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Reachingfor a

renaissanceA special report on China and its region

March 31st 2007

Zhong Biao

So far the world has come to China, but now a rising China isbeginning to reach out to the world, starting with Asia, says DominicZiegler. Is that a good thing?

think of it as a global one. Even if commer-cial and diplomatic tentacles stretchincreasingly round the world, the mainsite of China’s power, for decades to come,will be in its Asian backyard.

Go back ten years and Chinese o�cialsbristled at the notion of a rising power.They had surviving reserves of insecurityand cherished a historical sense of victim-hood. After a long twilight, Deng, the para-mount leader, had in February 1997 goneto meet Marx, leaving the Chinese Com-munist Party with unanswered questionsabout the stability of the �third-genera-tion� succession, led by President Jiang Ze-min. China was to get Hong Kong back inJuly 1997, yet even as one small territorywas coming back, Taiwan, the great un�n-ished business of China’s civil war, threat-ened to drift away in the direction of inde-pendence. China’s bullying attempts tostop the drift�it had lobbed missiles intothe seas around the island�had met with ashow of American force when PresidentBill Clinton dispatched two aircraft-carriergroups. Hawkish Western circles were de-bating how best to �contain� China.

In this atmosphere China’s rulingestablishment�in many areas narrow,prickly and distrustful of the outsideworld�played down China’s power. Atthe time an assistant foreign minister de-

Smile diplomacyWorking magic along China’s periphery. Page 4

History warsWhose stele is it? Page 5

The export juggernautGood for China, but good for its neighbourstoo. Page 6

Grim talesThe more growth, the more damage to theenvironment. Page 8

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

Here comes troubleChina’s little brother is a big headache. Page 11

Heavenly dynastyAs long as China is not satis�ed at home, itcannot be satis�ed in the world. Page 13

The Economist March 31st 2007 A special report on China and its region 1

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Reaching for a renaissance

THE China story since Deng Xiaopingopened the country’s doors three de-

cades ago has by and large been one of dis-covery by the outside world. The discov-ery of cheap land and labour drew in morethan $500 billion of foreign money(mainly from Asia) that today drivesChina’s export juggernaut; now foreign�rms are crawling over China’s domesticmarket, hard to crack but perhaps lucrativein places. Rather newer is the cultural dis-covery by the West and by the richer partsof Asia of a certain �China chic�: the lush,epic cinematography of Zhang Yimou; thehyper-hip nightlife of a reborn Shanghai;and the Western infatuation with modernChinese art, whose prices now leave a cyn-ical smile on many a painter’s face.

The world coming to China: the apogeewill come when it hosts the Olympics nextyear in Beijing, a capital now dotted withsignature buildings by the most fashion-able architects rushing to get �nished intime�from the Herzog & de Meuron sta-dium resembling a bird’s nest to a tita-nium-and-glass opera house (the world’slargest, naturally) by Paul Andreu.

But a more potent story that is only juststarting to be articulated is that China is go-ing out to the world. Indeed, China is ris-ing�some say has already risen�to be-come the newest great power. Do not yet

Also in this section

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A list of sources is at

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A country brie�ng on China is at

AcknowledgmentsThe author wants to thank all those who gave generously oftheir time and expertise in the preparation of this report.In addition to those named in the text, they include NishaAgrawal, Bu Ping, Elizabeth Evans, Graham Fletcher, HakSarom, Him Sarann, Bert Hofman, Hu Sheng-cheng, HuZhengyue, Jean-François Huchet, Koichi Kato, Liu Jin-song, Lo Chih-cheng, Masayuki Masuda, Morio Matsumoto,Pratap Bhanu Mehta, Satoshi Morimoto, Joseph Musso-meli, C.V. Ranganathan, Vaughn Rixon, Samdhong Lob-sang Tenzin, Shen Jiru, Noriyuki Shikata, Sun Shihai,Tomohiko Taniguchi, Tempa Tsering, Tenzin Taklha, Thub-ten Samphel, Tung Chen-yuan, Tim Wainwright, JimWalker, Joseph Wu Jaushieh, Xue Jun, Mitoji Yabunaka,Yue Deming and Zhai Kun.

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2 A special report on China and its region The Economist March 31st 2007

2 livered a stinging lecture to your corre-spondent. The Economist, he said, was �ex-aggerating China’s economic develop-ment, leading people to conclude that therise of China will inevitably unbalance theregion. Such arguments don’t hold water.China is not any kind of power. It is not atpresent. And it will not be one in future.�

Times change. The favourite reading atthe moment among a younger, more cos-mopolitan generation of Chinese dip-lomats is �Power Shift�, a collection of es-says by mainly American-based academ-ics. Its premise is that the tectonic platesthat have de�ned Asia for the past half-century are moving, and that China is thechief agent of change as it resumes its his-torical role as Asia’s central actor. Gone,largely, are China’s fears of encirclement.�Impossible!� a senior Chinese diplomatlaughs. �China is now far too powerful tobe contained.� One of Deng Xiaoping’s te-nets�that the country should, as a Chinesesaying has it, disguise its ambition andhide its claws�seems to have been buried.

But what kind of power is China be-coming? Some Western hawks �nd it un-settling that this is even being debatedwithin China, but it is better to talk about itthan not.

Only once a decade or so does a pieceof television programming break throughthe variety shows and the propaganda tocapture China’s attention. A hugely popu-lar 12-part series on China Central Televi-sion has just done so, showing how ninecountries rose to prominence, beginningwith Portugal in the 15th century and end-ing with the United States in the 20th. Theconclusion, as be�ts state television, de-livers an explicit political message, but onethat may surprise outsiders. In �ndingplenty of lessons to learn from, the seriesattaches greater importance to social sta-bility and peaceful foreign relations thanto jingoism and brute military strength.

Indeed, a propos of the television se-ries, the same senior Chinese diplomatmentioned earlier argued energeticallythat paci�st Japan’s post-war rise was amodel of good-neighbourliness thatChina itself could usefully emulate. That isintriguing. Much of the present bad bloodbetween China and Japan has to do withChina’s constant harping on Japan’s brutaldeeds in the �rst half of the 20th centurywhile glossing over its positive regionalin�uence in the second half.

In a forthcoming book about China,David Lampton of the School of AdvancedInternational Studies at Johns HopkinsUniversity argues that nations de�ne and

achieve their goals using three means: co-ercion, material inducement or intellec-tual motivation. Put more bluntly, thatmeans guns, money and ideas. HowChina blends the three, and how the rest ofthe world perceives the process, will morethan anything shape the future course ofAsia and beyond.

Velvet glove or mailed �st?America, more than most countries, seesChinese power as coercive. In late Febru-ary Vice-President Dick Cheney on a visitto Australia became the most senior ad-ministration o�cial to express grave con-cern about China’s military build-up. Themilitary budget has been growing at dou-ble-digit rates for years, with an 18% riseplanned for this year. The People’s Libera-tion Army is coy in the extreme about itscapabilities and intentions, but in Januarya missile had been sent into space to de-stroy an old weather satellite. China’ s mil-itary policies, Mr Cheney said, were atodds with the country’s stated peacefulaims�suggesting perhaps that he did notreally believe in those aims.

For now, though, it is clear that Presi-dent Hu Jintao and the rest of the Chinese�fourth-generation� leadership are seek-ing to soothe neighbours�even Tai-wan�by emphasising money and ideasover guns. As the next article will explain,this policy has had a transformational ef-fect on China’s relations in much of Asia,mostly for the better.

Yet suspicions remain. Mr Hu may haveembraced the notion of China’s �peacefulrise�, �rst advanced by Chinese academicsin 2003, yet even the phrase itself is unset-tling. As Lee Kuan Yew, Singapore’s formerprime minister and now its �minister men-tor�, puts it: � ‘Peaceful rise’ is a contradic-tion in terms. I told China’s leaders that. Isaid: ‘Why not call it a renaissance, a return

to a golden age when poetry, painting,clothes, music and drama �ourished?’ �

China’s economic rise is certainly im-pressive. The economy’s growth�an aver-age of 10% a year since 1990�is not reallymore remarkable than the earlier rise ofother Asian economies, led by Japan, butthere is a di�erence: the huge size ofChina’s population, at 1.3 billion. In 2005China overtook Japan in the volume oftrade it conducts. Depending on how youmeasure size and guess at future growthrates, it may overtake both Germany andJapan within 15 years to become theworld’s second-biggest economy. Mea-sured at purchasing-power parity, China’sshare of the world economy is alreadymuch closer to the rich countries’ (seechart 1). But bear in mind that the averageChinese income remains low. If China ison its way to becoming a superpower, itwill be the world’s poorest one yet.

Opinion polls suggest that the vast ma-jority of Chinese see their rise as nothingthat should trouble others. For many ofthem it merely marks a return to historicalnorms. Angus Maddison, an economichistorian at the University of Groningen,has estimated that between 1600 and theearly 19th century China accounted for be-tween a quarter and a third of global out-put (see chart 2). At that time China’s agri-culture was more advanced than theWest’s, its cities bigger and more literateand its ruling classes more meritocratic.The country had also proved itself capableof long-distance exploration by sea. An-other historian, Niall Ferguson, reckonsthat what went so spectacularly wrong forChina then is more remarkable and wor-thy of investigation than why thingsshould now be going right.

But what is the nature of China’s risingeconomic power now? There is room formisperceptions. Policymakers in Washing-

2A once and future giant

Sources: “The World Economy”

by Angus Maddison; IMF

*At purchasing -power parity†Estimate

China’s share of world GDP*, %

1600 1700 1820 1870 1913 1950 1973 1998 2006†0

10

20

30

40

1Coming up in the world

Source: IMF *At purchasing-power parity †Estimate

Share of world GDP*, % of total

1980 85 90 95 2000 06†0

5

10

15

20

25

30

China

Japan

United States

EU

Rest ofAsia


2 ton, DC, are alarmed by China’s exportstrength and its ballooning trade surplus.China is lambasted for having mercantilistpolicies that arti�cially boost exports, de-press the Chinese currency, restrict im-ports and widen America’s trade and cur-rent-account de�cits.

In several respects that view is wrong.With a trade-to-GDP ratio of around 70%and a sea of foreign investment, China isone of the world’s most open economies.Much of the growth in America’s bilateralde�cit with China re�ects a shift in low-cost manufacturing from other parts ofAsia to the Chinese mainland. CertainlyChina’s currency is undervalued, havingfollowed the dollar down since 2002. Butthat is reinforcing in�ationary pressures,particularly in wages, so China’s advan-tage as always the lowest-cost producercan no longer be taken for granted.

America’s emphasis on exports missesthe point about China’s economic power.That power comes not so much from beinga seller of things but increasingly from be-ing a buyer, an investor and a provider ofaid, in Asia and beyond. One Chinese dip-lomat puts it thus: �Imports: that’s real di-plomacy, because it means you’re attrac-tive to others. It means other countriesneed you, not that you need them.� Thissubtle understanding sets China in starkcontrast to how Japan viewed the worldduring its post-war rise.

With this new kind of power, the econ-omic and geopolitical sides are ever moreintertwined. China’s presence as a com-mercial force is rapidly being felt aroundthe world, through its growing invest-ments overseas and through an appar-ently insatiable hunger for resources tofuel the industrial revolution at home. Theshock troops of this force are there to see inChina’s main airports: planeloads of oil-drillers, pipe-layers and constructionworkers, in company overalls and hardhats, o� to work on oil rigs or build ports,highways or railways in South-East Asia,Africa, Latin America or the Middle East.Chinese workers are also moving intoother countries in less formal ways. In thenorthern birch forests of Mongolia, uno�-cial groups of them are cutting down treesfor chopsticks. In poor northern Laos,thousands of Chinese labourers havecome across from neighbouring Yunnan togrow corn and sugarcane for export backto China; traditional slash-and-burn agri-culture is giving way to polytunnels andlarge-scale market gardening.

This is not the �rst time that mainlandChinese have fanned out to work the

world’s natural riches. In the 19th centuryhundreds of thousands of coolies�inden-tured workers lured by Chinese and West-ern recruiters using a greater or lesser de-gree of deception�toiled in some of theworld’s worst hellholes: the guano depos-its of Peru, the canebrakes of Cuba or thegold mines of South Africa. Now the Chi-nese are back in some of the same parts ofthe world. The di�erence this time is thatChinese capital, usually state-owned,stands behind them.

Trying to charmOne of the advantages of state-led de-velopment is that China can entice coun-tries with packages of corporate invest-ment, cheap loans and other aid goodies.This way China has rapidly acquired inter-ests and in�uence across swathes ofSouth-East Asia, Africa and Central Asia.China’s outward foreign direct investmentmore than quintupled in the �rst half ofthe decade, to $11.3 billion in 2005, andwill have risen sharply since. Once a bigaid recipient, China hosted a summit of 48African leaders in Beijing last November,promising $5.5 billion in aid for Africa. Ac-

cording to a recent report by the Institutefor Public Policy Research in London,China has become Africa’s third-biggesttrading partner after America and France.

China is also increasingly investing inthe rich world. To some Americans, in par-ticular, this is distasteful. In 2005, citing na-tional-security concerns, Congress suc-ceeded in thwarting the $19 billion bid byChina National O�shore Oil Corporation(CNOOC) for Unocal, an American oil ma-jor with reserves in Asia. Competing re-source companies from the West oftenclaim that Chinese companies outbidthem in third markets, using cheap, state-subsidised funds. Yet in growing numbersof countries, rich and poor, the Chinesepresence is welcomed for bringing jobs,cash and infrastructure.

Australia has received more Chinese in-vestment than most Western countries,much of it in mining. It is criticised inAmerica and Europe for cosying up to adictatorship. �We’re also strong on the hu-man-rights front,� an Australian diplomatsays in defence. �But there’s stu� to bedone in the meantime.� When a senior Ca-nadian o�cial is asked what conclusionsChinese resource companies should drawfrom CNOOC’s experience, he replies in-stantly: �Come to Canada.�

China’s rise is a global phenomenon,but the rest of this special report will con-centrate on its relations with Asia. After all,the region is on its doorstep. �If we can’t getrespect in Asia,� says a Chinese policy-maker, �we can’t get on in the world. If wecan’t have a peaceful and prosperous back-yard, then there can’t be any rise of China.�

In vying for in�uence in Asia, Chinahas many competitors. They include India,rising in its idiosyncratic way; Japan, seek-ing a more robust foreign policy in the faceof China’s rise; Russia, a resource giant,even if a diplomatic minnow in Asia; theten countries that make up the Associationof South-East Asian Nations (ASEAN);and�still the top dog even if distracted inthe Middle East�America.

It is in Asia that America risks fallingprey to a �nal misperception. As Mr Lamp-ton points out, just as Americans overstateChina’s export prowess as a source ofeconomic power, so they underestimateChina’s intellectual, cultural and dip-lomatic in�uence. If policymakers viewChina’s power �in substantially coerciveterms when it is actually growing mostrapidly in the economic and intellectualdomains,� he writes, �they will be playingthe wrong game, on the wrong �eld, withthe wrong team.� 7

3A familiar tale...

Source: China’s Bureau of Statistics; UNCTAD

China’s FDI inflows, $bn

1983 90 95 2000 06

0

10

20

30

40

50

60

70

4...and a newer one

Source: UNCTAD

China’s FDI outflows, $bn

1983 90 95 2000 052

0

2

4

6

8

10

12

+

–

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THE Chinese government calls it�pickyour phrase�a �harmonised world� or

a �new security concept�, but Shi Yinhongof the People’s University in Beijing ex-presses it more felicitously: �smile di-plomacy�. Whatever it is called, the calcu-lus behind it is simple, if not usually speltout. Without encouraging peace and pros-perity around China’s long borders therewill be no peace and prosperity at home.And without peaceful development athome the Chinese Communist Party istoast. This calculus has become increas-ingly important over the past decade andmay well apply for decades more yet.

China’s smile diplomacy would havehad fewer chances of working without theeconomic forces of globalisation drawingmuch of East and South-East Asia closer toit (see next article). All the same, the trans-formation is astonishing. Just two decadesago China had no diplomatic relationswith South Korea, Singapore and Indone-sia, among others. On the Korean penin-sula, the government in Seoul eyed Chinawarily for being North Korea’s chiefbacker. In South-East Asia suspicions ofChina ran high, thanks in big part to at-tempts under Mao Zedong to export leftistrevolution and stir up overseas Chinesecommunities against their rulers. As forVietnam, which for much of its historywas a vassal of China, it was still smartingfrom a border war in 1979 launched (withAmerican blessing) to �teach Vietnam alesson� for unseating the genocidal(China-backed) Khmer Rouge regime nextdoor in Cambodia. Towards Japan, Chinaused a sense of victimhood to play uponJapanese war guilt in order to extract moreaid from its rich neighbour.

Relations with the Soviet Union wereonly just starting to thaw after a long fall-ing-out between the two former allies thathad included border skirmishes along theAmur in 1973; at the peak, 1.5m troops wereranged along both sides of the 7,000-kilo-metre (4,400-mile) border. In the Himala-yas, tensions had recently risen again inChina’s border dispute with India whichin 1962 had spawned a high-altitude war.

As well as border disputes on land,China pursued maritime and islandclaims with Japan, and also laid claim to a

Smile diplomacy

Working magic along China’s periphery

great swathe of the South China Seastretching down almost to the coast of Bor-neo. That set it against rival claimants tosome or all of it: Vietnam, Malaysia, thePhilippines and Brunei, as well as Taiwan.As recently as 1995, China alarmed itsneighbours when its armed forces occu-pied one of the larger specks of rock, aptlynamed Mischief Reef, that formed part ofthe Spratly Islands (around which large oildeposits are reckoned to lie). China has oc-cupied the Paracel Islands, disputed withVietnam, since a bloody skirmish in 1974.

Mutual engagementYet now China has applied balm to oldsores, particularly in South-East Asia. Per-haps, as David Shambaugh argues in�Power Shift�, the opening came after theTiananmen Square massacre in 1989,when Asian neighbours (except, partly, Ja-pan) failed to join the rest of the world inostracising China. Instead, though criticalof the regime in Beijing, Singapore’s thenprime minister, Lee Kuan Yew, led a South-East Asian push to engage China.

As Chinese diplomats tell it, the Asian�nancial crisis of 1997-98 was a watershed.Around Asia, currencies and stockmarketswere buckling as foreign and domesticcapital �ed. The crisis threatened to spreadto China. Yet if China devalued, a furtherround of competitive devaluations acrossAsia would redouble the turmoil.

China had every reason not to want adevaluation, which would have imper-illed a dire banking system and might evenhave brought down China’s autocracy.The regime also had the means easily to re-sist one. By standing �rm, then, it was do-ing itself a favour. But that action, and theaid and loans that China o�ered to othercountries, helped ease the crisis. China de-veloped a taste for getting respect.

Ties with South-East Asia have swiftlyevolved since. Indeed, many of the under-standings that have governed relationsamong the ten members of ASEAN�inparticular, non-interference in each other’sa�airs�are dear to China’s heart. In itsdealings with ASEAN, the key events cameearlier this decade. China undertook for-

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PUSHING up through the late-wintersnows on a hill above Manchuria’s Tu-

men river are scatterings of old burialmounds. For centuries these tombs andothers like them attracted little attention.Now they are at the heart of a bitter inter-national tussle that has, for once, unitedNorth and South Korea against China.

The tombs are the work of the Kogu-ryo kingdom (Gaogouli in Chinese) that�ourished between 37BC and 668AD. Atits height, Koguryo territory stretched allthe way from central Manchuria (north-east China) to south of present-day Seoul.At Koguryo’s former capital, near Ji’an inChina’s Jilin province, a magni�cent stelepraises the deeds of a �fth-century king.

For every Korean schoolchild, Kogu-ryo was one of Korea’s three foundingkingdoms. At the heart of the kingdom,Mount Paektu, which today spans theChinese border with North Korea, is con-sidered to be the fount of Korean cultureand myth: indeed, Kim Jong Il’s o�cialbiography insists that the North Koreanleader was born on its slopes.

Even a short stay in South Korea im-presses on the visitor that the matter ofKorea’s bloodlines is not to be messedwith. Yet in 2002 Beijing’s Centre for theStudy of Borderland History and Geogra-phy launched a project that reinforceswhat a growing number of Chinese his-torians have been �scienti�cally� insist-ing, despite sparse archaeologicalevidence: that the Koguryo kingdomshared its lineage and culture with theChinese, and was eventually absorbedinto the Chinese body politic. Koguryo, inshort, was not Korean but Chinese.

South Korean historians have taken tothe streets, demonstrating against Chi-nese ones. South and North Korea tried toblock Chinese attempts to have Koguryomonuments (as well as Mount Paektu)listed by UNESCO as a world heritage site.The South Korean government has chal-lenged the legitimacy of the 1909 Kandoconvention in which imperial Japan,which had just annexed Korea, gaveChina a chunk of Korean Manchuria in re-turn for concessions. This year, at thewinter Asian games in north-east China,South Korean skaters held up signs whichread: �Mount Paektu is our territory.�China wants to hold the 2018 winterOlympic games on its slopes.

In February the South Korean govern-ment said it planned to revise high-schoolbooks to trace Korea’s ancient historyback by 1,000 years more than hitherto.The Kojoson kingdom, the new bookssay, began in 2333BC, deftly outmanoeu-vring China’s claims on the younger Ko-guryo, which covers much of the sameterritory. Never mind the spurious preci-

sion of the date, or the statement that �Ko-joson was established by Tangun,� amythical demi-god.

China’s version of the past has every-thing to do with its present territory andborders. In Japan Focus, an online jour-nal, Yonson Ahn of the University ofLeipzig calls it China’s �territorialisationof history�. But why should it suddenlymatter so much now, in this bleak cornerof the country? For the answer, look toNorth Korea. Should the regime of KimJong Il collapse and the two Koreas beuni�ed, then China’s own 2.2m ethnic Ko-reans might agitate to come into the fold�and other supposedly happy �minoritynationalities�, such as Tibetans and Ui-ghurs, might also get �dgety.

When your correspondent asked hisethnic Korean guide to the tombs whichcountry he loved, the answer was quickand unequivocal: �China, of course! Thatis where I was born.� When asked whichcountry his home town should be in ifthe peninsula were ever to be united, theanswer was equally �rm: Korea.

Whose stele is it?History wars

Koguryo’s bones of contention

mally to settle its territorial disputes withASEAN members not by force but throughcollective mechanisms for con�ict resolu-tion. And it became the �rst non-memberto sign up to ASEAN’s Treaty of Amity andCo-operation, an undertaking never to useforce against its members for any reason.(India, South Korea, Japan and Pakistanhave since also signed.) Thus the risk ofhostilities in the South China Sea, which inthe 1990s was seen as a spark for a broadercon�agration, has greatly receded.

Lastly, China boldly proposed a China-ASEAN free-trade area (FTA), which wasagreed on in 2002 and will be imple-mented in stages (with safeguards forASEAN’s poorer members) up to 2015. Thedeal has done much to reassure South-EastAsia that China’s rise will not come at theexpense of the region’s prosperity.

In the mid-1990s China moved to easetensions with its land neighbours. The�Shanghai Five� grouping with the formerSoviet Union countries that share borders

with China�Russia, Kazakhstan, Kyrgyz-stan and Tajikistan�was formed to resolveremaining border issues, reduce militarytensions and build con�dence. In 2001 thegrouping became the Shanghai Co-opera-tion Organisation (SCO), which Uzbeki-stan also joined.

In South Asia, an unprecedented de-velopment in recent years has been hugeChinese road and rail projects that willeventually link the country’s remote west-ern regions with the Arabian Sea (at the

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2 Pakistani port of Gwadar) and its south-western regions with the Bay of Bengal,via Myanmar. Ever closer strategic (andmilitary) co-operation between China andPakistan, you would expect, might alarmIndia. Yet relations between India andChina have warmed. Annual trade is nowworth $25 billion�still modest, but a bigleap in recent years. India’s nuclear test in1998 angered the Chinese; some Indianpoliticians had suggested that the nucleardeterrent had been developed with Chinain mind. However, since the visit to Beijingin 2003 of India’s then prime minister, AtalBehari Vajpayee, relations have been on amore cordial footing.

There is even some prospect of resolv-ing what is almost China’s last remaining�and massive�border dispute (one withtiny Bhutan also remains). India appearsto have concluded that better relationswith China will act as a constraint onChina’s support for Pakistan, India’s oldfoe. The strengthening of a growing strate-gic partnership between India and the Un-ited States might also further push Chinatowards co-operation with India.

Ties that bindThrough its dealings with neighbours,China has been drawn into a cat’s cradle ofregional and sub-regional co-operation. Ithas shed its deeply held reluctance to getinvolved in multilateral groupings. Indeed,Hu Jintao, the president, Wen Jiabao, theprime minister, and other leaders seem attimes to be doing an interminable round

of summit meetings, including ASEAN

plus one (ie, ASEAN and China), ASEAN

plus three (China, Japan and South Korea)and the Asia-Paci�c Economic Co-opera-tion (APEC, the only trade forum embrac-ing both sides of the Paci�c). On sunnyHainan island, China itself hosts the BoaoForum, which it wants to become an Asianversion of the Davos World Economic Fo-rum. And some policymakers in Beijingeven want to turn the six-party talkshosted by China (with the United States,South Korea, North Korea, Japan and Rus-sia) launched in 2003 to get North Korea todismantle its nuclear weapons into abroader north-east Asian security forum.

Other groupings are gaining heft. Inparticular, the ASEAN Regional Forum,with more than two dozen participants(including the United States and the Euro-pean Union) has become the principalplatform for discussing security issues inthe Asia-Paci�c region. The SCO hasevolved to embrace issues such as drug-smuggling, energy and now economic co-operation in Central Asia. Zhou Li, direc-tor-general of European and Central Asiana�airs at China’s foreign ministry, saysthere is a possibility that India, Mongoliaand others will be invited to join. But �ght-ing what China calls �terrorism, separat-ism and extremism� remains a central pur-pose of the SCO. Ethnic Uighurs fromwestern Xinjiang province have longchafed at Chinese rule, and many have�ed to Central Asian states.

For China, the broader advantages of

engagement are becoming ever more obvi-ous. Relatively stable relations with itsneighbours act as protection against vola-tility in relations with the United States�particularly as that superpower is absentfrom many of the groupings. China’s stockand in�uence is undeniably on the rise. InJanuary, at the second East Asian Summitof 16 Asian nations held in the Philippines,the country’s president, Gloria MacapagalArroyo, declared, without any Orwellianirony: �We are happy to have China as ourbig brother.�

Yet whereas Chinese policymakers seethese growing webs of interdependencyas a way to ease their country’s rise, someneighbours see them also as a constrainton the giant among them. �Despite a wari-ness of China, which has its roots in thepast,� says Rodolfo Severino, a former Phil-ippine foreign minister and secretary-gen-eral of ASEAN, �South-East Asia’s onlychoice has been to engage China. Its rapideconomic advances awe people, who seethis big presence in their midst. Yet this ar-gues for viewing China not with concernbut with a sense of caution. And if you askwhether the process of engagement hashad the e�ect of ‘socialising’ China, the an-swer is certainly yes.�

Smile diplomacy, then, is working, butnot everywhere. Later, this special reportwill look at north-east Asia, where a di-vided Korean peninsula, historical and ter-ritorial tensions between China and Japanand the uncertain future of Taiwan suggestthat the cold war simmers on. 7

WHEN China joined the World TradeOrganisation (WTO) in 2001, many

developing neighbours felt more than atwinge of discomfort. With China alreadyan export juggernaut, they feared that thedismantling of tari� and other barriersthat went with WTO membership wouldmake the country irresistible to manufac-turers, diverting foreign direct investmentthat might otherwise have gone to them.

This appears not to have happened.Certainly, foreign investment in China hasincreased, as have China’s already headyexports, which since 2003 have beengrowing at their fastest pace since the early1990s. In 2004 China overtook Japan to be-

come the world’s third-largest exporter,behind America and Germany.

But foreign investment has grown else-where too. The ten ASEAN countries saw arecord $37 billion of investment in 2005.For some manufacturers, South-East Asia(or India) serves as a hedge against some-thing going wrong in their China opera-tions�be it social unrest, economic pro-blems or a business climate that turnsagainst foreign investment.

But much investment outside China isin fact contingent on the China boom. Sosupercharged has the Chinese exportmachine become that it has sucked in vastquantities of parts and components for �-

nal assembly from other parts of Asia�Thailand, Malaysia, Singapore, the Philip-pines and Indonesia, as well as richer Tai-wan and South Korea. The e�ect of WTO

membership, in other words, has been tobind China more tightly into existing andhighly sophisticated pan-Asian produc-tion networks, a task greatly facilitated bythe internet. Everybody has bene�ted,even rich Japan, which in 2002-03 waspulled out of a decade and a half’s slumpby Chinese demand for top-notch compo-nents and capital goods. South-East Asiahas got a further boost: rich in resources,including rubber, crude oil, palm oil andnatural gas, it looks likely to pro�t from

The export juggernaut

Good for China, but good for its neighbours too

1


2 China’s appetite for raw materials for along time to come.

Trade within East Asia has grown evenfaster than the region’s trade with the restof the world, suggesting deeper specialisa-tion and integration. But China’s impetushas also profoundly altered the course oftrade �ows in Asia. As a paper last year bythe Centre d’Etudes Prospectives et d’In-formations Internationales (CEPII) in Parisdescribes, the China e�ect over the pastdecade or more has been the driving forcebehind a shift in Japan from exporting �n-ished goods to Europe and North Americatowards exporting parts and componentsfor assembly on the mainland. In turn, Ja-pan now imports �nished goods (such aso�ce machines and computers) fromChina where previously they came fromAmerica and Europe.

For South Korea, Taiwan, Hong Kongand Singapore, trade has also turned fromthe rich world towards China. For HongKong, Taiwan and this year probably evenJapan, China is the biggest trading partner.

In China, according to the CEPII paper,the processing and assembly of importedparts and components now accounts formore than half of all exports. China’sgrowing trade surplus, it argues, is ex-plained entirely by this kind of assembly.William Fung, managing director of Li &Fung, a Hong Kong company that leads the�eld in �nding suppliers and managingsupply chains for Western retailers andbrands, uses a talking toy as an example:the plush fabric was made in Korea and thevoice chip in Taiwan, and the �nal assem-bly was done in Shanghai.

Toys are mostly relatively simplethings. But China has recently recordedphenomenal growth in exports of high-tech products too, principally notebookand desktop computers, DVD players, mo-bile phones and the like. Nicholas Lardy ofthe Institute for International Economicsnotes in a new book, �China: the BalanceSheet�, that between 1998 and 2004 Amer-ican imports of Chinese laptops jumpedfrom $5m to $7.7 billion and display unitsfrom $860,000 to $4.9 billion. Some nowask whether China is vaulting up the tech-nology ladder or even threatening Ameri-can national security. These concerns aregrossly overblown.

A recent edition of the China EconomicQuarterly (CEQ) looked at the top exportersamong foreign companies that had set upin China. In 2004 eight of the top ten wereTaiwanese electronics companies�knownas original design manufacturers(ODMs)�to which the world’s top com-

puter brands, such as Dell, Apple and HP,outsource their production and, increas-ingly, much of their design and innova-tion. At the start of this decade less than 5%of these �rms’ laptop production was onthe mainland. Since 2001, when the Tai-wanese government lifted restrictions pre-venting laptop-makers from investing inChina, they have shifted virtually all oftheir production there. Thanks to muchlower labour and land costs, each machinecosts $20-30 less to make.

A surge in high-tech exports (in 2005,telecoms equipment, electronics and com-puters accounted for 43% of China’s ex-ports by value) might look like a leap upthe value chain. Yet assembling many�high-tech� products is not that di�erentfrom making Mr Fung’s talking toy. MrLardy argues that a better label might be�mass-market commodities�: after all, thelaptops are simply assembled from foreigncomponents. As CEQ points out, most ofthe �rms involved are foreign, accountingfor three-�fths of all Chinese exports, four-

�fths of exports assembled from importedparts and components and nearly nine-tenths of the high-tech stu�. China’s ex-port model, then, still consists in big mea-sure of renting out cheap labour and landto foreigners. Even China’s most successfuldomestic computer �rm, Lenovo, whichacquired IBM’s personal-computer busi-ness in 2004, contracts its production outto Taiwanese companies.

Yet the model may already be chang-ing. Home-grown exporters, especially pri-vately owned ones, are honing their skillsin China’s cut-throat markets. Huawei, a te-lecoms company, already supplies hand-sets to Vodafone, the world’s biggest mo-bile operator. Bo Xilai, China’s commerceminister, promises vigorous support forhis country’s native car industry, whichhas leapt from nowhere to capture a quar-ter of the domestic market and is nowpoised to start exporting small, cheap cars.

Not the bargain it wasThe next question is whether more of theforeign-owned production networks thatcurrently span Asia will be moved toChina. There is some anecdotal evidencethat this is happening, though statisticianscannot yet put their �ngers on it.

A more identi�able trend is working inthe opposite direction. As the WorldBank’s country director for China, DavidDollar, points out, wages in China are nowrising two or three times faster than inother low-wage Asian economies, andcompanies are having problems keepingtalented sta�. Encouraged by the govern-ment, companies are moving further in-land to take advantage of cheaper labour.Yet the further inland they go, the lessskilled the employees and the higher thetransport costs to market.

Along China’s eastern seaboard, wheremost of the manufacturing for export takesplace, total monthly pay averages $250-

Mulling a new export model

5What a difference ten years make

Source: National statistics

20061996

China’s exports, % of total

Total:$969.2bn

UnitedStates 21.0 EU 18.8

Hong Kong16.0

Japan 9.5

Britain 2.5

South Korea 4.6

Singapore 2.4

Taiwan 2.1

Other23.1

Hong Kong21.8 Japan 20.4

UnitedStates

17.7

EU 13.1

South Korea 5.0Singapore 2.5

Britain 2.1

Taiwan 1.9

Other15.5

Total:$151.2bn

1


2 350. Some parts of Thailand have higheraverage wages in manufacturing, but else-where in that country, as well as in thePhilippines and Indonesia, manufacturingwages are $100-200 a month. Two decadesago all export-sector wages in these coun-tries were higher than in China.

So some argue that in many sectors theera of the �China price��exporters beingable to o�er the world’s cheapest goods�will soon have run its course. CEPII high-lights how the terms of trade have workedagainst China. Between 1995 and 2004, it�nds, China’s export prices rose by 4%whereas imports rose by 38%, a total deteri-oration in China’s terms of trade of 24%(see chart 6). Today exporters enjoy moreof the bene�t of an undervalued ren-minbi. Yet as CEQ points out, brow-beatingby an American government concernedabout its bilateral trade de�cit with Chinasuggests that the exchange rate is likely torise in future. It has already gone up by 6%since 2005.

Yet even for some of the cheapestgoods, productivity increases have morethan o�set a deterioration in the terms oftrade. A new paper by sta� at America’sFederal Reserve points out that between1989 and 2005 China increased its share ofexports to America in 41 industries, amongthem clothing and shoes. It is too early towrite o� China’s export machine, even atthe cheap end.

Either way, the consequences forChina’s neighbours depend on where-abouts on the manufacturing ladder theyare. For those increasingly competing withChina, the challenge is to make theirmanufacturing more sophisticated or their

design more specialised. Last year Amer-ica’s Intel greatly expanded its research fa-cilities in Malaysia that design micropro-cessors, motherboards and chipsets. Anumber of high-tech �rms, particularlyJapanese ones, are wary of putting suchcentres in China, fearing that their best de-sign work will get pirated. But for countriessuch as Taiwan that are losing their manu-facturing to China, the emphasis should beon fostering competition in the serviceindustries that now account for the bulk ofthe economy. Hong Deshang of the Tai-wan Institute for Economic Research saysthat his country’s future should be in re-search and development, design, brand-ing, �nancing and logistics.

For poorer countries, says Mr Dollar,China’s rise opens up opportunities. Viet-nam, which recently joined the WTO, is al-ready a bene�ciary, with annual growthaccelerating to nearly 8%; on the plain be-tween Hanoi and the coast, South Korean

and Japanese assembly plants are spring-ing up among the paddy �elds to take ad-vantage of the country’s low wages. Ex-traordinarily cheap jeans recently sold byTesco, Britain’s biggest supermarket chain,were made from Chinese fabric stitchedtogether in Bangladesh. Yet in much of de-veloping Asia the starting point needs tobe to make up for past omissions: openingup to trade, creating a favourable climatefor investment and ensuring an adequateinfrastructure for manufacturing. Mr Dol-lar argues that success will be determinedmore at the local than at the national level.After all, China’s industrial revolutionnearly 30 years ago began in a small hand-ful of experimenting cities.

Consumers galoreMoreover, China’s exports have to be putin context. Though very open to trade,China’s economy, like America’s, is essen-tially driven by its own huge domestic de-mand. This demand is now growing at aclip of 9% a year and starting to act as a re-gional engine of growth, sucking in im-ports. The World Bank forecasts that thiswill be the �rst year in which China’s im-ports will be growing by more than Amer-ica’s, becoming the biggest source of im-port growth in the world. Goldman Sachs,an investment bank, reckons that China’simports for domestic use are now roughlythe same as those used in assembling ex-ports, whereas �ve years ago they wereonly half as big. Much of what is importedis in the form of raw materials�oil, copper,gas, timber�to feed the China boom. Thenext article will look at the environmentalimplications of that boom. 7

Why the “China price” is eroding

Source: “China’s Emergence and the Reorganisation of Trade

Flows in Asia” by Guillaume Gaulier, Françoise Lemoine and

Deniz Unal-Kesenci

Terms of trade, 1993=100

6

1993 95 97 99 2001 03 04

80

100

120

140

60

Terms of trade

Unit valueof exports

Unit valueof imports

�THESE days,� says Pan Yue, China’sdeputy minister for the environ-

ment, �most Chinese missions go abroadto talk about securing energy, whereasmost foreign missions come to China totalk about our environmental impact. It’s aparadoxical diplomacy.�

For China’s neighbours, the countryposes an environmental threat on severallevels. In late 2005 an explosion at a chemi-cal plant in north-eastern Jilin provincesent a slick of toxic benzene 80km longinto the Songhua River. Local authorities

attempted a cover-up, but the city of Har-bin was forced to shut down its water sup-ply. With Russia downstream, the spill be-came an international incident.

In South-East Asia, China’s plan to dou-ble hydropower by 2010 is causing con-cern. Several large rivers that run throughthe region�the Salween, the Irrawaddyand the Mekong, among others�havetheir source in Tibet, and dams in China al-ready diminish their �ow. In India, policy-makers and environmentalists arealarmed at reported plans by China to

build a dam and divert the upper reachesof the Brahmaputra to dry parts of north-western China, though a Chinese special-ist on South Asia says that engineers con-sider the plan unfeasible.

As for airborne troubles, South Koreaand Japan both su�er from sandstorms ex-acerbated by deserti�cation in China. Thecountry is also the world’s biggest emitterof sulphur dioxide. The resulting acid rainis damaging Korean and Japanese forests.Even Japanese �shermen are a�ected byChina’s pollution: giant Nomura’s jelly-

Grim tales

The more growth, the more damage to the environment


2 �sh, which spawn o� the Chinese coastbefore drifting towards northern Japan,spoil catches of salmon and yellowtail andbreak nets and gear. Some of the recenthuge increase in their numbers is thoughtto have been caused by nutrient-rich run-o� (on which the larvae feed) from farmsand industry in China.

Even when China takes steps to dealwith environmental challenges, neigh-bours can feel unintended consequences.In 1998 the then prime minister, ZhuRongji, imposed a total logging ban after�oods in southern China that had been ex-acerbated by deforestation. The ban hasbeen remarkably well enforced and forestcover in China is increasing, albeit of amonoculture of Chinese red pine ratherthan of mixed native species. Yet with Chi-nese demand for timber unmet, one out-come of the ban has been increased forestdestruction in West Africa, Indonesia, Pa-pua New Guinea, Myanmar, Laos andCambodia (see the next article).

Bye, bye bicycleThe rate at which China uses up natural re-sources is simply not sustainable. Startwith its oil consumption. Domestic crudeproduction is rising only slowly, so im-ports are growing by more than 30% a year.China is already the world’s second-big-gest oil importer, behind America. There islittle prospect of slowing the growth inChina’s oil consumption, because the gov-ernment is committed to a car-led policyof development. The World Bank’s MrDollar has recently described this as �avery questionable development choice��though it had earlier been conceived withthe World Bank’s backing.

Already the idea of China as a nation ofcyclists seems quaint. Some 45,000km ofexpressways have been built or are underconstruction. Through cheap petrol andother means, the government is support-ing a domestic car industry, which it seesas an engine of future economic growth.The number of cars in China has leaptfrom just 4m in 2000 to 19m in 2005. Thattranslates into eight cars per 1,000 people,compared with 500 cars per 1,000 inAmerica. Goldman Sachs thinks the �gurewill more than double by 2010 and reachover 130m by 2020. But even then Chinawill still be way below American levels ofcar ownership today.

Oil is only part of the picture. China isthe world’s biggest producer of coal (aswell as of coal-mining fatalities), diggingout 2.2 billion tonnes in 2005. Today coalaccounts for four-�fths of China’s energy

use, and there is enough for at least an-other century.

It is both a blessing and a curse. China isbreaking new ground liquefying coal tomake oil substitutes, which may in thelong run help change its energy mix. Yetabundant use of coal means that Chinawill overtake the United States as theworld’s biggest producer of carbon emis-sions by 2009. Its current share is 17% ofthe world’s total, against America’s 22%.Last year alone China added the equiva-lent of California’s entire current generat-ing capacity, nine-tenths of it coal-�red.

Unsurprisingly, coal is also the main(though certainly not the only) source ofair pollution. Twenty of the world’s 30most polluted cities are in China. Accord-ing to a new book by the World Bank,�Dancing with Giants: China, India andthe Global Economy�, air pollution is caus-ing 427,000 extra deaths a year.

It is possible to �nd a few glimmers inthe murk. Because energy demand isgrowing so fast, China has more incentivethan countries with slow growth to adoptnew technologies. It is already the world’slargest user of alternative energies, includ-ing windpower.

With World Bank support, China hasbeen trying since 2003 to cut its emissionsof greenhouse gases through a mechanismset up under the Kyoto protocol. Compa-nies from signatory nations are committedto capping their greenhouse-gas emis-sions. If they want to exceed their quota foremissions, they can buy carbon �credits�from companies in developing countriesthat have invested in cutting their ownemissions. China has lots of emissions ofcarbon dioxide and other more noxiousgases, and now accounts for three-quarters

of all carbon credits traded under Kyoto’sclean development mechanism for de-veloping countries.

One reason for hope is that China’sleaders appear to understand the scale ofthe environmental problem. In the govern-ment’s latest �ve-year plan, which runs to2010, it committed itself to increasing for-est cover, cutting the discharge of the mainpollutants and reducing China’s energy in-tensity (the amount of energy consumedfor every unit of GDP) by 20%. Energy in-tensity fell between 1990 and 2003, buthas since risen sharply as heavy industriessuch as steel and cement have surged.

On the other hand, environmental reg-ulators, by Mr Pan’s own admission, areweak and divided. At the State Environ-mental Protection Administration, he can-not even appoint sta� at the provinciallevel. That is up to the provincial governor,who is usually more interested in growththan in the environment. The true cost ofChina’s environmental mess is hard to as-sess, but the o�cial government �gure,which puts it at about 3% of GDP, is cer-tainly a gross underestimate.

Mr Pan thinks growth should be sacri-�ced for resource conservation and envi-ronmental protection. That sets himsharply at odds with the Communist lead-ership. �People talk about the peaceful riseof China,� he says, �with all that impliesfor continuing rates of growth and re-source utilisation. But the earth cannotsupport it. China should control its growthand slow down its development, and theinternational community should doeverything it can to support China if itdoes.� China’s leaders know the calcula-tions. But they are not in a hurry to sacri�cegrowth and thereby risk social unrest. 7

A dark mountain of worries

1


THE quick way to Krang Skear forest inCambodia that the Chinese are logging

is to turn o� the highway in KampongChhnang province, a few hours north ofPhnom Penh, bump along a sandy trackfor 25km and, just as the track peters out,take the train through the scrub for the last30km. Or, rather, as the railway built by thecolonial French was abandoned years ago,you ride a dolly improvised from a fewplanks and an old petrol engine, taking thewhole a�air apart and to one side everytime you meet a similar contraption com-ing the other way.

The area is as poor as it gets even inCambodia, where more than one-third ofthe population lives on less than 60 cents aday. It is dry and dusty, with infertile soil,and the summer rains run away too fast fora decent crop of rice. Most of the local fam-ilies, living in raised single-room thatchedhuts without electricity, grow cashewnuts, bananas and corn for a meagre sub-sistence. Of the 250 families who live here,some 60, says Puy Sao, a 29-year-oldmother of six, depend wholly on the forestfor their livelihood, and many others inpart. The nearest health clinic is in the pro-vincial capital, 70km away, but the foresthas medicinal plants. It also has resin treesthat can be tapped, among other things, foroil used for lighting. And then there arewildlife products, such as beeswax. In heryard, Ms Sao is rearing a wild boar that herhusband caught when it was young.

A few years ago a company fromGuangdong in southern China wasgranted a concession to log a reputed17,000 hectares (42,000 acres) in KampongChhnang province and elsewhere. That initself is a breach of the law, which is meantto restrict concessions to 10,000 hectaresper bidder. In 2004 about 100 locals, in-cluding Ms Sao, went to Phnom Penh toprotest that they, too, had a claim to the for-est, but police outside the forestry ministrythreatened to beat them.

The Chinese have since logged 1,700hectares at Krang Skear, replanting someof it with a monoculture of acacia, a fast-growing but poor-quality tree. A giantplough, made in China, lies abandoned,along with hundreds of smashed jars thatcontained the tree seedlings, also brought

from China. The Chinese workers havevanished, but will presumably return tocut the less accessible virgin forest in thehills beyond. Both the company and thegovernment refuse to talk to locals.

Cambodia is in the midst of a land grab.High politicians and �y-by-night Chinesecompanies suddenly crop up as owners ofvast tracts of valuable hardwood forestthat get cut and shipped out to Vietnam orup the Mekong River to China, now thatChinese engineers have dynamited a navi-gable channel into Yunnan province.

Tree of lifeThe problem is most serious in the deeplyforested parts of the country populated bynon-Khmer minorities, such as thePhnong. In these forests, households�own� particular resin trees that can betapped for 50-60 years, bringing in per-haps $350 a year for the most valuable res-ins, according to the Wildlife ConservationSociety. But, says an expert at one non-gov-ernmental organisation, Chinese compa-nies come in and cut the trees down.Sometimes they promise schools andhealth clinics, but they rarely deliver.

The land grabs are only the most promi-nent examples of Cambodia’s endemiccorruption, from the o�ce of the primeminister, Hun Sen, all the way down. Re-cently a government minister threw ahousewarming party for his new mansionwhich features a moat around which youcan jet-ski. He boasted to ambassadorsabout the value of his house.

Corruption is a constant gripe of localsand of aid donors trying to help rebuild

this country of nearly 15m after the ravagesof genocide by the Khmer Rouge and acivil war that sputtered on until recently.The government chafes at the conditionswhich donors place on their aid. In recentyears the World Bank has suspended sev-eral projects after discovering misappro-priation in the procurement process. Forinstance, one project included a servicecentre for maintaining (Chinese) motorcy-cles provided for demobilised formerguerrillas; the centre turned out not to ex-ist. When the World Bank presented theevidence to the powerful deputy primeminister, Sok An, he angrily refused to readthe report. Only after the World Bankthreatened to suspend its whole Cambo-dia programme did the government payback money the bank had shelled out.

Now the government has an ally:China. Last March Cambodia’s aid-givers�including the World Bank, the Asian De-velopment Bank (ADB) and bilateral do-nors, though not China�agreed at their an-nual gathering with the government toprovide the country with just over $600min aid�the equivalent of three-�fths of thenational budget. But at the same time theydressed the government down for thecountry’s poor human-rights record andfor letting one more year go by withoutpassing an anti-corruption law. The aidwould come with lots of conditions.

Imagine the donors’ shock last Aprilwhen China’s prime minister, Wen Jiabao,paid Cambodia a visit and announcedthat China would pony up $600m forroads, dams, whatever�equivalent to al-most the entire international aid budget.And, it seemed, with no strings attached.

Mr Hun Sen has been rubbing donors’noses in it. At a recent ceremony to markthe opening of a Chinese-built road in thecountry’s north-east, he praised China forhonouring Cambodia’s �independenceand integrity�. All Cambodians ask, hesaid, �is for an equal relationship with itspartners�China is a very big country�If1.3 billion Chinese urinated all at once,they would cause a great �ood. But China’sleaders do good things with their part-ners�When China gives, it doesn’t say dothis or do that. We can do whatever wewant with the money.�

Can we help you?

How China is wooing a poor neighbour

1


2 Chinese aid, however, is not always asgenerous as it seems. Smoke-and-mirrorsaccounting certainly exaggerates the sumson o�er. Besides, the great bulk of aid is inthe form of loans that will have to be paidback one day. In Cambodia’s case, West-ern diplomats suspect that Chinese pres-sure is a factor behind delays in a UnitedNations-backed tribunal that is meant tobe trying elderly former Khmer Rougeleaders on charges of genocide.

No messing aboutEven so, some development specialistsshow a degree of sympathy for Cambodi-ans wanting to take China’s cash. Of themany donors in Cambodia, only theWorld Bank, the ADB and Japan are reallybuilding the things that people need, suchas roads, schools and hospitals. Too muchtraditional aid is in the form of so-calledtechnical assistance that often bene�ts thedonor countries more than the recipients.(South Korea’s help in providing �smart�national identity cards is an egregious ex-ample.) Besides, the time spent dealingwith so many do-good Western agencies,each with an aid agenda that almost cer-tainly con�icts or overlaps with others,sorely tests the government of a poorcountry short of institutional resources. Inthis light, China’s o�er just to get on andbuild the road looks tempting.

But why should China want to help in

the �rst place? The answer is energy. An oiland gas bonanza lies just o�shore in Cam-bodian waters. Though Chevron of Amer-ica has rights to the only block where largeproven reserves exist, much more oil is ex-pected to be found, and Chinese oil majorsintend to bid for it. For China, oil shippedfrom Cambodia has strategic value, for itwould not have to pass through the Ameri-

can-guarded Malacca Straits�called�China’s windpipe� by strategists in Bei-jing�on its way to the mainland. For Cam-bodia, a country historically overshad-owed by bigger powers, oil revenues ofperhaps more than $1 billion a year willgive its masters some of the respect theycrave. A bit of the money might eventrickle down to the people. 7

Part of the bargain

WHEN North Korea lobbed a handfulof missiles into the Sea of Japan last

summer and then exploded a nuclear de-vice beneath a mountain in October, itsputative enemies, South Korea, Japan andAmerica, had good cause for alarm. Yet thechief victim of North Korea’s nuclear she-nanigans appeared to be China, the ob-streperous country’s socialist ally andlong-time big brother.

For a start, there was the loss of face.The tests made a mockery of the idea thatChina’s policy of good neighbourlinesscould win over Kim Jong Il and his brutalregime. The Beijing government’s credibil-ity as a mediator�it had been the host ofsix-nation talks designed to get Mr Kim todisarm�was knocked. So China’s decisionto back United Nations resolutions con-

demning North Korea, imposing sanctionsand even opening up the possibility of us-ing force broke cleanly with the past. De-spite a friendship treaty going back to 1961which provides for both sides to come toeach other’s aid in danger, China made itclear it was no longer the North’s protector.The North Korean regime chose to presentthis change of mind as an act of treachery.

Yet much to everyone’s relief, North Ko-rea soon sent out signals suggesting that itmight sit down again at the six-party talks�rst convened in 2003 (and also includingSouth Korea, America, Japan and Russia)from which it had �ounced out in Septem-ber 2005. In mid-February, against mostgloomy predictions, a conceivably historicdeal was struck and China regained a gooddeal of the face it had lost.

The deal cleared the way for interna-tional nuclear inspectors, kicked out in2002, to return to North Korea. It also laidout a path for the country’s nuclear facili-ties to be dismantled, normal relations be-tween North Korea and America to be es-tablished and permanent peace to bedeclared on the peninsula at long last,more than half a century after the end ofthe Korean war. At each step of the wayNorth Korea is to be rewarded for doing theright thing. Bank accounts in Macau are tobe unfrozen, and North Korea is to get fueloil or �equivalent� aid.

Nobody believes Mr Kim can be trustedto stick to the bargain without the closestsupervision. Yet there is some cautious op-timism that he can be tempted away fromhis nuclear ambitions. For President

Here comes trouble

China’s little brother is a big headache


2 George Bush�who in early 2002 had in-cluded North Korea in his �axis of evil�and who had called Mr Kim a �pygmy��putting faith in the deal marks an about-turn. He had been strongly critical of a sim-ilar bargain struck in 1994 by his predeces-sor, Bill Clinton, which later unravelled.

To judge by conversations in Beijing,China is the most sceptical, even pessimis-tic, about the deal with North Korea. O�-cially the tone is upbeat. Below the surface,however, run deep concerns.

North Korea-watchers in America, Ja-pan and South Korea tend to suggest thatMr Kim’s decision to go nuclear was a re-sponse to Mr Bush’s axis-of-evil speech.The lesson that North Korea drew, this ar-gument goes, is that if you do not want tobe invaded by America, as was Iraq, then itis best to get your weapons of mass de-struction up and running. Once your ownsecurity is assured, you can bargain from aposition of strength.

Many Chinese disagree. Zhang Liangui,professor of international strategic re-search at the Party School of the ChinaCommunist Party Central Committee anda former student in Pyongyang, says thatthe Kim dynasty’s quest for nuclear weap-ons has been relentless over two genera-tions, beginning (with Russian help) withMr Kim’s late father, Kim Il Sung, in theearly 1950s. Mr Zhang says the regime’smotives are twofold. One is to strengtheninternal legitimacy. The second is to trans-form strategic relations with all its sur-rounding powers, and particularly withChina and Japan: the Korean psyche isdeeply sensitised to a history of neigh-bours invading the peninsula. Meanwhilethe regime can see for itself that the Bushadministration is hugely stretched in Iraqand Afghanistan and does not believeAmerica has the will for intervention (itmay be wrong). North Korea might wellwant detente with America, says MrZhang, but that is a separate matter.

What’s the deal?It follows from this reasoning that not allpolicymakers in Beijing expect North Ko-rea to give up its nuclear capability. TheFebruary agreement certainly leaves roomfor doubt. The government in Pyongyangis committed to freezing swiftly its mainnuclear facility at Yongbyon, where,among other things, plutonium is ex-tracted from spent fuel rods. But the dealmentions only an initial �disablement� offacilities, not their abandonment. Uncer-tainties remain about whether the regimewill come clean about its uranium enrich-

ment. There is nothing in the agreement tostop North Korea from conducting anothertest (though Mr Kim presumably knowsthat that would blow up the deal with it).Lastly, the deal does not make clear whatwill be done about North Korea’s existingnuclear weapons, thought to numbereight to ten. Mr Zhang thinks that the re-gime will want to hold on to its existingweapons but explains that �for China, thiswould be unacceptable.�

The pessimism runs deeper than nottaking Mr Kim at his word. It has to do withhow the Chinese think events on the Ko-rean peninsula might a�ect the region’sstrategic balance, and how that, in turn,might a�ect the future of Taiwan. It helpsto remember that whereas in economicterms China and America have a mutuallybene�cial, even symbiotic relationship(America buys Chinese exports, China re-cycles the dollars to help fund the Ameri-can current-account de�cit), in strategicterms Chinese policymakers see the ri-valry as intense. America has military alli-ances that surround China, with troops inSouth Korea and Japan and powerful sea-borne forces. Moreover, however muchChina might wish Taiwan to be an �inter-nal� matter, America underwrites the is-land’s security, through the Taiwan Rela-tions Act (which commits it to helpingTaiwan defend itself) and through the saleof weapons systems for defence against aChinese attack.

All this explains why some policymak-ers in Beijing can see no satisfactory out-come to the nuclear crisis. Writing in ChinaSecurity, a Washington-based journal,Shen Dingli, a prominent strategist at Fu-dan University in Shanghai, says thatwhether China likes North Korea or not,the country has for 50 years served as astrategic bu�er, keeping tens of thousandsof American troops pinned down and al-lowing China to deploy more force directlyopposite Taiwan to dissuade the islandfrom declaring independence. A nuclearNorth Korea would further help containAmerica, deterring it from intervening inany hypothetical con�ict across the Tai-wan Strait. North Korea, then, is China’s�guard post,� Mr Shen writes. �This is thelink between North Korea and Taiwan.�

And what if North Korea dismantles itsnuclear programmes, exchanging weap-ons for American friendship, rather asLibya has done? Or if it keeps its nuclearweapons and thus provokes America intotoppling the regime? For China, manystrategists think, this would be disastrous,putting Japan, South Korea, North Koreaand Taiwan��a part of China�, after all�all �rmly in the American camp. �In thiscase, China’s security pressure regardingTaiwanese independence would be farmore severe a burden, [one] that would behard to bear.� It’s a hard life being a Chi-nese strategist, obliged to look at the worldin zero-sum terms. 7

A blue-water navy in the making

1


�LET us imagine�, says Lin Chong-pin,president of Taiwan’s Foundation on

International and Cross-Strait Studies,�how President Hu Jintao in his dreamsmight wish the opening of his BeijingOlympics to be.� Not only, says Mr Lin,will he have brought the world’s �nest ath-letes there, but also its artists and celebri-ties. So far, so plausible. He will also have,on his right hand, the leader of the com-munists’ civil-war foe, the Kuomintang,newly elected in the spring of 2008 as pres-ident of Taiwan. And on his left a beamingDalai Lama, thankful to be back on Chi-nese soil once more after an exile of nearly50 years. �It would�, says Mr Lin, �be theheavenly dynasty all over again, and thebarbarians coming to worship.� That thishappy vision, though technically possible,is still implausible provides insights intothe paradox of China’s rise.

On the one hand, China appears overthe past decade to have signed up whole-heartedly to an international order, ofglobalised trade and rules-based relationsamong states, that was not of its making�even as America, the chief architect of thatorder, has partly walked away from it,with its �coalitions of the willing� andgrowing opposition to unfettered trade.

China has signed up because it realisesit is probably globalisation’s greatest bene-�ciary. This, more than anything, explainsthe country’s remarkable levelheadednessin its dealings with the United States eversince the last crisis in bilateral relations, in2001, when an American spy plane col-lided with a Chinese �ghter. The level-headedness has paid o�. For as Americanpower has been distracted in the MiddleEast, so Chinese power has moved up.

A touch of the diabolicOn the other hand, Chinese intentionsabout what to do with its power in thelong run remain deeply ambiguous. IfChina sees its constellation as heavenly�and the Chinese, like the Americans andthe French, have a sense of manifest des-tiny�neighbours see hints of the diabolic.

Perhaps the growth in the military bud-get re�ects China’s growing wealth andprestige, along with a desire to protect itsrising shipments of oil and other commod-

ities: the country seems bent on building ablue-water navy. Understandable, per-haps, within China’s terms of reference, tohave a military strength capable of deter-ring Taiwan from declaring independence.But why missiles with a range to hit Japan?Why, in January, did China test-�re arocket to destroy an old weather satellite,when it insists no one is more committedto the peaceful development of space?And why, last autumn, did a Chinese sub-marine suddenly pop up next to the KittyHawk, an American aircraft carrier?

Equally, what is China doing buildingroads, ports and pipelines in Myanmarand Pakistan, connecting west and south-west China with the Bay of Bengal and theIndian Ocean? The point could simply beto help the development of backward Chi-nese regions. But these links could equallyserve as future supply routes for the Chi-nese navy. For Brahma Chellaney, at theCentre for Policy Research in Delhi, theconclusion is plain: along with theplanned extension of the new Qinghai-Lhasa railway, which could in theorybring military material up quickly to theTibetan border, �it amounts to a strategicsqueeze of India.�

India’s government is less willing thansome of its intellectuals to see China’s ac-

tions as a strategic squeeze. Nevertheless,it is trying to balance China’s advances.Noting that the West’s abandonment ofMyanmar in the absence of democraticchange opened the way for Chinese in�u-ence, India is trying to make its own ad-vances to the awful regime there. ASEAN isdoing the same.

Thus China’s rise is quietly bringingabout an opposite, if not yet equal, reac-tion. Japan’s relations with China aremuch improved since the anti-Japanese ri-ots two years ago sparked by visits by thethen prime minister, Junichiro Koizumi, toYasukuni, Tokyo’s militarist war shrine. Assoon as Shinzo Abe became prime minis-ter last September, he made a fence-mend-ing trip to Beijing. North Korea’s nucleargames may also have pushed Japan andChina closer.

As for Taiwan, China currently calcu-lates that in next year’s presidential elec-tion a pliable Ma Ying-jeou, the KMT’s fa-voured son, will succeed the independ-ence-minded Chen Shui-bian of theDemocratic Progressive Party. Mr Ma’selection prospects, however, have gotmurkier since his indictment in Februaryover alleged misuse of funds during histime as Taipei’s mayor. And even if he doeswin, China may face disappointments.

Heavenly dynasty

As long as China is not satis�ed at home, it cannot be satis�ed in the world

A question of Hu and Wen

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It believes it has an understanding withthe KMT (whose elder statesman, LienChan, visited the mainland in a ground-breaking trip two years ago) that Taiwan isa part of China. Certainly, Mr Ma says hewill push for closer economic co-opera-tion and wants Taiwan to be a �peace-maker not a troublemaker�. But he alsosays the Taiwanese want to keep the statusquo�in other words, a sovereign Taiwanthat is independent in all but name. �Wewill not pursue talks on reuni�cation,� MrMa insists. �The matter will have to waituntil the mainland becomes democraticand prosperous.�

The home frontDoubts about China’s intentions, how-ever, stem perhaps less from its actionsoverseas than the values that underpin itsbehaviour at home. After all, China’s po-litical and economic a�airs are still runwith what is essentially a Leninist appa-ratus of state. The state’s instinct is to co-opt those within the empire who questionthe political orthodoxy�or if that does notwork, to deal with them harshly. Thus theDalai Lama is vili�ed, and Tibetans are de-meaned in their own land. Over Taiwan,China reserves the right to nuke what itsays are its own people.

As the Dalai Lama puts it: �Mr Hu’s con-stant emphasis on a ‘harmonious society’suggests that something is missing.� Chinais wracked by social inequality, environ-mental damage and government corrup-tion. Beijing’s preparations for the Olym-pics are a heart-rending metaphor for this.The games have provided a pretext for anorgy of o�cial corruption and culturalvandalism which in a few brief years hasall but destroyed a unique historical city. Afew scraps have been left for touristic con-sumption. Beijing’s inhabitants have beenshunted into tower blocks on the city’sedges. In their place rise vast bombasticstructures, architects’ and politicians’ self-indulgences with no civic context.

A constant theme heard from thought-ful Chinese is that China’s rise lacks amoral underpinning, and that a moral vac-uum lies at the heart of Chinese life. TheDalai Lama puts the blame on the Com-munist Party’s �radical atheism� and pre-dicts that �sooner or later, a spiritual ormoral culture will have to come to �ll aninternal emptiness; externally, there willhave to be rule of law, democracy, free-dom of the press.�

A slow enriching of both public andprivate life may already be under way.Non-government organisations to tackle

social and environmental issues havegrown hugely in number since earlier thisdecade. Some corners of the press havepushed the frontiers of what they canwrite about. And across China evidence isgrowing of a resurgence of spiritual and re-ligious inquiry.

All the same, raw and volatile forms ofnationalism lurk just beneath a usuallyplacid surface. They erupted in 1999 whenNATO bombs struck the Chinese embassyin Belgrade during the Kosovo war, andagain in anti-Japanese riots in the spring of2005. Internet chatrooms are full of vitup-erative anti-foreign sentiment.

The memories of past horrors inChina�foreign occupation, civil war, thecultural revolution�have made older Chi-nese generations into advocates of apeaceful region. All the same, the currentleaders ignore popular sentiment at theirperil. Passing on the lessons of history to ayounger, more nationalistic generationthat never experienced horrors at �rst

hand is China’s �big problem�, says LeeKuan Yew, Singapore’s elder statesman.

All this feeds into the neighbours’ sur-viving suspicions about China’s inten-tions, despite a decade-long charm o�en-sive. So long as China is not satis�edwithin its own borders, how can it be satis-�ed in the world?

In the long run, this will place limits onChinese power and in�uence. It is not justAmerica’s allies such as Japan and Taiwanthat want it to stick around for a long whileyet. ASEAN countries also need the UnitedStates to balance China. Singapore re-cently signed an agreement allowingAmerican forces greater access; Indonesiaand America have resumed bilateral mili-tary contacts; and Vietnam wants to forge astrategic alliance with its former enemy.

There is also, Thailand’s recent militarycoup notwithstanding, Asia’s general em-brace of democracy. Michael Green ofGeorgetown University, a former Asia di-rector at America’s National SecurityCouncil, sees it as a tremendous potentialsource of �soft� power for America.Whereas China rigidly sticks to its policyof non-interference in the a�airs of othernations, ASEAN has moved on. Malaysia’sprime minister, Abdullah Badawi, saysASEAN’s hallowed principle of non-inter-ference must be �updated�. A new draft ofASEAN’s governing charter says that re-gional stability rests on �the activestrengthening of democratic values, goodgovernance, the rule of law�, and so on.

Such sentiments around Asia might, atthe very least, stand in quiet opposition toChinese power. But if China embracedsome of them for itself, who can guess atthe limits to its celestial realm? 7

The Dalai Lama sees a moral vacuum

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