Interpreting China's Development

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中

I N T E R PR E T I NG

HINA’S

DEVEL

PMENT

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中

I N T E R PR E T I NG

C

HINA’S

DEVEL

PMENT

Editors

Wa n g G u n g w u Jo h n Wo n g East Asian Institute, National University of Singapore

World Scientific NEW JERSEY

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LONDON

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SINGAPORE

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BEIJING

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SHANGHAI

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HONG KONG

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TA I P E I

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CHENNAI

Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore 596224 USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601 UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE

British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library.

INTERPRETING CHINA’S DEVELOPMENT Copyright © 2007 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher.

For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy is not required from the publisher.

ISBN-13 ISBN-10 ISBN-13 ISBN-10

978-981-270-802-1 981-270-802-2 978-981-270-806-9 (pbk) 981-270-806-5 (pbk)

Printed in Singapore.

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Introduction

xiii

Part I. The Challenges of Governance Survey Chapter Responding to Challenges and Problems of Governance WANG Zhengxu & LYE Liang Fook

3

China’s leadership is grappling with mounting socio-economic problems and rising expectations. Besides various policy measures to cope with these challenges, the Party and government have attempted to re-invent themselves ideologically and organisationally.

Topical Chapters The Dynamics of Elite Politics in China BO Zhiyue

11

Elite politics is increasingly being institutionalised. The dynamic interactions between political institutionalisation and factional politics have continued to inﬂuence leadership line-ups.

How Did the Hu-Wen Leadership Consolidate Its Power? LAI Hongyi

16

Hu Jintao and Wen Jiabao have surprised many with their rapid consolidation of power. Their success results from the ongoing institutionalisation of leadership succession, as well as Hu’s effective political skills in building a political coalition to establish his authority.

The Chinese Communist Party in Rapid Transformation ZHENG Yongnian & TOK Sow Keat

20

The CCP has introduced organisational and ideological reforms, allowed limited elections at grass-roots levels and more space for selected social groups to maintain its dominant hold on politics.

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I N T E R P R E T I N G C H I N A ’S D E V E L O P M E N T

The Party and the Media: Control versus Change LYE Liang Fook

25

The Department of Propaganda of the Party has to balance control with the changing demands of society. It is under increasing pressure to adjust the old way of managing and controlling information based on ﬁat and fear.

Political Reforms First, Democracy Later? WANG Zhengxu

30

Political democratisation in China is driven by the people’s higher expectations and greater awareness of their rights and the Party’s desire to deliver good governance. As opposed to a big-bang approach, China’s democratisation is likely to be a gradual and ﬁtful process.

The Struggle against Corruption YANG Dali

38

To contain corruption, China has introduced institutional reforms, including completing market transitions, public sector management reforms, greater political accountability and stricter institutional restraints. The reforms have led to a modest reduction in corruption cases.

Managing China’s Civil Servants Kjeld Erik BRØDSGAARD

44

Contrary to popular belief, the number of civil servants in China is actually quite small. Improving the quality of personnel and governing capacity are important to preserve one-Party rule.

Can Beijing Still Dictate Local Politics? TAN Qingshan

48

Beijing is facing a big challenge in reining in local governments without jeopardising economic growth. Tthe key issue is whether they can deliver the outcome that Beijing wants.

Towards the Rule of Law ZOU Keyuan

53

The Party appears determined to promote rule of law to meet the demands of a marketoriented economy, the obligations of being a WTO member and the need to improve the administration and management of a more complex Chinese society.

The Party and the Gun: Civil-Military Relations LI Nan

57

The relationship between the civilian leadership and People’s Liberation Army (PLA) has undergone a fundamental change over the years. The political leadership has focussed more on governance issues while the PLA has concentrated on military-technical tasks.

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CONTENTS

The PLA in Transformation YOU Ji

vii 62

China’s national defence strategy seeks a transformation of the People’s Liberation Army (PLA) through mechanisation and informatisation. The real issue is whether the PLA can achieve a balanced transformation between these two objectives.

Hong Kong and Macau under One Country, Two Systems CHOU Kwok Ping

67

A decade of “One Country Two Systems” has produced different outcomes in terms of Hong Kong’s and Macau’s respective political relations with Beijing. These can be attributed to the different legacies of colonial rule and inﬂuences of democratic forces in these two localities.

Chen Shui-bian: Taiwan’s Lame Duck President John F. COPPER

72

The corruption and embezzlement charges involving Chen Shui-bian’s close aides, son-in-law and wife have dented his image and credibility. However, Chen has cleverly exploited the local identity movement to bolster public support for his party.

What to Expect from the 17th Party Congress WANG Zhengxu

77

The 17th Party Congress will most likely witness adjustments to the central leadership and comprehensive endorsement of the “scientiﬁc development” concept and creation of a “harmonious society”. While references may also be made to the need for political reforms, they are likely to stop short of concrete plans.

Part II. Growth and Structural Changes Survey Chapter China’s Major Economic Challenge: Sustaining High Growth Whilst Fixing Its Growth Problems John WONG

83

The Chinese economy has become a signiﬁcant force in the global economy. It has been argued that the current global economic boom is basically the combined effects of US consumption and Chinese production.

Topical Chapters China’s Twin Surpluses YU Yongding

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China is the only country in history which has run the twin surpluses for 15 years since 1990. The underdevelopment of China’s ﬁnancial market is one of the most important contributing factors to China’s persistent twin surpluses.

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I N T E R P R E T I N G C H I N A ’S D E V E L O P M E N T

Explaining High Productivity Growth WU Yanrui

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Whether productivity growth has played a role in China’s recent growth can be investigated by examining the source of growth. Economists conventionally attribute the rate of GDP growth to the combined growth in labour and capital inputs.

The 11th Five-Year Programme Sarah Y. TONG

108

The 11th Five-Year Programme outlines Hu and Wen’s vision for the country’s economic development and tackles growing economic and social problems following China’s recent rapid economic expansion.

China’s Drive to Become a Technological Power QUAN Xiaohong

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When China embarked on market-oriented economic reforms, its science and technology system was subjected to far-reaching challenges for its lack of efﬁciency, R&D weaknesses, poor technical skills and outdated focus on defence and other heavy technologies.

Banking Reforms to Meet WTO Obligations Sarah Y. TONG & ZHENG Yi

118

China’s banking reform has lessened the vulnerability of China’s banks to external shocks. However, this does not mean that most of China’s banks are now sufﬁciently robust to stand up to major international challenges.

Reforming State-Owned Enterprises Sarah Y. TONG

123

China's reform of state-owned enterprises (SOEs) has been quite successful in reorienting ﬁrms to be more responsive to market competition.

Rise of China’s Auto Industry YANG Mu & TENG Siow Song

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Many new auto players, including foreign companies have entered the Chinese market after China’s WTO accession. By 2005, China was the world’s second largest auto market (equalling Japan), with auto sales of over ﬁve million units.

The Political Economy of Urban and Regional Development CHIEN Shiuh-shen

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China’s economic transition over the past three decades was characterised by dramatic but imbalanced urbanisation, serious territorial competition and uneven regional development.

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CONTENTS

Shanghai’s Mega Port in Yangshan YANG Mu & Lionel HO

ix 139

Shanghai, the centre of the Yangtze River Delta manufacturing hub, has been earmarked by the Chinese government to regain its previous global shipping hub status.

China’s Energy Outlook Elspeth THOMSON

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Over the next ten years, rapid urbanisation and industrialisation and the dominance of the manufacturing sector in China together clearly presage China’s continual requirement for large quantities of energy.

Part III. Coping with Rising Social Problems Survey Chapters Social Dilemmas of High Economic Growth ZHAO Litao

153

Three decades of sustained economic growth have not only failed to boost social conﬁdence, but also given rise to persistent social problems such as social injustice, corruption, income inequality and environment degradation.

What is China’s San-Nong (Rural) Problem? John WONG

160

The rural problem, often dubbed “san-nong wenti”, is one of the burning issues the Chinese government must come to grip with. The rural problem, if remain unresolved, could become a potential time-bomb for the Chinese leadership.

Topical Chapters Growth and Widening Inequalities LAI Hongyi & TENG Siow Song

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As China’s economy continues to grow, income inequalities have also increased, generating social discontent. The Hu-Wen leadership has acted to address rural-urban and interregional divides. Their efforts, however, have only moderated but not reversed the growing trend of inequalities.

Reforming Hukou to Protect Migrant Labour ZHAO Litao

174

The introduction of the temporary hukou and resident permit, and the relaxation of the quota system governing conversion of agricultural hukou holders to nonagricultural hukou status have been highly successful in managing migrant labour, but problems of the “new poor” still need to be addressed.

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I N T E R P R E T I N G C H I N A ’S D E V E L O P M E N T

Building a New Social Safety Net GU Xin

179

China has established social insurance and public assistance systems to replace the workplace-based social security system to reduce the vulnerabilities of the “new poor”. However, compliance still remains a problem and current systems provide merely a low level of social protection.

China Facing an Environmental Crisis CHIEN Shiuh-shen & YANG Mu

184

China’s rapid economic growth has left a trail of environmental problems in its wake. It has to act fast to reverse the situation before some of its wonderful natural resources are permanently lost.

China’s Cultural Development ZHAO Litao & TAN Soon Heng

189

After the issuance of a national programme on cultural development in the 11th Five-Year period (2006-2010), the perception of culture – previously subverted as a convenient tool under communist propaganda – has been dramatically changed.

China’s Booming Higher Education QUAN Xiaohong & ZHAO Litao

194

The Chinese government’s decision to achieve “mass higher education” saw a substantial boom in the higher education sector. However, unemployment quickly becomes prevalent when the job market fails to expand as quickly.

China’s Emerging Middle-Class YAN Hao

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Though China’s middle class is unlikely to challenge the autocratic power of the Party and the government, its rise will certainly bring about profound implications for China’s future economic and social development.

Haigui in China's Modernisation YANG Mu & TAN Soon Heng

202

Overseas returnees or Haigui have already become China’s “movers and shakers” in the political, economic and social domains. Especially prominent is the Haigui-pai’s leading role in a new “technopreneurship wave” that is rapidly changing China’s modern economic sectors.

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CONTENTS

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Part IV. China’s Relations with Major Powers and its Neighbours Survey Chapter Featuring “Harmonious World” for “Peaceful Rise” LAI Hongyi & LYE Liang Fook

209

To secure a peaceful external environment for its domestic development, China has pledged to be a responsible power and follow a course of peaceful rise. It also advocates a “harmonious world” of diversity. So far China’s actions have generally been in line with its words.

Topical Chapters China and US: A Pivotal but Uncertain Relationship WANG Fei-ling

218

Despite sharing many economic interests, China and the United States are often at odds on numerous issues ranging from ideology differences to the Taiwan problem. However, both sides are determined to accommodate to each other as much as possible and for as long as possible.

Managing Difﬁcult Relations with Japan ZHENG Yongnian & TOK Sow Keat

223

Managing China-Japan relations is a challenging task especially when it involves numerous issues ranging from geo-strategic to historical factors. As the reconciliation process between China and Japan remains slow, their relations are becoming increasingly complicated.

Facing a More Assertive and Nationalistic Japan LAM Peng Er

227

Shinzo Abe’s aspiration for Japan is that of a “beautiful country” in which the Japanese people can rightly take pride in its tradition, achievements and autonomy. This could be a potential problem for Japan’s diplomatic relations with the region.

China and South Korea in Their Dealings with North Korea CHOO Jaewoo

233

China’s balancing act in the Korean peninsula is a delicate task. Under the notion of a “good-neighbour policy”, Beijing is involved in achieving a balance between an unpredictable Pyongyang and a democratic Seoul.

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Seeking Closer Cooperation with Post-Suharto Indonesia LIM Tin Seng

237

China’s relations with post-Suharto Indonesia is improving rapidly. Although there are still many challenges, cooperation between Beijing and Jakarta will become even closer and deeper in the future especially when this renewed relation is mutually beneﬁcial.

Malaysia’s Relations with China: From Mahathir to Badawi LAM Peng Er & LIM Tin Seng

241

Malaysia has recalibrated its foreign policy orientation from Japan to China following China’s phenomenal economic rise and the bursting of Japan’s bubble economy. However, Kuala Lumpur is careful not to play a zero-sum game but to pursue a “win-win” strategy to maintain close cooperation and exchanges with the region.

China’s Special Relationship with Singapore John WONG & TENG Siow Song

245

Over the years, relations between Singapore and China have deepened and matured into a multi-faceted one with extensive interactions between the two governments, business communities and peoples.

EU and China: Heading towards Bumpy Relations Jean-Pierre CABESTAN

251

Burgeoning relations between the European Union (EU) and China have often been perceived as a new “strategic partnership”. However, maintaining this partnership will not be a smooth and easy one as the EU and China have considerable differences over arms embargo, Taiwan, human rights and trade issues.

China’s Growing Inﬂuence in Africa WANG Zhengxu & LIM Tin Seng

256

China’s inﬂuence in Africa is growing rapidly but it has also invited severe criticism from the West. However, Beijing is unlikely to reverse its African policy especially when it complements its economic interests in the continent and has won strong approval from African leaders.

Index

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I

ntroduction

I The East Asian Institute (EAI), set up in April 1997 as a full-time autonomous research organisation under a statute of the National University of Singapore, is celebrating its 10th anniversary this year. EAI is the successor of the former Institute of East Asian Political Economy (IEAPE), whose main mission was to conduct policy-oriented research related to China’s economic reform and open-door policy. EAI has continued with this major research focus, but it has over the years also broadened its research scope to include the global and regional impact of the rise of China, particularly China’s fast-changing relations with its neigbhouring economies/countries in East Asia. In a way, EAI is virtually the only academic organisation in the whole of Southeast Asia that has its research heavily focussed on the study of contemporary China, i.e. “watching” developments of “Communist China” or the People’s Republic of China (PRC). The challenges for starting contemporary Chinese studies in places like Singapore were quite real. Because of Cold War legacies, non-socialist Southeast Asia basically had neither strong academic foundation nor strong public interests in studying developments of “Communist China”. Information on China used to rely heavily on Western media and research done by Western scholars. Our ﬁrst major task initially was to build up a good data base comprising primary source materials emanating from China. But the greater challenge for our scholars in their study of contemporary China here was to try to consciously follow an academic approach that is as far as possible “non-Western” and “non-PRC”. We believe that by analysing and interpreting events in China without going through certain ideological prisms would better meet the needs and interests of our policy makers and our community.

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I N T E R P R E T I N G C H I N A ’S D E V E L O P M E N T

Thanks to its success in economic reform and its opening up to the world, China in recent years has rapidly transformed its economy and its polity. This, coupled with the sharp growth in the two-way commercial contacts and travels, has rendered it much easier for people in Southeast Asia to know and comprehend what is going on in China. To many Singaporeans, China today appears much like another “normal” country, fairly open, as they can visit China anytime without a visa. Thanks also to the IT revolution, events in China often appear almost instantaneously on local media. Such a fast access to China’s information together with its greater transparency has certainly contributed to a greater understanding of contemporary China. Viewed from a different angle, however, analysing and interpreting events and developments in China have always been and will remain a formidable challenge, not just for non-specialists, but even for China experts. China is a huge and diverse continental-size economy, which is rapidly growing (at the breakneck rate of 9.6 percent for the past 27 years) and radically reforming itself, all at the same time. Size combined with speed creates its own dynamics. With its vast base, any growth in any industry or sector will inevitably push up China’s aggregate statistics to jumbo numbers. Today, China is the world’s top producer of a wide range of goods and commodities (for 2006, 2.4 billion tons of coal, 420 million tons of steel, 7.3 million automobiles, 85 million TV and so on). In percapita terms, however, China’s levels of production and consumption are invariably very low. Thus, China’s total GNP in 2006 ranked the world’s fourth largest after the US, Japan and Germany, but its per-capita GNP at around US$1,900 was near the bottom of the hundredth! It would be quite easy for someone from a smaller country to lose perspective on those numbers. China’s diversity (a product of its enormous size) is another important feature. In winter, the subzero temperature of Harbin up north contrasts sharply with the subtropical Hainan Island, some ﬁve or six ﬂying hours down towards the south from Harbin. In summer, serious ﬂoods in the Yangtze can occur simultaneously with serious droughts in the Yellow River basin. Because of its size, China is administratively divided into 34 provinces or regions, 333 regional cities and 2,863 counties. Many

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INTRODUCTION

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of China’s provinces are bigger than Germany or France. Numerous regional cities in China are bigger than Singapore. To rule such a vast country effectively, China’s governance has to function at ﬁve or six levels: zhongyang, sheng, qu, xian, xiang, and cun. Economic and technological dualism is quite common in many developing countries. However, China’s dualism is often exacerbated by its vast size and great diversity. While China has mastered sophisticated space technology in one sector, it still uses simple and traditional tools in others. Anyone with a preconceived idea or a certain theory on China is able to pick up real events from some part of China to support his story, be it the good, the bad or the ugly! One can go on with a long litany of examples about the “inscrutability” of China and the many enormous problems of studying and understanding it. But this is the land which is now engaged in an unprecedented undertaking of modernisation. Human history has never before witnessed such an intense level of industrialisation taking place on such a massive scale. It is not just the static complexity, but the dynamic changes and rapid transformations that make the task of analysing and interpreting developments in China a real challenge. As scholars, we believe that sound scholarship with painstaking search for information and evidence, and patient analysis will help us come up with a more balanced picture and better understanding of developments in China. Good modern social science skills can also help us better grasp the signiﬁcance of the fast-changing scenes in China. As always, studying China is a fascinating and rewarding feat for serious scholars.

II This particular commemorative volume is made up of papers and commentaries on various aspects of China’s development, written by present and past scholars at EAI, speciﬁcally for non-specialists. We have asked them to make their writing succinct and informal as well as readable in the hope that readers can easily get a good glimpse of what is happening in China, politically, economically and socially today.

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Many staff members at EAI have contributed to this volume. Dr Lai Hongyi, in particular, has done an excellent job in organising this project and arranging for its publication and Ms Jessica Loon, in the copyediting.

Wang Gungwu John Wong May 2007

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P ART I THE CHALLENGES OF GOVERNANCE

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esponding to Challenges and

Problems of Governance WANG Zhengxu LYE Liang Fook

The past decade in China’s politics was marked by mounting social and political challenges amidst China’s surging economy. Despite loud cries of “the coming collapse of China” and “China’s governance crises”, by around 2001–2002, the Party seemed to have survived all major tests in managing the world’s most populous society and fourth largest economy (second largest if using purchasing power parity calculation) by around 2006. Today the Party maintains tight control over political power while striving to re-invent the government. By doing so, the Party wants to continue to deliver economic growth and public goods, and to remain the legitimate ruling force for China. The challenges faced by the Chinese government in the last decade had all been daunting. The 1990s witnessed largely failing state-owned enterprises (SOEs) as opposed to the fast growing private sector. In the late 1990s, the reform of the SOEs resulted in millions of laid-off workers in Chinese cities, many of whom took to the streets. Meanwhile, social problems such as the rise of the Falun Gong Cult put the Party’s ability to maintain social control to serious tests. Problems caused by China’s unbalanced development abound, such as environment degradation, aggravating income disparity, government corruption and public protests. In fact, as often noted by the Western media, the number of public protests in China skyrocketed from about 10,000 in 1993 to 74,000 in 2004 and 87,000 in 2005. Against this background of challenges and problems, this chapter offers an overview of the major efforts the Party took in the last decade

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to stay relevant and renew its ability to deliver economic growth and governance. It has been a relatively remarkable record, but as the Party opens its 17th Party Congress, new challenges continue to cry out for urgent attention. In the coming decade, then, the Party will need to take up tasks that are even more trying.

China Under Jiang and Zhu With Deng Xiaoping’s demise in early 1997, the 15th Party Congress in the later part of the same year marked the ﬁrst Party congress presided by Jiang after his consolidation of power. As China entered a period of Jiang Zemin and (Premier) Zhu Rongji’s governance, the foremost political developments were the leadership’s effort to redeﬁne the Party and reorganise the government to stay relevant and competent. The Jiang-Zhu Administration had to manage China’s deeper reforms towards market economy, especially the large-scale SOE reform. Serious challenges continued to emerge; in 1997, China’s economy suffered a slowdown as the global economy was hit by the Asian ﬁnancial crisis. In 1998, China was hit by a ﬂood of scale unseen in more than a hundred years. Then in 1999 Gong’s practitioners besieged Zhongnanhai earlier in the year, followed by NATO’s bombing of the Chinese Embassy in Belgrade and Taiwan’s Lee Tenghui’s proclaimation that Taiwan and Mainland relations should be deﬁned as “special state-to-state relations”, openly asserting Taiwan’s independence tendency. Amidst these internal and external crises and challenges, the Party started the Sanjiang Campaign (三讲 literally “three stresses”, i.e. stress politics, stress virtues and stress studying) to beef up Party morale and unity, which had gradually eroded as China’s economy marketised and the old Marxist-Leninist ideology lost its appeals. By emphasising the “Three Stresses”, the leadership hoped to renew the Party’s strength and avoid or at least delay its degeneration. A more fundamental effort at ideological rejuvenisation is Jiang Zemin’s Sange Daibiao (三个代表 Three Represents) doctrine, meaning that the Chinese Communist Party represents the most advanced mode of production, represents the most advanced culture and represents the interests of the majority of the population. Jiang ﬁrst put forth this doctrine in February

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2000 during a studying tour to South China’s Guangdong Province where Deng Xiaoping revived China’s reform in his Southern Tour of 1992. Jiang then elaborated on it in July 2001 in a speech made to the Central Party School in which he also called on the Party to admit private entrepreneurs and other professionals into its ranks. The “Three Represents” doctrine marked a major shift in the traditional role of the Party, which was prescribed as the vanguard of the working class (the workers and the peasants, basically). Now the Party will represent all social groups, including private entrepreneurs and business owners, who, in orthodox Party ideology, were erstwhile treated as exploiters and enemies of the Party. The Three Represents doctrine is without doubt the Party’s afﬁrmation of the non-state sector in the economy, and shows the Party’s pragmatism in re-orientating its ideology. The Three Represents was eventually incorporated into the Party constitution at the 16th Party Congress in 2002, alongside Marxism1 Leninism, Mao Zedong Thought and Deng Xiaoping Theory. In the governmental arena, Premier Zhu Rongji pushed through a major reengineering of the State Council and its sub-national bureaucracies. It started at the State Council level at the 9th National Party Congress (NPC) in 1998, and in three years was expanded to all the provincial and sub-provincial governments. The goal was not only a slimmer and more efﬁcient government, but also tied to the marketisation of the economy: the reforming of the SOEs towards market forces meant many government agencies were now obsolete. In the end, the original 40 ministries within 2 the State Council were reorganised into 29 ministries. Jiang and Zhu also oversaw China’s accession to the World Trade Organisation (WTO) in 2001. This came after years of arduous negotiations with its trading partners, especially the US, and it was Jiang-Zhu’s political commitment to economic reform and opening that eventually made

1

See chapter by Zheng Yongnian and Tok Sow Keat in Part I of this volume for a focussed discussion of the Party’s transformation.

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Notably, all the major line ministries managing state-owned industries, such as the Ministry of Coal and Ministry Textile Industry, were all removed from the cabinet and reorganised into State Council-afﬁliated industrial associations or bureaus.

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it possible. In fact, when it ﬁnally came, most Chinese were uncertain whether it would be a boon or a bane. There was much fear that with the opening up of China’s domestic markets, some of China’s economic sectors would be overwhelmed by foreign competitors. But the Chinese leadership seemed to have displayed competence and gumption in managing this full-scale integration into the world economy. By the end of 2006, ﬁve years after China’s accession, China’s economy had surged ahead, greatly boosting the Party’s conﬁdence in leading China’s economy in a globalised world.

Hu Jintao: Searching for a New Development Model When Hu Jintao assumed the Party’s leadership in 2002, there were doubts about his ability to assert his position and assume ﬁrm control of power. The Western media had cynically asked “Who is Hu?” and speculated that Jiang Zemin would continue to wield power from behind the scene. However, Hu proved his critics wrong when he quickly consolidated his power. By 2004, Jiang Zemin had to leave his last post, and during these years Hu had also established his leadership style and governing principles. In tackling the problems and issues that confront China, such as income disparity, regional development gaps, social discontent, deteriorating work safety, ofﬁcial incompetence, corruption and environmental degradation, Hu tried to shift China’s development towards a more humane and more balanced model on the one hand, and tried to enhance state authority and political control on the other. Hu came into power with a populist, pro-people image. His ﬁrst public appearance in December 2002 after assuming the top leadership position was to visit an old revolutionary base in a rural area in Hebei Province where he articulated what was later called the New “Three People’s Principles” (新三民主义): power to be used by the people, concern to be showered on the people and beneﬁts to be enjoyed by the people (权为民所用, 情为民所系, 利为民所谋). At the height of the Severe Acute Respiratory Syndrome (SARS) epidemic in 2003, Hu and Premier Wen Jiabao displayed their caring and down-to-earth side with tours to hospitals, offering encouragement and words of comfort to frontline nurses and doctors handling SARS cases. Hu proclaimed that China should

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pursue “people-centred” development (以人为本), and put forward the concept of “scientiﬁc development” (科学发展观). Essentially, it was a call to shift from the single-minded pursuit of economic growth towards a more balanced and more sustainable model of development. “Scientiﬁc development” is intended to comprehensively address problems China faces following decades of fast growth, such as income disparity, inadequate healthcare and social security systems, and pollution. Eventually, these people-oriented ideas came to be manifested in the concept of “harmonious society” (和谐社会). This is both a grand vision Hu offered to the nation and an overarching idea that would guide the Party’s policies in the years to come. Hu Jintao apparently has come to believe that the Party should not only deliver economic growth, but also other public goods such as equity and good government. Hence, a “harmonious society” would contain elements of fairness and uprightness, rule of law, order, democracy and balance between the needs of man and nature. The “harmonious society” concept was developed into concrete initiatives in the 11th Five-Year Programme (2006–2010) endorsed by the 10th NPC in March 2006 that was aimed at spreading wealth more evenly and protecting the environment. More importantly, the 6th plenum of the Central Committee in October 2006 formally adopted building a “harmonious society” as its supreme goal in governance.

Building the Party: Educative Campaign and Fighting Corruption Hu Jintao also saw problems in the weakening of the Party’s unity and moral strength. From January 2005 to June 2006, the Party carried out a three-staged nationwide campaign, each lasting six months, to “maintain the advanced nature” of the Party (保持党的先进性). The purpose of this campaign was to improve the quality of the then 69 million Party members and eradicate malpractices that had tarnished the Party’s image and reputation. Party members had to attend educational and discussion sessions to improve the standard and quality of their work. Such educational campaigns, however, may fall short of being effective in improving the Party’s quality. A more effective way is to build institutions that are conducive to clean, transparent and competent

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government. As a move in this direction, the Party has taken measures to enhance its anti-corruption arms and stepped up efforts to ﬁght corruption. According to ofﬁcial ﬁgures, in the 19 months up to February 2007, 6,660 government ofﬁcials were investigated for corruption charges. Even senior ofﬁcials such as a Vice Mayor in Beijing and the Chief Procurator in Tianjin were not spared. The most high-proﬁle case was the ouster of Shanghai Party Secretary Chen Liangyu in September 2006 for the misuse of Shanghai’s pension fund and the abuse of power to seek improper beneﬁts for his family members. Other ofﬁcials of ministerial ranks, including Chief of the National Statistical Bureau Qiu Xiaohua and Head of the State Food and Drug Administration Zheng Xiaoyu were sacked. The results of such anti-corruption campaigns may be short-lived: once the centre’s effort recedes, corruption will resurge. Because of this, the Party is implementing institutional changes to curb corruption. For example, the Party’s Discipline Inspection Committee at various levels is given more power to check ofﬁcials, and in the ﬁrst half of 2007, a National Anti-Graft Bureau was launched. By introducing more transparency and openness in government, by giving local people’s congresses more authority to check the government and by introducing more rule of law in the government, the Party hopes to signiﬁcantly reduce corruption in 3 the years to come.

Coping with Social Discontent Amidst rising grievances and social discontent, in recent years, the Party has placed a premium on maintaining nationwide stability to ensure China’s development course will continue undisrupted. There are many sources of instability arising from public discontent such as local government’s illegal seizure of land, as well as soaring estate prices, medical expenses and educational expenses. For example, while land disputes continue to cause rural unrests, in recent years, the sharp rise in housing prices in the cities has become a source for urban discontent when many ordinary wage earners could not 3

See Yang Dali’s chapter in Part I of this volume for more detailed discussion of this topic.

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RESPONDING

TO

CHALLENGES

AND

PROBLEMS

OF

GOVERNANCE

9

ﬁnd affordable housing. A more worrying trend is the promotion of estate and development projects by local ofﬁcials to generate local revenue. In doing so, they disregard laws and proper procedures in seizing land and driving many peasants from their land and urban dwellers out of their housing. This often results in protests by the residents and peasants. In many extreme cases, thousands of protestors besieged government buildings, demanding government concessions. In response, the Party leadership has tightened supervision of local ofﬁcials, limited land use rights, as well as strengthened regulations on development projects. On the other hand, the Party and government also tried to allow more channels for citizens to voice their concerns. It made an effort to improve the “letters and visits” system (信访), through which citizens can bring their grievances to the attention of higher authorities for a resolution. To add a more personal touch, some local leaders made themselves directly available to the citizens by receiving a few petitioners every month to help solve their problems. In some provinces, aggrieved individuals can also request for an ofﬁcial hearing (听证会) if they are not satisﬁed with the initial handling of their petitions by the relevant government departments. Such measures seem to have generated some results. In 2006 the number of collective protests fell “markedly” by about 20 percent after going on an upward trend from 1993 to 2005. While displaying a caring front, the Party has also shown its readiness to act ﬁrmly against elements that could pose a threat to the stability of the country. These may include intellectuals, dissidents and representatives of non-governmental organisations. In particular, the leadership is averse to “colour revolutions” that have led to the downfall of regimes in several Central Asian countries. Luo Gan, a Politburo Standing Committee member in charge of law and order matters, said in February 2007 that the Party must “defend against inﬁltration and sabotage activities that threaten state security”. The Party can be expected to be even more vigilant as it gears up for the 17th Party Congress due in the second half of 2007.

Looking to the Future The intermittent reports of rising social unrest and environmental disasters by the Western media may have given the mistaken impression that the

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Chinese leadership is in danger of losing control. Yet these incidents still do not constitute a real threat to the regime. For one, China’s successful economic reform and development, whilst creating a lot of problems, has produced many winners, particularly the rising middle class in the urban areas. On the whole, the majority of the population is satisﬁed with and is still supportive of the Party and government. Public opinion surveys continue to conﬁrm this. Nevertheless, in the years to come, China will have to deal with some urgent problems arising from its rapid but unbalanced development. The government needs to deliver public goods in the areas such as affordable housing, education, healthcare and social security to everyone, including the very poor in the rural and urban areas. It also needs to reform government institutions to be more transparent, more lawbiding and more service-oriented. Government institutions need to be able to better protect citizens’ rights and respond to citizens’ demands. The Party also needs to allow civil society to grow more freely. There is increasing pressure for political liberalisation from an expanding urban, well-educated and well-informed middle class. To sum up, while shifting towards a “scientiﬁc development” model may help to solve some of the developmental problems such as environmental degradation and energy over-consumption, the Party needs to introduce real measures in government and political reform, and gradually put China onto the track leading to a pluralist democracy. In this regard, the “harmonious society” banner can ﬂy high. What it carries — democracy, rule of law, justice and equality, among others — is indeed what China needs. But understanding what it needs to deliver does not mean the Party can deliver. While the Party has been relatively successful in managing China’s economic reform and economic development, the current challenges of reforming and building government institutions are likely to be much more overwhelming. It remains to be seen, then, whether the Party can fulﬁl its promise to the people, that is, a democratic and prosperous China.

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T

he Dynamics of Elite Politics in China BO Zhiyue

China’s elite politics in the past decade has evolved along two seemingly contradictory trajectories. On the one hand, it has become increasingly institutionalised. Authority is closely linked to positions and those who do not occupy any ofﬁcial positions no longer have substantial powers. On the other hand, factional groups do exist and have been used as political resources for power contestation.

Political Institutionalisation In contrast to Mao Zedong (1893–1976) and Deng Xiaoping (1904–1997) who exerted extraordinary personal inﬂuences with or without any particular ofﬁces, the top leaders of the Chinese Communist Party (CCP) in the past decade exercised inﬂuence on the basis of their powerful positions. Jiang Zemin (1926–) was the core of the third generation leadership because he was General Secretary of the CCP, President of the People’s Republic of China (PRC), and Chairman of the Central Military Commission. When he relinquished his ofﬁces between November 2002 and September 2004, Jiang quickly faded into history. Although he is still alive and remains interested in the limelight, Jiang is no longer a key player in elite politics. In the same vein, Hu Jintao (1942–) emerged from obscurity into political prominence when he was elected General Secretary of the CCP at the 16th National Congress of the CCP in November 2002. He succeeded Jiang as President of the PRC at the First Session of the 10th National People’s Congress (NPC) in March 2003 and replaced Jiang as Chairman of the Central Military Commission of the CCP at the Fourth Plenum of

11

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the 16th Central Committee in September 2004. Hu’s prominence within the Party leadership was largely due to his assuming these powerful positions.

Factional Dynamics Political factions based strictly on clientelistic ties do not exist in Chinese politics. Yet four factional groups based on corporate ties can be identiﬁed. A typical factional group is the Qinghua Clique, graduates of Qinghua University. There are 20 Qinghua graduates in the 16th Central Committee: 16 full members and four alternate members. Noticeably, four of the nine standing members of the 16th Politburo were Qinghua graduates, including Hu Jintao, Wu Bangguo, Huang Ju and Wu Guangzheng. Another Politburo member, Zeng Peiyan, is also a Qinghua graduate. Other Qinghua graduates in the 16th Central Committee include 10 central leaders, three provincial leaders and one academic leader. These Qinghua graduates do not necessarily form a political faction, but their school ties may be used as resources in politics. The Shanghai Gang is a factional group whose members have worked or are currently working in Shanghai. This factional group is closest to the deﬁnition of a political faction because the relationship between Jiang Zemin, former party boss of Shanghai, and at least some other members of the group is to a large extent clientelistic in nature. There are 17 Shanghai Gang members in the 16th Central Committee of the CCP: 13 full members and four alternate members. Three Shanghai Gang members, Wu Bangguo (1941–), Zeng Qinghong (1939–) and Huang Ju (1938–), are with the Standing Committee of the Politburo. Chen Liangyu (1946–), former party secretary of Shanghai, used to be a member of the Politburo. Zeng Peiyan (1938–), another Politburo member, also had some work experience under Jiang Zemin in Shanghai. The Shanghai Gang reached its peak of inﬂuence at the First Session of the 10th NPC in March 2003 when many of its members took up important government positions in addition to their party positions. Wu Bangguo was elected Chairman of the Standing Committee of the 10th NPC; Zeng Qinghong was made Vice President of the PRC; Huang Ju and

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Zeng Peiyan were both appointed as Vice Premiers, and Chen Zhili and Hua Jianmin were both promoted as State Councilors. However, the Shanghai Gang began its downward slide a month later. Due to his mishandling of the severe acute respiratory syndrome (SARS) epidemic in China, Health Minister Zhang Wenkang (1940–), a Shanghai Gang member, was ﬁred in April 2003. In the meantime, the Shanghai Gang in general and Jiang Zemin in particular suffered reputation damage because they ﬂed to Shanghai. The arrest of Zhou Zhengyi, the richest man in Shanghai, further tarnished the image of the Shanghai Gang. Following Jiang Zemin’s complete retirement, his son, Jiang Mianheng (1951–), was transferred from Beijing back to Shanghai in August 2005. Zhao Qizheng, another Shanghai Gang member and Director of the Information Ofﬁce of the State Council, was also retired in the same month. Huang Ju, Jiang Zemin’s conﬁdant, was terminally ill in January 2006 and has been mostly inactive politically. Most importantly, Chen Liangyu was removed from ofﬁce in September 2006 as a Politburo member, a central committee member and Party Secretary of Shanghai due to his involvement in a corruption case in Shanghai. The third important factional group is the Communist Youth League Group (CCYL), former or current cadres of the Central Committee of the Chinese Communist Youth League. In the 16th Central Committee of the CCP, there are 57 CCYL cadres: 24 full members and 33 alternate members. General Secretary Hu Jintao is a former CCYL cadre. There are three other Politburo members who also worked in the apparatus of the CCYL earlier: Wang Zhaoguo (1941–), Liu Yunshan (1947–) and Wang Lequan (1944–). Since the 16th Party Congress, the CCYL Group has rapidly become an important political force, especially in provinces. In February 2007, nine out of 31 provincial party secretaries were former CCYL cadres. Among them, one may ﬁnd potential central leaders such as Li Keqiang (1955–), Li Yuanchao (1950–) and Wang Yang (1955–). At the same time, 12 out of 31 provincial governors were of CCYL origins. Many former CCYL cadres have also joined the provincial leadership as deputy party secretaries, standing members, vice governors, chairmen of the provincial

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people’s congresses, or chairmen of the provincial people’s consultative conferences. During the same period, former CCYL cadres also became prominent in the central party and government apparatuses. Shen Yueyue (1957–) was transferred to the Central Organisation Department in November 2002; Wu Aiying (1951–) became Minister of Justice in July 2005; Liu Peng (1951–) became head of the State Sports General Administration, and Cai Wu (1949–) became Director of the Information Ofﬁce of the State Council in August 2005. Finally, princelings, children of former high-ranking ofﬁcials of the CCP, constitute another factional group. There are 20 princelings in the 16th Central Committee: 15 full members and ﬁve alternate members. Among the Politburo members, one may ﬁnd Zeng Qinghong and Yu Zhengsheng. Six princelings are current (or former) provincial leaders: Hong Hu (former governor of Jilin), Wang Qishan (mayor of Beijing), Bai Keming (party secretary of Hebei), Xi Jinping (party secretary of Zhejiang), Li Yuanchao (party secretary of Jiangsu) and Yu Zhengsheng (party secretary of Hubei). Seven princelings are working (or worked) in the central party and government organisations: Zeng Qinghong (vice president of the PRC), Liu Yandong (vice chairman of the 10th National People’s Political Consultative Conference), Dai Bingguo (vice minister of Foreign Affairs), Li Tielin (former vice director of the Central Organisation Department), Liao Hui (director of the Hong Kong and Macao Affairs Ofﬁce), Bo Xilai (Minister of Commerce), Zhou Xiaochuan (governor of the People’s Bank of China, the central bank) and Liu Jing (vice minister of Public Security). Most noticeably, a group of princeling generals has emerged in recent years. In addition to three princeling generals in the 16th Central Committee (Ding Yiping, Xu Qiliang, and Ma Xiaotian), other princelings have also assumed important positions in the military. In the past, princeling generals faced two career barriers. Many of them retired in deputy positions and few of them could get into the central committee of the CCP. Now many of the new cohort of princeling generals have already overcome the barrier of the “deputy position phenomenon” to become key ofﬁcers in various organs of the military. Lieutenant General Xu Qiliang (1950–) is a deputy chief of the General Staff; Vice Admiral

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Wu Shengli (1945–) is commander of the People’s Liberation Army Navy; Lieutenant General Liu Yuan (1951–) is political commissar of the Chinese Academy of Military Sciences; Lieutenant General Zhang Haiyang (1949–) is political commissar of the Chengdu Military Region, and General Peng Xiaofeng (1945–) is political commissar of the Second Artillery Corps and a member of the Central Military Commission. It is very likely that some of these princeling generals will cross the “central committee hurdle” and enter the 17th Central Committee in the Fall of 2007.

Institutionalisation and Factional Dynamics Political institutionalisation has been the main feature of elite politics in the past decade. Authority is primarily determined by position. Those who lose their positions lose their authority and those who obtain positions obtain power. This is why Jiang Zemin was reluctant to let go of his ofﬁces because without these ofﬁces he would have no authority. This is also why Hu Jintao is able to emerge from obscurity to become the most powerful man in China. There are four identiﬁable factional groups in Chinese politics: Qinghua Clique, Shanghai Gang, CCYL Group and the Princelings. With different membership and varying degrees of group cohesion, these factional groups have played a role in China’s elite politics. Though seemingly contradictory, factional politics can also go hand in hand with institutionalised politics. Political leaders can augment their formal authority by placing former associates and personal friends into important positions and ﬁghting for formal authority through factional activities reinforces the importance of formal positions. It will be very interesting to see how these two factors — political institutionalisation and factional dynamics — operate to bring about a new leadership at the coming 17th National Congress of the CCP.

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H

ow Did the Hu-Wen Leadership Consolidate Its Power? LAI Hongyi

Only in their fourth year of ofﬁce and China President Hu Jintao, along with his political partner Premier Wen Jiabao, has already left a distinctive political trademark in China’s politics. Right in their ﬁrst year, Hu and Wen impressed with the dismissal of incompetent senior ofﬁcials for their mishandling of the severe acute respiratory syndrome (SARS) epidemic, and their projection of a people-loving image at home and an unyielding leadership image abroad. To cap it all, Hu-Wen’s new policy initiatives have even earned a positive term, the Hu-Wen New Deal (胡温新政). What Hu has achieved politically has come as a big surprise to many overseas observers. Many of them had expected Hu to have a feeble tenure, or Hu to be reduced to Jiang’s puppet at best, if not replaced. Hence the familiar headlines of “Who’s Hu?”, “Who/Hu’s in charge?” and “Is Hu 1 going to be lame-duck leader?” These predictions have turned out to be incorrect. Even when Jiang was still the Chairman of the Central Military Commission (CMC), Hu was able to introduce his pro-people agenda and handle the SARS epidemic decisively during the April–June 2003 period. Contrary to gloomy predictions, Jiang handed the CMC chairmanship over to Hu in September 2004. This marked the ﬁrst real smooth power transfer in the People’s Republic of China. Succession prior to Hu has been fraught with purges and near purges.

1

See Reuters, 15 November 2002; Times (Asia), 25 November 2002; International Herald Tribune, 21 November 2002; The Sunday Times (Singapore), 17 November 2002.

16

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HOW DID

THE

H U - WE N L E A D E R S H I P C O N S O L I D A T E I T S P O W E R ?

17

Hu’s surprising rapid power consolidation can be explained by ﬁrst, the ongoing institutionalisation of China’s leadership succession and second, Hu’s effective political skills. Hu has subtly but skilfully brought his own followers to top political elites and built a coalition. He has also treaded carefully to ensure a smooth leadership transfer, turned calamities into political opportunities and unveiled a series of political initiatives to establish his authority. Institutionalisation of China’s leadership succession started in Deng’s later years. New selective criteria were set for young leaders. They must be highly educated, young in age, professionally trained and politically reliable. Deng also favoured young leaders who embrace his principle of market liberalism, have coastal working experience and served in both 2 local and national positions. The institutionalisation of succession was accelerated under Jiang. The age and two-term limits were also rigidly imposed on top posts including State President, Premier and General Party Secretary (GPS) in the late 1990s. In 1997, Qiao Shi, the No. 2 man of the CCP, retired when he reached 70. In 2002, Jiang retired from State Presidency and GPS after he had served two terms. Another crucial component in the institutionalisation of leadership succession is the designation and two-step installation of the core leader. Deng helped institute this arrangement after June 1989. Deng suggested that each generation of leadership should have a core leader, and the core leader should hold three posts and is the ﬁrst among the equal. He also suggested that the new core leader assume Chairmanship of the CMC sometime after he took over the State Presidency and the GPS. Deng himself handed over this post to Jiang in November 1989, several months after 3 Jiang became the GPS. Obviously, Jiang followed Deng’s arrangement of phased succession. He handed over to Hu the posts of State Presidency 2

For a study on Deng’s promotion of young leaders, refer to Lai Hongyi. 2006. Reform and the Non-State Economy in China: The Political Economy of Liberalization Strategies, Chapter 5; Lee Hong Yung. 1991. From Revolutionary Cadres to Party Technocrats in Socialist China. Berkeley: University of California Press. 3

For a detailed discussion on institutionalisation of leadership succession, refer to Lai Hongyi. 2005. Hu-Wen Quan Toushi (Hu-Wen under full scrutiny). Hong Kong: Wenhua yishu chubanshe, pp. 16–41, 64–66, 319–364.

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and the GPS ﬁrst at the 16th Party Congress in November 2002. Less than two years thereafter, he passed the CMC Chairmanship to Hu. Hu also owes his political success to his political skill in managing top leadership politics and in introducing his own policies. First, Hu has been able to build his own following, form a critical political coalition and counter the inﬂuence of his predecessor’s faction among top leadership. While he was in charge of Party building in much of the 1990s, Hu quietly groomed ofﬁcials who share his institutional background of serving in the Communist Youth League. Coined tuanpai (or the League Faction), these ofﬁcials share many of his pro-people ideals and owe their careers to Hu, regardless of whether they have any direct working relationship with him. By the 16th Party Congress, the tuanpai had emerged as one of the few primary factions/groupings within the national and provincial leadership. Among members of the 16th Central Committee of the Party, the following groups of factions could be identiﬁed — the Shanghai Gang (formerly Jiang’s associates from Shanghai), tuanpai (associates of Hu’s Communist Youth League), economic technocrats groomed by Zhu Rongji 4 and further developed by Wen Jiabao and Wu Yi, and the princelings. What emerged was a balance of power among leaders of the state, the National Party Congress (NPC), the State Council, the Chinese People’s Political Consultative Conference and the military between the Shanghai Gang (or the elitist faction) on the one hand and the tuanpai and economic technocrats on the other. Hu then moved to form a coalition with economic technocrats led by Premier Wen Jiabao. This coalition dominated the Party (under Hu) and the administration (under Wen’s control) as the two most powerful and resourceful institutions of the state. Under this arrangement, Jiang’s associates can thus inﬂuence but not dictate major policies, giving Hu and Wen considerable room in introducing their own policies. Hu also displayed great dexterity in political manoeuvring. He skilfully managed his relations with Jiang and earned Jiang’s cooperation in leadership succession. Besides Premier Wen, Hu adroitly ﬁnds alliance at the Standing Committee of the Politburo. During the anti-corruption campaign Hu worked closely with Wu Guangzheng, his acquaintance at Qinghua University. When Jiang stepped down, Hu also found an ally in 4

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There are some overlaps among these factions.

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19

Zeng Qinghong. Hu also has a smooth working relationship with low-key Wu Bangguo, the head of the NPC. Hu was also able to seize opportunities amidst calamities, launch his own set of policies and move to assert his authority. Hu’s decisively open and intense ﬁght against SARS from mid April to June 2003 saw his popularity soar. Equally important, Hu also converted the downsides of 5 his predecessors’ policies into a main venue for claiming political credits. Former President Jiang Zemin left behind a fast-growing and prosperous economy along with a slowly transforming Communist Party, one that is ideologically ﬂexible enough to embrace capitalists. Yet Jiang was seen negatively as associating the Party too closely with the new rich at the expense of the working classes. To shrug off this negativity, Hu played up his concepts of “people ﬁrst” and “harmonious society” and went on to address elements of potential risks and causes of popular grievances and protests, such as rising urban-rural and inter-strata income inequality, regional economic disparity, urban unemployment and economic plights of commoners. To ease the economic agonies of the lower classes, the Hu-Wen leadership has introduced a pro-people policy platform and renewed reforms to social welfare, healthcare and demographic policies, and introduced rural and land policy reforms. These policies, as documented in other chapters of this volume, address stagnant income, discontentment with illegal resettlement, lack of social security, and rising public services cost for peasants, migrant workers and the low-income groups in the 6 cities. In their four years in power, Hu and Wen are a breath of fresh air in China’s politics and governance. Nevertheless, their pro-people promise and programme have yet to be put into practice by local ofﬁcials. To do so, reforming the highly authoritarian bureaucracy and Party is necessary to make ofﬁcials more responsive to the concerns and voices of the commoners than to the bidding of their superiors. 5

For a detailed analysis of how Hu and Wen established their authority through SARS management and introducing new policies, refer to Lai, Hu Wen Quan Toushi. 6

For an overview and assessment of the Hu-Wen new deal, refer to John Wong and Lai Hongyi, eds. 2006. China into the Hu-Wen Era. Singapore: World Scientiﬁc.

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T

he Chinese Communist Party in Rapid Transformation ZHENG Yongnian TOK Sow Keat

The Chinese Communist Part (CCP) is a party in transformation. China’s “open door” policy and rapid globalisation process in the post-Cold War era have generated increasingly high pressure for changes on the CCP leadership. Once deemed the vanguard of the Chinese State, the CCP’s failing ideological appeal, its equally unattractive and clumsy structure, and disillusioned party cadres are increasingly making the Party’s sustainability problematic. The CCP now needs to review its continued relevance to the ongoing and fast-changing economic, social and political climates in China. Party reforms appear to be the most logical and urgent choice. In the past years, the most apparent reforms to the party are ideological and organisational. Today, the CCP remains the world’s single largest political party with membership of over 70.8 million in the year 2005. The CCP has drastically transformed from a peasantry- and workers-based party to a “catch-all” party. During Mao’s era, the CCP was a revolutionary party that was dominated by workers and peasants. In 1956, the two groups made up 83 percent of the party membership. When Deng came to power, he initiated changes to this membership proportion, replacing workers and peasants with technocrats. Since then, the representation of workers and peasants has dwindled from 64 percent in 1981 to 48 percent in 1994 and to 29 percent in 2005 (see Figure 1). After private entrepreneurs were ofﬁcially admitted as members into the party in July 2001, the number of the once-shadowy group of CCP cadres swelled. Its actual numbers are not ofﬁcially available, but based on

20

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THE CHINESE COMMUNIST PARTY

IN

R A P I D TR A N S F O R M A T I O N

21

Figure 1. Professions of CCP Members, 2005 Self-employed Self-employed (entrepreneurs), free-lance (entrepreneurs), free-lance w orkers, 1.4% workers, 1.4% Government officials, 8.1% 8.1% Government ofﬁcials,

Military/Militiamen, 8.8% Military/Militiamen, 8.8%

Students, 29.7% Students, 29.7%

Workers, 9.1% Workers, 9.1%

Managers of enterprises, Managers of enterprises, non-profit organizations and non-proﬁt organisations professionals, 23.0% and professionals, 23.0%

Peasants, Peasants,19.9% 19.9%

Source: Xinhua News Agency.

2005 ﬁgures (see Figure 1), this group is deemed to come from various job categories from managers and professionals (23 percent), self-employed and free-lance workers (1.4 percent), to unknown numbers of peasantsturned-private entrepreneurs who remained categorised under their previous profession (19.9 percent). Given that the contributions of private enterprises to the Chinese economy were not ofﬁcially recognised by the State Constitution until 1999, this change of faith to allow their owners into the party represents a quantum leap in the CCP’s transformation. Other than private entrepreneurs, CCP cadres who were current students experienced a big jump in their numbers as well. The 2005 number stood at 29.7 percent, almost one-third of CCP’s total membership. This ﬁgure reﬂects the demographical changes to educational proﬁciency in China as well as the CCP’s general move towards building a younger and more educated core of cadres — 23 percent, or 16.3 million, of current membership was under the age of 35, and almost 30 percent of the total has at least attained a college degree. The CCP’s nomenklatura mechanisms have also undergone profound changes. Although the party has retained its Leninist structure, intra-

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party democracy (dangnei minzhu) is slowly transforming the way the CCP works. Experimentations on democratic reforms are carried out in tandem with the ongoing local leadership reshufﬂings. More democratic and transparent nomination and selection systems are encouraged at the local levels. It is now common to see more candidates running for Party committee member at the local levels than the seats that need to be ﬁlled. At times, these candidates were ﬁrst screened by party cadres and local legislators — as was the case with Jiangsu province — before public feedback was sought. The party’s rank and ﬁle is slowly feeling the heat from the State’s adoption of the “rule of law”. “Rule of law” places the party structure alongside that of the State’s, and not “outside” or above the State as before. Unlike the CCP’s Leninist structure which makes its membership highly susceptible to rent-seeking activities, the “rule of law” ﬁlls in for the lack of institutionalised societal supervision. Indictments for breaches of the law became pretexts for party disciplinary actions, more commonly “double restrictions” (shuanggui) or “double expulsion” (shuankai). In the year 2006, some 97,260 CCP members were disciplined by the party on corruption charges alone. This included high-proﬁle cases like that of Qiu Xiaohua, China’s former top statistician, and Liu Zhihua, Beijing’s former vice-mayor. But arguably, none catches more public attention than the sacking of Chen Liangyu, former Political Bureau member and Party Secretary of Shanghai. Chen is the highest-ranking CCP member to be disciplined in a decade. More recently, the Party is planning to set up a special body for corruption prevention at the central level under the direct control of the central leadership and independently from local governments. Corresponding changes were also made to the ideological dimension. CCP’s dogmatic stance with its Marxist roots took an abrupt turn in 1978 when then-paramount leader Deng Xiaoping embarked on his “open door” and “four modernisations” policies. The ideology that was applied as means for class struggle during the Mao era was transformed by Deng to one of development. Jiang Zemin, who succeeded Deng, took China further down Deng’s road of economic revivalism. With the passing of Jiang’s legacy, ideology now plays a different role. China’s current batch of top leaders, headed by Hu, plays the ideological card to justify policies

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THE CHINESE COMMUNIST PARTY

IN

R A P I D TR A N S F O R M A T I O N

23

towards building social justice. Ideologically, the CCP is progressively moving from its puritan Maoist roots to one that marries socialism with free market principles. Changes in organisation and ideology have led to greater space for political engagement by different social groups. The CCP has an aversion to bottom-up initiatives; it is more comfortable with the topdown approach through which it is able to keep developments in check. In recent years, the party has continued to tighten political control, and crackdown on budding social movements. Yet there are also moves taken by the CCP to broaden its social base by pro-actively engaging different social groups, particularly new social forces that have emerged in China’s changing socio-economic environment. Effective governance requires the CCP to solicit political support from these groups. Some democratic features were introduced (again on experimental basis) to local township and village elections. Various election systems were experimented; some adopted a two-vote system (where voters were allowed to vote for both members of their village/township committee as well as the village/township party secretary), while others practised simpler voting systems. The expansion of Non-governmental Organisations (NGOs) and their functions are important measures to gauge social engagement by the CCP. The number of NGOs in China has increased steadily over the years. Prior to 1978, there were only about 100 national social organisations in China. However, statistics released by the Ministry of Civil Affairs, which is in charge of NGO registration, show that by the end of 2003, their number had reached 1,736. Meanwhile, the number of local-level social organisations grew from 6,000 to 142,121. The number of private nonenterprise units, which did not exist before the reforms, hit 124,491. The state is today actively creating and sponsoring NGOs to take over hitherto state functions. In the economic sphere, the government has established intermediary organisations such as trade associations and chambers of commerce to perform sectoral coordination and regulation functions, which in the process reduced the government’s direct management role. In the social welfare sphere, the government is looking at fostering NGOs to take over part of the burden of service provision. In the social development sphere, the government makes use of NGOs to

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mobilise societal resources to supplement its own spending. However, unlike their counterparts in Europe and the US, these NGOs are far from autonomous. They will have to tow the line of the Chinese government in order to remain relevant and effective. Due to this lack of autonomy, the political inﬂuence of China’s NGOs tends to vary, depending on their agenda. In some areas such as poverty reduction, charity and environmental issues, NGOs are encouraged to play greater roles. But in other areas such as religions issues, ethnicity and human rights, the inﬂuence of NGOs is virtually absent. Some NGOs are more powerful than the others. At one end of the spectrum, commercial organisations are generally inﬂuential and powerful; it is not difﬁcult to ﬁnd business people in the People’s Congress and the Chinese People’s Political Consultative Conference at different levels of government. At the other end, workers and farmers are not allowed to organise themselves, and thus do not have any effective mechanism to articulate and aggregate their interests. All these transformations are however mere baby steps along the CCP’s long reformist route. As China refocuses its attention on sustaining economic development, the CCP has to reassess the sustainability of its party rule. The mission is clear: to stay viable, it has to boost its governing capacity (jiaqiang zhizheng nengli). Governing capacity, in turn, depends heavily on the CCP’s ability to renew itself through the party’s mechanisms, to legitimise its predominance in political affairs through connecting with the common people, and to reconnect its ideological frontage with ongoing social and economic changes. These are daunting tasks, but the party appears to be going on the right track, for now.

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T

he Party and the Media: Control versus Change LYE Liang Fook

When foreign media watchdogs examine the degree of press freedom in China, they invariably focus on the apparent ubiquitous control that the Chinese Communist Party wields over the media. According to the Worldwide Press Freedom Index compiled in 2006 by Reporters Sans Frontiers (RSF), a non-proﬁt organisation dedicated to press freedom worldwide, China is ranked dismally at 163 out of a total of 168 countries. RSF considers China among the “worst predators of press freedom” where journalists continue to risk imprisonment or their lives for keeping others informed. Yet, such an assessment underestimates the complex and dynamic changes that had occurred on China’s media scene in the past decade from 1997 to 2007. While the Party’s control over the media remains strong, it increasingly has to contend with a proliferation of various media channels driven by market forces and the population’s insatiable demand for alternative sources of information. Consequently, the Party has to tread a ﬁne balance between maintaining control and an increasing demand by the general public for timely and accurate information, both of which have implications for China’s long-term stability. Although the Party still has the upper hand, it would have difﬁculty persisting with its usual way of control based on fait and fear.

China’s Propaganda Machinery The institutional system that governs China’s mass media as a whole has remained largely unchanged. It can be divided into state and party

25

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institutions. At the governmental level, the two key organisations under the State Council involved in overseeing information ﬂow and control are the State Administration of Radio, Film and Television (SARFT) and the General Administration of Press and Publication (GAPP). Both have provincial or lower level bodies. In theory, all media players come under the purview of the relevant government bodies at the national or local levels. On the Party side, the foremost organisation for media control is the Department of Propaganda (DOP). The roles of the DOP include screening books and articles on the Party or nation’s leaders, signiﬁcant political issues, policies relating to foreign diplomacy, religion or other issues that may be regarded as sensitive, and issuing notices informing publishers and editors of the stories that can or cannot be covered, and the ideological standpoint that should be used when discussing certain issues. Between the Party and state institutions, it is the DOP that wields real control over the media under the rule known as the Party principle, by which the media must adhere ideologically to the Party line, propagate its message and obey its policies and directives. Hence, the DOP ranks above the SARFT and GAPP. In Chinese administrative parlance, these government bodies fall within the xitong (network) of the propaganda machinery of the Party. They often carry out directives set by the DOP.

Media Channels: Diversity and Proliferation The task of the DOP in media supervision and control is getting more challenging with the variety and growth of media channels. Since the reform and open door policy, and especially after Deng Xiaoping’s Southern Tour in 1992 that reafﬁrmed China’s market-oriented reforms, China’s media system has undergone dramatic changes. Among the most important are the trends towards decentralisation and commercialisation. Due to decentralisation, more newspapers, periodicals, television, broadcasting stations and books were established at the municipal/prefectural and county levels. Also, many newspapers and magazines specialising in particular subjects such as property, tourism, entertainment, fashion and employment have ﬂourished.

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THE PARTY

AND THE

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27

The second signiﬁcant trend in the media scene is commercialisation where the media, especially Party owned and afﬁliated ones, had to explore alternative sources of funding as they could no longer rely on government subsidies. An immediate outcome of media commercialisation is the growth of the advertising industry. According to ofﬁcial ﬁgures, the total advertising revenue in 2004 was RMB126 billion as opposed to RMB20 billion in 1994, representing an annual increase of 20 percent in over a decade. Of this amount, the bulk of the advertising revenue came from the property, pharmaceutical, food, cosmetics, home appliances and automobile sectors. Apart from traditional media channels, an equally important development is the growth of non-traditional media channels such as the short messaging systems and the Internet. According to a survey by China Internet Network Information Centre (CNNIC), the number of Internet users in China reached 137 million in 2006, up 23.4 percent from 2005. Another interesting development is the rise of Internet bloggers in China, estimated at 20 million in November 2006, representing a more than 20 percent increase over the same period in 2005. There is a limit to how much inﬂuence the Party and government can exert over these high-tech communication platforms.

Vocalness Versus Control In recent years, there are more reported instances of individuals speaking up against the excesses of the DOP and relevant state media organisations responsible for supervising and controlling the media. This is due to them being more well-informed and to their greater awareness of their rights as citizens. In April 2004, Jiao Guobiao, a professor at the School of Journalism and Communication at Beijing University, posted an article on the Internet attacking the excesses of the DOP including its blatant abuse of power and its endemic corruption. He even suggested that the DOP be scrapped. Jiao was subsequently pressured to resign in March 2005. Other established media organisations and individuals have also questioned the DOP’s high-handedness in dealing with publications that presumably ﬂout reporting parameters. In January 2006, Bingdian (冰点), a weekly publication of the highly-regarded China Youth Daily under

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the Chinese Communist Youth League, carried a controversial article on history textbooks in China. The author, Yuan Weishi, a retired college professor of philosophy from Sun Yat-Sen University in Guangzhou, had offered his interpretation of how past historical events such as the razing of the Summer Palace by the Anglo-French forces and the Second Opium War could have been avoided. The thrust of Yuan’s article was that instead of putting the blame entirely on the foreign invaders, the Chinese side ought to bear some responsibility for these events. The DOP’s response was to suspend the publication and remove Li Datong and Lu Yuegang, the publication’s respective Editor-in-Chief and Deputy Editor-in-Chief. Instead of relenting, Li Datong and Lu Yuegang lashed out at propaganda ofﬁcials and championed free speech in a letter posted on the Internet. A group of prominent scholars and lawyers publicly denounced the crackdown on Bingdian as a violation of China’s Constitution and reminded China’s top leaders of their promise for a consistent rule of law. Bingdian was eventually allowed to resume publication on 1 March 2006, but without its two top editors. Most recently, in January 2007, Zhang Yihe, a renowned writer in the mainland, publicly challenged the GAPP with her demand for an explanation why her book was banned. Zhang’s book is about the suffering endured by seven Peking opera actors, who were friends of her family, during the Cultural Revolution, a sensitive period in China’s history. However, the apparent reason for the book ban was not because of its contents but because of who the author is. Zhang Yihe is the daughter of former transport minister Zhang Bojun, the key target of Mao Zedong’s anti-rightist campaign in 1957. As a result, Zhang has vowed to defend her constitutional right to free speech and publication. Other writers and intellectuals both locally and abroad have expressed support for her. This is yet another example of individuals appealing to the constitution and other legal means to safeguard their rights.

Reform or Obsolescence The DOP will increasingly ﬁnd itself having to justify its actions to the public especially actions taken to ostensibly punish those who ﬂout reporting parameters. It used to be the case that once a course of action

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THE PARTY

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29

had been decided by the DOP, it is accepted and considered case closed. But times have changed. The reform and open door policy have brought about a more vocal and mature Chinese society which the DOP has to grapple with to stay relevant. The much touted harmonious society would require adhering to the rule of law, displaying fairness and respecting differing views. The DOP will need to meet this challenge or face the risk of obsolescence. It is not necessarily at the losing end as it remains an inﬂuential and pervasive organisation, which can tap on these advantages to reform itself. The predominant view of the DOP is that it is a tool of the Party to achieve certain desired ends. The ultimate challenge for the DOP is to transform itself into an organisation that not only serves the Party but also takes on board the interests of the people as well.

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2nd Reading

P

olitical Reforms First,

Democracy Later? WANG Zhengxu

Today’s public opinion surveys consistently ﬁnd the majority of the Chinese population supporting democracy as a form of government. Even among Chinese government ofﬁcials, the ganbu (cadres), the proportion of those supporting democracy and political reform is high and increasing. But some scholars also argue that the Chinese political system has acquired some sort of resilience, and democratic changes will be hard to come by. It is also possible that the Chinese state is turning into a predatory state, voraciously grabbing wealth of the society for the beneﬁt of the corrupt ofﬁcialdom. If such is the case, then political decay (probably in the LatinAmerican style), instead of democracy, will be the future of the Chinese regime. So will China become a democracy? In fact, the rising public demand for democracy and the Party’s desire to renew its governing capacity may combine to drive the state towards democratisation, although this will take place in a gradualist and trial-and-go way. State building and political reform under one-party rule might be the most likely path for China’s continuous democratic changes in the foreseeable future.

One-Party “Democracy” The Chinese Communist Party (CCP) has always emphasised political reform to build “socialist democracy”. To the CCP, China is already a democracy (as clearly stated in China’s Constitution), hence there is no need for China to “become” a democracy. Furthermore, CCP claims that building a socialist democracy is always a continuous, ever-deepening

30

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POLITICAL REFORMS FIRST, DEMOCRACY LATER?

31

process. As a result, a big-bang approach to democratisation is out of the question. Deng Xiaoping in 1980 was the ﬁrst to advocate political reform. To him, political reform was about separating the Party from the direct management of enterprises (zhengqi fengkai), setting age-limit for the retirement of leaders, decentralising power and promoting grassroots democracy (mainly giving labour unions the power of checking factory management). This kind of thinking has continued till today. For the Party, political reform has always been reforming the government institutions, largely in response to the changing tasks of managing the society and the economy. From Deng Xiaoping to Hu Jintao, the Party categorically rejected any idea of multiparty democracy or the weakening of the CCP rule. Following the 14th Party Congress of 1992, China formally launched the drive to transfer the economy to a completely free market economy. In less than ten years, China’s economic system has changed beyond recognition. No democratic changes that were even remotely close, however, took place in the political arena. Jiang Zemin’s era (1989–2002) was marked by tight political control and blind pursuit of economic growth. During this process, the CCP allowed capitalists to enter its rank, and advanced the theory of “Three Represents”, amounting to a minor ideological reconﬁguration. Meanwhile, the Party introduced elections at the village level, and allowed direct elections of the deputies to local people’s congresses. But in terms of political democratisation towards free media, free election of government leaders and legalisation of opposition parties, no visible progress has been made in the ofﬁcial thinking. In the work reports of the 14th (1992), 15th (1997), and 16th (2002) CCP National Congress, mere lip service was paid to the term “political reform”. Why are genuine democratic reforms ruled out by the Party? Lack of vision is probably the most important reason. The CCP leadership has a profound distrust of Western style democracy. The view that multi-party competition equals disorder and inefﬁciency is held by almost all CCP leaders, from Deng Xiaoping down to today’s Hu Jintao. Meanwhile, although the CCP always hails a populist mandate, the Party leadership appears ambivalent about the ability of the people to make right judgments

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in democratic politics. Wen Jiabo, the current amicable Premier, once commented that the low level of education of Chinese peasants is a major barrier to democracy. Lastly, CCP leaders all share the fear that the opening up of politics will lead to chaos, or luan. Hence, although they realise the need to allow more space for people to participate in politics, they maintain that such a process must be controllable and controlled by the Party.

The Increasingly Assertive Society Based on the above, the Party will thus attempt to prolong its one-party rule. Nevertheless, in today’s China two major impetuses are driving democratic changes in the Chinese political system. The ﬁrst is rising citizen awareness and the demand for rights, and the other is, ironically, the Party’s desire to maintain its legitimacy through deliverance of good governance. The ﬁrst is pressing the government to introduce more and more reforms that will legalise citizens’ rights against the state, thus further limiting the power of the state while the second is propelling the Party to adopt political reforms and build institutions that will bring about a more law-based, accountable, transparent and responsive government. In recent years, rising awareness of citizen rights has brought forth changes leading to constitutionalism and rule of law. In a notable case in 2003 (the Sun Zigang case), a college graduate was accidentally killed due to bad government policies at the local level. Citizens, journalists, public intellectuals and legal scholars rebuked the government for its unreasonable policy and inability to correct misdeeds. It eventually led to the public questioning of the constitutionality of certain government regulations, forcing the government to take corrective actions. A second notable case is the anti-discrimination case in 2003 involving a hepatitis B virus (HBV) carrier. Pertaining to this issue, more than a thousand people petitioned the National People’s Congress (NPC) for a constitutional review of the government’s recruitment policies across the country. As a result, at the end of 2003, the national government ordered the abolition of this and other similar discriminatory policies across all the 30 plus provinces. Several similar cases between 2002 and 2006 also demonstrated Chinese citizens’ increasing willingness (and the ability to mobilise themselves)

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33

1

to challenge government policies. Many citizens are also more ready to protest against abusive government ofﬁcials. In a well-known case in 2005, a protest escalated into an open conﬂict between the villagers and the police in Taishi Village, Guangdong. Of course, in all these cases the success of limiting government power or appealing for redress was partial. Nevertheless, in all of them the government was seriously challenged and curbed by the citizens. It appears, hence, that citizens, especially those educated and versed in legal languages, are able to ﬁght for rights and justice in the face of government power. Increasingly too, they are capable of organising themselves on a large scale. What is also important is the emergence of attorneys and social activists who advocate for the wronged and for those without the knowledge or skill to defend themselves in court. These developments do show that the Chinese polity is making small steps towards constitutionalism, limited government, rule of law and political openings in general.

In Search of Good Governance Another driving force to democratic changes is, ironically, the Party’s search for good governance. At least at the top leadership level, the Party seems seriously committed to building a competent and good government. Such commitments, beliefs and visions may stem from the Confucian tradition of government responsibility, the long-term inﬂuence of Party’s discourse and education, or the recently acquired understanding of modern governments in countries such as the US and Europe in the West, and countries such as Singapore in Asia. A second and probably more important cause to this urgent sense of government building is the crisis of governance.

1

Such as the BMW Case in Heilongjiang Province in which a BMW hit a peasant woman, the Nujiang River case in which citizens mobilised to stop a dam project, and the high-speed rail case in which citizens demanded that the government change course in contracting out a mega rail project linking Beijing and Shanghai.

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In recent years, China has experienced frequent social, economic, industrial, environmental and public health crises. In dealing with these increasingly explosive crises, the Chinese leaders realise that openness, transparency and a system of accountability are indispensable. The SARS (Severe Acute Respiratory Syndrome) epidemic in early 2003 was a costly lesson on the importance of transparency. In the single year of 2002, industrial accidents (coal mine collapses and factory explosions, for example) resulted in 14,924 deaths. In 2005 alone, there were 69 coalmine accidents, resulting in a total death toll of 2,671. In 2003, there were 379 cases of food poisoning, involving 12,876, with 323 deaths. Through such painful lessons, many caused or exacerbated by government failures, the top leadership realised that government processes needed to be made more open and transparent if crises were to be prevented or managed well. Since 2004, the Central government has promulgated several regulations to increase transparency and accountability of lower level governments. Another example is the Party’s war against corruption. The Party now understands that transparency is the key to ensuring a clean government. It has decided to build a system of ﬁnancial disclosure of ofﬁcials. At the NPC of 2005, it was made explicit that the Civil Service Law will soon be revised to include such requirements. The national auditing agency is also empowered to check (and release) ﬁnancial records of government agencies. In 2004 alone, the National Auditing Authority revealed illegal ﬁnancial practices of 38 Central Government agencies, involving a total amount of RMB9 billion (US$1.1 billion). Ofﬁcials are now subject to public scrutiny and inputs are invited from citizens. For example, major government appointments are announced for public scrutiny and public hearing sessions are held for some major policy decisions. To institutionalise transparency, accountability and openness, the Party has announced that China should build a law-based government (法治政府, fazhizhengfu). The impersonal, generalist rule of law should replace the case-by-case handling of corruption or ideological campaign, two methods that the Party heavily relied on up till now. In early 2004, the government issued a blueprint for building a “government based on rule of law”. It emphasises “using legal means in the administration of state affairs, economic, cultural, and social affairs”. Most notably, it puts forward concepts such as constitutionality, due process, openness, public’s

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35

right to government information, public’s right to participate in policy decisions and citizen’s right to legal redress. Legal redress has occurred in a well-publicised case in 2005: She Xianglin, a peasant wrongly convicted of murder and imprisoned for many years, received 900,000 yuan (about US$111,000) in state compensation. Other concrete actions have been taken to achieve governmental goals in accordance to law. A Law on Legislation (2005) was adopted for a “legislative check” on lawmaking. In addition to asserting constitutionality on any governmental laws and rules, any law or regulation curbing civil liberty can only be made by the NPC. Government Force Law (2005), Government Permission Law (2003) and Government Punishment Law (1996) form a relatively comprehensive legal framework to limit 2 government power.

Towards Rule of Law Besides building good government, rule of law is also ofﬁcially endorsed by the CCP. “Rule of law” is now included in China’s Constitution and the Party’s Constitution. In fact, in the wake of the Cultural Revolution (late 1970s), China had no legal system to speak of. From 1978 to 2003, China’s national lawmaking body (the NPC) passed 307 laws, giving China a fairly elaborate body of civil, criminal, administrative and procedural laws. In terms of the judiciary system, the People’s Court also started from scratch in the 1980s. By around 2000, courts at various levels had assumed an indispensable role in civil conﬂict resolution. In 2003 alone, courts across China issued verdicts to more than eight million legal cases (about ﬁve million of them are ﬁrst trial cases). Around 1978, the legal profession was nonexistent; by 2000, the number of lawyers in China had exceeded 100,000. Legal aid is also emerging, with lawyers, law students and social activists providing free legal support to those who cannot afford legal services. Law is playing a more and more critical role in China’s society indeed. Nevertheless, China’s judicial system was set up as a tool for the state to rule the society. Ofﬁcially, the legal arm of the Chinese government 2

See the chapter by Zou Keyuan in Part I of this volume on building a law-based government in China.

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includes the police (公 gong), the procuracy (检 jian) and the People’s Court (法 fa). By design, all these three bodies are to work together to prevent any challenges to state order and Party rule. Party control of the legal system results in institutional structures of non-independence and fragmentation of legal authorities. At the highest level, the court system is subjected to the control of both the CCP and the government. Within the court system, lower level courts are subjected to instructions and intervention from the upper level courts. Within a trial court, judges do not have the independent authority to make rulings. At the current stage, it is not possible to pursue “total” judicial independence, as the CCP still controls the legal arms of the state. But as long as the major function of the court system is to provide fairness and rule of law instead of prosecution, many meaningful reforms towards better judicial independence and integrity are possible. In fact, the legal reform has been identiﬁed as a major area of government reform. The Supreme People’s Court is spearheading a judiciary reform project that started from 1999. From 2004 through 2008, it is carrying out its second Five-Year Judiciary Reform Plan. Most of the reforms outlined in this ﬁve-year plan are still piecemeal changes, but big-scale structural reforms have also been identiﬁed as areas of reform, such as the reform of the jurisdiction system to prevent local inﬂuences in civil cases and reforming the Trial and Ruling Committee within the court, changing it into a smaller but more professional body that only serves an advisory function. Judges making independent ruling is to be the norm. In the longer run, more fundamental changes are likely to take place, such as giving courts ﬁscal independence from the same level government. There are also discussions on revamping the currently unitary court system into a sort of federalist system in which there is a national court and a local court. To better promote constitutionalism, there is also a discussion of establishing a constitutional court, much like what some other developing countries have done. Some of these reforms might be quite large in scale, and will be difﬁcult to implement within a short time. But the good news is, they make sense to the CCP leadership, which is ostensibly interested in more judicial professionalism and quality. Developments in the next ﬁve years or so will be good indicators of what to come.

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Growing Democracy under a One-Party Regime? Assuming the ruling CCP will stay in power for some time to come, how will democracy come about within such a strong one-party framework? For a long time to come, political changes in China will still come in a gradualist way, without fundamentally challenging the Party’s power. But nevertheless, this does not mean that there is no hope for democracy. On the one hand, the Chinese society is far more dynamic today compared to 20 or even 10 years ago, and will continue to become more dynamic. A dynamic society demands an open political system. Citizens are becoming more active, articulate, assertive and better organised than before. They are the real force that will drive the one-party regime to adapt. On the other hand, the Party is also consciously reforming the state apparatus to meet the demand of governance. This effort includes reforming the obsolete party-state institutions, but more importantly it includes building new institutions, such as transparency, accountability, representation and rule of law. Hence, China’s democratisation is not a transition into democracy per se, but should be more accurately characterised as building a democracy from within. In the decade to come, it will be a one-party regime that is acquiring more and more democratic elements, a form of “democratic growth” indeed. Such a democratic growth period will last long enough, until the one-party framework itself gradually becomes obsolete. By then a transition into a multi-party competitive democracy is possible.

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T

he Struggle against Corruption YANG Dali

Corruption is a serious socio-political issue in China. Popular discontentment with corruption, then referred to as ofﬁcial proﬁteering (官倒), was an important element behind the massive student demonstrations in 1989. Since the Tiananmen crisis, the scale of corruption in China is generally believed to have worsened. The Chinese media report on new corruption cases almost daily. The annual Auditor General report has unveiled many cases of irregularities, illegalities, and outright fraud and embezzlement in government budget management and operations of major state enterprises. Many corruption cases have also been uncovered in construction, banking, stock IPOs (initial public offerings), regulation of coal mining and pharmaceuticals, as well as customs administration, government procurement, land allocation, municipally-based social security fund management and personnel appointments. Many scholars suggest that endemic corruption is inherent to the system of Communist Party rule and thus continues to fester in the absence of political regime change. It can be argued, however, the introduction of numerous institutional reforms that bear on corruption prevention, together with greater efforts to crack down on corruption, has allowed the Chinese leadership to make some initial progress in containing the spread of corruption. It is likely that further progress will be made to curb corruption and improve governance.

Institutional Reforms for Anti-Corruption Until the 1990s China’s leaders tended to rely on anti-corruption campaigns. Since then they have combined the anti-corruption drive — China leads

38

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AGAINST

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39

the rest of the world in the number of ofﬁcials jailed for corruption each year — with comprehensive initiatives to alter the institutional incentives for ofﬁcials. Some of these initiatives are as follows.

Completing Market Transitions 1. Much of the 1980s type of ofﬁcial proﬁteering, made possible by the existence of multiple — plan, extra-plan, market — prices for the same products, had largely withered away by the mid-1990s as a result of the advent of buyer’s markets for most products. The spread of market incentives has generally reduced the need to go through gatekeepers to obtain goods and services. 2. In the 1990s, the involvement of the armed forces and government organs in business operations severely aggravated the smuggling crisis for the Chinese economy in 1998/99. Between 1998 and 2001, the Chinese leadership successfully divested the commercial businesses and operations owned by or afﬁliated with the People’s Liberation Army, the Armed Police, judicial organs, as well as Party and government agencies. Little noted in the West, the divestiture greatly helped to level the playing ﬁeld for businesses of all types, and reduced the possibilities of corruption. 3. The greater presence of multinational corporations, especially western companies which are subject to stricter regulations on corrupt practices, has helped dampen corruption in China. Companies such as Lucent have dismissed their top China representatives for questionable practices.

Public Sector Management Reforms 4. Since 1998, Chinese government reforms have eliminated most government ministries in charge of industrial sectors and downsized the staff strength of central and provincial government by as much as 50 percent. In the meantime, a systematic drive towards government transparency, service and a reduction of government red tape started in 2001. At different levels of government, the list of government approval items has been reduced substantially. These initiatives

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culminated in the enactment and implementation (in 2004) of the Administrative Licensing Law. 5. Learning from the experiences of Hong Kong and Singapore, a growing number of cities in China have established one-stop administrative service centres. Such government service centres not only improve government efﬁciency but also boost transparency and curb rent-seeking by bureaucrats. 6. Measures of transparency, particularly competitive bidding, tendering and auctions, have been introduced into areas widely known to be afﬂicted by serious corruption, including government procurement, government-funded construction projects and allocation of commercial land use rights. The use of quotas for stock IPOs was scrapped in favour of a more transparent registration process. Major projects, including the Three Gorges Dam and the Beijing 2008 Olympics, now come under the careful scrutiny of central government auditors. 7. In connection with the struggles against smuggling and ﬁnancial fraud in the late 1990s and early 2000s, there have been major investigations of the Customs Administration and state-owned commercial banks. The chiefs of more than a dozen customs ofﬁces nationwide are behind bars and hundreds of ofﬁcials in various cities were punished severely for colluding with smugglers, corruption and dereliction of duty. In the banking sector, Wang Xuebing, the former president of the Bank of China, and numerous lesser banking ofﬁcers, are spending time in jail. In both the Customs Administration and the banking sector, internal controls have been improved since the crackdowns.

Greater Political Accountability 8. The anti-corruption establishment, notably the Central Discipline Inspection Commission (CDIC)/Ministry of Supervision, has been empowered and augmented, particularly since 2004. While CDIC/ Supervision ofﬁcials seconded to other government ministries and agencies were largely part of the host ministries or agencies in the past, they are now required to report to the CDIC/Ministry of

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Supervision only. Meanwhile, the CDIC/Ministry of Supervision has institutionalised the use of roving inspection teams to monitor provincial leaders and uncovered a host of high-proﬁle corruption cases in the provinces. 9. The institutional framework for the punishment of corrupt behavior has been recalibrated. For example, changes in the Criminal Law now require corrupt ofﬁcials to prove that their assets are legally acquired. Those who cannot offer proof can be charged for possessing illegitimate income and sentenced to jail. On the other side of the equation, bribers have also received more attention from prosecutors in recent years. Corruption ﬁghters began to seriously crack down on commercial bribery in 2006. 10. Rules on ofﬁcial accountability and conﬂict-of-interest have been introduced, though enforcement has been relatively weak. All ofﬁcials are also subject to end-of-term audits whenever they are promoted, transferred, or retired. These audits have become an important measure for uncovering ﬁnancial irregularities and corrupt behavior.

Stricter Institutional Restraints 11. A very simple but important change for combating corruption has been the introduction of real name accounts in ﬁnancial services. Until recently anyone could open a bank account with a false name, making it easy for corruption and money laundering. Today real names and proof of identity need to be presented for opening accounts with banks, brokerages and for purchasing government bonds. 12. Government budgeting and management practices are being systematically reformed to reduce individual discretion and enhance monitoring. Take, for example, the collection of ﬁnes by police. The past practice was for the police ofﬁcer or his department to collect the ﬁne directly and spend the collected money (if the police ofﬁcer had not pocketed it himself). Today the police ofﬁcer would have to issue a ticket or payment form for the offender to pay through a monitored bank account. In general, such reforms — and there are

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many others — have strengthened ﬁnancial monitoring, ferreted out numerous ghost payrolls in the localities and regularised ﬁnancial management. 13. The National Audit Ofﬁce (NAO), with the support of the Premier’s ofﬁce and the National People’s Congress, has also gained clout. The public release of NAO’s audit reports has helped spur further reforms in government ﬁnancial management.

International Norms and Obligations 14. As its international presence has grown, China also has to live up to more international norms and obligations that bear on governance and anti-corruption. WTO membership, for example, imposes requirements on government transparency, especially in economic governance. As a corollary of its entry into the WTO, China is obligated to further promote government procurement reforms. As a signatory to the recently-approved UN Convention Against Corruption, China has announced that it will set up an Agency for Corruption Prevention even as it hopes the Convention will help it extradite corrupt ofﬁcials back to China.

Reforms and Results Various surveys from both within China and abroad have pointed to modest improvement in China’s corruption. In a tracking poll of urban residents, “Clean government/anti-corruption” rose to number two in 1998 and number one in 1999 among the three most important issues the residents were concerned with. As the Chinese leadership intensiﬁed the crackdown on corruption and introduced various institutional reforms, the ranking of “clean government/anticorruption” has moved down steadily and no longer ranks within the top seven. Meanwhile, Transparency International’s Corruption Perceptions Index (CPI) for China had recovered from the low achieved in 1995 to the 3.3 level in 2006. Though still quite low, China’s CPI score ranked it 70 among the 163 countries or economies in the survey and is actually substantially better than what its nominal per capita GDP would predict.

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Overall, the top leadership, the media, and the public are in favour of more sunshine measures and in such an atmosphere, it is virtually impossible for any politician to reverse basic reforms, such as auctions for land earmarked for commercial use. In conclusion, while the Chinese corruption situation remains serious, a more effective institutional framework for corruption ﬁghting has gradually come into being in China. Much remains to be done, of course. The Chinese leadership will be wise to continue to prioritise anti-corruption and promote institutional reforms that improve governance and reduce corruption.

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M

anaging China’s Civil Servants Kjeld Erik BRØDSGAARD

After a 12-year trial of regulations on civil servants, on 27 April 2005, the Standing Committee of the 10th National People’s Congress of the People’s Republic of China adopted The Civil Servant Law which took effect on 1 January 2006. Who are the civil servants in China and how many are there? According to the new law the term civil servant refers to a person who performs public duties in accordance with the law, is part of the state administrative stafﬁng (bianzhi) and enjoys salary and beneﬁts from the state ﬁnance. There are about 64 million people in China on the public payroll, but only 6.37 million of these can be categorised as civil servants. They work in state organs (jiguan) and are the real bureaucratic backbone of the system. A civil servant should satisfy the following: a Chinese citizen, at least 18 years of age, uphold the Chinese constitution, have good moral conduct, good health and an educational level and a working capacity as required for the position. The new law also stipulates that all public servants should be recruited through just, open and fair examinations. Ofﬁcials should take the blame and quit their posts if their mistakes or negligence cause major losses or serious social repercussions. Civil servants are also required to stay out of cases involving their relatives. Civil servants are normally regarded as cadres, but not all cadres are civil servants. In fact there are 42 million cadres in China, and only those working in administrative state organs are civil servants. This means that public employees working in shiye danwei such as schools, hospitals, cultural institutions, social service, etc cannot be regarded as civil servants.

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Civil servants are not necessarily party members. However, it is difﬁcult to go any further than the level of division head (chuzhang) without a party membership. It is almost impossible to be appointed to the “real leadership position” (zheng zhi) without being a party member, although there are an increasing number of non-party members in vice positions. Civil servants are classiﬁed according to the nature of work, level of responsibility and qualiﬁcation, ability and political integrity, working experience and the degree of complexity/difﬁculty involved in the position. Based on such classiﬁcations the civil service is divided into 15 grades. Corresponding to this hierarchy is a four-component wage system: position salary, grade salary, basic salary and seniority salary. According to this system, in 2003 the president of the PRC earned a salary of 3,186 yuan per month. This sum composed of position salary (1,750 yuan), grade salary (1,166 yuan), basic salary (230 yuan) and seniority salary (40 yuan). Basic salary and seniority salary is the same for everyone in the civil service; only position salary and grade salary vary. There have been some adjustment to the salaries of civil servants recently, but the basic system remains unchanged. In recent years, to strengthen the state’s governing capacity a number of regulations for the selection and appointment of cadres that serve as civil servants have been introduced. Thus there are now clear criteria concerning age, gender and national minority distribution. A civil servant without higher education will not be able to go beyond division level or become a top leader without having reached the division (chu) level before the age of 40 and the department (ju) level before the age of 45. This has resulted in a much better educated and younger bureaucracy than during Mao’s and Deng’s times. It is often argued that there are too many public ofﬁcials in China. This is an impression conveyed in speeches by government ofﬁcials as well as in scholarly publications. However, the reality is that China in an international comparison has comparatively few public employees. There are 64.38 million people on the state payroll in China. Of these, 28.41 million work in productive enterprises such as manufacturing and construction while 25.34 million work in health, education, culture, social

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service and other shiye danwei. There are 10.63 million public employees in government and party agencies, 6.37 million of whom belong to the category of civil servants. In addition there are more than three million in the military and in the People’s Armed Police (PAP). These people are encompassed by the bianzhi system and are said to “eat imperial grain” (chi huangliang). The Chinese often claim that the number of people “eating imperial grain” has increased dramatically and that the country has become highly bureaucratised. The reality provides another picture. State-salaried people in China constitute 5.1 percent of total population and 8.6 of total employment. In comparison the percentage in Denmark is 14.9 percent and 29.9 percent respectively. If the employees in productive enterprises are taken out the remaining 35.96 million employees in shiye danwei and in state and party administrative organs only account for 2.9 percent of the population or 4.8 percent of the total number of employed people. In comparison the Nordic countries employ between one quarter and one third of workforce in the public sector with Finland at the lower end, Sweden and Norway at the higher and Denmark in the middle. Among the developed countries Korea has one of the lowest percentages of public sector employment as a percentage of total employment (11.2 percent in 2004). The comparatively small size of the Chinese government is also reﬂected in the fact that government revenue in China only accounted for 19.3 percent of GDP in 2004. In the Nordic countries government revenue accounted for more than 50 percent of GDP in the same year. In Japan the percentage is 31.6 percent and even in the United States, government revenue amounted to 29.6 percent of GDP. During the 1990s the ratio of state revenues in China fell to about 10 percent, generating doubts about the Chinese state’s extractive capacity. Not only is the Chinese bureaucracy small, it is also plagued by a lack of qualiﬁed personnel. To be true in recent years the educational and professional quality of government personnel has risen considerably, but there are still many problems such as the widespread misuse of academic degrees and titles. The most common way of faking titles and degrees is changing technical school and post-secondary school diplomas into college degrees or even doctoral degrees. Another method is to change titles from,

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47

for instance, technician to chief engineer or economic administrator to chief economic administrator. A third widespread method is to equate courses taken at Party Schools to professional diplomas or university degrees. There is no doubt that the authorities are well aware of the many problems faced. There are discussions in the media and in internal government and party publications stressing the need to build a contingent of qualiﬁed personnel and of improving the state and the party’s governing capacity. The Chinese leadership has learned its lesson from the collapse of the Soviet Union and they know that improving the quality of public ofﬁcials and strengthening the capacity of governing institutions is a sine qua non for continued party rule. They also know that further reform in this area is a crucial part of ongoing attempts to further regularise and institutionalise Chinese politics.

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C

an Beijing Still Dictate Local Politics? TAN Qingshan

Beijing’s relations with provinces have never been so dynamic, ﬂuid and interdependent as in the past ten years. In central-local relations, local governments were often out of sync with central themes. The biggest challenge for the central government is to rein in local governments without jeopardising economic growth. Rapid economic development and ﬁnancial restructuring have given local governments the power to pursue their own developmental strategy which is often at odds with central priorities. A single-minded pursuit of rapid economic growth by local authorities has resulted in local regulatory negligence, corruption, occupational accidents, environment deterioration, and food and drug safety problems. To restrain wayward local governments, the central government has launched several noticeable counter measures including tightening personnel grip, reasserting party control at various levels, improving Party supervision, expanding state regulatory authority over local economies and centralising state regulatory institutions. The recentralisation is hardly a zero-sum game, but a way to ensure local compliance with central priorities. However, achieving such central objectives is increasingly dependent on local cooperation and implementation. The central leadership has tightened Party control over provincial governments. This is to address the conﬂict between top provincial leaders and among provincial political institutions over whether politics or economics should be given local priority. While provincial Party secretaries are more concerned with overall political and social stability,

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49

governors, administrative ofﬁcials and local legislators are more interested in economic development. To tighten Party control over provincial governments, the central leadership has placed provincial Party secretaries in top provincial people’s congress (PPC) posts and allowed most of the provincial Party secretaries to take over the presidency of PPC Standing Committees. That puts local Party leaders in control of local legislatures. To oversee the performance of provincial Party secretaries (PPS) and constrain possible PPS abuse of power, the supervising power of the Provincial Party Commission of Discipline Inspection (PCDI), a Party watchdog against corrupted and undisciplined provincial Party and government ofﬁcials is enhanced. In the past, PCDI personnel matters were controlled by locally appointed provincial Party secretaries, thus limiting its ability to discipline its provincial boss. With the direct appointment of provincial Party disciplinary committees heads by Beijing, this takes away the PPS personnel power over PCDIs. At the same time, centrallyappointed PCDI czars are also members of the provincial Party standing committees, the key provincial decision making body. This measure will make PCDIs answerable to Beijing rather than to provincial Party 1 secretaries and hold top provincial ofﬁcials more accountable. Boosting ﬁnancial power is a key part of the state’s strategy to rein in local governments. The central government has stepped up ﬁscal control over local governments by introducing a tax-sharing scheme in 1994 that aimed to streamline complicated ﬁscal measures and ending incessant bargaining between the central and local governments. The new ﬁscal system has generally improved state extractive capacity resulting in the steady increase in government revenue as a percentage of GDP from 10.8 percent in 1994 to 17.3 percent in 2005. The centre’s share of state revenues grew from 6 percent of GDP in 1994 to 9 percent in 2005. The centre has also reversed a declining trend in its share of revenue with local governments. Since 1999, the centre’s proportional share of government revenue has gone up to more than 53 percent on an annual average. The success in part

1

Tan Qingshan. 2004. “China’s Provincial Party Secretaries (II): Powers and Constraints.” EAI Background Brief, No. 196, East Asian Institute.

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was attributed to the establishment of the State Tax Administration with provincial agencies responsible for collecting various central taxes from the local governments. The Beijing leadership has also centralised and empowered other state institutions to exercise macro and regulatory control over local development. Newly empowered state agencies, such as the State General Administration of Quality Supervision, Inspection and Quarantine, the State Administration for Industry and Commerce, the State Environmental Protection Administration, the China Centre for Disease Control and Prevention, the China Securities Supervision Commission, and the State Food and Drug Administration, represent state determination to curtail local protectionism and establish central standardisation in policy implementation, market regulation and law enforcement. This “soft” centralisation may have transferred power from local governments to the centralised bureaucracies and to an extent, curbed localism, but it has also strengthened provincial governments, as they continue to control the 2 institutional mechanisms of personnel and budgetary resource allocations. The success of this regulatory centralisation will hence heavily depend on provincial cooperation. Given the state efforts, the centre still faces daunting challenge in lining up local governments to achieve state objectives, such as a “scientiﬁc concept of development” and a “harmonious society”. For years, unabated land development and investment has threatened the centre’s effort in achieving an economic soft landing, and yet, local governments continue to circumvent or ignore the centre’s directives by giving out bank loans and approving illegal land deals. The latest survey shows that illegal land use accounted for 60 percent of the total approved land use in 2005 and the situation is worsening. The central government has failed to curb housing investment and land development because the stake or incentive is too high for local ofﬁcials to forgo. These local ofﬁcials count on land development as their “political record” for career promotion as well as for boosting local revenues.

2

Andrew C. Mertha. 2005. “China’s ‘Soft’ Centralization: Shifting Tiao/Kuai Authority Relations.” The China Quarterly (184): 791–810.

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51

Even if the tax reform of 1994 has contributed to an increase in central revenues, local governments continue to enjoy non-tax revenues derived from “fees” imposed on the public. A report from the Ministry of Finance estimated total local non-tax revenues at more than one trillion yuan in 2005, which did not include revenue from land sale. Non-tax revenues constitute major income for governments in poorer regions. In some western areas, non-tax revenues are even higher than the total ﬁscal revenue for local governments. Most non-tax revenues were various administrative fees and ﬁnes imposed on the public, and were used for lavish “business consumption” (gongkuan xiaofei) and for year end bonuses for government or institutional employees. These incomes disproportionably beneﬁt government employees at the expense of the public. The lack of local cooperation and compliance with the centre often runs counter to the centre’s populist policy intent as local governments are often viewed by the public as predators. Despite the central objective of pursuing a “scientiﬁc concept of development” and building a harmonious society, corruption, miscalculation and mismanagement of local governments continue to generate mass protests and collective resistance. State statistics showed that in July 2005 alone, there were about 80,000 cases of social unrest, which was more than the 56,000 cases in 2004. Ironically, the high-handed behaviour of local ofﬁcials was, in many cases, responsible for the rise in social tension, and yet, these were the ofﬁcials entrusted with the task of crisis management. Proper handling of such social tensions not only calls for wisdom and tolerance, but pro-people attitudes of local government ofﬁcials. An iron-ﬁst approach to crack down on mass protects is short-sighted and often counter-productive. The recent decision to train over 56,000 county ofﬁcials on the issue of building a new socialist countryside represents the centre’s desire to reach out to local ofﬁcials directly. However, the effect of this new experiment on creating central orientation in local ofﬁcials very much hinges on the further tightening of Party control over local governments. The downfall of former Shanghai mayor Chen Liangyu could be politically motivated, but at the same time, it also demonstrated the centre’s resolve to punish

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those who deviate from the centre’s orders. The deterring effect of such a high proﬁle move by Beijing on local governments remains to be seen. The rectiﬁcation of current central-local relationship is the key to the realisation of the centre’s objectives of scientiﬁc development and harmonious society. Notwithstanding measures to ensure control of local ofﬁcials, better Party supervision, downward reach of state institutions and local administrative reform, the central government still ﬁnds it difﬁcult to contain local abuse of power, impose macro control and reduce social tensions. In the present central-local relationship, the central reach is long, but grip is just weak.

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T

owards the Rule of Law ZOU Keyuan

For the ﬁrst time in the history of the People’s Republic of China (PRC), the concept of the rule of law was incorporated into the Constitution, in 1999. Following that, progress towards building a government based on rule of law was gradually made. In April 2004, the policy on “Implementing Administration in Accordance with Law” ofﬁcially ushered in a new era of law-based government in China. The Party’s determination to promote rule of law is ﬁrst due to the fundamental changes China has seen since the late 1970s. The shift from the old planned economy to a new market-oriented economy has brought prosperity and the rule of law concept on which it is based. China has ofﬁcially pledged to establish a comprehensive legal system by 2010 to facilitate the development of the economy. The World Trade Organisation (WTO) obligations constitute another main factor for the change in China’s legal environment and law enforcement mentality and methods. As a WTO member, China has to bring its relevant laws and regulations in line with those of the WTO, including transparency and accountability. The severe acute respiratory syndrome (SARS) epidemic in 2003 and many later incidents were other push factors. The poor administration and management in the early period of the SARS outbreak was a partial cause for the thousands of SARS victims within and outside China. The Chinese government ﬁnally realised the importance of law when it applied the 1989 Law on Prevention and Control of Infectious Diseases to the SARS case.

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Implementing Law-Based Administration In the “Implementing Programme of Comprehensively Pushing Forward Administration in Accordance with Law” of 2004, the Chinese government pledged to realise a rule-of-law government by around 2014 or 2015. The document laid out six basic requirements for law-based administration, including lawful administration, reasonable administration, due process or judicial fairness in proceedings, efﬁciency and readiness to serve the people, honest and clean administration, and power with responsibility. In the last decade, several laws were enacted to build a law-based government. The most important of which is the Law on Administrative Licensing, passed in August 2003 and enforced on 1 July 2004. Administrative licensing as deﬁned by this Law is the examining and approving of a speciﬁed activity by an administrative organ. Administrative licensing is necessary for public health, macro economic adjustment and control, ecological environmental protection, and development and utilisation of limited natural resources. Administrative licensing documents must be publicised before an administrative license could be granted. A citizen, legal person or an organisation has the right to apply for administrative review or launch an administrative litigation. The new law explicitly forbids government agencies from granting permits or collecting fees not required by the law. Another important law is the 1996 Law on Administrative Punishment. It governs administrative activities and imposes punishment on violators. It works on several principles: (1) no punishment shall be imposed when there is no express stipulation for such a punishment; (2) the power to prescribe punishment for personal rights or property rights belongs to the central legislature, and (3) the procedure for administrative punishment is for the ﬁrst time detailed in the law, particularly the hearing system which is quite new in China. This is one of the important milestones for rule of law in China. Following this law, other major laws were also enacted, such as the Law on Administrative Review Procedure (1999) and the Law on Civil Servants (2005). The latest development in administrative law is linked to WTO requirements. Governments at all levels should administer in accordance to the law and follow the transparency principle set forth by the WTO.

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RULE

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After China’s accession to the WTO, it can no longer govern the country by using large amount of normative internal documents. These government documents should be reﬂected in the form of laws and regulations when needed and in line with WTO regulations.

Administrative Transparency The need for transparency in governance was made urgent by the SARS epidemic in 2003. The new Regulations on Public Health Emergencies were enacted in May 2003, granting individuals or organisations with the right to report emergencies and maladministration. For the ﬁrst time, an information publicising system at governmental level was established. This complemented the 2004 “Administration in Accordance with Law” which requires the “openness” of government information. The public has the right to consult publicised information under conditions stipulated by the government. In a recent Shanghai case, Dong Ming, a 70-year-old woman sued the Xuhui District Government for denying her right of access to archives of the garden villa she used to live in. According to Dong, her father bought the villa in 1947, but her family was expelled from it in 1968. Since it was the ﬁrst case after the Provisions of the Shanghai Municipality on the Openness of Government Information came into force on 1 May 2004, it drew wide attention within China, in particular from the legal circle. Transparency is also an internet-induced response. In the past, the government was able to monopolise and control information and its ﬂow. However, with the development of the internet, the public information platform has become very big. As a result, the government is no longer able to monopolise and control information, thus making transparency an inevitable choice. With the growth of the internet and with the number of internet users in China standing at 94 million as of 2004, the internet therefore poses a new challenge to Chinese governance.

Judicial Remedies A milestone in limiting governmental power is the promulgation of the Law on Administrative Litigation in 1989 which deﬁnes legal as well as illegal administrative activities. Since the implementation of this Law, and

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as of April 2004, courts throughout the country has accepted and handled more than 910,000 “min gao guan” (government ofﬁcials sued by ordinary citizens) cases covering more than 50 kinds of administrative areas. So far, 30 percent of plaintiffs won their case. The 1994 State Compensation Law is a big supplement to the Law on Administrative Litigation. Victims suffering damages caused by State organs or their personnel have the right to claim compensation from the State. In one of the notable cases, 25 repatriated people were burnt to death in a mini-bus travelling from Haifen to Guangzhou in Guangdong Province in April 2001. Families of victims were not satisﬁed with the post-death treatment and decided to sue the Shanwei local government. The court ruled in favour of the families of the victims. The Intermediate Court upheld the ruling in the appeal case. Between 1995 and November 2004 procuratorates at all levels throughout the country registered and handled 7,823 compensation cases and made decisions on 3,167 of such cases involving compensation of more than RMB58 million.

An Unﬁnished Task China is in a transitional period in which “rule of man” and “rule of law”, and “rule by law” and “rule of law” coexist. The current legal reform in China can be characterised as “rule of the Party by law”. It is not appropriate to use the standards of a matured legalised society to measure China’s legal developments. Although the CCP has imposed signiﬁcant constraints over the development of the Chinese legal system, admittedly the achievements in China’s legal reform up to today should be attributed to the efforts made by the Party. In the past, such as Mao’s era, the CCP had rejected outright the rule of law. The trend is now likely to change. For one, Chinese leaders trained in law have increased in number. Between the last two CCP Central Committees, the number of full members with law degrees rose from three (2 percent) to eight (4 percent). The course towards rule of law is thus irreversible.

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T

he Party And The Gun: Civil-military Relations LI Nan

Party-army relations in China under Mao Zedong were highly symbiotic for lack of clear institutional boundaries. This is due to Mao’s emphasis on “politics taking command” and “human factors”, but not divisionof-labour-based technical expertise. As a result, political alliances and conﬂicts were largely deﬁned by personalised factions that cut across party-army boundaries. Under Deng Xiaoping, however, clearer party-army boundaries emerged because Deng had allowed for more institutional autonomy, so that the People’s Liberation Army (PLA) could stay away from politics and pursue technical upgrading. The only caveat is that at the top leadership level such as the Central Military Commission (CMC), Deng relied on his personal inﬂuence and his pre-1949 Second Field Army comrades to control the army. These enabled him to employ the military against political opponents in the party and from society at critical moments such as the popular rebellion in 1989. By similar logic, many observers assumed that after he became the CMC chair in 1989, Jiang Zemin consolidated his power in the military through personnel appointments and budget increases, so that he was able to employ the military against his political opponents in the party and from society. During the 15 years of Jiang’s command of the gun, however, little evidence existed to show that Jiang had mobilised the military against political opponents in the party and from the society. Lacking Deng’s credentials and unsure of his ability to control a politically mobilised army, Jiang apparently adopted a different policy. That is, to enhance civilian governance, or the party’s legitimacy to rule by promoting

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economic growth and political stability, and to adopt programmes that conﬁne the military to narrow functional-technical tasks. These policies had helped to maintain party-army institutional boundaries and the internal cohesion of the military, because it denied the military of an opportunity to intervene in politics. On the civilian side, for instance, Jiang had replaced the post-1989 policy of military control and ideological indoctrination with a focussed pursuit of economic growth at the 14th Chinese Communist Party (CCP) Congress of 1992. This was intended to enhance the CCP’s legitimacy to rule by increasing the citizens’ income and improving living standards, and providing employment opportunities for millions of people who join the labour force every year. It also helped to generate revenue for preventing and preempting crises. Moreover, the attention was placed on managing social protests stemming from the downsides of rapid economic growth, such as massive urban unemployment due to the reform of state-owned enterprises, over-taxation of the peasants, rampant corruption, wealth polarisation and environmental degradation. The People’s Armed Police, which is primarily responsible for maintaining domestic social stability, was strengthened, and riot control units with non-lethal means such as tear gas and rubber bullets were deployed. All these had reduced the need to mobilise the PLA for domestic functions. On the military side, Jiang aimed to conﬁne the PLA to narrow military-technical tasks. For instance, he endorsed the new PLA strategic principle of preparing for local war under high-tech conditions in 1993, and in 1995 adopted a policy to transform the PLA from a manpowerintensive force to a technology-based one. He introduced the concept of “leapfrogging” development in 1997 by shifting the emphasis of military modernisation from mechanisation (adding new hardware platforms) to informationisation (developing information technologies (IT)-based network and software) to narrow the technological gap. This led to the CMC’s full endorsement of the policy of dual-transformation (mechanisation and informationisation) of the PLA in late 2002. These technology-centric policies led to decisions to downsize the PLA by 500,000 positions in 1997 and 200,000 in 2002. Promoting revolution in military affairs (RMA)-based transformation also beneﬁts civilian control because disparate military units would be integrated closer by

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the IT network, which reduces the “asymmetry of information” and thus enhances the effectiveness of central control. Finally, Jiang endorsed the policy to divest the PLA from business activities in 1998. This signiﬁcantly reduced the domestic role of the PLA. It also helped to reduce bickering over distribution of funding and corruption cases among ofﬁcers and the ranks, thus enhancing the internal cohesion of the PLA. Moreover, it was a good political strategy to control the PLA through the control of the purse by cutting off its sources of extra-budgetary income. Similar to Jiang, Hu took over the position of the CCP general secretary in 2002 with weak credentials, having no service experience and few close connections in the PLA. Hu’s strategies in dealing with the PLA are also similar to Jiang’s. Basically, he has focussed on enhancing civilian governance by promoting social justice and sustainable economic growth, and adopted programmes to conﬁne the military to narrow functionaltechnical and external tasks. On the civilian side, for instance, Hu has attempted to reverse the excesses of single-minded economic growth such as the widening of income gap that has led to serious social tension, the lack of social security for marginalised groups in society, graft of ofﬁcials and environmental damage. Hu believes that these issues cannot be resolved by more economic growth and riot control techniques alone, but rather by dedicated social policies. Hu has worked closely with Wen Jiabao to divert investment from the rich coastal regions to the less developed heartland and the west, reduce tax burdens of the farmers, remove restrictive regulations on migrant workers, develop basic social and medical safety valves for the poor and the unemployed, ﬁght corruption on a more substantial scale and require green gross-domestic-product growth as criterion for local ofﬁcials to have career advancement. These policies proved to be immensely popular, and contributed to the image that the CCP leadership can also have a heart and a human touch. The image of Hu’s fair and competent governance clearly enhanced the CCP’s legitimacy to rule. This helped to consolidate Hu’s control over the PLA as well because Hu also became popular among PLA ofﬁcers and ranks. The image of competent civilian governance also reduced the necessity for PLA’s intervention in politics.

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On the military side, Hu has endorsed programmes that conﬁne the PLA to its military-technical and external tasks. At a CMC expanded conference in late 2004, Hu introduced a new military policy that includes the four new missions of the PLA: 1) serve as a source of strength for consolidating the CCP’s governing party position; 2) provide security guarantee for the window of strategic opportunity for national development; 3) provide strategic prop for the expansion of China’s national interests, and 4) play an important role in safeguarding world peace and common development. The ﬁrst mission may contradict somewhat the institutional autonomy of the PLA, but it is the politically correct thing to say for any new CCP leader, and it really refers to the CCP’s “absolute leadership” of the PLA. The best way for the PLA to help consolidate the CCP’s governing position, however, is not to intervene in this governance, but to concentrate on developing its functional and technical expertise. The other three missions are generally in line with narrow militarytechnical tasks. The second mission, for instance, refers to continued military modernisation to enhance the credibility of deterrence against threats on the margins of China such as Taiwan independence and so forth. The strategic stability as a result ensures a peaceful external environment for economic development at a time when China beneﬁtted from the diversion of the US attention to countering terrorism, globalisation and integration of China into the global economy. The third mission refers to securing China’s newly emerging interests associated with the maritime space, electromagnetic space, outer space and other areas in addition to China’s traditional security interests such as its sovereign territories, airspace and waters. The ﬁnal mission refers to PLA’s participation in the United Nations peacekeeping operations. What is remarkable about these new missions is that they are all external. This is a good political strategy to control the PLA because civil-military relations usually are easier to manage when the military is externalised. At the operational level, Hu has continued Jiang’s programme of RMA-based transformation of the PLA. In May 2003, Hu presided over a Politburo study session in which researchers from the Academy of Military Science lectured members on world trends in RMA and priorities

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of China’s military modernisation. Hu has initiated a campaign to study RMA-related subjects in the PLA. He has also supported PLA personnel reform to appoint those who understand RMA to higher ranks and key positions and recruit IT specialists from civilian universities. Finally, Hu has stressed regular military training and exercises, rules and regulations and effective management as major ways to regulate behaviour. All these clearly aim to conﬁne the PLA to its functional and technical expertise, a good political strategy to enhance the “objectiveness” or institutional control of the PLA.

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T

he PLA in Transformation YOU Ji

In 2002 China substantially revised its 1993 national defence strategy ofﬁcially declared as “winning a regional limited war under high-tech conditions”. The new strategy has reset the direction of the People’s Liberation Army’s (PLA) modernisation: from seeking superiority through mechanisation (enhancing high-tech hardware) to realising dual transformation through mechanisation and informatisation (IT integration). This will exert profound impact on the PLA’s long term evolution.

The PLA’s New Path to Modernisation The PLA’s 1993 strategy was a response to the altered form of warfare, as shown by the ﬁrst Gulf War, and as a result of embracing the Revolution in Military Affairs (RMA). The strategy emphasised joint operations based on advanced conventional platforms. Weapons of Information Warfare (IW) were regarded as supportive. In the new century the PLA’s application of the RMA has entered a new stage: it has placed systems integration above developing individual high-tech hardware. Informatisation is thus singled out as the driving force behind PLA’s transformation by the Central Military Commission in 2002. This revised strategy reﬂects the PLA’s new understanding of the type of war facing the PLA in the future — if the combat is between conventional platforms, the key to victory is the IT systems integrating the hardware. Thinking in simplistic terms of adding hardware platforms to improve military capabilities is obsolete. Therefore, IW is no longer seen as a combat method but a dominant form and core of all other types of military engagement. Nor is IT upgrading a matter of technical signiﬁcance. It is the lifeline of the PLA in the next war.

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To the PLA, systems integration represents a short cut to raising combat effectiveness as compared to adding expensive hardware. Informatisation provides the means for intelligence to be quickly shared, decision process accelerated and orders implemented smoothly. Real time grasp of battle-ﬁeld situation is crucial for any war action in the IT era. 4 This sets the direction of PLA modernisation with C ISR (which stands for command, control, communication, computer, intelligence, surveillance and reconnaissance) interconnectivity as the top priority. Therefore, informatisation has made the RMA-driven transformation of the PLA more comprehensive and systematic than before. The 2002 strategy indicated a change in focus from platform-centric to networkcentric. This represents signiﬁcant progress in China’s catch-up campaign. Now the effort to enhance IW systems parallels that of creating a new class and new generation hardware. 4 Beyond the central levels, the PLA has no uniﬁed C ISR systems, leading to poor cooperation and coordination between different Services in combat operations. The PLA is designing an overarching program of informatisation to address this problem. IW systems will be standardised and regularised among and between all Services. This will help realise unobstructed and digitalised transfer of information between all systems at the strategic, campaign and tactic levels, among Services and between platforms.

The Generation Leap Strategy The idea of generation leap is the core of the new defence strategy. It means that the PLA pushes mechanisation and informatisation simultaneously. In the West mechanisation precedes informatisation, as the latter can only be built upon sophisticated hardware platforms. China’s mechanisation is far from complete but informatisation cannot be delayed any further because the prospects of ﬁghting a war dominated by IW are very real indeed. This propels the PLA to innovate on informatisation as a matter of urgency. Although the two transformations are pursued simultaneously, the emphasis is on informatisation. This will be reﬂected by the funding allocations. Speciﬁcally, the army units will not acquire large numbers

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of new tanks, an indicator of mechanisation, but will seek networking facilities to be IW capable as soon as possible. The PLA will ﬁrst upgrade its existing conventional weapons of industrial age by plugging IT assets into them individually to increase their interconnectivity and as force multipliers. Then all platforms will be integrated through systems integration. Ultimately, the PLA will possess the crucial features of 4 informatisation: an C ISR architecture that delivers real time command both vertically and horizontally; the ﬁve-dimensional intelligence systems (in the air, space, cyber-space, on the ground and at sea) that give the PLA good battleﬁeld transparency, and a lean and diversiﬁed force structure that is suitable for PLA units in all kinds of combat operations. This means further streamlining of its personnel and a new priority in weapons Research & Development. The idea of generation leap is also applicable to the process of informatisation itself. To the PLA, informatisation is through three stages: digitalisation, systems integration and intelligentisation (zhinenghua). The PLA has not fully entered the stage of digitalisation. Even though its formation and training of an experimental digital brigade has just begun, the PLA is already building comprehensive networking facilities throughout the army. The automated war zone command is being constructed based on this principle: it will skip some evolutionary stages. Such a leap strategy is risky, however. Many factors may hinder its realisation. First, China’s developing economy has clear limits in sustaining the double transformation as it dictates a huge increase in military spending. Fund available for upgrading mechanisation may dry out and that for upgrading IT assets may be wasted when systems integration is employed in obsolete platforms. Second, China’s IT industries are not yet able to provide key technologies required for informatisation. Finally, with low education level the soldiers have great difﬁculty mastering IT facilities.

Informatisation and War Preparation The 1993 high-tech strategy did not specify the object of war and the mode of warfare for the PLA. The revised strategy ﬁlled this vacuum. It guides each Service to explore the exact type of war it is going to ﬁght and offers a

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practical roadmap for PLA’s war preparation. Now that the Taiwan crisis with possible US involvement is identiﬁed, non-engagement warfare is logically set as the most likely form of combat, at least for the initial stage of war. A Taiwan war is a war of politics, not one of mass destruction. Too many Taiwanese casualties will dash any hope of reuniﬁcation. From this rationalisation, IW is the most suitable warfare that can help achieve the political objective. More concretely, when on the offensive, non-engagement warfare makes precision and beyond-vision strikes the primary choice, as this prevents large scale direct personnel engagement. In defence, the PLA’s belief is that in a worst case scenario (with US involvement) China’s future war will be fought against lightning air and missile surgical strikes, or sustained air, missile and electronic bombardment. The PLA envisages that its future action will be information-dominated and in the maritime areas. Non-personnel engagement will be a new but prominent feature of combat, although an exchange of ﬁre within short distance cannot be totally excluded. The idea of a pre-emptive IW strike is now central to the PLA’s design of operations: cripple the enemy’s major military assets rather than its urban centres. This has broadened its vision of waging an anti-RMA war against a superior opponent. Having to rely on inferior weapons to ﬁght the US, the PLA has seriously studied how to conduct a one-sided war. To PLA strategists, informatisation of the US military has not only generated strength, but also exposed its weaknesses. The 9/11 tragedy reﬂects the vulnerability of a mighty nation to new kinds of threat. The PLA is contemplating various types of asymmetrical warfare for selfprotection. 4 For instance, cyber attack on the enemy’s C ISR will be an integral part of future warfare. It is cheaper than attacks on carrier battle groups. The more a military depends on IT, the more it is exposed to attacks on its information hubs. One PLA researcher points out that about 80 percent of US military communications facilities rely on civilian networks, creating a window of opportunity for cyber strike. The PLA’s satellite killing exercise on 11 January 2007 indicated a prototype of this kind of warfare. As the PLA’s potential opponent is heavily dependent on its military satellites, knocking down a few essential ones may paralyse its satellite system,

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especially its National Missile Defense and Theater Missile Defense. And this type of asymmetrical warfare is highly cost-effective: to construct an advanced space combat system is extremely expensive and a few missiles cost close to nothing in comparison. The much talked-about missile strike in early 2007 is another form of non-engagement warfare the PLA is planning as an asymmetric measure against a powerful enemy.

A Crucial Decade For the PLA, moving in the right direction is more important than having available hardware. Its new strategy addresses a major problem in the 1993 strategy: lack of an overarching linkage between the abstract strategy and the PLA’s individual modernisation plans. This is one of the reasons why the pace of PLA transformation is relatively slow. The Chinese military has apparently found this linkage and may have entered a faster track of development. Certainly, as mentioned earlier, the most pressing challenge is whether it can achieve a balanced transformation between mechanisation and informatisation. The next decade will be crucial for the PLA.

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H

ong Kong and Macau under One Country, Two Systems CHOU Kwok Ping

The economic and political developments in Hong Kong and Macau after the handover of sovereignty (Hong Kong in 1997 and Macau in 1999) follow different trajectories. Before the handover, Hong Kong’s economy was shining. The Asian ﬁnancial crisis in 1997 and the SARS outbreak in 2003 pushed up unemployment rate and welfare expenditure while a fall in tax and land sale revenue undermined the government budget (from a surplus of HK$77 billion in 1997–98 to a deﬁcit of over HK$60 1 billion in 2002–03). Deﬂation badly hit property market, a powerhouse of Hong Kong economy. Real GDP growth rate dropped from 5.1 percent in 1997 to minus 5.5 percent in 1998, 0.6 percent in 2001 and 1.8 percent in 2002. The economy was unable to rebound until the Chinese government relaxed its control on outbound tourism to its two SARs in mid 2003, fuelling the tourism industry. Macau was eclipsed by Hong Kong after it became a British colony in 1841. Before the handover its economy was hit by the Chinese government’s macro-economic control in 1993, Asian ﬁnancial crisis in 1997 and the gangster warfare shortly before the handover in 1999. The economy regained momentum after the gangster warfare was settled. The liberalisation of gambling further pushed up its real GDP growth rate by 14.2 percent in 2003, 28.4 percent in 2004, 6.7 percent in 2005, and 15.4 percent in 2006 (from ﬁrst to third quarter) respectively. The strong growth propelled Macau’s GDP per capita (HK$221,311 in 2006), ahead of Hong Kong’s HK$214,710. 1

In April 2007, S$1 = HK$5.15.

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The two SARs also differed in their ﬁrst leaders’ popularity. Tung Chee-hwa, the ﬁrst Hong Kong Chief Executive, was always compared unfavourably with his Macau counterpart Edmund Ho. Tung’s record high approval rate was 67.7 percent in September 1997, a couple of months after the handover. His approval rate plunged to a historical low of 36.2 percent in July 2003 owing to public discontentment with economic setback and government’s mishandling of controversial issues (for example, short piling of public housing, Cyber Port project, penny stock saga, Financial Secretary’s “car-gate”, SARS outbreak and National Security Bill). In contrast, Edmund Ho has inherited his father Ho Yin’s political capital as the chief representative of the Chinese community; he served in the Legislative Assembly for over ten years before the handover. Thanks to the public trust on him and economic prosperity in post-handover era, Edmund Ho’s approval rate is always above 70 percent. Beijing-Hong Kong relations in post-handover era are more strained than Beijing-Macau relations. In the right of abode controversy in 1999, the Standing Committee of National People’s Congress (SCNPC) interpreted Hong Kong’s mini-constitution Basic Law. It overturned the decision of Hong Kong Court of Final Appeal to grant the right of abode in Hong Kong to children of parents who also had the right of abode. The interpretation was construed to have undermined Hong Kong’s judicial independence. In 2002, Tung Chee-hwa proposed National Security Bill, a bill which was viewed as undermining human rights, and Beijing was believed to have masterminded it. This bill triggered over half a million citizens to take to the streets and protest against the Bill on 1 July 2003, and ﬁnally led to the downfall of Tung and three of his ministers. In 2004, SCNPC interpreted Basic Law again to rule out universal suffrage of Chief Executive and Legislative Council in 2007 and 2008 respectively. The realisation of universal suffrage supported by most Hong Kong citizens and explicitly stated in Basic Law as the ultimate end of Hong Kong’s democratisation became elusive. Hong Kong citizens do not welcome Beijing government’s intervention in Hong Kong’s democratisation. An opinion poll conducted by the Chinese University of Hong Kong in November 2006 revealed that only 20 percent of the respondents were satisﬁed with Beijing’s performance over Hong Kong’s democratisation. Another opinion poll

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by the same university in December 2006 found that almost 90 percent of the respondents hoped that the 2007 Chief Executive election would be a contested one. With the support of public opinion, most of the candidates from the pan-democracy camp were returned to the Election Committee of Chief Executive. As a result, democrat Alan Leong was able to receive enough nominations to contest with incumbent Donald Tsang, then Acting Chief Executive, who had Beijing’s support. Though the Election Committee members were under heavy inﬂuence of Beijing and were not representative of the Hong Kong people, the wide margin of Donald Tsang’s popularity rate of over 60 percent over Alan Leong’s 20 percent showed that the candidate handpicked by Beijing would have won a real election anyway. Beijing-Macau relations are more harmonious. The right of abode in Macau is more clearly deﬁned. SCNPC has never interpreted Macau Basic Law, and therefore Macau’s judicial independence has never been questioned. Witnessing the bad example of Hong Kong, the Macau government held back on its own version of National Security Bill as required by Basic Law. Democratisation in Macau is not a contentious issue. Unlike Hong Kong Basic Law, Macau Basic Law does not state that universal suffrage must be introduced in the end. The Macau people are dissatisﬁed with the SAR’s political development, but their discontentment has not been translated into territory-wide demand for universal suffrage of the Chief Executive and Legislative Assembly. Beijing has also interfered with the election of Macau’s Chief Executive and Legislative Assembly; the interference has not led to a backlash, however. Macau has its own problems. The public administration is notorious for inefﬁciency and widespread patronage. Many inexperienced local ofﬁcials were promoted to senior positions to replace their non-Chinese counterparts after the handover. The wastage and overspending of municipal councils and the 2005 East Asian Games provoked public outcry. The discontentment with the increasing social disparity in the wake of gambling liberalisation in 2002 and the collusion between government and business over labour import and land sale culminated in the 2006 Labour Day demonstration involving over 3,000 participants, the largest protest since 1989 June Fourth Incident. These issues, however, neither undermined people’s trust in the handover of sovereignty and in the

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Chinese government nor adversely affected Beijing-Macau relations. Local people tend to blame domestic factors rather than the Beijing government for the problems. The difference between Hong Kong and Macau in the degree of internal conﬂicts and their relations with Beijing may explain the strength of pro-Beijing elements (major pro-government forces in the two SARs) and democrats (major opposition parties in the two SARs). Pro-Beijing elements in Hong Kong were marginalised from the political landscape and their inﬂuence in the community was limited until the last days of colonial rule. The 1967 riot — an overspill of the Cultural Revolution — engineered by pro-Beijing forces killed dozens of people, caused huge economic loss and tainted the image of pro-Beijing forces. The graduates of pro-Beijing Chinese schools were few in number and had far fewer career opportunities than their counterparts in English schools. Their lack of proﬁciency in English hindered their progress in almost all professions and sectors of business. In contrast, pro-Beijing forces in Macau are much entrenched. Portuguese colonial rulers lost the will and muscle to govern the colony effectively in the 1966 riot, again an overspill of the Cultural Revolution. Without strong colonial rule, pro-Beijing forces have successfully penetrated all walks of life. Many younger people study in pro-Beijing Chinese schools and receive tertiary education in China (or in Macau through distance learning programmes conducted by China’s universities). Most of other social services are either funded or delivered by pro-Beijing forces with government subsidies. Because of the extensive inﬂuence of pro-Beijing forces, the outlook of the population has been shaped to be more pro-Beijing than their Hong Kong counterparts. The variation in the strengths of the democrats in the two SARs plays a part as well. The start of democratisation in the late 1970s (in Macau) and early 1980s (in Hong Kong) were windows for the rise of democrats in domestic politics. Since they support 1989 China’s student movement and are the staunchest critics of the two SAR governments, Beijing never trusts them. Democrats in Hong Kong have capitalised on the weakness of proBeijing forces and seized over 60 percent of the votes in the post-handover Legislative Council elections (geographical constituencies) as well as over one third of the seats in the Council. They called for universal suffrage of the Chief Executive and Legislative Council that are deemed by Beijing

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as a conspiracy to weaken its political control over Hong Kong. In Macau, the democrats only won some 20 percent of the vote in post-handover legislative assembly election (geographical constituencies) and less than 10 percent of the seats of the legislature. None of their motions proposed in legislative assembly has been passed. Their ability to mobilise social movement is weak. The limited success of Macau democrats to amass public support is due to the deep penetration of pro-government interest groups in the civil society. Without strong opposition camp, both the Beijing and Macau governments ﬁnd it easier to contain disputes affecting Beijing-Macau relations. In coming days, the Beijing-Hong Kong dispute will centre on political reform. To pacify discontent and win support for delaying the pace of democratisation, the Beijing government will continue its preferential economic policies, such as further relaxing outbound tourism and outﬂow of capital to Hong Kong. For Macau, Beijing will be more concerned with Macau’s underground banks and casinos, signiﬁcant sources of China’s corruption problems and transit points of criminals’ capital. The Macau government will also feel pressured to align its legislation with international practices of combating casino-related crimes such as money laundering and illegal gambling credit because the advent of American and Australian capital in the gambling industry has raised the SARs’ international visibility.

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C

hen Shui-bian: Taiwan’s Lame Duck President John F. COPPER

On 1 June 2006, Taiwan President Chen Shui-bian made a startling public announcement: he declared he was surrending authority over domestic affairs to his premier, Su Tseng-chang, effective immediately. Why the sudden move to shed part of his job? Simple. President Chen’s poll numbers were ﬂuctuating in the 20 percent range, down from more than 70 percent in 2000. The opposition parties, the Nationalist Party or Kuomintang (KMT) and the People First Party (PFP), were preparing to recall him or cast a no-conﬁdence vote in his premier. The president has been a liability to his party, the Democratic Progressive Party (DPP), for some time. Many said the DPP lost the last two elections because of Chen. In December 2006, citizens would vote to choose the mayors of Taiwan’s two metropolitan cities, Taipei and Kaohsiung, and the city councils of both cities. The prospects were not good for DPP candidates and Chen was to blame. These elections, moreover, were said to be a bellwether for what would happen in a legislative election at the end of 2007 and a presidential election in 2008. The DPP’s future, owing to Chen, thus appeared dim. Why had Chen Shui-bian become so unpopular? From early in his presidency he was perceived as having wrecked the economy, undermined cross-strait ties and bungled relations with the United States. Six months after Chen became president, Taiwan experienced a bad recession. The gross national product contracted and unemployment reached levels few had ever heard of or thought possible. Growth

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was restored, but not the kind Taiwan had seen in the past or people expected. There was serious tension with China, mainly the result of Chen promoting Taiwan’s legal independence in order to promote local nationalism and stoke ethnic conﬂict to his political advantage. Relations with the United States, which were very good in early 2001, subsequently declined rapidly. Washington objected strenuously to Chen provoking China while America was trying to deal with terrorism and a myriad of other problems and needed Beijing’s help. Bush administration ofﬁcials criticised Chen harshly, even broaching the subject of whether the US should defend Taiwan. But when he ceded power to his premier, corruption was the immediate cause of Chen’s woes. Chen, his close aides and his family, including the First Lady, were seen as crooked and venal. This tainted the party and the government. Some said the DPP and Chen were bad from the start. Most DPP ofﬁcials came from positions in local politics, where corruption is worse than in national politics. Chen had gotten campaign donations from known gangs when he ran for mayor of Taipei in 1994. He and his party had inherited Lee Teng-hui’s “money politics” legacy. Before the end of his ﬁrst term, according to opinion polls, the public perceived Chen and his party as more corrupt than the KMT. During the 2004 presidential election campaign, the press reported that Chen and his people expected to lose the election so they thought they had to cash in fast, and they did. Chen and his party were then given a respite. The president and vice president were shot and a sympathy vote got them reelected. But the corruption persisted and even got worse. Chen’s appointees taking bribes and absconding with public funds hurt the DPP at the polls in a legislative election in December 2004 and local elections in 2005. The corruption problem was unusually corrosive for the ruling DPP for two reasons: One, the party had long portrayed the KMT as dirty and the DPP as poor and clean. Many people believed this. It was a good campaign issue in 2000 and 2001. But no more. Two, President Chen, a superb campaigner, was no longer an asset to the party in election campaigns since most voters believed Chen facilitated ofﬁcial corruption. Now he handicapped DPP candidates.

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Many top DPP leaders wanted Chen to resign rather than face hostile voters at the polls in December 2006 with him still in ofﬁce. But there was a serious downside: if Chen left ofﬁce, Vice President Annette Lu would assume presidency. Top DPP leaders did not want that. They reckoned that as the sitting president Lu could not be denied the party’s nomination for the 2008 presidential election. Premier Su, former premier Frank Hsieh, and party chairman Yu Shyi-kun all hoped for the party’s nod. Ma Ying-jeou, the KMT’s chairman and its likely nominee for the presidential contest, preferred not to face an incumbent. So he too was not sanguine about Chen resigning or being recalled. Meanwhile, the US Department of State came to view Chen’s predicament as a positive sign. It made him more pliable. And, Lu, State thought, might be a bigger troublemaker. She was certainly a stronger advocate of Taiwan’s independence than Chen. China saw it this way too. Beijing thus muted its criticism of Chen. This explains why a recall effort against Chen failed. Still, the DPP had to worry about Chen dragging down its candidates in the coming election. Then former DPP chairman, Shih Ming-teh, known as “Taiwan’s Nelson Mandela” because of his years of imprisonment for opposing the KMT, launched a mass movement to compel Chen to quit. Shih called for a million people to contribute and they did. His movement attracted huge turnouts in Taipei and other cities. On 10 October 2006, Taiwan’s National Day, Shih planned a demonstration ﬁnale. President Chen did not appear in public for some time. There were reports that some of Shih’s activists would storm the presidential palace and guards would shoot them and this would incite a revolution. Chen would then ﬂee the country. Chen survived this, but a month before the city elections, three of Chen’s close aides and his wife, the First Lady, were indicted for fraud, embezzlement and perjury. His son-in-law was already under detention. The prosecutor, who had been a Chen supporter, said Chen would be indicted too except that as president he could not be charged with crimes other than treason.

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Nobel prize winner Lee Yuan-tseh, who had helped Chen get elected in 2000, wrote a public letter saying the president should resign. Former president Lee Teng-hui spoke likewise. Opinion surveys showed most citizens, by a good margin, thought Chen was unﬁt for ofﬁce and should quit. Only 5 percent of civic groups supported him. Leading up to voting day, it appeared the corruption issue would catapult the KMT to victory in both city elections. However, just before the voting the DPP closed ranks and President Chen skilfully played the “ethnic card”. This helped the DPP’s candidate, Chen Chu (no relation to Chen Shui-bian), to win the Kaohsiung mayorship by a thread. Afterwards pundits said Chen had survived. Some even said that the KMT had lost the election in spite of winning the Taipei mayorship and making big gains in both city councils races. KMT Chairman Ma Yingjeou was seen as having failed to help the KMT candidate in Kaohsiung. Yet, according to post-election polls, Ma remained the favourite to win the presidency in 2008. Premier Su was a distant second in the polls. Frank Hsieh, who lost the Taipei mayorship race but made a good showing, led among DPP members. Most observers concluded Annette Lu was the reason for Chen surviving and the public continued to view President Chen, his family, and his administration as woefully corrupt. Chen, the media said, was “saved by Lu”. Then, in February 2007, prosecutors indicted Ma Ying-jeou for misusing Taipei city funds when he was mayor. Ma immediately resigned as KMT head and the party seemed to be in disarray. But Ma forthwith announced his candidacy for the presidency and his poll numbers rose. Almost two-thirds of survey respondents reported they felt he was honest and the indictment was wrong. Still the event helped President Chen. After all they were accused of the same crime, though the magnitude of it in Chen’s case was much larger and what his friends and relatives had done showed culpability of a different sort. The bitter competition for the DPP’s presidential nomination also helped Chen. He stepped in to set the rules in what might have otherwise been a bruising ﬁght.

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President Chen also launched a movement to get rid of the vestiges of the former government: Chiang Kai-shek’s statues and his memorial and the names of company and government organisations that used “China” or in some way indicated Taiwan was part of China. Chen thus grasped leadership of the local identity movement, which would be central to the DPP’s strategy to win the late 2007 legislative election and the 2008 presidential election. Chen thus restored some conﬁdence in his ability to lead. Yet the elections will produce other leaders and the president’s lame duck status will again become evident. Also, as the end of Chen’s term comes closer, this question will gain salience: Will a new DPP president pardon Chen or will he ﬂee the country before a KMT president is sworn in?

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W

hat to Expect from the

17th Party Congress WANG Zhengxu

The Congress scheduled for the second half of 2007 is the 17th since the founding of the Chinese Communist Party in 1921. In the Party’s 85-year history, it is in the last two decades that the Party Congress has gradually been institutionalised and followed increasingly predictable patterns. In the Party’s early years, its ﬁrst six Congresses were held in the space of seven years, from 1921 to 1928. The Congress did not meet again until 18 years later, in 1945 after the Party had survived the Long March and re-settled in Yan’an. The Eighth Congress met in 1956, 11 years after the Seventh. The Ninth did not meet until 13 years later in 1969, which was followed only four years later by the 10th Congress in 1973. The arrest of the Gang of Four and the end of the Cultural Revolution in 1976 made another Party Congress inevitable, which met in 1977. It is under Deng Xiaoping that the Party Congress began to stabilise. Since the 12th of 1982, Party Congresses have met every ﬁve years, and starting from the 14th of 1992, the Congress gradually assumed two most important roles: successions and consensus building. Now at every Party Congress there is either succession or adjustments to the top Party leadership, and an emphatic effort by the Party to achieve ideological unity. At the 17th Party Congress, this pattern will be institutionalised even further.

Harmonious Society: The Party’s New Focus One major function of the Party Congress is for the Party leadership to set the ideological platform of the Party. The work report read at the opening session of each Congress normally bears the most signiﬁcance

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in expressing the Party’s ideological thinking and policy orientations. This report always gives a comprehensive reexamination of the Party’s work record in the past ﬁve years, while at the same time setting the goals and directions for the Party for the coming years. One or a few central concepts are emphasised in ofﬁcial documents throughout the Congress, and will dominate Party discourse in the years to come. By informing party members of the most important goals and policy directions of the Party the leadership hopes to achieve ideological unity within the Party. Past Congresses have articulated all of the Party’s major ideological formulations. For example, the 12th of 1982 ofﬁcially embarked on economic reform, the 13th of 1987 recognised China as at the “preliminary stage” of socialism, and the 14th of 1992 called for transition into “socialist market economy”. The 15th Congress of 1997 called for the whole nation to strive toward a “comprehensive well-off society” by the end of the century, while at the 16th of 2002, the “three-represents” theory was ofﬁcially hailed. This year’s 17th Party Congress, for sure, is going to see the comprehensive articulation of Hu Jintao’s policy thinking. Since he took over as the Party Secretary General in late 2002, Hu Jintao has been promoting two doctrines: “scientiﬁc development” and “harmonious society”. “Scientiﬁc development” calls for China’s shift towards a more balanced and more sustainable mode of development, such as reducing economic inequality among the population and achieving environmentfriendly economic development. On various occasions, Hu characterised the “scientiﬁc development” concept as the “newest advancement” in the “Marxist theory of development”. The “harmonious society” is a broader concept reﬂecting Hu Jintao’s understanding of the present challenges China faces. On top of a “scientiﬁc” way (that is, more balanced and more sustainable) of development, China needs to introduce more social and political elements in order to build a harmonious society. These include social justice, democratic and efﬁcient governance, rule of law as well as cultural, educational and moral developments. In the last two and a half decades, the Party’s mission had centred on economic development. With the “harmonious society” concept, Hu is telling the people that the Party can and will deliver more than just economic development.

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WHAT

TO

EXPECT

FROM

THE

17TH PARTY CONGRESS

79

This does not mean the Party is ready to put up its political power for electoral competition and judicial checking, but rather the Party is hoping to make the government more responsive, more accountable and more open. In any case, Hu hopes to use the concept of “harmonious society” and “scientiﬁc development” to rally the whole Party, and to continue to win public allegiance to the Party. Hence, in the upcoming Party Congress, Hu’s work report will very likely be structured around these two concepts. “Harmonious society”, in particular, will be the main catchword of the work report.

Personnel: Mid-Term Adjustments Succession for the top leadership now takes place every ten years at the Party Congress. That is, each cohort of central leadership will serve two terms or two Party Congresses. By the end of the ﬁrst term, however, some adjustments to the leadership team may be made. Within this framework, Hu Jintao succeeded Jiang Zemin at the 16th Congress of 2002, and will serve until the 18th Congress of 2012. The 17th Congress will amount to a mid-term adjustment under Hu’s leadership. Mid-term adjustments include a re-composition of the Central Committee, retiring those older than 63 and replacing them with younger ones. Because the Central Committee members are also serving as provincial party secretaries, governors and cabinet ministers, recomposing the Central Committee also means reshufﬂing cadres of those positions. What is most signiﬁcant at the Congress is what will be the new makeup of the Politburo and Politburo Standing Committee. No age limit on Politburo membership has been explicitly set, and exceptions may be made in some rare cases, but those of 68 or older will very likely give way. Because of this, the retirement of up to ﬁve from the current nine members from the Politburo Standing Committee, and another three to four from the Politburo can be expected. In the Politburo Standing Committee, Luo Gan (aged 72), Huang Ju (69), Wu Guanzheng (69), are above the 68-limit, while Zeng Qinghong (68) and Jia Qinglin (67) are on the borderline. All these people are likely to retire, with probably the only exception of Zeng Qinghong. Based on the 68-year limit, Zeng may be obliged to go, especially if the younger Jia

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Qinglin is already set to. But because this age rule has not been explicitly set, given that Zeng has played a rather important role in Hu’s governing team, and his rather clean record in terms of corruption, it is likely he will stay. Among the Politburo members, Wu Yi (70), Cao Gangchuan (73), Zhang Lichang (69) and Zeng Peiyan (70) will retire. Related is who will ﬁll the seats. They will mostly be young (born around or after 1950, for example), highly educated and with a proven work record. Among these newly admitted to the Politburo and its Standing Committee, a few of them will emerge as the successors to Hu Jintao and Wen Jiabao ﬁve years down the road in 2012. At the moment, it looks like Liaoning Party Secretary Li Keqiang (born 1955), Jiangsu Party Secretary Li Yuanchao (1950) and Minister of Commerce Bo Xilai (1949) are the forerunners. Exactly who will take which seat, however, will be difﬁcult to know until the Congress concludes.

Political Reform: Beyond the Congress In the last few years, within and without the Party, the call for major political reforms is increasing. But one should not expect political reform to be a dominant theme at the upcoming 17th Party Congress, even less of concrete measures of political reform to be adopted. Because each Party Congress is occupied with building ideological unity and personnel changes, it normally does not deliver concrete policy plans. At best, some general policy directions may be stated at the Congress, but operational arrangements will only take shape at the Plenums of the Central Committee that will follow in the years after the Congress closes. The work report at the Congress will very likely repeat the Party’s commitment to continuing political reform towards democracy and rule of law, but will avoid giving out concrete action plans regarding how to achieve those goals. In the ﬁve years after this Congress and before the next one, however, some political reforms may take place, such as expanding grassroots elections to the upper levels, building a more accountable and transparent government and enhancing judicial independence. That is to say, for political reform, what can be expected from this Congress is, alas, not much.

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P ART II GROWTH AND STRUCTURAL CHANGES

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C

hina’s Major Economic Challenge: Sustaining High Growth Whilst Fixing Its Growth Problems John WONG

The Chinese economy had indeed displayed spectacular performance for the whole period of 1979–2005, growing at an average annual rate of 9.6 percent. In 2006, it further chalked up a 10.7 percent growth. As shown in Figure 1, the growth process ﬂuctuated a lot in the 1980s, a result of the so-called “reform cycles”. Since 1990, the growth process has experienced two spurts of high growth: one sparked off by Deng Xiaoping’s Nanxun (tour of South China) in early 1992 and the other by China’s accession to the WTO in 2001. The Nanxun signals China’s march into the market economy while the WTO membership marks the rapid integration of China into the global economy. Both the Nanxun effect and the WTO effect combined to fuel China’s continuing high economic growth for the past 15 years through a sustained rise in domestic investment and exports. The second spurt caused by the WTO effect was by far the most signiﬁcant, not just because it chalked up an average rate of 10 percent growth for ﬁve years (2001– 2006), but also because it occurred at the tail-end of China’s long period of high growth when China’s economic base had grown quite large. China’s economy in 2006 was 70 percent bigger than what it was in 2001. This is a clear example of the dynamics of “speed compounded by scale”. When Deng introduced economic reform and the open-door policy at the historic Third Party Plenum in December 1978, China’s total GDP was only 365 billion yuan. By 2006, total GDP increased to 21 trillion yuan or 50 times more. In 1978, China’s nominal GDP per capita was only 381 yuan. In 2006, it increased 37 folds to 15,500 yuan. In 1978, the Chinese

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84

16%

30% 15.2%

14%

14.2%

14.0%

13.5%

12%

11.7%

11.6% 10.9%

11.3% 18.8%

10% 9.1%

8% 7.6%

25%

24.1% 13.1%

GDP

20%

10.9%

18.0%

10.7% 10.2% 10.0% 10.1%

17.1% 10.0% 9.2%

8.8%

9.3%

14.7%

15%

9.1% 8.4% 8.3%

7.8%

7.8%

7.6%

10%

9.3%

6%

8.3% 6.5%

6.0% 5.2%

7.3%

6.4%

4%

4.1% 2.4%

2.0% 0.7%

2%

1.9% 1.5%

2.8%

5% 3.9%

3.8% 3.4% 3.1%

2.8%

CPI -0.8%

1.8% 1.5%

1.2%

0.4% 0.7%

0%

-0.8%

-1.4%

5/17/2007 10:22:40 AM

Source: China Statistics Year Book, 2006.

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

1979

-5% 1978

0%

I N T E R P R E T I N G C H I N A ’S D E V E L O P M E N T

2_16 China Major Economic Challenge.indd 84

Figure 1. China’s Economic Growth and Inﬂation, 1978–2006

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85

economy was insigniﬁcant in the global context, as China’s total GDP was estimated to be just about 0.5 percent of the world’s total. By 2006, China’s share of the world’s GDP in nominal terms had increased to about 6 percent. Converted into US dollar at current exchange rate, China’s total GDP in 2006 reached US$2.8 trillion to become the world’s fourth largest economy after the USA, Japan and Germany even though its percapita GNP, at US$1,900, was still close to the world’s bottom hundred. Nonetheless, China’s economy today belongs to what the World Bank used to categorise as one of the lower middle-income economies. In terms of purchasing power parity (PPP) GDP (i.e. pricing Chinese output at international or US levels), China has already been the world’s second largest economy after the US for many years. In late 2006, China’s ofﬁcial TV channels featured a popular documentary entitled “The Rise of Great Powers”. Following this, many Chinese ofﬁcials and intellectuals have started to perceive their country as a rising power (da guo). However, politically, militarily and technologically, China is far from being a great power. Socially, China’s backwardness is just too obvious. Only in the economic area can China claim its place on the international stage. Still, China is a rising economic power (jingji daguo) only as an aggregate economic entity, certainly not in per-capita terms.

Signiﬁcant International Impact Since the start of economic reform some 27 years ago, the Chinese economy has also been radically transformed from a closed system based on Mao’s tenet of “self reliance” to one that is actively participating in the global economic system in terms of trade and foreign investment. China’s exports have indeed been growing very rapidly, averaging at 16 percent a year since 1978 and over 20 percent since 2001, rising from US$9.8 billion in 1978 to US$970 billion in 2006, or 100 times more. By 2006, China had become the world’s third largest exporting country after Germany and the US. China’s share of the world’s export markets in 2006 reached 7 percent, compared to the tiny 0.6 percent in 1979. For foreign direct investment (FDI), China has since the late 1990s become one of the world’s most favoured destinations. By the end of 2006,

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China had attracted a total of US$685 billion in FDI. It may be noted that China has continued to promote FDI primarily as a vehicle for technology transfer and the development of export markets. Not surprisingly, over 80 percent of the world’s Fortune 500 largest corporations and its top 100 information technology ﬁrms have set up businesses in China. Indeed, the massive inﬂux of foreign capital into China has continued unabated despite the fact that China has already become a capital-surplus economy on account of its persistent “twin surpluses” in both capital and current accounts. The problem of capital surplus got more serious in 2006 because of China’s record trade surplus of US$177 billion and the rapid accumulation of its foreign reserves to the record level of US$1 trillion (the world’s highest). Hence, the Renminbi or the yuan has since 21 July 2005 been gradually revalued. China is expected to continue chalking up a sizeable trade surplus because of the very nature of China’s exports. As the world’s manufacturing hub for processing activities, China needs to import before it exports, and its exports must produce a surplus (as the value-added of the processing activities) for China. Accordingly, China is confronted with the acute problem of how to proﬁtably and smoothly recycle its bulging foreign reserves back to the international ﬁnancial system. The Chinese government recently declared that it would set up a specialised agency, modelled after Singapore Temasek Holdings or the Singapore Government Investment Corporation (GIC), to invest part of its hefty foreign reserves. As China’s economy continues to grow and expand rapidly, it will inevitably produce a strong external impact, at ﬁrst, regionally, but now globally. A few years back, China was mostly referred to as a rising regional economic power as its growth had signiﬁcantly impacted only its neighbouring economies in East Asia, which traded with China and invested in China greatly. By 2006, China’s economic growth had, beyond any doubt, far-reaching global implications. By its sheer size, China’s levels of production, consumption, imports and exports carry signiﬁcant worldwide ramiﬁcations. On account of its massive industrialisation, China has become the world’s top consumer of a wide variety of natural resources and primary commodities from iron-ores and aluminum to oil and gas. China’s rising demand for these products in recent years has driven up their world prices. In fact, China has been responsible for about 50 percent

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87

of the cumulative growth of these economically sensitive commodities. At the same time, China’s large-scale fabrication of a wide range of industrial products has also brought down their world prices. For boom or for bust, therefore, the movement of China’s economy has become a signiﬁcant force in the global economy. A few years ago, the economic rise of China helped Japan out of its prolonged recession. More recently, it has been argued that the current global economic boom is basically the combined effects of US consumption and Chinese production! China’s external economic impact is best manifested in its unique pattern of trade balances with its major trade partners. Figure 2 shows how China in recent years has continued to run substantial trade deﬁcits with its neigbhouring economies, from Japan, Korea, Taiwan and the ASEAN-5 to Australia and India, and how China turned around by incurring a large trade surplus with the US and the EU. In this way, China could still end up with an overall trade surplus. But China’s trade deﬁcits with its East Asian neighbours also mean that China has opened up its vast domestic market for their exports (both manufactured products and primary commodities), thereby operating as an engine for their economic growth. The underlying economic implications of China’s overall trade pattern and its trade balances are actually more profound. Because most of China’s exports are processed products (55 percent of total exports in 2005) or ﬁnal products generally with low domestic value-added and low domestic contents (domestic value-added usually no more than 40 percent and only 20 percent or even lower for most products), China must import in order to export. Since over half of China’s exports are handled by foreign invested enterprises (58 percent on average in 2005, with much higher proportions for some high-tech products), particularly those from Japan, Korea, Taiwan and Hong Kong, China’s foreign trade is a highly internationalised economic act incorporating foreign trade activities of many other countries. Viewed from a different angle, China operates as a critical link in the East Asian supply chains, spawning numerous regional and global production networks. It can further be argued that, as shown in Figure 3, China has in fact become an important “integrator” of global and regional production networks, partly due to China’s special trade patterns as shown earlier, and partly because China is home to numerous regional and global

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2_16 China Major Economic Challenge.indd 88

88

Figure 2. China’s Trade Balance with Selected Countries (In US$ Billions)

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Australia Thailand

I N T E R P R E T I N G C H I N A ’S D E V E L O P M E N T

Indonesia Philippine Malaysia Taiwan Korea Japan Singapore HK USA Europe ��

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��

��

Trade Balance 2006

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Trade Balance 2005

5/16/2007 2:36:20 PM

Source: China’s Customs Statistics, 2005–2006.

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Book.indb 89

Figure 3. China at the Centre of Global Production Networks

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5/8/2007 10:39:48 AM

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90

I N T E R P R E T I N G C H I N A ’S D E V E L O P M E N T

production networks. Thus, China’s exports embody raw materials, parts and components, technology and equipment, and ﬁnancial and economic services from different Asian economies. China’s major manufacturing hubs in the Pearl River Delta and the Yangtze River Delta operate as big economic “concrete mixers”, converting “Made-in-Asia” into “Made-inChina” products for the world market. Most international supply chains, be they Asian or global, have been operating efﬁciently and smoothly in China’s various industrial hubs along its coast, thanks to their efﬁcient and low-cost infrastructure and transport networks. In this way, China’s exports also generated multiplier effects in other economies, often more than in China itself. Accordingly, China’s own economic growth is at the same time a source of economic growth of other economies. By doing this, China is also a catalyst for regional and global economic integration.

Is High Growth Sustainable? China’s highly creditable economic performance after its successful economic reform has inevitably given rise to one critical question. Is such dynamic economic growth sustainable? To begin with, China’s past high growth, though very impressive, is actually not so exceptional or really unprecedented if viewed in the historical context of the dynamic East Asia region, which comprises many high-performance economies like Japan, the four “NIEs” (newly industrialised economies) of South Korea, Taiwan, Hong Kong and Singapore, and the four ASEAN economies of Indonesia, Malaysia, the Philippines and Thailand. Historically speaking, the East Asian growth process is marked by three waves of high growth. Japan was the ﬁrst non-Western country to become industrialised. Its high growth dated back to the early 1950s amidst its rapid post-war recovery and to the 1960s and much of the 1970s. Japan’s economic growth engine was initially based on the export of labour-intensive manufactured products. It was soon forced by rising wages and increasing costs to shed its comparative advantage for labourintensive manufacturing in favour of the four NIEs, which started their industrial take-off in the 1960s. These four NIEs, once dubbed “Asia’s

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91

Four Little Dragons”, were arguably the most dynamic economies in Asia, as they had sustained near double-digit rates of growth for three decades, from the early 1960s to the 1980s and even the 1990s. The rise of the NIEs constituted the second wave of the region’s growth and integration. By the early 1980s, high costs and high wages had also caught up with these four NIEs, which had to restructure their economies towards more capital-intensive and higher value-added activities by passing their comparative advantage in labour-intensive products to the late-comers of China and the four ASEAN economies (dubbed “Asia’s Tiger Economies”), thereby spreading economic growth to the latter. In this way, China and some ASEAN economies were able to chalk up high growth rates through the 1980s and the 1990s. Many Japanese scholars like to depict this pattern of development in Asia as the “Flying Geese” model, which is still a highly intuitive way of explaining the splendid economic success of East Asia. (See Table 1). By putting China’s economy in the East Asian context one can thus easily yield a compelling empirical argument to support China’s long-term growth prospects. Clearly, China has been one of the “geese” in the rapid EA ﬂight formation, and all the “geese” have taken turns to experience their dynamic economic growth, one after another. In simple parlance, it should run like this: If it is possible for the Japanese to achieve successful industrialisation, why not the Koreans? And why not the Chinese — ﬁrst from Hong Kong, then Taiwan, and now the Mainland? Furthermore, if Japan had historically over 25 years of high economic growth while the four NIEs had well over 30 years, why not China? China’s present run of high growth covers only about 25 years, and it could easily continue for another decade or more. In fact, since China’s economy is a much larger and more diverse economy, it should have much more internal dynamic to sustain higher growth for a longer period. Considering the historical pattern of East Asian economic growth, it is not over-optimistic to say that China has the ability to sustain its high growth potential for quite a while, say, over the next decade.

Fixing Many Growth Problems Whether China can realise its future growth potential still depends much on its ability to overcome a number of important institutional and

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Book.indb 92

PPP GNP Population estimates of per-capita (Mn) GNP per(US$) capita (US$) 2004

Growth of GDP (%)

2004

Total GDP (US$ bn), 2004

1960–70

1970–80

1980–90

1990–2001 2000–2004

2005

2006

China

1,297

1,290

5,530

1,930

5.2

5.5

10.3

9.7

9.2

10.2

10.7

Japan

128

37,180

30,040

4,623

10.9

4.3

4.1

1.3

1.3

2.7

6.4

South Korea

48

13,980

20,400

680

8.6

10.1

8.9

5.7

4.7

4

5.2

Taiwan

23

14,033

n.a.

321

9.2

9.7

7.9

5.7

3.3

4.1

4.3

Hong Kong

7

26,810

31,510

163

10

9.3

6.9

3.8

3.2

7.3

6.4

Singapore

4

24,220

26,590

107

8.8

8.3

6.7

7.4

2.8

6.4

6.9

Indonesia

218

1,140

3,460

258

3.9

7.2

6.1

3.8

4.6

5.6

5.2

Malaysia

25

4,650

9,630

118

6.5

7.9

5.3

6.5

4.3

5.3

5.5

Philippines

83

1,170

4,890

86

5.1

6

1

3.3

4.2

5.1

5

Thailand

62

2,540

8,020

163

8.4

7.1

7.6

3.8

5.3

4.5

4.5

1080

620

3,100

692

3.4

3.6

5.8

5.5

5.9

8.5

8.8

NIEs

ASEAN-4

India 5/8/2007 10:39:50 AM

Source: EIU Database.

I N T E R P R E T I N G C H I N A ’S D E V E L O P M E N T

2004

92

Table 1. East Asia Economic Performance Indicators

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structural constraints. These include continuing efforts to complete the unﬁnished business of political, social and economic reforms and efforts to address the resource constraint and the environment. With over two decades of near double-digit rates of unbridled growth, China’s economy has inevitably created a lot of structural strains and accumulated a great deal of socio-economic side-effects, which are crying out for attention. Chinese top policy makers in 2006 and again at the 2007 National People’s Congress had pledged their determination to step up structural adjustment by re-balancing the economy and re-orienting development policies towards more socially desirable goals. Thanks to its continuing high economics, China now has the capacity and the resources to deal with the many negative consequences of economic growth if it also has the required political will and social consensus. It may be noted that the many problems created by fast growth from income inequalities to rural-urban disparities are not new but are actually familiar to development economists. It may be helpful to take a leaf from a standard economic development textbook to put them in proper perspective. To begin with, as pointed out by Nobel Laureate W. Arthur Lewis, all development processes are inherently inegalitarian as development cannot take place in all economic sectors and embrace all peoples and all classes at the same time. Hence, regional disparities and income inequalities are inevitable, particularly in the initial phase of development. Such is also the underlying wisdom of Deng Xiaoping when he embarked on China’s economic reform with the pragmatic policy of allowing some people to “get rich ﬁrst”. Speciﬁcally on the issue of income inequality, Simon Kuznets, another Nobel Laureate, has argued that the relation between income distribution and development typically follows an inverted U-shaped curve: income distribution can be equal before development but gets unequal as development proceeds. Eventually, income distribution will become more equal again after further development. Such is the celebrated notion of the “trickle-down” process. Furthermore, most developing countries have experienced, in varying degrees, urban-biased patterns of development, simply because

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industrialisation itself is basically a process of transferring rural surplus to the urban areas for industrial development. In most cases, even in the success stories of Japan, Korea and Taiwan, their peasants used to carry a heavy burden in the initial phase of industrialisation, e.g. the extremely regressive land tax at the time of the Meiji Restoration. In the Chinese case, regional disparities are serious but inevitable, given the historical circumstances of China’s economic reform and development. The government has implemented several “regional development policies”, e.g. the “Western Development”, to address the problem, efforts which will take years to produce concrete results. Further development will certainly reduce regional disparities. However, the many negative social by-products of development still need immediate attention from policy makers. It seems strange that Chinese leaders, from the centre to the localities, are all committed to the relentless pursuit of GNP growth, with no automatic built-in measures for effective “redistribution” in the process. It has been argued that rapid economic development in China took place at the same time as economic reform (system transformation). In its earnest to introduce the market system, the Chinese government had not put in place an effective institutional framework to regulate or guide the operation of the market. Without such safeguards, the market tends to work for efﬁciency at the expense of equity. Accordingly, Chinese economic development has not been accompanied by an effective “trickle-down” process; in some cases, development beneﬁts have actually been “trickled up”, as evidenced by the worsening pattern of income distribution. Whatever their causes, such glaring inequalities are getting increasingly unacceptable, both politically and socially. Above all, most Chinese peasants remain very poor in the wake of successful industrialisation. The rural-urban income gaps have been widening instead of narrowing. Worse still, bad politics has reinforced bad economics. Sad to say, many socio-economic problems in China are often aggravated by poor governance and widespread corruption of local ofﬁcials. The case in point is the frequent compulsory appropriation of peasants’ land for development without adequate compensation. The rural problem, if left unresolved, can be a real time-bomb for Beijing.

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Not Just High Growth, But Better Growth and Its Sustainability Sufﬁce it to say that the sustainability of China’s future high growth much depends on how the Chinese government tackles the aforementioned socio-economic problems. On environmental protection, the physical constraints on growth related to the environment and resource utilisation have also been put on the high agenda. China’s environmental degradation from water to air pollution has indeed become very serious. But most by-products of industrial development are not created by design — hence the economist uses the term “negative externalities”. China’s environmental problems are largely the result of its mammoth scale of industrialisation at a very high speed, though the government’s indiscriminately pro-growth policies together with its weak regulatory regime have also been signiﬁcant contributing factors. Most developing countries, particularly those in East Asia, have followed the time-honoured policy of “develop ﬁrst, clean up later”. But in China, the big Song Hua River contamination accident in 2005 plus 159 serious accidents of environmental pollution in 2006 should be a signal that the time has come for the Chinese government to act urgently on its environmental problems. It may be argued that China’s long-term challenges are not food, not even energy, but the environment, including the question of water. Thanks to technological progress, Chinese agriculture basically has the capability to feed the nation, leaving only a small deﬁcit to be met by international trade. For energy, China still enjoys a relatively low degree of external dependency (e.g. oil imports currently constitute only 48 percent of total demand), much less than other Asian countries. However, the environment is a different matter, recently much heightened by the world-wide concern over global warming. The Kyoto Protocol came into effect in 2005, which required 38 industrialised countries to reduce their greenhouse gas emissions from 2008. China was not on its list. On its own, however, China announced its willingness to do so on account of the rapid deterioration of its own environment. Back in 2004, China attempted formulating a crude “Green GDP” index, which showed the cost of pollution to be about 3 percent of the GDP. Really that serious!

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In 2006, the ﬁrst year of China’s 11th Five-Year Programme, the government set some environmental improvement targets: For instance, to reduce COD (chemical oxygen demand) in water and SO2 (sulphur dioxide) emissions each by 2 percent a year or 10 percent by 2010. But the SO2 emissions in 2006 actually went up 1.89 percent and COD, 1.2 percent! China’s utilisation is notoriously inefﬁcient. Recent ﬁgures show that China accounted for 15 percent of global energy consumption but generated only 5.5 percent of global GDP. It may be argued that it is exceedingly difﬁcult for an overheated economy growing at 10 percent to reduce pollution or reduce energy consumption. But the long-term challenge is there. With a rapidly ageing population and a rapidly deteriorating environment, China has no other option but to maximise economic growth in order to generate the needed resources to ﬁght pollution. In the past, China went for an all-out growth or growth at all costs. But this is no longer viable. Future growth has to trade off some quantity for quality, i.e. growing and cleaning up at the same time. And that will give rise to long-term sustainable economic growth. Sufﬁce it to say that the Hu-Wen leadership has come to realise that China’s past development patterns are physically unsustainable, and politically and socially unacceptable. They have embraced the need to change. The new development paradigm is embodied in the 11th FiveYear Programme. However, implementation is far from easy, and there is still a great deal of uncertainty.

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C

hina’s Twin Surpluses YU Yongding

International balance of payments consists of three entries: current account, capital account and changes in foreign exchange reserves. Current account in turn consists of three entries: trade account, investment income and unilateral transfers. Capital account comprises Foreign Direct Investment (FDI), portfolio investment and bank claims, and liabilities. Under capital mobility and a free ﬂoating exchange rate regime, the sum of current account and capital account should be zero. As a result, there will not be any change in foreign exchange reserves. Under a ﬁxed exchange rate regime, imbalances between capital account and current account will end up with changes in foreign exchange reserves. China is the only country in history which has run the twin surpluses for 15 years (except 1993) since 1990 (Figure 1) and probably will continue to do so in the next decade. China already surpassed Japan to become the world’s largest foreign exchange reserve holding country in 2006. Figure 1. China’s Twin Surpluses ��

In US$ Millions

��

current account

��

��

��

��

��

��

��

��

��

��

��

� ��

��

��

�

FDI

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Causes of Twin Surpluses The underdevelopment of China’s ﬁnancial market is one of the most important contributing factors to China’s persistent twin surpluses. In general, China’s ﬁnancial sector is primarily bank-based, which is heavily dominated by the four state banks. China’s banking system tends to discriminate against local small and medium enterprises (SMEs). China’s bond markets are not well developed. Until the early 2000s, China’s bonds/GDP ratio was less than 30 percent. The share of corporate bonds in total bonds was less than 5 percent. China’s stock markets are still suffering from many structural problems. In short, it is very difﬁcult to channel ﬁnancial resources from surplus sectors to deﬁcit sectors or from surplus units to deﬁcit units among the same sector. Policy-led market distortion is also an important contributing factor to China’s twin surpluses. China’s preferential policy towards FDI has played a very important and positive role in attracting FDI. However, preferential policies also distort market signals. The artiﬁcially low land, energy and infrastructural construction prices, favourable tax treatment result in the wrong FDI both in terms of quality and quantity. China’s trade surplus is a result of the Chinese government’s export promotion policy (weak currency, export subsidies and tax rebates). The Chinese government was very aware of the possibility of FDI-related current account deﬁcits leading to an international balance payments crisis. Therefore, the government required each foreign funded enterprise (FFE) to balance its own foreign exchange needs. As a result of the selfbalancing requirement, FDI-related imports were minimised, while the exports were maximised. Processing trade is a favourable form of trade for the Chinese government because it guarantees that trade deﬁcits and hence the loss of foreign exchange reserves will not happen. The Chinese government has encouraged the development of this type of trade for decades. Owing to the domination of processing trade, the import content of China’s exports was more than 57 percent in 2005. Multinationals were responsible for more than 60 percent of China’s exports in 2005. In this sense, trade surplus has become structural.

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Capital controls have also made important impact on the twin surpluses. Because of the lack of a clearly deﬁned ownership structure, the Chinese government is afraid of losing control over state-owned assets once they are no longer under government’s jurisdiction. As a result, China’s overseas direct investment was very restrictive. The economic and administrative cost to overseas direct investment is very high. In many circumstances, overseas investment has been prohibited outright.

Why Are China’s Twin Surpluses Unsustainable China’s twin surpluses have created great revaluation pressures on the RMB. The continuation of twin surpluses consolidates RMB’s appreciation expectations in the foreign exchange market. The appreciation expectations in turn cause more speculative capital inﬂows. A vicious circle has thus been established. To avoid a revaluation of the RMB, the Central Bank has to sterilise the increase in liquidity caused by foreign capital inﬂux. In general, sterilisation can be achieved by the following policy measures: open market operations (sell Treasury bills and other instruments to the public through the central bank)；encourage private investment overseas; allow foreigners to borrow from the local market; implement wider-band exchange rate policies; permit forward exchange market intervention; shift government deposits; allow foreign exchange swaps, and launch capital control measures. In recent years, the People’s Bank of China (PBOC) already exhausted its major assets-government bonds in the process of sterilisation. Now the instrument for sterilisation is central bank bills. In just over three years, the volume of central banks bills sold by the PBOC is almost equivalent to the volume of government bonds issued over the past ten years. The rolling over burden has become increasingly heavy. Losses caused by sterilisation operations are difﬁcult to measure and probably much more serious than what most people have realised. According to a study, enterprises that are foreign exchange rich and have sold the lion’s share of foreign exchanges to the central bank are export-oriented joint ventures. On the other hand, enterprises that rely on banks are mostly stateowned enterprises in energy and raw materials sectors. Consequently,

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sterilisation worsened the ﬁnancial conditions of large-sized state-owned enterprises in energy and raw materials sectors. The rapid increase in the share of central bank bills in commercial banks’ assets has lowered commercial banks efﬁciency and proﬁtability, creating dire consequences to commercial banks performance. In short, it is wrong to assume that the Central bank can resort to sterilisation in whatever manner and length of time it prefers. The increase in current account surplus (trade surplus) will worsen trade frictions. China’s exports are already targeted by the United States, European Union and many developing countries, including Mexico and Brazil. The damage on China’s economic growth made by protectionism will be very grave indeed. The devaluation of the US dollar is necessary for the correction of global imbalances. The US dollar has begun its so called strategic devaluation since 2002. Although in 2005 the US dollar had rebounded against the Japanese Yen and the Euro, the US twin deﬁcits have been worsening continuously. Therefore, economic fundamentals are still pointing to the direction of further devaluation by the US dollar. Furthermore, the Fed is likely to stop raising the Federal Funds rate under the new chairman, Ben Bernanke. Recently, the Bank of Japan declared the end of the “quantitative easing” policy. As a result, the interest rates in Japan are likely to rise in the future. All these factors will add more weight to push down the dollar. With US$1 trillion in foreign exchange reserves, potential losses for China’s foreign exchange reserves, due to the devaluation of US dollar, are enormous. Following the increase in FDI stock, the investment income by FFEs will increase steadily. Currently, China’s accumulated FDI has surpassed US$600 billion. However, nobody knows what the exact ﬁgure of FDI stock is. Assuming that by the end of 2003, China’s FDI stock was US$300 billion, average proﬁtability for FDI was 10 percent and foreign investors remitted all the investment income back home, the outﬂows of investment via current account would be US$30 billion. To balance the current account alone, China must run US$30 billion trade surplus. The increase in trade surplus that has to be used to pay foreign investors’ investment incomes will become a heavy drag on China’s national income (Gross National Product).

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Policy Remedies for China To reduce current account surplus, the saving-investment gap should be reduced by increasing the investment. As China’s current investment rate is already too high, the focus should be on increasing consumption. In order to do so, the government expenditures on public goods must be increased. The major areas of expenditure increase should be on social security, healthcare and education. The government’s recent decision to increase funds to support rural development will “kill two birds with one stone”. Furthermore, government investment in infrastructure, such as railways, expressways, airports and harbours, and government-supported R & D should also be increased. Preferential policies towards FDI should be abolished so that domestic and foreign companies are given equal treatment in terms of credit access, tax treatment and environmental requirement. Export promotion policy should also be abolished gradually for all enterprises, regardless of their products’ destinations; they should have equal rights and responsibilities. Imports, which are more competitive than their domestic counterparts, will increase. Financial reforms should be speeded up. SMEs should not be discriminated against. Corporate bond markets should be developed and stock markets made more effective and less speculative. The reform will allow domestic savings to be channelled effectively to enterprises so that they will have less incentive to attract FDI for the purpose of credit substitution. FFEs should be allowed to tap China’s domestic capital market, so that there will be less need for new cross-border FDI. Chinese enterprises should be encouraged to invest abroad both in the form of Greenﬁeld investment and Mergers and Acquisitions. However, the outﬂows should be strictly monitored by the government. Capital account liberalisation should be carried out gradually and orderly. However, the completion of ﬁnancial reforms and the revitalisation of China’s ﬁnancial institutions and banks must be followed by the ﬁnal liberalisation of the RMB, i.e. the RMB must be made convertible. RMB exchange rates continue to appreciate gradually. Compared with large scale government purchases, this is a more efﬁcient way to increase imports.

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The twin surpluses are a result of long-term imbalances in the past 25 years. The pattern of twin surpluses cannot be changed overnight. The problem cannot be solved in a rush. However, with the Chinese government’s heavier reliance on domestic demand, China will solve the problem of twin surpluses and establish a more rational international balance of payments pattern.

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E

xplaining High Productivity Growth WU Yanrui

The Chinese economy has been growing at an average rate of 9.8 percent per annum since 1978 when the economic reform programme was initiated. This spectacular growth is likened to the economic miracle of the four East Asian Tigers in the 1960s and 1970s. Has productivity growth played an important role in China’s high sustained growth over the past 29 years? The answer would probably be no if one were to ask Paul Krugman (1994) and his supporters such as Alywn Young (1994), Jong-Il Kim and Lawrence Lau (1994) who argued that East Asian economic growth has been driven mainly by the expansion of factor inputs with little technological progress and is hence not sustainable in the long run. Krugman is however terribly wrong about the economic growth of East Asia which, though interrupted by the 1997 Asian ﬁnancial crisis, has outperformed other regions and is still to date the engine of world economic growth. Whether productivity growth has played a role in China’s recent growth can be investigated by examining the source of growth. Economists conventionally attribute the rate of GDP growth to the combined growth in labour and capital inputs in a nation. The difference between these two growth rates is known as the “residual”, deﬁned as a measure of the rate of technological progress or total factor productivity (TFP) growth. While growth in labour and capital is limited and diminishes over time, technological progress can be long-lasting and even unlimited. Thus, the rate of technological progress determines whether economic growth in a nation is sustainable or not in the long run. Though a more precise estimate is difﬁcult to be derived, the existing studies and the author’s own research have shown that productivity growth has indeed played an important role in China’s economic growth in the last decades, accounting

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for an average of about one-third to a half of China’s growth (Table 1). This is a good indication of sustainable growth in the long run. Table 1. Sources of Economic Growth in China Estimates by Total

Time Period

Growth Contributions (%) (%) Capital Labour TFP Total

Maddison (1998)

1978–1995

7.5

49

21

30

100

Chow and Li (2002)

1978–1998

9.3

55

13

32

100

Wu (2006)

1980–2004

9.5

52

11

37

100

Hu and Khan (1997)

1979–1994

9.3

46

13

41

100

Swamy (2003)

1980–1997

10.0

39

16

45

100

World Bank (1997)

1978–1995

9.4

37

17

46

100

Bosworth and Collins (2003)

1980–1990

9.2

23

31

46

100

Bosworth and Collins (2003)

1990–2000

10.1

32

18

50

100

Note: Statistics in this table are according to the author’s own compilation from the studies cited. Modiﬁcations where applicable were made so that the statistics become compatible.

Factors Affecting Productivity Growth Productivity growth can appear in two forms, i.e. efﬁciency improvement and technological advancement. The former represents gains in output by utilising existing resources more efﬁciently through institutional changes, improvement in resource allocation, microeconomic management, infrastructure and so on. In the last 29 years, especially at the early stage of economic reforms, China’s productivity growth largely resulted from efﬁciency improvement associated with economic reforms which brought about reallocation of resources among sectors such as labour movement from the farming sector to the more productive manufacturing sector and diversion of capital from loss-making state-owned enterprises to the private sector. The contribution of this type of productivity gains alone amounted to one to three percentage points of China’s economic growth (World Bank, 1997).

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The contribution of such efﬁciency improvement can however be a one-off gain or a level effect. As a result, the second component of productivity growth, i.e. technological advancement, becomes more important. This component can have a long-lasting effect or a growth effect. In China, as economic reform deepens, the potential in efﬁciency improvement is gradually being exhausted or marginalised. Technological advancement is thus vital to long-term economic growth. Existing studies have shown that, in the 1990s, technological advancement was already the main driving force behind productivity growth (Wu, 2007; Zheng and Hu, 2007). Technological advancement has become possible because of China’s embracement of foreign capital and technology as well as China’s increasing investment in education and Research and Development (R&D) in the last 29 years, particularly during the last decade. The impact of investing in education is reﬂected in the number of students enrolled in various institutions, for instance. In 1978, about 870,000 students including 11,000 postgraduates were enrolled in Chinese tertiary institutions. In 2005, the number of tertiary students reached 15.6 million including 978,610 postgraduate students. In addition, nearly a million students went overseas to pursue their postgraduate studies. Furthermore, the total number of patent applications granted in China jumped from merely 138 in 1985 to 22,588 in 1990 and 214,007 in 2005. The total value of transaction in the technologies market also grew from about 10 billion yuan in 1991 to 65 billion yuan in 2000 and 155 billion yuan in 2005.

Productivity Growth at the Industry Level In addition to productivity studies at the aggregate level, many investigations are also concerned with productivity performance at the industry level, e.g. agriculture, state-owned enterprises and foreigninvested ﬁrms. The advantage of an industry level study is its coverage of the role of industry-speciﬁc factors in productivity change and hence its relevance to sector-oriented policy formation. In terms of labour productivity, there is considerable variation among the three major sectors, i.e. agriculture, manufacturing and services (Figure 1). Thus, it is sensible to look at the individual sectors.

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I N T E R P R E T I N G C H I N A ’S D E V E L O P M E N T Figure 1. Labour Productivity in Three Sectors

3.5 3

10,000 yuan pc

2.5 2

Agricultural Agriculture Manufacturing Manufacturing Services Services

1.5 1 0.5

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

Note: The unit of labour productivity is 10,000 yuan per head expressed in 1993 constant prices.

Productivity growth and its contributions to China’s agricultural economy have been well documented. The consensus view is that rural reforms such as the introduction of the household responsibility system (HRS) in the late 1970s and early 1980s had boosted productivity growth and thus contributed to agricultural growth. The estimated percentage contributions range from 23 percent to 49 percent. Productivity performance in the industrial sector, especially the state-owned enterprises (SOEs), is however much more controversial. On the one hand, empirical studies show that productivity growth has contributed to the growth of output in industry. On the other hand, some authors presented evidence of occasional falling productivity which hence hinders output growth in the SOEs. In addition, foreign-funded and other non-state owned enterprises are found to be more efﬁcient than the SOEs.

Productivity in China’s Economic Growth In summary, empirical evidence shows that productivity improvement has made substantial contributions to China’s recent economic growth.

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This is good news for the sustainability of China’s growth in the near future. However, in the international perspective, China still has to do a lot more to promote innovation and hence productivity growth so that the country can catch up with the world’s best practice. Table 1 shows that on average productivity growth accounts for about 41 percent of output growth in China while the same ﬁgure is 50 percent for Japan, 56 percent for Italy, 57 percent for the UK, 58 percent for Germany and 60 percent for France during the 1960–1989 period. In terms of labour productivity, though considerable progress has been made over the years, there is still a huge gap between China and the world’s best practice. In addition, there is disparity across the sectors. Some sectors are catching up much faster than that in other sectors. The causes for the variation should be investigated and may have important policy implications. Though China’s investment in R&D and education has increased substantially, its share over GDP is well below those in the world’s major economies. For example, most OECD countries spend proportionally twice as much as China does on R&D activities. These countries also invested much more in education than China did. Singapore is a good example. Though the country’s spending on R&D and education as proportions of GDP is much higher (2.1 percent and 3.3 percent) than China’s (1.1 percent and 2.9 percent), Singapore still aims to achieve a higher level of investment on her R&D and education. Overall, China’s human development ranking is far behind that of the world’s major economies. It can be anticipated that the investment in R&D and education in China will continue to grow in the future. This will further boost productivity growth.

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T

he 11th Five-Year Programme Sarah Y. TONG

On 11 October 2005, the 16th Central Committee of Chinese Communist Party (CPC) concluded its Fifth Plenary Session where a draft proposal for formulating China’s 11th Five-Year Programme for National Economy and Social Development was approved. Detailed guidelines were prepared and revised in the following months and later approved at the Fourth Plenary Session of the 10th National People’s Congress (NPC) in March 2006. The new guidelines attracted considerable attention. The programme not only provided an important opportunity for the Hu-Wen leadership to outline its vision on the future direction of the country’s economic development, but was an attempt by the leadership to tackle growing economic and social problems following China’s recent rapid economic expansion. Compared to previous ﬁve-year plans, the current programme has quite a few distinctive differences. First, to highlight a shift in the function, the plan has been given a new name, from “plan” to “programme” or “guideline”. Second, considerable efforts have been made for the new guidelines to be formed through a more consultative process. The most important change, however, is the shift from a previously strong growth emphasis to a more balanced and sustainable development emphasis or the “scientiﬁc approach to development”. The question remains as to whether, and to what extent, the new programme will have a signiﬁcant impact on the future dynamics of China’s economic and social development. In fact, economic planning in China has experienced dramatic transformation over the past decades. In the earlier years, a Soviet Stalinist mandatory central planning served as the important apparatus to achieve rapid industrialisation with a strong preference for heavy industry

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and state ownership. Since the late 1970s, with the decrease in state dominance in the economy, compulsory central planning has gradually been phased out. The recent 11th Five-Year Programme is better seen as another step in a continuous effort to move away from direct government intervention towards a more indicative planning for economic and social development. In addition to the shift from direct government intervention, recent economic conditions also prompted the government’s decision to modify its development strategies. While there is little doubt that China’s economic reform since 1978 has been largely a success, with annual growth rates of 9.6 percent in GDP and 8.4 percent in per capita GDP between 1979 and 2005, China’s export-oriented and heavily domestic investment driven growth model has engendered a number of problems that threatened China’s further development. The ﬁrst pressing concern is the increasing income disparity. For example, urban-rural income gap has widened lately due to the relative stagnation of rural income. The ratio of urban to rural per capita disposable income increased from 2.5 in 1996 to 3.2 in 2005. Per 1 capita GDP ratio between the richest region and the poorest region also increased signiﬁcantly, from seven times in 1990 to 10 times in 1995, and further to 13 times in 2000 and 2004. The situation is aggravated by the rapid expansion of cities into rural China where no effective institutional arrangement exists to protect the interests of displaced farmers. As a result, there has been an increase in the number of cases of rural unrest related to land disputes. In addition to potential social and political consequences, growing income disparity also has serious economic ramiﬁcations. For example, rising regional disparities and widening urban-rural divide have impeded domestic consumption growth, raising the economy’s dependence on exports and capital spending. While investment expansion has put further strain on energy and other resources, export expansion may also face increasing challenges due to rising protectionism in China’s major export markets. 1

The regions used here refer to provinces, autonomous regions and province level municipalities.

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China’s recent economic growth has been highly energy and resource intensive, a source of distress on its sustainability. This is another grave concern leading to the recent shift in China’s development strategy. The situation seems to have worsened in recent years. Since 2000 energy and electricity consumption has increased signiﬁcantly faster than GDP. The dramatic increase in energy consumption is partly responsible for the recent explosion in the number of coal mine accidents. Energy shortages have also hindered economic growth in some regions and industries, leading to growing dependency on energy import, which has ramiﬁcation on energy security and is a potential source of international conﬂict. Lastly, high energy consumption is also responsible for high pollution in many Chinese cities. Few would have doubted that international trade has played a crucial role in China’s economic growth in recent decades. Between 1979 and 2005, China’s GDP grew at an average annual rate of 9.6 percent, while average annual growth of export reached more than 17.5 percent. Since 2004, China has overtaken Japan to become the world’s third largest trader, after the United States and Germany. In 2005, China made up 6.1 percent of world import and 7.3 percent of world export. Export expansion constitutes a crucial element in China’s economic growth. In the future, however, it is unlikely that China can sustain trade expansion at such high pace. The rapid expansion of China’s trade and growing trade surplus in recent years have already led to growing anxiety in a number of China’s major trading partners. Since the mid-1990s, an increase in China’s overall trade has been associated with growing trade surplus of more than US$30 billion a year on average between 1997 and 2004. In 2005 and 2006, China’s trade surplus reached US$102 and US$176 billion, respectively. The ratio of China’s trade surplus to overall trade also increased to 7 percent in 2005 and 10 percent in 2006, from a modest level of less than 5 percent between 2000 and 2004. China’s increasing trade surplus has not only fuelled the constant call for China’s exchange rate reform, but also led to China’s trade tensions with its major trading partners, especially the US and EU. The row over China’s export of textile and clothing in 2005 is one recent example.

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The guidelines bring to light the current Hu-Wen government’s initiatives for China’s future, which put more emphasis on balanced and sustainable development. Are the objectives achievable and to what extent? From the guidelines, it seems that the Chinese leaders will continue their reliance on developing a functioning market and on various government apparatus. To a large extent, the guidelines follow the practice of indicative planning where certain goals are projected but not actively pursued. For example, China’s total trade in goods is projected to reach US$2.3 trillion by 2010. The actual ﬁgure will eventually depend on situations in the marketplace. In addition, the guidelines have identiﬁed speciﬁc objectives to be achieved through, at least partly, government efforts such as direct investment. For example, key projects for revitalising equipment manufacturing industry, as well as key transportation infrastructure projects, have been listed. Until now, it is far from clear whether the market combined with direct government intervention approach will be effective in redirecting China’s economy towards a more balanced growth path. For example, the guidelines speciﬁed an annual growth target of 7.5 percent a year between 2006 and 2010, compared with an actual average annual growth of 9.6 percent from 1979–2005. By lowering the growth target, the central government intends to focus on various development issues, including income disparity, education, healthcare, housing and pollution. In addition, the government also seeks to move its economy away from an over-reliance on investment and export-led growth. Finally, it is evident that the leadership is determined to address the energy issue with a targeted cut in energy consumption per unit of output by 20 percent between 2005 and 2010. 2 Preliminary estimates for 2006 show only slight changes in China’s growth performance. In 2006, GDP grew by 10.7 percent, which is faster than that of 2005 and much higher than the proposed 7.5 percent. Growth continues to rely on investment and trade expansion. Despite various direct

2

“China National Economy Maintained Stable and Relatively Speedy Development in 2006.” National Bureau of Statistics, 25 January 2007 (http://www.stats.gov.cn/ tjfx/jdfx/t20070125_402382298.htm).

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and indirect government measures to control investment surge, ﬁxedasset investment grew rapidly, by 24 percent. Total trade grew by 23.8 percent, 27.2 percent for export and 20.0 percent for import, respectively. In contrast, domestic consumption grew much more modestly. Total retail increased by 13.7 percent. Moreover, urban-rural income gap continues to widen as per capita rural disposable income grew by 7.4 percent and per capita urban disposable income grew by 10.4 percent. China’s growth performance in 2006 had demonstrated little adjustment as proposed in the guidelines. This largely reﬂects the central government’s limited inﬂuence on economic activities which have been mostly decentralised and market driven. Indeed, the guidelines formulated at the central level may contradict with policies of regional leaders which continue to focus on growth. Much more are needed to alter the emphasis of local governments from growth-centred to more balanced development, including a change in inter-government income transfer and in the appraisal system of government ofﬁcials. As China attempts to address social and environment-related development issues, maintaining growth will remain a crucial element in China’s economic policy. The challenge is how to effectively utilise resources to alleviate some key social grievances, such as escalating costs in education, healthcare and housing. As a large developing country, China cannot afford to lose the battle.

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C

hina’s Drive to Become a Technological Power QUAN Xiaohong

China’s investment in science and technology (S&T) is steadily increasing. Total Research & Development (R&D) expenditure increased from 34.9 billion yuan in 1995 to 245 billion yuan in 2005, with an annual compound growth rate of about 21.5 percent. Meanwhile, gross domestic expenditure on R&D as a percentage of GDP was boosted from 0.6 percent (1995) to 1.34 percent (2005). However, it is still low when compared with developed countries. For instance, the R&D expenditure already accounted for 2.51 percent of GDP in 1995 in the US, and about 3 percent as of overall GDP in Japan in recent years. For many years, the government has dominated R&D investment in China. From 1949 to 1977 all research, development, and engineering activities were controlled and coordinated by two agencies, the State Development Planning Commission and the State Science and Technology Commission. The detailed annual and ﬁve-year plans that allocated resources throughout the economy come under the purview of the State Development Planning Commission. Each administrative and productive unit made investment, production, pricing, distribution and other operational decisions according to these guidelines. The State Science and Technology Commission oversaw the funding and administration of science and technology activities in Chinese research institutes, ﬁrms and universities. R&D was conducted by state-owned research institutes including those doing basic research such as the giant Chinese Academy of Sciences and the hundreds of industrial and local institutes that conducted more applied R&D. In most cases, the relevant ministries of the central government administratively governed the R&D institutes, controlling

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both funding and personnel, as well as the state-owned enterprises that were to implement and exploit the new technology. China’s system of higher education was organised in the same period to both nurture and disseminate scientiﬁc and technological knowledge. By 1965, 55 universities had been established across the country; however their focus was on teaching rather than research. By the early 1980s, when China embarked on market-oriented economic reforms, its S&T system was subject to far-reaching challenges for its lack of efﬁciency, R&D weaknesses, poor technical skills, and dated focus on defence and other heavy technologies. Policy makers launched a series of ambitious initiatives in the 1980s and 1990s for enhancing the nation’s technological capabilities. The efforts included 1) exploiting the international environment by acquiring foreign technology, attracting foreign investment and sending students abroad for training; 2) reforming the S&T system by promoting university-based research (which was barely existent in the pre-reform era), encouraging closer ties between research and production, and encouraging horizontal, marketmediated ties between research institutes, universities and enterprises, as well as supporting the formation of “new technology enterprises”, and 3) promoting programmatic innovations through a variety of funding schemes and institutional innovations to improve the focus and coherence of R&D and technology diffusion efforts, including most famously the “863” Programme. The “863” Programme is a well funded effort to monitor the world’s high technology frontier, train a new generation of researchers and advance Chinese capabilities in ﬁelds such as biotechnology, information technology, energy, new materials, space and lasers. These reforms signiﬁcantly improved the infrastructure for domestic research in China and reduced the direct control of the central government over decisions made by ﬁrms and research units. The development of the S&T system has been accelerated since 1995. The Chinese National Science Conference of 1995 featured a document entitled the “Decision to Accelerate the Development of Science and Technology” that called for “revitalising the country through science and education.” The new agenda that resulted from this and subsequent meetings of the Party Congress and the National People’s Congress included 1) a commitment to allocate more resources to R&D, particularly

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in enterprises rather than government institutes; 2) greater attention to quality and performance (especially productivity) in resource allocation decisions, and 3) increased international cooperation in S&T, including recognition of the overseas Chinese scientists and engineers as an important resource. Similar to the “863” Programme, a state-led “973” Plan was initiated in March 1997, which focuses on basic research in six areas including agricultural biotechnology, energy, informatics, natural resources and the environment, population and health, and materials science. As one result of these development agenda, R&D investment by Chinese enterprises totalled 164 billion yuan in 2005, which represented a sharp increase from just 29 percent of total domestic R&D expenditure in 1992 to 67 percent of total in 2005. A ratio of over 60 percent as industryﬁnanced R&D follows the norms in most developed countries. For example, ﬁrms accounted for 70 percent of the total R&D investment in the United States in 2005, while the percentage was 76.7 percent for Japan. Despite its inadequacy and inaccuracy in measuring science and technology activities, patent is still the best and most used indicator for national innovation capability. Domestic application for patents increased at an annual rate of 18.6 percent from 69,535 cases in 1995 to 383,157 cases in 2005. Meanwhile, granted patents also reached 190,238 cases in 2005. However, invention patent, which represents more fundamental innovation capability, accounted for only a quarter of the total patents granted. Incremental innovation shown as utility model and external design patents accounted for 75 percent of the total. Furthermore, foreign entities outside of China took the majority of the relatively small number of invention patents registered in China. As a result, although the number of invention patents in China ranked third internationally after Japan and the US, about two thirds of the invention patents were granted to institutions/ﬁrms outside of China. Comparatively, fourth-placed South Korea has the majority of invention patents coming from its domestic entities. Impressive progress has been made for scientiﬁc publications. The number of national S&T publications in international referencing systems including Science Citation Index (SCI), Engineering Index (EI), and Index to Science and Technical Proceeding (ISTP) accumulated to 153,374 (1994–

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2004) or 6.78 percent of the world total. This earned China the ﬁfth place in world ranking in terms of the production of SCI papers, a big jump from No. 15 a decade ago. Nevertheless, just as in invention patents, foreign institutions and individuals in China have contributed a large part to its international publications. Data on invention patents and S&T papers illustrated the fact that China’s radical innovation capability, which in the long term leads to the change in international S&T competition pattern and subsequent commercial beneﬁts, is still weak. In fact, the level of basic research, which directs radical innovation, has remained quite low. Development and applied research accounted for the majority of the R&D expenditure in China, leaving only about 5 percent for basic research. The size of the scientists and engineers community in China is considerably large and comparable to the leading nations such as the US and Japan. However, the number of scientists and engineers per 10,000 workers in China was only 12 in 2003, while it was over 90 in the US, 101 in Japan, 67 in Germany, 66 in South Korea, to name a few. On the other hand, the percentage of engineering undergraduate enrollment in institutes of higher education declined from about 40 percent of overall students in 1995 to only 30 percent in 2004. Similar declining trend happens in the ﬁeld of sciences. Furthermore, the relative decrease in graduate enrollment is also evident. The gap between S&T labour supply and demand is widening. National and regional policies on attracting FDI and promoting technology transfer have always been in place ever since the beginning of China’s economic reform in the late 1970s. Although a gigantic amount of FDI has ﬂowed in and played a positive role in advancing technological development in China through knowledge transfer and diffusion, the most up-to-date technology will not be introduced from abroad as a result of national security and international competition. On the other hand, the government has recognised the growing ﬂow of overseas returnees as increasingly important S&T resources for China. Internally, policies favouring state-owned-enterprises have continued to make small technological ﬁrms struggle to survive in a harsh environment lacking in sufﬁcient ﬁnancial support. However, private small and medium enterprises (SMEs) are playing an increasingly

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important role in national innovation. In 2005, these non-state owned S&T ﬁrms accounted for about 17 percent of the total National S&T Advance Awards. Policies facilitating SMEs’ innovation are critically desired. National S&T research funding has usually been dominated by senior scientists who may be more inclined to protect their own reputation and practical beneﬁts than to advance the development of science and technology. Research efforts of innovative young scientists and engineers often go unrecognised or unrewarded due to a distorted evaluation system under a complicated net of guanxi. As a result, although the Chinese government is adamant in propelling indigenous innovation in all identiﬁed strategic ﬁelds as articulated in the National Medium- and Long-Term S&T Development Plan (2006–2020), China’s becoming a great technological power in the world is still inconceivable without circumventing the various cultural and institutional barriers.

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B

anking Reforms to Meet WTO Obligations Sarah Y. TONG ZHENG Yi

The year 2006 was a signiﬁcant year for the Chinese banking sector. It marked the ﬁfth anniversary of China’s entry into the World Trade Organisation and the last year of China’s transition period to fully open its markets. On 11 December 2006, China was obligated to fully open its ﬁnancial market in line with its WTO commitments of ensuring equal national treatment for foreign banks to engage in the Chinese currency business. This poses a big challenge to China’s indigenous banks, as they face not only signiﬁcantly more intensive competition, but also considerable changes in the regulatory environment. When China became a formal WTO member in late 2001, its banking sector was mired by a devastating non-performing loans (NPLs) crisis, along with many other weaknesses and ﬁnancial risks. Indeed, NPLs accounted for 26 percent of China’s total bank loans in 2002. Hampered by poor assets quality, Chinese banks were extremely inefﬁcient. In 2002, the average return on equity and the average return on assets of China’s stateowned banks (SOBs) were only 3.6 percent and 0.14 percent, compared to 9.9 percent and 0.41 percent for European Union (EU) banks, respectively. The banking sector is also weak in corporate governance, regulations and risk management so much so that some commentators even warned that China’s banking system could collapse and trigger a serious domestic economic crisis. A weak banking sector was considered one of the most critical and urgent post-WTO challenges facing the country. To prepare China’s banks for the upcoming competition, China accelerated reforms to its shabby banking sector in the ﬁve years following its WTO accession.

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The earliest effort was to improve assets quality of the banking sector. The attempt ﬁrst started in 1998 with the injection of RMB270 billion (US$33 billion) into the four state-owned banks (SOBs). In 1999, the government established four state-sponsored asset management companies (AMCs) to take over RMB1.4 trillion (US$169 billion) of bad debts from the SOBs. In January 2004, a total of US$45 billion was injected into the two better performing SOBs, China Construction Bank (CCB) and Bank of China (BOC), to improve their capital adequacy ratio. The most recent effort came in April 2005 when US$15 billion was injected into the Industrial and Commercial Bank of China (ICBC) to increase its capital. The restructuring of ICBC continued in June 2005 with a plan to further dispose US$85.5 billion of NPLs to AMCs and to issue subordinated debts of US$12 billion. In addition to injecting funds into the big SOBs, since January 2005, China’s central bank (PBC), together with the regulator (CBRC), has coordinated with local governments to restructure local deposit institutions, through measures including debt-for-equity restructuring, writing off of bad loans and closing down of some insolvent credit coops and local banks. A total of RMB23.3 billion has since been injected by local governments to carry out debt-for-equity restructuring of 28 city commercial banks. China’s banks have also undertaken structural transformations including incorporatisation and ownership diversiﬁcation. The government started to incorporate CCB and BOC in 2004. Since 2005, the ICBC has undergone similar incorporatisation. During incorporatisation, the government also encourages the banks to sell their shares to selected foreign “strategic investors”. There have also been considerable efforts to improve and reinforce bank regulation, corporate governance and risk management of the banking industry. In 2003, China Banking Regulatory Commission (CBRC) was established to enforce bank regulation. To improve corporate governance and risk management, CBRC has taken a very stringent stance on requiring 1 banks to meet its Basel I Capital Adequacy Ratio (CAR) of 8 percent . 1

The capital adequacy ratio refers to the ratio of a bank’s capital to its risk-weighted credit exposure. The bank capital is vital to a bank’s survival and development, as well as a country’s ﬁnancial security; the global standard is Basel I Capital Adequacy Ratio of 8 percent.

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The various reform measures have led to a remarkable transformation of the banking sector. Instead of a meltdown as some analysts had predicted, China has guided its banks towards solvency and success. Improvement is particularly evident with respect to the three stronger of the four big SOBs. First, NPLs in China’s banking sector have been reduced by more than half in four years, from RMB2.7 trillion in 2002 to RMB1.3 trillion in 2006. By the second quarter of 2006, according to CBRC, overall NPLs of all commercial banks had dropped to RMB1.28 trillion or 7.5 percent of total bank loan, representing a signiﬁcant reduction from 23.2 percent in 2002. Among the four big SOBs, the CCB had the lowest NPLs ratio of 3.8 percent in 2005. Second, due to the improvement of assets quality and the expansion of new loans, China’s banks have substantially increased their pre-tax proﬁts and provision ratio over the past few years. In three large state banks, namely, CCB, BOC and ICBC, proﬁtability measured by return on equity has improved signiﬁcantly (to between 13 percent and 22 percent) and is now closer to the world average level of 23 percent, with the exception of the Agriculture Bank of China. In 2005, these three banks demonstrated further improvements in main performance indicators such as NPL ratios, capital adequacy ratio, return on assets and return on equity. As a result, in 2006, according to The Bankers Magazine, UK, 25 Chinese banks were listed as among the world’s top 1000 banks in terms of assets and tier one capital. The CCB, for example, improved its ranking from 25th in 2005 to 2 11th in 2006, followed by ICBC’s 16th, and BOC’s 17th . Three of the four large state banks, CCB, BOC and ICBC have been incorporated into share holding banks, among which CCB and BOC were successfully listed in the Hong Kong Exchange in 2006, raising initial public offerings (IPOs) of US$9.2 billion and US$11.2 billion, respectively. ICBC was listed in both Hong Kong and Shanghai Stock Markets on 27 October 2006, raising the largest IPO of US$19 billion. On the other hand, increasing market access to foreign banks has actually proceeded gradually and consistently since 2001 as speciﬁed in China’s WTO accession agreement. The amount of foreign investment in 2

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The ranking was before ICBC and BOC raised their IPOs in 2006.

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Chinese banks had risen signiﬁcantly and indeed accelerated in the past two years. Between 2001 and 2003, foreign banks bought shares worth only US$343 million in domestically-registered Chinese banks. Since 2004, stakes in Chinese banks by foreign investors, including both completed and announced deals, have added another US$21.4 billion. It is expected that rising foreign penetration in Chinese banks through increasing shares will lead to qualitative improvement of the banks’ governance. Foreign banks have maintained high growth momentum in China, with annual growth in assets, deposits and loans all exceeding 30 percent. The amount of capital paid in foreign bank branches and joint ventures rose by 31 percent in 2004. In 2000, there were only 69 foreign banks with 214 representative ofﬁces operating in China. The number rose to 173 banks, with 238 representative ofﬁces and 238 operational entities, in 2005. The number of banks allowed to conduct local currency business also increased from 32 in 2001 to 138 in 2006. Consequently, the total assets of foreign banks in China rose from US$45.1 billion in 2001 to US$84.5 billion at the end of 2005. Although foreign banks accounted for 20 percent of total foreign currency loans, given the huge size of China’s domestic banking industry, their shares in total bank assets remained low at around 2 percent in 2006. Overall, China’s banking reform has indeed made impressive progress after China’s accession to the WTO. The various measures have lessened the vulnerability of China’s banks to external shocks when the sector opened up further at the end of 2006 to meet full WTO obligations. However, this does not mean that most of China’s banks are now sufﬁciently robust to stand up to major international challenges. The nagging NPL problem apart, Chinese banks are still saddled with several structural weaknesses, which include acute shortage of well-trained and experienced professional staff, weak regulatory framework (as in its ineffective implementation) and lack of operational experiences in such new areas as risk management. Though most banks in the region, except those in Singapore and Hong Kong, also have, in varying degrees, similar structural shortcomings, the problems faced by Chinese banks were aggravated by a period of rapid economic growth and rapid banking expansion. The banks simply do not

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have sufﬁcient time to train an adequate number of professional staff, put the modern management system in place and work out an acceptable pattern of relationship with the government for more operational autonomy. Therefore, the reform and transformation of China’s banking sector may well be a continuing task.

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eforming State-Owned Enterprises Sarah Y. TONG

Reforming China’s state-owned enterprises (SOEs) has been one of the most important objectives for the Chinese authority, and probably the most challenging one. The reforms have gone through roughly two phases with different objectives and measures. In discussing China’s SOE reforms, one needs to keep in mind that the government has been extremely reluctant to privatise SOEs on a mass scale, especially those considered as of strategic importance to the economy. During the initial phase, between 1978 and mid-1990s, the main objective was to establish and strengthen proﬁtability-related incentives for the managers. In the early 1980s a system of manager-responsibility was introduced where a manager of a ﬁrm signed proﬁt contracts with its 1 supervising agency on negotiated terms. Over time, the types of contracts evolved from a “proﬁt retention scheme” (lirun liucheng) to a “contract proﬁt-lost responsibility system” (zifu yingkui), and subsequently to the introduction of “tax for proﬁt system” (li-gai-shui). The process of “incentivising” the ﬁrms was also accompanied by the “dual track” (shuanggui) pricing system. Price reform was slowly introduced along with measures taken to decentralise and reduce government planning. There had been gradual but continuous and increasing reliance on the market in the allocation of consumer goods and factors of production, in investment ﬁnancing, in foreign trade and in foreign exchange management. Increased

1

Under the central-planning system, each state-owned-enterprise (SOE) was categorised into the government’s management system at various levels. For example, some SOEs were centrally managed and subject to supervision of different ministries. Provincial SOEs on the other hand were managed and supervised by provincial branches of the government ministries.

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marketisation was aimed at reducing the overall degree of price distortion in the economy, which in turn would bring about a more conducive macroeconomic environment for SOEs to operate closer to being business entities. The approach was quite successful in its move to reorient ﬁrms to be more responsive to market competition. Since the mid-1990s, this contractual solution has gradually been abandoned and SOE reforms entered a new phase. Following Deng Xiaoping’s tour to South China in 1992, China unleashed a new reform momentum to build the “socialist market economy”. During the 1993– 97 period, the main thrust of the SOE reform efforts was directed at the establishment of a “modern enterprise system”. Speciﬁcally, apart from promoting further improvement in enterprise governance through “scientiﬁc” (modern) management, the government placed major emphasis on enterprise groups (qiye jituan) through mergers and acquisitions of SOEs. The experimentation of the shareholding system earlier on was also stepped up and the Company Law enacted in July 1994 to provide a legal framework for the corporatisation drive. In early 1995, China’s SOE reform efforts crystallised further into a more explicit strategy of “nurturing the big while letting go of the small SOEs (Zhuada Fangxiao)”. The government has decided that they could “let go” of the 240,000 or so, small, mainly local-level SOEs, via various forms of restructuring including reorganisations, mergers and takeovers, leasing and management contracts, conversion to shareholding companies, or even outright closures. At the same time, they will retain the 1,000 large SOEs belonging to the central government, for economic and social reasons. These key SOEs are still of strategic importance as they constitute the backbone of China’s industrial economy in terms of total capitalisation and employment. This second wave of SOE reform has resulted in the mass laying off of workers in the urban areas and the slow and consistent shrinking of SOE share in China’s industrial sector. Between 1990 and 1995, the share of SOEs in total industrial output dropped from 55 percent to 34 percent. Since 1995, a new statistical system has been implemented in which SOEs and corporations controlled by the state are grouped under one category. Under the new reporting system, their shares in total output and total

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2

value-added of above scale industry have been decreasing in recent years. In 1998, SOEs and corporations controlled by the state accounted for 50 percent of the total output and 57 percent of value-added of the above scale industry. In 2005, the ﬁgures declined to 33 percent and 38 3 percent, respectively. On the whole, the decades-long government efforts of grappling with the SOE reform problem have produced many encouraging results though many problems remain unresolved. For example, there has been repeated ofﬁcial acknowledgment of mounting SOE losses and continuing indebtedness of SOEs. In 2005, for example, while state-owned and statecontrolled enterprises accounted for 11 percent of all above-scale industrial establishments, 21 percent of all loss-making enterprises were SOEs or state-controlled. From 1997, the call for enterprise reform has accelerated again, under the general policy of “enterprise restructuring”. One important objective of enterprise restructuring is to clarify ownership of SOEs. In many cases, restructuring implies a mild change in “corporatisation”, converting a previously bureaucratically-run SOE into a company with deﬁned ownership shares and a board of directors to exercise control. In other cases, restructuring can include overt privatisation, with a new set of private owners replacing the vaguely deﬁned public interest. In this newest wave of reforms, the number of SOEs has dropped signiﬁcantly. Remaining SOEs fall under the supervision of either the central or various local authorities. In June 2003, a State-owned Assets Supervision and Administration Commission of the State Council (SASAC) was established. SASAC was designed to be the owner and the investor of state-owned assets as well as the supervisory body of the Centrally-Administrated Enterprises (CAEs) in China. While the number of CAEs under SASAC is small and decreasing, from 196 in 2002 down to about 160 in 2006, these ﬁrms are

2

Above-scale industry includes large and medium size enterprises as well as small enterprises with an annual turnover of above ﬁve million yuan (about US$600,000). 3

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Source: China Statistical Yearbook, 1999, 2006.

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considered the cornerstones of Chinese industry. For example, by the end of 2002, there were 196 CAEs with total assets of RMB7.13 trillion in book value, and RMB3.2 trillion in net value, of which RMB2.6 trillion were owned by the state. By the end of 2005, there were less than 170 CAEs with total assets of RMB 10.6 trillion in book value and RMB4.65 trillion in net value. The total revenue and proﬁt for the year were RMB6.7 trillion and RMB6.3 million, respectively. The most important sectors under SASAC’s control are capital-intensive large-scale industries including petroleum and reﬁning, metallurgy and electricity. Much effort has been made to improve and strengthen the effectiveness of SASAC. However, SASAC is still troubled by various deﬁciencies. For example, SASAC does not have the authority to appoint the top managers of some CAEs. That power goes to the Communist Party. As a result, the appointees may not set as their top priorities the maximisation of proﬁt and the value of state assets. Moreover, SASAC also does not have the authority to collect the earnings of the CAEs under its supervision. SASAC is often powerless as many of the CAEs are very powerful and well connected with some evolving from former government ministries. There is still a long way to go for SASAC to become an effective government body to exercise its designated right as the owner and investor of stateowned assets. It has been more than 12 years since China passed its Company Law, which provided a legal framework for SOEs to be reorganised into corporations. Implantation has been relatively slow. In fact, the majority 4 of state ﬁrms have not yet been corporatised . This is also true for the CAEs. By the end of 2003, only less than 10 percent of the CAEs have been registered according to the Company Law with the rest remaining as wholly state-owned companies. In contrast, the SOEs under local authorities are more active in the corporatisation drive. On the other hand, improvement in corporate governance is still limited for those re-organised under the Company Law. For example, many of the corporatised ﬁrms still do not have functioning Boards of Directors. In many cases, appointed board members are part of the management team

4

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Barry Naughton. 2007. The Chinese Economy: Transitions and Growth, p. 316.

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for the ﬁrms. Other challenges include the establishment of an effective system for Independent Directors, a functioning Board of Supervisors, and a reliable system to evaluate the ﬁrms’ business performance. After China embarked on its economic reform in 1978, China’s industry has been almost completely transformed with the SOEs being the last to undergo serious restructuring. Nonetheless, large scale privatisation and re-organisation of SOEs, especially those small- and medium-sized SOEs, have indeed taken place since the mid-1990s. However, Chinese ﬁrms still have a long way to go before becoming world-class corporations. Much more is needed to strengthen the corporate governance of Chinese ﬁrms in general and CAEs in particular.

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ise of China’s Auto Industry YANG Mu TENG Siow Song

China ﬁrst established its automobile industry in the early 1950s. The industry did not ﬂourish until after China’s entry into the World Trade Organisation (WTO) in December 2001 when many new auto players, including foreign companies, entered the Chinese market. By 2003, China was already the third largest auto consumer in the world, and by 2005, it was also the world’s second largest auto market (equalling Japan’s), with auto sales of over ﬁve million units. China has over 120 vehicle producers, almost parallelling the total combined number of companies in the United States, Japan and Europe. In June 2006, Chery (a Chinese auto brand) exported the ﬁrst China-made car to Singapore.

Chinese Domestic Brands (Private and State-Owned) In 2005, China’s domestic auto brands captured about 25 percent of the domestic market. It was also the year Chinese Original Equipment Manufacturers (OEMs) made history. Chery, a local government-owned passenger car company sold a record 180,000 units, including 18,000 units for export, equivalent to its annual growth rate of 100 percent. This made Chery the national leader in auto sales growth. Another privately-owned local OEM based in Zhejiang Province, Geely, made another history by being the ﬁrst Chinese company to be invited to participate in the Frankfurt Auto Show in September 2005 and in the Detroit Auto Show in early 2006. China’s low labour costs, abundant raw materials, less stringent environment regulations, preferential government policies and growing market potential have made China the largest supplier of aluminum

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wheels for the American auto industry. Foreign auto makers would do well to capitalise on their strengths in design, engineering, marketing, research and development (R&D) and take advantage of China’s low manufacturing, labour and other costs to expand their automobile and auto related components and parts manufacturing in China. The future of China’s automobile industry appears to be bright, with plenty of room for maintaining high growth rates. Foreign companies will continue to strengthen their penetration into and control over China’s auto industry in terms of fund injection, new auto model introduction, product series, sale rights and auto culture. There will be ﬁercer competition among foreign and domestic auto makers in the days ahead. The number of foreign-Chinese auto alliances will also continue to increase.

Foreign Brands With the entrance of more foreign multinational auto companies into China, the stage is set for more intense competition. Toyota came to China in 2003 and cooperated with FAW (First Automobile Works Corporation) to expand their auto production to between 400,000 and 500,000 units by 2010. Nissan entered China in 2003 and cooperated with China’s Dongfeng Auto Corporation to produce six Japanese car models in 2006. They plan to produce 300,000 units of passenger cars by 2007 and become one of the world’s top three producers. Ford made its foray into China in 1997 together with China’s Chang An Auto Corporation. Ford currently has six joint ventures in China and plans to increase its production to 150,000 units annually from the present 20,000. BMW has cooperated with China’s Brilliance Auto Holdings to jointly manufacture the 3 and 5 series luxury cars since 2000. General Motors (GM) partnered Shanghai Auto Industry Corporation to become the largest Sino-American joint venture (JV) in China. In 2005, Shanghai GM sold 298,000 units compared to 201,188 units in 2003. Shanghai GM made history in 2005 by replacing Shanghai Volkswagen as the market leader in the Chinese passenger car segment for the ﬁrst time in 20 years.

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DaimlerChrysler entered China in 1987. In 2002 it sold more than 8,000 Mercedes sedan in China. In 2005, it entered into a 50:50, 30-year partnership with Beijing Auto Corporation to jointly manufacture 20,000 units of Mercedes “E” and “C” classes. Volkswagen was the ﬁrst foreign auto company to come to China in 1985. It partnered Shanghai Auto Industry Corporation to form Shanghai Volkswagen and is the most successful auto maker in China; its market share has dwindled with the entry of other auto brands. In 2002, it produced over 500,000 units and is now exploring new car designs based on the European markets’ tastes and preferences. Volkswagen also partnered China’s First Automobile Works to form FAW Volkswagen to export cars and car parts worth some US$1 billion from just US$100 million.

Government Industrial Policies Despite increases in total auto sales volumes, proﬁt levels have been declining rapidly and will most likely decline further when these foreign companies expand their production. Substantial improvements in manufacturing techniques, product quality, product differentiation, costs competitiveness and customer services will only be achieved through more R&D, production efﬁciency, quality control and brand management. There will be a change in the make-up of the three distinct groups of auto makers namely, more private auto companies, more foreign-Chinese JVs and less state-owned companies. Chinese auto OEMs have to learn and adapt more quickly and responsibly in order to attain international standards. It took the Koreans and Japanese roughly 30 years to build up and optimise their auto productdevelopment processes before launching self-developed products into the market. At current standards of auto development, it would take China another ten to 15 years (two to three product development cycles) before they can fully master the product development skills required to compete in a mature market. China must also learn from and abide by other auto companies’ (especially foreign companies’) intellectual designs and technology.

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The Chinese government is also very keen in expanding China’s auto parts and components industry, both for exports as well as for its domestic markets. Currently, complaints have been lodged against China by foreign auto companies whose auto parts imports into China are subject to a tariff of between 10 and 14 percent (the tariff for a complete imported vehicle is 28 percent); the auto parts tariff were lowered to 10 percent and a complete vehicle tariff lowered to 25 percent (complete imported vehicle is deﬁned as one with imported components comprising 60 percent or more of its total value) in July 2006. China is under WTO obligations to remove all forms of tariffs or impediments to trade. Figure 1. Number of Automobiles in China: 1978–2005 Units (Million)

Source: China Statistical Year Book, 2006.

At the end of 2005, there were some 30 million cars on China roads (see Figure 1 and Table 1). Over the next 15 years from 2005–2020, an estimated 150 million Chinese families (about 500 million people) will be expected to purchase cars. The increase in the demand for auto fuel, increase in industrial power usage for auto production together with the uncertainties in the global energy markets will most likely cause energy prices to rise. In 2000, automobiles consumed about one-third of China’s total oil consumption. The proportion is likely to increase to about 43 percent (about 138 million tons of oil) in 2010 and further to 60 percent of total oil consumption in 2020.

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The trafﬁc situation on Chinese roads is set to deteriorate, leading to worsening congestion, air and noise pollution etc, as China’s households continue to buy cars. The Chinese government is frenetically building roads and expressways at a rate of about 24,000 kilometres every ﬁve years, (4,800 km per year) and connecting all provincial capitals and major cities by 2010. At the end of 2005, the length of expressways in China was 41,000 kilometres, the world’s second longest after the United States. Recognising this vast growing market, the Chinese government hopes that through joint ventures, domestic auto ﬁrms would be able to learn from their foreign partners. Chinese auto OEMs will then be able to learn to leverage global capability by hiring global talents. Chinese law requires that all foreign OEMs must form 50:50 foreign-China JVs if they want to produce complete vehicles locally. Currently, about 60 percent of domestic auto OEMs or component companies are operating at a loss. From January 2007, the Chinese government has been limiting the number of domestic companies in cars export. Under this system, the number of companies that can export vehicles will be limited through the use of export licenses. This is to protect domestic ﬁrms from vicious internal competition. There is no limit on auto imports. In response to the current and future increase in demand of automobiles, the Chinese government has decided to impose consumption taxes on passenger vehicles with engine capacity larger than 2.0 litres from the existing 8 percent to 20 percent. It will also lower the levies on smaller vehicles with engine capacity between 1.0 and 1.5 litres from the current 5 percent to 3 percent. This is to encourage more people to buy smaller cars and discourage the purchase of bigger fuel guzzling sedans and sport utility vehicles (SUVs). Table 1. Number of Cars per 1000 People Year

China

United States

World

2005

24

700

135

In June 2006, a new national auto industry policy was launched stipulating that any new vehicle project in China have to have an

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investment of at least two billion yuan (US$250 million) and no less than 500 million yuan (US$62 million) to be spent on R&D (about 25 percent of total investment). The Chinese government also wants JVs to build localbrand vehicles. China aims to export US$70 billion worth of automobiles and components by 2010. According to the internationally used automobile “R” Index (whereby R=Car Value/ Per Capita Income: a value of 3 indicates that cars are affordable to middle-income families), China’s R Index was 15.3 in 2004; based on this assumption, some analysts suggest that China has a good 20 years of auto expansion potential.

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T

he Political Economy of Urban and Regional Development CHIEN Shiuh-shen

Research has shown that China’s successful economic transition was, in a large part, attributable to its active local economies particularly at the urban and regional/provincial level. Regional development, coupled with urbanisation, is thus seen as a major strategy to modernise and strengthen the economy, to mobilise China’s resources and population, and to recreate familiar cityscapes in new locations. In the last three decades, the Chinese government had formulated policies and development plans along these lines. A number of spatialoriented urban or regional-based development plans (centrally initiated projects) were drawn up either for small-scale experimentation before nationwide implementation (for example, the concept of “special economic zone” launched ﬁrst in Guangdong and Fujian, and then implemented across China after the mid 1980s), or as an economic boost to certain underdeveloped areas (policies such as “Western development”, “revitalisation of the Northeast” and “the rise of Central Area”).

Dramatic and Unbalanced Urbanisation In terms of urban and regional development, China’s economic transition over the past three decades was characterised by dramatic but imbalanced urbanisation, serious territorial competition (with limited regional coordination) and uneven regional development. During Mao’s time, urban development was almost non existent. Mao’s self-reliance principle to all localities (instead of spatial division of labour between rural and urban areas) was sanctioned and encouraged by the then central

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government. It was only in 1978 that relatively rapid urbanisation began. By the mid 1990s, the process had gained momentum and the number of urban inhabitants increased dramatically from less than 20 percent in 1978 to over 40 percent in 2005. The number of cities also rose from less than 200 in 1978 to nearly 700 in 2005, with near 200 cities having more than 1 one million residents and more than ten cities over four million. The advantages of urbanisation are undeniable. There is a strong association between increasing urbanisation and rising per capita income, and there are economic advantages in urban areas in terms of economies of scale in providing labour, capital, services and infrastructure while reducing transaction costs, maximising access to business information and triggering huge industrialisation. A growing number of urban inhabitants are now enjoying higher standards of living. They live in more spacious houses equipped with the latest electronic products and travel around in locally produced or foreign cars. This growth, however, is not without its problems. Mounting social dissatisfaction as a result of rural-urban disparity has been reported. China’s Gini coefﬁcient, the measure of inequality of a distribution, went up from less than 0.3 at the beginning of reform to near 0.5 by 2005. Apart from income inequality, rapid urbanisation has also brought forth new challenges in environment protection. Without proper urban planning, urbanisation has created huge ecological and health challenges, like water shortage, air pollution and industrial wastes. Although new policies like free compulsory education to rural area were implemented along with more stringent enforcement of planning regulations, negative externalities as a result of dramatic urbanisation cannot be easily eradicated.

Local Innovations with Territorial Competition With much ﬁscal and economic decentralisation starting from 1978 (particularly as compared to Mao’s time), many local governments have been innovatively introducing new projects (locally initiated projects), creatively negotiating with investors, ﬂexibly shifting resource allocations, 1

These ﬁgures are still underestimated ﬁgures due to the household registration system (hukuo), which was only relaxed recently.

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arbitrarily reinterpreting policies to favour investors. On the positive side, without such ﬂexible and innovative behaviours of local ofﬁcials, China’s economic development may not have been so dynamic and so rapid. The behaviour of urban and provincial governments is understandable. As economic growth was used as a yardstick for career advancement, these innovative urban and provincial governments compete with each other in order to put them in a better stake for a promotion. However, in many cases, competition between these city and provincial governments took place at the expense of other cities and provinces as well as national development. First, competition has resulted in the construction of thousands of development zones and hundreds of power stations without a care for their locality and necessity. The adoption of similar development strategies (like those of the automobile industry or real estate business) without considering the niches of localities is a common phenomenon in many if not all provinces in China. As pointed out by a World Bank (2004) report, local protectionism is still common in China, though on a different scale and approach. For example, traditional inter-provincial trade barriers, like customs patrols and transport licences, have been replaced with more subtle administrative methods, such as the import ban on products from other provinces on the ground that their product quality cannot meet local standards. In addition, there is another effect of the “miniaturisation of investment projects”, which is attributable to the combination of such unregulated territorial competition and market fragmentation. Many investment projects are of sub-optimal size, particularly in relation to the scale of the Chinese economy. Taken together, the unregulated territorial competition is one of the main structural causes of China’s repeated over-investments and a challenge to China’s national stability if political promotion based on economic performances remains unchanged.

Let Southeastern Regions Get Rich First Uneven regional development (particularly between southeastern provinces and other regions), which has reached an unprecedented level, can be understood as a by-product of Deng’s famous “let some people (and places) get rich ﬁrst”. In Mao’s era, national sources (such

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as ﬁxed investment) were concentrated in the interior regions of China, partly because of the communist ideology of egalitarianism and partly because of military considerations in the context of the Cold War. This had resulted in developmental gaps between the interior and coastal regions, which were basically reduced in the 1960s and 1970s. After 1978, the regional development policy has been changed to one that focuses on economic pragmatism: south eastern regions with better geographical conditions and overseas Chinese link were able to attract foreign direct investment (FDI) and export-oriented activities were “allowed” to develop ﬁrst. Resources and preferential policies were strategically channelled to the Pearl River Delta of Guangdong in the 1980s and the Yangtze River Delta with the Pudong area of Shanghai as the centre in the 1990s. As a consequence, economic development disparities within China widened, particularly after the 1990s. For example, by 2004, GDP per capita in the eastern region was 2.6, 2.2 and 1.4 times higher than that in the western region, central area and north eastern areas respectively. In 1978, it was just 1.7, 1.8 and 0.8 respectively. There was uneven development within the eastern region with GDP per capita in the Pearl River Delta being RMB43 thousand by 2004, much higher than in the Yangtze River Delta (RMB35 thousand) and the Beijing-Tianjin-Hebei area (RMB20 thousand) (Tables 1 and 2). Table 1. Economic Performance of Regions across China in 2004

Total GDP (trillion RMB) GDP structure * I: II: III Fixed Capital Investment (billion RMB) Trade (billion US$)

Coastal China

Central China

West China

9.5

4.0

2.8

10: 52: 38

17: 49: 34

19: 45: 36

3,300

1,300

1,200

1,100

50

40

Note:

* I refers to the primary sector, II to the secondary (manufacturing) sector and III to the tertiary sector. Source: Central and West China Economic Development Yearbook, 2005.

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Total GDP (trillion RMB) GDP structure * I: II: III Fixed Capital Investment (billion RMB) Trade (billion US$)

Tianjin-BeijingHebei Area

The Yangtze River Delta

The Pearl River Delta

1.4

2.9

1.3

9: 47: 44

5: 55: 40

4: 53: 43

640

1,400

450

150

400

340

Note:

* I refers to the primary sector, II to the secondary (manufacture) sector, and III to the tertiary sector Source: China Regional Economic Development Report, 2005–2006.

To narrow regional disparities between the south eastern regions and the rest of China, China launched four campaigns: “the Western development” (1999), “revitalisation of the Northeast” (2003), “the rise of the Central Area” (2004) and the Tianjin Binhai New Area (2005). The implementation of these new regional strategies is basically identical in two approaches: ﬁrst, designated industries and enterprises in these regions are able to apply for favourable tax policies and second, provision of ﬁnancial sources for infrastructure construction — either through direct disbursement from the centre or through loans on favourable terms from state-owned banks or new banks/industrial funds — is more likely to be assigned to these regions. The effectiveness of these strategies is, however, questionable as new statistics on the increasing income gap between the east and the west conﬁrms. Without favourable natural geographical conditions (such as proximity to a port), skilled labour, good infrastructure, R&D capacity, institutional coordination and environmental capacity (like the availability and accessibility of quality of water) — important market mechanisms for economic development — these relatively backward areas has a long way to go before it could catch up with developments in the Pearl River Delta and Yangtze River Delta.

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S

hanghai’s Mega Port in Yangshan YANG Mu Lionel HO

Chinese coastal ports have witnessed exponential growth in recent years on account of the rapid growth of China’s international trade. Statistics show that about 80 percent of world trade is done through ocean shipping, while the proportion for China exceeds 90 percent. Since container ports handle high value exports, they are an important area for further infrastructural development. In China, container trafﬁc as a percentage of total shipping trafﬁc rose from 22 percent in 1980 to 65 percent in 2004. Globally, its share of container trafﬁc surged from a mere 4 percent in 1995 to 17 percent in 2004. In May 2006, China’s Communications Minister Li Shenglin forecast that China’s ocean cargo handling capacity would rise from 3.8 billion tons in 2005 to ﬁve billions tons in 2010, and its coastal handling of containers, as measured in TEUs (twenty-foot equivalent unit), will grow from 74 million in 2005 to 130 million in 2010. Shanghai, at the centre of Yangtze River Delta manufacturing hub, has been earmarked by the Chinese government to regain its previous global shipping hub status. However, big container vessels cannot dock at both Huangpu River and Yangtze River because of depth constraints. With the support of former President Jiang Zemin in the early 2000s, a time when the “Shanghai Gang’s” inﬂuence in Beijing was paramount, the Shanghai Government was able to proceed with the development of Yangshan deep water port, north of Hangzhou Bay area. The project is to be built in two stages. There are at least three phases in the ﬁrst stage. Phase 1 started operations on 10 December, 2005 after two and a half years of construction. With a 1.6 km-long waterfront, Phase 1 of Yangshan deep water port offers ﬁve container berths, each around 15

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metres deep, and an annual capacity of 2.2 million TEUs. With the water depth remaining around 15 metres all year round, the berths can handle the new generation of super container ships (up to 8,500 TEUs), known as post-Panamax, as existing container terminals in Wusong (at the mouth of Huangpu River) and Waigaoqiao (at the mouth of Yangtze River) cannot handle. In addition, the berths can accept outsize liners with a 14.5 metre sea gauge and capacity of over 10,000 TEUs that were put into use in late 2006. The total investment of US$1.7 billion in Phase 1 came from domestic investors. The investment in Phase 2, which includes four berths, is US$780 million. This is made up of 32 percent from APM Terminals, 32 percent from Hutchison Port Holding, 16 percent from Shanghai International Port Group, and another 10 percent each from COSCO Paciﬁc and China Shipping Terminal Development. Yangshan deep water port, together with Pudong International Airport and other supporting infrastructures, will transform Shanghai into a regional logistics hub, anchored by the buzzing manufacturing activities in the Yangtze River Delta.

Historical Background Shanghai was a world-renowned shipping hub in the Far East as early as the 1930s. However it lost its might in the following decades due to communist China’s closed door policy from 1950s to late 1970s. In the 1980s, Shanghai established Wusong Port at the mouth of Huangpu River. The port has 10 container berths, a 2,281 waterfront, 20 container bridge cranes and 550 thousands square metres of piling-up areas. In 1992, the Shanghai government started to build Waigaoqiao Port at the mouth of Yangtze River. The project, built in three phases, consisted of 16 container berths, a 4,900 metre waterfront, 55 bridge cranes, and 2,350 thousand square metres of piling-up areas. With these efforts, Shanghai has maintained its leading position as China’s top coastal port, in terms of freight volume handled. The volume of freight handled in Shanghai port grew from 140 million tons in 1990 to 379 million tons in 2004, thanks to the buoyant manufacturing activity in the Yangtze River Delta. Shanghai surpassed Singapore to become the

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world’s largest cargo port, in terms of total throughput, in 2005. It handled 443 million tons of cargo in 2005, as compared to the 423 million tons handled by Singapore. One particularly important development is the rapid rise in Shanghai’s container throughput over the years. Shanghai’s containerised cargo volumes of 18.1 million TEUs in 2005 enabled it to become the third busiest container port globally, trailing just behind Singapore (23.2 million TEUs) and Hong Kong (22.4 million TEUs). On a negative note, Shanghai is facing intense competition from Shenzhen, anchored by the bustling Pearl River Delta manufacturing hub, for China’s busiest container port status. However, Shanghai’s grand ambition to become China’s premier shipping hub was being constrained by the physical conditions surrounding Huangpu River. Huangpu River is not only narrow but shallow, with a depth of only seven metres. Big vessels often have to wait for up-tides to enter and leave the Port. The Waigaoqiao Port at the mouth of Yangtze River showcased Shanghai government’s efforts to improve the capacity and competitiveness of Shanghai port. Though the goal is to create a 13 metre deep water port, the feasibility of maintaining even an 8.5-metre depth due to the silting of the Yangtze River is questionable. Under such circumstances, the construction of a mega deep water port is of paramount importance to Shanghai as it serves its long term needs and fulﬁls its grand ambition to be China’s key shipping hub. The Yangshan Deep Water Port Project was formally approved by the central government in 2005 after six years of careful feasibility studies and lobbying.

Yangshan Deep Water Port in Shanghai’s Development Strategy The development of Yangshan deep water port represents Shanghai’s effort to keep up with the explosive growth of international trade in the Yangtze River Delta region, which has emerged as a strong rival to China’s long-dominant Pearl River Delta area. The development of Yangshan deep water port highlights Shanghai Municipal Government’s long term

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strategy to grow its maritime and logistics industries by capitalising on its geographical advantage. In the early 1990s, the Chinese government already had plans to transform Shanghai into China’s hub for ﬁnance, international trade and shipping. That vision still prevails today, as showcased in the Shanghai Municipal Government’s 11th Five-Year Plan (2006–2010). The development of Yangshan deep water port will help Shanghai further grow its service industry, a spillover effect from the development of logistics related services. The contribution of the services industry to the Shanghai economy has been shrinking since hitting a peak of 51 percent in 2002. In 2003 and 2004, the ﬁgure stood at 48.4 percent and 47.9 percent respectively. During his July 2004 visit to Shanghai, China President Hu Jintao noted the decline; this exerted great pressure on Shanghai ofﬁcials to develop its service industry.

Regional Implications The commissioning of Yangshan deep water-port in December 2005 may lead to major industry shakeups in North East Asia. It has upset Busan’s plan to be the prime logistics hub in North East Asia. Kaohsiung Port, once the third busiest container port globally, is increasingly losing its trans-shipment status in the Asia Paciﬁc region. It is also likely to thwart Kobe’s ambition to become Asia’s leading port. On a negative note, intense competition among Asian ports has raised concerns over an oversupply of cargo handling capacity coming on line. Indeed, industry players are already forecasting a dip in charges in certain ports in the near future. Since Yangshan deep water port relies on the manufacturing clusters surrounding Yangtze River Delta as well as the regions along the upper and middle reaches of Yangtze River for containers, its impact on Hong Kong will not be detrimental. Hong Kong depends on southern China, especially Pearl River Delta for containers. However, Hong Kong’s position as a transfer hub to mainland China will be weakened. The inauguration of Yangshan deep water port has induced Ningbo Port and Zhoushan Port to co-operate and re-brand itself to fend off potential competition from Shanghai. The joint entity, known as NingboZhoushan Port, plans to invest RMB10 billion to build a 12-berth facility

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in Zhoushan to meet the rising demand for container space from the Yangtze River Delta region; they are in talks with COSCO Paciﬁc, Orient Overseas (International) and China Shipping Group, for project ﬁnancing. Construction is due to start in 2008, and the ﬁrst two berths are due for commissioning in 2010. By 2008, the partners will also be shortlisting foreign investors who will participate in the project. In the medium term (2006–2010), the Ningbo Port operation, comprising the old port area of Ningbo, Zhenhai Port, Beilun Port, Daxie Port and Chuanshan Port, aims to handle 11 million TEUs in 2010, up from 5.2 million TEUs in 2005. By 2010, 21 berths are expected to be in operation. Ningbo Port is also committed to spend RMB28.8 billion on capital expenditure during the ﬁve-year period to meet targets set.

Constraints and Challenges In addition to growing competition from other ports in the region, the new Yangshan port is also experiencing some operational problems as freight forwarders complained about higher costs and longer time span in transporting goods from downtown to Yangshan deep water port, estimated at some 85 km. The weather conditions do not help either, with typhoons and fog forcing the 32.5 km bridge linking Yangshan deep water port to the mainland to close for over 30 days a year. Transportation capacity of the six-lane highway is ﬁve million container units annually, well below the port’s planned capacity. Shipping companies fear long delays if there are accidents on the bridge. There is also no space for a rail-link on the bridge, although the railway has extended to Luchao Gang Harbour Town, the mainland town where the bridge starts. Exporters shipping from Zhejiang Province will ﬁnd it more cost effective to use the Ningbo Port instead. While Shanghai has big plans, it is facing intense competition from other Chinese regions, namely Guangdong and Beijing-Tianjin. With the retirement of President Jiang Zemin, the “Shanghai Gang” was slowly losing political clout. It was unsure if the new Hu-Wen administration would continue to channel resources, especially ﬁnancial resources, to support Shanghai or divert resources to regions that are needier or politically in vogue.

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Despite these uncertainties and operational problems that have yet been resolved, international investors chose to focus on the port’s immense potential to emerge as the busiest container port globally, and invested US$830 million to develop the second phase of the port. Construction of the port’s second phase kicked off in December 2005 and completed by end 2006. The third phase has already started. The Yangshan deep water port coupled with the existing Pudong International Airport and other supporting infrastructures will transform Shanghai into a regional logistics hub, supported by the enormous manufacturing cluster surrounding Yangtze River Delta. This reﬂects not only Shanghai’s dynamic growth, but also its self-assertiveness in a global economy in which China is going to take an ever increasing important role.

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C

hina’s Energy Outlook Elspeth THOMSON

China has the world’s largest population and is one of the fastest growing economies. Over the next ten years, the rates of urbanisation and industrialisation are expected to remain very high, and the manufacturing sector will continue to dominate the economy. Energy consumption per capita presently stands at only 45.9 million British Thermal Units (BTU) compared to the world average of 70.1. As incomes rise, there is no question that the demand for private cars and air travel will increase exponentially. These factors together clearly presage China’s continuing requirement for almost unimaginably large quantities of energy for the foreseeable future. The country’s role in the global energy market will expand markedly. China currently consumes about 60 quadrillion BTU (QBTU), equivalent to over half of total North American primary energy consumption (121 QBTU) and about 70 percent of total European 1 consumption (86 QBTU). By 2030, it is estimated that total consumption could reach almost 140 QBTU or about 20 percent of the world total up from 13 percent. Between 2003 and 2030, China’s average annual rate of energy consumption growth is expected to increase at 4.2 percent compared to 2.0 percent for the world as a whole, 1 percent for the OECD and 3 percent for non-OECD countries. Yet, compared to many other countries, China is relatively energy self-sufﬁcient. The country relies on imports to meet only about 12 percent of its total energy requirements, while Japan, for example, relies on imports

1

All forecast statistics in this article are from the Energy Information Administration’s reference case. See its website at: http://www.eia.doe.gov/emeu/international/contents.html (28 February 2007).

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to meet over 80 percent. The country’s enormous coal reserves mean it can largely rely on domestic energy resources for electricity production.

Oil Though China remains the sixth largest producer of crude oil in the world, the rate of production since 1994 has been less than 2 percent, while consumption has increased at an average rate of over 7 percent. It is estimated that China’s oil consumption growth currently accounts for nearly 40 percent of global world demand. China is the world’s third largest net importer of oil after the US and Japan. It became a net importer of oil products in 1993 and a net importer of crude oil in 1996. The country’s dependence on oil imports reached 49.2 percent in 2005 and is expected to reach 58 percent by 2020. Between 2003 and 2030, the EIA estimates that the average annual growth rate of China’s oil consumption will be 3.8 percent compared to 1.4 percent for the world, 0.8 percent for the OECD countries and 2.3 percent for the non-OECD countries. The country’s share of global oil consumption is estimated to increase from 7 percent in 2003 to 13 percent in 2030. Out of necessity, the country’s national oil companies are scouring the globe for partnerships of various types in all the oil-producing countries. China currently relies on Middle Eastern countries for about half of its total crude oil imports and is attempting to diversify its sources and obtain larger shares from Africa, South America and eventually Russia and the Caspian Region. About 60 percent of China’s oil is delivered via the Malacca and Singapore Straits. Besides playing a role in the security of this critical choke-point, the Chinese government is studying all possible alternative routes, e.g. pipelines through Pakistan, Myanmar and/or Thailand, shipments through Vietnam, etc. China’s own oil tanker ﬂeet is small and old relative to the amount of oil the country is importing and consuming. Reﬁning capacity relative to requirements is still seriously inadequate but is rapidly expanding. The share of the reﬁning capacity able to process “sour” Middle Eastern crude oil must be raised considerably.

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Natural Gas Natural gas presently accounts for only about three percent of the country’s total energy consumption mix, but the government is planning for this share to rise to 8–10 percent by 2010. The country has considerable on- and off-shore natural gas deposits of its own to develop and also plans to import from Turkmenistan, Uzbekistan and Russia by pipeline. Planning for some 15 liqueﬁed natural gas (LNG) terminals along the eastern seaboard is also underway. The ﬁrst of these LNG terminals took shipments in 2006. The average annual growth rate of natural gas consumption between 2003 and 2030 is estimated at 6.8 percent compared to 2.4 percent for the world, 1.5 percent for the OECD and 3.3 percent for the non-OECD countries. The share of global consumption could rise from 1.3 percent to 3.8 percent.

Coal China is the largest producer and consumer of coal in the world. Recoverable reserves rank third in the world. China’s use of coal is not expected to wane. Between 2003 and 2030, China’s average annual coal consumption growth rate is expected to be 4.2 percent compared to a world average of 2.5 percent, 1.2 percent for the OECD and 3.3 percent for the non-OECD countries. The country’s share of global coal consumption is estimated to rise from 28 percent in 2003 to 44 percent in 2030. For many years, the government has been trying to close down small coal mines which account for at least a third of national production and which are largely responsible for the country’s horriﬁc coal mine accident rate. Each year, according to ofﬁcial statistics, an average of some 6000 miners are killed as a result of mine explosions, ﬂoods, ill-maintained equipment, etc. The actual ﬁgure is purported to be much higher. It is the poorest peasants who work in these mines and they often fall victim to unscrupulous mine managers who often lack training themselves or who often knowingly scrimp on safety equipment and/or take senseless production risks.

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A major problem in the coal industry is the lack of water in the key mining areas of the north. In many places there is not enough clean water available for household use, let alone the processing of coal. The use of untreated coal produces considerably higher levels of air pollution than cleaned coal. Clean coal technologies can obviate this problem but are investment-intensive. Also, for decades, the government has tried to alleviate coal transport problems. Coal occupies some 35 percent of total railway capacity and many thermal plants struggle with irregular deliveries. Over the past decade, for supply and quality reasons, many southern and coastal areas in China favoured importing coal over having it brought from the north. The country became a net coal importer for the ﬁrst time in January 2007.

Electricity China’s electricity generation mix now stands at 82.1 percent from thermal plants, 15.4 from hydro plants, 2.3 from nuclear plants and 0.1 from geothermal, solar, wind, wood and waste sources. In recent years, hundreds of new thermal plants have been built. Between 2003 and 2030, China’s average annual growth in net electricity consumption is expected to average 4.8 percent compared to an average of 2.7 percent for the world, 1.5 percent for the OECD and 3.9 percent for the non-OECD countries. Most of the increase in power production will come from the hundreds of new thermal plants that are being built now. Of the new hydroelectric plants, most will be on the Yellow River. China’s Three Gorges Dam on the Yangtze River, to be ﬁnally completed in 2009, will be the world’s largest hydroelectric project; however, it will generate an equivalent of only about 3 percent of the nation’s 2006 total electricity generation. For many years before construction began, the plans were controversial. The project remains highly contentious on engineering, economic, environmental, historical and cultural grounds. Over the next 15 years, China plans to build about two new nuclear plants per year. However, the share of nuclear power in the total electricity mix will still be less than 5 percent.

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Environmental Issues China’s heavy reliance on coal has had extremely serious effects on the environment and the health of the population. China is the second largest emitter of carbon dioxide in the world after the United States, and the annual growth rate of these emissions from 2003 to 2030 is expected to average 4.2 percent, compared to 2.1 percent for the world as a whole, 1.1 percent for the OECD and 3.0 percent for the non-OECD countries. In 2003 China’s share of global emissions was 14.1 percent, but by 2030 it could reach almost 25 percent. As a developing country, China is not required to sign the Kyoto Protocol. However, in recent months, a number of high-proﬁle reports on climate change have been released from reputable scientiﬁc organisations in various countries and China’s expected production of greenhouse gases in the coming years is of great international concern. In the 11th Five-Year Programme, announced in March 2006, the Chinese government aimed to reduce industrial pollutants by 2 percent by 2010. However, since then, they have actually increased by 3–4 percent.

Energy Consumption Efﬁciency Historically, China’s energy consumption efﬁciency has been very low. In 2004, energy intensity was 9,080 BTU per US dollar (year 2000 terms) compared to 6,532 in Japan and 4,205 in India (world, OECD and nonOECD totals are unavailable). However, due to energy shortages, worries about energy security and environmental concerns, the government, in its 11th Five-Year Programme announced some very ambitious targets to conserve energy. It has come to the realisation that conserving energy can signiﬁcantly add to the supply of energy more cheaply than procuring energy either domestically or abroad and can quickly contribute to higher business competitiveness, trade balances and incomes. The key target set for 2010 is to reduce energy consumption per unit of GDP by 20 percent. A number of measures have been put in place to achieve this goal. The speciﬁc target for 2006 was to reduce energy consumption per unit of GDP by 4 percent. However, ofﬁcial statistics

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reveal that the country's energy consumption per 10,000 yuan (S$1,973) of GDP fell by only 1.23 percent in 2006. Thus, if the goal for 2010 is to be met, more energy must be saved than planned in the next few years.

Global Implications For the past 20 years or so, China’s economy has been growing at an average annual rate of over 9 percent. Rapid economic growth is expected to continue for many years yet. One possible constraint, however, is energy. In order to sustain such growth, sufﬁcient energy must be available in the required forms. The decisions that the Chinese government makes, pertaining to energy mix, energy supply and energy consumption, will all have major ramiﬁcations for the global economy and ecological well-being of the planet. Concerned citizens and governments around the world will be watching each and every one of the Chinese government’s energy polices very carefully. Energy, particularly oil, is a strategic commodity. Much depends on its price, which determines the amounts extracted from the ground and made available. Consuming an ever-growing share of world production, China’s relations with other large oil consumers could become increasingly competitive. For example, some analysts portend rising competition with India on many fronts, not least procuring energy, especially oil supplies. As for its relations with the United States, the Chinese government is doing all it can to avoid a US inﬂuence over Chinese energy supplies. 2 Relations with Japan, for a variety of reasons , have been strained in recent years, but at the time of writing were improving. This bodes well in terms of energy cooperation. Perhaps the endless disputes over potentially large oil and gas deposits under their shared seas will ﬁnally be resolved. The Japanese government has already pledged to assist China in dramatically raising its energy consumption efﬁciency and to conserve large amounts of energy through the introduction of energy-saving technologies and industrial management techniques.

2

See the chapter by Zheng Yongnian and Tok Sow Keat, and the chapter by Lam Peng Er in Part IV of this volume.

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P ART III COPING WITH RISING SOCIAL PROBLEMS

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S

ocial Dilemmas of High Economic Growth ZHAO Litao

China’s high economic growth has sustained for nearly three decades since the launch of reforms in 1978. Its impact on the Chinese society has largely been positive: the Chinese population is now more educated, enjoys better standard of living and has higher life expectancy than before. Since 1990, China has climbed 24 places to rank 81 in the United Nations’ 2004 Human Development Index, a composite measure of life expectancy, education and standard of living. As the prospect for high economic growth for the next decade is good, China is expected to make continuing social progress in the years to come. In the third decade, the image of a rising China has evoked two contrasting responses from within and outside China. While international attention was centred on China’s rise, the focus in China was less on its rise or the beneﬁts of high economic growth but more on its negative consequences. Among the most salient problems highlighted are social injustice, corruption, income inequality and environment degradation. There was heated debate over whether China’s reform path was seriously ﬂawed. It is clear that in the last decade, high economic growth failed to boost social conﬁdence in the ongoing reform. Underlying such a dilemma is the changing relationship between economic growth and social development. Unlike the ﬁrst two decades of largely broad-based economic growth, social development and economic growth do not progress as closely in the third decade as in the ﬁrst two decades.

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Growing Income Inequality Income inequality has been on the rise in much of the reform period, except for the early 1980s when the reform was ﬁrst launched in the rural areas and the mid-1990s when the state raised procurement prices for main agricultural products. China’s national Gini coefﬁcient for income distribution rose from 0.29 in 1981 to 0.46 in 2005, indicating China’s evolvement from a highly egalitarian country into a highly unequal one. A change of this magnitude is highly unusual as it occurred within one generation’s time. During the ﬁrst two decades of reform, the growing income inequality was given scant attention as this period was perceived by many as “reform without losers”. An overwhelming majority of population gained, with some gaining more and others less. The reform strategy of “letting some get rich ﬁrst” was balanced by the promise of co-prosperity in the future. The ﬁrst two decades were not without problems — public outcry against corruption even fuelled social unrest in the late 1980s. But by and large the growing income inequality was not a top concern. The period of “reform without losers” however ended in the mid1990s when the restructuring of state enterprises began. From 1998 to 2003, more than 28 million workers were laid off by state-owned enterprises. Although many found new jobs through reemployment services, many others were reduced to urban poor. They were losers not only in relative terms but also in absolute terms. Land expropriated farmers formed another group of losers. As of 2005, about 40 million farmers have partially or entirely lost their lands to urbanisation and industrialisation, many of whom were without due compensation and employment. Compared with two other vulnerable groups (rural poor and migrant workers), the urban poor and land expropriated farmers were the ones who experienced downward mobility. They were not only left behind, but deprived of their normal livelihood. Such a negative effect of high economic growth was unknown. As losers were produced in large numbers in the third decade, the promise of co-prosperity came to be seen by many as nothing more than a myth. The prevailing wisdom that economic growth increases inequality in the short run but reduces it in the long run was increasingly viewed with suspicion. Many do not want to wait too long for the “trickle down” effect to happen.

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Stagnating Poverty Reduction The relationship between economic growth and poverty reduction has also changed over time. In the ﬁrst two decades, high economic growth lifted some 200 million people out of absolute poverty in rural China. But into the third decade, poverty levels remained high despite rapid gains in per capita GDP. From 1998–2005, about 19 million were lifted out of absolute poverty in rural China, compared to 154 million between 1978 and 1988, and 54 million between 1988 and 1998. Poverty reduction would have been much less impressive if changes in the deﬁnition of poverty line are taken into account. The ofﬁcial poverty line for 1984 was 200 yuan/ person, about 50 percent of the national average; in 2005 the poverty line was 683 yuan, about 21 percent of the national average. It is clear that in the ﬁrst two decades of reform, high economic growth was able to enrich much of the impoverished population. But into the third decade, the remaining impoverished population was largely outside of the process of economic development. With more than half of the poor living outside the ofﬁcially designated poor areas, government policies were also less effective in alleviating poverty than before. Individual vulnerability has become a major cause of poverty as 70 percent of the poor were pushed into poverty by income shocks, such as layoffs, injury and illness. The government’s region-based poverty alleviation programmes have yet to adapt to target individual vulnerability. Over time, as high economic growth and poverty reduction do not correlate, it casts doubt over the promise of co-prosperity and the trickle-down effect of high economic growth.

Persisting Disparities in Education and Healthcare China’s social development in education and healthcare also lagged behind its economic development. From a comparative perspective, China entered the reform era with education and health indicators much better than countries with comparable per capita income level; however, it had become less outstanding by the early 2000s. Unequal access to education and healthcare is the primary reason. Across provinces and within provinces, between rural and urban areas and within rural and urban

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areas, large gaps in social development have persisted. Disparities between men and women and between rich and poor have also widened. China’s efforts to universalise compulsory education since 1986 have substantially reduced the illiteracy rate of those aged 15 and over. The 2004 illiteracy rate declined to half of the 1994 level, down to 10.3 percent from 21.1 percent. But the rural-urban gap remained large. In 2004, rural illiteracy rate was three times urban illiteracy rate (13.7 percent versus 4.8 percent). In terms of regional disparity, an analysis of county level data has shown increasing inequality across the country. The same pattern also holds true for rural China. In terms of gender disparity, the gap has increased over time as well. In 1994, the female illiteracy rate was 134 percent higher than the male illiteracy rate. The gap widened to 151 percent in 1998 and 157 percent in 2004. Overall, the rural-urban gap in infant mortality, under ﬁve mortality and maternal mortality, has been on the decline over time. But in contrast to this general trend, under ﬁve mortality has been increasing since 2003 in the poorest rural areas. Moreover, regional disparity remains large even today. While infant and childhood mortality rates in coastal regions mirror those of industrialised countries, rates in most western provinces are 3-5 times higher. In the last decade, the cost of health services rose more quickly than household income. What was worse was that the majority of the people had to foot their own medical bills. Out-of-pocket spending accounted for 60 percent of total health spending in 2004, and as high as 90 percent in rural areas. National health services surveys found that in 2003, about half of those surveyed refused outpatient service when sick. Excessive cost was cited as the primary reason. In stark contrast to high economic growth, the non-usage rate of outpatient services increased from 36 percent in 1993 to 49 percent in 2003. Moreover, the gap in non-hospitalisation rates between the bottom and the top quintile groups widened during the 1993–2003 period from 19 to 22 percentage points in rural areas and 15 to 1 24 percentage points in urban areas. 1

Ofﬁce of the World Health Organisation Representative in China and Social Development Department of China State Council Development Research Centre. 2005. China: Health, Poverty and Economic Development.

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Declining Acceptance of Social Inequality Another profound change is the social attitude towards growing inequality. In the 1980s, the government launched a concerted attack on the “iron rice bowl” concept. Egalitarianism as practised in the Mao era was regarded as both inefﬁcient and unfair. It was unfair because individual remuneration was based on seniority and political performance rather than meritocracy. The public was made to believe that they would have a better life without the “iron rice bowl” and a higher degree of inequality was not only good for the economy, but also good for themselves. The transition from a planned economy to a market economy would increase returns to their skill, productivity and entrepreneurship. In the earlier period of reform, the public was not so concerned about rising inequality as it was only fair that the most capable ones —the educated, the enterprising, and the mobile — take advantage of rising opportunities and gain more from the economic growth; besides, the reform strategy of “letting some get rich ﬁrst” promised co-prosperity in the future. The sentiment towards growing inequality, however, changed dramatically in the 1990s. Inequality increased too much in a too short a time and many of the new wealthy became rich not based on their entrepreneurial capability, but through power and connection. To the general public, this type of inequality was unfair and unacceptable. Research has shown that up to the mid-1990s, government ofﬁcials and private entrepreneurs as the two largest beneﬁciaries of market transition were viewed with great suspicion by the public. By the end of the 1990s, negative sentiments towards government ofﬁcials remained strong. But with the massive entry of small- and medium-sized private ﬁrms, social attitudes towards private entrepreneurs — with the exception of those who made it rich with the help of “corrupt” ofﬁcials, especially those who stripped assets from state-owned enterprises through insider privatisation — became much more positive. Recent surveys showed low tolerance for inequality in China. More than 80 percent of those surveyed believed that income distribution in China was inequitable and higher than most countries with comparable levels of income inequality. A comparison between China and the US is revealing. The Gini coefﬁcient for income distribution in both countries

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reached 0.46 in 2005 with 65 percent of Americans and 95 percent of the Chinese regarding their income inequality as too great.2

Moving Towards More Balanced Development In the last decade, the negative consequences of high economic growth were more apparent to the public, leading to an erosion of social conﬁdence in market reform. Into the new millennium, a heated debate over China’s reform took place. Some emphasised the need to continue with the current reform path, arguing that economic growth will eventually solve many problems it has generated in the short run; some saw the need to advance the reform from the economic arena to the social and political arena while some others wanted an overhaul to the market-oriented reform. While sharing the concern over many problems discussed aforesaid, different people had very different views about the causes and solutions to these problems. To some, the problem of growing inequality was not unique to China. It was due more to the process of globalisation than to a ﬂaw in China’s reform strategy. To others, globalisation is not an explanation for the big jump in income inequality in such a short period of time. The biased reform strategy should be blamed instead. Among those who blamed the biased reform strategy, some saw the source of the problem as economic and proposed an increase in government spending on infrastructure and human capital in poor areas; others saw the problem as social and political, and proposed social and political reforms to better protect the vulnerable as well as help promote government accountability. Despite the profound disagreement over the priority of the reform, there was increasing consensus that China should shift from a singleminded pursuit of economic growth to one that promises more balanced development. To a large extent, the widening rural-urban gap and the growing regional disparity are a result of the biased reform strategy that favoured urban and coastal areas over rural and inland areas. As private consumption is expected to play a larger role in sustaining China’s 2

See China Development Research Foundation. 2005. China Human Development Report 2005.

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economic growth, it is important for China to shift towards a broaderbased development. The government is also perceived as having a larger role to play in advancing China’s social development. Major improvements in education and health outcomes can be achieved with relatively modest increases in public spending. A UN report suggests that in China, over 75 percent of maternal deaths and 70 percent of under ﬁve mortality are preventable with better access to basic inexpensive healthcare and health information. Gaps in educational attainment are likely to diminish greatly if the ratio of government spending on tertiary-secondary-primary education could be modiﬁed from the current 10:2:1 to a more balanced structure. As the momentum of high economic growth looks set to continue into the next decade, achieving greater equity in education and health is likely to be a greater challenge for China. The Chinese government has recognised the need for broader-based growth and has taken steps to promote more balanced development. It may take years to see concrete results, but China’s experience makes it amply clear that high economic growth could take many forms. One is broad-based and beneﬁts even the poor; the other is narrower and favours the already better off. Into the fourth decade of reform, the public call for a broader-based growth has been unprecedentedly strong.

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W

hat is China’s San-Nong (Rural) Problem? John WONG

China’s economy, having sustained over two decades of high growth at 9.6 percent, is now confronted with a lot of socio-economic problems, which are crying out for attention. The rural problem, often dubbed “san-nong wenti” 三农问题 (i.e. agriculture, village, and peasant), is one of the burning issues the government must come to grip with. Many commentators have argued that the rural problem, if remained unresolved, could become a potential time-bomb for the Chinese leadership. Accordingly, for several years in a row, the Number One Document from the State Council was about ways and means of dealing with the san-nong problem. The 11th Five-Year Programme and the recent National People’s Congress (March 2007) have also given prominent attention to this issue. To begin with, the rural issue or the san-nong problem in China has always been a popular subject of discussion among Chinese intellectuals: economists, historians, sociologists, political scientists, journalists, commentators and even politicians. Their debate on this subject is often conducted in a mixed and emotive manner, much outside analytical modern social science framework. It needs to be pointed out that the very concept of “san-nong 三农” is a concept peculiar to the Chinese and not commonly used outside of China. San-nong involves (1) “Nongye 农业 or agriculture”, which can best be discussed by agricultural economists in terms of productivity and supply and demand; (2) “ Nongcun 农村 or village”, which can best be handled by sociologists in terms of social change and migration, and (3) “Nongmin 农民 or peasant”, which is basically a broad, inter-disciplinary

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term involving politics, sociology and economics. The whole question of san-nong is therefore an immensely complex issue. Beyond modern social science, the issue is also deeply rooted in Chinese culture and history.

The Historical Perspective For a big country like China with over 20 percent of the world’s population supported by only 7 percent of the world’s cultivated land, agriculture in China has invariably been more than an important economic sector; it was also a matter of national economic survival. All through the ages, agricultural production in China was primarily about food production, which had been historically one of the most sensitive barometers of China’s economic and social stability. All Chinese emperors knew only too well that their “Mandate from Heaven” to rule China would be immediately withdrawn once they failed to feed China’s teeming millions. Mao Zedong, with a strong peasant background himself, was even more obsessed with agricultural and rural development, repeatedly asserting that “agriculture is the foundation of the Chinese economy, with grain as the key link in agricultural development” — 以农为本，以粮为纲. Indeed, all the ﬁrst-generation Chinese Communist leaders took this historical motto seriously to heart: 无农不稳, 无粮则乱 or “Without a strong agriculture, there will be no stability; without sufﬁcient food grain, there will be chaos”. In the early 1990s, when economic reform had already taken hold and agriculture taken a backseat in the economy, Deng Xiaoping still had this to say: “Should China encounter problems in the 1990s, it would happen in agriculture”. Viewed in today’s context, Deng’s warning seems to be particularly ominous!

The Confused Notion of Nongmin Just how many nongmin or farmers are there in China today? Many people in China confuse the concept of nongmin 农民 with “nongye renkou 农业人口” or “rural population”, with the latter referring to the people living the areas administratively designated as “countryside”. The problem is further complicated by the ofﬁcial use of hukou 户口 or the “household registration” system in classifying rural population. According to this administrative deﬁnition, China’s nongye renkou or agricultural population

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(i.e. those carrying rural household registration) in 2000 amounted to 942 million or 74 percent of total population, compared to 78 percent in 1990. In 2005, China re-classiﬁed its population into “urban” (chengzhen) or “rural” (xiang-cun), with “rural population” amounting to only 745 million or 57 percent of the total population. However, “rural population” in China remains a fuzzy concept, based primarily on such arbitrary administrative classiﬁcations. This is because not everybody in this category is truly a nongmin by functional deﬁnition, i.e. farming by occupation. Thus, in 2005, of the total employment of 504 million in the administratively-deﬁned rural areas, only 300 million or 32 percent actually worked in the “primary sector” (farming, ﬁsheries and livestock). Based on such an “occupational deﬁnition”, the actual number of nongmin in China is much smaller. However, this does not include those with the nongmin status actually living and working in areas classiﬁed as urban, and they include millions of nongmin gong or migrant workers. (Strictly speaking, the nomin gong is a contradictory term, as it refers to a person who is a farmer by origin but an industrial worker by occupation). One can further argue that not all those who live in the village and profess to be nongmin are 100 percent nongmin, if a stricter functional deﬁnition is applied. Because of the existence of the phenomenon of “disguised unemployment” (or under-employment) and “seasonal unemployment” in agriculture, many so-called nongmin may spend more of their productive time through the year in non-farm occupations or derive more income from non-farm activities during the off-peak seasons. In Taiwan and Japan, they are called part-time farmers. Strictly speaking, a person who does not derive his main source of income from cultivating the land is no longer a true nongmin.

The Diminishing Role of Nongye (Agriculture) Confusion also arises with the use of the word nongye or agriculture. What is the role of agriculture in a rapidly industrialising economy? Some traditional scholars today, unaware of China’s extensive industrialisation progress thus far, still call China “a great agrarian-based country” (农立大国). The truth is, economically speaking, China’s primary sector (including agriculture, ﬁsheries and livestock) in 2005 constituted only

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a tiny 12.5 percent of its total GDP, compared to the 47.3 percent for the secondary sector (industry) and the 40.2 percent for the services. The proportion for agriculture is set to shrink further as the Chinese economy continues to develop. In Taiwan, the agricultural sector accounted for less than 2 percent of its GDP (2002). In Japan, agriculture accounted for only 1.3 percent of its GDP (2004). In South Korea, agriculture accounted for 3.2 percent of its GDP (2004). This, along with another fact that manufactured products, has for years come to constitute over 90 percent of China’s total exports, clearly shows that China has, by most indicators, already been transformed into a highly industrialised economy, with agricultural production playing an increasingly marginal role in China’s economic growth. In other words, nongye or agriculture in China has long ceased to be what Mao used to assert as “the foundation of the economy”. Most Chinese writers dealing with san-nong problem do not seem to realise that agriculture has become a “sunset industry” in many countries. Why is this so? According to W. Arthur Lewis (a Nobel laureate economist), economic development is actually synonymous with industrialisation, which is also synonymous with urbanisation. Thus, the main thrust of economic development is typically marked by the transfer of “agricultural surplus” (surplus food and redundant agricultural labour) from the rural areas to the urban areas for their industrial development. The agricultural surplus will then form the base of industrial capital formation in urban areas. Once the industrial sector has achieved its take-off to self-sustained growth, the agricultural sector starts to decline, both relatively and absolutely, as it cannot grow at the same high rate as industrial growth, a trend which is actually happening in China today. With the decline of the agricultural sector, the number of nongmin will also shrink. As shown earlier, the actual number of nongmin in China has been rapidly declining in recent years, which is now just about 40 percent of the total labour force. In Japan at the time of the Meiji Restoration in the 1880s, nongmin constituted about 80 percent of the labour force. It was about the same proportion for Taiwan and South Korea in the early 1950s before their industrialisation. In Japan today (2004), nongmin made up only 5 percent of the labour force. In Taiwan (2002) and South Korea (2004), nongmin accounted for 7 percent and 8 percent of their labour force

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respectively. And not all those classiﬁed as nongmin are full-time nongmin — hence the common phenomenon of “part-time farmers” in Japan, Korea and Taiwan, as they only do farming during the peak seasons. In the US, nongmin constitute less than 2.5 percent of the labour force while the proportion for EU as a whole is about 2 percent. In the US, many nongmin are not really “farmers” in the traditional sense, but more like businessmen, who manage agricultural production much like a business and heavily dependent on hiring temporary “farm hands” or “temporary agricultural workers” to do the actual farming. In UK, many “farmers” are rich landowners, who do not even depend on farming for their livelihood — hence the term “gentleman farmers”. Ultimately, nongmin in a modern economy will become a kind of “endangered species”! Why is this so? A powerful internal economic force operates against agriculture. In the manufacturing industries, productivity growth (i.e. higher output per unit of labour) will beneﬁt their workers, as higher productivity can usually translate into higher wages. In agriculture, the reverse seems to be true. To begin with, higher agricultural output does not necessarily bring about higher income for nongmin because of the low demand elasticity for agricultural products, particularly for food. Even worse, the higher the productivity, either in terms of per unit of labour or per unit of land, a smaller number of agricultural workers will eventually be needed. In other words, a hardworking nongmin may eventually work himself out of the job! In any case, because of continuous technological progress, agricultural productivity will also continue to go up, leading to agricultural overproduction, a common phenomenon in the developed countries. In short, given the ﬁxed supply of arable land in the short run and given the low elasticity of demand for most agricultural products, higher productivity per unit of land means that less and less nongmin are eventually needed on the farms! In the foreseeable future when the average agricultural productivity in mainland China has reached the productivity levels of Japan, Korea and Taiwan (in terms of output per unit of land), China would need less than 100 million nongmin to produce sufﬁcient food for the nation. It may be noted that the US has less than three million full-time farmers, who can produce enough food to feed 270 million plus a surplus for exports.

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When Chinese agriculture has reached such high levels of productivity, it will have also been radically transformed. Agricultural production may become highly efﬁcient in terms of production, but it is likely also to become “high-cost agriculture”, much as in the other developed East Asian economies like Japan and Korea today. However, long before the number of real nongmin in China declines to below the 100 million level, the Chinese government would have already implemented all kinds of incentives and subsidies to support agriculture together with agricultural trade protection in order to stem such a decline. As a result, the prices of Chinese agricultural products are likely to be much higher than world price levels, as is the case in those three East Asian economies today — Japan being the worst, with the price of rice more than 6–8 times above world price. Viewed from a different angle, higher agricultural prices are needed to close the rural-urban income gaps, and to keep the nongmin on the farm. In other words, for the Chinese nongmin to continue enjoying higher income, the Chinese urban population would have to pay much more for food. Technically, this also means that the terms of trade for agricultural products have been reversed by turning against the industrial products from the urban sector.

Lessons of Experience for China Sufﬁce it to say that a modern economy is full of unfavourable economic and social forces against both the nongye and nongmin. Most governments have to step in to protect agriculture to keep agricultural production going and to stem the further decline of nongmin regardless of total economic costs to society. In many developed countries, particularly the US and Japan, nongmin have successfully organised themselves into a powerful political interest group, thanks to the historical political structure in those countries (e.g. giving rural voters a disproportionately higher representation in their national electorates). In some countries, nongmin as a minority often make use of the “food security” argument to work to their advantage and at the expense of the majority. In France, farmers can further invoke old cultural factors such as “rural nostalgia” to argue for agricultural protection. Farming is promoted as a way of preserving traditional rural life and rural culture. Agriculture in France accounts for

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only 3 percent of its GDP, and French farmers account for only 4 percent of the total labour force, numbering about half a million in all. Yet this small privileged group eats up 20 percent of the total EU subsidies (about 44 billion Euros in 2004) under the controversial Common Agricultural Policy (CAP) arrangements while the rest of the French population continues to pay for expensive food! What can China learn from past development experiences of other countries? To begin with, Chinese nongmin have so far contributed a lot to China’s industrialisation and yet they are losing out on overall development beneﬁts, as evidenced by the worsening rural-urban income gaps and so on. Apart from their economic woes, Chinese nongmin also have plenty of other political and social grievances. It may be argued that at the initial phases of development, someone in society must make more sacriﬁces than the rest, and in most cases, the burden rest on the nongmin. This has been the case for Japan, Korea and Taiwan. In this sense, the hardship of the nongmin at China’s present stage of development is unavoidable. In other words, it is not wrong for the government to “squeeze” the nongmin for the sake of economic development. The next question is trickier: Have the Chinese nongmin been excessively “squeezed”? In other words, are the many development policies currently in force in China too blatantly biased against the sannong? The answer to this is more subjective, but one is nevertheless able to gather sufﬁcient evidence to show that most Chinese nongmin have in fact been left out of development beneﬁts. Furthermore, even with the assumption that the original development designs were not wrong, their implementation would have been badly affected by poor governance and bad politics. In other words, there have clearly been many policy failures in China that have excessively hurt the interests of the nongmin. The case in point is the frequent compulsory appropriation of peasants’ land for development without adequate compensation.

A Happy Ending for the San-Nong Issue? To sum up, the san-nong problem is a real problem in China today. It is right for the government to embark on more pro-nongye and pro-nongmin policies. In fact, it is high time for the government to address those burning

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issues urgently. But at the same time, one should also be aware of the inherent limitations of such pro-agriculture and pro-farmer policies, as analysed above. A lot of intellectual debates on the san-nong issue in China today have been misguided and even wrongly headed, with their arguments based on inadequate understanding of modern agricultural economics. To extricate the nongmin from their economic and social plight, effective solutions and policy options often lie outside the agricultural sector. Going back to Chairman Mao’s way of starting an all-out “back to the countryside movement” in order to support nongye and to help the nongmin is out. China is already a highly industrialised economy. To reduce rural unemployment and to increase rural income, the answer must come from non-farm sectors and even outside the rural areas. Over the long run, many existing rural problems can only be resolved by moving nongmin out of the nongye. Meanwhile, the most effective government policy is to strengthen rural education. This is what Premier Wen Jiabao has professed to do. Once a farm boy has acquired a good level of education and skills, he will inevitably leave the farm for urban employment. It follows that whatever the government can do and will do, nongye as an economic sector will still gradually decline, and the number of nongmin will still gradually decrease. China today is a highly industrialised economy, and nongye will never again be the foundation of the economy regardless of any government measures to strengthen it. Nongcun or villages as a rural society will also gradually decay under the impact of further urbanisation and social changes, with more and more young people migrating to urban areas regardless of whatever government efforts to improve the social conditions of the nongcun. Over the longer run, when China has become a developed economy, China too will end up having a relatively high-cost agricultural sector with a high degree of agricultural trade protection, as in other developed countries today. By that time, Chinese nongmin will no longer pose a serious economic problem to the country (their income will be much higher); the problem of nongcun will mainly be sociological in nature, such as deserted villages and an ageing nongmin population.

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G

rowth and Widening Inequalities LAI Hongyi TENG Siow Song

Despite China’s impressive economic growth over the past quarter century, income inequality has increased. As inequality generates social instability and social discontentment, the Hu-Wen leadership is hardpressed to take immediate actions to address the problem of rural-urban and interregional divides. Their efforts, however, have only moderated but not reversed the growing trend of inequalities.

Rising Inequalities and China’s Remedies China’s economic performance has been impressive. From 1979 to 2005, China’s growth on average was an annual 9.6 percent while in 2006, it registered a higher 10.7 percent. However, China’s remarkably high economic growth rate has been accompanied by rising inequality, a trend that has taken place since the mid 1980s. A recent Xinhua News report noted that the top ﬁfth of China’s population accounted for 50 percent of the country’s total income whereas the bottom ﬁfth takes home just 4.7 percent. The Gini coefﬁcient of income distribution in China registered a low 0.288 in 1981 only to soar to 0.403 in 1998 and to 0.459 in 2001, on par with US’ 0.466 in 2001. In 2005, China’s Gini coefﬁcient was 0.46. A survey of 7,140 households by the Chinese Academy of Social Sciences puts the 2006 ﬁgure at 0.496. A Gini coefﬁcient closer to zero signiﬁes perfect equality while a number closer to one signiﬁes perfect inequality, and any value above 0.4 represents serious inequality (see Figure 1). In the reform era, China has indeed made an impressive achievement in reducing absolute poverty. In the countryside, the share of population below the ofﬁcial poverty line decreased from 40 percent in 1980 to about

168

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GINI COEFFICIENT OF INCOME DISTRIBUTION IN CHINA, 1978-2006

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Figure 1. Gini Coefﬁcient of Income Distribution in China, 1978–2006 0.6

NationalEstimates Estimates National by Zhao ZhaoRenwei Renweiand by Liand ShiLi Shi NationalEstimates Estimates National by World WorldBank Bank by

Gini Coefﬁcient

0.5 0.4 0.3

NationalEstimates Estimates National by Ministry by Ministry ofof Finance Finance Estimates by Yang Yang Estimates by Yiyongand andOthers Others Yiyong

0.2 0.1 0 1980 1985 1990 1995 2000 2005

Years, 1978–2006 Year, 1978-2006

CASS CASS

14 percent by the mid 1990s. This rosy picture, however, reﬂects only the national aggregate. Relative poverty emerges as a new problem. Rising income has been distributed rather unevenly, and income disparities have become severe since the late 1990s. The absolute number of people in poverty in China is large, partly due to its large population. The World Bank estimated in 2004 that 200 million Chinese (or 15 percent of the population) lived below the international poverty line. Urban-rural, regional, and inter-strata gaps contributed a great deal to income disparities. China categorises 60 percent of its population as rural residents. In 1978, an average rural resident’s consumption was 1 equivalent to 34.1 percent that of an average urban resident. It improved to 43.3 percent in 1985 only to decrease drastically to 33.9 percent in 1990 and to an alarming 27.8 percent in 2001. In contrast, in many other countries the rural income level was equivalent to two-thirds of the urban level; few countries witness a ratio below 50 percent. 1

Economists who research on incomes see consumption expenditure as a more reliable and readily available measure than income itself, because people may not disclose their true income.

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INCOME

Income Ratio RATIO

WIDENING INCOME GAPS CHINA, Figure 2. Widening Income Gaps inIN China, 1978–2005 1978- 2005 4 3 2 1 0

Coastal vsVS COASTAL Interior Income INTERIOR INCOME RATIO Ratio Urban VS vs Rural URBAN RURAL Income RATIO Ratio INCOME 1978 1985 1990 1995 1998 2001 2002 2004 2005

Years, 1978–2005

YEAR: 1978- 2005 In terms of per capita resident income, the interior region was 67 percent that of the coastal region in 1985. This rate declined to 55.8 percent in 1995, and to a much lower 46.5 percent in 2001, a trend which was 2 sustained up till 2005 (see Figure 2). Finally, the income gap of different strata (in cities and countryside alike) has widened, as levels of labour skills vary and wage differentials widen. For this reason disparities within the cities and in the countryside 3 have both grown.

China’s Remedies Prior to the mid-1980s, the state’s social relief covered only rural and urban individuals with “three-nos” (三无) — those who had no working abilities and no ﬁnancial and no family support. In 1998 unemployment increased in the wake of state-owned enterprises (SOEs) reform. In response, local governments were tasked to provide assistance to all qualiﬁed urban

2

For an earlier discussion of income disparities, refer to Lai Hongyi. 2005. “Growth with Rising Income Inequality: China’s Response to the Problem.” EAI Background Brief No. 227, Singapore: EAI, NUS, February; Lai Hongyi. 2006. “Income Inequalities and Limited Social Mobility: Initiatives and Challenges.” In John Wong and Lai Hongyi, eds. China into the Hu-Wen Era. Singapore: World Scientiﬁc, pp. 323–350.

3

For an earlier comprehensive analysis of income disparities, refer to Carl Riskin, Zhao Renwei and Li Shi, eds. 2001. China's Retreat from Equality, Income Distribution and Economic Transition. Armonk, NY: M E Sharpe.

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residents through a programme called basic subsistence guarantee (BSG, or 基本生活保障) and minimum subsistence guarantee (MSG, or 最低生活保障). From 1986, the State Council has made aid to the poor in the countryside a routine task. In that year it established an Aiding-the-Poor and Development Leading Small Group (APDLSG, 国务院扶贫开发领导小组) and set up an ofﬁce. Now some 30 million or 3 percent of rural residents qualify for aid. Since coming into power in early 2003, the Hu-Wen leadership has taken bold and drastic measures to help out the lower class and combat rural-urban and inter-regional income disparities. Social insurance expenditures increased from 347.2 billion yuan in 2002 to 401.6 billion yuan in 2003 and further to 540.1 billion yuan in 2005. The Chinese government is aware of the importance of rural development and the resolution of the “rural problem” (san-nong wenti) in its efforts to improve the income of rural residents. It has thus accelerated ﬁscal and governmental reforms, pledging increased ﬁnancial support for the countryside. In 2003 the state increased ﬁnancial inputs into agriculture to improve productivity and facilitate commercialisation. In 2004 the state’s support for peasants in the form of tax cuts, exemptions and subsidies amounted to 45.1 billion yuan (US$5.4 billion). In 2006, the agricultural tax was phased out, well before the ﬁve-year time-frame set by the state in 2003. Some 339.7 billion yuan were allocated for rural development in 2006. The government has increased per person spending subsidies from 10 yuan in 2006 to 20 yuan in 2007 for rural residents. Since 2003, efforts have also been made to address land market proﬁteering abuses. With reduced revenue from agricultural tax, the interior provinces face ﬁscal shortfalls. In response, the centre has stepped up ﬁscal support for these provinces, especially in education. Over the next ﬁve years (2006– 2010), the proportion of government expenditure on public education will rise from 3.4 percent in 2002 to 4 percent in 2010 or a total spending of 218.2 billion yuan. Free education will also be provided to some 150 million rural children eligible for nine years of compulsory education. In recent years, the state has allowed rural residents to work in the cities with the relaxation of the residential household registration or hukou (户口) system. The state has also asked localities to make provisions for

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rural children’s education and healthcare, and employment training and work safety for peasant workers. To reduce coastal-interior income gaps, a series of regional developmental programmes have been introduced in the recent years. The state implemented western development in 2000. Huge sums of state funds have been invested in infrastructure, energy, environmental and resources extraction projects in 12 western provinces. Western provinces have grown moderately faster since 2000. China’s western development was followed by a programme to revive the economy of the northeast (Liaoning, Jilin and Heilongjiang Provinces) (振兴东北) in 2003 and a 4 central development programme in 2004.

Achievements and Challenges China has achieved several successes in reducing poverty. First, the average living standard in China has continued to grow rapidly. During the 1978–2002 period, China’s rural household income grew at an average 7.2 percent a year and urban household income 6.7 percent a year. In 2004 both rural and urban household income continued its noticeable growth at 6.8 percent and 7.7 percent, respectively. These two growth rates registered a respective 6.2 percent and 9.6 percent in 2005 and 11.9 percent and 10.2 percent in the ﬁrst half of 2006. The World Bank estimated that in 1999, 19 percent of the Chinese lived below the international poverty line of US$1 a day. In 2004 this share dropped to 15 percent. Second, welfare and regional development programmes in the 2000s apparently had restrained the rapidly growing trend of regional income disparities. The ratio of interior-coastal consumption, which reﬂects regional income disparities, decreased only modestly from 0.51 in 1998 to 0.46 in 2004; it increased slightly to 0.47 in 2005. This suggests that the interior-coastal income gap deteriorated further in 2004 from a severe level in 1998 and improved only slightly in 2005. Third, major barriers discriminating against migrant workers in the cities have been removed, and peasant workers are enjoying better 4

For a study of the program to develop central China, refer to Lai Hongyi. 2007. “Developing Central China: A New Regional Programme.” China: An International Journal (5/1): 109–128.

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treatment at the workplace. In Shenzhen, for example, peasants can legally live in the city with either proof of employment or room rental. To attract these workers, foreign-invested ﬁrms have renovated dormitories and provided recreational facilities. Nevertheless, China continues to face daunting challenges. Inequality has not been erased despite the state’s aforementioned efforts to generate growth in peasants’ income and stimulate development of the interior regions. In particular, urban-rural income disparities continue to widen. The ratio of rural-urban consumption decreased from 0.53 in 2000 to 0.48 in 2004 and sharply to 0.41 in 2005. China needs to follow through industrialisation and move most of its peasants, whose income depends mainly on farming activities and who constitute about 40 percent of the population, into non-farming jobs. China’s current social security coverage is very thin compared to developed countries. The Chinese government deﬁnes poverty way below world standards (partly due to China’s low price level). In the 2000s China’s MSG was for urban residents with monthly income ranging from 79 to 319 yuan. The rural poverty line was set at 53 yuan a month in 2003 and 57 yuan a month in 2006. At the end of 2005, Chinese statistics classiﬁed 23 million people as living below the poverty line. However, if the internationally accepted poverty deﬁnition of US$1 per day (232 yuan per month) is used, China still has between 120 and 130 million poor. China has to do more to provide decent basic services for the poor and to let the poor decide on local social affairs. According to the World Bank this is the best way to reduce poverty and inequality. The Chinese government has yet to deliver healthcare, education, utilities and security services to the poor or improve their human capital and provide them with equal opportunities as other residents. In addition, it has yet to empower elected village committees with the running of communal and economic affairs and in preventing corruption and power abuse by local cadres. Inequality breeds instability in China. The only way out is to keep working hard at reducing such inequity.

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R

eforming Hukou to Protect Migrant Labour ZHAO Litao

China’s household registration or hukou system, assigns each household with an occupational category — either agricultural or nonagricultural — and a place of residence. Established in the late 1950s, this system links employment, social welfare and public services to hukou status, favouring urban hukou holders over rural residents. It serves to preserve the privileges of urban hukou holders through restrictions on rural-tourban and small cities-to-large cities migration.

Migration Control as a Focus of Earlier Reform The hukou system has been under mounting pressure to reform since the late 1970s. The earlier focus was on migration control, one of the key functions of the hukou system. Keenly aware that hundreds of millions of peasants were anxious to move out of agriculture, the Chinese government decided to relax migration control in a cautious way. It actively promoted rural enterprises — particularly those owned by township and village governments — to prevent the massive inﬂux of rural migrants to the urban areas. By the end of 1980s, more than 90 million peasants moved out of agriculture without moving into cities. With the decline in township and village enterprises in the 1990s, rural-to-urban migration became a primary means of job access for rural residents. Although the booming urban economy created a strong demand for low-cost rural labour, city governments were concerned that the urban infrastructure was not immediately ready for an inﬂux of rural migrants. As a result, the hukou system was changed, but at a pace that seemed manageable to individual city governments.

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The ﬁrst change was the introduction of temporary hukou and resident permit that allowed rural migrants to work in the hosting city without giving them access to other beneﬁts. In much of the 1990s, this was a welcome move in the eyes of rural migrants. Given the widening rural-urban gap and the growing regional disparity, rural migrants were more concerned with securing a non-farm job than anything else. The fact that they were treated as outsiders did not prevent them from ﬂowing into cities and coastal areas. Today there are more than 150 million migrant workers in China. The hukou system has largely been irrelevant as a mechanism of migration control. The second change was the relaxation of the quota system that governed the conversion of agricultural hukou holders to nonagricultural hukou status. Since 1980, this number has been set at between 0.2 percent and 0.5 percent of the total agricultural population. Over time small cities were less restricted by this quota system. It became a national policy in 2001 to eliminate the quota system in small cities. Non-locals who had a regular job and a legal residence were qualiﬁed to become a local hukou holder. The requirement for obtaining a local hukou was higher in medium-sized cities, but the quota system was nonetheless much relaxed than before. In contrast, larger cities such as Beijing and Shanghai still strictly enforced the quota system and the requirement for obtaining a hukou was extremely high. The ﬁrst change allowed rural-to-urban migration without permanent hukou relocation. It opened up the urban labour market to rural migrants. The second change facilitated rural-to-urban migration with permanent hukou relocation, but the requirement for hukou relocation was high, especially in larger cities. While the ﬁrst change beneﬁtted rural migrants, the second change was in favour of investors and the well educated. These reforms are highly successful in the sense that they produced the largest labour ﬂow in human history in a largely non-disruptive manner. Confrontations between urbanites and rural migrants are minimised because rural migrants are denied most beneﬁts enjoyed by urban hukou holders, such as state subsidies in housing, transportation, education and healthcare. By and large urbanites are not threatened by rural migrants as to their long accustomed urban privileges.

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Labour Protection as a New Focus Ironically, in recent years what makes these reforms so successful also makes them highly controversial. Today there are more than 150 million migrant workers in the cities, far surpassing urban workers as the main Chinese industrial workforce. This demographic change has prompted the government to acknowledge rural migrant workers as part of the working class. Economically and socially, however, migrant workers share much of the features of the urban underclass. What characterise their life in the cities are low wages, wage defaults, excessive overtime and a lack of job and social security. Migrant workers together with the rural poor, the urban poor and land expropriated farmers constitute the four vulnerable groups in China. Their second-class status attracted attention when a serious shortage of migrant workers occurred in Guangdong, Fujian and Zhejiang in 2004, a strange phenomenon in a labour adundant country. The shortage of skilled workers is reported as the primary reason; to a lesser extent, it is also due to the workers’ ﬂight from substandard employment conditions. There are different arguments to the lower status of migrant workers in the cities. One argument emphasises their lower education and skills as the primary cause of their second-class status. Following this argument, providing education and training becomes a solution. Another argument highlights hukou status as the basis of segmentation between rural migrants and urban dwellers. Low education only partially accounts for the income disadvantage of migrant workers. On average, migrant workers earn about 1 80 percent of the wages of local workers with the same skills. About 82 percent of the wage difference between migrant and urban workers was 2 due to differences in pay for the same occupation. Moreover, income is only one of the many disadvantages experienced by migrant workers. Others — excessive overtime without compensation, wage defaults and 1

See John Knight, Song Lina and Jia Huabin. 1999. “Chinese Rural Migrants in Urban Enterprises: Three Perspectives.” The Journal of Development Studies (35): 73–104.

2

See Xin Meng and Zhang Junsen. 2001. “The Two-Tier Labor Market in Urban China: Occupational Segregation and Wage Differentials between Urban Residents and Rural Residents in Shanghai.” Journal of Comparative Economics (29): 485–504.

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a lack of job and social security — are based on hukou status rather than 3 human capital. There is growing consensus that the earlier hukou reform is partial and far from complete, and a source of discrimination against migrant workers. The labour market is segmented on the basis of hukou status, with desired jobs reserved for urban hukou holders. In the late 1990s when urban workers were laid off in large numbers by state enterprises, labour bureaus often pressed local enterprises to dismiss migrant workers to accommodate laid-off workers. Without urban hukou, migrant workers remain unprotected by the Labour Law, making them easy prey to arbitrary labour practices. According to the 2000 census, nearly twice as many migrant workers as urban workers worked six days a week, and as many as 58 percent of migrant workers worked seven days a week. Given the inadequacy of previous reforms, extending labour protection to migrant workers becomes a new focus of the hukou reform.

“De-link” as a Dominant Reform Approach The current Hu Jintao-Wen Jiabao administration, with its newfound focus on balanced development and social harmony, realised the need to balance growth-centred economic policies with social policies catering to vulnerable groups. Since 2003, the administration has given unprecedented attention to migrant workers. Improving the employment environment of migrant workers has become an important part of the new leadership’s pro-people policy. Insofar as the hukou reform is concerned, two changes are visible. First, the central government is more active in initiating reform measures. For a long time, the hukou reform was a local phenomenon. It proceeded at the local level, with local hukou policies tailored to local conditions. Such reforms are often in favour of investors and well educated professionals, who are much sought after by local governments. The reforms at the local level continue in the Hu-Wen era, offering no solution to the problems

3

See Zhao Litao. 2006. “Labor Market Reforms under Hu-Wen Administration.” In China into the Hu-Wen Era, John Wong and Lai Hongyi, eds. Singapore: World Scientiﬁc, pp. 351–377.

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faced by migrant workers. What the Hu-Wen administration is keen in doing is to formulate national policies as guidelines for local practices. Second, there has been a shift in the reform approach, from a focus on making urban hukou more accessible to de-linking social welfare and public services from urban hukou status. The ﬁrst approach did not work well for migrant workers because in practice, the requirements for obtaining a local hukou are often too stringent for them. Not surprisingly, the Hu-Wen administration favoured the de-linking approach. One targeted area is social security, which has long been an urban phenomenon. As social security is linked to urban hukou, very few migrant workers have pension, medical insurance, child birth insurance, unemployment insurance and work-related injury insurance. The HuWen administration decided in 2003 to extend social security coverage to migrant workers, starting with work-related injury insurance. Another targeted area is education for migrant children. Urban public schools are ﬁnanced to provide education for urban children, and not for migrant children. Migrant children are charged much higher tuition fees in public schools, forcing many into under-funded and often unlicensed private schools. The government decision in 2003 to extend equal educational subsidies to migrant children in public urban schools serves to de-link education from urban hukou. The de-linking approach is not without its challenges. Implementation of a national policy is always a problem within a decentralised ﬁnancing system. But before the population size of rural migrants reaches an unprecedented level, ﬁnding ways to integrate them into mainstream society is a necessity.

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B

uilding a New Social Safety Net GU Xin

China had made tremendous progress in poverty reduction over the past three decades. Hundreds of millions of people have escaped absolute poverty, yet tremendous socioeconomic transformation has also produced new vulnerable social groups and poor people. The social safety net inherited from the past was inadequate for coping with new social risks and poverty. To sustain market reforms and maintain social stability, the Chinese government has made great efforts in reweaving a new social safety net. Social safety nets can be broadly deﬁned as a wide range of instruments aimed at mitigating possible adverse effects of social risks — e.g. ageing, sickness, unemployment, and disability — on vulnerable groups. In many developed as well as developing countries including China, social insurance, public assistance and temporary relief (normally targeting victims of disasters) constitute the main fabric of a social safety net. Social insurance is a kind of social security arrangement on the basis of compulsory insurance, and it is normally ﬁnanced by joint contributions from the employer and employee. Public assistance refers to programmes ﬁnanced by public revenues to provide the poor or the needy with beneﬁts in cash or in kind on the basis of means (income) test. In China, a social insurance system has been established in the cities to replace the previous workplace-based social security system. While playing a signiﬁcant safety net role for working people in the formal sectors, social insurance fails to provide social protection for people working in informal sectors, such as the self-employed and the part-time employees in some service sectors. Another problem with social insurance is that it basically does not cover peasants. This phenomenon also happens in other developing countries such as India and Thailand.

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Therefore, public assistance plays an important role in ﬁlling the gap. From the mid-1990s, the Chinese government has introduced new public assistance schemes, namely minimum income support schemes, in both urban and rural areas. Recently, new public assistance programmes focusing on healthcare and education have also been introduced. Public assistance beneﬁciaries have been substantially expanded from narrowly deﬁned marginalised social groups to all households passing the means test. The combination of social insurance consolidation and public assistance development, together with the continuation of public delivery of temporary relief to the poor, constitutes the new three pillars of a social safety net in China.

Social Insurance for Working People in Formal Sectors Social insurance schemes were developed at different times and driven by different factors. So far, social insurance funds covering old-age pension, healthcare, unemployment compensation, workplace injury compensation and maternity beneﬁts have been established in urban China. The pension insurance fund is the largest in terms of fund size, while workplace injury and maternity insurance schemes are rather small. Social insurance schemes share some commonalities. They are all administered by municipal social insurance agents, and ﬁnanced by the employer or the employee or joint contributions from their payrolls. Nevertheless, their coverage is different. Basically, all formal employees are covered by ﬁve social insurance schemes, and the self-employed can enrol in these schemes on a voluntary basis. In recent years, the Chinese authorities have been looking at ways to extend this social insurance coverage to migrant workers. China’s social insurance system faces severe problem of noncompliance. Although being compulsory in nature, many private companies (especially foreign-invested companies) are reluctant to enrol in the schemes as employers’ contributions cast signiﬁcant costs on their operation. Many municipal governments are not stringent on the enforcement of social insurance regulations out of consideration of attracting investment to promote employment.

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Social pension insurance is the most costly scheme for employers, and therefore the expansion of its coverage has not been an easy process. The coverage rates for social pension insurance covered only slightly more than half of employees and retirees in urban areas by 2004 and 2005. The coverage ﬁgure of social health insurance was similar. The Ministry of Labour and Social Security plans to achieve universal coverage of social health insurance for all urban residents by 2010. The coverage rates of unemployment insurance ﬂuctuated over the past years, covering only about 40 percent of employees. Since 1996, the year it was established across the country, the coverage of workplace injury insurance has been low, covering only about 30 percent of working people in recent years. In contrast, maternity insurance covered almost all female employees in the formal sectors in 2004; it has now been gradually extended to female workers in informal sectors.

Public Assistance to Protect People in Vulnerable Groups Public assistance had been marginalised for a long time until the mid1990s. The poor mostly relied on family and their relatives for ﬁnancial assistance. During the mid-1990s, massive lay-offs took place in the cities, invalidating employment-based social insurance schemes and depriving these workers of social protection. To close the loopholes in the old safety net, the Chinese government has taken steps to develop a minimum income support scheme in the cities since the mid-1990s. All households whose income falls below the poverty line set by the municipal government are eligible for claiming beneﬁts in cash and in kind. In 2000, the central government decided to implement the minimum income support system across the country. Since then, the number of public assistance beneﬁciaries in urban areas soared, reaching 22 million by 2004 and 2005, or about 4 percent of urban residents. A parallel development has been the expansion of public assistance to the countryside. The traditional public assistance programmes inherited from the pre-reform era were implemented strictly. Only those who had no work ability and exhausted all other alternative support sources for maintaining basic livelihood were eligible to receive income support and other beneﬁts in kind. From the mid-1990s, the Ministry of Civil

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Affairs has promoted a couple of new public assistance programmes while consolidating the old ones. One of the most important operational principles for the new programmes is to replace the previous test of work ability with the means test. Along with this new principle, all rural households whose earnings are below locally decided poverty levels are eligible for claiming public assistance beneﬁts. As a result, the number of public assistance beneﬁciaries increased considerably over the past years. At the end of 2006, the Ministry of Civil Affairs decided to launch a consolidated minimum income support scheme in the countryside across the country. Apart from minimum income support schemes, the Chinese government has also developed some categorical types of public assistance programmes, providing poor families with certain social beneﬁts in kind such as healthcare, education subsidies and housing. In response to the situation of 84 percent of rural residents having no health security coverage, the Chinese government decided in early 2003 to establish a voluntary based health insurance scheme in the countryside called the “new-type cooperative medical scheme”. By the end of 2006, this programme had covered almost half of the rural residents. In 2004, the Chinese government further launched a new Medicaid scheme in rural areas, providing poor rural households with cash assistance to partially cover their healthcare bills. In 2005, a similar scheme was implemented in the cities on an experimental basis.

Social Safety Net as Social Infrastructure In advanced countries, the social safety net is widely seen as a kind of “social infrastructure”, which is as important as “physical infrastructure”, such as highways, to economic growth and social development. Hence, public spending on weaving a social safety net is regarded as not only consumption or redistribution, but also “social investment”. As numerous World Bank and IMF publications point out, a well-functioning social safety net is crucial to market transition and social stability in transitional countries including China. Social safety net reweaving has been accompanying economic reforms in China. Between the mid-1980s and the mid-1990s, major government

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efforts were directed at re-building a social security system to correspond with newly emerging social issues such as massive unemployment. Yet the newly established social insurance schemes could not perform social protection functions for the newly poor, especially the unemployed in the cities. In response to this, public assistance reforms have become a new focus for social policy transformation in China since the mid-1990s. From 2003, under the new ofﬁcial banner of “social harmony”, the new leadership team headed by Hu Jintao and Wen Jiabo has paid much attention to social issues such as the widening urban-rural income gap, inadequate health security for low-income people (especially peasants), social security for migrant workers, and so on. Although the social safety net has been developed very quickly in China, it provides the Chinese people only with a low-level of social protection. The total amount of social security spending (combining social insurance and public assistance expenditures) is relatively small, accounting for about 4 percent of GDP in recent years. It has been increasingly recognised among Chinese ofﬁcials that increasing government spending on social security would have multiple positive effects upon China’s socioeconomic development. Not only could it bolster social equity, but also promote economic growth.

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hina Facing an Environmental Crisis CHIEN Shiuh-shen YANG Mu

That China has achieved astounding economic development over the past two and a half decades is undoubted. The unnerving fact is, it is achieved at the cost of rising environmental problems and an economic loss of RMB512 billion in 2004 or 3 percent of China’s GDP (although the World 1 Bank estimates that environmental pollution may shave off 15 percent of China’s GDP). The 2006 statistics on economic development and environment protection clearly show the “disharmony” between these two goals. With economic growth rate in 2006 higher than expected, China unfortunately failed to achieve its overall environment control goals set up for the ﬁrst time in its 11th Five-Year Programme (2006–2010). Sulphur dioxide (SO2) of air pollutants and chemical oxygen demand (COD) of water pollution did not decrease by 2 percent as targeted, but increased by 1.8 percent and 1.2 percent respectively from that of 2005. There were 160 reported cases of heavy pollution in 2006, with more than 600 thousands environmental2 related complaints (30 percent more than 2005). This sad state of affairs was well summed up by Pan Yue, vice minister of the State Environmental Protection Administration (SEPA), that “2006 is the grimmest year of 3 China’s environmental situation”.

1

The World Bank. 2005. “The World Bank and China’s Environment 1993–2003.” The Operations Evaluation Department of the World Bank series reports.

2

This refers to complaints ﬁled with China’s environmental protection agency through email, letter, telephone and ofﬁce visit.

3

News source: Xinhua Net, 20 January 2007.

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Prosperity with Pollution The severity of China’s environmental problems can best be seen in the latest World Bank report (2006). Of the top 20 most severely polluted cities in the world, 16 are in China. A research on Chinese cities also shows that only 4.2 percent Chinese cities achieved grade one (the most comfortable) of the National Ambient Air Quality, with 40 percent in the moderate or severe-level of pollution. That goes to say that the inhabitants of every third metropolis in China are forced to breathe in polluted air everyday and accounting for the estimated 400 thousands deaths every year, not to mention that more than 300 cities and counties in China are suffering from acid rain. Moreover, land degradation, including desertiﬁcation, erosion, landslide, salinisation, sand storm and loss of high-quality arable land to urban development, affected 40 percent or 3.56 million square kilometres of China’s land area until the end of 2005. Major rivers in China are either over-used (for example, utilisation ratio of Yellow River is 70 percent), or highly polluted (like the Yangtze River where 30 million tons of wastewater and industrial waste have been dumped). While more than 75 percent of rivers in urban areas are unsuitable for drinking, more than 340 million rural and urban people have poor access to clean drinking water. About 400 out of about 1,500 large and small cities are also facing a water shortage of six billion cubic metres caused by water pollution, over-exploration of underground water and inefﬁcient water consumption. Taken together, China is paying the price for consistently putting economic development before environment.

Made-in-China Pollutants Around the Globe In the past, China’s development strategy was formulated with a singleminded pursuit of economic growth and without any consideration for the environment. China uses 20–100 percent more energy than OECD countries for many industrial processes. Automobile standards lag behind European standards by ten years. The volume of carbon dioxide discharge increased at 67 percent during the 1990–2004 period, less than India’s (88 percent) but much higher than Europe’s (6 percent), Japan’s (23 percent), and the US’ (19 percent). In 2004, China’s carbon dioxide emissions per

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unit of GDP (purchasing power parity) was 1.6 times higher than India’s, 1.7 times higher than Europe’s and Japan’s as well as nearly equalling that of the US’ (1.06 times). China has been the world’s second largest emitter of the global greenhouse gas since 2004 (after the United States), at over one billion tons annually or 14 percent of the world’s total. In 2005, a toxic chemical spill following an industrial accident on the Song Hua river got the Russians worried about its drinking water supplies in the Khabarovsk region, where the river goes downstream. China’s pollution problems have also travelled beyond its borders to Japan and western America when researchers identiﬁed similar pollutants in the make-up of cloud particles in their skies. In other words, China’s slow and non-transparent actions to environmental protections have impacted the globe greatly, triggering international criticism of its lack of environmental protection efforts.

Dirty Dragon Trying Hard to Clean Itself Although China is not one of 38 countries required by the Kyoto Protocol to reduce their greenhouse gas emission between 2008 and 2021 by an average of 5.2 percent below 1990 levels, it has gone on to introduce institutional innovations — albeit on a small scale for some — that might generate 4 a positive impact on the environment in 2007. First, local leaders who are tasked with the responsibility of enforcing environmental regulations are now hard pressed to ensure their enforcement. For example, SEPA will impose the “regional project approval restriction” sanction on four cities for making no signiﬁcant improvement to rampant pollution in their cities. Operation permits of all new plants in these four cities are put on hold until the polluting factories in the areas signiﬁcantly improve their environmental treatment facilities. On top of that, the concept of green GDP, calculated by deducting the cost of natural resources’ depletion and environmental degradation from traditional GDP, will be applied throughout China in 2007. A set of performance targets on environmental improvement assigned by the centre will also be dispatched to each 4

News source: Xinhua, 20 February 2007; China Daily, 1 February 2007, 23 February 2007; Financial Times, 7 September 2006.

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provincial leader. These new institutions are able to clearly record efforts of local leaders, providing certain political incentives for them to play a more active role in environmental protection. Second, new “carrot and stick” policies to enterprises have also been introduced. In April 2007, SEPA submitted a list of blacklisted companies that had violated anti-pollution laws to the People’s Bank of China for further action by all commercial banks. Thenceforth, it will be more difﬁcult for violators to secure bank loans if their pollutant discharges are not eradicated. In addition, with the help of the United Nations, China has also launched the carbon-credit exchange system. This pilot “tradable” pollutant discharge right system will be applied to the power industry and in east China’s Tai Hu lake area. It is to encourage “green technology” investors from developed countries who are eager to earn “credits” under the carbon-credit exchange system to invest in clean-energy projects in developing countries (including China). Other measures implemented by China include the promulgation of new ﬁscal and taxation policies to offer more ﬁnancial incentives to the recycling industry and the renewable energy industry. Third, civil society, including non-governmental-organisations (NGOs) and journalists can now play a role in monitoring and participating in environmental protection. The construction of dams on Nu Jian (Salween River) is a case in point. The dam project was proposed by the central government but was successfully suspended in 2005 due to collective 5 protests organised by Chinese environmental NGOs and journalists. In March 2007 the Institute of Public Environment and Management, an environmental NGO in China whose director was chosen by the Times magazine in 2006 as one of the “100 people who shaped our world”, issued a pollution blacklist that includes 33 multinational corporations in China, ﬁve of which are even Fortune 500 companies. Environmental oriented civil groups, for the ﬁrst time, encourage China’s customs department to boycott products made by blacklisted companies to exert external pressure on these pollution-causing corporations.

5

Worldwath Institute. 2006. State of the World 2006 — The Challenge of Global Sustainability. UK: Earthscan.

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Challenges Ahead To sum up, China’s environmental crisis is largely the result of its immense scale of high-speed industrialisation, inefﬁcient energy development, indiscriminate pro-growth policies and weak regulatory regime. Economically, much of China’s pollution comes from coalburning power stations and car exhaust fumes. China’s energy structure still relies heavily on coal, 70 percent as compared to 27 percent of world’s average. Seven million cars were sold in China in 2006 alone; from 2002 to 2006, the annual growth rate was 36 percent. Although the search for alternative solutions like wind-driven generator, biomass energy, solar energy and hydropower capacity is on, it will be a long time before the coal-dependent and car-consumption pattern behind China’s economic development will be replaced. Politically, with economic growth being the key criterion for political promotions, local leaders consider impressive growth rates as more important for their career than a clean environment. A survey conducted in the Shanxi province showed a sharp contrast in attitude of local cadres and citizens towards environment protection and economic development. When asked if the environment should be sacriﬁced for development, 70 percent of citizens rejected the idea while 91 percent of cadres agreed. It is obvious that without signiﬁcant changes to the operation of these economic and political dimensions, a green China remains a distant and far-fetched dream.

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hina’s Cultural Development ZHAO Litao TAN Soon Heng

Changes in the larger context have made culture a salient issue in China. The sustained economic growth, the rising demand for cultural goods, the desire of many Chinese for a national revival that includes both economic and cultural rise, and China’s view of culture as an important source of national strength have provided the momentum to bring the issue 1 of cultural development to the fore. In September 2006, China issued a national programme on cultural development in the 11th Five-Year period (2006–2010). It is the ﬁrst of its kind since the Chinese Communist Party (CCP) came into power in 1949.

A Differentiated View of Culture China has come to perceive culture in a more sophisticated way in recent years. This began with the concept of a “cultural industry”, which ﬁrst appeared in a proposal for the 10th Five-Year Plan in 2000. Previously, culture was seen as a sector to be insulated from commercial interests and subordinated to communist politics. The concept of a cultural industry marked a new understanding of culture and a break with the past. For the ﬁrst time the connection between culture and economy was established and recognised. The concept of cultural industry led to a differentiated view of culture. The 16th Party Congress in 2002 ofﬁcially endorsed the distinction between public cultural institutions (文化事业) and commercial cultural

1

See Zhao Litao and Tan Soon Heng. 2007. “China’s Cultural Rise: Visions and Challenges.” China: An International Journal (5): 97–108.

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industry (文化产业), attributing different developmental means and ends to each. Since then, the cultural sector has been divided into two subsectors. Somewhat ironically, the ﬁrst is considered commercialisable and less sensitive to national cultural identity and information security. This includes artistic performances, tourism, cultural exhibitions, entertainment and the technical production and distribution of audiovisual products. These commercialisable sectors are open to investments from both domestic as well as foreign capital. The second sub-sector consists of state-owned institutions which are highly relevant to cultural identity formation and information security. Within this large category, a distinction is made between the non-commercialisable and the commercialisable. The former includes public libraries, museums and institutions responsible for the creation and preservation of national culture. The latter includes broadcasting, television, press and publication. With a much more sophisticated view of culture, China has begun to redeﬁne the role of government in the cultural sector. For the sub-sector which is considered commercialisable and less sensitive to national culture and information security, state capital is ordered to exit gradually through asset sales, transfers, mergers and bankruptcy. For the sub-sector which is considered commercialisable but of strategic importance to the country, the state maintains dominance in content delivery, but conditionally opens up service-related value chains for private capital access. Finally, the public sector in the cultural sphere comes under the jurisdiction of the government, which is ﬁnancially responsible for the functioning of this sub-sector.

China’s First Five-Year Programme for Cultural Development When viewed separately, problems facing cultural institutions are radically different from those facing cultural industries. Cultural institutions, which include art performance troupes and their venues, cultural centres, libraries and museums, have been under-ﬁnanced in many places around the country. Ofﬁcial statistics show that cultural institutions account for

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an extremely small share of government appropriation throughout the reform period (well below 1 percent). Moreover, except for 2004, their share has been declining since the mid-1990s. Compared to their peak of 0.51 percent in 1985, their share dropped to a historical low of 0.35 percent in 2003, even lower than the period during the Cultural Revolution (about 0.40 percent). Insofar as cultural institutions are concerned, “cultural development” has been more of rhetoric than actual actions undertaken during much of the reform period. The state policy clearly favours economic growth over cultural development. Unlike cultural institutions, China’s cultural industries have experienced substantial “development” over the years, thanks to incremental changes in lifestyle and consumption behaviour driven by economic growth, urbanisation, educational expansion and the rise of the middle-class. According to a senior government ofﬁcial, the gross output value of Chinese cultural industries stood at 1.2 trillion yuan (about US$150 billion) in 2004, and is expected to reach four trillion yuan in ﬁve years time. Given the rising demand for cultural products, the biggest problem facing China’s cultural industries is the lack of global competitiveness and the undersupply of cultural products to meet rising domestic demand. Chinese ﬁrms fall far behind US and Japanese ﬁrms in supplying appealing cultural products, while China is currently the world’s largest importer of animation and cartoon products. The widening cultural trade deﬁcit has begun to attract top ofﬁcials’ attention to address the issue. The current Hu-Wen’s policy adjustment towards balanced development and social harmony, coupled with the notion that culture can bring about potential economic beneﬁts, led to the release of the national programme on cultural development in the 11th Five-Year period (2006– 2010), the ﬁrst milestone of the Chinese government’s determination to give culture its priority. In this programme, the government plans to push the country’s cultural development on three fronts. First, given growing regional inequality, the government has pledged more equal access to public cultural facilities and services; second, the government will promote elite culture as part of the national pride-fostering and identityformation process, and provide greater ﬁnancial support to elite cultural institutions; last but not least, the government will nurture the cultural industry, make it competitive both domestically and internationally,

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and encourage cultural exchange and the exportation of Chinese culture worldwide. The programme targets nine cultural industries and four cultural projects for preferential development, where much emphasis is placed on the research and development of modern digitised products such as video, music and animations. Three economic powerhouses of the eastern region — the Yangtze River Delta, Pearl River Delta and the Bohai Gulf — are expected to become leading cultural clusters and to develop new cultural trends with a global orientation. Meanwhile central and western provinces are encouraged to explore and take advantage of their local cultural uniqueness. Since the programme is tied to economic beneﬁts, the local governments have hailed the cultural industry as their new engine of growth. Meanwhile, since cultural institutions are now part of the national pride-fostering and identity-formation process, a new lifeline has been thrown to a number of cultural performance troupes. Key governmentfunded ones include the National Peking Opera Theatre of China (中国京剧院), the National Drama Theatre (国家话剧院), China National Opera House (中央歌剧院), National Ballet of China (中央芭蕾舞团) and Chinese National Orchestra (中央民族乐团), just to name a few. They are to transform and repackage themselves as part of an elitist culture orientated towards middle-class consumption.

Social Participation in Cultural Development Although the ﬁrst step has been taken, it becomes increasingly clear that a successful cultural development is not a unilateral one — it must be able to mobilise public support and amass its willing participation. The face of China has changed drastically in just two decades, where market reforms have produced a diverse economy, a more differentiated society and an increasingly rights-conscious population. Today, the vibrant Chinese society is able to produce its own superstars and cultural models without the party’s ofﬁcial endorsement, and there are indeed times of unspoken tension when popular cultures and state propaganda collide. Therefore the future of the cultural project will hinge on whether the CCP is willing to open up its cultural and political domains to facilitate the emergence of attractive cultures relevant to modern times.

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The programme has largely been silent on issues concerning the types of desirable cultural values which should be fostered. Instead, it continues to stress the role of state-controlled institutions such as schools and work units in the process of cultural development. The equally or even more effective institutions, such as religion and community organisations and voluntary associations, have been denied a larger role in the preservation and creation of cultural values. In this light, the promotion of a broader social participation will increasingly become critical to China’s cultural development in the future. In conclusion, after nearly three decades of single-minded pursuit of economic growth, the Chinese government has ﬁnally brought the cultural issue from the periphery of policy-making to the core. Although there still remains much uncertainty, one thing is certain: a fast-changing China now calls for the country to create (or recreate) a great culture that is attractive, innovative, relevant and appealing to both itself and to the outside world. If the cultural project turns out to be successful, not only will China be able to offer much more to its own people, it will have a lot more to offer to the world as well. By then, the global perspective of China will perhaps shift from apprehension to amiability, and China’s quest to become a great power will be far more convincing than ever.

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hina’s Booming Higher Education QUAN Xiaohong ZHAO Litao

One remarkable development in China in the last decade was the rapid expansion of higher education. Having stayed at a low rate of enrolment for many years, higher education in China has experienced a huge surge since 1998. Tertiary student enrolment did not reach one million until 1997. In about a decade, it expanded to 5.4 million in 2006. The annual growth rate was 22.2 percent during the 1998–2006 period, compared to 4.4 percent from 1985–1998. The Chinese government decided in 1998 to achieve “mass higher education” by 2010. The benchmark is 15 percent of the age group (18– 22) having access to higher education. Thanks to an explosive expansion that began in 1999, China achieved the goal in 2002 and well before the targeted year. The government’s decision to expand higher education came in the wake of the 1997 Asian ﬁnancial crisis. Due to sluggish demand, China’s economy has slowed down since the second half of 1997. The situation did not improve in 1998 despite the government’s pro-active ﬁscal policy. China was also concerned with rising urban unemployment. Due to the restructuring of state enterprises, the rate of unemployment was then estimated to reach nine percent in 1998. Over three million high school graduates could only aggravate the situation if most of them were to enter the job market instead of colleges and universities. To stimulate domestic spending and to curb potential social unrest, the government took some scholars’ suggestion to expand higher education. As a result, the number of students admitted in 1999 jumped to 1.6 million, up 48 percent from

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1.08 million in 1998. The trend continues in subsequent years, with each 1 year adding 500–600 thousand of students upon the previous year.

The Issue of Educated Unemployment After the government’s decision to expand higher education, some scholars anticipated educated unemployment as an upcoming problem. The reason is simple: the job market is unlikely to expand as quickly as higher education. Some anticipated that the problem would loom large by as early as 2003, when the 1999 cohort began to enter the job market. Unfortunately, such a concern became a reality. From 2003 to 2005, unemployed bachelor degree holders at the point of leaving the university increased from 750,000 to 1.2 million. In 2004, there were 990,000 unemployed general degree holders, accounting for 41 percent of the total 2.4 million graduates. The problem worsened in 2005 and 2006. The National Development and Reform Commission estimated that 60 percent of new graduates would face unemployment in 2006. The number of graduates was expected to increase 22 percent to 4.13 million over 2005 while the job market could only absorb 1.66 million, down 22 percent over the previous year. Although these graduates may ﬁnd jobs one or more years later or go for postgraduate studies, the size of educated unemployment is nonetheless growing at an astounding rate.

The Issue of Financing The problem of ﬁnancing higher education also looms large. This is due in part to the explosive expansion, and in part to the earlier reform that increased user-fee for higher education. While government appropriation remains the major ﬁnancial source for education, its proportion in total expenditure on education dropped from about 80 percent in 1994 to 70 percent in 1999 and to 60 percent in 2004. The decline was caused by the shrinking government spending on higher education. In 2003, government

1

See Bai Limin. 2006. “Graduate Unemployment: Dilemmas and Challenges in China’s Move to Mass Higher Education.” China Quarterly (185): 128–144.

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appropriation accounted for 46.8 percent of total expenditure on higher education, compared to 76.5 percent in 1997. Financing education through tuition and miscellaneous fees has increased steadily since the mid-1990s, particularly for higher education. It made up only 16.3 percent of total expenditure on higher education in 1997, but increased to nearly 30 percent in 2003. Expansion of higher education has led to a drop in government spending for each undergraduate student to about 2,000 yuan, compared with about 6,000 yuan prior to the expansion. Against this background, affordability is increasingly becoming an issue. Ofﬁcial data show that annual tuition fees for universities in Beijing are between 4,200 to 6,000 yuan, higher than the average annual income of rural residents (about 3,255 yuan in 2005). Taking living expenses into account, the minimum cost for the average university student is well above 10,000 yuan per year, a problem even for ordinary urban households. Education has become one of three most singled out ﬁnancial burdens in China (with housing and healthcare being the other two).

Looking Ahead The explosive expansion of higher education also raised other concerns, one of which is in the quality of education. One indicator was the drastic increase of student-to-teacher ratio over the last decade. By the end of 2004, the ratio increased from 5.6 in 1992 to 15.5. Another concern was with the huge loans made by many universities from state banks to ﬁnance their expansion. Some loans were backed by local governments, which tried to develop “university cities” not only for promoting higher education but also for commercial and business purposes. Various scandals aside, the accumulating debts have cast serious doubt over the ﬁnancial viability of such projects. In view of the aforementioned problems, the central government decided in 2006 to slow down the pace of expansion. The explosive expansion seen in the period of 1999–2005 ﬁnally came to the end. The focus of China’s higher education for the 11th Five-year Programme (2006–2010) was on improving the quality of education rather than on expanding it.

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Despite all stops, China’s higher education will continue to expand. But unlike in the period of 1999–2005, it will do so in line with the pace of economic development. From a long-term perspective, China has yet to produce enough college graduates for its growing economy. Although the gross enrolment rate at the tertiary level increased to 19 percent in 2004, it was still far behind many countries. Middle income countries typically have a gross enrolment rate of 29 percent, while high income level OECD countries averaged 71 percent in 2004. China’s tertiary enrolment rate was even lower than some developing countries like Mexico (23 percent). Seen in this light, China’s higher education will continue to expand, but at a more sustainable pace. China’s higher education should also be more responsive to market demand. A mismatch between supply and demand has been one of the most important reasons behind the problem of educated unemployment encountered by China since 2003. One lesson to be learned is that while enrolment in sciences and engineering accounted for half of total tertiary enrolment in 1995, it surprisingly dropped to 40 percent a decade later, an unexpected phenomenon for a developing and industrialising country. Seen in this light, China’s higher education should be restructured, and closer ties between universities and industries encouraged to facilitate technology transfer from universities on the one hand and to refresh universities with new industrial knowledge on the other.

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hina’s Emerging Middle Class YAN Hao

Since the late 1970s, the Chinese government has introduced a series of reform and open-up policies to replace central planning with a “market economy with Chinese characteristics”, where growth and efﬁciency are given top priority. The transition so far has been successful according to major macro-economic indicators. Progress has also been made in poverty reduction and improving people’s living standard. However, fast economic growth has caused a number of unwanted side effects. Among others is the widening income gap between the rich and poor, rural and urban areas and across regions. At the same time, a “classless” society of pre-reform China has also begun to stratify as well. In recent years the emergence of a middle class has attracted increasing attention. Currently, the Chinese government still claims to be ofﬁcially a classless society. In the discussion on the middle class and other related topics, therefore, different terms have been used to stay politically correct, such as middle income earners (中等收入者), middle income group (中等收入群体，中等收入人群), middle income stratum (中等收入阶层) or middle stratum (中间阶层，社会中间层) and middle class (中产阶级，中产阶层). In China, income is the ofﬁcial designated criterion for middle class and other socio-economic criteria are irrelevant. The problem is that the government has yet to set an ofﬁcial income range that can be understood as “middle”. Therefore, many unofﬁcial sources have come up with their own estimates in recent years. In general, experts tend to agree that ideal middle income earners do not necessarily refer to the group occupying the middle half of the current per capita income distribution tables, say urban residents with an annual personal income of RMB5,705 to RMB10,463 in 2003.

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Depending on the deﬁnition, estimates of the current size of the middle classes differ substantially from one source to another, ranging from 13–20 percent of urban households or from 7–20 percent of total population. Survey data reveal that the Chinese middle class are younger than their counterparts in industrialised countries, and the gender gap is not very striking. Geographically, the Chinese middle class live mainly in three urban areas: a) large and modern metropolitans; b) provincial capitals, and c) medium-sized cities in the coastal region. By occupation, the Chinese middle classes compose mainly of professionals and white collar workers. However, it is relevant in the Chinese context to divide them into two broad groups by their relations with the Party and state: those who are inside the establishment: a) ofﬁcials in Party and government organs, b) professionals in public institutions (science, education, health, culture and media), and c) middle and highlevel managerial staff and professional technicians in SOEs, and those who are outside the establishment: a) private business owners, b) middle and high-level managerial staff and professional technicians in non-state ﬁrms (private, joint venture and foreign owned), and c) self-employed professionals. Recent studies reveal that the Chinese middle class are usually distinct from other social groups in behaviour and attitudes. For example, 1 a 2003 survey found that the Chinese middle class prefer to spend more on housing, culture/leisure, and education for children than other groups. In their attitude towards political participation, the middle class are more active in participating in social organisations, community election and management, and online discussion; they are also in favour of political reform and better protection of private property and human rights. The emergence of the middle classes in China in recent years is attributable to a series of factors. Economic factors include fast and continued economic growth, reform and economic restructuring characterised by liberalisation, marketisation and privatisation, growth of the tertiary and knowledge-based industries, and opening-up and

1

Zhou Xiaohong. 2005. Zhongguo zhongchan jieji diaocha (A Survey of China’s Middle Class). Beijing: Social Sciences Academic Press.

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globalisation. Social and political factors include relaxed Party and state control of the society, end of political and social discrimination, increased social mobility, expansion of higher education, and increased tolerance to diversiﬁed ideas and values. The phenomenon of a new middle class in China has profound implications for the country’s economic and social development. From an economic perspective, the Chinese middle class can play a dual role: an impetus for growth and a leading force in consumption. From a social perspective, the middle class can play a threefold role in the society: a stabiliser, a buffer and a value carrier. As a matter of fact, the underlying consideration of the government’s policy to expand middle income earners 2 is to promote social harmony, rather than to promote economic growth . It is believed that an olive-shaped society with middle class being the bulging middle is always more stable than a pyramid-shaped society with wealth polarisation. From a political perspective, the expansion of middle class in China serves obviously very well the Party and government goals of economic growth and social stability. Meanwhile, the Chinese middle class remains supportive of and cooperative with the Party and government, being part of the establishment or major beneﬁciaries of the reform. One question that has been asked is whether the middle class will challenge the autocratic power of the Party and government when it becomes large and strong, as in the case of Taiwan and South Korea. Given that China’s middle class is one of the major beneﬁciaries of the market reform, the scenario is less likely to happen in China in the foreseeable future. As mentioned earlier, a considerable proportion of the Chinese middle class are from inside the establishment. China has the largest Party and state apparatus in the world today: 6.5 million public servants, 29 million employees of public institutions, and at least 10 million managerial staff in 192,000 state-owned enterprises. As some analysts pointed out, the Party is unable to secure the loyalty of these people through ideological indoctrination; it thus uses material perks and job opportunities in

2

For example, this policy is listed in Chapter 10 of the 11th Five-Year Programme, under the title of “Promoting the Building of a Socialist Harmonious Society”.

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3

government and SOEs as political patronage . It is therefore unlikely that people inside the establishment will challenge something that they depend on for a living. Those from outside the establishment have little motivation, either. As a matter of fact, they are all direct beneﬁciaries of the government’s pro-market and pro-business policies, and are still in close contact with the establishment in one way or another. For example, it is estimated that 30 percent of private business owners are former SOE managers. That the Chinese middle class is not going to challenge the Party and state power head-on does not suggest that they are opposed to any political reform in the course of modernisation. China’s top leaders have made public their wish to push for political reform — Hu Jiaotao pointed out during his recent US visit that without democracy, modernisation would 4 not be possible . Unquestionably, the middle class are a key force that the Party and government can count on in its drive towards political reform in China. Educated, rights-conscious, ﬁnancially independent and with a worldly vision, the middle class can do an excellent job in promoting rule of law, good governance and civil society building in China, since the goal of political reform does not necessarily mean a Western style multiparty democracy. In fact, the Chinese middle class have increasingly been involved in a wide range of political participation activities, such as community development, local election and civil right protection.

3

Pei Minxin. 2006. “Politics Blamed for China’s Trillion-Dollar Bad Debts.” The Australian, 9 May. 4

Ofﬁce of the Press Secretary. 2006. “President Bush Meets with President Hu of the People’s Republic of China.” White House News Releases, 20 April.

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H

aigui in China’s Modernisation YANG Mu TAN Soon Heng

A majority of mainland Chinese who left China over the last decades have chosen to stay in their countries of adoption. For those who have decided to return to resettle on the mainland, they were called “Haigui” (海归), or overseas returnees, a contemporary term used to describe returning graduates, scholars and professionals. Collectively, these returnees can be informally called the “Haigui-pai” (海归派). According to the 2005 China Statistical Yearbook, between 1978 and 2000, the accumulative number of Chinese students venturing overseas had exceeded 200,000. The number tripled to over 600,000 in 2004, and is expected to reach the one million mark by end 2006. About a quarter have returned, and judging by the sheer number of overseas students, many more are expected to return in the near future. Despite facing a problem of “brain drain”, China’s number of Haigui will still be very signiﬁcant in the coming years. Haigui usually hold prestigious overseas degrees, are bi- or trilingual, and possess value-added skills and international experience not easily acquired by Chinese mainlanders. Considered as the crème de la crème and highly prized by the government and private sectors, the Haigui-pai forms a unique talent-group that could potentially take China from its domestic playing ground unto the more competitive international stage. Haigui who returned from the past two decades have subsequently become China’s “movers and shakers” in the political, economic and social domains, and are shaping the country’s future faster than most thought. The concept of sending Chinese students to learn from more developed countries has a history of nearly 150 years. In the past, these students were traditionally called “Liuxuesheng” (留学生), and the history

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of studying overseas was known as “Liuxueshi” (留学史). It is not an exaggeration to remark that China’s modern’s history is largely shaped by the Haigui-pai. From Nationalist party leaders like Sun Yat-sen and Chiang Kai-shek who successfully toppled the Qing dynasty, Communist party leaders like Deng Xiaoping and Zhou Enlai who progressively modernised China, avant-garde nuclear physicist Qian Sanqiang and rocket engineer Qian Xuesen who laid the foundation for China’s scientiﬁc progress, to social philosophers Hu Shi who advocated a literary revolution, these are Haigui who made tremendous impact on China’s modern history. Today, as China opens up and sets forth on the imminent path to reform, it needs as many of its talents as possible during this crucial period of transition. In Deng Xiaoping’s 1992 “Southern Tour” speech, he put forth a convincing case urging those who had gone overseas to return and contribute to China, regardless of their political inclination. This sent a powerful message to all Chinese citizens residing outside mainland China, informing them of the country’s opening up, its change for the better, and the many opportunities awaiting them upon their return. Deng’s message marked the beginning of the era of the “Haigui times” (海归时代). In science and technology, the Haigui-pai are leading the higher echelon of research and playing a key role in China’s scientiﬁc progress. The successful launch of the piloted spacecrafts Shenzhou 5 and 6, and the successful testing of an anti-satellite missile, spoke volumes of the technological advances China had achieved. Coupled with innovations in other sciences such as telecommunications, information technology (IT) and bio-pharmacy, China’s high-tech sector is already on track to be with the best of the world. In the social sciences, subjects such as economics, sociology, political science, demography and international studies are also gaining importance, with signiﬁcant contributions from the Haigui-pai. Especially so is the ﬁeld of economics, where China requires special talents to head its crucial economic reforms and accelerate its eventual integration with the world economy. Meanwhile, much hyped about in China today is “technopreneurship”, the setting up of new companies using modern management methods and advanced technology. Currently, the Haigui-pai is leading the pack in this new “technopreneurship wave”, and an increasing

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number of Haigui “technopreneurs” are rapidly changing China’s modern economic sectors. Prominent “movers and shakers” include Li Yanhong (李彦宏) and Zhang Chaoyang (张朝阳), creators of search portals Baidu and Sohu respectively, who revolutionised the Chinese Internet scene and overtook Google and Yahoo in the domestic market. Another example is Dr. Shi Zhengrong (施正荣), who founded Suntech Power which produces photovoltaic cells used in tapping solar energy. To date, Suntech Power is the largest photovoltaic cells manufacturer in China and one of the top 10 in the world; Dr. Shi was ranked 350 by Forbes among The World's Richest People In 2006. China now has more than 60 “technopreneurship parks” in major cities, and the total value of companies set up by Haigui has exceeded RMB10 billion. Most successful in riding this “technopreneurship wave” is Beijing’s Zhongguancun (中关村) and Shanghai’s Zhangjiangyuan (张江园). The former is best known as an IT base that houses more than 138 topnotch research institutions including the Chinese Academy of Sciences, and 56 leading higher-learning institutes including Peking and Tsinghua universities. The latter is well-known as China’s bio-pharmaceutical and telecommunication base that houses more than 90 bio-pharmaceutical enterprises and national level Research and Development (R&D) organisations including the Institute of Materia Medica of the Chinese Academy of Social Sciences and the National Human Genome Centre. Both Zhongguancun and Zhangjiangyuan have been hailed as China’s new Silicon Valleys. After joining the WTO in 2001, China has been rapidly integrated into the global economy. To expand its domestic market and place less emphasis on export growth, “technopreneurship” has been playing a leading role in creating jobs for the population and shifting the country’s source of growth towards domestic demand. It also has the potential of setting off chain reactions and achieving high gearing effects for economic growth. “Technopreneurship” has thus emerged as a new domestic engine driving China’s economy. The role Haigui play in this budding economic sector is not to be underestimated. Not only are Haigui “technopreneurs” critical agencies to promote China’s growing economic sector, they are also involved in injecting new ideas and introducing better practices into local product development and

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marketing innovations. They play important roles in fostering a culture of openness and creativity, promoting a “can-do” spirit, and internalising the acceptance of failures within the community. The relatively open sharing of information over the Internet and the agglomeration of both physical and intellectual resources in “technopreneurship parks” have allowed “technopreneurs” to tap on them unhindered. Judging from statistics, it is expected that “technopreneurship” will become an increasingly prominent trend in China. From a sociological perspective, numerous “push” and “pull” factors have contributed to this Haigui-led “technopreneurship wave”. “Push” factors include fewer employment opportunities, entry barriers to the academia, and competition from local graduates. “Pull” factors include increasingly favourable business environment offered by local governments and the promulgation of “technopreneurial” success stories over the media motivating the young to become rich and successful. With few institutional and political barriers, the level playing ﬁeld of “technopreneurship” and its relatively high rewards have motivated Haigui to set up their own companies. China now has an emerging middle class whose purchasing and consumption power is rapidly increasing. As more families are sending their children overseas to study each year, it is expected that the number of Haigui “technopreneurs” would increase proportionally. As Haigui continue to stamp their dominance, it is expected that China will become increasingly liberalised in both thought and practice. Many held the optimistic view that this new generation of Haigui would be a prominent force to veer China towards greater openness and transparency, and to bring about greater political liberalisation in the future.

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P ART IV CHINA’S RELATIONS WITH MAJOR POWERS AND ITS NEIGHBOURS

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F

eaturing “Harmonious World” for “Peaceful Rise” LAI Hongyi LYE Liang Fook

Building on its domestic catch-phrase of a “harmonious society”, China has articulated the vision of a “harmonious world” in the conduct of its foreign relations. Comprising themes of peace, cooperation, development and inclusiveness, this ideal was ﬁrst raised by President Hu Jintao in his address at the World Summit and the 60th General Assembly of the United Nations in New York in September 2005. A “harmonious world” is an extension of the “peaceful rise” concept of 2003 that was intended 1 to defuse anxieties over China’s growing economic and political clout. Since then, Chinese leaders and scholars have reiterated that China’s rise or development would beneﬁt the world and enhance international peace and stability. China had started to play a more constructive and responsible role in regional and world affairs well before such pronouncements. At a time when regional economies were reeling from the impact of the 1997 ﬁnancial crisis, China refrained from devaluing its currency and offered US$4 billion in aid through the International Monetary Fund and bilateral

1

It was Zheng Bijian, then Executive Vice President of the Central Party School of the Chinese Communist Party, who ﬁrst raised this concept at the Boao Forum in Hainan Province in November 2003. Recent books related to China’s rise in terms of its foreign policy include: Avery Goldstein. 2005. Rising to the Challenge: China’s Grand Strategy and International Security. Stanford: Stanford University Press and Deng Yong and Wang Fei-Ling, eds. 2005. China Rising: Power and Motivation in Chinese Foreign Policy. Lanham, MD: Rowman & Littleﬁeld, pp. 25–31.

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channels. In 2001, after years of arduous negotiations, China acceded to the World Trade Organisation, joining the global trade regime. China overtook Japan to become the world’s third-largest exporter, behind America and Germany in 2004. China has also participated in several peace keeping operations in Cambodia (1991–1993), East Timor (since 2000), Ethiopia-Eritrea (since 2000), Afghanistan (since 2003), Liberia (since 2003), Kosovo (since 2004) and Lebanon (since 2006). These actions signal China’s determination to contribute to the international community and be a stakeholder in it.

Objectives of Harmonious and Peaceful Orientation China’s harmonious and peaceful orientation in its foreign policy can be attributed to a few key objectives. The ﬁrst is to create an external environment conducive to China’s domestic development. The orientation began with Deng Xiaoping’s move away from Maoist political and ideological campaigns to one that pursues deep reform in economic development. China’s foreign policy was adjusted to service this paramount need. When Jiang Zemin took over, he sought to turn China into a “responsible big power” which was subsequently followed by Hu Jintao’s “peaceful rise” and “harmonious world”. Whatever the terms used, China’s underlying thrust is to avoid conﬂicts and expand cooperation with other countries so that its energy and resources can be channelled to internal socio-economic development. The second is to counter the “China threat” theories. Previously, China’s growing economic and political strength engendered fears from other countries, especially its neighbours that they would be inundated by cheap Chinese products and deprived of vital foreign investments diverted to the mainland. There were also fears that China’s economic strength would eventually translate into military might. China’s rise visà-vis other countries was then regarded as a zero-sum game. Over time, however, such a perception has waned although it has not dissipated altogether. Today, most countries recognise China as an important player and have adjusted themselves to this reality. The last is to capitalise on the increased interdependence between countries to secure beneﬁts for China. By expanding and deepening its

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trade and economic ties with other countries, Beijing is able to secure vital resources necessary for its economic growth. While trade frictions and disputes with other countries have increased, China has been levelheaded in its response and stayed focussed on its goal of strengthening the country.

From Confrontation to Cooperation China’s present harmonious and peaceful orientation is all the more remarkable considering that its foreign policy posture was very different several years ago. During the 1960s and 1970s, when Mao Zedong was at the helm, China’s relations with other countries, especially its neighbours, were characterised by tensions and suspicions. At that time, China was seen as considering “overseas Chinese” residing in neighbouring countries 2 as its citizens and openly encouraging them to return to China. More irksome was China’s support for communist movements in a number of Southeast Asian countries. It was perceived as seeking to overthrow the governments in these countries. Deng Xiaoping’s pragmatic economic agenda in the late 1970s produced a fundamental change in China’s foreign policy. Except for its relations with Vietnam where a brief war was fought in 1979, China’s relations with other neighbouring countries improved in the 1980s especially after Deng severed China’s support of the communist parties in these countries. Further away, China and the US established diplomatic relations in January 1979. Following the 1989 Tiananmen crackdown, however, China relations with the US, Japan and the European Union deteriorated. China’s relations with the developing countries, particularly Southeast Asia, were then least affected and even improved. Between 1990 and 1991, Beijing established diplomatic relations with Jakarta, Singapore and Brunei, and normalised relations with Hanoi. China’s relations with its neighbours continued to strengthen during Jiang Zemin’s tenure. China became a dialogue partner of ASEAN in 1996.

2

It was only in 1974 that China started to require “overseas Chinese” to apply for visas to visit China and stopped encouraging them to return to China, thereby procedurally treating them as citizens of their resident countries.

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In 2000, China raised the idea of a Free Trade Area (FTA) with ASEAN and concluded a Framework Agreement on ASEAN-China Comprehensive Economic Cooperation in 2002. China’s relations with major powers also began to recover. In 1997 Jiang visited the US and President Clinton returned a visit in 1998. Both sides pledged to build a constructive strategic partnership. The 11 September 2001 terrorist attack of the US provided an impetus for collaboration to ﬁght global terrorism. Hu Jintao has stepped up efforts to engage powers like the US, EU, India and Japan, as well as ASEAN and other developing countries. China’s relations with these countries generally adhere to the following three broad guidelines: a) establish good neighbourly and friendly relations with its neighbours; b) enhance unity and cooperation with developing countries; and c) focus on improving and developing its relations with 3 developed countries.

Good Neighbour and Partner Over the past decade, China has made concerted efforts to expand and deepen its relations with its neighbours. China has positioned itself as a reliable and responsible neighbour and partner. A safe and stable neighbourhood would provide the basis for China and its neighbours to beneﬁt and prosper together. To secure its northern frontier, China in 1996 signed a military conﬁdence building pact with Russia, Kazakhstan, Kyrgyzstan and Tajikistan which eventually paved the way for the establishment of the Shanghai Cooperation Organisation in 2001. While there remains latent suspicion between China and Russia, in particular due to historical rivalries, the two countries have established a useful platform to engage each other. China-ASEAN relations have grown closer and deeper despite initial misgivings of most ASEAN countries to China’s rise. From a dialogue partner in 1996, China’s relations with ASEAN have moved beyond the political and economic realms into many other areas. At the 9th ASEANChina Summit in Kuala Lumpur in 2005, the leaders identiﬁed ﬁve new

3

See Chinese Ministry of Foreign Affairs Website at http://www.fmrc.gov.cn/ eng/wjdt/wjzc/t24881.htm.

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priority areas of cooperation, namely, energy, transport, culture, public health and tourism, under the 2003 Joint Declaration on the Strategic Partnership for Peace and Prosperity. These new areas are in addition to the ﬁve original priority areas of cooperation, namely, agriculture, information technology, two-way investment, human resources development and Mekong River Basin Development. China has also strived to resolve existing disputes with its neighbours and put aside intractable ones. In recent years, it has concluded border and maritime agreements with Russia, India, Vietnam and Laos, sometimes ceding more territories than the other party to secure an agreement. As for the South China Sea disputes, China has dropped its initial reluctance for a multilateral approach and signed the Declaration on the Conduct of Parties in the South China Sea in 2002. It acceded to ASEAN’s Treaty of Amity and Cooperation in 2003, the ﬁrst major power to do so.

Mutual Cooperation and Mutual Beneﬁt As the largest and most populous developing nation, China is in an enviable position to champion the interests of the developing countries for both political and economic reasons. On the political front, China is eager to expand its inﬂuence and cooperation with the developing world to enhance its international standing as the de facto leader of a group of nations which the US and EU appear to have relegated to the economic backwaters. By focusing its attention on building better relations with these countries, China is making slow but steady inroads into an international order long-dominated by the Western countries. Most notably, China hosted the Forum on China-Africa Cooperation in Beijing in November 2006, the biggest gathering to date of Chinese and African leaders. On the economic front, China has stressed that its relationship with the developing world is based on the principle of mutual cooperation and mutual beneﬁt. Despite its voracious appetite for oil, gas and minerals from developing countries such as Africa, Latin America and the MiddleEast, China has been sensitive to accusations that this is a one-way trafﬁc where China is beneﬁting disproportionately. In return for these vital resources, China has pumped in money on infrastructural, community and oil exploration projects. In Mozambique, for instance, a country under

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re-construction after decades of civil war, one third of all roads currently being built can be attributed to Chinese inward investment. China has also pledged to double aid and offer US$5 billion in loans and credits to the underdeveloped African continent by 2009. At the UN, China actively pushes for South-South cooperation and North-South dialogue to address the issues affecting developing countries. In both economic and diplomatic terms, the Chinese have stolen a march on the US and EU in the developing world. For the moment, the developing world also sees the beneﬁt of establishing closer relations with China. However, this does not necessarily mean that they would do to China’s bidding as each would have its own internal calculations and would want to refrain from being overly dependent on China.

Expanding Common Grounds and Managing Differences China has tacitly recognised an international order in which the US is the sole superpower. Under this framework, China seeks to expand common grounds and minimise differences with the US. China-US relationship is now on a more stable footing, after experiencing the many ups and downs arising from President Bush’s “strategic competitor” statement in 2000 to former Deputy Secretary of State Robert Zoellick’s “responsible stakeholder” remark in 2005. While the personal chemistry between President Hu Jintao and Bush is not as close as that between President Jiang Zemin and Bush, the relationship between the two countries appear to be more institutionalised, albeit an increasingly complex one. In November 2006, the two sides held their ﬁrst ever strategic economic dialogue to address economic issues between them that affect the health of the global economy. This dialogue complements the strategic political dialogue initiated in 2004 to discuss “big picture” issues. While recognising the pre-eminent position of the US, China has advocated a world where other powers like itself, the EU, Russia, India and Japan can have a role to play. Among the EU countries, China’s trade and economic ties with the UK, France and Germany are the most substantial. China wants the EU to lift the arms embargo imposed on China since the 1989 Tiananmen incident. Despite lingering suspicions, China’s relations with India have improved markedly in recent years with high-level

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exchanges of visits and commitment by the leaders of the two countries 4 to develop their relationship further. China’s rocky relations with Japan have stabilised somewhat after Shinzo Abe took over as Prime Minister in September 2006 and visited China on his ﬁrst overseas foray. Previously, relations were affected due to former Prime Minister Koizumi’s annual visit to the Yasukuni shrine and the controversy surrounding Japanese history textbooks. Worth mentioning here is the deft approach China has adopted on the Taiwan issue which Beijing regards as a domestic matter. Rather than the show of force across the strait such as the ﬁring of missiles from 1995 to 1996 and the exchange of harsh words, China has tried to woo Taiwanese political parties and win the hearts and minds of its people. This new approach is better received by many countries, especially those in the Asia-Paciﬁc. More importantly, China has enlisted US help to rein in Taiwan’s pro-independent President Chen Shui-bian. This has, for the moment, taken the wind out of the sails of the independence movement and contributed to regional stability.

Peaceful or Aggressive Power Over the past ten years, China has been rather successful in integrating itself into the international community. More signiﬁcantly, China has been rather skilful in manoeuvring on the regional and international stage to boost its standing and credentials as a responsible and useful player committed to peace and development. This is an achievement compared to China’s past negative image due to its support of foreign communist parties in other countries. Powers like the US, the EU, Japan and India are increasingly engaging and involving China on various issues. The developing world sees China as a partner who can articulate their interests and serve as a key source of developmental assistance. To China’s neighbours, including the ASEAN

4

Indian Prime Minister Vajpayee visited China in June 2003, marking the ﬁrst time in ten years that an Indian Prime Minister has visited China. In November 2006, President Hu Jintao visited India and both sides agreed on a 10-pronged strategy to expand and deepen relations.

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countries, China has emerged as an important economic and trading partner. Overall, China has widened its circle of friends and deepened relationships by identifying common interests, expanding common grounds and minimising differences. China’s star on the world stage will rise further if it continues to play its cards right. There are, however, a number of challenges on the horizon that could complicate this process. Already, China’s new found conﬁdence and status has been viewed with some trepidation particularly by the US, Japan and India. Recent events, such as China’s success in shooting down an old weather satellite in January 2007 and its announcement in March 2007 of a 17.8 percent increase in this year’s defence budget, the largest increase ever, are seen as indications of China’s growing military assertiveness. China has to recognise and assuage these concerns if it wants the constructive relationship it has built up with these powers to continue. In particular, the US has so far given China greater leeway on the world stage so long as Beijing does not set itself up against the US. Moreover, the US is presently militarily engaged in Iraq and Afghanistan. This has therefore provided China with the much needed space to fulﬁl its vision of a harmonious world. But it is not entirely impossible for the US to reassess its position and be less accommodating especially when China becomes a serious threat to US interests. This would restrain China’s peaceful rise. Already, it is unclear how US policy towards China will be affected when a new US Administration takes ofﬁce in 2009. Although remote, there is also a possibility of mismanagement of the Taiwan issue by Beijing, Taipei and Washington. With the looming 2008 Presidential elections in Taiwan, incumbent Chen Shui-bian and his supporters may undertake more radical moves towards independence to drum up support for his party and anointed successor. This may force Beijing’s hand and push Washington to make a difﬁcult choice. A conﬂict over Taiwan will derail China’s peaceful rise. A rising China will also have to manage potentially explosive issues with its immediate neighbours in Northeast Asia. These issues include North Korean nuclear programmes, China’s and Koreas’ different interpretations of the history of the Koguryo kingdom, and China-Japan

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disputes over territorial water and islets in the East China Sea and Japan’s revisionist history of World War II. Another factor that may complicate China’s peaceful rise is the West’s visceral aversion to the prospect of a strong and prosperous China under an authoritarian state that offers a seductive alternative to the open and transparent political systems in the West. The West may pressure China to undertake necessary internal political reforms and meet the aspirations of democratic forces in Hong Kong and Taiwan. It is insisting that China should promote human rights, democracy and good government in trading with the developing countries (such those in Africa). The misﬁt in the values and ideas that underpin the Chinese and Western political 5 systems may become a potential source of contention. For the moment, however, China is sticking to its vision of a harmonious world and its commitment to a peaceful rise. It remains to be seen if China will continue to adhere to what it has espoused once it becomes successful.

5

For the latest detailed journalistic coverage on China’s rise and potential problems, refer to The Economist, 31 March–6 April 2007, pp. 3–16.

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C

hina and US: A Pivotal but

Uncertain Relationship WANG Fei-Ling

China-US relations today have achieved a dynamic stability featuring tremendous gains, enormous potential and great uncertainties. The pair, so mutually dependent on each other economically and yet so very different in their political regimes, appears to be the only realistic contenders for global leadership, wealth and power. The good news is that there are strong desires and efforts on both sides to maintain and improve relations to avoid unnecessary and costly confrontations. Beijing has long viewed its relationship with Washington as the core of its foreign policy, and the United States as either its most important partner or its deadliest adversary. The United States, still heavily entangled in other places like Iraq, is nonetheless increasingly taking China seriously as an upcoming fellow stakeholder, a formidable challenger, or both. China is presently focussed on maintaining and taking advantage of a stable Sino-American relationship. Beijing has seized “the historic, strategic opportunity for peaceful rise” created by the 9/11 attacks in 2001 when the United States was forced to divert its attention and energy away from dealing with a rising China. Yet key issues and serious problems still remain between them. Whether the window of golden opportunity could last 20 years, as openly estimated by the then PRC President Jiang 1 Zemin in 2002 , remains to be seen. With President Hu Jintao’s agenda of creating a harmonious society at home and a harmonious world abroad,

1

Jiang Zemin. 2002. “Political Report to the CCP National Congress.” Beijing, November.

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and with the anticipated post-Iraq retrenching of the United States, ChinaUS relations are likely to be as pivotal and uncertain as ever before.

Matching Interests Today, shared interests between China and the United States stabilise their working relationship. First and foremost are their extensive and complementary economic relations. In a liberalising world trading system, much of the impressive economic growth of China is fuelled by the insatiable American demand for Chinese goods. The lion’s share of China’s vast export now goes to the US, earning the bulk of China’s trade surplus. Much proﬁts ﬂow to the US from American ventures that brought capital, technology, designs and market to China. In addition to cheap goods and services, China has poured hundreds of billions of dollars back to the US to subsidise American consumers and Washington’s deﬁcit spending. What China has and makes is what the US wants, and what the US has and makes is what China desires. No wonder from Wall Street to the main streets, China now represents opportunity, proﬁt and often sheer economic necessity. Despite diverse ideological beliefs and political values, Beijing and Washington also share common interests in the geopolitics of the AsiaPaciﬁc region. United States is only happy to see a rising China that accepts the status quo including the dominant presence of the US military in the region. Beijing cooperates with Washington on many international issues ranging from the North Korean nuclear issue (as evidenced by China’s hosting of the Six-Party Talks), the war on terrorism to burdensharing activities such as various UN actions and missions. Hu Jintao, so far, appears to have emulated the same cautious, low-key and cooperative policy established by the late Deng Xiaoping towards the United States. China’s accommodating acts and gestures may have been motivated 2 by Beijing’s peculiar desire for its own regime preservation . Beijing’s reluctance to directly challenge the US hegemon has gone a long way

2

Yong Deng and Wang Fei-Ling, eds. 2005. China Rising: Power and Motivation in Chinese Foreign Policy. Lanham, MD: Rowman & Littleﬁeld, pp. 25–31.

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to pacifying Washington and stabilising China-US relations. Since 2005, Washington has shown its delight by openly calling Beijing to be more of 3 a “responsible stakeholder”.

Issues and Problems Real issues and serious problems, such as the political future of Taiwan and disputes over trade and intellectual property rights, still bedevil the PRC and the US. Indeed, these issues have the potential to derail SinoAmerican relations. However, since the late-1990s, and especially the Bush Administration since 2002, Beijing and Washington have learnt to manage their disagreements in these areas. High level and regular dialogues and horse-trading have shown promises of ironing out some of the economic frictions. The China-US consensus to “no unilateral change” in status quo in the Taiwan Strait has signalled a more matured and skilful co-management of the Taiwan issue. However, it is not inconceivable that a Taiwan seeking de jure independence might push the US and China into an armed conﬂict in the Taiwan Strait. More fundamentally, the PRC and the US are in contradistinction in political ideology and values. The hope that trade and engagement will inevitably and peacefully transform China politically, even at the expense of some American jobs, is still very much alive in the US But there are now voices calling for a reexamination of the US policy to address Beijing’s continued, even worsened, record of human rights and democracy. Wakening up from “the China fantasy”,4 many inside the Beltway are now seriously wondering if Washington has made a historical blunder by empowering an ideological foe who is destined

3

Robert Zoellick, Deputy Secretary of State. 2005. “Whither China: From Membership to Responsibility?” Remarks before the National Committee on USChina Relations, September 21. Thomas Christensen, Deputy Assistant Secretary for East Asian and Paciﬁc Affairs. 2006. “China’s Role in the World: Is China a Responsible Stakeholder?” Remarks Before the US-China Economic and Security Review Commission, Washington, DC, August 3.

4

James Mann. 2007. The China Fantasy: How Our Leaders Explain Away Chinese Repression. New York: Viking.

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to clash with the United States. The successful testing of China’s space weapon in early 2007 has given new momentum to that discourse. There might well be a reassessment of China once the US pulls out of Iraq and a new administration less obsessed with the war on terrorism occupies the White House. At the same time, new power and wealth have led many PRC elites to feel more annoyed and hurt by the relentless and often self-righteous American lectures and criticisms. That widespread resentment reinforces powerfully the emerging nationalistic sentiments amongst the Chinese. The censored media and tightly controlled education have nourished a new generation of angry youths who increasingly deem the United States as an inevitable enemy of a rising China, not just an opponent of the undemocratic PRC government under the CCP (Chinese Communist 5 Party) . Impatience is visibly growing and both arrogance and ignorance are brewing. A revival of the Chinese tianxia (a centralised rule with the Mandate of Heaven) worldview and the efforts to promote Confucian values for a “harmonious new world order” signal a new era in which the PRC is increasingly taking the offensive in the ideological contest with the United States. Ironically, perhaps, a political democratisation and media liberalisation in the PRC is likely to further nationalist sentiment, even imperialist tendencies, at least in the short run.

Prospects There is great potential for a cooperative China-US relationship to continue; it is also possible for the two to be at loggerheads. An armed conﬂict over Taiwan is not inconceivable. Nevertheless, the rise of China, so far, has yet to turn Sino-American relations into a zero-sum game between them. Beijing has been wise not to repeat the history of many past rising powers which challenged the hegemon by its insistence on “peaceful rise” and its vow never to seek hegemony. Although Beijing has essentially avoided challenging the US hegemony, few in Washington really believe

5

Cong Riyun. 2007. “Nationalism and the Process of Democratization in Contemporary China.” Beijing Zhengfa University, unpublished paper, January.

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that the proud Chinese under an undemocratic leadership armed with Sino-centric feelings will remain satisﬁed as number two once it becomes truly rich and powerful. China’s latest assertiveness especially in resource acquisition in Africa and Iran, and Beijing’s concerted efforts to increase its military budget and capability have already alarmed many China watchers in Washington. Without genuine democratic reforms and rule of law, a rising China with the CCP at its helm, will necessarily instil fear in the US. A conceivable Sino-American grand compromise in Western Paciﬁc may give the two countries signiﬁcant time to work out their differences. Washington could trade some of its inﬂuence in the region for peace and tune down some of its rhetoric to make the ruling PRC elite feel less discontented. Taiwan could be sacriﬁced and the PLA could be given more room and freedom to operate in the blue seas. Beijing could make more internal reforms to be better incorporated into the US-led world system. A mightier but basically satisﬁed China and a reduced but also contented United States could thus coexist and compete virtuously and peacefully. Such an idealist scenario, both desirable and possible, requires new incentives and norms, brilliant leadership and sheer luck on both sides that may not be in place in time. The future of China-US relations, therefore, is greatly uncertain. It is entirely possible for a more powerful China to enjoy a more equal and mostly amicable relationship with the United States for a long time to come. But the deep divide between the two countries, if unchanged, threatens to usher in more Sino-American discord.

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M

anaging Difﬁcult Relations with Japan ZHENG Yongnian TOK Sow Keat

Rapid globalisation, the uncertainties posed by a post-Cold War international environment, the rise of China and the momentous shifts in economic and strategic balances in East Asia have transformed the way China and Japan see each other. In China’s eyes, Japan is facing prolonged stagnation following four decades of economic boom, and is naturally not as respected as it used to be; China, on the other hand, appears to be on the roll — economically, technologically, militarily and politically — and its weight is growing exponentially in East Asia. Japan’s perception of China is greatly coloured by the latter’s potential security threat led by a communist regime that Japan has always deemed suspect. In the past decade, China and Japan seemed to be heading for confrontation: repeated visits by Japan’s former Prime Minister Junichiro Koizumi to the Yasukuni Shrine (which honours 14 Class-A war criminals), was a contention in China-Japan relations; so are the overalapping claims over the East China Sea and its deposits of energy especially gas. Japan also views China’s military modernisation with anxiety. It listed China as a potential threat in its National Defense Guideline 2004, and reacted strongly to China’s anti-satellite test in January 2007. Nevertheless, the two countries are deepening their economic relations as their argument continues. This anomaly is best described as “zhengleng jingre” (literally, “chill politics and warm economics”), a term which is used extensively to characterise their relations. But will China and Japan move towards greater friction?

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Changing political environment in both China and Japan suggests tensions will persist in the years ahead. In China, the gradual opening up of the society under globalisation has produced more voices, especially nationalistic ones, in the political realm. This development puts Chinese authorities in a predicament. Their political control over society diminishes as the society becomes more open. Yet, nipping off budding national movements is as good as undercutting its own legitimacy. Moreover, China’s Japan policy has always been a contentious issue with the Chinese leadership, a sand trap to be avoided by both aspiring and incumbent leaders. For this reason, Chinese leaders like Jiang Zemin and Hu Jintao have, since the 1990s, faithfully towed nationalist lines. For Japan, changes in its external and internal political environment also favour the rise of popular nationalism. Unlike the new Chinese nationalism, the new Japanese nationalism did not draw as much on the issue of history, but envisioned a more assertive military and foreign policy commensurate with its economic power. This nationalism is further boosted by the new generation of Japanese born after World War II who do not feel personally responsible for the atrocities of the past. In the political domain, changes in Japanese politics and public opinion and the priority of domestic reform agenda have directly affected Japan’s China policy. The late 1990s saw the rise of the Mori faction within the LDP, the power base of Prime Minister Koizumi. This faction favours a robust security policy and is sceptical about China. The inﬂuence of pro-China politicians and foreign ministry bureaucrats has waned, and powerful LDP politicians who promoted normalisation with China and supported warmer Sino-Japanese relations have passed from the scene. Also noted is the drastic declination of Corporate Japan’s ability to inﬂuence the administration over the years eroded by reforms in the electoral system and campaign ﬁnancing. Meanwhile, the security dilemma between the two Asian giants continues to haunt China-Japan relations. In this scenario, a third power, the United States, comes into the picture. Following the rapid rise of China in the 1990s, Japan was seen to be moving ever closer to its alliance partner. The strengthening of the US-Japan alliance in the 1996 Hashimoto-Clinton Declaration, followed by Japan’s endorsement of the US’ Anti-ballistic Missile Defense shield in 2004, the mention of Taiwan as a common

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strategic objective and the US-Japan “2+2” meetings, all point towards pricky relations ahead. Japan’s new Prime Minister Shinzo Abe has not made reconciliation any easier; his constitutional reforms package looks set to inch Japan towards a “normal state”, as Japan’s Self-Defense Agency has recently been upgraded to a full ministry. He has also lobbied the EU against lifting its weapon ban on China. On the China side, economic growth momentum remains strong and military modernisation will continue. Even though China is increasingly making use of external forces to constrain Taiwan’s move towards de jure independence, and Beijing and Tokyo are seen actively engaging each other in low-level talks on territorial disputes, China-Japan relations are likely to remain volatile. This strategic equation is deﬁnitely not helped by rising nationalistic sentiments on both sides. As US and Japan are now institutionally bounded to maintain a joint force structure as a necessary counterweight to China’s military modernisation, a military build-up, even an arms race, in East Asia is not inconceivable. In the economic realm, China has become the manufacturer of the world. China has comparative advantage not only in the labour-intensive industries but also in some cases, across entire value chains. China is fast emerging as a strong competitor to Japan in high-tech, high value-added manufacturing including cell phones, advanced semi-conductor chips, machine tool and ship-building. China is also a top destination of FDI. Many companies have relocated their production bases from the NIEs and ASEAN to China. The growing economic interdependence between China and Japan, however, mitigates the grim picture painted thus far. At the same time as China’s rapid economic rise has led to a sense of crisis among many Japanese business people, politicians and bureaucrats, it has also offered unprecedented opportunities for Japanese businesses. Driven by the economic logic, more and more Japanese companies are relocating to China regardless of domestic political pressure and disquiet. The two countries are key trading partners. In 2006, their bilateral trade exceeded US$207 billion, up 12.4 percent from the previous year. While Japan is China’s third largest trading partner after the European Union and the US, China has become Japan’s largest trading partner. China’s economic rise has become a major source of Japan’s economic recovery, as Japanese

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companies use the mainland’s vast labour pool as a manufacturing base for the crucial US market. China’s Commerce Minister Bo Xilai commented in 2005 that China’s trade with Japan had created some 9.2 million jobs for China. Also, despite their nationalistic sentiments, Japan continues to be one of the most popular destinations for Chinese tourists. In 2006, Japanese tourists recorded 3.7 million visits to China, a 10.5 percent growth from 2005. The growth of Chinese tourists visiting Japan is more dramatic; in 2006, visitors from China grew by 24.3 percent to 812,000. Both China and Japan have realised the signiﬁcance of their growing economic interdependence. Policies towards each other are changing. Hu Jintao invited Abe to Beijing at the very ﬁrst opportunity after Abe came to power. This is in sharp contrast to China’s Japan policy under Jiang Zemin, who adopted a hardline policy and refused to meet the then Japan Prime Minister Koizumi Junichiro, in protest to Koizumi’s visits to the Yasukuni Shrine. Jiang also ignored all calls for summit meetings between the two leaderships for ﬁve years. Following Abe’s visit in October 2006, Beijing and Tokyo have resumed their summit meetings, paving the way for better relations. The level of interdependency has no doubt risen. Interdependency does not prevent conﬂicts, but help raise the threshold for potential conﬂicts. However, as China and Japan deepen their economic relations, there should be more causes for optimism. Even though dangers continue to lurk, strong economic incentive should act as the necessary lids to prevent bilateral tensions. Given their long-standing differences, political relations will naturally wax and wane, but growing mutual economic importance will motivate both Beijing and Tokyo to maintain an even keel in their relations. For the time being, economic relations will take precedence, as other issues are conveniently swept under the carpet. The price of a conﬂict will be far too high for either party.

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F

acing a More Assertive and Nationalistic Japan LAM Peng Er

An external challenge faced by Beijing is a more assertive Tokyo. This chapter focuses on the rise of Abe Shinzo, arguably the most nationalistic Prime Minister of Japan in recent years. Abe clinched the ruling Liberal Democratic Party’s (LDP) Presidential Election in September 2006 and subsequently the Prime Minister’s post in the same month. That he won the Presidential Election with a comfortable two-thirds majority of the votes suggests that his political agenda has resonance within the party. However, to the general public, Abe’s personality and image — boyish and bashful charm, and nice and soft-spoken demeanour while steel-like towards North Korea — is his main attractiveness rather than the vision of conservative value change in Japan. Abe has another advantage: he was handpicked and groomed by popular Prime Minister Koizumi Junichiro to be his successor. However, Koizumi is a tough act to follow. Abe is deﬁnitely less charismatic and politically inexperienced than Koiuzmi. In this regard, Abe may well face difﬁculties when implementing his agenda. The new Prime Minister’s pedigree stems from both the paternal and maternal sides. His father is Abe Shintaro, a Foreign Minister, LDP faction leader and a key contender for Premiership in the late 1980s. Abe’s maternal grandfather is Kishi Nobusuke, a suspected Class A War Criminal (who was never formally indicted but detained by the American Occupiers until 1948) and a Prime Minister (1957–60) reputed for his determination to revise the constitution, rearm the military properly and reclaim Japanese values from the tide of progressive (leftist) ideas. Apparently, Kishi has profoundly inﬂuenced his grandson’s political worldview.

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Unlike former Prime Minister Koizumi Junichiro’s constituency in urban and “modern” Kanagawa prefecture, Abe’s electoral district is in 1 rural and conservative Yamaguchi prefecture (former Choshu). Though he was educated in Tokyo, Abe inherited his electoral seat in Yamaguchi from his father. Presumably, his conservative values have a good ﬁt with the local culture of rural Yamaguchi. Abe earned his nationalistic ideological stripes and catapulted into national prominence by taking a hard line against Pyongyang’s abduction of Japanese nationals when he, as the Deputy Chief Cabinet Secretary, accompanied then Prime Minister Koizumi to Pyongyang in 2002. He was also the driving force behind Japan’s successful push for a United Nations Security Council Resolution in 2006 to condemn North Korea’s missile tests. Earlier, Abe was associated with rightists who sought to write and promote a revisionist history textbook that gloriﬁes Japan’s past and its culture, while whitewashing its wartime atrocities in Asia. Being the ﬁrst Prime Minister born in the post-Second World War era explains, in part, Abe’s conservative worldview. Unlike earlier cohorts of LDP leaders who had experienced the deprivations of war and defeat, Abe has neither personal memories of war nor feelings of guilt towards Imperial Japan’s war atrocities in Asia. In this regard, Abe’s attitude towards history and Japan’s past and future role is not atypical of many younger politicians from both the ruling and main opposition parties.

1

Abe’s constituency is the fourth electoral district of Yamaguchi prefecture and his home is located in the small and quiet city of Nagato (population of around 41,000) in the same prefecture. Amazingly, Yamaguchi (Choshu) has provided eight Prime Ministers (including Abe) to Japan since the Meiji era, more than any other prefectures. Choshu and Satsuma (Kagoshima prefecture) were the key actors that toppled the Tokugawa Shogunate, restored a “traditional” Emperorcentric system in 1867 and modernised Japan to ward off Western imperialism. Meiji leaders from Choshu were often both traditionalists and reformists who invented tradition by using the Emperor system to legitimise their sweeping reforms. It will be interesting to see whether Abe can do likewise by utilising “tradition” and “conservatism” to reform and remake Japan.

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Abe’s Domestic Agenda Prime Minister Abe’s aspiration for Japan is that of a “beautiful country” in which the Japanese people can rightly take pride in its tradition, achievements and autonomy. He proposes constitutional revision (imposed by the US occupiers after Japan’s World War II defeat) for the country to be truly autonomous, and to unshackle the Self Defence Forces (SDF) to engage in collective security. Constitutional revision and the promotion of traditional Japanese values are not novel and have indeed been enshrined in the LDP’s charter when it was ﬁrst formed in 1955. However, the LDP did not push hard for this conservative agenda during the Cold War due to at least two reasons: the parties of the left then were strong enough to oppose and block such moves, and the LDP could maintain its perennial rule by being a developmental party which had successfully redistributed the fruits of the Japanese economic miracle to its supporters, the general public and especially rural Japan. This distributive welfare approach is no longer tenable as a result of the “lost decade” after the bubble economy burst in 1991. In recent times, Japanese Prime Ministers cannot win mass support simply by promising massive economic redistribution when the country, suffering from a severe ﬁscal deﬁcit, can no longer afford to do so. The LDP now relies on the charisma and popularity of its President to win elections instead. Abe is useful to the LDP insofar as he is able to win elections for the party. Writing away Article 9 (the famous no-war clause of the constitution) does not necessarily mean that Abe’s Japan is seeking to strengthen the military signiﬁcantly to address the North Korean threat and balance a rising China. Indeed, it is a symbolic yet signiﬁcant move to reclaim Japan’s own identity and pride if an authentic and new constitution is written by its own people, thus dispensing the foreign one written by the US occupiers. Abe envisages the writing of a new constitution to be a protracted process that may take at least ﬁve years. While it is difﬁcult for him to revise the constitution because of the requirement of a two-thirds majority in both the Lower and Upper Houses of parliament followed by a national referendum, he will seek to introduce legislation to permit a national referendum in the future.

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Besides constitutional revision, another major plank of Abe’s domestic agenda is to reform the educational system to inculcate desirable family values and patriotism. He believes that Japan should raise the standard of its education and even ﬁre teachers who are incompetent professionally. Other domestic reforms Abe will be seeking include the introduction of a National Security Council (modelled after the US), and the boosting of the number of personnel to strengthen the policymaking apparatus of the Prime Minister’s Ofﬁce.

Abe’s Diplomatic Agenda Abe’s immediate diplomatic task was to seek bilateral summits and restore badly frayed ties with China and South Korea caused by Koizumi’s stubborn insistence to visit the Yasukuni Shrine. However, Abe’s “strategic ambiguity” on his own future Yasukuni Shrine visits, issues of war responsibility and whether Tokyo fought a war of aggression will make a historical reconciliation between Japan and its immediate neighbours 2 difﬁcult. In international affairs, Abe advocates an alignment with the US, India and Australia — countries purported to share the values of democracy, the rule of law, human rights and market capitalism — while excluding Japan’s closest neighbours, China and South Korea, from this 3 grand coalition. However, India and Australia are unlikely to join Abe’s 2

Abe has adopted a position of “neither conﬁrm nor deny” concerning the Prime Minister’s visit to Yasukuni.

3

Abe Shinzo. 2006. Utsukushi kuni he [Towards a Beautiful Country]. Tokyo: Bunshu Shinsho, pp. 157–161. Abe is extremely bullish about India emerging as an “IT Power”. He remarks that barely a decade ago, nobody could predict that bilateral trade between China and Japan will overtake US-Japan bilateral trade. Similarly, it is not “strange” if India-Japan relations were to supersede Sino-Japanese ties a decade from now. Abe is also happy with India on two scores: ﬁrstly, then Indian Prime Minister Nehru told his grandfather Kishi that the Indians and their quest for independence from Britain were inspired by Japan’s defeat of Russia in 1905 (the ﬁrst by an Asian power against a great European power); secondly, he was pleased with the friendly Indian public opinion towards Japan. See also “Chugoku kensei kiwadatsu Abe shi.” [Abe’s emphasis on constraining China], Asahi Shimbun, 13 September 2006.

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coalition to avoid alienating China, an increasingly important market to both countries. China is likely to be wary of the Japanese Prime Minister’s desire to strengthen the US-Japan Alliance, forge a strategic partnership with rising India to balance China, and promote an active SDF role in collective security even though Abe is cognisant of the rising economic interdependency between Japan and China, and has suggested environmental and energy cooperation with Beijing. After earning his credentials as an uncompromising nationalist towards North Korea, Abe did not have to promise Yasukuni Shrine visits to win the support of rightwing politicians, Association of War Bereaved Families and veteran associations in the September 2006 LDP Presidential Election. As Abe pragmatically sidesteps the Yasukuni Shrine issue, a ﬂashpoint in Sino-Japanese relations has been removed and permits the resumption of leadership summits. Nevertheless, the East China Sea territorial dispute especially over energy resources is likely to become a thorn in the ﬂesh in bilateral relations in the years ahead.

Challenges Ahead for Abe There are considerable hurdles for Abe before he can consolidate his position politically: the April 2007 Local Elections and July 2007 Upper House Elections. In addition, Abe also has to address issues like a hike in consumption tax, pension reforms and the widening of income gaps between individuals, and between the metropolitan areas and rural Japan. Apparently, these are bread and butter issues that mean more to the average Japanese voter than Abe’s agenda of constitutional reform and the inculcation of patriotism. While Abe is riding high today in his mass support, it is unclear whether it will remain so until and after the next Upper House Election. Moreover, Abe’s LDP has lost considerable organisational support from party members and interest groups. Party membership had plunged from 4 5.47 million in 1991 to 1.22 million in 2005. The LDP’s traditional bastions 4

See “Jimin: Ushinawareta dainamizumu.” [LDP: Dynamism lost], Sankei Shimbun, 9 September 2006. The Yomiuri Shimbun notes that LDP membership has been falling for eight continual years. See Yomiuri Shimbun, 21 September 2006.

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of support from construction companies, postal masters and farmers have also been severely eroded. If the LDP were to perform very badly in the forthcoming Upper House Election, Abe might have to take responsibility and resign. Even if Abe were to survive the forthcoming Upper House Elections, he faces the challenge of sustaining Japan’s economic recovery and growth. Ironically, the Japanese economy has recovered, in part, by riding on the back of the Chinese economy. But it is uncertain whether Abe has the political will to pursue unpopular economic reforms at a time when the Japanese public has become somewhat complacent about nascent economic recovery and is now clamouring to reduce the income gap between individuals, and between urban and rural Japan.

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C

hina and South Korea in Their

Dealings with North Korea CHOO Jaewoo

China’s decision in 1992 to establish diplomatic relationships with South Korea was perhaps the biggest challenge to its “good-neighbour policy” (mulin youhao zhengce). The inherent problem was how to achieve a balance between the two Koreas. During this transitional discourse, a de jure and de facto policy was fully in use to complement the good-neighbour policy in the face of changes in not only the Korean peninsula, but also the domestic, regional and global arena. It was only in May 1999 when the North Korea’s Supreme People’s Assembly President Kim Yong Nam visited Beijing that a normalisation of relationship was declared. With this, China was able to achieve the desired balance in its relationship with both Koreas and overcoming the litmus test of recognising two rival regimes. Beijing’s balancing act in the Korean peninsula was precipitated by domestic, regional and global changes. China’s persistently high economic growth rate, coupled with the normalisation of relations with the two Koreas in 1999 justiﬁed China’s continued economic aid and assistance to the North. In 2001, this balancing act culminated to two meaningful events in the peninsula: the ﬁrst ofﬁcial state visit by China’s top leader (then President Jiang Zemin) since 1990 and the elevation of relations with Seoul from “cooperative” to “full-scale cooperative” partnership. The historical summit meeting by former president of South Korea Kim Dae Jung and Kim Jong-Il of the North in June of 2000 also facilitated the process. A series of new developments in regional and global affairs also prompted Beijing and Pyongyang to address the strategic importance of their alliance. The US’ strategic manoeuvres in Northeast Asia including

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the Theater Missile Defense (TMD) plan and the New Guidelines of US-Japan alliance then were perceived as moves to contain China. US’ bypassing of the United Nations and its unilateral decision to intervene in Kosovo following the bombing of the Chinese Embassy provided Beijing and Pyongyang with an external impetus to improve their deteriorating relationship. On the part of South Korea, its newly adopted “Sunshine policy” towards North Korea rests on the belief that with consistent economic support to the North, the eventual prosperity and development may induce the isolationist state to open itself to the world and better manage economic development fuelled by investment from the South and other parts of the world. Although this policy line and strategic thinking are similar to those adopted by the Chinese, it is clearly against those of the US. The pursuit of the “Sunshine policy” marked the beginning of a rift in the US-South Korea alliance as well as the start of a convergence of interest with China regarding North Korea. This convergence of interest has successfully facilitated further cooperation between the two nations towards one common end: stability and peace in the Korean peninsula. To Washington, this cooperative relationship between Beijing and Seoul is a move to prolong the lifespan of the Pyongyang leadership it hopes to change. To the Chinese and South Koreans, this economic commitment to the North is for maintaining stability in the peninsula, and not to appease the North’s brinksmanship or to perpetuate Kim Jong Il’s regime. This shared interest was further evident in the course of negotiation following the outbreak of the second North Korean nuclear crisis in October 2002. While there were talks in Washington about attacking Pyongyang’s nuclear sites if a peaceful solution is impossible, China, with full support of the South, prefers to mediate between the US and North Korea. The US pressure on North Korea only brought China and South Korea closer. US’ coercive measures, which may trigger a war with the North, are likely to ﬂood both countries with refugees or even destroying the South’s economy. Any armed conﬂict in the Korean peninsula will greatly affect Chinese economic activities not only in its peripheral region but also in the global market.

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Both China and South Korea also share similar outlook towards the six-party talks and UN resolutions following the North’s missile test in July 2006 and nuclear test in October 2006. They have also worked closely together for the resumption of the talks whenever there is hitch. They were the only ones that were willing to reward the North for its return to the talks. When North Korea carried out successive missiles and nuclear tests within the following three months, it left China and South Korea with no other choice but to comply with the UN in adopting resolutions 1695 and 1718, respectively. Nonetheless, during the resolution negotiation process, China took the responsibility to void any measures that would be detrimental to the North’s survival as a nation-state, thereby successfully manipulating the resolution to remain largely symbolic — a stern message that will not hinder the principles of a peaceful solution. Under the circumstances, an all out economic sanction that was strongly favoured by others was opposed on the grounds that it would bring dire consequences to the peninsula if it is fully implemented. The proposed sanction was, therefore, watered down to still allow China and South Korea to continue supporting the North economically. In return, Pyongyang promised Beijing to return to the six-party talks as well as to stop all tests when the Chinese special envoy headed by Vice Premier Tang Jiaxuan visited Kim Jong Il following the ﬁrst nuclear test in October 2006. Beijing’s warning delivered on numerous occasions seems to have positive effects on Pyongyang. At least for now, North Korea has shown certain commitment to the six-party talks and the series of bilateral meetings with the US in recent times. The North’s endeavour could be attributed to its desire to seek peace and stability for the peninsula in general and for its own economic well-being in particular. The 2007 New Year address by the North’s ruling party — Korean Worker’s Party — explicitly singled out economic development and “military ﬁrst politics” as its foremost policy priorities. Although how the North’s nuclear problem will be resolved requires further observation, China’s balancing stance coupled with the North’s desire for economic development has seemingly paid positive dividends to the peace and stability of the peninsula and to its ties with the two Koreas.

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China’s balancing act in the Korean peninsula, however, is not without ramiﬁcations. It could, for instance, perpetuate the division of the peninsula as the North remains under the patronage of China while it strives to recover from its economic woes. It will also mean North Korea’s deeper integration with the Chinese economic system, given the North’s current foreign economic conditions, which necessitates China’s sustained alliance with the North. To Beijing, alliance is perceived to be an effective political, if not necessarily military, tool for keeping external actors (e.g. US) from making reckless, hasty and irresponsible strategic decision against the North. To China, its balancing act will maintain peace (or status quo) in the peninsula, thus serving its domestic political and economic interests while conﬁrming its international proﬁle as a responsible state.

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S

eeking Closer Cooperation with Post-Suharto Indonesia LIM Tin Seng

After the 1997 Asian ﬁnancial crisis triggered the collapse of the authoritarian Suharto regime, China-Indonesia relations have been improving rapidly. The post-Suharto leadership in a democratising Indonesia no longer publicly harps on Beijing’s alleged involvement in the 1965 PKI (Partai Komunis Indonesia — Indonesian Communist Party) abortive coup, which ruptured China-Indonesia relations from 1967 to 1990, or the “China threat” theory but sought to take advantage of China’s rapid economic rise for the country’s own recovery and growth. Indeed, when Abdurrahman Wahid became President in 1999, he declared China-Indonesia relation a priority for Indonesia’s economic recovery and his “Look towards Asia” policy. During his state visit to Beijing in December 1999, President Wahid pointed out in the joint communiqué with President Jiang Zemin that there were “important opportunities for improvement and growth [in China-Indonesia] relations at the turn of the century”. China-Indonesia relations were further strengthened and consolidated when Megawati Sukarnoputri became President. During her state visit to Beijing in March 2003, Megawati stated that she admired China’s economic development. She also entered into various Memorandum Of Understandings in trade, investment, science and defence cooperation with China, and pledged to increase cultural and social exchanges. Most of these agreements were realised during Susilo Bambang Yudhoyono’s administration after it upgraded China-Indonesia relations to a new level with the signing of a Joint Declaration of Strategic Partnership with Beijing in April 2005.

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Beijing’s Initiatives to Better Relations Jakarta’s attitude shift was attributable to Beijing’s diplomatic charm offensive, the notion of “China’s peaceful development”. Beijing launched various constructive initiatives, including its accession to the Treaty of Amity and Cooperation in 2003 and the signing of the Declaration on the Conduct of Parties in the South China Sea in 2002. These initiatives substantially reduced tension over territorial disputes in the South China Sea and displayed China’s willingness to resolve the issue with the disputing parties through peaceful means. Other developments include China’s strong support for the ASEAN Regional Forum and Southeast Asia Nuclear Weapon Free Zone, and its active participation in the ASEAN plus Three process to build an East Asian Community. Beijing’s initiatives were appreciated by Jakarta as gestures of good neighbourliness and substantially increased the comfort level of the two sides, thus paving the way for better China-Indonesia relations. Economic factors also contributed to an improvement in ChinaIndonesia ties as each sees the large economic potential of the other. With Indonesia’s population hitting 250 million, it offers China a huge market in the region. China could also tap into Indonesia’s abundant natural resources, particularly oil, to fuel its robust economy. In fact, China’s state-owned oil companies, PetroChina and China National Offshore Oil Corp have invested billions of dollars to acquire numerous oil and energyrelated projects in Indonesia in the past few years. Similarly, China’s vast domestic market offers immense beneﬁts to Indonesia’s ailing economy and its current export-oriented economic plan — the “triple track” strategy. Speaking at the 12th Nikkei International Conference on the Future of Asia in May 2006, Indonesian Vice President Jusuf Kalla highlighted the growing trade volume between China and Indonesia and the vast market opportunities in China as “important” for Indonesia’s economy. He also stated that competitive pricing of Chinese imports “promotes efﬁciency” in Indonesia’s industries and allows lowerincome Indonesians to increase their consumption. Meanwhile, bilateral trade between China and Indonesia increased ﬁve-fold from US$4 billion in 1997 to US$20 billion in 2006, making China Indonesia’s fourth largest trading partner after Japan, Singapore and the

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US. Besides, Indonesia has been posting an average annual trade surplus of nearly US$1 billion in its trade with China since 1997. Although the trading volume is still small as compared to other ASEAN countries such as Singapore, Malaysia and Thailand, other dynamics such as an increasingly integrating world economy, the gradual effect of the China-ASEAN Free Trade Agreement and China’s accession to the World Trade Organisation in 2002, and the growing demand for Indonesia’s natural resources will further strengthen the complementary trade relations between China and Indonesia. In fact, China-Indonesia trade value is anticipated to rise from US$20 billion in 2006 to US$30 billion in 2010. This positive development is expected to continue especially after Chinese Minister of Commerce Bo Xilai and his Indonesian counterpart Mari Pangestu pledged to intensify bilateral economic, trade and investment cooperation during the 8th meeting of the Joint Commission on Economic, Trade and Technical Cooperation in Bali in October 2006. Beijing is also improving China-Indonesia ties through cultural and people-to-people exchanges in areas such as public health, education and tourism. It provided ﬁnancial and medical assistance amounting to nearly US$52 million in tsunami relief to Aceh in 2005 and about US$3 million worth of relief funds and materials for the Yogyakarta quake victims in 2006. China’s involvement in these relief efforts in Indonesia is unprecedented and signiﬁcant especially when it is still a developing nation with Purchasing Power Parity which is only slighter higher than most ASEAN states, including Indonesia. This is discounting the fact that China has to attend to many natural disasters within its own borders. Nonetheless, its enthusiasm to provide humanitarian relief shows that China is sincere in forging stronger ties with Indonesia and is eager to exercise its “peaceful development” foreign policy to the fullest.

Problems Still Persist Despite such positive developments, persisting domestic problems in Indonesia such as anti-Chinese sentiment may undermine the blossoming China-Indonesia relations. Anti-Chinese sentiment has been deep-rooted in the Indonesian society. It became widespread after the 1965 PKI abortive coup and during Suharto’s administration when ethnic Chinese were made

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to bear the brunt of government policy failure, or what has been referred 1 to as “scapegoat politics”. As recent as 1998, such politics were played by the Suharto government leading to the outbreak of anti-Chinese violence and the sacking of Jakarta’s Chinatown. Although the anti-Chinese issue has recently become less of an irritant in China-Indonesia relations as PostSuharto Indonesia is slowly accommodating to the cultural aspirations of the ethnic Chinese and resolving their loyalty issue, more time is still needed for the anti-Chinese sentiment to completely disappear in the Indonesian society. In addition, as China’s rapid economic rise has made it an increasingly important political and economic player in Southeast Asia, it may raise concerns in Indonesia that this ascendancy may, in the long run, challenge Jakarta’s long standing aspiration to become the ﬁrst among equals in Southeast Asia. As the country with the largest Muslim population in the world and a key actor in the non-aligned movement, Indonesia expects itself to play a regional as well as international leadership role. In fact, as it was recently elected as a non-permanent member in the United Nations Security Council, Indonesia has made overtures in the UN to play a role in the Palestinian-Israeli conﬂict and to mediate in the North Korean nuclear standoff. It has also dispatched a thousand troops to the United Nations Peacekeeping Operations in Lebanon. However, it is unlikely that the present policy of friendship and cooperation between Indonesia and China would be reversed especially when mutual beneﬁts are anticipated. Furthermore, as Beijing continues to step up its diplomacy to engage Indonesia and the region for stability and prosperity, it should be sufﬁcient to quell sceptics in Indonesia of Chinese dominance of the region in the future.

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See J.A.C Mackie, ed. 1976. The Chinese in Indonesia: Five Essays. Melbourne: Thomas Nelson, Australian Institute of International Affairs, for more details.

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alaysia’s Relations with China: From Mahathir to Badawi LAM Peng Er LIM Tin Seng

Malaysia has recalibrated its foreign policy orientation from Japan to China following China’s phenomenal economic rise and the bursting of Japan’s bubble economy. Its “Look East” policy, devised by former Malaysian Prime Minister Mahathir Mohamad in 1981 to boost productivity and output by emulating Japanese work ethics and labour discipline, has lost its fervour as Malaysia takes advantage of China’s economic rise.

Recalibration of Malaysia’s “Look East” Policy Over the past ﬁve years, China has become Malaysia’s fourth largest trading partner after the US, Singapore and Japan as bilateral trade ballooned from about US$6 billion in 2000 to around US$30 billion in 2006. With China’s accession to the WTO in November 2001 coupled with Malaysia’s recognition of China as a market economy in May 2004 and the ratiﬁcation of China-ASEAN Free Trade Agreement (CAFTA) in 2002, trade between the two countries is poised for stronger growth. In fact, China-Malaysia trade is expected to hit US$50 billion by 2010. Following burgeoning bilateral economic relations, both sides have also stepped up political and social exchanges in recent years. One particular area where Kuala Lumpur will be focusing on is tourism with the launch of the “Visit Malaysia 2007” campaign. Malaysia hopes that total Chinese tourist arrivals in 2007 will surpass the 2004 record of 550,000 especially after it dipped to 420,000 in 2006 following a series of negative incidents involving Chinese tourists in Malaysia in late 2005.

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On the other hand, in the wake of the 1997 Asian ﬁnancial crisis, bilateral trade between Malaysia and Japan had shrunk considerably from US$30 billion in 1996 to US$20 billion in 1998. Although it rebounded to US$30 billion in 2000, trade volume between the two countries from 2001 to 2006 stagnated at an annual average of US$30 billion. Since 1997, Japan has ceased to become Malaysia’s largest trading partner. Furthermore, Malaysia continues to record a large trade deﬁcit in its trade with Japan as a result of Japanese trade protectionism.

Factors to Better China-Malaysia Relations Different approaches by China and Japan in regional cooperation played an important role in Malaysia’s tilt towards China. Japan failed to match China’s Free Trade Agreement (FTA) initiatives given its slow FTA negotiation with ASEAN and its reluctance to open up its agricultural market. On the other hand, since China accepted Malaysia’s 1994 invitation to join ASEAN as a dialogue partner, it has been very active in strengthening and deepening regional cooperation. It has participated in various dialogues with ASEAN ranging from political and economic consultation to scientiﬁc and technology cooperation. For instance, in 1999, the ﬁrst informal ASEAN+1 (China) meeting was held. In 2003, China signed the Treaty of Amity and Cooperation, a key ASEAN security protocol. Beijing also boldly signed the CAFTA in 2002 to allay ASEAN’s fear over its economic rise. This marked the reorientation of Northeast and Southeast Asian economies from the “ﬂying-geese” model of development with Japan as a leading goose to one based on regional integration with China as its manufacturing centre. Malaysia’s top leadership change also led to the shift in its foreign policy. Throughout his tenure as Prime Minister, Mahathir had always been very pro-Japan and ambivalent about the rise of China. This stand was despite Japan’s failure to support his East Asian Economic Group proposal, and China’s intensifying impact on the Malaysian economy. However, Prime Minister Abdullah Badawi, Mahathir’s successor, adopted a different perspective. At the 2005 Asia Paciﬁc Roundtable, Badawi perceived this century as “a contest for economic supremacy

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between the United States, China and India”. Hence, China rather than Japan is Badawi’s major player in the global economy. Indeed, Badawi also distanced himself from Mahathir’s pro-Tokyo doctrine by symbolically paying his ﬁrst state visit as Prime Minister beyond the ASEAN region to China.

Not a Zero Sum Game Although Kuala Lumpur is recalibrating its “Look East” policy from Tokyo to Beijing, it remains careful not to play a zero sum game at the expense of its unique relationship with Japan. First, the Malaysian government still views Japan as an important source of information technology (IT) knowledge and technical training. In fact, when Malaysia signed an Economic Partnership Agreement (EPA) with Japan in 2005, it renewed the “Look East” policy with the “Abdullah-Koizumi Training Programme” which concentrates on developing IT-savvy Malaysians. Second, Malaysia still values Japanese Foreign Direct Investment (FDI). Indeed, after the signing of the Malaysia-Japan EPA in 2005, Japan has become the largest source of FDI in Malaysia in the past two years. In 2005 and 2006, total Japanese FDI in Malaysia was US$1 billion and US$1.2 billion respectively. This is a signiﬁcant development in MalaysiaJapan economic cooperation especially after Japanese FDI plunged from US$869 million in 1997 to just US$88 million in 2002. The Malaysia External Trade Development Corporation expects Japanese FDI to increase further as Japanese companies continue to diversify and expand their operations in Malaysia’s electrical and electronic sector amid growing conﬁdence in the Malaysian economy. Finally, Badawi cannot publicly adopt a China-centred “Look East” policy despite closer Sino-Malaysian economic ties due to ethnic Malay dominance in domestic politics. Although Malaysia has sought to foster ethnic harmony since the violent May 13 ethnic clashes, the country’s political, economic, cultural and social policies are still structured along ethnic lines with the Malays enjoying privileges as Bumiputra (sons of the soil). Indeed, it is difﬁcult for Badawi to urge Malaysian Malays to embrace a “Look East” policy towards Beijing beyond economics.

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However, Malaysia is expected to continue expanding its ties with China in the coming years as it wishes to ride on China’s economic growth. To Badawi, China has no hegemonic ambitions and it has “never been openly declared [by the region] as a military threat or potential threat”. Badawi also called China “a friend in the neighbourhood” and labelled Western suspicions of the rise of China as both “unnecessary” and “destabilising” for the development of East Asian regionalism. To him, the present and future China is and will be “a force for peace and stability”. While not fearing that it will become a satellite of any great Asian powers, Malaysia will continue to recalibrate the balance between Japan and China for its own interests.

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C

hina’s Special Relationship with Singapore John WONG TENG Siow Song

In the ﬁrst two decades after its establishment in 1949, the Cold War, ideology and geopolitics framed the People’s Republic of China’s relations with non-communist Southeast Asia. Maoist China then was supporting the Malayan Communist Party while the Singapore government was staunchly anti-communist. It was not until the 1970s that individual Southeast Asian countries improved their relations with China after the latter winded down its support for communist insurgencies in the region. Singapore established formal diplomatic ties with Beijing in October 1990 only after Jakarta did so to avoid giving the wrong impression to the region that Singapore is a “Third China”. With the demise of the revolutionary ideology in China’s foreign policy coupled with the phenomenal rise of the Chinese economy, economics has emerged as a key factor in ChinaSingapore relations.

Trade Relations with China Pragmatism — the separation of trade and politics — guided Singapore’s relations with China during the Cold War era. Indeed, from 1950 to 1990, China-Singapore trade persisted despite the lack of ofﬁcial diplomatic ties. In 1981, three years after China adopted the open-door policy, ChinaSingapore trade was only about US$170 million. Thereafter, it went on an upward climb to US$2.8 billion in 1990 to reach US$26.7 billion in 2004 and US$33.1 billion in 2005, a 195-fold increase in value over 1981. In 2006, total bilateral trade was US$56 billion, a 330-fold increase in value over

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1981. See Figure 1. Singapore exports mostly semi-conductors and hightech products to China while importing mostly consumer manufactures, foodstuff etc from China. Singapore’s investments in China mainly centre on services, manufacturing and other labour intensive industries whereas China’s investments in Singapore centre mainly on the setting up of ofﬁces, thus generating employment for the local people. Singapore’s relations with China are therefore largely economic based.

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The ﬁrst signiﬁcant bilateral economic cooperation between Singapore and China was the Suzhou Industrial Park (SIP) project. Launched in 1994, the SIP is now commonly acknowledged as a resounding success, a Singapore model of management for other industrial parks in China despite the problems encountered during the early days. The second milestone was the inaugural meeting of the Joint Council for Bilateral Co-operation (JCBC) in 2004. The JCBC is the highest level forum between the two sides aimed at deepening bilateral co-operation. In recent years, China has become one of the top trade partners of most of its neighbouring economies, including Singapore. China’s trade deﬁcits with its neighbours also mean that China has opened up its vast domestic market for their exports (both manufactured products and primary commodities), thereby operating as an engine for their economic growth. In the past, many ASEAN countries were apprehensive of a rising China because of its potential competitive pressure on ASEAN’s

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manufactured exports and the zero-sum effect on ASEAN’s FDI (i.e. more FDI to China means less to ASEAN). Now with China and other East Asian economies becoming increasingly integrated into many common international supply chains, the rise of China has suddenly turned into a win-win situation for the East Asian region, including Singapore. See Figure 2. A recent study by the United Nations Conference for Trade and Development (UNCTAD) conﬁrmed that China’s growth has not adversely affected FDI inﬂow to other East Asian economies. Instead it appears to be “crowding in rather than crowding out FDI in the region”. See Figure 3. Figure 3. China-Singapore Economic Growth (1981–2006) ��

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Political Relations with China Singapore ofﬁcially adheres to the one-China policy — that Taiwan is a part of China. Nevertheless, Singapore also maintains good informal ties with Taipei as evidenced by the Singapore Armed Forces’ training in Taiwan since the 1970s — an arrangement tacitly accepted by Beijing. In August 2004, China protested strongly when former Deputy Prime Minister Lee Hsien Loong visited Taiwan in his private capacity. But Singapore was able to diplomatically justify the visit and avoided a bilateral long term spat with China and earned the respect of both China and Taiwan. Since then, China-Singapore relations have deepened and broadened. Former Prime Minister (presently Minister Mentor) Lee Kuan Yew ﬁrst visited China in 1976 and the late paramount leader Deng Xiaoping visited Singapore in 1978. Subsequently, leaders of both countries have met and exchanged views regularly on issues of common interest. Geopolitically, China and Singapore forged a united front (along with the United States, Japan and the ASEAN states) against Vietnam’s occupation of Cambodia and the Soviet Union’s (Vietnam’s superpower ally) invasion of Afghanistan. In the aftermath of the 1989 Tiananmen incident, Singapore did not ostracise China like some Western countries did. Instead, it chose to establish ofﬁcial relations with Beijing the following year. Singapore also tried to promote stability in the Taiwan Strait by offering itself as the neutral venue for the ﬁrst cross-strait talks (Wang-Koo Talks) in 1993. However, it is probably difﬁcult for Singapore to play a “bridging role” in the future especially if Taiwan’s ruling party, Democratic Progressive Party, succeeds in capturing the Taiwanese presidency and refuses to accept the “One China Principle”, a precondition before Beijing is willing to even hold informal talks with Taipei. With Singapore’s support in ASEAN, China has been invited as a guest of the ASEAN Ministerial Meeting (AMM) since 1991. More importantly, China has become a consultative partner of the then newly established ASEAN Regional Forum (ARF) from 1994. China too became ASEAN’s dialogue partner in the Post Ministerial Conference in 1996 and a participant at ASEAN-China Senior Ofﬁcials’ Meetings and ASEAN informal summits from 1997. Thenceforth, interactions between ASEAN

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and China at all other levels, formal or informal, increased all under the active promotion and push from Singapore. While Singapore is seeking good relations with China, it is also pragmatically maintaining close ties with other great powers including the US and Japan. Unlike certain opinions within the US which view the rise of China as a long-term potential threat to regional stability, Singapore perceives China’s economic growth as a great opportunity for the region.

Treaties and Agreements At the ASEAN-China Summit in November 2001, former Chinese Premier Zhu Rongji proposed the creation of a China-ASEAN Free Trade Agreement (CAFTA) by 2010. On 1 January 2004, China also initiated the Early Harvest Programme with some ASEAN countries, cutting tariffs on 500 items of mainly agricultural products. Singapore has been instrumental in pushing for the CAFTA. The formation of the ASEAN-China FTA signiﬁes the creation of an economic region of 1.7 billion consumers with a combined GDP of US$2 trillion. Singapore is in negotiations with China for a bilateral FTA. Of equal importance, Premier Wen at the Summit also signed the Treaty of Amity and Cooperation (TAC) with ASEAN to express China’s goals of establishing a strategic partnership with ASEAN for “peace and prosperity”. China is the ﬁrst country to conclude this historic treaty, signalling to ASEAN countries and to Singapore, China’s acceptance of ASEAN’s norms and values, and her willingness to play by the rules as a responsible regional and global leader.

Continuing Good Relations China-Singapore relations have ﬂourished since the end of the Cold War era. Beijing ﬁnds Singapore a useful link to interact politically and economically with other ASEAN countries while Singapore seeks to take advantage of the economic rise of China. Singapore also appreciated the friendship that China displayed during the Asian ﬁnancial crisis ten years ago, when China resisted devaluating the RMB. Singapore looks forward

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to many more good years of trade and development, peace and mutual beneﬁt with China. Indeed, China-Singapore ties are multi-faceted and mutually beneﬁcial. Notwithstanding the US and Japanese’s suspicions of a rising China, Singapore will continue to maintain strong relations with China of its own accord.

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E

U and China: Heading Towards Bumpy Relations Jean-Pierre CABESTAN

Burgeoning relations between the European Union (EU) and China have often been perceived as a new “strategic partnership”, an “axis” or even a new “alliance” that creates a “new strategic triangle” between the United States, the EU and China, and weakens America’s inﬂuence in the world. China and some European nations, such as France, may prefer this outcome but the reality is somewhat different.

The Emergence of EU-China Relations: Towards a “Strategic Partnership”? The strengthening of EU-China relations since the end of the Cold War has been based on a much older mutual recognition of the importance of this relationship. The EU’s mainstream view is that China is important and should be a priority in its common foreign and security policy. Though bilateral problems are acknowledged, differences between the EU and China should not, therefore, hinder the development of EU-China relations. Engaging China is perceived as the best strategy for integrating it into the world community and helping it succeed in its economic reform and development and thus in its legal and political modernisation. As a result, since 2003, the EU has decided to build a global strategic partnership with China. However, the new agenda for EU-China relations released by the EU Commission on 24 October 2006 underscore growing frictions. Although the EU approach remains one of engagement, in Brussels’ view, a closer strategic partnership with China means an increase in mutual responsibilities.

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China’s European Policy In October 2003, the Chinese government made public an unprecedented document, “China’s EU Policy”, which enunciated its relations with the EU as crucial. This document gloriﬁed EU’s power and inﬂuence in the world as if it is a real political and military pole and stressed the converging views between China and the EU, the lack of conﬂict of interest and their supposedly shared willingness to ﬁght for a more democratic and multipolar world. The document also listed a series of demands on Taiwan, Tibet, human rights and the lifting of the arms embargo. The failure of the “pro embargo-lifting camp” in Europe, following Beijing’s promulgation of the Anti-Secession Law in March 2005, has led China to reassess its European policy. Recognising the powerful impediments to the emergence of a strategic triangle between the US, the EU and China, Beijing has toned down its multipolar credo in preference for a more ecumenical concept of multilateralism.

EU-China: A Not So Easy “Working Relationship” The EU has clearly become an independent political actor and economic powerhouse whose interests do not necessarily coincide with those of the US. China therefore has good reasons to draw this large entity closer to itself and further away from the US on as many issues as possible to increase its room for manoeuvre vis-à-vis the latter. But this strategy faces two major obstacles: 1) the EU is an atypical and complex international actor (27 member-states since January 2007) who can only convince member-states to retain as much foreign policy initiative as possible at the national level; 2) The alliance that most EU member-states have maintained with the US through NATO (North Atlantic Treaty Organisation) serves to constrain EU foreign and security policy, and not only its policy towards China. This in turn affects the European debate on the arms embargo. Besides these two major obstacles, the EU-China “working relationship” has to confront difﬁculties which are, to a large extent, similar to the ones faced by the US.

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The Lifting of the Arms Embargo In 2003, France pushed for the lifting of the arms embargo imposed on China after Tiananmen. However, strong opposition within the EU and from the US on human rights and security grounds, as well as China’s adoption of an “anti-secession law” in 2005, killed this plan. Though the EU remains committed to an eventual lifting of this embargo, no decision will be made soon.

The Taiwan Issue Taiwan presents another obstacle to China and the EU. The EU’s policy on Taiwan is very similar to that of the US: while maintaining “a one-China policy”, the EU still advocates a “peaceful resolution” to the differences between Beijing and Taipei, and does not support Beijing’s peaceful uniﬁcation policy as such. In other words, like the US, the EU would not welcome a solution that would not be acceptable to the Taiwanese. Some governments in Europe have been tempted to close the gap between the EU’s and China’s stance on Taiwan. However, the EU cannot ignore the growing arms race and military tension in the Taiwan Strait. The EU also acknowledges that Beijing’s refusal to hold political talks with Taipei is unhelpful and that negotiations should be initiated in one way or another to alleviate tension and possibly establish conﬁdence-building measures across the Strait. The EU also favours the rapid opening of direct air and sea links between the two sides.

Human Rights On human rights, some EU governments (e.g. the Nordic countries and the Netherlands) are keener than others to push for genuine changes in the human rights situation in China. At the same time, however, the EU has embarked since 1997 on a human rights policy towards China that is non-confrontational, cooperative and based on ofﬁcial dialogues. The EU also has insisted on or stressed the importance of cooperation programmes on good governance, judicial reform and the training of Chinese civil servants, lawyers and judges in Europe. Questioned by some segments

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of public opinion, this policy has become since 2006 more focussed and result-oriented.

Trade Issues On trade issues, there are also obvious convergences between EU and US interests, with both suffering a widening deﬁcit with China. Because WTO commitments were approved by the EU as a political and economic entity, most trade difﬁculties were negotiated at the Union level between Brussels and Beijing (textiles, shoes, etc.). The EU’s trade deﬁcit with China (€106.4 billion or US$127 billion in 2005 and €130 billion or US$170 billion in 2006) is today comparable to the US deﬁcit with China (US$202 billion in 2005 and US$232 billion in 2006). It has fed an increasing number of EU complaints about China’s lack of compliance with WTO commitments, its cheap currency, its inadequate protection of intellectual property rights as well as protectionist tendencies within Europe. Echoing the concern of many EU industries, the European Commission continues to resist giving China a market economy status, which makes anti-dumping procedures easier. More globally, the question at stake is China’s opening of its economy and market to more imports and investments in sectors that it still considers as strategic ones.

Other Issues: The Impact of China’s Rise on World Affairs There are other newer problems between the EU and China, all of which have to do with China’s rising inﬂuence in world affairs as a result of its sheer economic development and growing need for energy and agricultural products from outside markets. In the last decade or so, China has put a priority on securing access to major oil and gas producing countries. This new security policy priority has made China hesitant to join the rest of the international community, and in particular the EU, which wants to exert pressure on countries that commit major infringements to human rights, as in the case of Sudan or Zimbabwe, or to prevent a country, like Iran, from acquiring the capability to manufacture nuclear weapons. China’s increasing arms exports to Africa have also become an issue for the EU.

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This list of problems is far from comprehensive but it helps to put into perspective the maturing “strategic partnership” that both the EU and China have wished to build in the last decade or so.

Uncertainties Ahead Today, the relations between the EU and China have become a key component in international relations. It is a dense and growing partnership. However, its strategic dimension should not be overestimated because, despite genuine differences on a number of international issues, the EU and the US are pursuing identical objectives regarding China. Ways and means may differ, mainly because, unlike the US, the EU is not a “hard power” and can only rely on its “soft power”, its institutional toolbox and role models in particular, to inﬂuence other nations. But the objectives regarding China approved and shared by the EU have much in common with those of the US: integrate this country into the world community, e.g. in terms of non-proliferation, human rights and the building of peace. This means that from a strategic viewpoint, there is no triangle between the EU, the US and China and there is little chance of seeing one take shape.

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C

hina’s Growing Inﬂuence in Africa WANG Zhengxu LIM Tin Seng

China has renewed its interest in Africa recently. In the last few years, Hu Jintao, Wen Jiaobao and other top Chinese leaders have been touring the continent, and African leaders have been competing with one another for a chance to visit Beijing. All signs are showing that China is stepping up its involvement in Africa. Unlike China’s African ventures in the 1960s and 1970s, which were based more on ideological pledges to enhance China’s relationship with Third World countries, this round China is more interested in trade and economic cooperation. Africa is becoming an important source for China’s energy and natural resources needs, and a market for China’s industrial products. Furthermore, to ensure long-term relationships and mutual beneﬁts, China appears ready to assist African countries in developing their economy. Hence in the years ahead, China’s presence and inﬂuence in Africa is likely to rise.

Burgeoning Relation Bilateral trade almost quadrupled from US$10.6 billion in 2000 to US$50 billion in 2006, with Africa registering a trade surplus of more than US$1 billion in 2005. Trade value is anticipated to rise to US$100 billion by 2010. China looks at the continent as a major supplier of natural resources, particularly oil, while African governments found China’s no stringsattached aid programmes and investments more appealing than aid from Western countries. Burgeoning China-Africa bilateral ties can certainly help to develop the continent’s economy. Real GDP in Africa grew at an average annual rate of 4.2 percent from 2001 to 2004, compared with 3.3 percent from 1997

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to 2000. Moreover, sub-Saharan Africa’s real GDP growth rate reached a record 5.9 percent in 2005. China’s contribution to this economic boom is believed to be signiﬁcant. Meanwhile, China is willing to extend important aid packages to African countries. In November 2006, Beijing rolled out a multi-billion dollar aid and loan package to Africa during the China-Africa Summit in Beijing. It featured a loan worth US$5 billion, a US$5 billion investment fund, debt relief and a pledge to double China’s assistance by 2009. Beyond economics, China and Africa are stepping up political exchanges. Apart from the tri-annual Forum of China-Africa Cooperation, which was established in 2000, Chinese leaders are also visiting the African continent more often in recent years to foster closer political relations. For example, President Hu Jintao made an eight-nation trip to Africa from 30 January to 10 February 2007. It was less than a year since his last visit to the continent, and his third in four years.

African Reactions African leaders and some sections of the African society welcome the burgeoning China-Africa relations. President Thabo Mbeki of South Africa described China’s presence in the continent as “what Africans themselves wanted”, while Angolan President Jose Eduardo viewed Chinese loans and investment as “mutually constructive”, “without any precondition”, and are “responding to the development needs of African nations”. N’gandu Magande, Zambia’s ﬁnance minister, was equally encouraged by Beijing’s presence. He said that African nations will “have to look to the East, where the sun rises, and not to the West”. African capitals also showed great interest in following China’s example in economic development. Impressed by China’s double-digit annual growth and its steady alleviation of its poverty problem, African leaders wanted to adopt the Chinese economic model especially to solve their poverty problem. The Chinese model was also singled out by the United Nations (UN) for Africa’s emulation. Special advisor to former UN Secretary General Koﬁ Annan, Jeffrey Sachs, said that Chinese technology, investment and “its recent historical experience” can help Africa solve its crisis in poverty.

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As for now, it seems Beijing’s ventures in Africa have generally been well accepted by most African countries. In its latest African policy White Paper, released in January 2006, Beijing pledged to continue to build a long-term Sino-African “win-win” relationship based on mutual respect and understanding. Whether such a relationship can be achieved in the long run will depend on China’s ability to manage its activities and diplomacy in Africa, and more generally, its eventual rise on the globe.

Not Without Challenges Nevertheless, China’s African venture faces many challenges. Most importantly, its growing inﬂuence in Africa invited criticism from the West. In October 2006, World Bank President Paul Wolfowitz accused China of “not respecting the Equator Principles” when providing loans to Africa. He labelled the loans as “bad borrowing” and stated that it will only fuel corruption, deepen African debt problems and encourage more human rights abuses. Similar accusations were raised by other Western groups, particularly human rights activists. The West also blamed China for fuelling the violence in some African countries such as Sudan, Ethiopia, Eritrea and Zimbabwe by selling weapons and providing ﬁnancial aid to “pariah” regimes. Economically, the domination of Chinese goods such as textiles and household utensils in the African market, coupled with China’s growing appetite for the continent’s commodity market, has led some to perceive China’s presence in Africa as a new form of colonialism or “neo-colonialism”. Such Western criticisms betray deeper problems China’s involvement in Africa is causing to global geopolitics. As the world’s sole superpower, the United States naturally sees threats to its global interests in China’s increasing inﬂuence in Africa. Japan, with a strong need for natural resources and market for its products in Africa, also perceives formidable competition in China’s increasing role in Africa. Lastly, as the US and European countries have an interest in promoting democracy and human rights around the world, China’s apolitical approach in Africa certainly causes concerns. The instability in Africa is another challenge for China. Since the end of the Cold War, African countries especially those in the Sub-Saharan region

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have often faced tumultuous times. Prolonged civil wars, genocides and oppressive xenophobic governments are some of the common problems that these countries are facing. In fact, one of China’s top oil exporters in Africa, Sudan, is still plagued by civil wars. Consequently, this raises the question of whether or not Beijing’s investment or development in Africa could be sustained. In addition, the reliability of African governments poses another challenge for Beijing. Some of them are still ambivalent about the One-China policy while others may bend on Western pressure to take stances against China. More importantly, many African governments are unpopular and undemocratic authoritarian regimes, hence domestic pressure may rise against the pro-China policy of these governments. For instance, during the 2006 Zambian presidential election, one candidate promised to “chase out” Chinese investors if he were to be elected. In South Africa and Zambia, protests against increasing Chinese imports are on the rise and are pressuring the government to take a more cautious stance against China. Beijing will need to manage these issues carefully if it wants to maintain the momentum of its growing inﬂuence in Africa. South Africa’s Deputy Foreign Minister Aziz Pahad openly declared that his government “reject the (neo-colonialism) argument” and “does not believe that China is coming to Africa as a new colonial power”. China also stressed that peace and stability is essential to economic development for African countries at the China-Africa Summit in November 2006. But it still maintained that it was best for the African countries to solve the conﬂicts by themselves. To support African countries in their efforts to build unity and integration, Beijing announced that it will build a conference centre for the African Union to encourage more dialogues among African countries. Speaking at the University of Pretoria at South Africa in February 2007, President Hu stated that China and Africa are important “forces of peace and development”. He said that Beijing will continue to “forge friendships, maintain close political dialogue, and increase mutual understanding and trust with Africa”. Hu also added that China will step up its UN peacekeeping operations in Africa and “fully implement” the pledges made at the China-Africa Summit in November 2006.

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Nonetheless, the geopolitical complications created by China’s growing inﬂuence in Africa will continue to invite more criticism from the West. China will have to manage these challenges for a long time to come. But there are also areas of cooperation in which China can engage the West in Africa. The most notable is in United Nations’ (UN) peacekeeping operations. China is sending troops for the UN peacekeeping tasks. Such actions certainly contribute to the US’ plans of remaking the political landscapes in Africa, and hence can be most fruitful in changing Western view of China’s role in Africa.

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I

ndex

Central Discipline Inspection Commission (CDIC) 40 Central Military Commission (CMC) 57, 62 Chen Shui-bian 72, 75 China-ASEAN Free Trade Agreement (CAFTA) 239, 241 China-ASEAN relations 212 China-US relationship 214 China threat 210 Choshu 228 civil-military relations 57 civil servants 44–46 civil society 71 coal 146–149 colonial rule 70 Communist Youth League 13 competitiveness 141 cooperative medical scheme 182 corporate governance 118, 119, 126, 127 corporatisation 124–126 corruption 38–43 crises of governance 3 cultural development 189, 191–193 cultural industry 189, 191, 192 cultural institutions 190 current account 97, 98, 100, 101

11th Five-Year Programme 96, 108, 109 17th Party Congress 77, 78, 80

A Abdullah Badawi 242 Abdurrahman Wahid 237 Abe Shintaro 227 Abe Shinzo 227, 230 African policy White Paper 258 agriculture 160–165, 167 Annette Lu 74, 75 arms embargo 252, 253 auto 128–133

B balanced development 158, 159 Bingdian 27, 28 Bumiputra 243 bureaucracy 45, 46

C capital account 97 capital controls 99 central-local relations 48 central-local relationship 52 Centrally-Administrated Enterprises (CAEs) 125

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D

G

deep water port 139–144 democracy 30–32, 37 Democratic Progressive Party (DPP) 72 democrats 70, 71 Department of Propaganda (DOP) 26

General Administration of Press and Publication (GAPP) 26 Gini coefﬁcient of income distribution 168 good-neighbour policy 233 good governance 32, 33 good neighbour 212 governance 38, 42, 43 governing capacity 45, 47 green GDP 95, 186 growth 128, 129

E East China Sea 223 economics dominated ChinaSingapore relations 246 economic growth 48, 153–159 educated unemployment 195, 197 efﬁciency 104, 105 elections 23 electricity 146, 148 elite politics 11, 15 energy 145–150 energy and resource intensive growth 110 enrolment 194, 197 environment 149 environmental crisis 188 European Union 251 EU Commission 251

F factions 12 foreign investment 120 Forum of China-Africa Cooperation 257 France 251, 253

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H harmonious society 7, 78, 79 harmonious world 209, 210, 216, 217 higher education 194–197 Hong Kong 67–71 household responsibility system 106 Hu-Wen New Deal 16 hukou 174–178 Hu Jintao 6, 256, 257

I ideological 20, 22, 24 ideological change 77, 78, 80 income disparity 109, 111 indicative planning 109, 111 informationisation 58 informatisation 62–66 innovation capability 115, 116 institutionalisation 11, 17 institutional reforms 38

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international balance 97 Iran 222 Iraq 218, 219, 221

J Japan 241–244 Japan’s Self-Defense Agency 225 Jiao Guobiao 27

K Kanagawa 228 Kim Jong-Il 233 Koizumi Junichiro 223, 226–228 Kuomintang (KMT) 72

L “Look East” policy 241, 243 labour market 175, 177 labour productivity 105–107 Law on Civil Servants 44, 54 leadership succession 17, 18 Liberal Democratic Party’s (LDP) 227 local identity movement 76 local innovations 135 logistics 140, 142, 144

M Macau 67–71 Mahathir Mohamad 241 market-oriented economy 53 Ma Ying-jeou 74, 75 mechanisation 58, 62–64, 66 middle class 198–201 middle income earners 198, 200

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migrant workers 175–178 migration 174, 175

N Nanxun 83 National Audit Ofﬁce (NAO) 42 NATO 252 natural gas 147 neo-colonialism 258, 259 network-centric 63 Non-governmental Organisations (NGOs) 23 non-performing loans 118 normal state 225 North Korea 227, 228, 231 North Korean nuclear crisis 234 North Korean nuclear issue 219

O oil 146, 150 One Country, Two Systems 67 organisational 20 over-investments 136

P Party supervision 48, 52 Party transformation 77 Paul Wolfowitz 258 peaceful development 238 peaceful rise 209, 210, 216, 217 peasant 160, 161 People’s Liberation Army (PLA) 57, 62 people in poverty 169 platform-centric 63

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political participation 199, 201 political reform 10, 30, 31 pollution 184–188 poverty reduction 155 princelings 14 privatisation 125, 127 productivity growth 103–107 Provincial Party Commission of Discipline Inspection (PCDI) 49 public assistance 179–183 Pyongyang 233–235

Q Qinghua Clique 12, 15

R R&D 105, 107, 113–116 recentralisation 48 regional development programmes 172 regulations 118 resources 256, 258 responsible big power 210 responsible stakeholder 220 revolution in military affairs (RMA) 58, 60–62 risk management 118, 119, 121 rule of law 22, 32–37, 53, 54, 56 rule of man 56 rural development 171 rural population 161, 162 S san-nong problem 160, 163, 166 scapegoat politics 240

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science and technology (S&T) system 113 scientiﬁc development 7, 78, 79 Seoul 233, 234 Shanghai Gang 12, 13, 15 share holding banks 120 shipping hub 139–141 shiye danwei 44, 46 Singapore-Taiwan 248 Singapore-US 249 Six-Party Talks 219, 235 social development 153, 155, 156, 159 social harmony 200 social inequality 157 social insurance 179–181, 183 social protection 179, 181, 183 social safety net 179, 180, 182, 183 social security 176–178 State-owned Assets Supervision and Administration Commission of the State Council (SASAC) 125 State Administration of Radio, Film and Television (SARFT) 26 state administrative stafﬁng (bianzhi) 44 State Environmental Protection Administration (SEPA) 184 succession 79 Suharto 237, 239, 240 Sunshine policy 234 sustainability 95 sustainable development 108, 111

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T

V

technocrats 18 technological development 116 territorial competition 134–136 TEUs 139–141, 143 Third Party Plenum 83 trade expansion 108–111 transformation 20, 21 tuanpai 18 twin surpluses 97–99, 102

village 160, 162

U uneven development 134 United States 218, 219, 221, 222 university cities 196 urban-rural gaps 169 urbanisation 134, 135

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W Wen Jiabao 6 World Trade Organisation (WTO) 53, 128 Y Yamaguchi 228 Yasukuni Shrine 223, 226, 230, 231 Z Zhang Yihe 28

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