CHINA’S RISECHALLENGES AND OPPORTUNITIES CHINA’S RISECHALLENGES AND OPPORTUNITIES C. FRED BERGSTEN CHARLES FREEMAN NICHOLAS R. LARDY DEREK J. MITCHELL PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES WASHINGTON, DC SEPTEMBER 2008 PETER G. PETERSON INSTITUTE For reprints/permission to photocopy FOR INTERNATIONAL ECONOMICS please contact the APS customer service 1750 Massachusetts Avenue, NW department at Copyright Clearance Center, Washington, DC 20036-1903 Inc., 222 Rosewood Drive, Danvers, MA (202) 328-9000 FAX: (202) 659-3225 01923; or email requests to: www.petersoninstitute.org [email protected] C. Fred Bergsten, Director Printed in the United States of America Edward Tureen, Director of Publications, 10 09 08 5 4 3 2 1 Marketing, and Web Development CENTER FOR STRATEGIC Library of Congress Cataloging-in- AND INTERNATIONAL STUDIES Publication Data 1800 K Street, NW Washington, DC 20006 China’s rise : challenges and opportunities / (202) 887-0200 FAX: (202) 775-3199 C. Fred Bergsten . [et al.]. www.csis.org p. cm. Includes bibliographical references and John J. Hamre, President and CEO index. James Dunton, Director of Publications ISBN 978-0-88132-417-4 (alk. paper) 1. China—Economic conditions—2000– 2. China—Foreign economic relations. Typesetting by BMWW 3. Democratization—China. 4. China— Printing by United Book Press Politics and government—2002– Cover design by Sese-Paul Design I. Bergsten, C. Fred, 1941– II. Peterson Institute for International Economics. Copyright © 2008 by the Peter G. Peterson III. Center for Strategic and International Institute for International Economics and Studies (Washington, D.C.) the Center for Strategic and International Studies. All rights reserved. No part of this HC427.95.C4566 2008 book may be reproduced or utilized in any 330.951—dc22 form or by any means, electronic or me- 2008028925 chanical, including photocopying, record- ing, or by information storage or retrieval system, without permission from the Institute. The views expressed in this publication are those of the authors. This publication is part of the overall program of the Institute and the Center, as endorsed by their Boards of Directors, but does not necessarily reflect the views of individual members of the Boards or the Advisory Committees. Contents Preface vii Chronology of Main Events xiii Introduction 1 1 China’s Challenge to the Global Economic Order 9 2 China Debates Its Future 33 3 Democracy with Chinese Characteristics? Political Reform and the Future of the Chinese Communist Party 57 4 Center-Local Relations: Hu’s in Charge Here? 75 5 Corruption in China: Crisis or Constant? 91 6 Sustaining Economic Growth in China 105 7 Energy Implications of China’s Growth 137 8 Why Does the United States Care about Taiwan? 169 9 China’s Military Modernization 191 10 China and the World 209 11 Conclusion 235 Bibliography 241 About the Authors 245 About the Organizations 249 Acknowledgments 253 Advisory Committee 255 vi Index 259 Tables Table 6.1 Government expenditure on social programs, 2002–07 122 Table 7.1 Energy demand by sector, 2005 142 Table 7.2 GDP by sector, 2005 142 Table 7.3 Industrial profit margins, on an earnings-before-tax basis 148 Table 7.4 Global steel industry: Production, market share, and industry concentration, 2006 149 Table 7.5 Industry concentration in China 150 Table 9.1 Competing statistics on China’s military expenditure, 2006 200 Table 10.1 China’s top trading partners, 2007 210 Table 10.2 China’s rank among countries’ top trading partners 221 Table 10.3 China’s top five sources of crude oil imports, 2003–07 222 Figures Figure 5.1 Perceived level of corruption in China, 1984–2006 93 Figure 6.1 Investment as percent of GDP, 1978–2007 107 Figure 6.2 Household consumption as percent of GDP, 1978–2007 107 Figure 6.3 Government consumption as percent of GDP, 1978–2007 108 Figure 6.4 Net exports of goods and services, 1992–2007 109 Figure 6.5 Manufacturing and services share of urban investment, 1995–2007 111 Figure 6.6 Losses of unprofitable industrial enterprises, 1995–2007(e) 113 Figure 6.7 Industry profits as percent of GDP, 1998–2007(e) 113 Figure 6.8 Current account balance as percent of GDP, 1994–2007 115 Figure 6.9 Household savings and interest income, 1992–2003 119 Figure 7.1 Energy intensity of the Chinese economy, 1953–2007 139 Figure 7.2 Energy demand, historic and recent forecasts, 1974–2030 140 Figure 7.3 China’s share of global production, 2006 143 Figure 7.4 Industrial electricity prices, 2006 145 Boxes Box 1.1 Other economic superpowers? 10 Box 1.2 Will China dump its dollars? 18 Box 2.1 “Emancipation of the mind” campaigns 43 Box 9.1 China’s defense budget 192 Box 9.2 Aircraft carriers 198 Preface China remains a country of complexity and contradiction. It has become an economic powerhouse and an increasingly influential global player, raising the prospect that it will be a future rival to the United States in world affairs. At the same time, China’s unbalanced growth fuels unsus- tainabilities and inequities in its political and social system, raising longer- term questions about its domestic stability. Abroad, China is widely wel- comed as an engine of economic growth, even as its military modernizes and its increasing footprint creates palpable discomfort about its impact on global stability and the international system. For Americans and others in the international community, coping with the rise of China has emerged as the key challenge of the 21st century. For- mulating an effective strategy to do so, however, demands a far richer and more nuanced understanding of China’s fundamental social, political, and economic context than that shaping the current public debate in the United States and elsewhere. The China Balance Sheet Project, a joint endeavor by the Center for Strategic and International Studies (CSIS) and the Peterson Institute for International Economics, was established in 2005 with the intention of providing a balanced and objectively reasoned source of information on China for government officials, business and other private-sector leaders, the media, and the interested public alike. Our first book, China: The Bal- ance Sheet—What the World Needs to Know Now about the Emerging Super- power, was published in April 2006. Translated into several languages, that book—and the one-page issue summaries derived from it provided on www. chinabalancesheet.org—has become a standard reference for poli- cymakers, journalists, and students around the world, fulfilling an un- mistakable need for authoritative and balanced discussion of China’s con- temporary economic, military, political, social, and international policies and perspectives. It has been widely quoted by top officials of both gov- viii ernments, including US Secretary of the Treasury Henry Paulson, Jr. and former Chinese Vice Premier Wu Yi. In May 2007, the two institutions held a full-day national conference to continue the discussion of China and US-China relations. At that session, we released The China Balance Sheet in 2007 and Beyond, a compilation of papers that delved into topics including Beijing’s internet censorship poli- cies, the rule of law in China, and China’s relations with India and Rus- sia. Keynote presentations were delivered by Secretary of the Treasury Henry Paulson, Jr.; Robert Zoellick, president of the World Bank and for- mer US deputy secretary of state; and Craig Mundie, chief research and strategy officer for Microsoft. This book seeks to take the analysis several important steps further by connecting China’s development directly to US and global interests, and offering a series of possible policy responses. It begins by looking at the global economic challenge posed by China, a central theme throughout the volume, in a chapter written by Dr. C. Fred Bergsten, director of the Peterson Institute. It then turns to the emerging policy debates on all these issues in China, where an intellectual climate is forming that is more open, diverse, and creative than many outsiders realize. As in the earlier two publications, the book then assesses the likely de- velopment of China itself under three headings: domestic political and so- cial affairs, economic policy, and foreign and security policy. The authors divided lead responsibility for the discussion according to their expertise. Charles Freeman, holder of the Freeman Chair in China Studies at CSIS, took primary responsibility for the chapters devoted to China’s domestic policies. Dr. Nicholas Lardy, senior fellow at the Peterson Institute, ad- dressed China’s domestic economy. Trevor Houser and Daniel Rosen of the Peterson Institute coauthored chapter 7 on China’s energy issues. Derek Mitchell, senior fellow in the International Security Program at CSIS, took on the multifaceted challenges of China’s foreign and security policy. All these authors have published extensively on their areas of expertise. In the process, we would like to thank many people for their contribu- tions. Melissa Murphy was instrumental in writing chapters 2, 3, and 5 and Andrew Wedeman of the University of Nebraska-Lincoln in the writ- ing of chapter 5 on corruption. David Finkelstein of the Center for Naval Analyses provided the first draft of and substantial intellectual input into chapter 9 on China’s military modernization. We have been enormously assisted in the preparation of the book by an Advisory Committee of high-level experts on China and US-China re- lations. The full committee met with the authors and their team to dis- cuss the book in its early stages and helped shape its ultimate direction through their invaluable comments and suggestions. It should be noted, however, that the findings and opinions in this book rest with the authors. They do not necessarily represent the views of our Advisory Committee members, contributing authors, and others who have provided support.