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We tend to have bad feelings about China, going back to the Cold War, when they of course allied themselves against us. These feelings were most recently reinforced with the 1989 Tienanmen Square massacre - but despite fears at the time, the human rights situation has gotten better, not worse. Nowadays, the situation is quite different than it was. They have actually managed to achieve quite impressive economic growth - a 40-year sustained 9% annual GDP growth, something unprecedented for a country with over 1 billion people.

The way they have done this is by systematically opening up their markets, dissolving state-owned enterprises and social programs. They even are showing at least a sensitivity for democracy, by their obsessive monitoring of public opinion (it may not be quite like an opinion poll, but it gets the job done!) In short, they have all the elements of our Western society, even if they haven't managed to put it all together yet. Their Communist party leaders still remain in power, but their name is just about the only thing still communist about them.

This could be very useful for the war on terror. They represent a large source of capital that's willing to invest in the third world. As they do invest, they work a 'stealth' diplomacy where we introduce people to Western values, without even their recognition that those values are Western. We need to encourage China to invest around the perimeters of the Islamic empire, to help 'contain' the radicals' ideology until it eventually burns itself out.

Some people are worried about our trade imbalance with China, and their ownership of US dollars. The solution to that is higher interest rates. Besides limiting the supply of dollars that they can buy directly, this will also reduce the amount of US consumer debt, and encourage consumers to save more, thus weakening demand for Chinese-made products. What this problem doesn't merit, however, is a whole repudiation of free markets in general.

Much of our diplomacy presently focuses around Europe, under the Cold War assumption that it was in our interests to keep them from going red. Nowadays, it's pretty clear that Europe will not go along with us with the war on terror - or at the very least they won't be persuaded by us - so we need to move our diplomats where they will be of more use. Our relationship with China is impossible to address militarily, but it offers numerous opportunities for small gains in more under-the-table type deals - and these can eventually add up to larger victories. The first step in that process though is to welcome them with open arms, despite our historical disagreements and their present faults.
Tom Clancy dealt with these issues in the book "The Bear and The Dragon"

....I think the old men in the Chinese Politburo must have read the book. lol
Ken
Before you set everything in stone b5d, read this decade forecast on China from Stratfor.

Things are not as good as you think over there


East Asia

On China, we said, "Our forecast is for a deeply troubled China, increasingly torn by domestic strife, with a government, in the face of it, alternating between brutal repression and helplessness." China appears to be facing no such intense struggle, at least on the surface. However, not far below these placid waters swirls a mix of economic, social, political and security issues waiting for the slightest external stimulus to bring them bubbling to the top.

As for the rest of East Asia, we said, "The Korean Peninsula will become the epicenter of tensions in Northeast Asia" -- a forecast we see taking shape. In Southeast Asia, we said, "Indonesia will continue to be the center of attention as it struggles to maintain unity and redefine its role among its neighbors" - again, a prediction we still stand by.

On the whole, Stratfor's long-term East Asian forecasts have been right on the money. However, we have always been bearish on China -- not for ideological reasons but for structural ones -- and our forecasts, which we believe remain fundamentally accurate, have not matched the bullish view that others give to the Chinese economy and national status. Our view of China's future is in stark contrast with the positive outlooks we see coming from investment houses and others.

One key reason for the difference is that most forecasts on China are linear -- in essence they say that since the Chinese economy is clipping along at 8 percent or 9 percent GDP growth each year, in 10 or 20 years China will dominate the global economy. Our basic supposition, however, is that the shape of the world today is probably the least likely shape of the world a decade or two out. The world operates in cycles, long and short, and linear extrapolations fail to take into account the reactions and arrestors on growth or decline. For example, in 1990, a year after the Tiananmen Square incident, the prediction that China would be the regional economic engine a decade later would have been laughable, as foreign investors fled the country and the hands of repression were clearly seen. A decade later, it was hard to keep foreign money out of China, and Beijing was even beginning to look at ways to slow the economy.

China is obviously a major factor for East Asia in the next decade. And in looking at China, the status of the economy -- particularly growth -- is the core issue. It is our view that China's economic growth rates, driven largely by foreign investment, trade and government spending, will continue to slow. This slowing will exacerbate underlying structural tensions in the Chinese economic system -- between the urban and rural areas, between the coast and the interior, between the north and south, between the rich and poor and between the center and the periphery -- and at its core between the state-controlled and market economies.

Why, then, if Stratfor sees a China on the verge -- if not already in the midst -- of massive internal upheaval, is there a general global acceptance of the idea that not only is China on an unstoppable rise, but that people should pour their money into the Chinese economy? In part, this is due to tunnel vision -- assessors of the Chinese economy are looking only at the booming center-coastal economies in and around Shanghai. In part, it is intentional self-delusion, a failure to connect the dots.

There is no shortage of reporting on the underlying weaknesses of the Chinese banking system, the state-owned enterprises (SOEs), the unemployment problems, the uneven distribution of wealth and labor and myriad equally troubling and seemingly insurmountable problems. However, the holy grail of selling a single orange to each of the 1.3 billion Chinese continues to blind others to the reality of the situation, and the desire for a piece of what someone else might get has fed a steady stream of investment into China, keeping the system on life support and "justifying" the positive outlooks.

But on this last point, something has been overlooked: In recent years, foreign direct investment (FDI) moving into China has declined, but this trend is hard to see clearly. U.S. investment in China was the key driver in bringing China up from the Asian economic crisis. Weary of waiting for the return on investment in China, U.S. investors slowed the flow of FDI. However, the herd mentality and the shiningly optimistic assessments of China as the next golden goose led to a successive wave of European investments. This was followed by Asian investors, who did not want to be left behind.

This rush of foreign investment and interest in China has masked the Chinese economy's underlying weaknesses and given the government tools to maintain control. But it will not last. Already there is dissent forming in the international community, and the need for quicker profits -- or any profits -- is driving companies and investors to look elsewhere. Rising interest rates and the perception of strong market fundamentals are bringing investments to the United States. High energy prices, sector bubbles and the resurgence of "China threat" fears are taking the shine off the Chinese economy.

Beijing has enjoyed a brief respite from these fears. The external pressures on China were set to increase in late 2000 with the election of U.S. President George W. Bush. By early 2001, China and the United States were in a tense standoff as a U.S. E-P3 sat on a Chinese runway on Hainan Island. The incident was resolved, but the strains on U.S.-Chinese relations were not relieved. The came the Sept. 11 attacks in the United States, and suddenly China became a back-burner issue. Beijing even became, briefly, a fellow "target" of international terrorism, convincing Washington that Uighur militants were tied to Osama bin Laden and out to create a greater Islamist state in western China and Central Asia.

But while Beijing had some time -- and took advantage of it to effect a relatively smooth transition from Jiang Zemin to Hu Jintao, the so-called Third and Fourth Generation leadership -- Washington's overwhelming infatuation with bin Laden, al Qaeda and international jihadism began taking a more proportional position in the American global strategy. For China, this means the return of U.S. pressure.

The same factors that led to the downfall of the Qing Dynasty in 1911 are still inescapable today. China is showing classic symptoms apparent before the end of dynasties: the disruption of internal economic wealth, increasing gaps between rich and poor and between regions, the economic encroachment of outside powers and the undermining of the social contract with the state. The central government has lost its legitimacy after trading ideology for money that is now supplied from afar rather than from within.

The balance between the center, which seeks to pacify and stabilize the vast interior population, and the coastal periphery, whose economic and political interests lie in foreign trade and are therefore ultimately aligned more with foreign nations than the center of China, continues to create friction. The center, in order to maintain control of the interior, must take money from the periphery. Fears of issues of social stability lead the center to take action in the interior, which might be anathema to the interests of the coastal provinces.

China today has two economies: the import/export economy based in the densely populated coastal regions and the remains of the old Maoist SOE-based economy in the interior and the Northeastern "rust belt." FDI supports the import/export economy, while the central government must keep the SOEs afloat. In 2003, SOEs employed 375 million of 750 million workers and controlled 57 percent of the country's industrial assets. The SOEs are kept alive -- and at times bailed out -- by preferential bank loans, but the inefficient enterprises are giant capital vacuums, compounded by corruption and continued mismanagement.

Bad loans in China, most of which stem from lending to SOEs, have been estimated to reach as high as $500 billion -- by no less than the investment houses who have a vested interested in making this number appear as low as possible. That is not far off China's $609.9 billion -- as of Jan. 1, 2005 -- in foreign currency reserves. Beijing is constantly pulling from its own reserves to feed the state banks, which in turn feed the SOEs. Since 1999, Beijing has spent about $275 billion in asset transfers and bailouts in attempts to solve the bad loan problem. All such "fixes" have failed, since they do not require the SOEs to change their operating policies. The SOEs, in turn, feed the people who, under the communist system, came to expect -- and depend on -- the continued existence of a state-sponsored Iron Rice Bowl.

The coastal areas, where the import/export economy is based, received 87 percent of China's FDI in the last three years, but western China, which is home to many SOEs and farming operations, received only 3 percent of FDI in the same period. In these areas, where nearly a quarter of China's population lives, per capita income fell from 84 percent of the national average to 56 percent from 1980 to 1999.

The forces at work within China's SOE-based economy are preventing the country from capitalizing on its current growth and will eventually drain the energy from the import/export economy. Fearing the urban unemployed even more than the rural unemployed, since poor farmers at least have land and can feed themselves, Beijing is offering life support; but unemployment, which in 2002 was between 6.2 percent (official data) and 13.1 percent (estimated by a 2004 University of Michigan study), continues to rise. This triggers wave after wave of demonstrations and protests -- which have thus far been isolated incidents -- but the chances for coordination increase daily. And Beijing's only response will be repression, sending in troops to end by force whatever opposition it perceives, as it did at Tiananmen Square.

China recovered from Tiananmen not because of the continued crushing of the students and their supporters but through capitulation to the population, which resulted in the state taking a steadily decreasing role in the lives of the average Chinese. But this capitulation to the masses, while initially resulting in pacification, also has served to raise material expectations. Turning back is no longer an option. Beijing is, therefore, stuck. It options are limited and time is running out. The mandate of heaven, it appears, is being repealed.

Beijing knows the troubles it is in. The strains between the coast and the interior, the rich and poor and the north and the south are growing more and more tense, and Beijing's ability to maintain the system is fading. This is compounded by corruption, which not only drains government coffers but further de-legitimizes the Party.

China's leadership is presented with few options.

First, it can implement a sudden and swift overhaul of the entire economic system, similar to South Korea's actions following the 1997 economic crisis. This, however, would require a government characterized by lethargy and fear of social instability to make a sharp, painful and -- if done effectively -- relatively swift move. The massive social dislocation of such a move makes it untenable.

Second, Beijing could revert to the Deng and Jiang method of encouraging unabated and unequal growth at the expense of profit, occasionally trimming dead wood in SOEs, pumping money into the banks to recycle into the insolvent SOEs and thereby maintain the bare minimum of social stability to avoid significant unrest. Any small stirrings are met with crackdowns on social movements. This, however, only furthers the underlying structures that have rotted out China's economic expansion, and, in relying on the "Asian" model and the "Communist" model, it fails to address the true problems.

A third method is that being attempted by Jintao. This involves slowing growth a few percentage points, more closely regulating the economy from the center and trying to direct FDI into the worst of the SOE areas, namely the northeast. In the midst of this, Beijing seeks to take a million small steps toward addressing underlying weaknesses. This simply prolongs the pain -- even if regionally isolated -- and builds tensions between haves and have-nots. And it relies on foreigners' good will or poor judgment to invest in the worst of the Chinese state institutions. Ultimately, if social stability can be maintained (and this seems unlikely for long), China's best case is a sustained slump, reminiscent of the past few decades in Japan.

The fourth option is the "Mao" method: Close the country and economy and undertake a massive social restructuring. This is not really an option among the Chinese leadership, which has a vested interest in expanding trade with the outside world. It also would result in a loss of international power, at least for a decade or so. Without the ideological underpinnings that allowed Mao Tse-Tung's social revolutions, gaining any sense of national buy-in for another "Cultural Revolution" would be highly unlikely, and the opposition to such a path would be anything but quiet.

The first and fourth options appear untenable now and in the foreseeable future. The fight is not over closing the economy or keeping it open, but over the pace and scope of economic growth versus economic fundamentals. It is a core question of defining strength. While the "Hu" method has won out for now, if things start to bite -- and they likely will -- there will be a renewed push for the "Jiang" method, though whether China can entice others into a new "boom" too many times is unclear.

The government is challenged now to prove its legitimacy as the center of the nation. Under Mao, the underpinning was ideology and a sense of international embattlement. Under Deng and Jiang, that underpinning was the promise of money and material goods. China's rapid growth economy is very young, and tearing that promise away -- even in the name of market fundamentals -- is extremely dangerous. The only way South Korea managed it was to rely on a very close sense of ethnic nationalism and to put the blame for the pain on a non-state actor, the International Monetary Fund. China has neither the ethnic homogeneity nor pervasive sense of nationalism to ask for much self sacrifice, and the stresses on the system will continue to compound.

If China adheres to the World Trade Organization (WTO) accession agreement and opens its banking system in 2006, the SOEs will collapse, since China's banks would no longer able to funnel money to bail out non-performing companies. Strengthening the SOEs through reform creates massive new pools of unemployed labor, leaving even more disgruntled and disillusioned former state workers with no jobs and nowhere to turn. Ending bank lending to the state institutions creates hundreds of millions of new unemployed. A social cataclysm of that magnitude will tear the country apart -- or at minimum lead to the collapse of the Party and the government. Therefore, China will choose another path.

Beijing will want to prop up the SOEs as long as possible to buy time to convert them into productive members of China's economy. However, time is not on China's side; the country must open its economy before the SOEs can be converted. The center will want to forestall this as long as possible and is therefore unlikely to accede to its full obligations under the WTO agreement.

Beijing, then, will seek to mitigate the internal upheavals now apparent from the 1979 economic opening and reform the system. Mismanagement, rampant corruption and the combination of an Asian (growth-driven rather than profit-driven) and Communist (social control over profits) economy has left Beijing with few immediate solutions. If China slows its opening and reforms -- the most likely path, albeit done in a subtle Chinese way -- FDI will begin to dry as foreign investors shift away from China. When FDI dries up, growth in the import/export economy will slow down. When growth slows down, social stability issues will become more pronounced, since there will be less and less money to pump into the SOEs. Capital flight by Western investors already has begun, with Asian investors making up the difference, but they will be unable to sustain adequate levels for very long.

FDI decreases also factor into the rifts between the center and the periphery in somewhat unexpected ways. A decrease in FDI is what triggered the 1999 corruption crackdown. In 1999, FDI going into China decreased by more than 11 percent as a result of the Asian financial crisis. With less money coming into the country, the center tried to keep the SOEs afloat with money from the import/export economy. This was met with resistance in the periphery, and the center responded by moving in and taking what it wanted under the guise of a crackdown on corruption. In extreme cases, the periphery reacted violently; in others it simply took the money and ran.

China will struggle on through 2008. The Olympics are a powerful force, driving economics and providing a rallying point to keep divergent interests temporarily subdued. That will not last. Nationalistic entreaties playing off the Olympics, space programs and the like can do little to hold the disparate interests and factions together. Intentionally or not, the face of the Chinese Communist Party will shift in the years shortly following the Olympics.

The turmoil this will likely cause will lead to a loss of central control and a regionalization of power, as has often been seen in Chinese dynastic transitions, in which the country -- while nominally unified -- will in fact become a cluster of fiefdoms, effectively modern warlord states. The capital will have a national leader but the center's reach and influence will be at the mercy of the regions. In a place such as Afghanistan, this is called status quo; in China, warlordism -- only this time, there will be nuclear weapons in play.

As China's economy triggers social upheaval, other Asian states will look for different sources of strength and regional leadership. The alternative to China is Japan, and Japan is embarking on a more aggressive assertion of its leadership role in Asia and seeking to spread its influence and security sphere along its energy supply lines through the Indian Ocean to the Middle East. This process will continue through the decade.
John: There are of course differing opinions on this, and nobody's saying that everything will be happy from this point on. But, as far as I can see, their central argument doesn't even really hold water.

Quote:China recovered from Tiananmen not because of the continued crushing of the students and their supporters but through capitulation to the population, which resulted in the state taking a steadily decreasing role in the lives of the average Chinese. But this capitulation to the masses, while initially resulting in pacification, also has served to raise material expectations. Turning back is no longer an option. Beijing is, therefore, stuck. It options are limited and time is running out. The mandate of heaven, it appears, is being repealed.
Even if the Beijing regime has "traded ideology for money," that doesn't neccesarily mean that things are going to get much worse. Supposing growth does falter, and public resentment does build up to topple the regime. If people now are just interested in money, as this analysis seems to suggest, they'll have to simply put up another regime with similar policies.

There are several other reasons why this stratfor analysis doesn't contradict my basic notion of coming closer to China. The first is simply that (as they note) they are a minority view. I like to let the free market guide these sorts of things, and most of the money is still on them succeeding. Even if, as they say, recent numbers may be slightly inaccurate, that still only amounts to a small dent.

Secondly, this analysis asks who's going to have the most power, which is a slightly different question then who we should ally ourselves with. Our friends should have good governance principles, like free markets and democracy, and being successful is strong evidence that they have these princliples - but it's not the only evidence.

Finally, this is a decade forcast, which may not be long enough to see the true long-term nature of China's rise. Most of their predictions are on a few-years basis, and the longest time period that gets mentioned is 10-20 years. China's GDP growth has been at around 9% for forty years. I too have a little bit of trouble believing they'll be able to sustain that too much longer, but that still has a long way to go even to come down to our 3-3 1/2% range.

There are always risks with choosing friends and enemies. But as we think about our foreign policy during the war on terror, the sorts of risks China poses are not the ones we're the most worried about - I think this is a chance worth taking.
I don't see China as a definite opponent,but a possible one. What is their history like? Is it one of expansion like Russia's?

I don't know. I do know they aren't into Marxist literally anymore and we do have some things in common.

I think the Islamic states are a far more definite problem,whereas China is a maybe.
Quote:What is their history like? Is it one of expansion like Russia's?
They've definitely never had any aspirations of world dominance, like Russia, but I think they have had aspirations of regional dominance. The earliest example in modern history is Tibet, in the 1950's, which they've really only started to assimilate recently.

Nowadays of course, the issue is Taiwan. Taiwan is a functioning democracy, that they are hell bent on taking over - we don't know exactly how far they are willing to go towards this end, but they've been making some pretty serious threats. (I'm surprised Stratfor didn't mention this issue.)

I tend to think though that it's easier to resolve this problem by making China more democratic, then by repelling them from Taiwan. While they might be willing to work with us on the democracy angle, they see being kept out of Taiwan as actually an existential threat. Think of a US-Mexico situation, except in reverse, where the small group that refuses to accept the rule of law is much wealthier and better organized than the country as a whole.
So they monitor public opinion. Ofcourse they do they want to prevent uprisings. China does not respect human rights. China's economy growing could explain the reduction in atrocities but thats because when things are good less people complain not because there has been any progress.
b5d Wrote:They've definitely never had any aspirations of world dominance, like Russia, but I think they have had aspirations of regional dominance. The earliest example in modern history is Tibet, in the 1950's, which they've really only started to assimilate recently.

More important here is this. Do you think that the US has aspirations of world dominance? And if so, how so?
Dems4Bush Wrote:China's economy growing could explain the reduction in atrocities but thats because when things are good less people complain not because there has been any progress.
But, things are good. What other kind of progress should we be worrying about?

John L Wrote:More important here is this. Do you think that the US has aspirations of world dominance? And if so, how so?
Yes, probably. We're just better at it than everyone else 8)
b5d Wrote:
Dems4Bush Wrote:China's economy growing could explain the reduction in atrocities but thats because when things are good less people complain not because there has been any progress.
But, things are good. What other kind of progress should we be worrying about?

John L Wrote:More important here is this. Do you think that the US has aspirations of world dominance? And if so, how so?
Yes, probably. We're just better at it than everyone else 8)

You did not answer my "How SO" part. It is obvious that the US is not interested in physical dominance through occupation. If we were, we would still be in the Phillipines, and not pulling out of Europe. We would still be in Afghanistan in full force, and we would not be getting ready to withdraw from Iraq. Further, I don't see Kuwait or SA shouting about our occupational posture either.

So, again, How So?

It sounds more like you are proving Dr Shelby Steele correct about White Guilt. Did you bother to read his monumental essay?
John,

I think the USA tends to desire world dominance also. But,we see this as a benevolent move and we do not do it without the consent of the "parts" of the empire.

If Japan tells us to exit,we do,but while they don't,we and they work together to have dominance in Asia.
Well, there are kinds of dominance other than direct military control.

But I never said anything about this being bad. There's no white guilt or such here. In fact, my argument is that being allies with China will help us increase our dominance.
Palladin Wrote:John,

I think the USA tends to desire world dominance also. But,we see this as a benevolent move and we do not do it without the consent of the "parts" of the empire.

If Japan tells us to exit,we do,but while they don't,we and they work together to have dominance in Asia.

I was trying to get b5d to think here. I agree that we wish dominance, but in economic dominance only. That is where we are leaning. And in the process, others are pulled along with us economically. The entire world is better off, if it practices Free Enterprise, and it's citizens acquire new wealth.

That is what I was trying to get him, and you BTY, to acknowledge. Wink1