i CHINA’S NEW LEADERSHIP AND IMPLICATIONS FOR THE UNITED STATES HEARING BEFORE THE U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION ONE HUNDRED THIRTEENTH CONGRESS FIRST SESSION THURSDAY, FEBRUARY 7, 2013 Printed for use of the United States-China Economic and Security Review Commission Available via the World Wide Web: www.uscc.gov UNITED STATES-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION WASHINGTON: 2013 ii U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION Hon. WILLIAM A. REINSCH, Chairman Hon. DENNIS C. SHEA, Vice Chairman Commissioners: CAROLYN BARTHOLOMEW DANIEL M. SLANE PETER BROOKES SEN. JAMES TALENT ROBIN CLEVELAND DR. KATHERINE C. TOBIN JEFFREY L. FIEDLER MICHAEL R. WESSEL SEN. CARTE P. GOODWIN DR. LARRY M. WORTZEL MICHAEL R. DANIS, Executive Director The Commission was created on October 30, 2000 by the Floyd D. Spence National Defense Authorization Act for 2001 § 1238, Public Law No. 106-398, 114 STAT. 1654A-334 (2000) (codified at 22 U.S.C. § 7002 (2001), as amended by the Treasury and General Government Appropriations Act for 2002 § 645 (regarding employment status of staff) & § 648 (regarding changing annual report due date from March to June), Public Law No. 107-67, 115 STAT. 514 (Nov. 12, 2001); as amended by Division P of the “Consolidated Appropriations Resolution, 2003,” Pub L. No. 108-7 (Feb. 20, 2003) (regarding Commission name change, terms of Commissioners, and responsibilities of the Commission); as amended by Public Law No. 109- 108 (H.R. 2862) (Nov. 22, 2005) (regarding responsibilities of Commission and applicability of FACA); as amended by Division J of the “Consolidated Appropriations Act, 2008,” Public Law Nol. 110-161 (December 26, 2007) (regarding responsibilities of the Commission, and changing the Annual Report due date from June to December). The Commission’s full charter is available at www.uscc.gov. iii February 13, 2013 The Honorable Patrick J. Leahy President Pro Tempore of the Senate, Washington, D.C. 20510 The Honorable John A. Boehner Speaker of the House of Representatives, Washington, D.C. 20515 DEAR SENATOR LEAHY AND SPEAKER BOEHNER: We are pleased to notify you of the Commission’s February 7, 2013 public hearing on “China’s New Leadership and Implications for the United States.” The Floyd D. Spence National Defense Authorization Act (amended by Pub. L. No. 109-108, section 635(a)) provides the basis for this hearing. At the hearing, the Commissioners received testimony from the following witnesses: Christopher K. Johnson, Senior Advisor and Freeman Chair in China Studies, Center for Strategic and International Studies; Dr. Cheng Li, Director of Research and Senior Fellow, John L. Thornton China Center, Brookings Institution; Dr. Eswar Prasad, Senior Professor of Trade Policy, Cornell University; Nicholas Borst, Research Associate and China Program Manager, Peterson Institute for International Economics; Dr. James Mulvenon, Vice- President, Intelligence Division, Defense Group, Inc.; Roy D. Kamphausen, Senior Advisor for Political and Security Affairs, National Bureau of Asian Research; LtGen Wallace ‘Chip’ Gregson, Jr. (USMC, ret.), Senior Director, China and the Pacific, Center for the National Interest; Dr. David M. Lampton, Professor and Director of China Studies, Johns Hopkins University, School of Advanced International Studies; and Dr. Michael Auslin, Resident Scholar and Director of Japan Studies, American Enterprise Institute. In 2012, the Chinese Communist Party’s 18th Party Congress ushered in a new generation of political leaders, raising questions over what China’s priorities will be over the next decade. This hearing examined impacts of China’s recent leadership transition through the lenses of China’s domestic policies, its economy, and its military. Additionally, the hearing included a discussion on the United States’ evolving policy towards Asia. We note that prepared statements for the hearing, the hearing transcript, and supporting documents submitted by the witnesses will soon be available on the Commission’s website at www.USCC.gov. Members and the staff of the Commission are available to provide more detailed briefings. We hope these materials will be helpful to the Congress as it continues its assessment of U.S.-China relations and their impact on U.S. security. The Commission will examine in greater depth these issues, and the other issues enumerated in its statutory mandate, in its 2013 Annual Report that will be submitted to Congress in November 2013. Should you have any questions regarding this hearing or any other issue related to China, please do not hesitate to have your staff contact our Congressional Liaison, Reed Eckhold, at (202) 624-1496 or via email at [email protected]. Sincerely yours, Hon. William A. Reinsch Hon. Dennis C. Shea Chairman Vice Chairman iv CONTENTS THURSDAY, FEBRUARY 7, 2013 CHINA’S NEW LEADERSHIOP AND IMPLICATIONS FOR THE UNITED STATES Opening Statement of Commissioner William A. Reinsch (Hearing Co-Chair) .........................................................................................................1 Prepared Statement ...........................................................................................................3 Opening Statement of Commissioner Dennis C. Shea (Hearing Co-Chair) .........................................................................................................4 Prepared Statement ...........................................................................................................5 Panel I: China’s Political Transition Panel I Introduction by Chairman Reinsch ..........................................................................6 Statement of Christopher K. Johnson Senior Advisor and Freeman Chair in China Studies Center for Strategic and International Studies (CSIS) .....................................................7 Prepared Statement .........................................................................................................10 Statement of Dr. Cheng Li Director of Research and Senior Fellow John L. Thornton China Center, Brookings Institution ..................................................19 Prepared Statement .........................................................................................................22 Panel I: Question and Answer............................................................................................34 Panel II: China’s Economic Transition Panel II Introduction by Chairman Reinsch.......................................................................56 Statement of Dr. Eswar Prasad Senior Professor of Trade Policy, Cornell University ....................................................57 Prepared Statement .........................................................................................................60 Statement of Nicholas Borst Research Associate and China Program Manager Peterson Institute for International Economics. .............................................................74 Prepared Statement .........................................................................................................77 Panel II: Question and Answer ..........................................................................................86 Panel III: China’s Military Transition Panel III Introduction by Vice Chairman Shea ................................................................106 Statement of Dr. James Mulvenon v Vice-President, Intelligence Division, Defense Group, Inc. ........................................107 Prepared Statement .......................................................................................................110 Statement of Roy D. Kamphausen Senior Advisor for Political and Security Affairs National Bureau of Asian Research .............................................................................120 Prepared Statement .......................................................................................................123 Panel III: Question and Answer ......................................................................................133 Panel IV: The U.S. “Rebalance” to Asia Panel IV Introduction by Vice Chairman Shea................................................................153 Statement of LtGen Wallace ‘Chip’ Gregson, Jr. (USMC, ret.) Senior Director, China and the Pacific, Center for the National Interest .....................154 Prepared Statement .......................................................................................................155 Statement of Dr. David M. Lampton Professor and Director of China Studies John Hopkins University, School of Advanced International Studies .........................167 Prepared Statement .......................................................................................................169 Statement of Dr. Michael Auslin Resident Scholar and Director of Japan Studies, American Enterprise Institute .........176 Prepared Statement .......................................................................................................179 Panel IV: Question and Answer ......................................................................................189 1 CHINA’S NEW LEADERSHIP AND IMPLICATIONS FOR THE UNITED STATES THURSDAY, FEBRUARY 7, 2013 U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION Washington, D.C. The Commission met in Room 2212 Rayburn House Office Building, Washington, D.C. at 9:00 a.m., Chairman William A. Reinsch and Vice Chairman Dennis C. Shea (Hearing Co- Chairs), presiding. OPENING