STUMBLING GIANT 4081_01_FM_to_CH03.indd 1 29/03/13 4:56 PM 4081_01_FM_to_CH03.indd 2 29/03/13 4:56 PM TIMOTHY BEARDSON STUMBLING GIANT THE THREATS TO CHINA’S FUTURE YALE UNIVERSITY PRESS NEW HAVEN AND LONDON 4081_01_FM_to_CH03.indd 3 29/03/13 4:56 PM Copyright © 2013 Timothy Beardson All rights reserved. This book may not be reproduced in whole or in part, in any form (beyond that copying permitted by Sections 107 and 108 of the U.S. Copyright Law and except by reviewers for the public press) without written permission from the publishers. For information about this and other Yale University Press publications, please contact: U.S. Office: [email protected] www.yalebooks.com Europe Office: sales @yaleup.co.uk www.yalebooks.co.uk Set in Minion Pro by IDSUK (DataConnection) Ltd. Printed in Great Britain by TJ International Ltd, Padstow, Cornwall Library of Congress Cataloging- in- Publication Data Beardson, Timothy. Stumbling giant: the threats to China’s future/Timothy Beardson. pages; cm ISBN 978-0-300-16542-5 (cl: alk. paper) 1. China—Economic conditions—2000. 2. China—Politics and government—21st century. 3. China—Foreign relations—21st century. I. Title. HC427.95.B42 2013 330.951—dc23 2013002119 A catalogue record for this book is available from the British Library. 10 9 8 7 6 5 4 3 2 1 4081_01_FM_to_CH03.indd 4 29/03/13 4:56 PM Contents Acknowledgements vi List of Abbreviations viii Introduction: Facing Multiple Challenges 1 1 The Making of Today’s China 7 2 The Broken Economic Model 50 3 The Elusive Knowledge Economy 79 4 Finance 115 5 Social Welfare: Missing Umbrella 137 6 The Environment 162 7 Threats to Social Stability 191 8 Threats to Civil Stability 212 9 Identity: Future of State and Party 243 10 America and China: Common Interests, Mutual Antagonisms 269 11 Great Power Relationships 284 12 Central Asia 321 13 Undeclared War in the Fourth Dimension? 339 14 Nervous Neighbours 354 15 China in the World 373 16 Outcomes 398 Notes 436 Bibliography 477 Index 494 4081_01_FM_to_CH03.indd 5 29/03/13 4:56 PM Acknowledgements I would like to thank many friends and acquaintances for their advice, comment and contributions. In the traditional manner, I hasten to say that I am indebted to them for their assistance but any errors and all opinions are my own. In fact many of them hold quite different views to mine and would not share all the conclusions I have drawn. In a number of countries, some people have asked not to be acknowledged owing to sensitivities. Advice and opinion have been given at many points over the years since my first visit to China in 1978 and have helped to form my evolving understanding of the country’s dramatic develop- ment and potential destiny. Some people I met early on others more recently. I should thank Zhou Xiaochuan, Liu Hongru, then Vice Governor at the People’s Bank of China, Wang Ruipu at the Communist Party Central School, Li Yining, the late Jing Shuping at CITIC and Ma Hong at the Development Research Centre of the State Council, amongst many, for their early perspec- tives in the 1980s. Later I benefited from Liu Mingkang’s views. I would like to thank Robbie Lyle for encouraging me to expand my interest in China. In particular, I would like to thank Cheng Siwei, previously Vice Chairman of the Standing Committee of the National People’s Congress. I gained from speaking with Professors Kang Shaobang, Gong Li and Qin Zhilai of the Communist Party Central School, Zhang Weiying at Peking University, Ding Ningning of the Development Research Centre at the State Council, Andrew Goudie, formerly of the Oxford University China Centre, Wu Qidi, formerly Vice Minister of Education, Li Peilin and Wang Zhimou of the Chinese Academy of Social Sciences (CASS) and Michael Pettis at Peking University. I should mention Felipe Larrain from the Catholic University of Chile, now Chilean Minister of Finance, for his input on R&D and innovation, Zhu Min, then at the Bank of China, Li Ruogu at the State Export-Import Bank for his ever- robust views, Manmohan Singh, the Prime Minister of India, Shaukat Aziz, 4081_01_FM_to_CH03.indd 6 29/03/13 4:56 PM Acknowledgements vii formerly Prime Minister of Pakistan, Bob Tuttle, President George W. Bush’s ambassador to London, Thomas Rawski at Pittsburgh University, Alexei Pushkov in Moscow, John Harrison, then Vice-Chairman of KPMG, Philip Snow, the historian, Frank Dikotter at Hong Kong University for his illumina- tion of Chinese economic and social history, particularly during the Republican period, Ben Simpfendorfer, now at Silk Road Associates, Larry Lau, then President of the Chinese University of Hong Kong, Carsten Holz, then at Hong Kong University of Science and Technology, Bob Mundell at Columbia University, Anthony Chow of the CPPCC, Rick Levin, Zhiwu Chen and Jeff Prescott at Yale University, Ali Allawi, formerly Minister of Finance and Defence in Iraq, Serge Michailof, a leading specialist in aid and reconstruction, and Nick Shenton of Polar Capital in London. I would like to thank Weili Fan in Beijing, Hugues Maury in Paris, Rana Mitter in Oxford, Anthony Pettifer in Hong Kong, Zhaodi Bell and Verne Grinstead in London and Charles Elwell in Madrid for their advice on the text. I should particularly mention Nick Fielding for the extensive efforts he made to advise on the whole draft. I am indebted to Julian and the late Christine Gaisford-St Lawrence in Ireland for giving me the opportunity at short notice to exchange some views and think in peace. Some people made brief points, which registered with me, others provided more discursive contributions. No matter how distinguished the advice, mistakes on my part are regrettably inevitable. In particular, I would like to give posthumous thanks to Wang Daohan in Shanghai who kindly encouraged and sponsored my early involvement in the development of capital markets in China in the 1980s and 1990s and taught me much of what I understand of modern China. I still have the original copy of Mao’s ‘Red Book’ which was given to me by the Chinese Embassy in London in the 1960s and so it was a particularly poignant moment when the investment bank I had founded was the only foreign institution invited onto the working party to set up the Shanghai stock exchange and became the first foreign firm to be authorised by the People’s Bank of China to open up in the country in 1989. I should probably say here that, although the opinions expressed are not closely aligned to official views, I am putting them forward as an old friend who has spent over thirty years working with China and who wishes it well. I would like to thank my wife Clair for her steadfast support and wise advice throughout this project, inspired, I am sure, through her love of China and its culture. It is with no hesitation that I dedicate this book to China which has had such terrible nineteenth and twentieth centuries and which fully deserves a prosperous, successful and happy twenty-first century. 4081_01_FM_to_CH03.indd 7 29/03/13 4:56 PM Abbreviations ADB Asian Development Bank AFP Agence France Presse AP Arunachal Pradesh APSCO Asia Pacific Space Cooperation Organisation ASEAN Association of South East Asian Nations BMJ British Medical Journal BRICS Brazil, Russia, India, China and South Africa CASS Chinese Academy of Social Sciences CCP Chinese Communist Party CPPCC Chinese Peoples’ Political Consultative Conference CCTV China Central Television CIC China Investment Corporation CIS Commonwealth of Independent States CMC Central Military Commission CSM Christian Science Monitor CSTO Collective Security Treaty Organisation DPJ Democratic Party of Japan DPP Democratic Progressive Party [Taiwan] EAS East Asia Summit EC The Economist ETIM East Turkestan Islamic Movement FAO Food and Agriculture Organization FDA [US] Food and Drug Administration FDI foreign direct investment FT Financial Times GDP gross domestic product GDFCF gross domestic fixed capital formation 4081_01_FM_to_CH03.indd 8 29/03/13 4:56 PM Abbreviations ix GONGO government- organised non- governmental organisation ICC International Criminal Court ICOR Incremental Capital– Output Ratio IHT International Herald Tribune IMF International Monetary Fund IPO initial public offering Jane’s Jane’s Defence Weekly LA (Daily Times): Los Angeles (Daily) Times NATO North Atlantic Treaty Organization NBS National Bureau of Statistics NDRC National Development and Reform Commission NGO non- governmental organisation NIEs newly industrialising economies NPC National People’s Congress NRI non- resident Indian NYT New York Times OECD Organisation for Economic Cooperation and Development OEM original equipment manufacturing PBC People’s Bank of China PLA People’s Liberation Army PRC People’s Republic of China PRD Pearl River Delta PPP purchasing power parity R&D research and development RMB renminbi SCMP South China Morning Post SCO Shanghai Cooperation Organization SEPA State Environmental Protection Agency SLEs state- linked enterprises SMEs small and medium- sized enterprises SMH Sydney Morning Herald SOEs state- owned enterprises SIPRI Stockholm International Peace Research Institute TI Transparency International TVEs town and village enterprises UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Programme UNESCO United Nations Educational, Scientific and Cultural Organization USCESRC US– China Economic and Security Review Commission 4081_01_FM_to_CH03.indd 9 29/03/13 4:56 PM x Abbreviations UWSA United Wa State Army [Burma] WHO World Health Organization WSJ Wall Street Journal WTO World Trade Organization 4081_01_FM_to_CH03.indd 10 29/03/13 4:56 PM Introduction: Facing Multiple Challenges The question of whether, and when, China might replace the United States as the superpower is one that occupies much time and attention.1 China has been, bar none, the country that has changed fastest over the last thirty years.