The delicate dance: EU carmakers and PRC wheelmakers

WSJ story on how European rim makers (not the tires but the metal wheels) want antidumping protection from China, whereas European car makers fear they'll get caught up in the fray and lose market share there.

Good quote that captures China's rapid move up the production chain:

"Trade disputes with China used to be about bras, T-shirts, shoes and ironing boards," says Simon Evenett, a professor of trade economics at the University of St. Gallen in Switzerland.  "Now they're moving downstream, and increasingly, they're going to be about cars."

America coming out of the Civil War sold basic consumers goods like that overseas (shoes were a biggie), but by the end of the century, we were likewise elevated to complex manufactured goods, thus increasingly the complexity of our trade relations with the world.

Good cop "Uncle Wen" makes nice @ WEF event

WSJ coverage of World Economic Forum event in Tianjin, where Chinese premier Wen Jiabao went out of his way to combat the nation's growing image as inhospitable to foreign business.

Naturally, a WEF event in China is going to feature a certain amount of self-censorship by foreign businesses, thus allowing Wen's comeback to basically go unchallenged.

Still, the key is he acknowledged policy missteps by China.

It will--for a very long time--remain a tricky balancing act for China:  trying to divert continued economic growth inland while not being too stingy on foreign penetration.

CCP opens complaint line

FT and WSJ stories on new online bulletin board where ordinary Chinese can leave messages to senior party leaders--at some personal risk, of course.

A good sign, of course, but mostly a defensive one:

 . . . the internet has diluted the state media's traditional information monopoly.  Corruption, abuse of power and the other ills of one-party rule are now being revealed online every day.

So yeah, an exercise in PR, but one that reveals the party's largely reactive mode and demonstrates their fear of popular unrest--and that alone represents a certain responsiveness to the public.

Get used to this headline, because the Chinese will

NYT story by the always impressive Simon Romero.

Gist:

In its worldwide quest for commodities, China has scoured South America for everything from Brazilian soybeans to Guyanese timber and Venezuelan oil. But long before it made any of those forays, China put down stakes in this desolate mining town in Peru’s southern desert.

The year was 1992. Chinese companies had begun to look abroad. One steelmaker, the Shougang Corporation of Beijing, set its sights on an iron ore mine here and bought it in a move that seemed particularly bold. At the time, Peru was still plagued by attacks by the Maoist guerrillas of the Shining Path.

But the hero’s welcome for Shougang soon faded. Workers at the mine, which was founded by Americans in the 1950s and nationalized by leftist generals in the 1970s, began fomenting the unexpected: a revolt that has endured to this day, marked by repeated strikes, clashes with the police and even arson attacks against their nominally Communist bosses from China.

“We quickly realized that we were being exploited to help build the new China, but without seeing any of the rewards for doing so,” said Honorato Quispe, 63, a longtime union official at the mine, where workers have held three strikes this year alone, including an 11-day stoppage last month.

The long-festering conflict with Shougang over wages, environmental pollution and Shougang’s treatment of residents of this company town does not square well with China’s celebratory vision of its rising profile in Latin America, in which everyone benefits and a “win-win” is “the consensus.” Latin America, as this idea of so-called South-South cooperation goes, sells China raw materials like copper, oil or iron; in return, the region buys goods like cellphones, cars and cheap plastic toys.

The tension in Marcona, one of the most conflict-ridden towns in a country increasingly prone to conflict over mining and energy projects, suggests that China’s engagement in the region — like that of the United States, Britain and other powers that preceded it in Latin America — is not without pitfalls.

While not the dominant theme in the region’s relations with China, a wariness is crystallizing in some countries over the booming trade with China.

Reactions to this surge largely focus on cheap Chinese imports or on China’s assertive efforts to win access to energy reserves. In both Brazil and Argentina, for instance, manufacturers accused Chinese companies of unfairly dumping Chinese products in their markets, prompting new tariffs against some Chinese imports.

The backlash on China's penetration of the Gap is just beginning, and it'll be led by fellow New Core pillars ike Argentina and Brazil, who will have the guts to push back.

Having spent some time talking with China's extractive industry execs, I know that they know that their model isn't what it should be WRT to the win-win notion.  But the truth is, it'll take a build-up of experience and the accompanying backlash to force Chinese companies--and the government that stands behind them--to improve their approach.  Plenty of Western multinationals learned this the hard way, like Honda and Toyota here in the States years ago:  if you want to sell globally, you have to source and manufacturer and R&D locally too.  You become, in Sam Palmisano's terminology, a globally integrated enterprise.

This is the key evolution for Chinese national companies, and it will stress them out considerably--especially in their diverging (in terms of goals) relationship with the Chinese government/single-party state.  But the only way to get from here to there is more connectivity leading to more tension leading to more change.

So I say to Chinese business, bring [the connectivity] on!"

And I also say to the locals, "Don't give up anything without a fierce fight."

A good measure of social stress in China--and rising expectations

Great reporting piece in the NYT.

The guts:

Forget the calls by many Chinese patients for more honest, better-qualified doctors. What this city’s 27 public hospitals really needed, officials decided last month, was police officers.

And not just at the entrance, but as deputy administrators. The goal: to keep disgruntled patients and their relatives from attacking the doctors.

The decision was quickly reversed after Chinese health experts assailed it, arguing that the police were public servants, not doctors’ personal bodyguards.

But officials in this northeastern industrial hub of nearly eight million people had a point. Chinese hospitals are dangerous places to work. In 2006, the last year the Health Ministry published statistics on hospital violence, attacks by patients or their relatives injured more than 5,500 medical workers.

“I think the police should have a permanent base here,” said a neurosurgeon at Shengjing Hospital. “I always feel this element of danger.”

In June alone, a doctor was stabbed to death in Shandong Province by the son of a patient who had died of liver cancer. Three doctors were severely burned in Shanxi Province when a patient set fire to a hospital office. A pediatrician in Fujian Province was also injured after leaping out a fifth-floor window to escape angry relatives of a newborn who had died under his care.

Over the past year, families of deceased patients have forced doctors to don mourning clothes as a sign of atonement for poor care, and organized protests to bar hospital entrances. Four years ago, 2,000 people rioted at a hospital after reports that a 3-year-old was refused treatment because his grandfather could not pay $82 in upfront fees. The child died.

Such episodes are to some extent standard fare in China, where protests over myriad issues have been on the rise. Officials at all levels of government are on guard against unrest that could spiral and threaten the Communist Party’s power.

Doctors and nurses say the strains in the relations between them and patients’ relatives are often the result of unrealistic expectations by poor families who, having traveled far and exhausted their savings on care, expect medical miracles.

But the violence also reflects much wider discontent with China’s public health care system. Although the government, under Communist leadership, once offered rudimentary health care at nominal prices, it pulled back in the 1990s, leaving hospitals largely to fend for themselves in the new market economy.

By 2000, the World Health Organization ranked China’s health system as one of the world’s most inequitable, 188th among 191 nations. Nearly two of every five sick people went untreated. Only one in 10 had health insurance.

Over the past seven years, the state has intervened anew, with notable results. It has narrowed if not eliminated the gap in public health care spending with other developing nations of similar income levels, health experts say, pouring tens of billions of dollars into government insurance plans and hospital construction.

The World Bank estimates that more than three in four Chinese are now insured, although coverage is often basic. And far more people are getting care: the World Bank says hospital admissions in rural counties have doubled in five years.

“That is a steep, steep increase,” said Jack Langenbrunner, human development coordinator at the World Bank’s Beijing office. “We haven’t seen that in any other country.”

Still, across much of China, the quality of care remains low. Almost half the nation’s doctors have no better than a high school degree, according to the Organization for Economic Cooperation and Development. Many village doctors did not make it past junior high school.

Primary care is scarce, so public hospitals — notorious for excessive fees — are typically patients’ first stop in cities, even for minor ailments. One survey estimated that a fifth of hospital patients suffer from no more than a cold or flu. Chinese health experts estimate that a third to a half of patients are hospitalized for no good reason.

Once admitted, patients are at risk of needless surgery; for instance, one of every two Chinese newborns is delivered by Caesarean sections, a rate three times higher than health experts recommend.

Patients appear to be even more likely to get useless prescriptions . . ..

There are plenty of such Marxian dynamics on the road of rapid development--when rising expectations outstrip the ability of the state to respond.

And when that state is non-democratic, the public tends to go to extremes to express its displeasure.

Central Asia's silk roads re-spun by China

image here

Nice sensible piece by Parag Khanna in the NYT.

Gist:

The fate of the massive deposits of lithium recently discovered in Afghanistan is destined to be no different from that of landlocked Central Asia’s other natural resources: tapped by the West, and eventually controlled by the East.

Siberian timber, Mongolian iron ore, Kazakh oil, Turkmen natural gas and Afghan copper are already channeled directly to China through a newly built East-bound network that is fueling the rapid development of the world’s largest population.

China’s head-start in building roads, railways and pipelines across Central Asia creates an opportunity for the West — and the region itself. Rather than engaging in a high-stakes competition for Central Asia’s valuable resources — a new round of the 19th century Great Game — the West should support China’s initial steps by coaching local governments on how to expand textile and agricultural exports and avoid the resource curse that blights many developing, one-commodity nations.

China has paved the way to finally open up landlocked Central Asia, and the West should build on its success, creating a new, oil-fueled, East-West Silk Road.

Oil pipelines from the Caspian Sea across Kazakhstan, the recently opened gas pipeline from Turkmenistan via Uzbekistan and Kazakhstan, and other planned roads and railways across Russia as well as down to the deep sea port of Gwadar in Pakistan are all part of China’s effort to turn Central Asia from a region of buffer states into a transit corridor between East and West. Beijing’s leaders have rightfully looked to Eurasia as a rich source of natural resources to fuel their booming economy.

Rather than think of China’s moves into Central Asia — and into Africa — as a suspicious form of neocolonialism, Western countries should focus on how to use Chinese-built roads and railways to make their own floundering regional strategy a success. This means cooperation rather than competition, and it can happen through heavy infrastructure investment, building new lines on the map that transcend arbitrary borders and bring real economic value.

As a longtime argument of mine (globalization:  "the last in, the next [phase of frontier integration] to begin"), I couldn't agree more.  I still spend a good chunk of my current brief arguing that we need to widen our perspective on potential allies in shrinking the Gap.  Lotsa times, I feel stupid still making this arguments almost a decade after I started using the slides, but this is still somewhat radical thinking in a US national security establishment that prefers its China as a threatening near-peer competitor. Why?  No China threat, no good argument on keeping the Leviathan fat dumb and happy in acquisitions while continuing to starve the SysAdmin.

China: eager to sell to the bottom-of-the-pyramid and confident of emissions advantage

image here

FT story on how Chinese low-end truck makers, having protected their own turf from foreign competition, are now looking to move aggressively into Gap markets (SE Asia and Africa).  Last year China produced almost half of the world's heavy and medium commercial trucks.  

China's manufacturers don't do so well in the Old Core West because they can't meet emissions standards--not a problem across the Gap.

The Indian-Chinese rivalry on outsourcing: India's upper hand for now

FT story on how India fears China will become a major competitor in outsourcing of services, with the concluding judgment being:  1) China's share remains but a fraction of India's for now; and 2) even if it grows a great deal, this global economy IS big enough for the both of them.

Right now, China's service outsourcing sector is growing faster, but it's where India was years ago, so that steep trajectory is unremarkable.  The Indians are just scared because they know what it means to roll up markets and worry about the Chinese doing the same to them.

Beijing's declared goal:  ten internationally competitive outsourcing hubs with 1k vending Chinese companies pulling in 100 multinational companies as client.  Naturally, China is making some headway in the US and Europe--traditional strongholds of the Indians.  

Why China won't catch up here?  India's language advantage (and frankly, trust advantage) and China's big domestic market.  Plus China is small fry compared to India ($10b to India's $50b).  China's domestic IT services market is already bigger than India's, so China's service outsourcing industry can expect a lot of growth there in addition to whatever it wins abroad.  India's industry would love to capture some of that China pie as state-owned banks and telecoms open up more in that way, but I would expect Beijing to make sure most of that business stays home.

Japan starts pushing China on trade and currency

FT story on how Japan getting testy in China's direction over rise of yen and growing Chinese purchases of Japanese debt--sound familiar?

Japan's finance minister, speaking in the parliament, complains that it's a one-way street:  Japan cannot buy Chinese currency or debt.  Meanwhile, China's yen purchases this year are 6x larger than the previous five years put together.

All this while the latest maritime spat plays itself out.

Japan's Democratic Party won power for several reasons, to include their promise to work for a "relationship of trust" with China.

No one, for now, predicting a decline in relationships similar to 2005, because the economic bonds have grown spectacularly since then.  But something to watch:  in May China promised to restart talks on bilat exploitation of gas in East China Sea.  Does that go away now?

South Koreans are now bitching about the same things.

So we see continue to see natural regional resistance to China's rise, which is less a choice on China's part and more of a negotiation on everybody's part. Beijing seems to be losing track of the latter reality.

But that will change.

Chart of the Day: China goes inland for cheaper labor

WSJ story on how Hon Hai, the "world's biggest contract manufacturer of electronics," is heading inland in search of cheaper labor.  The shift, as detailed in the chart, will be profound.  Big investment bets being placed in major inland cities.  The dream is a natural one, insource inland to prevent too much job flight to neighbors and help the country "retain its role as the world's factory floor for decades."  Hon Hai chairman Terry Gou dismisses the notion that competing neighbors will ever be able to displace China.

Besides the geographic shift inland to capture labor costs estimated to be 2/3rds of those along the coast, there is a philosophical shift: this time around Hon Hai has no ambition to create and run entire factory towns within which the company is responsible for housing, healthcare, etc.

Krepenevich sees a "Finlandization" strategy by China in the Pac

Andrew Krepinevich op-ed in the WSJ that's a bit breathless in its admiration for the much-hyped Chinese strategy of the "assassin's mace."  It always kills me how so many experts criticized net-centric warfare as so much high-tech BS and then seem to swallow this stuff hook, line and sinker from a military that hasn't actually fought anybody in a sustained fashion for more than half a century.

Of course, we might outspend everybody by gajillions and yet our stuff is sooooooo easy to counter, but China is going to pull off this amazing collection of high-tech hijinks the very first time and it'll be so amazingly hard to counter.

Naturally, Krepinevich's logic exists in his usual vacuum where economics and political repercussions of such behavior are set aside--to wit, his argument that China is building up all this power to "Finlandize" the region.

Well, turns out, looking at my post from yesterday, that SE Asian weapon buying has doubled in the past half decade and America seems to be having no trouble locating new military friends from this neck of the woods.

Ah, but we are told that Team Obama is the naive player here, even though virtually every China hand will tell you that Bush-Cheney talked a tougher game but were more lenient with China while Obama-Biden talk a nicer game but actually are tougher. The reason why Pentagon planners refer to China as "Voldemort" (i.e., the threat that dare not be named) is that the scenarios for conflict are bleeding plausibility with each passing year.  The Pentagon, in its complete isolation from the economic world and globalization and global supply chains and global financial flows, might find pumping up the China threat to be a tough sell, and that tough sell may be particularly galling for the Air Force and Navy that see their platform budgets tightened thanks to Long War dynamics that favor the Army and Marines more, but watching Krepinevich trying to sell the stealthiness of China's military rise is just sad.

No one is ignoring this build-up--not the US with its annual report nor China's neighbors, and balancing has naturally resulted in the region.  Krepinevich oversells the regional fear and overhypes the notion that, unless we start spending mucho on the USAF-USN-heavy Leviathan, that SE Asia "may have no choice but to follow Finland's Cold War example."

I mean, I'd love to read the scenario whereby China's "dazzles" a few US satellites and launches some surprise cyber attacks and blows up a couple of US warships with missiles and voila! Suddenly everybody in SE Asia is China's cowed minions willing to do whatever it says.  Oh, and the rest of the world just accepts this fait accompli, offering no response. Doesn't that fantastic logic strike you as mirror-imaging the same sort of net-centric "shock and awe" that we've never been able to pull off on anyone to any lasting effect?  So how come China, with its completely inexperienced military, is going to make that happen with such ease and such obvious and permanent gain (i.e., "finlandization)?

It's amazing to me: we supposedly learn the harsh reality of war in the 21st century in Iraq and Afghanistan (i.e., that the high-tech most certainly does not rule--much less guarantee victory), but now we're supposed to freak out and go all Cold War over China because it's able--on a zero-experience base--to do everything we weren't able to do with net-centric warfare and they'll be so good at it that we'll never see it coming and we'll lose everything before we even know what hit us.

Am I the only national-security type who finds this straight-faced juxta-positioning to be ludicrous?

If Krepinevich represents Pentagon war planning thinking, then he's demonstrating that the Defense Department is no closer to understanding globalization today than it was back in 2001.  This is classic war-within-the-context-of-war myopia.

All I can say is, thank God for Gates. Obama better do everything in his power to keep him past 2011. The President has no idea how bad the Pentagon's internal dynamics could get in his absence, or what a bulwark he is against such narrow thinking.

Yikes!

More natural counter-China balancing in Asia: Vietnam + US

AP story on growing mil-mil cooperation between US and Vietnam via Stewart Ross.

Cold War enemies the United States and Vietnam demonstrated their blossoming military relations Sunday as a U.S. nuclear supercarrier cruised in waters off the Southeast Asian nation's coast — sending a message that China is not the region's only big player.

The visit comes 35 years after the Vietnam War as Washington and Hanoi are cozying up in a number of areas, from negotiating a controversial deal to share civilian nuclear fuel and technology to agreeing that China needs to work with its neighbors to resolve territorial claims in the South China Sea.

But I say again, cannot the Assassin's Mace render this all asunder, with a flip of a button?

Yes, yes.  As the Pythons used to note, "No one expects the Spanish Inquisition!"

To which I now add, "Nyyyoooooobody eck-spects the Assassin's MaSSSSSSSSSSSS!"

[It's a fair blog.]

China's rise triggers natural military cooperation among those made nervous

Great WAPO piece by the always good John Pomfret that highlights a recent theme of mine: no great need to "encircle" China, because the more the neighbors worry over its economic rise and foolish threats about the South China Sea, they will simply come to us--for arms and alliance.

Thus, no great effort required.

Weapons acquisitions in the region almost doubled from 2005 to 2009 compared with the five preceding years, according to data released by the Stockholm International Peace Research Institute this year.

"There is a threat perception among some of the countries in Southeast Asia," said Siemon Wezeman, senior fellow at the institute. "China is an issue there."

The buying spree is set to continue . . .

We have this tendency in the West to suppose our "decline" is absolute and China's "rise" will unfold with no feedback from the system.  Neither, of course, is true, especially the latter.  

China will learn that there is a reason why the U.S. has long had the world's largest gun with no one trying to build one similar: the simple truth is that we're trusted in that role and with that capability.  And a big reason why is that we're a democracy.

China cannot rise as a single-party state and get the same pass. It's rise will naturally trigger all manner of localized and regionalized and globalized balancing by all sorts of players. It will not need to be organized; it will simply happen as a matter of course.

Whatever we do inside the US military to prepare for the China threat (AirSea Battle comes to mind) is marginal compared to this self-selected balancing by so many states, in large part because it will ultimately reflect smaller states pursuing across-the-board hedging strategies vis-a-vis China.

Remember these words:  in the pre-American-styled-globalization, trade followed the flag; today it's the flag that follows trade--as China will soon learn on its own in so many places in the world to its great discomfort.

Blast from my past: "Ten Reasons Why China Matters to You" (2008)

 

Ten Reasons Why China Matters to You

by Thomas P.M. Barnett

GOOD magazine, May/June 2008, pp. 58-65

Don’t be scared of China—the country is perfectly positioned to be our most powerful ally (lack of democracy notwithstanding, of course). But if there is anything to worry about, it’s not China’s massive military; it’s the economy, stupid.

Why China Matters To You:

10.

Because Nixon went to China and your world was born.

When President Richard Nixon reopened diplomatic ties with Mao Zedong's communist China in 1972, he enabled the most profound global economic dynamic of the last half century: China's historic reemergence as a worldwide market force. Nothing shapes your world today more than China's rise, and nothing will shape our planet's future more--for good or ill--than China's ongoing trajectory.

After centuries of relative isolation, China’s rapid reintegration into the global economy transformed globalization from its narrow Cold War-era base (the West) to its current “majority” status, whereby two-thirds of humanity now enjoys deep and growing connectivity with international markets and the remaining third works toward it. China’s decision to rejoin the world was globalization’s tipping point, meaning—absent global war—there’s no turning back now, only adaptation.

If Nixon opened the door, then Mao’s successor Deng Xiaoping led the Chinese people through it. Unlike Mikhail Gorbachev, Deng chose wisely: By tackling economic freedom before political liberalization, Deng kept China stable during its tenuous first years of market reform. Although Deng is correctly labeled an autocrat (he ordered the bloody suppression of the Tiananmen Square democracy protests in 1989), he is also correctly identified as a modernizer who unleashed a generation’s immense creativity.

Many from that generation will tell you that, before Tiananmen, they felt freedom was “90 percent political and 10 percent economic,” but after Deng’s crackdown, they concluded—somewhat harshly—that real freedom was “90 percent economic and 10 percent political.” In other words, they decided that markets were the first, best instruments for generating positive change in China.

A grand bargain was struck: Deng won military support for further market reforms so long as a lid was kept on political change, and the army was afforded enough of a budget to modernize. The Party would remain supreme, but state involvement in the economy would shrink and private business would be encouraged along with investment from, and trade with, the outside world.

China has experienced incredible economic growth ever since, increasing its gross domestic product annually by almost 10 percent—as fast as you dare expand. But China is also nowhere near becoming a democracy, and its achievement scares nations around the world—and excites others—because it suggests that you can rapidly embrace globalization, achieve great income growth, and remain a single-party state by following the so-called China model.

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9.

Because China may be an ancient civilization, but it's a young society that's growing up very quickly--and unevenly.

China's modernization strategy included slowing population growth through the “one-child policy.” Yet China remains huge: 1.3 billion souls crammed into a country no larger than our own. So if you think we’ve added quite a few Hispanics in the last couple of decades, imagine inviting everyone in the Western Hemisphere and half of Africa to come live inside the United States, because that would give us China’s crowded mix of rich and poor.

Given China’s traditions, the one-child policy favors males over females; the latter are too often aborted or offered up for international adoption. (Disclosure: My fourth child originally hailed from Jiangxi province.) The build-up of males has led some Western demographers to worry that over time, China will inevitably become militarily aggressive—how else to distract all those frustrated young men? But this fear is overblown, as is evidenced by trends in the rest of Asia, where, for example, similarly frustrated South Korean males simply go abroad and, you know, marry a broad in places like Vietnam or Thailand. Bottom line? Desire wins out.

The more profound legacy of the one-child policy is that China will grow very old, very fast. Right now the country enjoys a demographic sweet spot: plenty of workers supporting relatively few children or elders. But once you restrict the baby supply, the population as a whole moves up collectively in age, meaning that China will rapidly progress toward the “Florida mark” (20 percent of the population above age 65) in just two decades. The United States will hit Florida around the same time. If America, in all its wealth, is struggling with that profound shift, how much harder do you think it will be for China, weighed down by hundreds of millions of impoverished peasants?

Here’s one thing to remember when anyone tries to sell you on China running the world someday soon: that China will get very old before it gets truly rich, something the world has never witnessed before. What history tells us is this: Aging populations are not aggressive populations.

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8.

Because China's transformation echoes much of America's past: not only the good, but plenty of the bad, and the ugly too.

Impossible, you say. Ruled by communists, China’s civilization bears no resemblance to our own.

But China’s true “communist” period was just three decades out of a 5,000-year history, the rest of which featured a social bent toward markets in general (the Chinese are inveterate gamblers, for example) and past periods of serious global trade connectivity (recall the Silk Road of yore). Add in the strong focus on family ties and a deep spiritual history that has long featured free competition among various faiths and we’re not exactly talking about some brother from another planet.

So forget trying to figure out today’s China through its own history, an endless cycle of disintegrating peace and integrating war. Think about it this way: Right now, China is somewhere in the historical vicinity of “rising America” circa 1880—absent democracy, of course. Once you realize that, then depending on where you go around China, you can locate yourself somewhere in the last 125 years of America’s own ascendancy.

Some examples: Foreign policy-wise, you’re looking at a mild-mannered Teddy Roosevelt: China’s military stick is getting bigger, but it still prefers to speak softly, mostly threatening small island nations (read: Taiwan) off its coast.

The nation is likewise undergoing a construction and investment boom that’s right out of 1920s America, and frankly, that should give pause to anyone concerned with global economic stability. China’s banking and financial industries are about as regulated as ours were prior to the Great Crash of 1929. But there’s no sign of a slowdown. Shanghai already has 4,000 skyscrapers—twice as many as New York—and plans another thousand.

Check out China’s space program, which just put its first man in orbit. Beijing now speaks openly of repeating our 1960s quest for the moon. Groovy! Let me just raise my glass of Tang in salute and wonder why Americans aren’t on Mars yet. Speaking of which, there’s also a sexual revolution brewing, with China’s urban youth taking one great leap forward from Father Knows Best to Sex and the City. This revolution won’t be televised, but it’s being compulsively blogged.

Corruption-wise, Beijing remains stuck somewhere prior to the Progressive Era of late-19th-century America, and that’s no good. China’s political system needs to be able to process all this social and economic pressure with more flexibility. Citizens are simply growing angrier and more demanding with each passing year. China’s legal system also needs to clean up its act, because the more China’s economy opens up, the more the global business community is going to demand greater transparency and better avenues for legal redress. Corruption already consumes upwards of 5 percent of China’s gross domestic product. In a “flat world” of economic hypercompetitiveness, such inefficiency eventually costs too much.

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7.

Because China's rapid and deep integration into manufacturing means that Chinese products permeate your life--at some risk.

Globalization tends to integrate trade by disintegrating global supply chains. By breaking up these chains, globalization spreads various segments of production and assembly across those economies that offer the cheapest labor for each particular stage. China has deftly inserted itself into a long list of these chains, becoming the final assembler of note in toys, cell phones, CD players, computers, and auto parts, to name but a few. By doing so, China has consolidated much of Asia’s previous trade surpluses with America into its own burgeoning bilateral trade with the United States. So when you hear about America’s huge trade deficit with China, bear in mind that it’s the same huge trade deficit we’ve long had with Asia as a whole.

Also be aware that this figure hides a lot of complexity. Foreign corporations control the majority (approximately two-thirds) of this production for export. American companies in particular dominate China’s U.S.-export sector, meaning it’s basically our companies renting Chinese labor and keeping much of the profit. The Chinese export that sells for hundreds of dollars in America nets only tens of dollars for the Chinese economy. That’s how Wal-Mart, the single biggest source for Chinese exports in the world, keeps its prices so low. So if you think Western companies are exploiting cheap Chinese labor, then understand that you’re a prime beneficiary.

Naturally, China’s deep penetration of the U.S. market has raised product-safety issues. Any economy that is growing as fast as China’s cuts plenty of corners. But realize that China learns by scandals just as America did over the past century. Frankly, the best crises are the ones you actually hear about, because that means the international press got ahold of them, and those already affected or at risk will get the information they need to protect themselves. Once tracked back to China, Beijing is put on public notice that whatever laxness exists simply cannot be tolerated anymore, with threats of quarantine, bans on exports, cessation of investment flows, and so on.

A generation ago, such threats would elicit yawns from China’s ruling elite, but now, with the Communist Party’s legitimacy riding on economic expansion, they’re taken with the utmost seriousness. In short, China’s government is starting to act more like a business which recognizes that its reputation is often its most important asset, because fierce competition means that today’s mistake allows somebody else to steal your customers by the start of business tomorrow.

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6.

Because China's demand for resources is altering global markets in ways both profound and perverse.

China’s explosive economic growth forces it to suck in resources from all over the world. As James Kynge, a longtime China-watcher, notes in his recent book China Shakes the World, “China’s endowments are deeply lopsided.” Blessed with too many people, China is short on just about everything else: arable land, water, energy, and raw materials of all sorts. Thus, the only way China manages to serve as globalization’s “manufacturing floor” is to become a leading global importer of virtually any commodity you can name, from cement and copper to oil and gas.

While there’s hardly anything wrong about that, China’s insatiable demand for resources likewise drives Beijing to actively court pariah states and “rogue regimes” while the West tries to isolate the same regimes with economic sanctions. Take China’s relationship with Iran: While American diplomats work night and day to level even harsher sanctions to slow down Tehran’s reach for the bomb, China quietly edges out Japan as Iran’s major energy investor, sweetening the deal by reselling it some of that fabulous high-tech military hardware the Chinese military imports from Israel—hardware which then turns up in southern Lebanon in the hands of Hezbollah.

On the face of it, that constitutes obstructionism on China’s part, as if it’s trying to prevent the global community from cracking down on bad behavior. But the inescapable truth is that China’s scramble to find resources means it has to cut deals with anybody, no matter their disreputable record. So while Sudan’s government engages in what many Western states consider to be “ethnic cleansing” or genocide in its Darfur region, China is more than happy to invest heavily in Sudan’s oil industry while supplying the Sudanese government with weapons. Do that long enough and you’ll have Hollywood stars galore decrying your hoped-for coming-out party as the “genocide Olympics.”

But the longer-term danger is this: China is getting awfully dependent on a lot of unstable countries without having the global military footprint of a great power—you know, like somebody building a very large house made of straw, nowhere near a fire station. When bad things happen—like, say, that one afternoon nine Chinese oil-rig workers were killed by rebels in eastern Ethiopia—China can’t respond like a military power you should fear, because it needs that oil. Once that reality sinks in with local bad actors, expect them to start squeezing Beijing for their own slice of protection money. You know that Thomas Friedman bit about America funding both sides of the “war on terror”? Well, this is how that sort of thing starts.

Today, China might get by simply by buying off every dictator it can. But that won’t work in a future world defined by hyperconnectivity, where everyone can witness the human implications of China’s deal-making. Nor will it work in a future world defined by hyperinterdependency, a world China is creating—whether it realizes it or not.

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5.

Because the panda "huggers" versus "sluggers" debate is a lot of hot air--until Washington scares Beijing into raising your mortgage interest rate five points overnight.

I’m considered a “panda hugger,” someone who rationalizes China’s current lack of democracy and argues that, despite all its selfish behavior, China should be considered by America more as a potential ally than a downstream threat. Being an economic determinist (I taught Marxism at Harvard in another life), I believe economics shapes politics more than the other way around. Thus, I tend to be patient when I see an autocratic regime marketizing its economy, especially when the economy opens up to globalization’s networks.

So when I draw up a list of regimes I’d like to see forcibly changed by the global community, China’s nowhere near the “to do” range. That doesn’t mean I want Washington to forgo pushing Beijing’s leaders in the direction of increasing political freedom and transparency, it just means that I have more faith in the transformative power of markets than others do, so I don’t argue for picking fights with China on that score when I think there are so many other, more urgent situations around the planet today that we could collectively address.

“Panda sluggers” refers to those politicians, writers, and activists who make just the opposite argument: China has had plenty of time to change politically in a manner commensurate with its embrace of markets and globalization. If Beijing’s ruling elite has managed to keep such a firm grip on political power, then maybe it’s really cracked the code on “authoritarian capitalism,” meaning we’re looking at an inherently antagonistic model of development. If so, America had better wake up to that reality and start combating China’s “soft power” influence-peddling around the world.

This view dovetails with trade protectionists who say that Washington must confront Beijing over its unfair trade practices and defense hawks who say similar things over China’s rising military spending. My counterargument? When America was a rising power around the beginning of the last century, we were highly protectionist. Now that we’re advanced, we’d like everybody else to follow our example. Fair? All things being equal, yes. But all things aren’t equal when you’re trying to catch up, the way China is today. I say, if you talk them into becoming capitalists, then you have to live with the consequences and be patient.

What concerns me most about this ongoing debate is the potential for the perfect triggering crisis to come along and decisively shift public opinion in favor of the “slugger” position, launching America down some path of economic retaliation against and/or military confrontation with China. Obvious security situations spring to mind, such as North Korea’s nuclear program, Iran’s nuclear program, or some significant U.S. military intervention in Pakistan—a longtime strategic ally of China.

But a more likely trigger is an extended economic downturn in the United States, or a financial panic in China following the bursting of some stock market bubble. If seriously threatened, might China decide to divest itself of U.S. currency—China currently holds $1.4 trillion in U.S. dollar reserves—sending the value of the dollar into a tailspin? No one knows for sure, but intelligent observers realize that, as former treasury secretary Lawrence Summers has put it, there basically exists a financial “balance of terror” between our two economies, meaning that when either of us pulls the economic trigger, we may well both end up with fatal wounds.

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4.

Because as China builds out its infrastructure, it can set a good or a bad example to developing economies struggling to deal with fragile environments.

American businesses face a key decision: dive into China’s dynamic markets or risk missing out on their coming wave of innovation. Nowhere is this more true than in infrastructure development, which is expanding like gangbusters in China right now and will continue to do so for the next couple of decades. Good example: China is building freeways like crazy. In about 20 years, it’ll have roughly 50,000 miles of them—the equivalent of our interstate system.

In that time, the world will spend $10 trillion for infrastructure development in energy ($6 trillion) and water ($4 trillion). Most will happen inside China and India at a pace not witnessed on this planet since America spread its network westward following our Civil War. Naturally, environmentalists are worried. If China replicates our resource-intensive style of growth throughout its economy, there will be no end to its pollution and carbon emissions. If you’ve spent any time in China, you know what I’m talking about: acrid-tasting air that the U.N. estimates is responsible for the premature death of 400,000 Chinese a year. Now add in the four times as many cars and trucks that will be on Chinese roads in 20 years’ time, along with far more urbanization and industrialization, and tell me if that sounds sustainable.

But guess what? The Chinese themselves aren’t exactly clueless on the subject. After all, they live there. So I’m betting—and I admit this is a bet—that the Chinese, along with the Indians and emerging markets elsewhere, will be smarter than that. Not because they want to be, but because they’re forced to be. These rising economies will have to zig where we zagged, and how they zig will be important, not just for the “advanced” West, but for all those emerging markets to come in places like Africa.

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3.

Because China is globalization's general contractor: always happy to take the job and your money, but hard to get on the phone once you discover problems.

Globalization now impinges on the most traditional, off-the-grid societies in the world. Not surprisingly, there’s going to be plenty of cultural blowback triggered by that process, and some of it is going to come our way in the form of transnational terrorism—just as it did on 9/11.

For America to win a long war against radical extremism, we need to make globalization truly global by integrating the one-third of humanity whose noses remain pressed to the glass, wondering when they’ll be let in to the party. That’s labor-intensive, and American workers price out far too high. Yes, we must be significantly involved, but it’s not going to be Americans—much less Europeans—who do the heavy lifting. No, it’s going to be those longtime frontier laborers of the global economy—the Chinese and other Asians. The highly networked Chinese have shown up like clockwork at every frontier globalization has ever created. Currently, more than a million Chinese nationals have turned up in Africa alone, engaging in what I call preemptive nation-building. It’s great that China has triggered a commodities boom over much of Africa. God knows those economies can use all the help they can get. But the longer it looks like China is just there for the raw materials, the more Africans are going to catch on to the fact that—for now—the Chinese aren’t doing any more for the continent’s long-term development than the European colonial powers did decades ago.

But China needs our help, too. As the Chinese become increasingly dependent on resources drawn from unstable regions—by 2020, roughly 70 percent of China’s oil imports will be from the Middle East—the country must continue leveraging U.S. military power. Otherwise, it’ll be left unduly subsidizing weak or corrupt regimes, with China’s economic connectivity put at risk by local warlords, chronic insurgencies, and radical extremists bent on driving out globalization’s networks. If America can’t afford to maintain global security on its own, and China can’t afford to replace our effort on its own, then a strategic alliance makes eminent sense.

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2.

Because China will not be our biggest future enemy but our most important ally.

A significant portion of our national-security establishment wants desperately to cast China as an inevitable long-term threat. Why? Part of it is simply habit, as most who argue this line spent the bulk of their professional lives in the Cold War and just can’t imagine a world that doesn’t feature a superpower rivalry. For those who need to fill that hole, China is the best show in town, because its military buildup allows these hawks to argue that America must buy and maintain a huge, high-tech military force for potential large-scale war with the Chinese.

My counter is this: China’s military buildup is not historically odd. America did the same as it became a global economic power in the late decades of the 19th century. Remember Teddy Roosevelt and the Great White Fleet? It’s the same logic we see with China today.

But won't events put China and the United States at odds—say, over the strategic issues of fostering stability in the Persian Gulf? Hardly. Right now the United States imports only about one-tenth of the Persian Gulf’s oil exports, with the vast bulk heading east to Asia. Frankly, there’s no sense in the strategic equation “American blood (spilled) for Chinese oil (imports secured).” As China’s oil imports skyrocket in coming years, unlike ours, do you think that’s a politically sustainable situation?

My larger, more long-term fear is that by keeping China our preferred threat, we deny ourselves access to its significant military manpower and growing budget. With Europe and Japan both aging dramatically and China’s strategic interests ballooning in unstable regions, this makes no sense. Better to lock in China as soon as possible as the land-power anchor of an East-Asian version of NATO. The sooner we achieve that, along with Korea’s reunification, the sooner we can draw down our military in the region and better employ it in hotter spots around the world, eventually with Chinese (and Indian) troops helping out.

What would a strategic alliance with China look like? It won’t come as some “grand bargain” achieved in a single summit, but rather a long-term buildup of trust through coalition operations. Asia is an obvious focal point for such cooperation, but a complex one. Far better in the short run would be to create a strategic dialogue between the Pentagon’s nascent Africa Command and the Chinese military regarding joint peacekeeping and humanitarian operations in Africa. By focusing on that relatively clean slate, America and China could come together to explore what our military alliance could ultimately entail.

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1.

Because we're less than five years from a new generation of Chinese leaders with whom a far stronger relationship may well be built.

China is on the verge of a generational leadership change that will profoundly shape its emergence as a global power over the next decade. America should take advantage of this new group’s eagerness to play an actively constructive role in international affairs.

To make clear how this would work, here’s a quick primer on the generations of Chinese leaders since 1949: Mao personified the first generation, Deng the second. Deng was followed by a third generation fronted by Jiang Zemin, China’s president and party boss across the 1990s. What’s important to note about the third generation is that this cohort was largely educated in the Soviet Union during the 1950s. The technocratic flavor of that formative experience emboldened these leaders to extend Deng’s economic reforms far deeper into Chinese society, even as the leaders steadfastly refused political liberalization.

That brings us to the current, or fourth, generation of leaders, represented by President Hu Jintao and Premier Wen Jiabao, a risk-avoiding pair who have been quietly at the helm of “peacefully rising” China since 2002. Internally, their focus has been on harmonizing the huge imbalance between the booming coastal provinces and the left-behind rural poor of the interior.

Since 9/11, China has been almost invisible in international security affairs, essentially free riding on America’s vigorous prosecution of both radical Islam’s global insurgency and the so-called Axis of Evil, despite being a potentially key player. After all, China has long stood as North Korea’s patron and now emerges as a dynamic investor for energy and raw-materials providers throughout the Middle East and Africa.

But understand this: China’s fourth-generation leaders did not travel abroad in the 1960s for their college education, trapped as they were by the Cultural Revolution. So it’s hardly a surprise that these homebodies have proven reticent to step out internationally. But that’s changing as China’s fifth-generation leaders-in-waiting step into senior positions of power. Starting in the late 1970s, many of them were educated right here in the United States—the birthplace of today’s market-driven globalization. All but penciled in for future top slots last fall at the Communist Party’s supreme gathering, this group has already begun its years-long transition to rule, slated to begin officially in 2012. Increasingly, China’s next leadership generation speaks openly of the nation’s achievement of great power status.

How America engages China’s emerging elite in coming years could well determine—for good or ill—the lasting contours of the most important bilateral relationship of the 21st century. The scariest aspect to this relationship right now is that America’s economic interdependency with China vastly outweighs the two nations’ political and, more important, military connectivity. Bind America and China together, and globalization cannot be derailed. But set them persistently at odds, and that’s a recipe for unacceptable danger.

The "rebalancing" that takes decades?

Banyan column in The Economist.

The key point:

It's economy, for all its three-decades-long boom, still only accoiunts for 8% of global GDP in current dollars; domestic private consumption, though growing fast, remains a small part of national GDP by global standards (36%).  This will grow as China reforms its economy to give a bigger share to household income, for example, by lifting wages for China's factory workers . . This "rebalancing," though, could take decades.  In the short term the high-speed growth much of the rest of the world has enjoyed will moderate.  Growth will not be measured against the worst of the slump; and faltering recovery in the G3 will dent exports, however well China does.  The golden age is not here yet.

Basic message:  there is no real leap-frogging of the West by China.  It got to where it stands today largely because the West could absorb its exports.  That is ending by necessity and by choice--and perhaps soon enough by emotion and fear to boot.

There is no singular rise in a world of interdependencies.  China needs friends far more than its recent hubris and arrogance indicate.

The world needs a new type of leadership in China no less than it does in America.

Kim Jong Un: China seconds that devotion

Economist piece on the second trip that Kim Jong Il took to convince his Chinese patrons that idiot son #3 Kim Jong Un is the right man at the right time.

When Kim snuck off earlier this year, you know the subject was the same, but at least China could feign some ignorance.  Word was that the son snuck along for the train ride this time, with the Chinese offering kind words for the upcoming big party meet that will crown the boy.

So it would seem that the Chinese have clearly signed off on the succession, meaning they will bear some real responsibility for what comes next.

China: Will fail, but too big to let fail

image here

Guardian op-ed by way of WPR's Media Roundup.  Fascinating piece.

Very sensible run down to start off:

There is no question that China's growth has been anything short of exceptional. However, that success may have run its course. China will have to rise again in order to rebalance growth while reducing inequality and environmental degradation. The plight of 1.6 billion people depends on it, and the entire world economy. The global community should do all it can to help China succeed.

Like Japan, South Korea, and others before, China has deployed a hybrid mix of state and market-led forces to globalise its economy over the past 30 years. Like its East Asian predecessors the Chinese miracle has been built on exports to the west. The results have been unprecedented, with a growth rate of approximately 10% that has lifted 566 million people over the $1.08 "extreme poverty" threshold set by the World Bank.

Yet the Chinese model is not sustainable in the long run. It has created severe inequalities and environmental degradation and has contributed to the global imbalances that were at the root of the financial crisis. There is an across the board consensus that China needs to diversify demand toward its domestic market.

Yilmaz Akyuz, chief economist of the South Centre, estimates that close to 60% of China's imports are used in the export sector and only 15% of imports are for domestic consumption. 

All sensibly rendered, especially noting the non-uniquenes of the China model.

But here's where Chinese incrementalism cannot be condemned:

The west can't have its cake and eat it too. The west can't tell China to increase domestic demand and rebalance its economy through domestic consumption (without increasing carbon dioxide emissions), and at the same time shun China's incremental approach to to monetary policy, strikes and wage increases, policies for financial stability, and green industrial innovation. China should be enabled to succeed. A country of 1.6 billion people that is now one of the only rudders working in the global economy is too big to fail.

So an argument for focusing on direction over degree--as in, is China slowly moving in the right direction?  And not obsessing too much over speed.

Why?  Simply put, no one wants to own the problem of a ship-wrecked Chinese economy.

Excellent, intelligent piece.

Stealing from Africa: China's aggressive pursuit of Global Fund health grants

Foreign Policy piece, by way of WPR's Media Roundup, that rightfully accuses China of stealing from Peter (Africa) to pay Paul (it's own interior rural poor) in its aggressive pursuit and winning of "Global Fund to fight AIDS, tuberculosis and  malaria" health grants to the tune of $1B.

Chow points out that China has donated only $16m to the fund over 8 years, compared to $5.5B by the U.S. 

Particularly egregious:  $149m in health grants to battle malaria, when last year China suffered 38 deaths from that disease.

Meanwhile, a lot of African countries with far worse health burdens are getting crumbs compared to China, which ranks #4 in the world for Global Fund grants.

No one says China still doesn't have issues, but with $2.5T in money from the West already in terms of trade-surplus-generated reserve currency holdings, it's hard to argue that China should still be shoving aside more worthy African recipients.

The big-war fantasy that is the Taiwan scenario

fantasy image here

Great piece by Keith Richburg in WAPO.

The start:

China considers Taiwan a renegade province and keeps more than 1,000 missiles pointed at the island. Taiwan stockpiles American weapons to defend itself. And the standoff remains the longest-running irritant in Washington's relations with Beijing.

But the unresolved rivalry across the narrow Taiwan Strait masks a different reality on the ground. In many ways -- economics, culture, family ties -- China and Taiwan are rapidly becoming closely intertwined, making the chances of a military confrontation seem increasingly remote.

More than a million Taiwanese now live in China full time -- about half of them in the Shanghai area -- running factories, starting restaurants, attending universities, buying property.

There are 270 regularly scheduled flights each week between Chinese and Taiwanese cities, and they are almost always fully booked. The number of weekly flights is set to grow to more than 400 in a few weeks.

Many Taiwanese living in China are too young to have known China as a hostile neighbor; rather, they see a vast marketplace.

"I could see it was happening around me, people were moving to China," said Tingting Yang, 39, who came to Shanghai from Taipei seven years ago and runs a public relations company. "They don't need to do anything militarily. Taiwan is already close to China. And getting closer."

They gave me a rifle, but I invaded with a briefcase instead:

Taiwanese men speak of the irony of being taught during military service to see China as the enemy. "We were trained to land in China on a marine landing craft with rifles and tanks," said Martin Liou, 51, who was an officer in the Taiwanese army and later set up Amway's warehouse and factory network in China. "Instead of a rifle, I came with a briefcase."

The soft-power kill moves head at full speed:

Taiwanese culture has also invaded mainland China, from soap operas to the accent and slang being mimicked by teenage girls in Shanghai.

The wave goes the other way, as well, though it is more limited. Chinese are increasingly traveling as tourists to Taiwan -- 800,000 of them so far this year. For now, they must go with organized tours, but later this year, the rules will allow individual travel.

While tension still exists at the level of nation-states, it's basically lost at the individual level:

"The two governments have their political concerns, their sense of pride," Liou said. "But we regular people, we want to make friends, make money, we want to see each other."

"If China leaves Taiwan alone, if they are patient, sooner or later, it's going to be unified," he said.

This scenario bleeds plausibility, but it's what the USN-USAF AirSea Battle lives and breathes on.

Japanese employers have a counteroffer to Beijing

WSJ story in which Japan is basically saying to China, if you want us to stay, you have to make your legal system more transparent and your business rules more robust.  

Lately, as a result of worker unrest against Japanese factories in China, Beijing has been lecturing the Japanese on the need to pay its workers better wages.  So apparently the Japanese have decided to return the lecturing favor.

In effect, this is Japan joining the growing chorus of Western businesses complaining about China's increasingly hostile investment and business environment--a big sign, in my mind.