was higher than America’s. So what? At China’s stage of industrialisation it should use a lot of steel. A more relevant yardstick is the America of the early 20th century. According to Ms Wang of UBS, China’s steel capacity of almost 0.5kg (about 1lb) per person is slightly lower than America’s output in 1920 (0.6kg) and far below Japan’s peak of 1.1kg in 1973.

Many commentators complain that China’s capital-spending spree last year has merely exacerbated its industrial overcapacity. However, the boom was driven mainly by infrastructure investment, whereas investment in manufacturing slowed quite sharply (see chart 2). Given the scale of the spending, some money is sure to have been wasted, but by and large, investment in roads, railways and the electricity grid will help China sustain its growth in the years ahead.

Some analysts disagree. Pivot, for instance, argues that China’s infrastructure has already reached an advanced level. It has six of the world’s ten longest bridges and it boasts the world’s fastest train; there is little room for further productive investment. That is nonsense. A country in which two-fifths of villages lack a paved road to the nearest market town still has plenty of scope for building roads. The same goes for railways. Again, a comparison of China today with the America of a century ago is pertinent. China has roughly the same land area as America, but 13 times more people than the United States did then. Yet on current plans it will have only 110,000km of railway by 2012, compared with more than 400,000km in America in 1916. Unlike Japan, which built “bridges to nowhere” to prop up its economy, China needs better infrastructure.

It is true that in the short term, the revenue from some infrastructure projects may not be enough to service debts, so the government will have to cover losses. But in the long term such projects should lift productivity across the economy. During Britain’s railway mania in the mid-19th century, few railways made a decent financial return, but they brought huge long-term economic benefits.

The biggest cause for worry about China is the third point of similarity to Japan: the recent tidal wave of bank lending. Total credit jumped by more than 30% last year. Even assuming that this slows to less than 20% this year, as the government has hinted, total credit outstanding could hit 135% of GDP by December. The authorities are perturbed. This week they increased banks’ reserve requirement ratio by half a percentage point. They have also raised the yield on central-bank bills.

However, too many commentators talk as if Chinese banks have been on a lending binge for years. Instead, the spurt in 2009, which was engineered by the government to revive the economy, followed several years in which credit grew more slowly than GDP (see chart 3). Michael Buchanan, of Goldman Sachs, estimates that since 2004 China’s excess credit (the gap between the growth rates of credit and nominal GDP) has risen by less than in most developed economies.

Even so, recent lending has been excessive; combined with overcapacity in some industries, it is likely to cause an increase in banks’ non-performing loans. Ms Wang calculates that if 20% of all new lending last year and another 10% of this year’s lending turned bad, this would create new bad loans equivalent to 5.5% of GDP by 2012, on top of 2% now. That is far from trivial, but well below the 40% of GDP that bad loans amounted to in the late 1990s.

Much of the past year’s bank lending should really be viewed as a form of fiscal stimulus. Infrastructure projects that have little hope of repaying loans will end up back on the government’s books. It would have been much better if such projects had been financed more transparently through the government’s budget, but the important question is whether the state can afford to cover the losses.

Official gross government debt is less than 20% of GDP, but China bears argue that this is an understatement, because it excludes local-government debt and the bonds issued by the asset-management companies that took over banks’ previous non-performing loans. Total government debt could be 50% of GDP. But that is well below the average ratio in rich countries, of around 90%. Moreover, the Chinese government owns lots of assets, for example shares of listed companies which are worth 35% of GDP.

Ying and yang

Even if, as argued above, concerns about a financial crash in China are premature, the risks of a dangerous bubble and excessive investment will clearly increase if credit continues to expand at its recent pace. The stitching on the Chinese economy could fray and burst. Would that imply the end of China’s era of rapid growth?

Predictions that China is heading for a prolonged Japanese-style slump ignore big differences between China today and Japan in the late 1980s. Japan was already a mature, developed economy, with a GDP per person close to that of America. China is still a poor, developing country, whose GDP per person is less than one-tenth of America’s or Japan’s. It has ample room to play catch-up with rich economies by adding to its capital stock, importing foreign technology and boosting productivity by shifting labour from farms to factories. This would make it easier for China to recover from the bursting of a bubble.

Chart 4 examines the relationship between growth rates and income per head for six Asian economies. Each plot shows a country’s growth rate and GDP per person relative to America’s for successive ten-year periods, starting when their rapid growth took off. It illustrates how growth rates slow as economies catch up with America, the technological leader. The fact that China’s GDP per head is much lower than Japan’s in the 1980s suggests that its growth potential over the next decade is much higher. Even though China’s labour force will start shrinking after 2016, rapid productivity gains mean that its trend GDP growth rate is still around 8%, down from 10% in the past decade.

Japan’s stockmarket and land-price bubbles in the early 1960s offer a better (and more cheerful) analogy to China than the 1980s bubble era does. Japan’s economy was poorer then, although relative to America its GDP per person was more than double China’s today, and its trend rate of growth was around 9%. According to HSBC, after the bubble burst in 1962-65, Japan’s annual growth rate dipped to just under 6%, but then quickly rebounded to 10% for much of the next decade.

South Korea and Taiwan, which experienced big stockmarket bubbles in the 1980s, are also worth examining. In the five years to 1990, Taipei’s stockmarket surged by 1,600% (in dollar terms) and Seoul’s by 700%, easily beating Tokyo’s 450% gain in the same period. After share prices slumped, annual growth in both South Korea and Taiwan slowed to around 6%, but soon regained its previous pace of 7-8%.

The higher a country’s potential growth rate, the easier it is for the economy to recover after a bubble bursts, so long as its fiscal and external finances are in reasonable shape. Rapid growth in nominal GDP means that asset prices do not need to fall so far to regain fair value, bad loans are easier to work off and excess capacity can be more quickly absorbed by rising demand. The experience of Japan in the 1960s suggests that if China’s bubble bursts, it will hurt growth temporarily but not lead to prolonged stagnation.

However, it is Japan’s experience after the 1980s that most influences the thinking of policymakers in Beijing. Many blame Japan’s deflation and its lost decades of growth on the fact that its government caved in to American demands for an appreciation of the yen. In 1985 central banks in the big rich economies agreed, in the Plaza Accord, to intervene to push down the dollar. By 1988 the yen had risen by more than 100% against the greenback. One reason why policymakers in Beijing have resisted a big rise in the yuan is that they fear it could send their economy, like Japan’s, into a deflationary slump.

The wrong lesson

Yet Japan’s real mistake was not that it allowed the yen to rise, but that it had previously resisted an appreciation for too long, so that when it did happen the yen soared. A second error was that Japan tried to offset the adverse economic effects of a strong yen with over-lax monetary policy. If policy had been tighter, the financial bubble would have been smaller and its aftermath less painful.

This offers two important lessons to China. First, it is better to let the exchange rate rise sooner and more gradually than to risk a much sharper appreciation later. Second, monetary policy should not be too slack. Raising reserve requirements is a small step in the right direction. Despite the bears’ growling, China’s economic collapse is neither imminent nor inevitable. But if it continues to draw the wrong lesson from the tale of Japan, then one day its economy may look just as tatty.


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Fear of the dragon

China’s export prospects

China’s share of world markets increased during the recession. It will keep rising

MANY people start the new year by resolving to change their old ways. Not China. On December 27th Zhong Shan, the country’s vice-minister of trade, declared that China will continue to increase its share of world exports. Figures due out on January 11th are expected to show that China’s exports in December were higher than a year ago, after 13 months of year-on-year declines. China’s exports fell by around 17% in 2009 as a whole, but other countries’ slumped by even more. As a result China overtook Germany to become the world’s largest exporter and its share of world exports jumped to almost 10%, up from 3% in 1999 (see chart).

China takes an even bigger slice of America’s market. In the first ten months of 2009 America imported 15% less from China than in the same period of 2008, but its imports from the rest of the world fell by 33%, lifting China’s market share to a record 19%. So although America’s trade deficit with China narrowed, China now accounts for almost half of America’s total deficit, up from less than one-third in 2008.

Trade frictions with the rest of the world are hotting up. On December 30th America’s International Trade Commission approved new tariffs on imports of Chinese steel pipes, which it ruled were being unfairly subsidised. This is the largest case of its kind so far involving China. On December 22nd European Union governments voted to extend anti-dumping duties on shoes imported from China for another 15 months.

Foreigners insist that the main reason for China’s growing market share is that the government in Beijing has kept its currency weak. But there are several other reasons why China’s exports held up better than those of its competitors during the global recession. Lower incomes encouraged consumers to trade down to cheaper goods, and the elimination of textile quotas in January 2009 allowed China to increase its slice of that market.

How high could China’s market share go? Over the ten years to 2008 China’s exports grew by an annual average of 23% in dollar terms, more than twice as fast as world trade. If it continued to expand at this pace, China might grab around one-quarter of world exports within ten years. That would beat America’s 18% share of world exports in the early 1950s, a figure that has since dropped to 8%. China’s exports are likely to grow more slowly over the next decade, as demand in rich economies remains subdued, but its market share will probably continue to creep up. Projections in the IMF’s World Economic Outlook imply that China’s exports will account for 12% of world trade by 2014.

Its 10% slice this year will equal that achieved by Japan at its peak in 1986, but Japan’s share has since fallen back to less than 5%. Its exporters were badly hurt by the sharp rise in the yen—by more than 100% against the dollar between 1985 and 1988—and many moved their factories abroad, some of them to China. The combined export-market share of the four Asian tigers (Hong Kong, Singapore, South Korea and Taiwan) also peaked at 10% before slipping back. Will China’s exports hit the same barrier as a result of weakening competitiveness, or rising protectionism?

An IMF working paper published in 2009 calculated that if China remained as dependent on exports as in recent years, then to sustain annual GDP growth of 8% its share of world exports would rise to about 17% by 2020. To consider whether that was feasible, the authors analysed the global absorption capacity of three export industries—steel, shipbuilding and machinery. They concluded that to achieve the required export growth, China would have to reduce prices, which would be increasingly hard to manage, whether through productivity gains or a squeeze in profits. In many export industries, particularly steel, margins are already wafer-thin.

However, China’s future export growth is likely to come not from existing industries but from higher-value products, such as computer chips and cars. Japan’s exports also moved swiftly up the value chain, but whereas this was not enough to support durable gains in its market share, China has the advantage of capital controls that will prevent its exchange rate rising as abruptly as Japan’s did in the 1980s. When China does eventually allow the yuan to rise, it will do so gradually.

Another big difference is the vastness of China’s economy. China consists, in effect, of several economies with different wage levels. As Japan moved into higher-value exports, rising productivity pushed up wages, making old industries, such as textiles, uncompetitive. In China, as factories in the richer coastal areas switch to more sophisticated goods, the production of textiles and shoes can move inland where costs remain cheaper. As a result China may be able to remain competitive in a wider range of industries for longer.

Foreign hostility to China’s export dominance is growing. Paul Krugman, the winner of the 2008 Nobel economics prize, wrote recently in the New York Times that by holding down its currency to support exports, China “drains much-needed demand away from a depressed world economy”. He argued that countries that are victims of Chinese mercantilism may be right to take protectionist action.

From Beijing, things look rather different. China’s merchandise exports have collapsed from 36% of GDP in 2007 to around 24% last year. China’s current-account surplus has fallen from 11% to an estimated 6% of GDP. In 2007 net exports accounted for almost three percentage points of China’s GDP growth; last year they were a drag on its growth to the tune of three percentage points. In other words, rather than being a drain on global demand, China helped pull the world economy along during the course of last year.

Foreigners look at only one side of the coin. China’s imports have been stronger than its exports, rebounding by 27% in the year to November, when its exports were still falling. America’s exports to China (its third-largest export market) rose by 13% in the year to October, at the same time as its exports to Canada and Mexico (the two countries above China) fell by 14%.

Some forecasters, such as the IMF, expect China’s trade surplus to start widening again this year unless the government makes bold policy changes, such as revaluing the yuan. However, Chris Wood, an analyst at CLSA, a brokerage, argues that China is doing more for global rebalancing than America. Rebalancing requires that China spends more and America saves more. Mr Wood argues that China is doing more to boost domestic consumption (for example, through incentives to stimulate purchases of cars and consumer durables, and increased health-care spending) than America is doing to boost its saving. America’s total saving rate fell in the third quarter of last year to only 10% of GDP, barely half its level a decade ago. Households saved more, but this was more than offset by increased government “dissaving”.

Strong growth in China’s spending and imports is unlikely to dampen protectionist pressures, however. China’s rising share of world exports will command much more attention. Foreign demands to revalue the yuan will intensify. A new year looks sure to entrench old resentments.


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Is China the Next Enron?

Reading The Herald Tribune over breakfast in Hong Kong harbor last week, my eye went to the front-page story about how James Chanos — reportedly one of America’s most successful short-sellers, the man who bet that Enron was a fraud and made a fortune when that proved true and its stock collapsed — is now warning that China is “Dubai times 1,000 — or worse” and looking for ways to short that country’s economy before its bubbles burst.

China’s markets may be full of bubbles ripe for a short-seller, and if Mr. Chanos can find a way to make money shorting them, God bless him. But after visiting Hong Kong and Taiwan this past week and talking to many people who work and invest their own money in China, I’d offer Mr. Chanos two notes of caution.

First, a simple rule of investing that has always served me well: Never short a country with $2 trillion in foreign currency reserves.

Second, it is easy to look at China today and see its enormous problems and things that it is not getting right. For instance, low interest rates, easy credit, an undervalued currency and hot money flowing in from abroad have led to what the Chinese government Sunday called “excessively rising house prices” in major cities, or what some might call a speculative bubble ripe for the shorting. In the last few days, though, China’s central bank has started edging up interest rates and raising the proportion of deposits that banks must set aside as reserves — precisely to head off inflation and take some air out of any asset bubbles.

And that’s the point. I am reluctant to sell China short, not because I think it has no problems or corruption or bubbles, but because I think it has all those problems in spades — and some will blow up along the way (the most dangerous being pollution). But it also has a political class focused on addressing its real problems, as well as a mountain of savings with which to do so (unlike us).

And here is the other thing to keep in mind. Think about all the hype, all the words, that have been written about China’s economic development since 1979. It’s a lot, right? What if I told you this: “It may be that we haven’t seen anything yet.”

Why do I say that? All the long-term investments that China has made over the last two decades are just blossoming and could really propel the Chinese economy into the 21st-century knowledge age, starting with its massive investment in infrastructure. Ten years ago, China had a lot bridges and roads to nowhere. Well, many of them are now connected. It is also on a crash program of building subways in major cities and high-speed trains to interconnect them. China also now has 400 million Internet users, and 200 million of them have broadband. Check into a motel in any major city and you’ll have broadband access. America has about 80 million broadband users.

Now take all this infrastructure and mix it together with 27 million students in technical colleges and universities — the most in the world. With just the normal distribution of brains, that’s going to bring a lot of brainpower to the market, or, as Bill Gates once said to me: “In China, when you’re one-in-a-million, there are 1,300 other people just like you.”

Equally important, more and more Chinese students educated abroad are returning home to work and start new businesses. I had lunch with a group of professors at the Hong Kong University of Science and Technology, or HKUST, who told me that this year they will be offering some 50 full scholarships for graduate students in science and technology. Major U.S. universities are sharply cutting back.

Tony Chan, a Hong Kong-born mathematician, recently returned from America after 20 years to become the new president of HKUST. What was his last job in America? Assistant director of the U.S. National Science Foundation in charge of the mathematical and physical sciences. He’s one of many coming home.

One of the biggest problems for China’s manufacturing and financial sectors has been finding capable middle managers. The reverse-brain drain is eliminating that problem as well.

Finally, as Liu Chao-shiuan, Taiwan’s former prime minister, pointed out to me: when Taiwan moved up the value chain from low-end, labor-intensive manufacturing to higher, value-added work, its factories moved to China or Vietnam. It lost them. In China, low-end manufacturing moves from coastal China to the less developed Western part of the country and becomes an engine for development there. In Taiwan, factories go up and out. In China, they go East to West.

“China knows it has problems,” said Liu. “But this is the first time it has a chance to actually solve them.” Taiwanese entrepreneurs now have more than 70,000 factories in China. They know the place. So I asked several Taiwanese businessmen whether they would “short” China. They vigorously shook their heads no as if I’d asked if they’d go one on one with LeBron James.

But, hey, some people said the same about Enron. Still, I’d rather bet against the euro. Shorting China today? Well, good luck with that, Mr. Chanos. Let us know how it works out for you.

Thomas L. Friedman, New York Times


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Don’t mess with us

Harsh justice in China

No forgiveness; no quarter. Happy Christmas from China

A SEASON of good cheer in much of the world, late December saw a typically harsh apportionment of justice by China’s legal system, and a typically rigid display of governmental indifference to foreign opinion. On Christmas Day a Beijing court sentenced Liu Xiaobo, a veteran human-rights activist, to 11 years in prison for “inciting subversion of state power”. China swatted away all criticism about this as groundless meddling in its internal affairs.

In a separate case that was not entirely an internal affair, China’s reaction was not much different. On December 21st Akmal Shaikh, a 53-year-old Briton charged with smuggling drugs, had his death sentence upheld by China’s Supreme People’s Court. Rejecting pleas for clemency from Mr Shaikh’s family, international human-rights groups, and the British government, Chinese authorities executed him by lethal injection on December 29th in the north-western region of Xinjiang, where he was first arrested in late 2007 after carrying roughly 4kg of heroin into the country.

Family members claimed Mr Shaikh suffered from bipolar disorder, and was the victim of manipulation by the drugs traffickers who, they claimed, tricked him into carrying the contraband. British officials announced news of the execution before China did. Hours after it took place China’s foreign-ministry spokeswoman, Jiang Yu, said it would brook no outside interference in the workings of its legal system, and expressed “strong dissatisfaction and resolute opposition” to Britain’s complaints. The prime minister, Gordon Brown had said he was “appalled” and condemned the execution “in the strongest terms”. Ms Jiang said Mr Shaikh’s case was handled appropriately and all his legal rights had been honoured at trial. A day after the execution, Chinese newspapers were full of angry commentary over Britain’s attempt to intervene. Many drew comparisons to the Opium War.

Although it ended in the first known execution of a European in China since the 1950s, Mr Shaikh’s case was otherwise not unusual. According to available (and incomplete) statistics, China executed 1,700 convicts in 2008, or nearly five each day.

Neither was the harsh treatment meted out to Mr Liu unusual by Chinese standards. Criticism of the government, though always risky, is sometimes tolerated. Attempts to organise criticism, however, as Mr Liu had by helping draft a petition calling for political freedoms, are routinely met with a firm thumping. Jailed twice before for his political activities Mr Liu knew this as well as anyone. He had said he was ready to face prison again.

The document he helped write in December 2008 was called Charter 08. It soon attracted more than 300 other Chinese signatures. Its publication marked the 60th anniversary of the Universal Declaration of Human Rights. In the year since its release, thousands more have signed it.

Charter 08 calls for sweeping changes in China’s political order, including an end to limits on free expression, political activity and religious practice. It proposes drastic reforms that would dismantle one-party rule, allow public supervision of government officials, and free the army and judiciary from Communist Party control.

Mr Liu was detained just before the release of the manifesto and held for six months before charges were lodged. His sentencing came two days after a trial lasting less than three hours. The 11-year term exceeds any other known sentence for the vague crime of “inciting subversion”. Within days of the sentencing, Chinese media published a speech by a senior security official who warned of threats to China’s social stability from “hostile forces stirring up chaos” and called for “pre-emptive attacks” against them. “In the new year, there will be no relaxation of stability preservation, and no lightening of pressure on stability,” said Yang Huanning, a deputy minister of public security.

Mr Liu won supporters on the internet, a central theatre these days in the struggle for civil liberties. The authorities are moving to tighten their control there. Besides stepping up monitoring and blocking “unsuitable” web traffic, regulators have put new restrictions on the registration and operation of websites by individuals.

The founder of a web-hosting service in Beijing says that internet servers have been unceremoniously unplugged under new rules and new standards of enforcement. “For nine years I have run a successful and legal business, and now I have suddenly been told that what I do makes me a criminal.” Worried that his company may not survive, and angry about the arbitrary changes, he will not, however, circulate a protest petition—not if he is wise, that is.


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In Whose Service?

The reckless actions of a pro-Mao ‘China hand’ in the State Department.

For many years no expert on China stood higher in the opinion of American students of China, including myself, than John S. “Jack” Service. A fluent Mandarin speaker born in China, he entered the U.S. Foreign Service in his mid-20s, only to become a casualty of the McCarthy period and a subject of State Department loyalty probes.

Service, who died in 1999, was eventually judged innocent of disloyalty to the U.S. and abetting Chinese communism. But for years he was accused of being one of the State Department China hands who had “lost China” to the Communists in the 1940s. “Honorable Survivor,” by journalist Lynne Joiner, who was also his close friend, makes it clear—and this is Ms. Joiner’s chief contribution—that at a minimum Service was “recklessly indiscreet” in his contacts with Communist sympathizers in the U.S. to whom he gave documents or disclosed details of U.S. policy.

Service was in many ways the ultimate China hand. Born in Chengdu in 1909 to a missionary family, he loved China and believed that he not only knew what was best for the country but could help bring it about. In the State Department he acquired a reputation as a China expert and linguist and in 1944, when the first official American government mission flew to Mao’s guerrilla stronghold in Yan’an in north-central China, Service was a member of the group.

The Americans were received with fanfare by the Communists, who greeted Service and his colleagues with the same spirit of contrived comradeliness that had overwhelmed Edgar Snow in 1936 (and resulted in his influential, hagiographic book “Red Star Over China”). Like many visitors, Service contrasted Yan’an and the idealistic fervor in the air there with Nationalist China’s capital, Chongqing, and its corruption, conspiracies and the “claptrap of . . . officialdom” in Chiang Kai-shek’s government.

On their return to Chongqing and later Washington, Service and the other Americans reported that they had seen China’s future. The U.S. emissaries maintained that the Communists should be treated with at least the same respect as Chiang’s regime. Mao—amusing, dramatic, confiding, eager and mendacious—declared that he would cooperate with the Nationalists and not fight a civil war. According to Ms. Joiner, Service said: “I was almost taken off my feet by the warmth and fervor and earnestness” of Mao’s entreaties for American support.

Service’s dispatches impressed his State Department superiors. But it was those dispatches and others that convinced his enemies in government that he was a Communist dupe. Becoming increasingly disillusioned with President Roosevelt’s pro-Nationalist China policy, Service began leaking information and airing his opinions to anyone who would listen—including Communist agents and sympathizers. Ms. Joiner’s biography shows how certain Service was that the U.S. could “fix” China if only Washington knew what it was doing. She argues that this self-confidence, combined with recklessness, led Service to begin giving documents to leftist and probably Communist contacts who played him.

What he didn’t know was that the FBI was tapping the phones of the offices of Amerasia, a leftist journal edited by Phillip Jaffe, a devoted Stalinist who, although not a party member, later admitted that he was “giving information to . . . the Soviet intelligence agents.” It was at the Amerasia offices one day that Service gave Jaffe information that he warned was “top-secret.” In June 1945, Service was arrested and charged with spying based on the Amerasia wiretaps. Testifying under oath repeatedly over several years, Service said that he had revealed no real secrets to Jaffe and others.

Eventually all charges were dropped, but Service was nevertheless dismissed from the State Department in 1951 because of doubts about his loyalty. He was rehired in 1957 at the instruction of a federal judge because the official case against him had collapsed. But Service was never again given a policy-making or China-related post, and he was not promoted. Although he was supported by some senior State Department officers and public figures, including the diplomat and presidential adviser George Kennan, he also had a number of implacable foes, including FBI Director J. Edgar Hoover and Sen. Joseph McCarthy. In 1973, Service received a standing ovation at a State Department luncheon for retired China experts.

Worn out by the years of suspicion and questioning, Service had retired from the State Department in 1963 and spent the last years of his professional life at the University of California at Berkeley, where he was admired by students and colleagues and regarded as a witch-hunt victim.

But Jack Service was more than that. In two phone interviews with me shortly before he died a decade ago, Service admitted that in the 1940s he had given Jaffe a top-secret document revealing the Nationalist Order of Battle, which showed the exact disposition of the forces facing Mao’s troops. When I observed that some might regard this as treason (I made no accusation), Service said he knew it. “I want to get this off my chest,” he said, explaining: “I was gullible, and trusting, and foolish.” He also told me that he had purposely ignored Mao’s persecution, including executions, of his perceived enemies at Yan’an. Why cover for the supposedly moderate Communist leader? “I wanted them to win. I thought they were better than the Nationalists and that if we always opposed them we would have no access to the next Chinese government.”

Service pressed me to publish our conversation, but friends of his said that it would be very painful. I agreed and after some time forgot the whole episode, until Ms. Joiner’s book came my way. His stunning admission that he did supply classified intelligence to Jaffe, whom he must have assumed would pass it on, puts his later career—and Ms. Joiner’s book—in a different light. If what Service told me near the end of his life is true, he can no longer be viewed as an innocent victim.

Mr. Mirsky is a former East Asia editor for the Times of London.


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The Long Arm of China

Why were members of China’s Uighur minority group recently deported from Cambodia?

On Saturday night under cover of darkness, a special Chinese plane departed from the military section of the Phnom Penh airport carrying 20 Uighur asylum seekers. For this group of men, women and children, this was the end of their failed effort to seek freedom from the Chinese regime.

Cambodia’s decision to deport the asylum seekers, who were in the process of applying for refugee status at the office of the United Nations High Commissioner for Refugees, is a reminder that Beijing’s oppression of the Uighurs does not stop at China’s borders. The Uighurs are a predominantly Turkic, Muslim people who live in East Turkestan (also knows as the Xinjiang Uighur Autonomous Region). For decades they have been the victims of systemic human-rights abuses at the hands of the Chinese government.

Fearing further persecution, these 20 Uighurs had fled to Cambodia in November with the assistance of Christian aid groups. The Cambodian Foreign Affairs Ministry initially declared it would cooperate with the UNHCR regarding the asylum interview process, but, in an about-face with tragic consequences, two days later issued a proclamation of “illegal entry” by the 20 Uighurs. UNHCR officials had yet to finish reviewing their cases when the Uighurs were handcuffed and forcefully taken from UNHCR protection by Cambodian authorities. China’s track record of mistreating repatriated Uighur refugees leads us to fear that they can expect even worse on Chinese soil.

A riot policeman holds back a crowd in Urumqi during protests on July 7, 2009.

There’s little hope these deportees will receive fair trial: Chinese Foreign Ministry spokesmen have already declared them to be criminals without offering any evidence to back up their claims (and despite the fact two of the Uighurs are children). China’s insistence on the guilt of these Uighurs in the absence of proof is consistent with its treatment of other Uighurs detained after the July unrest in Urumchi, whom Chinese officials declared to be criminals prior to the start of any criminal trials.

Beijing leaned hard on Phnom Penh to secure the deportation of these Uighurs, because once free they would no doubt contradict the official version of the events of July 5, when security forces cracked down violently on Uighur protestors and unrest spread through the city of Urumqi. The government has portrayed the unrest solely as a criminal act carried out by a small group of violent Uighurs, ignoring the security forces’ killings of Uighur protestors, the mass arbitrary detentions of Uighurs and the systemic human-rights issues that led Uighurs to engage in a peaceful protest on the afternoon of July 5. At least two of the recently deported Uighurs reported having witnessed security forces beating and killing Uighur protestors on July 5.

The Cambodian government must be held accountable for its act of complicity with the Chinese government. Cambodia is a signatory of the 1951 Refugee Convention, but turned a deaf ear to the entreaties of the U.S. and other democratic countries on behalf of these Uighur asylum seekers. Phnom Penh’s decision was no doubt influenced by enormous Chinese pressure, backed by hundreds of millions of dollars in aid and a reported $1 billion in foreign direct investment. Prime Minister Hun Sen has labeled China as Cambodia’s “most trustworthy friend,” and Cambodian officials were loathe to disappoint Chinese Vice President Xi Jinping on the eve of his Dec. 20 visit to Phnom Penh.

The deportation of the Uighurs in Cambodia is a sign of China’s increasing ability to resist international pressure regarding its human-rights violations. As China’s economic influence grows throughout Asia and the world, so too does its diplomatic clout. Economies in Central, South and Southeast Asia are increasingly dependent on cooperation with China, as the Chinese market seeks to feed its ravenous need for the natural resources available in these nations. Governments of countries neighboring China are reluctant to take any action that would displease Chinese authorities, leaving Uighurs nowhere to flee.

The United States and other nations committed to the preservation of human rights must call upon China to provide the 20 repatriated Uighurs with due process of law and must continue to express concern about their situation despite China’s protestations over what it terms “interference in its domestic affairs.” During my time in a Chinese prison, my jailers often told me the world did not care about me or the Uighurs’ struggle for freedom, but my treatment did improve when officials from the U.S. and other democratic countries campaigned for my release. If there is to be any hope for the safety and well-being of these Uighur asylum seekers, it is vital that world powers continue to press China regarding their welfare.

Ms. Kadeer is the president of the World Uighur Congress and the Uighur American Association.


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China’s New Security State

The Communist Party tries to hold on to power through a vast and growing antisubversion network.

As 2009 draws to a close, China’s leaders should be breathing a sigh of relief that a tense year of major anniversaries, including the 20-year anniversary of the Tiananmen massacre, is ending. But instead of rolling back the draconian security measures put in place to guard these special dates, Beijing is busy hashing new plans for a larger, more powerful, more invasive national security apparatus.

On December 2, senior state-security personnel met in Tianjin to fine-tune a new nationwide antisubversion network to help safeguard the Chinese Communist Party’s ruling status. Official media says the network is aimed at fighting “the redoubled threats of separatism, infiltration and subversion” and stopping the leakage of state secrets.

It’s no coincidence that this is happening now: The authorities anticipate more challenges to the regime from disaffected peasants and workers, and “anti-Beijing” elements in Xinjiang and Tibet, following the deployment earlier this year of extra troops of the paramilitary People’s Armed Police to promote socio-political stability in those areas. State-security specialists also want to seal China off from the “subversive” ideas of the West. And preparation for the all-important Party Congress in 2012 will begin in earnest in the spring. President Hu Jintao, who wants to promote dozens of his protégés at the Congress, is keen to show the party’s 76 million members that he is in firm control of the nation.

In the words of State Security Minister Geng Huichang, the new effort aims to “win the ‘people’s warfare’ in safeguarding national security and ensuring socio-political stability under new conditions.” Big and medium-sized cities are setting up state security “leading groups” which will be headed by municipal Party secretaries. These leading groups set the agenda for police and security departments, and ensure that enough vigilantes and voluntary informants can be recruited from the populace. They can also ask other government units to contribute funds and resources to help maintain overall stability.

Smaller cities and county-level administrations are also setting up new big-brother units to ensure stability, called Offices to Maintain Social Stability and to Rectify Law and Order. In rich coastal cities, such outfits are being set up in every district and major street. According to a government circular, these groups are charged with ferreting out “anti-CCP elements” and “snuffing all destabilizing forces in the bud.” The circular called upon these offices to “get a firm grip on the activities of hostile forces within and outside China,” specifically fingering foreign NGOs and religious organizations as potential sources of subversion and sabotage.

The social stability offices also have a mandate to “prevent hostile elements from fomenting chaos by inflaming hot-button issues” in Chinese society. They are empowered to coordinate the efforts of the police, state-security agents, and People’s Armed Police officers to combat “anti-government forces”—and to recruit vigilantes and voluntary informants within their jurisdiction.

The “leading groups” and social-stability offices are only the latest additions to a labyrinthine state-security apparatus that employs several million full-time police and spies, and many more part-time informants. Since mid-2008, municipalities nationwide are being asked to emulate Beijing’s security measures during the Olympics, when the city mobilized more than 1.5 million vigilantes and informants to safeguard security. Moreover, police and state-security agents in increasing numbers of cities are conducting regular training and operations in conjunction with private security staff employed by factories and universities.

According to Public Security Minister Meng Jianzhu, Beijing’s goal is to construct a fangkong (“prevention-and-control”) grid that is “multi-dimensional, all-weather, and foolproof.” Writing in the December 1 issue of the Party theoretical journal Seeking Truth, Mr. Meng refers to several layers of anti-infiltration and antisubversion networks: Those based in streets and communities; internal security and anti-sabotage units in every government office, college and commercial firm; CCTV and surveillance grids especially in big cities; coordination networks among security-related units in each province and region; and Internet-policing facilities. Parts of this plan are already in place; for instance, two million surveillance cameras are being installed in the prosperous Pearl River Delta to target ordinary criminals, dissidents, foreign spies as well as members of underground religious groups.

Mr. Meng issues dire warnings about the subversive nature of China’s fast-developing information superhighways. “The Internet has become a major vehicle through which anti-China forces are perpetrating their work of infiltration and sabotage,” he noted. On a provincial tour last month, Mr. Meng called upon police officers to boost cooperation with high-tech companies. So it’s little surprise that Internet police units in provincial and municipal public security departments have since mid-2009 received more funding and resources to erect firewalls and to track down “subversive” Web sites.

The government appears to be devoting vast resources to all of these stabilization efforts, although Beijing never publishes its state-security budgets. Aggressive recruitment of college graduates—particularly those who are conversant in IT and foreign languages—by the social-stability offices testifies to the fact that the Communist Party has earmarked unprecedented resources to keeping itself in power.

These efforts are already bearing fruit in the form of increased arrests and harassment of dissidents, including activists like Liu Xiaobo, who was charged with subversion yesterday for his role in promulgating Charter 08. Late last month, Huang Qi, a Chengdu-based activist, was given a three-year jail term for “illegally holding state secrets.” His “crime,” according to human-rights watchdogs, was helping families whose children died during the earthquake in Sichuan Province in May last year. The politicization of the judiciary also continues to be exacerbated.

The Hu leadership seems confident that the reinforced control apparatus will substantially reduce the more than 100,000 cases of “mass incidents” estimated to have hit China this year. In the short term, security forces may succeed in halting the “infiltration” of Western values. But ultimately redoubled repression will only drive the forces of discontent underground—and render Mr. Hu’s goal of a “harmonious society” illusory.

Mr. Lam is professor of China Studies at Akita International University, Japan, and adjunct professor of History at Chinese University of Hong Kong.


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Is President Obama Abandoning Taiwan?

His joint statement with Chinese President Hu Jintao raises questions about his commitment.

Before President Obama’s recent trip to China, Taiwanese President Ma Ying-jeou asserted that “current Taiwan-U.S. ties are better than any time in the past 60 years and mutual trust between the two countries has been completely restored,” referring to ructions with the previous government in Taipei. After Mr. Obama’s trip, the U.S.-Taiwan relationship is still far from friendly.

In a speech in Tokyo, President Obama emphasized that the U.S. would not seek to contain China, but did not mention Taiwan at all. In his meetings with Chinese leaders, Mr. Obama avoided the issue of China’s building military threat. His administration hasn’t announced any arms sales to Taiwan since taking office in January, either.

More fundamentally, the U.S. and China issued a joint statement which included the phrase: “China emphasized that the Taiwan issue concerns China’s sovereignty and territorial integrity, and expressed the hope that the United States will honor its relevant commitments and appreciate and support the Chinese side’s position on this issue.”

This statement leans toward giving Beijing what it has sought for decades but has tried in vain—until now—to achieve: to get Washington to accept China’s claim of sovereignty over Taiwan. In July 1982, American Institute of Taiwan Director James Lilley delivered “Six Reassurances” on behalf of then-President Ronald Reagan, which stated that “the U.S. had not altered its position regarding Taiwan’s sovereignty, meaning the U.S. does not recognize China’s claim of sovereignty over Taiwan.”

In July 1998, the Chinese coaxed then President Bill Clinton, who was visiting China, to state a policy of so-called “Three Nos” regarding Taiwan, that includes “no independent Taiwan,” “no two Chinas or one Taiwan, one China,” and “no Taiwan membership in intergovernmental international organizations.” The third “no” is a serious and outright violation of the Taiwan Relations Act, a U.S. law which states: “Nothing in this Act may be construed as a basis for supporting the exclusion or expulsion of Taiwan from . . . any international organization.”

President Obama’s predecessor, George W. Bush, took a much more pro-Taiwan stance. When Mr. Bush visited China the first time in February 2002, there were no surprises from his talks with Chinese leaders, nor was there any joint statement. Prior to his arrival at Beijing, President Bush made a speech to Japan’s Diet and said: “America will remember our commitment to the people on Taiwan,” He also pledged “to do whatever it takes to help Taiwan defend itself.” Three months before he left office, he approved a $6.5 billion package of arms sales to Taiwan.

The Obama team seems to understand that its message may upset Taiwan. After Mr. Obama’s trip, the chairman of the American Institute in Taiwan, Raymond Burghardt, was dispatched to Taipei, where he met President Ma, Legislative Yuan Speaker Wang Jin-pyng, and the opposition Democratic Progressive Party Chairwoman Tsai Ing-wen. Mr. Burghardt told them that U.S.-Taiwan policy remains unchanged, including Washington’s stance on the island’s sovereignty and defense needs. But few leaders seemed to buy this message and local media roundly criticized the visit.

Now is not the time to repeat Mr. Clinton’s mistakes. It is morally and politically wrong for the U.S. to oppose the right of Taiwan, a democratic and open society of 23 million people, to determine its own future. President Obama may be leaning in that direction by not supporting an independent Taiwan and backing China’s opposition to Taiwan independence. Beijing has long tried to isolate Taiwan in the international community, lock the island into the framework of a “one China” policy, pave the way for Taiwan’s eventual unification with China, and most importantly, seek Washington’s support for its maneuvers.

The Obama-Hu statement “welcomes the peaceful development of relations across the Taiwan Strait and looks forward to efforts by both sides to increase dialogues and interactions in economic, political, and other fields, and develop more positive and stable cross-Strait relations.” There is no reason for Washington to believe that Taiwan’s unification with Communist China is desirable or inevitable. The three U.S.-China communiques and other joint statements do not commit Washington to Taiwan’s unification—and democratic changes in Taiwan have precluded it. The U.S.-Taiwan relationship is valuable in its own right and should not be subordinated to or merely a function of the U.S.-China relations.

To remove any doubts and reassure Taiwan, President Obama should reiterate the commitment of his administration to the Taiwan Relations Act and Reagan’s “Six Reassurances.” Moreover, to honor the U.S. pledge on security support to Taiwan, the Obama administration should soon make self-defense weapons available to Taiwan. Only then will the U.S.-Taiwan relationship truly be restored.

Mr. Chang, professor emeritus of political science at Penn State University, is the CEO of the Taiwan Institute of Political, Economic and Strategic Studies and former deputy secretary general of Taiwan’s National Security Council. He has also served as a legislator for the Democratic Progressive Party.


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The currency quarrel

China won’t change on command. America must retake control of its own financial destiny.

BY NOW it is a cliche that the United States has no more important bilateral relationship than that with China. Yet in the wake of President Obama’s sometimes awkward visit to Beijing, it is becoming clear that, in one crucial respect, Sino-American relations are dysfunctional: Though umbilically connected by trade and capital flows, the two countries are pursuing incompatible economic policies. Without a course correction, both will suffer, and so will the global economy.

China has achieved its economic miracle through exports — producing far more than its people consume. The United States — where consumers have driven 70 percent of the economy in recent years — is its biggest market. The United States, in fact, consumed more than it produced, but China enabled this by accumulating $2.3 trillion in reserves and plowing much of it back into U.S. government bonds.

When the global boom went bust, the United States cut interest rates to zero and began running a fiscal deficit of 10 percent of gross domestic product. This made the dollar vastly cheaper, but China, to protect its export industries, has responded by linking its currency to the plunging buck. Thus, U.S. exports are not growing as much as they would otherwise, and neither are those of other countries in Asia. China, meanwhile, evinces anxiety about its dollar-denominated assets, and U.S. leaders try to deal with having a distant, militarily powerful and authoritarian state as their banker.

Economically, the solution is obvious. China must increasingly grow by producing to meet domestic demand; the United States must live within its means. Both sides have made some headway. China has plans to build hundreds of new hospitals; pension reforms, which would reduce the need to save for old age, are also said to be on the way. In the United States, private savings have risen from minus 2.1 percent of GDP in the last quarter before the recession to 6.2 percent now. But more action is needed: Not only must the United States seriously address its long-term budget deficits; China must also allow its currency, the yuan, to rise. This view is confirmed by the two countries’ trading partners as well as the International Monetary Fund.

The problem is how to get there. In theory, the United States and China might pursue some 21st-century version of the 1985 Plaza Accord, the intergovernmental agreement that called for appreciation of the Japanese yen and the West German mark against the dollar. In practice, that’s not likely: Japan and West Germany were not only trading partners but also Cold War military allies of the United States. Communist China does not exactly fit that description. Moreover, the deal’s results were ultimately disappointing, and it was abandoned in 1987.

And so, the United States and China are at an impasse, with each demanding, in effect, that the other change first. For Washington, the best approach is to continue pointing out the costs and contradictions of China’s policy — while taking charge of its own destiny. Given the current fragility of the U.S. economy and the 10.2 percent unemployment rate, it would be unwise, both for the United States and China, to tighten monetary policy and slash the budget deficit immediately, as some Chinese commentators have demanded. But, by beginning work now on credible “exit strategies” for fiscal and monetary policy, the United States could undermine China’s beggar-thy-neighbor currency stance and ensure the long-term stability of the dollar.

Editorial, Washington Post


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Nonstop party

The surprising persistence of Chinese communism

ARRIVING IN CHINA last week as part of his multi-country Asia trip, President Barack Obama echoed many of the same themes as George W. Bush, Bill Clinton, and George H.W. Bush before him. He saluted China’s ancient and dynamic culture, touted the intricate links between American and Chinese businesses, and vowed that Washington and Beijing would work to prevent any conflict from erupting between them. Calling China a “majestic country,” Obama vowed that “The notion that we must be adversaries is not predestined.” But Obama made one dramatic change from the historical script: He did not predict that the Communist Party would collapse.

For at least two decades, most American leaders – and many American China-watchers – have been waiting for the party to fail. At least since the Tiananmen protests of 1989, the US foreign policy establishment has assumed that China’s Communist Party would eventually bow, making way for Chinese democracy. After all, in 1989 virtually every other communist regime collapsed, and in the following years democracy spread across Africa, Latin America, Eastern Europe, and East Asia, including neighbors of China such as Thailand and South Korea. “Color Revolutions” swept through countries as diverse as Georgia and Lebanon. Even nations far poorer than China, like Malawi and Bangladesh, held successful multi-party elections.

American leaders also offered more principled arguments for why the Chinese Party eventually could not continue to “stand on the wrong side of history,” in the words of Bill Clinton. New communications technology, like cellphones and the Internet, would allow people to organize out of the watch of the regime. (Bill Clinton once memorably compared China’s efforts to control the Internet to “nailing Jell-O to a wall.”) Economic development would build a middle class, which had proven the key to democratization in other parts of the world. As the Communist Party grew larger, farther from its early revolutionary days, and richer, it would become harder for it to keep its senior leadership united, and corruption would grow so endemic that it would alienate the population.

Yet Beijing has defied history and nailed Jell-O to the wall. Today, no obvious challengers confront the party’s rule, and the senior Chinese leadership, now preparing for the next transition of power in 2012, appears completely united. The average Chinese citizen, at least in urban areas, seems to have bought into Communist Party rule. One poll of Chinese citizens taken by the Pew Global Attitudes Project found that people in China have a higher degree of satisfaction with conditions in their nation than in almost any country studied.

“Many China observers have long been predicting that China’s encounter with market forces or liberal institutions and instruments from the West would spur inevitable democratic change,” argues Ying Ma, a fellow at the Hoover Institution, in an essay in Policy Review. “They have been delusional.”

China’s Communist Party has turned the conventional wisdom on its head. Rather than economic growth undermining the regime, the party has used that expansion to strengthen its hold on political power. Instead of the Internet opening up avenues for dissidents and bringing freer flows of information to the People’s Republic, the party has harnessed the Web to reinforce nationalism and bolster its control over the information Chinese have access to. Through its success, the CCP forces Western nations to question whether democracy is truly the inevitable end state of political development – and whether the party’s model could work elsewhere.

FOR DECADES, POLITICAL theorists such as Harvard’s Samuel Huntington argued that the development of a middle class drives political liberalization. When a sizable middle class developed, they believed, that group would begin to make more demands on the state for the kind of social and political freedoms that go along with their increasing economic freedom. In addition, the middle class would become educated, and would learn about the history of liberalization in other parts of the world, and then begin to import these concepts back at home.

In China, this has not happened. Within China in the 1980s, these urban elites were angry about stagnant wages, one of the reasons for the protests that led to the Tiananmen Square crackdown. By sparking growth, liberalization has made the urban elites, who are critical to any political movement, less interested in pushing for political change that might upset their standard of living. But even as it has opened the economy, the party has maintained enough control of economic levers – banks, key companies – that the urban elites see the party as part of the creation of wealth, rather than an impediment to it. Shanghai now boasts a GDP per capita of nearly $9,000, putting it on par with middle-income countries.

The regime has increased salaries for academics, who played a major role in the 1980s protests, and for other professionals with government-linked jobs, according to Minxin Pei, a China specialist at Claremont McKenna College in California. The party also has opened membership to private entrepreneurs – another decision that cast the party as benefiting urban businesses. Indeed, entrepreneurs soon coveted party membership because it allowed them to network with officials, who could make or break their business ventures.

The “middle class is the strongest supporter of the party,” notes John Lee, a fellow at the Hudson Institute in Washington. “These elites comprise the fastest-growing groups wanting to become party members.”

In this way, China is not unique: in many other developing countries, urban elites have realized that, at least in its initial stages, political freedom could threaten their economic gains, by opening opportunity to a wider spectrum of society and, potentially, by allowing populist politicians to redistribute wealth. So, from Russia to Malaysia to Thailand, economic growth has pushed urban elites closer to authoritarian regimes, which they see as best protecting their interests. Sometimes, those urban elites actually help overthrow a democratic government to replace it with an authoritarian regime, as happened in Thailand, where elites backed a 2006 coup.

China has also disproved the notion that integration with the world reduces the kind of sour nationalism exploited, during the Cold War, by authoritarian regimes like the Soviet Union. China has certainly integrated itself with the world: It enjoys a staggering trade surplus with the US, has developed into the manufacturing platform for the world, and voraciously consumes Western popular culture and food. But this embrace of Western products has not meant an embrace of Western ideas on democracy, or warmer views of the United States. In the 2009 BBC poll of global public opinion, 58 percent of Chinese had a negative view of the United States – and this at a time when America’s global image overall was improving.

By presenting China’s economic growth as a triumph over a world aligned against the People’s Republic – Chinese media constantly portray the West as attempting to halt China’s rise – the party has turned that economic success into a tool of aggrieved nationalism. On many Chinese blogs and Internet forums, which are dominated by young urbanites, writers this year cheered premier Wen Jiabao’s public chiding of Western countries for getting the world into a financial crisis, and applauded the governor of China’s central bank when he publicly suggested the world should shift away from the dollar as the reserve currency.

At the same time, Beijing has systematically fostered Han Chinese nationalism, through the use of school textbooks, youth groups, spectacles like the 60th anniversary parade and the Beijing Olympics, and other means of bolstering ethnic Chinese pride. This new nationalism helps ensure that protest in outlying ethnic minority regions, the most likely sources of turbulence, do not spread to the rest of China, since ethnic Han increasingly take the side of the state against minorities.

It has also become clear that the spread of information technology does not necessarily open up politics. The party successfully filters information before it even gets to average Chinese, so that they receive a skewed, limited view of the world. Yet because the filters, which include blocking certain websites and ensuring certain stories never appear in the domestic media – are not readily apparent, the Chinese media appears as professional as the West, and most citizens have little idea they are not getting the whole story. By contrast, a regime that obviously controls the media, like Burma, where domestic papers read like Pravda, is essentially tells its public that they are getting false news.

The spread of technology has not fostered change in Iran, or Russia, where average citizens seem willing to allow a greater consolidation and state domination of most media. In Russia, as in China, the Internet has allowed average citizens to read outside reporting on Russia, and yet the government’s use of nationalism shades views of foreign coverage of Russia, while its domination of domestic television means that it can effectively flood the airwaves with pro-government messages, calling into doubt foreign reporting (or the occasional independent Russian reporting) critical of the Kremlin.

THE CCP’S HOLD is forcing the world to re-evaluate the stability of authoritarian regimes. Perhaps, Westerners are realizing, countries can survive for decades, or even longer, without making a transition to democracy, even as they become wealthy. Indeed, after years of reporting gains in the numbers of nations classified as “free” or “partly free,” in its 2009 report Freedom House noted what it calls a “freedom stagnation” – three straight years of a decline in global freedom. The Obama administration also seems to have recognized that authoritarian rule may be stable in some places, and it is trying to engage Burma, Sudan, and other autocratic regimes.

Other authoritarian regimes now try to copy the Chinese “formula” for staying in power: just enough reform to co-opt the middle class, using nationalism to shore up the regime, and moderating (and monitoring) the flow of information into the country. Most successfully, Vietnam, which for years sent officials to China to study the Communist Party’s strategy, has followed the CCP’s policies like a textbook. Other countries, from Cuba to Syria to Kyrgyzstan, also have sent senior officials to China to study the party’s methods. Other authoritarian regimes seem almost awed by China’s success. Indeed, in some countries, like Syria, officials tout the idea of importing a “China model” without seeming capable of even defining what China has done, other than pairing some economic liberalization with virtually no political liberalization.

And yet China’s model contains some serious flaws. The regime’s stability depends upon favoring the urban elites, who tend to be the most involved in politics, but unequal growth will come back to bite the regime. Already, China has among the worst levels of income inequality in Asia, and there is no evidence this will improve. While Chinese urbanites may be happy, the rural masses are becoming increasingly disaffected. The vast majority of the tens of thousands of “mass incidents” (protests) in China each year take place in rural areas. In the first quarter of 2009 alone, Chinese authorities estimated there were more than 50,000 of these incidents, which have become increasingly violent, with protestors wielding clubs, bombs, and other weapons against local officials.

The Communist Party’s success also relies on boosting nationalism, but in the long run, the young nationalists it has created may become just as critical of the government as their liberal democratic predecessors in the 1980s – critical of Beijing for not being tough enough with the rest of the world, for example. Indeed, during the 2007 Tibet protests, many young Chinese nationalists took a far harder stance, online, against foreign countries that criticized Beijing than the CCP actually did. And economically, the party may face a different conflict: its success depends upon retaining enough control of the economy that it can control the allocation of capital, key jobs, major projects, and other foundations of the economy, yet in the long term continued economic growth may require greater opening of the economy, as happened in nearly every other Asian tiger economy after a certain period of state control.

For now, Beijing appears capable of papering over these flaws. Certainly, the Party is not unaware of them – and while it attempts to address them, other countries likely will continue copying the Chinese formula. Unlike many communist regimes before the fall of the Berlin Wall, the CCP appears to understand its own weaknesses and is prepared to combat them. Recognizing the threat of income inequality, the party launched a campaign to “Develop the West” – to plow investment into poorer parts of central and western China, so that they can catch up to the coastal regions. Understanding the potential dangers of nationalism, Beijing has, in recent years, tried to blunt some of the more aggressive nationalism by rethinking its school textbooks and other means of education.

And yet, American policy makers need not just accept that the Communist Party will rule forever, or ignore the party’s abuses. After all, to the hundreds of millions of rural Chinese who have not benefited from the party’s economic reforms, China remains in many ways an oppressive and brutal place. And despite the party’s co-opting of urban elites, there remains, in influential intellectual circles, discussion of the need for greater liberalization, highlighted last year by an online petition called Charter 08 that called for building the rule of law in China.

An effective American China policy, then, should balance greater acceptance of Beijing’s rising power with a demonstration that, despite China’s rising influence, the US is not going to back off core beliefs, such as human rights advocacy. Washington also must recognize that trade and investment alone will not open up Chinese politics; the US could focus on areas where Beijing, though increasingly sure of itself, remains weak – such as providing technology for Chinese bloggers to get around Internet filters, or highlighting the vast problems of rural Chinese society (both Voice of America and Radio Free Asia have extensive Chinese broadcasts which penetrate rural China).

Washington has walked this line before. In a previous era when many academics believed the Soviet regime would last for decades, American administrations both dealt with Moscow on issues like arms control and pressured it on human rights. And the Soviet Union, perhaps like China today, had internal fissures whose extent went unappreciated. Ultimately, the USSR’s weaknesses overwhelmed it.

Joshua Kurlantzick is a fellow at the Council on Foreign Relations.


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China’s spirits hold Mickey Mouse at bay

The Shangai park will rival Disneyland in Hong Kong, but is opposed by local villagers

Mickey Mouse has met an unexpected obstacle on his chirpy march to bring Walt Disney’s consumer culture into China — ancestor worship.

Amid rice fields and bamboo groves south of Shanghai, hundreds of villagers are resisting plans to dig up family graves in order to make way for the first Disneyland in mainland China.

“It’s harder than persuading them to move out of their homes,” lamented one of three local officials charged with the task.

“A house just equals money but to disturb the forefathers is a trauma for generations.”

Officials are using tact and cajolery to avoid spoiling the news that more than £2 billion is to be lavished on what Disney calls “a Magic Kingdom theme park with characteristics tailored to the Shanghai region”.

There is already a storm of controversy over the decision to let Disney into China, with critics tearing into the project in official newspapers and on the internet. Some have denounced the insidious influence of Hollywood. Others say the state is wasting money on a bad investment.

Mickey and his friends will be socially divisive, according to one writer in the Workers’ Daily newspaper. “Rich and poor kids alike enjoy Mickey Mouse and Donald Duck, but only the rich kids can afford a ticket so it will be a paradise for them and heartbreaking for the poor,” the writer said.

Many contributors to the websites of Chinese television and the People’s Daily complain that Disney fare is an insult to China’s ancient culture. One commentator went so far as to predict that Disney’s seductive array of characters would destroy the nascent Chinese cartoon industry.

Typical comments republished by the state news agency, Xinhua, labelled Disneyland and its products as “valueless” and “destined to turn us Chinese into consumer fetishists and cultural slaves”.

Such elitist concerns are remote from the folk in this cluster of rural villages, where generations went on working the land while the dynamic metropolis of Shanghai surged up over the last century, just 30 miles to the north.

Most people in Zhaohang could hardly believe their luck when the Shanghai government announced on November 4 that it had reached a joint venture deal with the famously hard bargainers from Disney to build the theme park in their area.

“I’m looking forward to moving for free into a new modern apartment and being able to go to the cinema or karaoke any time I like,” said a 25-year-old mother named Guo, cradling her one-year-old boy, “and when he’s bigger it’ll amuse my son.”

Two men called Zhao were standing outside their farmhouse, awaiting government valuers who will determine how much compensation about 4,000 people will receive in addition to their free homes.

The younger Zhao, 27, muttered that the amount they would be offered would be too low, but officials will have the last word since all land in China belongs to the state and may only be leased.

The elder Zhao, 60, was troubled by more than money and house moving. “They came round more than a month ago to tell us that we had to dig up our ancestors’ bones,” he said. “It’s difficult, because our forefathers have been sleeping under the earth for so long that it is cruel to awaken them.”

All over the countryside the deceased rest in peace near the fields and fishponds they tended in life, their graves chosen according to feng shui, the traditional art of geomancy, for harmonious concord with the winds and waters.

Officials want to transfer the remains to a public cemetery near Shanghai’s ultra-modern Pudong airport, where millions of visitors are expected to arrive en route to Disneyland when it opens in 2014.

It will be another flourish for China’s commercial capital as it rushes to outshine its rivals in Tokyo and Hong Kong.

Local reports suggest that the park will offer the lowest Disneyland admission prices anywhere. Yet it ought to make a profit because there are now millions of people enjoying incomes of more than £5,000 a year in the booming coastal region.

That income level is roughly where Japan was when it hosted the 1964 Olympics and showed off its economic miracle at Expo ’70 in Osaka.

For China, the 2008 Olympics and Expo 2010 in Shanghai mark similar strides towards greatness.

President Barack Obama dropped into Shanghai last week to lend his support and, for the city’s leaders, Disneyland is the icing on the fairy cake.

Young people in the villages that will vanish can hardly wait to move out, driven by a restless urge to travel and spend that has more than doubled domestic tourism over the past decade.

Yet the impact of modernity on places like Zhaohang and on people like the elder Zhao is so stark that even officialdom is trying its best to ease the transition.

“We have to handle this very carefully,” explained an official who was talking to old people in a community hall.

“They all believe that the ancestors’ graves are determined by feng shui and will influence the fortunes of their descendants.”

So far the local government has won over only 50 out of 1,000 families, said an official, who added that it “did not want to spoil the atmosphere”.

All names of villagers in this article have been changed to protect them.


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Obama’s Nice Guy Act Gets Him Nowhere on the World Stage

US Foreign Policy

US President Barack Obama is back in the US after an Asian trip that produced few results.

When he entered office, US President Barack Obama promised to inject US foreign policy with a new tone of respect and diplomacy. His recent trip to Asia, however, showed that it’s not working. A shift to Bush-style bluntness may be coming.

There were only a few hours left before Air Force One was scheduled to depart for the flight home. US President Barack Obama trip through Asia had already seen him travel 24,000 kilometers, sit through a dozen state banquets, climb the Great Wall of China and shake hands with Korean children. It was high time to take stock of the trip.

Barack Obama looked tired on Thursday, as he stood in the Blue House in Seoul, the official residence of the South Korean president. He also seemed irritable and even slightly forlorn. The CNN cameras had already been set up. But then Obama decided not to play along, and not to answer the question he had already been asked several times on his trip: what did he plan to take home with him? Instead, he simply said “thank you, guys,” and disappeared. David Axelrod, senior advisor to the president, fielded the journalists’ questions in the hallway of the Blue House instead, telling them that the public’s expectations had been “too high.”

The mood in Obama’s foreign policy team is tense following an extended Asia trip that produced no palpable results. The “first Pacific president,” as Obama called himself, came as a friend and returned as a stranger. The Asians smiled but made no concessions.

Lost Some Stature

Upon taking office, Obama said that he wanted to listen to the world, promising respect instead of arrogance. But Obama’s currency isn’t as strong as he had believed. Everyone wants respect, but hardly anyone is willing to pay for it. Interests, not emotions, dominate the world of realpolitik. The Asia trip revealed the limits of Washington’s new foreign policy: Although Obama did not lose face in China and Japan, he did appear to have lost some of his initial stature.

In Tokyo, the new center-left government even pulled out of its participation in a mission which saw the Japanese navy refueling US warships in the Indian Ocean as part of the Afghanistan campaign. In Beijing, Obama failed to achieve any important concessions whatsoever. There will be no binding commitments from China to reduce greenhouse gas emissions. A revaluation of the Chinese currency, which is kept artificially weak, has been postponed. Sanctions against Iran? Not a chance. Nuclear disarmament? Not an issue for the Chinese.

The White House did not even stand up for itself when it came to the question of human rights in China. The president, who had said only a few days earlier that freedom of expression is a universal right, was coerced into attending a joint press conference with Chinese President Hu Jintao, at which questions were forbidden. Former US President George W. Bush had always managed to avoid such press conferences.

Relatively Unsuccessful

A look back in time reveals the differences. When former President Bill Clinton went to China in June 1998, Beijing wanted to impress the Americans. A press conference in the Great Hall of the People, broadcast on television as a 70-minute live discussion, became a sensation the world over. Clinton mentioned the 1989 Tiananmen Square massacre, when the government used tanks against protestors. But then President Jiang Zemin defended the tough approach taken by the Chinese Communists. At the end of the exchange, the Chinese president praised the debate and said: “I believe this is democracy!”

Obama visited a new China, an economic power that is now making its own demands. America should clean up its government finances, and the weak dollar is unacceptable, the head of the Chinese banking authority said, just as Obama’s plane was about to land.

Obama’s new foreign policy has also been relatively unsuccessful elsewhere, with even friends like Israel leaving him high and dry. For the government of Israel Prime Minister Benjamin Netanyahu, peace is only conceivable under its terms. Netanyahu has rejected Obama’s call for a complete moratorium on the construction of settlements. As a result, Obama has nothing to offer the Palestinians and the Syrians. “We thought we had some leverage,” says Martin Indyk, a former ambassador to Israel under the Clinton administration and now an advisor to Obama. “But that proved to be an illusion.”

Even the president seems to have lost his faith in a genial foreign policy. The approach that was being used in Afghanistan this spring, with its strong emphasis on civilian reconstruction, is already being changed. “We’re searching for an exit strategy,” said a staff member with the National Security Council on the sidelines of the Asia trip.

‘A Lot Like Jimmy Carter’

An end to diplomacy is also taking shape in Washington’s policy toward Tehran. It is now up to Iran, Obama said, to convince the world that its nuclear power is peaceful. While in Asia, Obama mentioned “consequences” unless it followed his advice. This puts the president, in his tenth month in office, where Bush began — with threats. “Time is running out,” Obama said in Korea. It was the same phrase Bush used against former Iraqi dictator Saddam Hussein, shortly before he sent in the bombers.

There are many indications that the man in charge at the White House will take a tougher stance in the future. Obama’s advisors fear a comparison with former Democratic President Jimmy Carter, even more than with Bush. Prominent Republicans have already tried to liken Obama to the humanitarian from Georgia, who lost in his bid to win a second term, because voters felt that he was too soft. “Carter tried weakness and the world got tougher and tougher because the predators, the aggressors, the anti-Americans, the dictators, when they sense weakness, they all start pushing ahead,” Newt Gingrich, the former Republican speaker in the House of Representatives, recently said. And then he added: “This does look a lot like Jimmy Carter.”

Gabor Steingart, Der Spiegel

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Beijing’s Post-Obama Crackdown

Beijing arrests a human-rights lawyer.

President Obama soft-pedaled human rights in Beijing this week, presumably in an effort to cajole China into better behavior. The country’s public-security apparatus has responded by proceeding with business as usual.

The wheels of Air Force One were barely off the runway when Beijing’s security forces beat and seized human-rights lawyer Jiang Tianyong as he was taking his daughter to school yesterday morning. Two of his colleagues told us he was still being detained at a police station as we went to press.

This is only the latest installment for Mr. Jiang, who has been harassed since he agreed to represent a Tibetan “living Buddha” accused of inciting unrest during the March 2008 riots. Last year, the government suspended his legal license temporarily, and this year he has been effectively disbarred since June.

None of this dissuaded Mr. Jiang from talking about the true state of human rights in China. On Oct. 29, he addressed a Congressional human-rights commission during a trip to the U.S. He returned to China and was placed under house arrest, but he still tried to meet Mr. Obama Wednesday, according to a colleague. The police escorted him back to his house. The U.S. embassy press office in Beijing said it was not aware of any invitation for Mr. Jiang to meet with the President.

Mr. Jiang’s case isn’t an isolated incident. Over the past few months, the government has pressured human-rights lawyers to drop sensitive cases, denied them license renewals, or resorted to physical violence. Democracy activists and other groups threatening to one-party rule have also come under increased scrutiny.

The Obama Administration has gone out of its way to not criticize China’s human-rights violations in public, although Mr. Obama reportedly spoke strongly in private to the Chinese leadership on the topic this week. That will be of little comfort to Mr. Jiang and the millions of Chinese who support what he stands for.

Editorial, Wall Street Journal


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Assessing the China Trip

President Obama has faced a fair amount of criticism for his China trip. He was too deferential; he didn’t speak out enough on human rights; he failed to press Beijing firmly on revaluing its currency; he achieved no concrete results. The trip wasn’t all that we had hoped it would be, but some of the complaints are premature.

The trip was a template for rising American anxieties about the rising Asian power. President Obama went into his meetings with President Hu Jintao with a weaker hand than most recent American leaders — and it showed. He is still trying to restore the country’s moral authority and a battered economy dependent on Chinese lending. Yet the United States needs China’s cooperation on important and difficult problems, including stabilizing the global financial system, curbing global warming, persuading North Korea to give up its nuclear program and preventing Iran from building any nuclear weapons.

On the positive side, the two leaders hinted in a joint statement that there may have been enough agreement on climate change to give momentum to the Copenhagen negotiations. An American government source said there also may have been some unannounced progress on North Korea.

But publicly, Mr. Obama pulled his punches on China’s exchange rate, saying only that Beijing had promised previously to move toward a more market-oriented rate over time. Despite its indebtedness, the United States has the world’s largest economy; Mr. Obama should have nudged Beijing to move faster. We hope he did so privately.

We were especially disappointed that China made no discernible move to join with the United States and other major powers in threatening tougher sanctions if Iran fails to make progress on curbing its nuclear weapons program. President Obama should have made clear in his private talks that the United States and Europe will act anyway if Beijing and Moscow block United Nations Security Council action.

It was also dispiriting that Mr. Obama agreed to allow China to limit his public appearances so markedly. Questions were not permitted at the so-called press conference with Mr. Hu, and his town hall meeting with future Chinese leaders in Shanghai not only had a Potemkin air, it was not even broadcast live in China. It’s obvious that the last thing Mr. Hu wanted was to get questions about issues like his brutal repression in Tibet and Xinjiang. That doesn’t explain Mr. Obama’s acquiescence in such restrictions.

Mr. Obama did not meet with Chinese liberals. In Shanghai, he spoke of the need for an uncensored Internet and universal rights for all people, including Chinese, and at the press conference he called for dialogue between Beijing and the Dalai Lama. He delayed a meeting with the Dalai Lama until after the China summit and should schedule it soon.

President Obama was elected in part because he promised a more cooperative and pragmatic leadership in world affairs. We support that. The measure of the success (or failure) of his approach won’t be known for months, and we hope it bears fruit. But the American president must always be willing to stand up to Beijing in defense of core American interests and values.

Editorial, New York Times


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The Great Chinese Media Offensive

China’s image in the world hasn’t been the best lately. Now, Beijing is pumping billions of dollars into a global media campaign in an effort to reverse that trend. Chinese television may be coming soon to a TV near you.

Much of the state-run media in China are far from independent and come across with a corresponding degree of implausibility.

China’s answer to Larry King wears a suit and tie instead of suspenders. His fame hasn’t yet spread quite as far as the renowned CNN television host, but Yang Rui, 46, has come far in his long march through the media world. Beijing now wants to engage his help to break the media dominance of Western TV and to realign global opinion with its own.

It’s still early in the morning at the television center in Beijing, and, since Yang doesn’t host his “Dialogue” program until the evening, the star of CCTV-9, the English language channel at China’s state-controlled television network, has time to talk about his mission.

Yang says he wants to “enhance China’s prestige in the world.” The outside world, he complains, repeatedly criticizes China — especially Western media that are obsessed with the sensational. He says Western journalists prefer listening to separatists who oppose Beijing rather than reporting the accomplishments of China’s communist leadership in an “objective and balanced” way.

He speaks in a gentle, friendly manner — in the precise English he learned as a student in Great Britain. Here too, outside the studio, he remains the consummate gentleman, never rising into the shrill tones favored by many a government spokesperson.

The Battle for Global Opinion

Yang embodies China’s new ambitions. As Asia’s leading power, China wants to become a global media player — one focused above all on maintaining its own image. After the rebellion in Tibet last year and the public relations disaster surrounding the Olympic torch, Beijing recognized that it was no longer possible to retain control over its enormous empire only with police-state tactics directed at its own population.

Rather, the country’s leadership decided, China needs to assert itself to the outside world — and it believes that is best done with the help of a controlled media apparatus. And Beijing is fighting the battle for global opinion on three fronts:

  • the Internet, brutally monitored domestically but also used to broadcast CCTV-9 worldwide;
  • new English-language editions of party newspapers, intended to enhance China’s reputation in the rest of the world;
  • the global development and acquisition of television networks.

Several TV networks already compete to deliver China’s patriotic news to the world. The government’s official press agency, Xinhua, supplies around 50 foreign media services such as Reuters and CNN with television news in English. This summer, several months earlier than planned, CCTV launched an Arabic language network for 22 countries with a total of 300 million potential viewers. The project was rushed due to the unrest in Xinjiang, as China tried to shore up support among Muslims following the brutal oppression of Muslim Uighurs in the autonomous region.

English Language News Network

The state TV network also kicked off a Russian channel in September, with over 100 Chinese and 20 foreign employees. Spanish and French programming exists already, and a Portuguese language network is in the works. By late 2011, the media giant plans to include 10 global TV channels, including its own English language news network.

It is certainly not uncommon for Beijing to generate ambitious new plans, but the media offensive is being led by Hu Jintao, head of state and of the Communist Party, personally. Hu lamented last year, on the occasion of the 60th anniversary of the party organ People’s Daily, that the West is strong and China is weak when it comes to international public opinion. And that, he said, has to change. “The battles in the fields of news and opinion will become more fierce and complicated,” Hu predicted.

China does possess an important advantage over the West’s crisis-plagued media industry in the coming propaganda war — the Communist government’s coffers are full. Beijing reportedly plans to pump the equivalent of €4.4 billion ($6.5 billion) into its global media campaign.

In addition, advertising revenue is rising at a good pace despite the recession. The giant CCTV network, which has recently completed a gigantic new headquarters in Beijing designed by Dutch star architect Rem Koolhaas, brought in €350 million in advertising in just the first quarter of this year. That may not sound like much compared to Western revenues, but it’s 19 percent more than in the same period last year.

Degree of Implausibility

But despite the money, China faces high hurdles. Beijing’s greatest disadvantages are its lack of experience with Western tastes and, above all, its state-run media, which are far from independent and often come across with a corresponding degree of implausibility.

One notable exception was Caijing, a financial magazine that consistently tested governmental boundaries with its exposés of corruption and misdoings in the business world. Last week, however, magazine founder and editor in chief Hu Shuli, 56, threw in the towel in the wake of a grueling internal power struggle.

More than journalistic skills, Beijing expects allegiance from its media representatives. “We must strengthen the party’s leading role in radio, film, and television,” declares Wang Taihua, director of the State Administration of Radio, Film, and Television. When CNN or BBC broadcast images critical of China, Beijing simply switches monitors to black.

Even within the country, the government station CCTV is often ridiculed for its crude propaganda. The evening news consists of a pair of stiff newscasters reading off party resolutions, which can go on for several minutes each. There is no advertising on the evening news, yet the program is interrupted twice — first to celebrate “pioneers of time” and then to remember “heroes and role models of the people.”

Higher-ups do allow the foreign language channels a little more latitude. Yang describes proudly how he invited two American professors onto his live program, where they argued against the death penalty. For Chinese standards, Yang showed a degree of courage. Nonetheless, he’s still worlds away from a critical journalist’s desire to provide the public with unbiased information.

On the Global Scene

More than anything, China’s leadership wants to see its successes as a nation recognized. The same impulse inspired its opening spectacle at the 2008 Summer Olympics, meant to impress TV viewers the world over. Now Beijing is drawing more Western professionals from the PR and media industries into its services, to present itself even more perfectly on the global scene.

One example of these partnerships is 5CTV, a television network founded in 2008 by the Chinese governmental information authority together with American investors and launched at a fancy party in Los Angeles. William M. Campbell, chief executive officer of the new network, declared, “Our goal will be to bring China to the world, and the world to China.”

Campbell, who headed Discovery Networks in the US until 2007, demonstrated how he plans to market China in an interview with Cai Wu, China’s culture minister and the powerful former head of the state’s Information Office. The American businessman placed his right hand submissively on his chest and asked the Chinese official “for some thoughts about 5CTV and for some advice I can share with our Western and American viewers.”

The United States, however, is at most a sideline for Chinese strategists. A much more important region is the Middle East. China depends on countries there as suppliers of raw materials, but also as allies in the United Nations, as Yang explains. Beijing risked alienating Arab Muslims with its harsh treatment of the Muslim Uighurs; al-Qaida even threatened attacks on China in response. As a result, the country is attempting to persuade Arab viewers to see the benefits of China’s policy on minorities.

Friendship Offensive

On its new program, Chinese newscasters speaking in Arabic deliver the latest from China and around the world, and elaborate historical documentaries that recall friendly ties between China and the Arab world, for example through the Silk Road.

Meanwhile, this friendship offensive is being complemented by the ventures of private businessmen such as Wang Weisheng. Wang acquired an entertainment network in Dubai more than three years ago, then expanded it into the financial channel Arab Asia Business TV (AABTV). Now he broadcasts around the clock with bilingual information about the Chinese economy aimed at Arab businesspeople.

Gao Du, 36, head of AABTV, receives visitors in his TV studio in Hangzhou, not far from Shanghai. “We produce around 60 percent of our programming in China and the rest in Dubai,” he explains. Next up is expansion into Europe and India. “We’re thinking globally,” he says.

Then there’s Ye Maoxi, a media manager and real estate tycoon from Wenzhou in eastern China, who recently acquired the British satellite channel Propeller TV. Traveling in Europe this spring with Chinese premier Wen Jiabao, Ye learned of the channel’s financial problems and decided to buy it.

‘They Have Hollywood’

Attacking separately, then triumphing collectively — in the end this may just be the formula that allows China’s new media giants to take over the world. Yang Rui, the TV anchor, comments, “when the United States wants to keep our country from advancement, they mobilize their private NGOs and criticize us on human rights and democracy. So why shouldn’t our private businesspeople act on China’s behalf?”

Yang is proud of what his country has achieved, and remembers clearly why he decided to become a journalist 26 years ago. He was studying in Shanghai at the time, when an official from the State Administration of Radio, Film, and Television came to recruit new talent. “She told us that foreigners imagine people with braids and bound feet when they think of us Chinese.” Yang was shocked.

Now, he himself is the one presenting foreigners with a politically correct image of China. But he knows he can never quite measure up to the real Larry King at CNN. “He can get every star guest,” Yang says. “After all, he knows them all.” And the US has another advantage China will never be able to compete with: “They have Hollywood.”


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A yuan-sided argument

China’s currency

Why China resists foreign demands to revalue its currency

PRESIDENT Barack Obama, on his first visit to China this week, urged the government to allow its currency to rise. President Hu Jintao politely chose to ignore him. In recent weeks Jean-Claude Trichet, the president of the European Central Bank, and Dominique Strauss-Kahn, the managing director of the International Monetary Fund, have also called for a stronger yuan. But China will adjust its currency only when it sees fit, not in response to foreign pressure.

China allowed the yuan to rise by 21% against the dollar in the three years to July 2008, but since then it has more or less kept the rate fixed. As a result, the yuan’s trade-weighted value has been dragged down this year by the sickly dollar, while many other currencies have soared. Since March the Brazilian real and the South Korean won have gained 42% and 36% respectively against the yuan, seriously eroding those countries’ competitiveness.

Speculation about a change in China’s currency policy increased in the week before Mr Obama’s visit, after the People’s Bank of China tweaked the usual wording in its quarterly monetary-policy report. It dropped a phrase about keeping the yuan “basically stable” and added that foreign-exchange policy will take into account “international capital flows and changes in major currencies”. But exchange-rate policy is decided by the State Council, not the central bank. And many policymakers, notably in the Ministry of Commerce, do not favour a revaluation right now.

Indeed, Chinese officials have become bolder in standing up to Washington. “We don’t think that it’s good for the world economic recovery, and it is also unfair, that you ask others to appreciate while you depreciate your own currency,” said a spokesman for the Ministry of Commerce on November 16th. The previous day Liu Mingkang, China’s chief banking regulator, blasted Washington for its low interest rates and for the falling dollar, which, he claimed, was encouraging a dollar carry trade and global asset-price bubbles. He strangely ignored the fact that China’s own overly lax monetary policy, partly the result of its fixed exchange rate, is fuelling bubbles in shares and property.

Foreigners argue that a stronger yuan would not only help reduce global imbalances, such as America’s trade deficit, but would also benefit China. It would help China regain control of its monetary policy. By pegging to the dollar, it is, in effect, importing America’s monetary policy, which is too loose for China’s fast growing economy. A stronger yuan would also help rebalance China’s economy, making it less dependent on exports, putting future growth on a more sustainable path.

If a stronger exchange rate is in China’s own interest, why does it resist? Beijing rejects the accusation that its exchange-rate policy has given it an unfair advantage. It is true that other emerging-market currencies have risen sharply this year, but this ignores the full picture. Last year China held its currency steady against the dollar throughout the global financial crisis, while others tumbled. Since the start of 2008, the yuan has actually risen against every currency except the yen.

Beijing also argues that it has done a lot to help global rebalancing. Thanks to its monetary and fiscal stimulus, domestic demand has contributed an incredible 12 percentage points to GDP growth this year, while net exports subtracted almost four percentage points. Its current-account surplus has almost halved to around 6% of GDP from 11% in 2007. Chinese policymakers accept that the yuan needs to appreciate over the longer term, but say now is the wrong time, because exports are still falling, by 14% over the past 12 months.

Another reason for hesitation is that the theory that revaluing the yuan will allow Beijing to tighten its monetary policy is too simplistic. China’s experience since 2005 shows that a gradual rise encourages investors to bet on further appreciation; hot-money inflows then swell domestic liquidity. A large one-off increase might work, as it would stem expectations of a further rise. But the sort of increase required—perhaps 25%—is politically unacceptable because it would put many exporters out of business overnight.

Some Chinese economists warn that the benefits to America from yuan revaluation are much exaggerated. In particular, a stronger yuan would not significantly reduce America’s trade deficit. There is little overlap between American and Chinese production, so American goods cannot replace Chinese imports. Instead, consumers would simply end up paying more for imports either from China or other producers, such as Vietnam. This would be like imposing a tax on American consumers.

These arguments help explain why China is dragging its feet. Nevertheless, in the long run, a stronger yuan would benefit China’s economy—and the world’s—by helping shift growth from investment and exports towards consumption. It would boost consumers’ purchasing power and squeeze corporate profits, which have accounted for most of the increase in China’s excessive domestic saving in recent years. China will probably allow the yuan to start rising again early next year. This will not be the result of foreign lobbying—indeed, China is more likely to change its policy if foreign policymakers shut up. But by early next year China’s exports should be growing again, its year-on-year GDP growth could be close to 10%, and its inflation rate will have turned positive. The arguments in favour of revaluation will then loom much larger.

The Economist


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The China Obama Didn’t See

Shuttered churches belie a “harmonious” society.

In the northeast part of this city, not far from the old Friendship Hotel, stands a boxy little cinema specializing in anime. A nondescript building on a nondescript thoroughfare, it’s hardly a place one would expect a tourist to notice, much less a visiting president. Yet had Barack Obama wanted to understand something of the real China on his visit this week, his time would have been better spent here than at the various state dinners, Forbidden City photo-ops, and carefully managed town-hall events that consumed the balance of his time.

At ten o’clock Sunday morning, more than 500 members of Shouwang church gathered at the cinema for a service. Shouwang, founded in 1993 by pastor Jin Tianming, is one of the city’s largest unregistered churches and counts around 800 regular members. But until last weekend, the church members had never once been able to meet in such large numbers in an indoor space in Beijing.

Shouwang is what is known in China as a “house” church, meaning that it is an unregistered entity in a country where all religious groups are supposed to report to the State Administration for Religious Affairs. Officially, the Chinese government counts some 10 million Protestants and four million Catholics belonging to registered churches, which proscribe evangelical activity and preach a patriotic dogma. But Chinese and foreign observers alike believe the number of Chinese belonging to underground churches may now exceed 100 million people. And that figure has been growing rapidly as increasing numbers of Chinese—particularly well-educated city dwellers raised on a diet of Party atheism—seek to clarify their own moral universes.

Life has never been easy for the underground churches, and recently it has gotten a lot harder—the result, according to the Christian charity group China Aid, of a state directive handed down in August. What do China’s powerful leaders have to fear from these churches, most of which steer clear of politics? It may be that they have grown increasingly paranoid about the political power of religion given the unrest they have recently faced in Buddhist Tibet and Muslim Xinjiang. Or it could be because dissident intellectuals, such as jailed human-rights lawyer Gao Zhisheng, have sometimes tended toward Christianity.

Carefully managed town-hall events hid the country’s sad human rights record.

Whatever the reason, the crackdown has made things a lot more difficult for churches like Shouwang, which have tried to maintain a low profile. In recent weeks the church has been forced to hold their services outdoors (including during a snowstorm) as their attempts to find an indoor space were repeatedly rebuffed. Twenty minutes into Sunday’s service, Pastor Tianming announced that “some of our brothers and sisters are being held at their homes and have not been able to come to church. But we are all one body in Christ, so we will wait for them to start the service.” After another hour of singing and praying, the congregation suddenly broke into applause—one of the detained members, who is training to become a pastor, had apparently talked his way out of detention and arrived at the cinema. The service got underway; by the time it ended a second detained elder had arrived. The previous Sunday, it was Pastor Tianming who had been detained.

This story is hardly unique to Beijing. Earlier this month, police sealed the doors of the Wanbang church in Shanghai, scattering its congregation of 2,000 people. In Shanxi province one of the country’s largest house churches, with dozens of branches and tens of thousands of members, has seen its leaders arrested in a crackdown that has worsened since September. Shouwang itself would not likely have obtained permission to hold its services at the cinema had Mr. Obama’s trip not given authorities a reason to avoid ruffling feathers.

Now Mr. Obama is gone, after a visit that was conspicuous for its attentiveness to the sensibilities of China’s rulers. As for the future of China’s underground churches, it seems to hang by a thread. In their quest for stability and “harmony,” China’s leaders have been rolling back basic liberties in press rooms, court houses, universities and on the Internet. Shuttering underground churches is part of the trend.

But freedom of faith—which is really to say the integrity of conscience—is something not even history’s most repressive governments have ever been fully able to snuff out: not the Romans in their suppression of the earliest Christians; not the Communists in their efforts to substitute History for God; not Joseph Stalin, Mao Zedong, Kim Il Sung and other cult-of-personality leaders who attempted to substitute themselves for God. So while Shouwang has no place to meet this coming Sunday, and no guarantee that any meeting at all will be possible, the church will still be there, only more deeply steeled in its faith. This is the side of China that will ultimately determine its future—the side President Obama opted not to see.

Ms. Hook is an editorial page writer for The Wall Street Journal Asia.


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