Reaching for a renaissance A special report on and its region March 31st 2007 Zhong Biao

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Reaching for a renaissance Also in this section

Smile diplomacy Working magic along China’s periphery. Page 4

History wars Whose stele is it? Page 5

The export juggernaut Good for China, but good for its neighbours too. Page 6

Grim tales The more growth, the more damage to the environment. Page 8

Can we help you? How China is wooing a poor neighbour. Page 10

Here comes trouble So far the world has come to China, but now a rising China is China’s little brother is a big headache. beginning to reach out to the world, starting with Asia, says Dominic Page 11 Ziegler. Is that a good thing? Heavenly dynasty HE China story since Deng Xiaoping think of it as a global one. Even if commer- Topened the country’s doors three de- cial and diplomatic tentacles stretch As long as China is not satised at home, it cades ago has by and large been one of dis- increasingly round the world, the main cannot be satised in the world. Page 13 covery by the outside world. The discov- site of China’s power, for decades to come, ery of cheap land and labour drew in more will be in its Asian backyard. than $500 billion of foreign money Go back ten years and Chinese ocials (mainly from Asia) that today drives bristled at the notion of a rising power. China’s export juggernaut; now foreign They had surviving reserves of insecurity rms are crawling over China’s domestic and cherished a historical sense of victim- market, hard to crack but perhaps lucrative hood. After a long twilight, Deng, the para- in places. Rather newer is the cultural dis- mount leader, had in February 1997 gone Acknowledgments covery by the West and by the richer parts to meet Marx, leaving the Chinese Com- The author wants to thank all those who gave generously of of Asia of a certain China chic: the lush, munist Party with unanswered questions their time and expertise in the preparation of this report. In addition to those named in the text, they include Nisha epic cinematography of Zhang Yimou; the about the stability of the third-genera- Agrawal, Bu Ping, Elizabeth Evans, Graham Fletcher, Hak hyper-hip nightlife of a reborn Shanghai; tion succession, led by President Jiang Ze- Sarom, Him Sarann, Bert Hofman, Hu Sheng-cheng, Hu and the Western infatuation with modern min. China was to get back in Zhengyue, Jean-François Huchet, Koichi Kato, Liu Jin- song, Lo Chih-cheng, Masayuki Masuda, Morio Matsumoto, Chinese art, whose prices now leave a cyn- July 1997, yet even as one small territory Pratap Bhanu Mehta, Satoshi Morimoto, Joseph Musso- ical smile on many a painter’s face. was coming back, , the great unn- meli, C.V. Ranganathan, Vaughn Rixon, Samdhong Lob- The world coming to China: the apogee ished business of China’s civil war, threat- sang Tenzin, Shen Jiru, Noriyuki Shikata, Sun Shihai, Tomohiko Taniguchi, Tempa Tsering, Tenzin Taklha, Thub- will come when it hosts the Olympics next ened to drift away in the direction of inde- ten Samphel, Tung Chen-yuan, Tim Wainwright, Jim year in , a capital now dotted with pendence. China’s bullying attempts to Walker, Joseph Wu Jaushieh, Xue Jun, Mitoji Yabunaka, signature buildings by the most fashion- stop the driftit had lobbed missiles into Yue Deming and Zhai Kun. able architects rushing to get nished in the seas around the islandhad met with a timefrom the Herzog & de Meuron sta- show of American force when President A list of sources is at dium resembling a bird’s nest to a tita- Bill Clinton dispatched two aircraft-carrier www.economist.com/specialreports nium-and-glass opera house (the world’s groups. Hawkish Western circles were de- largest, naturally) by Paul Andreu. bating how best to contain China. An audio interview with the author is at But a more potent story that is only just In this atmosphere China’s ruling www.economist.com/audio starting to be articulated is that China is go- establishmentin many areas narrow, ing out to the world. Indeed, China is ris- prickly and distrustful of the outside A country brieng on China is at ingsome say has already risento be- worldplayed down China’s power. At www.economist.com/china come the newest great power. Do not yet the time an assistant foreign minister de-1 2 A special report on China and its region The Economist March 31st 2007

2 livered a stinging lecture to your corre- to a golden age when poetry, painting, spondent. The Economist, he said, was ex- Coming up in the world 1 clothes, music and drama ourished?’ aggerating China’s economic develop- Share of world GDP*, % of total China’s economic rise is certainly im- ment, leading people to conclude that the pressive. The economy’s growthan aver- 30 rise of China will inevitably unbalance the EU age of 10% a year since 1990is not really region. Such arguments don’t hold water. 25 more remarkable than the earlier rise of China is not any kind of power. It is not at other Asian economies, led by , but present. And it will not be one in future. United States 20 there is a dierence: the huge size of Times change. The favourite reading at Rest of 15 China’s population, at 1.3 billion. In 2005 the moment among a younger, more cos- Asia China China overtook Japan in the volume of 10 mopolitan generation of Chinese dip- Japan trade it conducts. Depending on how you lomats is Power Shift, a collection of es- 5 measure size and guess at future growth says by mainly American-based academ- rates, it may overtake both Germany and 0 ics. Its premise is that the tectonic plates † Japan within 15 years to become the that have dened Asia for the past half- 1980 85 90 95 2000 06 world’s second-biggest economy. Mea- Source: IMF *At purchasing-power parity †Estimate century are moving, and that China is the sured at purchasing-power parity, China’s chief agent of change as it resumes its his- share of the world economy is already torical role as Asia’s central actor. Gone, achieve their goals using three means: co- much closer to the rich countries’ (see largely, are China’s fears of encirclement. ercion, material inducement or intellec- chart 1). But bear in mind that the average Impossible! a senior Chinese diplomat tual motivation. Put more bluntly, that Chinese income remains low. If China is laughs. China is now far too powerful to means guns, money and ideas. How on its way to becoming a superpower, it be contained. One of Deng Xiaoping’s te- China blends the three, and how the rest of will be the world’s poorest one yet. netsthat the country should, as a Chinese the world perceives the process, will more Opinion polls suggest that the vast ma- saying has it, disguise its ambition and than anything shape the future course of jority of Chinese see their rise as nothing hide its clawsseems to have been buried. Asia and beyond. that should trouble others. For many of But what kind of power is China be- them it merely marks a return to historical coming? Some Western hawks nd it un- Velvet glove or mailed st? norms. Angus Maddison, an economic settling that this is even being debated America, more than most countries, sees historian at the University of Groningen, within China, but it is better to talk about it Chinese power as coercive. In late Febru- has estimated that between 1600 and the than not. ary Vice-President Dick Cheney on a visit early 19th century China accounted for be- Only once a decade or so does a piece to became the most senior ad- tween a quarter and a third of global out- of television programming break through ministration ocial to express grave con- put (see chart 2). At that time China’s agri- the variety shows and the propaganda to cern about China’s military build-up. The culture was more advanced than the capture China’s attention. A hugely popu- military budget has been growing at dou- West’s, its cities bigger and more literate lar 12-part series on China Central Televi- ble-digit rates for years, with an 18% rise and its ruling classes more meritocratic. sion has just done so, showing how nine planned for this year. The People’s Libera- The country had also proved itself capable countries rose to prominence, beginning tion Army is coy in the extreme about its of long-distance exploration by sea. An- with Portugal in the 15th century and end- capabilities and intentions, but in January other historian, Niall Ferguson, reckons ing with the United States in the 20th. The a missile had been sent into space to de- that what went so spectacularly wrong for conclusion, as bets state television, de- stroy an old weather satellite. China’ s mil- China then is more remarkable and wor- livers an explicit political message, but one itary policies, Mr Cheney said, were at thy of investigation than why things that may surprise outsiders. In nding odds with the country’s stated peaceful should now be going right. plenty of lessons to learn from, the series aimssuggesting perhaps that he did not But what is the nature of China’s rising attaches greater importance to social sta- really believe in those aims. economic power now? There is room for bility and peaceful foreign relations than For now, though, it is clear that Presi- misperceptions. Policymakers in Washing-1 to jingoism and brute military strength. dent Hu Jintao and the rest of the Chinese Indeed, a propos of the television se- fourth-generation leadership are seek- ries, the same senior Chinese diplomat ing to soothe neighbourseven Tai- A once and future giant 2 mentioned earlier argued energetically wanby emphasising money and ideas China’s share of world GDP*, % that pacist Japan’s post-war rise was a over guns. As the next article will explain, model of good-neighbourliness that this policy has had a transformational ef- 40 China itself could usefully emulate. That is fect on China’s relations in much of Asia, intriguing. Much of the present bad blood mostly for the better. 30 between China and Japan has to do with Yet suspicions remain. Mr Hu may have China’s constant harping on Japan’s brutal embraced the notion of China’s peaceful 20 deeds in the rst half of the 20th century rise, rst advanced by Chinese academics while glossing over its positive regional in 2003, yet even the phrase itself is unset- 10 inuence in the second half. tling. As Lee Kuan Yew, ’s former In a forthcoming book about China, prime minister and now its minister men- 0 David Lampton of the School of Advanced tor, puts it: ‘Peaceful rise’ is a contradic- 1600 1700 1820 1870 1913 1950 1973 1998 2006† International Studies at Johns Hopkins tion in terms. I told China’s leaders that. I Sources: “The World Economy” *At purchasing -power parity by Angus Maddison; IMF †Estimate University argues that nations dene and said: ‘Why not call it a renaissance, a return The Economist March 31st 2007 A special report on China and its region 3

2 ton, DC, are alarmed by China’s export cording to a recent report by the Institute strength and its ballooning trade surplus. A familiar tale... 3 for Public Policy Research in London, China is lambasted for having mercantilist China’s FDI inflows, $bn China has become Africa’s third-biggest policies that articially boost exports, de- trading partner after America and France. press the Chinese currency, restrict im- 70 China is also increasingly investing in ports and widen America’s trade and cur- 60 the rich world. To some Americans, in par- rent-account decits. 50 ticular, this is distasteful. In 2005, citing na- In several respects that view is wrong. tional-security concerns, Congress suc- 40 With a trade-to-GDP ratio of around 70% ceeded in thwarting the $19 billion bid by and a sea of foreign investment, China is 30 China National Oshore Oil Corporation one of the world’s most open economies. 20 (CNOOC) for Unocal, an American oil ma- Much of the growth in America’s bilateral 10 jor with reserves in Asia. Competing re- decit with China reects a shift in low- source companies from the West often cost manufacturing from other parts of 0 claim that Chinese companies outbid 1983 90 95 2000 06 Asia to the Chinese mainland. Certainly them in third markets, using cheap, state- China’s currency is undervalued, having Source: China’s Bureau of Statistics; UNCTAD subsidised funds. Yet in growing numbers followed the dollar down since 2002. But of countries, rich and poor, the Chinese that is reinforcing inationary pressures, world’s natural riches. In the 19th century presence is welcomed for bringing jobs, particularly in wages, so China’s advan- hundreds of thousands of cooliesinden- cash and infrastructure. tage as always the lowest-cost producer tured workers lured by Chinese and West- Australia has received more Chinese in- can no longer be taken for granted. ern recruiters using a greater or lesser de- vestment than most Western countries, America’s emphasis on exports misses gree of deceptiontoiled in some of the much of it in mining. It is criticised in the point about China’s economic power. world’s worst hellholes: the guano depos- America and Europe for cosying up to a That power comes not so much from being its of Peru, the canebrakes of Cuba or the dictatorship. We’re also strong on the hu- a seller of things but increasingly from be- gold mines of South Africa. Now the Chi- man-rights front, an Australian diplomat ing a buyer, an investor and a provider of nese are back in some of the same parts of says in defence. But there’s stu to be aid, in Asia and beyond. One Chinese dip- the world. The dierence this time is that done in the meantime. When a senior Ca- lomat puts it thus: Imports: that’s real di- Chinese capital, usually state-owned, nadian ocial is asked what conclusions plomacy, because it means you’re attrac- stands behind them. Chinese resource companies should draw tive to others. It means other countries from CNOOC’s experience, he replies in- need you, not that you need them. This Trying to charm stantly: Come to Canada. subtle understanding sets China in stark One of the advantages of state-led de- China’s rise is a global phenomenon, contrast to how Japan viewed the world velopment is that China can entice coun- but the rest of this special report will con- during its post-war rise. tries with packages of corporate invest- centrate on its relations with Asia. After all, With this new kind of power, the econ- ment, cheap loans and other aid goodies. the region is on its doorstep. If we can’t get omic and geopolitical sides are ever more This way China has rapidly acquired inter- respect in Asia, says a Chinese policy- intertwined. China’s presence as a com- ests and inuence across swathes of maker, we can’t get on in the world. If we mercial force is rapidly being felt around South-East Asia, Africa and Central Asia. can’t have a peaceful and prosperous back- the world, through its growing invest- China’s outward foreign direct investment yard, then there can’t be any rise of China. ments overseas and through an appar- more than quintupled in the rst half of In vying for inuence in Asia, China ently insatiable hunger for resources to the decade, to $11.3 billion in 2005, and has many competitors. They include , fuel the industrial revolution at home. The will have risen sharply since. Once a big rising in its idiosyncratic way; Japan, seek- shock troops of this force are there to see in aid recipient, China hosted a summit of 48 ing a more robust foreign policy in the face China’s main airports: planeloads of oil- African leaders in Beijing last November, of China’s rise; Russia, a resource giant, drillers, pipe-layers and construction promising $5.5 billion in aid for Africa. Ac- even if a diplomatic minnow in Asia; the workers, in company overalls and hard ten countries that make up the Association hats, o to work on oil rigs or build ports, of South-East Asian Nations (ASEAN); highways or railways in South-East Asia, ...and a newer one 4 andstill the top dog even if distracted in Africa, Latin America or the Middle East. China’s FDI outflows, $bn the Middle EastAmerica. Chinese workers are also moving into It is in Asia that America risks falling other countries in less formal ways. In the 12 prey to a nal misperception. As Mr Lamp- northern birch forests of Mongolia, uno- 10 ton points out, just as Americans overstate cial groups of them are cutting down trees 8 China’s export prowess as a source of for chopsticks. In poor northern , economic power, so they underestimate thousands of Chinese labourers have 6 China’s intellectual, cultural and dip- come across from neighbouring Yunnan to 4 lomatic inuence. If policymakers view grow corn and sugarcane for export back 2 China’s power in substantially coercive to China; traditional slash-and-burn agri- + terms when it is actually growing most 0 culture is giving way to polytunnels and – rapidly in the economic and intellectual large-scale market gardening. 2 1983 90 95 2000 05 domains, he writes, they will be playing This is not the rst time that mainland the wrong game, on the wrong eld, with Chinese have fanned out to work the Source: UNCTAD the wrong team. 7 4 A special report on China and its region The Economist March 31st 2007

Smile diplomacy

Working magic along China’s periphery

HE Chinese government calls itpick great swathe of the South China Sea As Chinese diplomats tell it, the Asian Tyour phrasea harmonised world or stretching down almost to the coast of Bor- nancial crisis of 1997-98 was a watershed. a new security concept, but Shi Yinhong neo. That set it against rival claimants to Around Asia, currencies and stockmarkets of the People’s University in Beijing ex- some or all of it: Vietnam, , the were buckling as foreign and domestic presses it more felicitously: smile di- and Brunei, as well as Taiwan. capital ed. The crisis threatened to spread plomacy. Whatever it is called, the calcu- As recently as 1995, China alarmed its to China. Yet if China devalued, a further lus behind it is simple, if not usually spelt neighbours when its armed forces occu- round of competitive devaluations across out. Without encouraging peace and pros- pied one of the larger specks of rock, aptly Asia would redouble the turmoil. perity around China’s long borders there named Mischief Reef, that formed part of China had every reason not to want a will be no peace and prosperity at home. the Spratly Islands (around which large oil devaluation, which would have imper- And without peaceful development at deposits are reckoned to lie). China has oc- illed a dire banking system and might even home the Chinese Communist Party is cupied the Paracel Islands, disputed with have brought down China’s autocracy. toast. This calculus has become increas- Vietnam, since a bloody skirmish in 1974. The regime also had the means easily to re- ingly important over the past decade and sist one. By standing rm, then, it was do- may well apply for decades more yet. Mutual engagement ing itself a favour. But that action, and the China’s smile diplomacy would have Yet now China has applied balm to old aid and loans that China oered to other had fewer chances of working without the sores, particularly in South-East Asia. Per- countries, helped ease the crisis. China de- economic forces of globalisation drawing haps, as David Shambaugh argues in veloped a taste for getting respect. much of East and South-East Asia closer to Power Shift, the opening came after the Ties with South-East Asia have swiftly it (see next article). All the same, the trans- Tiananmen Square massacre in 1989, evolved since. Indeed, many of the under- formation is astonishing. Just two decades when Asian neighbours (except, partly, Ja- standings that have governed relations ago China had no diplomatic relations pan) failed to join the rest of the world in among the ten members of ASEANin with , Singapore and Indone- ostracising China. Instead, though critical particular, non-interference in each other’s sia, among others. On the Korean penin- of the regime in Beijing, Singapore’s then aairsare dear to China’s heart. In its sula, the government in Seoul eyed China prime minister, Lee Kuan Yew, led a South- dealings with ASEAN, the key events came warily for being North Korea’s chief East Asian push to engage China. earlier this decade. China undertook for-1 backer. In South-East Asia suspicions of China ran high, thanks in big part to at- tempts under Mao Zedong to export leftist revolution and stir up overseas Chinese communities against their rulers. As for Vietnam, which for much of its history was a vassal of China, it was still smarting from a border war in 1979 launched (with American blessing) to teach Vietnam a lesson for unseating the genocidal (China-backed) Khmer Rouge regime next door in . Towards Japan, China used a sense of victimhood to play upon Japanese war guilt in order to extract more aid from its rich neighbour. Relations with the Soviet Union were only just starting to thaw after a long fall- ing-out between the two former allies that had included border skirmishes along the Amur in 1973; at the peak, 1.5m troops were ranged along both sides of the 7,000-kilo- metre (4,400-mile) border. In the Himala- yas, tensions had recently risen again in China’s border dispute with India which in 1962 had spawned a high-altitude war. As well as border disputes on land, China pursued maritime and island claims with Japan, and also laid claim to a The Economist March 31st 2007 A special report on China and its region 5

2 mally to settle its territorial disputes with Lastly, China boldly proposed a China- with ChinaRussia, Kazakhstan, Kyrgyz- ASEAN members not by force but through ASEAN free-trade area (FTA), which was stan and Tajikistanwas formed to resolve collective mechanisms for conict resolu- agreed on in 2002 and will be imple- remaining border issues, reduce military tion. And it became the rst non-member mented in stages (with safeguards for tensions and build condence. In 2001 the to sign up to ASEAN’s Treaty of Amity and ASEAN’s poorer members) up to 2015. The grouping became the Shanghai Co-opera- Co-operation, an undertaking never to use deal has done much to reassure South-East tion Organisation (SCO), which Uzbeki- force against its members for any reason. Asia that China’s rise will not come at the stan also joined. (India, South Korea, Japan and expense of the region’s prosperity. In South Asia, an unprecedented de- have since also signed.) Thus the risk of In the mid-1990s China moved to ease velopment in recent years has been huge hostilities in the South China Sea, which in tensions with its land neighbours. The Chinese road and rail projects that will the 1990s was seen as a spark for a broader Shanghai Five grouping with the former eventually link the country’s remote west- conagration, has greatly receded. Soviet Union countries that share borders ern regions with the Arabian Sea (at the1

History wars Whose stele is it?

USHING up through the late-winter Psnows on a hill above Manchuria’s Tu- men river are scatterings of old burial mounds. For centuries these tombs and others like them attracted little attention. Now they are at the heart of a bitter inter- national tussle that has, for once, united North and South Korea against China. The tombs are the work of the Kogu- ryo kingdom (Gaogouli in Chinese) that ourished between 37BC and 668AD. At its height, Koguryo territory stretched all the way from central Manchuria (north- Koguryo’s bones of contention east China) to south of present-day Seoul. At Koguryo’s former capital, near Ji’an in South Korean historians have taken to sion of the date, or the statement that Ko- China’s Jilin province, a magnicent stele the streets, demonstrating against Chi- joson was established by Tangun, a praises the deeds of a fth-century king. nese ones. South and North Korea tried to mythical demi-god. For every Korean schoolchild, Kogu- block Chinese attempts to have Koguryo China’s version of the past has every- ryo was one of Korea’s three founding monuments (as well as Mount Paektu) thing to do with its present territory and kingdoms. At the heart of the kingdom, listed by UNESCO as a world heritage site. borders. In Japan Focus, an online jour- Mount Paektu, which today spans the The South Korean government has chal- nal, Yonson Ahn of the University of Chinese border with North Korea, is con- lenged the legitimacy of the 1909 Kando Leipzig calls it China’s territorialisation sidered to be the fount of Korean culture convention in which imperial Japan, of history. But why should it suddenly and myth: indeed, Kim Jong Il’s ocial which had just annexed Korea, gave matter so much now, in this bleak corner biography insists that the North Korean China a chunk of Korean Manchuria in re- of the country? For the answer, look to leader was born on its slopes. turn for concessions. This year, at the North Korea. Should the regime of Kim Even a short stay in South Korea im- winter Asian games in north-east China, Jong Il collapse and the two Koreas be presses on the visitor that the matter of South Korean skaters held up signs which unied, then China’s own 2.2m ethnic Ko- Korea’s bloodlines is not to be messed read: Mount Paektu is our territory. reans might agitate to come into the fold with. Yet in 2002 Beijing’s Centre for the China wants to hold the 2018 winter and other supposedly happy minority Study of Borderland History and Geogra- Olympic games on its slopes. nationalities, such as Tibetans and Ui- phy launched a project that reinforces In February the South Korean govern- ghurs, might also get dgety. what a growing number of Chinese his- ment said it planned to revise high-school When your correspondent asked his torians have been scientically insist- books to trace Korea’s ancient history ethnic Korean guide to the tombs which ing, despite sparse archaeological back by 1,000 years more than hitherto. country he loved, the answer was quick evidence: that the Koguryo kingdom The Kojoson kingdom, the new books and unequivocal: China, of course! That shared its lineage and culture with the say, began in 2333BC, deftly outmanoeu- is where I was born. When asked which Chinese, and was eventually absorbed vring China’s claims on the younger Ko- country his home town should be in if into the Chinese body politic. Koguryo, in guryo, which covers much of the same the peninsula were ever to be united, the short, was not Korean but Chinese. territory. Never mind the spurious preci- answer was equally rm: Korea. 6 A special report on China and its region The Economist March 31st 2007

2 Pakistani port of Gwadar) and its south- of summit meetings, including ASEAN engagement are becoming ever more obvi- western regions with the Bay of Bengal, plus one (ie, ASEAN and China), ASEAN ous. Relatively stable relations with its via . Ever closer strategic (and plus three (China, Japan and South Korea) neighbours act as protection against vola- military) co-operation between China and and the Asia-Pacic Economic Co-opera- tility in relations with the United States Pakistan, you would expect, might alarm tion (APEC, the only trade forum embrac- particularly as that superpower is absent India. Yet relations between India and ing both sides of the Pacic). On sunny from many of the groupings. China’s stock China have warmed. Annual trade is now Hainan island, China itself hosts the Boao and inuence is undeniably on the rise. In worth $25 billionstill modest, but a big Forum, which it wants to become an Asian January, at the second East Asian Summit leap in recent years. India’s nuclear test in version of the Davos World Economic Fo- of 16 Asian nations held in the Philippines, 1998 angered the Chinese; some Indian rum. And some policymakers in Beijing the country’s president, Gloria Macapagal politicians had suggested that the nuclear even want to turn the six-party talks Arroyo, declared, without any Orwellian deterrent had been developed with China hosted by China (with the United States, irony: We are happy to have China as our in mind. However, since the visit to Beijing South Korea, North Korea, Japan and Rus- big brother. in 2003 of India’s then prime minister, Atal sia) launched in 2003 to get North Korea to Yet whereas Chinese policymakers see Behari Vajpayee, relations have been on a dismantle its nuclear weapons into a these growing webs of interdependency more cordial footing. broader north-east Asian security forum. as a way to ease their country’s rise, some There is even some prospect of resolv- Other groupings are gaining heft. In neighbours see them also as a constraint ing what is almost China’s last remaining particular, the ASEAN Regional Forum, on the giant among them. Despite a wari- and massiveborder dispute (one with with more than two dozen participants ness of China, which has its roots in the tiny Bhutan also remains). India appears (including the United States and the Euro- past, says Rodolfo Severino, a former Phil- to have concluded that better relations pean Union) has become the principal ippine foreign minister and secretary-gen- with China will act as a constraint on platform for discussing security issues in eral of ASEAN, South-East Asia’s only China’s support for Pakistan, India’s old the Asia-Pacic region. The SCO has choice has been to engage China. Its rapid foe. The strengthening of a growing strate- evolved to embrace issues such as drug- economic advances awe people, who see gic partnership between India and the Un- smuggling, energy and now economic co- this big presence in their midst. Yet this ar- ited States might also further push China operation in Central Asia. Zhou Li, direc- gues for viewing China not with concern towards co-operation with India. tor-general of European and Central Asian but with a sense of caution. And if you ask aairs at China’s foreign ministry, says whether the process of engagement has Ties that bind there is a possibility that India, Mongolia had the eect of ‘socialising’ China, the an- Through its dealings with neighbours, and others will be invited to join. But ght- swer is certainly yes. China has been drawn into a cat’s cradle of ing what China calls terrorism, separat- Smile diplomacy, then, is working, but regional and sub-regional co-operation. It ism and extremism remains a central pur- not everywhere. Later, this special report has shed its deeply held reluctance to get pose of the SCO. Ethnic Uighurs from will look at north-east Asia, where a di- involved in multilateral groupings. Indeed, western Xinjiang province have long vided Korean peninsula, historical and ter- Hu Jintao, the president, Wen Jiabao, the chafed at Chinese rule, and many have ritorial tensions between China and Japan prime minister, and other leaders seem at ed to Central Asian states. and the uncertain future of Taiwan suggest times to be doing an interminable round For China, the broader advantages of that the cold war simmers on. 7 The export juggernaut

Good for China, but good for its neighbours too

HEN China joined the World Trade come the world’s third-largest exporter, nal assembly from other parts of Asia WOrganisation (WTO) in 2001, many behind America and Germany. , Malaysia, Singapore, the Philip- developing neighbours felt more than a But foreign investment has grown else- pines and , as well as richer Tai- twinge of discomfort. With China already where too. The ten ASEAN countries saw a wan and South Korea. The eect of WTO an export juggernaut, they feared that the record $37 billion of investment in 2005. membership, in other words, has been to dismantling of tari and other barriers For some manufacturers, South-East Asia bind China more tightly into existing and that went with WTO membership would (or India) serves as a hedge against some- highly sophisticated pan-Asian produc- make the country irresistible to manufac- thing going wrong in their China opera- tion networks, a task greatly facilitated by turers, diverting foreign direct investment tionsbe it social unrest, economic pro- the internet. Everybody has beneted, that might otherwise have gone to them. blems or a business climate that turns even rich Japan, which in 2002-03 was This appears not to have happened. against foreign investment. pulled out of a decade and a half’s slump Certainly, foreign investment in China has But much investment outside China is by Chinese demand for top-notch compo- increased, as have China’s already heady in fact contingent on the China boom. So nents and capital goods. South-East Asia exports, which since 2003 have been supercharged has the Chinese export has got a further boost: rich in resources, growing at their fastest pace since the early machine become that it has sucked in vast including rubber, crude oil, palm oil and 1990s. In 2004 China overtook Japan to be- quantities of parts and components for - natural gas, it looks likely to prot from1 The Economist March 31st 2007 A special report on China and its region 7

2 China’s appetite for raw materials for a fths of exports assembled from imported long time to come. parts and components and nearly nine- Trade within East Asia has grown even tenths of the high-tech stu. China’s ex- faster than the region’s trade with the rest port model, then, still consists in big mea- of the world, suggesting deeper specialisa- sure of renting out cheap labour and land tion and integration. But China’s impetus to foreigners. Even China’s most successful has also profoundly altered the course of domestic computer rm, Lenovo, which trade ows in Asia. As a paper last year by acquired IBM’s personal-computer busi- the Centre d’Etudes Prospectives et d’In- ness in 2004, contracts its production out formations Internationales (CEPII) in Paris to Taiwanese companies. describes, the China eect over the past Yet the model may already be chang- decade or more has been the driving force ing. Home-grown exporters, especially pri- behind a shift in Japan from exporting n- vately owned ones, are honing their skills ished goods to Europe and North America in China’s cut-throat markets. Huawei, a te- towards exporting parts and components lecoms company, already supplies hand- for assembly on the mainland. In turn, Ja- sets to Vodafone, the world’s biggest mo- pan now imports nished goods (such as bile operator. Bo Xilai, China’s commerce oce machines and computers) from minister, promises vigorous support for China where previously they came from his country’s native car industry, which America and Europe. Mulling a new export model has leapt from nowhere to capture a quar- For South Korea, Taiwan, Hong Kong ter of the domestic market and is now and Singapore, trade has also turned from puter brands, such as Dell, Apple and HP, poised to start exporting small, cheap cars. the rich world towards China. For Hong outsource their production and, increas- Kong, Taiwan and this year probably even ingly, much of their design and innova- Not the bargain it was Japan, China is the biggest trading partner. tion. At the start of this decade less than 5% The next question is whether more of the In China, according to the CEPII paper, of these rms’ laptop production was on foreign-owned production networks that the processing and assembly of imported the mainland. Since 2001, when the Tai- currently span Asia will be moved to parts and components now accounts for wanese government lifted restrictions pre- China. There is some anecdotal evidence more than half of all exports. China’s venting laptop-makers from investing in that this is happening, though statisticians growing trade surplus, it argues, is ex- China, they have shifted virtually all of cannot yet put their ngers on it. plained entirely by this kind of assembly. their production there. Thanks to much A more identiable trend is working in William Fung, managing director of Li & lower labour and land costs, each machine the opposite direction. As the World Fung, a Hong Kong company that leads the costs $20-30 less to make. Bank’s country director for China, David eld in nding suppliers and managing A surge in high-tech exports (in 2005, Dollar, points out, wages in China are now supply chains for Western retailers and telecoms equipment, electronics and com- rising two or three times faster than in brands, uses a talking toy as an example: puters accounted for 43% of China’s ex- other low-wage Asian economies, and the plush fabric was made in Korea and the ports by value) might look like a leap up companies are having problems keeping voice chip in Taiwan, and the nal assem- the value chain. Yet assembling many talented sta. Encouraged by the govern- bly was done in Shanghai. high-tech products is not that dierent ment, companies are moving further in- Toys are mostly relatively simple from making Mr Fung’s talking toy. Mr land to take advantage of cheaper labour. things. But China has recently recorded Lardy argues that a better label might be Yet the further inland they go, the less phenomenal growth in exports of high- mass-market commodities: after all, the skilled the employees and the higher the tech products too, principally notebook laptops are simply assembled from foreign transport costs to market. and desktop computers, DVD players, mo- components. As CEQ points out, most of Along China’s eastern seaboard, where bile phones and the like. Nicholas Lardy of the rms involved are foreign, accounting most of the manufacturing for export takes the Institute for International Economics for three-fths of all Chinese exports, four- place, total monthly pay averages $250-1 notes in a new book, China: the Balance Sheet, that between 1998 and 2004 Amer- 5 ican imports of Chinese laptops jumped What a difference ten years make from $5m to $7.7 billion and display units China’s exports, % of total from $860,000 to $4.9 billion. Some now 1996 2006 ask whether China is vaulting up the tech- Hong Kong United nology ladder or even threatening Ameri- 21.8 Japan 20.4 States 21.0 EU 18.8 can national security. These concerns are grossly overblown. Total: Total: United A recent edition of the China Economic Other $151.2bn $969.2bn Hong Kong 15.5 States Other Quarterly (CEQ) looked at the top exporters 17.7 23.1 16.0 among foreign companies that had set up Taiwan 1.9 Japan 9.5 EU 13.1 in China. In 2004 eight of the top ten were Britain 2.1 Taiwan 2.1 South Korea 4.6 Taiwanese electronics companiesknown Singapore 2.5 Singapore 2.4 as original design manufacturers South Korea 5.0 Britain 2.5 Source: National statistics (ODMs)to which the world’s top com- 8 A special report on China and its region The Economist March 31st 2007

2 350. Some parts of Thailand have higher and Japanese assembly plants are spring- average wages in manufacturing, but else- Why the “China price” is eroding 6 ing up among the paddy elds to take ad- where in that country, as well as in the Terms of trade, 1993=100 vantage of the country’s low wages. Ex- Philippines and Indonesia, manufacturing traordinarily cheap jeans recently sold by 140 wages are $100-200 a month. Two decades Unit value Tesco, Britain’s biggest supermarket chain, ago all export-sector wages in these coun- Unit value of imports were made from Chinese fabric stitched tries were higher than in China. of exports 120 together in . Yet in much of de- So some argue that in many sectors the veloping Asia the starting point needs to era of the China priceexporters being 100 be to make up for past omissions: opening able to oer the world’s cheapest goods up to trade, creating a favourable climate will soon have run its course. CEPII high- 80 for investment and ensuring an adequate Terms of trade lights how the terms of trade have worked infrastructure for manufacturing. Mr Dol- 60 against China. Between 1995 and 2004, it 1993 95 97 99 2001 03 04 lar argues that success will be determined nds, China’s export prices rose by 4% Source: “China’s Emergence and the Reorganisation of Trade more at the local than at the national level. whereas imports rose by 38%, a total deteri- Flows in Asia” by Guillaume Gaulier, Françoise Lemoine and After all, China’s industrial revolution oration in China’s terms of trade of 24% Deniz Unal-Kesenci nearly 30 years ago began in a small hand- (see chart 6). Today exporters enjoy more ful of experimenting cities. of the benet of an undervalued ren- design more specialised. Last year Amer- minbi. Yet as CEQ points out, brow-beating ica’s Intel greatly expanded its research fa- Consumers galore by an American government concerned cilities in Malaysia that design micropro- Moreover, China’s exports have to be put about its bilateral trade decit with China cessors, motherboards and chipsets. A in context. Though very open to trade, suggests that the exchange rate is likely to number of high-tech rms, particularly China’s economy, like America’s, is essen- rise in future. It has already gone up by 6% Japanese ones, are wary of putting such tially driven by its own huge domestic de- since 2005. centres in China, fearing that their best de- mand. This demand is now growing at a Yet even for some of the cheapest sign work will get pirated. But for countries clip of 9% a year and starting to act as a re- goods, productivity increases have more such as Taiwan that are losing their manu- gional engine of growth, sucking in im- than oset a deterioration in the terms of facturing to China, the emphasis should be ports. The World Bank forecasts that this trade. A new paper by sta at America’s on fostering competition in the service will be the rst year in which China’s im- Federal Reserve points out that between industries that now account for the bulk of ports will be growing by more than Amer- 1989 and 2005 China increased its share of the economy. Hong Deshang of the Tai- ica’s, becoming the biggest source of im- exports to America in 41 industries, among wan Institute for Economic Research says port growth in the world. Goldman Sachs, them clothing and shoes. It is too early to that his country’s future should be in re- an investment bank, reckons that China’s write o China’s export machine, even at search and development, design, brand- imports for domestic use are now roughly the cheap end. ing, nancing and logistics. the same as those used in assembling ex- Either way, the consequences for For poorer countries, says Mr Dollar, ports, whereas ve years ago they were China’s neighbours depend on where- China’s rise opens up opportunities. Viet- only half as big. Much of what is imported abouts on the manufacturing ladder they nam, which recently joined the WTO, is al- is in the form of raw materialsoil, copper, are. For those increasingly competing with ready a beneciary, with annual growth gas, timberto feed the China boom. The China, the challenge is to make their accelerating to nearly 8%; on the plain be- next article will look at the environmental manufacturing more sophisticated or their tween Hanoi and the coast, South Korean implications of that boom. 7 Grim tales

The more growth, the more damage to the environment

HESE days, says Pan Yue, China’s attempted a cover-up, but the city of Har- build a dam and divert the upper reaches Tdeputy minister for the environ- bin was forced to shut down its water sup- of the Brahmaputra to dry parts of north- ment, most Chinese missions go abroad ply. With Russia downstream, the spill be- western China, though a Chinese special- to talk about securing energy, whereas came an international incident. ist on South Asia says that engineers con- most foreign missions come to China to In South-East Asia, China’s plan to dou- sider the plan unfeasible. talk about our environmental impact. It’s a ble hydropower by 2010 is causing con- As for airborne troubles, South Korea paradoxical diplomacy. cern. Several large rivers that run through and Japan both suer from sandstorms ex- For China’s neighbours, the country the regionthe Salween, the Irrawaddy acerbated by desertication in China. The poses an environmental threat on several and the Mekong, among othershave country is also the world’s biggest emitter levels. In late 2005 an explosion at a chemi- their source in , and dams in China al- of sulphur dioxide. The resulting acid rain cal plant in north-eastern Jilin province ready diminish their ow. In India, policy- is damaging Korean and Japanese forests. sent a slick of toxic benzene 80km long makers and environmentalists are Even Japanese shermen are aected by into the Songhua River. Local authorities alarmed at reported plans by China to China’s pollution: giant Nomura’s jelly-1 The Economist March 31st 2007 A special report on China and its region 9

2 sh, which spawn o the Chinese coast before drifting towards northern Japan, spoil catches of salmon and yellowtail and break nets and gear. Some of the recent huge increase in their numbers is thought to have been caused by nutrient-rich run- o (on which the larvae feed) from farms and industry in China. Even when China takes steps to deal with environmental challenges, neigh- bours can feel unintended consequences. In 1998 the then prime minister, Zhu Rongji, imposed a total logging ban after oods in southern China that had been ex- acerbated by deforestation. The ban has been remarkably well enforced and forest cover in China is increasing, albeit of a monoculture of Chinese red pine rather than of mixed native species. Yet with Chi- A dark mountain of worries nese demand for timber unmet, one out- come of the ban has been increased forest use, and there is enough for at least an- of all carbon credits traded under Kyoto’s destruction in West Africa, Indonesia, Pa- other century. clean development mechanism for de- pua New Guinea, Myanmar, Laos and It is both a blessing and a curse. China is veloping countries. Cambodia (see the next article). breaking new ground liquefying coal to One reason for hope is that China’s make oil substitutes, which may in the leaders appear to understand the scale of Bye, bye bicycle long run help change its energy mix. Yet the environmental problem. In the govern- The rate at which China uses up natural re- abundant use of coal means that China ment’s latest ve-year plan, which runs to sources is simply not sustainable. Start will overtake the United States as the 2010, it committed itself to increasing for- with its oil consumption. Domestic crude world’s biggest producer of carbon emis- est cover, cutting the discharge of the main production is rising only slowly, so im- sions by 2009. Its current share is 17% of pollutants and reducing China’s energy in- ports are growing by more than 30% a year. the world’s total, against America’s 22%. tensity (the amount of energy consumed China is already the world’s second-big- Last year alone China added the equiva- for every unit of GDP) by 20%. Energy in- gest oil importer, behind America. There is lent of California’s entire current generat- tensity fell between 1990 and 2003, but little prospect of slowing the growth in ing capacity, nine-tenths of it coal-red. has since risen sharply as heavy industries China’s oil consumption, because the gov- Unsurprisingly, coal is also the main such as steel and cement have surged. ernment is committed to a car-led policy (though certainly not the only) source of On the other hand, environmental reg- of development. The World Bank’s Mr air pollution. Twenty of the world’s 30 ulators, by Mr Pan’s own admission, are Dollar has recently described this as a most polluted cities are in China. Accord- weak and divided. At the State Environ- very questionable development choice ing to a new book by the World Bank, mental Protection Administration, he can- though it had earlier been conceived with Dancing with Giants: China, India and not even appoint sta at the provincial the World Bank’s backing. the Global Economy, air pollution is caus- level. That is up to the provincial governor, Already the idea of China as a nation of ing 427,000 extra deaths a year. who is usually more interested in growth cyclists seems quaint. Some 45,000km of It is possible to nd a few glimmers in than in the environment. The true cost of expressways have been built or are under the murk. Because energy demand is China’s environmental mess is hard to as- construction. Through cheap petrol and growing so fast, China has more incentive sess, but the ocial government gure, other means, the government is support- than countries with slow growth to adopt which puts it at about 3% of GDP, is cer- ing a domestic car industry, which it sees new technologies. It is already the world’s tainly a gross underestimate. as an engine of future economic growth. largest user of alternative energies, includ- Mr Pan thinks growth should be sacri- The number of cars in China has leapt ing windpower. ced for resource conservation and envi- from just 4m in 2000 to 19m in 2005. That With World Bank support, China has ronmental protection. That sets him translates into eight cars per 1,000 people, been trying since 2003 to cut its emissions sharply at odds with the Communist lead- compared with 500 cars per 1,000 in of greenhouse gases through a mechanism ership. People talk about the peaceful rise America. Goldman Sachs thinks the gure set up under the Kyoto protocol. Compa- of China, he says, with all that implies will more than double by 2010 and reach nies from signatory nations are committed for continuing rates of growth and re- over 130m by 2020. But even then China to capping their greenhouse-gas emis- source utilisation. But the earth cannot will still be way below American levels of sions. If they want to exceed their quota for support it. China should control its growth car ownership today. emissions, they can buy carbon credits and slow down its development, and the Oil is only part of the picture. China is from companies in developing countries international community should do the world’s biggest producer of coal (as that have invested in cutting their own everything it can to support China if it well as of coal-mining fatalities), digging emissions. China has lots of emissions of does. China’s leaders know the calcula- out 2.2 billion tonnes in 2005. Today coal carbon dioxide and other more noxious tions. But they are not in a hurry to sacrice accounts for four-fths of China’s energy gases, and now accounts for three-quarters growth and thereby risk social unrest. 7 10 A special report on China and its region The Economist March 31st 2007

Can we help you?

How China is wooing a poor neighbour

HE quick way to Krang Skear forest in from China. The Chinese workers have this country of nearly 15m after the ravages TCambodia that the Chinese are logging vanished, but will presumably return to of genocide by the Khmer Rouge and a is to turn o the highway in Kampong cut the less accessible virgin forest in the civil war that sputtered on until recently. Chhnang province, a few hours north of hills beyond. Both the company and the The government chafes at the conditions Phnom Penh, bump along a sandy track government refuse to talk to locals. which donors place on their aid. In recent for 25km and, just as the track peters out, Cambodia is in the midst of a land grab. years the World Bank has suspended sev- take the train through the scrub for the last High politicians and y-by-night Chinese eral projects after discovering misappro- 30km. Or, rather, as the railway built by the companies suddenly crop up as owners of priation in the procurement process. For colonial French was abandoned years ago, vast tracts of valuable hardwood forest instance, one project included a service you ride a dolly improvised from a few that get cut and shipped out to Vietnam or centre for maintaining (Chinese) motorcy- planks and an old petrol engine, taking the up the Mekong River to China, now that cles provided for demobilised former whole aair apart and to one side every Chinese engineers have dynamited a navi- guerrillas; the centre turned out not to ex- time you meet a similar contraption com- gable channel into Yunnan province. ist. When the World Bank presented the ing the other way. evidence to the powerful deputy prime The area is as poor as it gets even in Tree of life minister, Sok An, he angrily refused to read Cambodia, where more than one-third of The problem is most serious in the deeply the report. Only after the World Bank the population lives on less than 60 cents a forested parts of the country populated by threatened to suspend its whole Cambo- day. It is dry and dusty, with infertile soil, non-Khmer minorities, such as the dia programme did the government pay and the summer rains run away too fast for Phnong. In these forests, households back money the bank had shelled out. a decent crop of rice. Most of the local fam- own particular resin trees that can be Now the government has an ally: ilies, living in raised single-room thatched tapped for 50-60 years, bringing in per- China. Last March Cambodia’s aid-givers huts without electricity, grow cashew haps $350 a year for the most valuable res- including the World Bank, the Asian De- nuts, bananas and corn for a meagre sub- ins, according to the Wildlife Conservation velopment Bank (ADB) and bilateral do- sistence. Of the 250 families who live here, Society. But, says an expert at one non-gov- nors, though not Chinaagreed at their an- some 60, says Puy Sao, a 29-year-old ernmental organisation, Chinese compa- nual gathering with the government to mother of six, depend wholly on the forest nies come in and cut the trees down. provide the country with just over $600m for their livelihood, and many others in Sometimes they promise schools and in aidthe equivalent of three-fths of the part. The nearest health clinic is in the pro- health clinics, but they rarely deliver. national budget. But at the same time they vincial capital, 70km away, but the forest The land grabs are only the most promi- dressed the government down for the has medicinal plants. It also has resin trees nent examples of Cambodia’s endemic country’s poor human-rights record and that can be tapped, among other things, for corruption, from the oce of the prime for letting one more year go by without oil used for lighting. And then there are minister, Hun Sen, all the way down. Re- passing an anti-corruption law. The aid wildlife products, such as beeswax. In her cently a government minister threw a would come with lots of conditions. yard, Ms Sao is rearing a wild boar that her housewarming party for his new mansion Imagine the donors’ shock last April husband caught when it was young. which features a moat around which you when China’s prime minister, Wen Jiabao, A few years ago a company from can jet-ski. He boasted to ambassadors paid Cambodia a visit and announced Guangdong in southern China was about the value of his house. that China would pony up $600m for granted a concession to log a reputed Corruption is a constant gripe of locals roads, dams, whateverequivalent to al- 17,000 hectares (42,000 acres) in Kampong and of aid donors trying to help rebuild most the entire international aid budget. Chhnang province and elsewhere. That in And, it seemed, with no strings attached. itself is a breach of the law, which is meant Mr Hun Sen has been rubbing donors’ to restrict concessions to 10,000 hectares noses in it. At a recent ceremony to mark per bidder. In 2004 about 100 locals, in- the opening of a Chinese-built road in the cluding Ms Sao, went to Phnom Penh to country’s north-east, he praised China for protest that they, too, had a claim to the for- honouring Cambodia’s independence est, but police outside the forestry ministry and integrity. All Cambodians ask, he threatened to beat them. said, is for an equal relationship with its The Chinese have since logged 1,700 partnersChina is a very big countryIf hectares at Krang Skear, replanting some 1.3 billion Chinese urinated all at once, of it with a monoculture of acacia, a fast- they would cause a great ood. But China’s growing but poor-quality tree. A giant leaders do good things with their part- plough, made in China, lies abandoned, nersWhen China gives, it doesn’t say do along with hundreds of smashed jars that this or do that. We can do whatever we contained the tree seedlings, also brought want with the money. 1 The Economist March 31st 2007 A special report on China and its region 11

2 Chinese aid, however, is not always as generous as it seems. Smoke-and-mirrors accounting certainly exaggerates the sums on oer. Besides, the great bulk of aid is in the form of loans that will have to be paid back one day. In Cambodia’s case, West- ern diplomats suspect that Chinese pres- sure is a factor behind delays in a United Nations-backed tribunal that is meant to be trying elderly former Khmer Rouge leaders on charges of genocide.

No messing about Even so, some development specialists show a degree of sympathy for Cambodi- ans wanting to take China’s cash. Of the many donors in Cambodia, only the World Bank, the ADB and Japan are really building the things that people need, such as roads, schools and hospitals. Too much traditional aid is in the form of so-called technical assistance that often benets the donor countries more than the recipients. (South Korea’s help in providing smart Part of the bargain national identity cards is an egregious ex- ample.) Besides, the time spent dealing the rst place? The answer is energy. An oil can-guarded Malacca Straitscalled with so many do-good Western agencies, and gas bonanza lies just oshore in Cam- China’s windpipe by strategists in Bei- each with an aid agenda that almost cer- bodian waters. Though Chevron of Amer- jingon its way to the mainland. For Cam- tainly conicts or overlaps with others, ica has rights to the only block where large bodia, a country historically overshad- sorely tests the government of a poor proven reserves exist, much more oil is ex- owed by bigger powers, oil revenues of country short of institutional resources. In pected to be found, and Chinese oil majors perhaps more than $1 billion a year will this light, China’s oer just to get on and intend to bid for it. For China, oil shipped give its masters some of the respect they build the road looks tempting. from Cambodia has strategic value, for it crave. A bit of the money might even But why should China want to help in would not have to pass through the Ameri- trickle down to the people. 7 Here comes trouble

China’s little brother is a big headache

HEN North Korea lobbed a handful demning North Korea, imposing sanctions The deal cleared the way for interna- Wof missiles into the last and even opening up the possibility of us- tional nuclear inspectors, kicked out in summer and then exploded a nuclear de- ing force broke cleanly with the past. De- 2002, to return to North Korea. It also laid vice beneath a mountain in October, its spite a friendship treaty going back to 1961 out a path for the country’s nuclear facili- putative enemies, South Korea, Japan and which provides for both sides to come to ties to be dismantled, normal relations be- America, had good cause for alarm. Yet the each other’s aid in danger, China made it tween North Korea and America to be es- chief victim of North Korea’s nuclear she- clear it was no longer the North’s protector. tablished and permanent peace to be nanigans appeared to be China, the ob- The North Korean regime chose to present declared on the peninsula at long last, streperous country’s socialist ally and this change of mind as an act of treachery. more than half a century after the end of long-time big brother. Yet much to everyone’s relief, North Ko- the Korean war. At each step of the way For a start, there was the loss of face. rea soon sent out signals suggesting that it North Korea is to be rewarded for doing the The tests made a mockery of the idea that might sit down again at the six-party talks right thing. Bank accounts in Macau are to China’s policy of good neighbourliness rst convened in 2003 (and also including be unfrozen, and North Korea is to get fuel could win over Kim Jong Il and his brutal South Korea, America, Japan and Russia) oil or equivalent aid. regime. The Beijing government’s credibil- from which it had ounced out in Septem- Nobody believes Mr Kim can be trusted ity as a mediatorit had been the host of ber 2005. In mid-February, against most to stick to the bargain without the closest six-nation talks designed to get Mr Kim to gloomy predictions, a conceivably historic supervision. Yet there is some cautious op- disarmwas knocked. So China’s decision deal was struck and China regained a good timism that he can be tempted away from to back United Nations resolutions con- deal of the face it had lost. his nuclear ambitions. For President1 12 A special report on China and its region The Economist March 31st 2007

2 George Bushwho in early 2002 had in- ment. There is nothing in the agreement to All this explains why some policymak- cluded North Korea in his axis of evil stop North Korea from conducting another ers in Beijing can see no satisfactory out- and who had called Mr Kim a pygmy test (though Mr Kim presumably knows come to the nuclear crisis. Writing in China putting faith in the deal marks an about- that that would blow up the deal with it). Security, a Washington-based journal, turn. He had been strongly critical of a sim- Lastly, the deal does not make clear what Shen Dingli, a prominent strategist at Fu- ilar bargain struck in 1994 by his predeces- will be done about North Korea’s existing dan University in Shanghai, says that sor, Bill Clinton, which later unravelled. nuclear weapons, thought to number whether China likes North Korea or not, To judge by conversations in Beijing, eight to ten. Mr Zhang thinks that the re- the country has for 50 years served as a China is the most sceptical, even pessimis- gime will want to hold on to its existing strategic buer, keeping tens of thousands tic, about the deal with North Korea. O- weapons but explains that for China, this of American troops pinned down and al- cially the tone is upbeat. Below the surface, would be unacceptable. lowing China to deploy more force directly however, run deep concerns. The pessimism runs deeper than not opposite Taiwan to dissuade the island North Korea-watchers in America, Ja- taking Mr Kim at his word. It has to do with from declaring independence. A nuclear pan and South Korea tend to suggest that how the Chinese think events on the Ko- North Korea would further help contain Mr Kim’s decision to go nuclear was a re- rean peninsula might aect the region’s America, deterring it from intervening in sponse to Mr Bush’s axis-of-evil speech. strategic balance, and how that, in turn, any hypothetical conict across the Tai- The lesson that North Korea drew, this ar- might aect the future of Taiwan. It helps wan Strait. North Korea, then, is China’s gument goes, is that if you do not want to to remember that whereas in economic guard post, Mr Shen writes. This is the be invaded by America, as was Iraq, then it terms China and America have a mutually link between North Korea and Taiwan. is best to get your weapons of mass de- benecial, even symbiotic relationship And what if North Korea dismantles its struction up and running. Once your own (America buys Chinese exports, China re- nuclear programmes, exchanging weap- security is assured, you can bargain from a cycles the dollars to help fund the Ameri- ons for American friendship, rather as position of strength. can current-account decit), in strategic Libya has done? Or if it keeps its nuclear Many Chinese disagree. Zhang Liangui, terms Chinese policymakers see the ri- weapons and thus provokes America into professor of international strategic re- valry as intense. America has military alli- toppling the regime? For China, many search at the Party School of the China ances that surround China, with troops in strategists think, this would be disastrous, Communist Party Central Committee and South Korea and Japan and powerful sea- putting Japan, South Korea, North Korea a former student in Pyongyang, says that borne forces. Moreover, however much and Taiwana part of China, after all the Kim dynasty’s quest for nuclear weap- China might wish Taiwan to be an inter- all rmly in the American camp. In this ons has been relentless over two genera- nal matter, America underwrites the is- case, China’s security pressure regarding tions, beginning (with Russian help) with land’s security, through the Taiwan Rela- Taiwanese independence would be far Mr Kim’s late father, Kim Il Sung, in the tions Act (which commits it to helping more severe a burden, [one] that would be early 1950s. Mr Zhang says the regime’s Taiwan defend itself) and through the sale hard to bear. It’s a hard life being a Chi- motives are twofold. One is to strengthen of weapons systems for defence against a nese strategist, obliged to look at the world internal legitimacy. The second is to trans- Chinese attack. in zero-sum terms. 7 form strategic relations with all its sur- rounding powers, and particularly with China and Japan: the Korean psyche is deeply sensitised to a history of neigh- bours invading the peninsula. Meanwhile the regime can see for itself that the Bush administration is hugely stretched in Iraq and Afghanistan and does not believe America has the will for intervention (it may be wrong). North Korea might well want detente with America, says Mr Zhang, but that is a separate matter.

What’s the deal? It follows from this reasoning that not all policymakers in Beijing expect North Ko- rea to give up its nuclear capability. The February agreement certainly leaves room for doubt. The government in Pyongyang is committed to freezing swiftly its main nuclear facility at Yongbyon, where, among other things, plutonium is ex- tracted from spent fuel rods. But the deal mentions only an initial disablement of facilities, not their abandonment. Uncer- tainties remain about whether the regime will come clean about its uranium enrich- A blue-water navy in the making The Economist March 31st 2007 A special report on China and its region 13

Heavenly dynasty

As long as China is not satised at home, it cannot be satised in the world

ET us imagine, says Lin Chong-pin, Lpresident of Taiwan’s Foundation on International and Cross-Strait Studies, how President Hu Jintao in his dreams might wish the opening of his Beijing Olympics to be. Not only, says Mr Lin, will he have brought the world’s nest ath- letes there, but also its artists and celebri- ties. So far, so plausible. He will also have, on his right hand, the leader of the com- munists’ civil-war foe, the Kuomintang, newly elected in the spring of 2008 as pres- ident of Taiwan. And on his left a beaming Dalai Lama, thankful to be back on Chi- nese soil once more after an exile of nearly 50 years. It would, says Mr Lin, be the heavenly dynasty all over again, and the barbarians coming to worship. That this happy vision, though technically possible, is still implausible provides insights into the paradox of China’s rise. On the one hand, China appears over A question of Hu and Wen the past decade to have signed up whole- heartedly to an international order, of ities: the country seems bent on building a tions as a strategic squeeze. Nevertheless, globalised trade and rules-based relations blue-water navy. Understandable, per- it is trying to balance China’s advances. among states, that was not of its making haps, within China’s terms of reference, to Noting that the West’s abandonment of even as America, the chief architect of that have a military strength capable of deter- Myanmar in the absence of democratic order, has partly walked away from it, ring Taiwan from declaring independence. change opened the way for Chinese inu- with its coalitions of the willing and But why missiles with a range to hit Japan? ence, India is trying to make its own ad- growing opposition to unfettered trade. Why, in January, did China test-re a vances to the awful regime there. ASEAN is China has signed up because it realises rocket to destroy an old weather satellite, doing the same. it is probably globalisation’s greatest bene- when it insists no one is more committed Thus China’s rise is quietly bringing ciary. This, more than anything, explains to the peaceful development of space? about an opposite, if not yet equal, reac- the country’s remarkable levelheadedness And why, last autumn, did a Chinese sub- tion. Japan’s relations with China are in its dealings with the United States ever marine suddenly pop up next to the Kitty much improved since the anti-Japanese ri- since the last crisis in bilateral relations, in Hawk, an American aircraft carrier? ots two years ago sparked by visits by the 2001, when an American spy plane col- Equally, what is China doing building then prime minister, Junichiro Koizumi, to lided with a Chinese ghter. The level- roads, ports and pipelines in Myanmar Yasukuni, Tokyo’s militarist war shrine. As headedness has paid o. For as American and Pakistan, connecting west and south- soon as Shinzo Abe became prime minis- power has been distracted in the Middle west China with the Bay of Bengal and the ter last September, he made a fence-mend- East, so Chinese power has moved up. Indian Ocean? The point could simply be ing trip to Beijing. North Korea’s nuclear to help the development of backward Chi- games may also have pushed Japan and A touch of the diabolic nese regions. But these links could equally China closer. On the other hand, Chinese intentions serve as future supply routes for the Chi- As for Taiwan, China currently calcu- about what to do with its power in the nese navy. For Brahma Chellaney, at the lates that in next year’s presidential elec- long run remain deeply ambiguous. If Centre for Policy Research in Delhi, the tion a pliable Ma Ying-jeou, the KMT’s fa- China sees its constellation as heavenly conclusion is plain: along with the voured son, will succeed the independ- and the Chinese, like the Americans and planned extension of the new Qinghai- ence-minded Chen Shui-bian of the the French, have a sense of manifest des- Lhasa railway, which could in theory Democratic Progressive Party. Mr Ma’s tinyneighbours see hints of the diabolic. bring military material up quickly to the election prospects, however, have got Perhaps the growth in the military bud- Tibetan border, it amounts to a strategic murkier since his indictment in February get reects China’s growing wealth and squeeze of India. over alleged misuse of funds during his prestige, along with a desire to protect its India’s government is less willing than time as Taipei’s mayor. And even if he does rising shipments of oil and other commod- some of its intellectuals to see China’s ac- win, China may face disappointments. 1 14 A special report on China and its region The Economist March 31st 2007

2 It believes it has an understanding with hand is China’s big problem, says Lee the KMT (whose elder statesman, Lien Kuan Yew, Singapore’s elder statesman. Chan, visited the mainland in a ground- All this feeds into the neighbours’ sur- breaking trip two years ago) that Taiwan is viving suspicions about China’s inten- a part of China. Certainly, Mr Ma says he tions, despite a decade-long charm oen- will push for closer economic co-opera- sive. So long as China is not satised tion and wants Taiwan to be a peace- within its own borders, how can it be satis- maker not a troublemaker. But he also ed in the world? says the Taiwanese want to keep the status In the long run, this will place limits on quoin other words, a sovereign Taiwan Chinese power and inuence. It is not just that is independent in all but name. We America’s allies such as Japan and Taiwan will not pursue talks on reunication, Mr that want it to stick around for a long while Ma insists. The matter will have to wait yet. ASEAN countries also need the United until the mainland becomes democratic States to balance China. Singapore re- and prosperous. cently signed an agreement allowing The Dalai Lama sees a moral vacuum American forces greater access; Indonesia The home front and America have resumed bilateral mili- Doubts about China’s intentions, how- social and environmental issues have tary contacts; and Vietnam wants to forge a ever, stem perhaps less from its actions grown hugely in number since earlier this strategic alliance with its former enemy. overseas than the values that underpin its decade. Some corners of the press have There is also, Thailand’s recent military behaviour at home. After all, China’s po- pushed the frontiers of what they can coup notwithstanding, Asia’s general em- litical and economic aairs are still run write about. And across China evidence is brace of democracy. Michael Green of with what is essentially a Leninist appa- growing of a resurgence of spiritual and re- Georgetown University, a former Asia di- ratus of state. The state’s instinct is to co- ligious inquiry. rector at America’s National Security opt those within the empire who question All the same, raw and volatile forms of Council, sees it as a tremendous potential the political orthodoxyor if that does not nationalism lurk just beneath a usually source of soft power for America. work, to deal with them harshly. Thus the placid surface. They erupted in 1999 when Whereas China rigidly sticks to its policy Dalai Lama is vilied, and Tibetans are de- NATO bombs struck the Chinese embassy of non-interference in the aairs of other meaned in their own land. Over Taiwan, in Belgrade during the Kosovo war, and nations, ASEAN has moved on. Malaysia’s China reserves the right to nuke what it again in anti-Japanese riots in the spring of prime minister, Abdullah Badawi, says says are its own people. 2005. Internet chatrooms are full of vitup- ASEAN’s hallowed principle of non-inter- As the Dalai Lama puts it: Mr Hu’s con- erative anti-foreign sentiment. ference must be updated. A new draft of stant emphasis on a ‘harmonious society’ The memories of past horrors in ASEAN’s governing charter says that re- suggests that something is missing. China Chinaforeign occupation, civil war, the gional stability rests on the active is wracked by social inequality, environ- cultural revolutionhave made older Chi- strengthening of democratic values, good mental damage and government corrup- nese generations into advocates of a governance, the rule of law, and so on. tion. Beijing’s preparations for the Olym- peaceful region. All the same, the current Such sentiments around Asia might, at pics are a heart-rending metaphor for this. leaders ignore popular sentiment at their the very least, stand in quiet opposition to The games have provided a pretext for an peril. Passing on the lessons of history to a Chinese power. But if China embraced orgy of ocial corruption and cultural younger, more nationalistic generation some of them for itself, who can guess at vandalism which in a few brief years has that never experienced horrors at rst the limits to its celestial realm? 7 all but destroyed a unique historical city. A few scraps have been left for touristic con- Future special reports sumption. Beijing’s inhabitants have been Oer to readers Reprints of this special report are available at a Countries and regions shunted into tower blocks on the city’s price of £2.50 plus postage and packing. Brazil April 14th edges. In their place rise vast bombastic A minimum order of ve copies is required. structures, architects’ and politicians’ self- Business, nance, economics and ideas indulgences with no civic context. Corporate oer Telecoms April 28th A constant theme heard from thought- Customisation options on corporate orders of 100 Cities May 5th ful Chinese is that China’s rise lacks a or more are available. Please contact us to discuss International banking May 19th moral underpinning, and that a moral vac- your requirements. The green economy June 2nd uum lies at the heart of Chinese life. The Send all orders to: Air travel June 16th Dalai Lama puts the blame on the Com- The Rights and Syndication Department munist Party’s radical atheism and pre- 26 Red Lion Square dicts that sooner or later, a spiritual or London WC1r 4HQ moral culture will have to come to ll an Tel +44 (0)20 7576 8000 internal emptiness; externally, there will Fax +44 (0)20 7576 8492 have to be rule of law, democracy, free- e-mail: [email protected] Previous special reports and a list of dom of the press. forthcoming ones can be found online A slow enriching of both public and private life may already be under way. www.economist.com/specialreports Non-government organisations to tackle