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cloud_zhou - 2008/6/18 14:29:00
John Mauldin's Outside the Box http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/default.aspx No matter where in the world I am, in South Africa, in Europe, in LaJolla, there's one question I get asked over and over, "What aboutChina?" And small wonder. The increasing impact of China in the lastgeneration is just staggering and seemingly accelerating every day. Ifyou're in the market for oil, minerals, arable land, equities or debt,you're bidding against Chinese government-sponsored entities with a $1trillion warchest. And the list of markets where China is a key playergrows every day. Bottom line: whether you're filling up your gas tankor trading credit default swaps, China's decisions impact your pocketbook. The only thing that's crystal clear about China is theneed to look long term, at the underlying forces that don't change dayby day. Nobody does this better than my friend George Friedman and histeam at Stratfor. Their geopolitical focus filters out the noise in thepopular press and concentrates on the real drivers behind nationalpolicy. This is especially critical for a market like China, wheretraditional financial statement analysis is impossible and profitmotives just don't apply. On Monday, George and his team arereleasing the second in their series of Geopolitical Monographs, calledThe Geopolitics of China. I've received an advance copy of the reportbelow, and it is today's Special Edition of Outside the Box. Click this link to take advantage of a special pre-release offeron a Stratfor Membership that George is offering just to my readers.Did you know that China is functionally an island? Want to understandChina's strategy behind their sovereign wealth funds? Policy in Tibetand Darfur? Join Stratfor now. You'll get a whole year of Stratfor'sinsights, plus you'll get The Geopolitics of China and their otherGeopolitical Monographs included free. You really don't want to missout on this opportunity. Look at the map below that shows howChina is functionally an island. Fascinating. It's just one of the mapsGeorge uses to illustrate what makes China, China. I hope you find thisreport intriguing, and do take George up on his offer for a free copyof the entire series included with your Stratfor Membership. John Mauldin, Editor Outside the Box
cloud_zhou - 2008/6/18 14:30:00
THE GEOPOLITICS OF CHINA: A Great Power Enclosed ContemporaryChina is an island. Although it is not surrounded by water (whichborders only its eastern flank), China is bordered by terrain that isdifficult to traverse in virtually any direction. There are some areasthat can be traversed, but to understand China we must begin byvisualizing the mountains, jungles and wastelands that enclose it. Thisouter shell both contains and protects China. Internally, China must be divided into two parts: The Chinese heartlandand the non-Chinese buffer regions surrounding it. There is a line inChina called the 15-inch isohyet. On the east side of this line morethan 15 inches of rain fall each year. On the west side annual rainfallis less than that. The bulk of the Chinese population lives east andsouth of this line. This is Han China, the Chinese heartland. It iswhere the vast majority of Chinese live and the home of the ethnic Han,what the world regards as the Chinese. It is important to understandthat over a billion people live in an area about half the size of theUnited States. The Chinese heartland is divided into twoparts, northern and southern, which in turn is represented by two maindialects, Mandarin in the north and Cantonese in the south. Thesedialects share a writing system but are almost mutuallyincomprehensible when spoken. The Chinese heartland is defined by twomajor rivers -- the Yellow River in the north and the Yangtze in theSouth, along with a third lesser river in the south, the Pearl. Theheartland is China's agricultural region. However -- and this is thesingle most important fact about China -- it has about one-third thearable land per person as the rest of the world. This pressure hasdefined modern Chinese history -- both in terms of living with it andtrying to move beyond it. A ring of non-Han regions surroundthis heartland -- Tibet, Xinjiang province (home of the MuslimUighurs), Inner Mongolia and Manchuria. These are the buffer regionsthat historically have been under Chinese rule when China was strongand have broken away when China was weak. Today, there is a great dealof Han settlement in these regions, a cause of friction, but today HanChina is strong. These are also the regions where the historical threat to Chinaoriginated. Han China is a region full of rivers and rain. It istherefore a land of farmers and merchants. The surrounding areas arethe land of nomads and horsemen. In the 13th century, the Mongols under Ghenghis Khan invaded and occupied parts of Han China until the 15thcentury, when the Han reasserted their authority. Following thisperiod, Chinese strategy remained constant: the slow and systematicassertion of control over these outer regions in order to protect theHan from incursions by nomadic cavalry. This imperative drove Chineseforeign policy. In spite of the imbalance of population, or perhapsbecause of it, China saw itself as extremely vulnerable to militaryforces moving from the north and west. Defending a massed population offarmers against these forces was difficult. The easiest solution, theone the Chinese chose, was to reverse the order and impose themselveson their potential conquerors. There was another reason. Asidefrom providing buffers, these possessions provided defensible borders.With borderlands under their control, China was strongly anchored.Let's consider the nature of China's border sequentially, starting inthe east along the southern border with Vietnam and Myanmar. The borderwith Vietnam is the only border readily traversable by large armies ormass commerce. In fact, as recently as 1975, China and Vietnam fought ashort border war, and there have been points in history when China hasdominated Vietnam. However, the rest of the southern border whereYunnan province meets Laos and Myanmar is hilly jungle, difficult totraverse, with almost no major roads. Significant movement across thisborder is almost impossible. During World War II, the United Statesstruggled to build the Burma Road to reach Yunnan and supply ChiangKai-shek's forces. The effort was so difficult it became legendary.China is secure in this region. Hkakabo Razi, almost 19,000 feet high, marks the border between China,Myanmar and India. At this point, China's southwestern frontier begins,anchored in the Himalayas. More precisely, it is where Tibet,controlled by China, borders India and the two Himalayan states, Nepaland Bhutan. This border runs in a long ark past Pakistan, Tajikistanand Kirgizstan, ending at Pik Pobedy, a 25,000-foot mountain markingthe border with China, Kirgyzstan and Kazakhstan. It is possible topass through this border region with difficulty; historically, parts ofit have been accessible as a merchant route. On the whole, however, theHimalayas are a barrier to substantial trade and certainly to militaryforces. India and China -- and China and much of Central Asia -- aresealed off from each other. The one exception is the nextsection of the border, with Kazakhstan. This area is passable but hasrelatively little transport. As the transport expands, this will be themain route between China and the rest of Eurasia. It is the one landbridge from the Chinese island that can be used. The problem isdistance. The border with Kazakhstan is almost a thousand miles fromthe first tier of Han Chinese provinces, and the route passes throughsparsely populated Muslim territory, a region that has posedsignificant challenges to China. Importantly, the Silk Road from Chinaran through Xinjiang and Kazakhstan on its way west. It was the onlyway to go. There is, finally, the long northern border first with Mongolia andthen with Russia, running to the Pacific. This border is certainlypassable. Indeed, the only successful invasion of China took place whenMongol horseman attacked from Mongolia, occupying a good deal of HanChina. China's buffers -- Inner Mongolia and Manchuria -- haveprotected Han China from other attacks. The Chinese have not attackednorthward for two reasons. First, there has historically not been muchthere worth taking. Second, north-south access is difficult. Russia hastwo rail lines running from the west to the Pacific -- the famousTrans-Siberian Railroad (TSR) and the Baikal-Amur Mainline (BAM), whichconnects those two cities and ties into the TSR. Aside from that, thereis no east-west ground transportation linking Russia. There is also nonorth-south transportation. What appears accessible really is not. Thearea in Russia that is most accessible from China is the regionbordering the Pacific, the area from Russia's Vladivostok toBlagoveschensk. This region has reasonable transport, population andadvantages for both sides. If there were ever a conflict between Chinaand Russia, this is the area that would be at the center of it. It isalso the area, as you move southward and away from the Pacific, thatborders on the Korean Peninsula, the area of China's last majormilitary conflict. Then there is the Pacific coast, which hasnumerous harbors and has historically had substantial coastal trade. Itis interesting to note that, apart from the attempt by the Mongols toinvade Japan, and a single major maritime thrust by China into theIndian Ocean -- primarily for trade and abandoned fairly quickly --China has never been a maritime power. Prior to the 19thcentury, it had not faced enemies capable of posing a naval threat and,as a result, it had little interest in spending large sums of money onbuilding a navy. China, when it controls Tibet, Xinjiang,Inner Mongolia and Manchuria, is an insulated state. Han China has onlyone point of potential friction, in the southeast with Vietnam. Otherthan that it is surrounded by non-Han buffer regions that it haspolitically integrated into China. There is a second friction point ineastern Manchuria, touching on Siberia and Korea. There is, finally, asingle opening into the rest of Eurasia on the Xinjiang-Kazakh border. China's most vulnerable point, since the arrival of Europeans in the western Pacific in the mid-19thcentury, has been its coast. Apart from European encroachments in whichcommercial interests were backed up by limited force, China sufferedits most significant military encounter -- and long and miserable war-- after the Japanese invaded and occupied large parts of eastern Chinaalong with Manchuria in the 1930s. Despite the mismatch in militarypower and more than a dozen years of war, Japan still could not forcethe Chinese government to capitulate. The simple fact was that HanChina, given its size and population density, could not be subdued. Nomatter how many victories the Japanese won, they could not decisivelydefeat the Chinese. China is hard to invade; given its sizeand population, it is even harder to occupy. This also makes it hardfor the Chinese to invade others -- not utterly impossible, but quitedifficult. Containing a fifth of the world's population, China can wallitself off from the world, as it did prior to the United Kingdom'sforced entry in the 19th century and as it did under MaoZedong. All of this means China is a great power, but one that has tobehave very differently than other great powers.
cloud_zhou - 2008/6/18 14:30:00
China's Geopolitical Imperatives China has three overriding geopolitical imperatives:
cloud_zhou - 2008/6/18 14:31:00
Maintaining Internal Unity China is more enclosed than anyother great power. The size of its population coupled with its securefrontiers and relative abundance of resources, allows it to developwith minimal intercourse with the rest of the world, if it chooses.During the Maoist period, for example, China became an insular nation,driven primarily by internal interests and considerations, indifferentor hostile to the rest of the world. It was secure and, except for itsinvolvement in the Korean War and its efforts to pacify restless bufferregions, was relatively peaceful. Internally, however, China underwentperiodic, self-generated chaos. The weakness of insularity for China is poverty. Given the ratio ofarable land to population, a self-enclosed China is a poor China. Itspopulation is so poor that economic development driven by domesticdemand, no matter how limited it might be, is impossible. However, anisolated China is easier to manage by a central government. The greatdanger in China is a rupture within the Han Chinese nation. If thathappens, if the central government weakens, the peripheral regions willspin off, and China will then be vulnerable to foreigners takingadvantage of Chinese weakness. For China to prosper, it has toengage in trade, exporting silk, silver and industrial products.Historically, land trade has not posed a problem for China. The SilkRoad allowed foreign influences to come into China and the resultingwealth created a degree of instability. On the whole, however, it couldbe managed. The dynamic of industrialism changed both the geography of Chinese trade and its consequences. In the mid-19thcentury, when Europe -- led by the British --compelled the Chinesegovernment to give trading concessions to the British, it opened a newchapter in Chinese history. For the first time, the Pacific coast wasthe interface with the world, not Central Asia. This in turn, massivelydestabilized China. As trade between China and the worldintensified, the Chinese who were engaged in trading increased theirwealth dramatically. Those in the coastal provinces of China, theregion most deeply involved in trading, became relatively wealthy whilethe Chinese in the interior (not the buffer regions, which were alwayspoor, but the non-coastal provinces of Han China) remained poor,subsistence farmers. The central government was balancedbetween the divergent interests of coastal China and the interior. Thecoastal region, particularly its newly enriched leadership, had aninterest in maintaining and intensifying relations with European powersand with the United States and Japan. The more intense the trade, thewealthier the coastal leadership and the greater the disparity betweenthe regions. In due course, foreigners allied with Chinese coastalmerchants and politicians became more powerful in the coastal regionsthan the central government. The worst geopolitical nightmare of Chinacame true. China fragmented, breaking into regions, some increasinglyunder the control of foreigners, particularly foreign commercialinterests. Beijing lost control over the country. It should be notedthat this was the context in which Japan invaded China, which madeJapan's failure to defeat China all the more extraordinary. Mao'sgoal was three-fold, Marxism aside. First, he wanted to recentralizeChina -- re-establishing Beijing as China's capital and politicalcenter. Second, he wanted to end the massive inequality between thecoastal region and the rest of China. Third, he wanted to expel theforeigners from China. In short, he wanted to recreate a united HanChina. Mao first attempted to trigger an uprising in thecities in 1927 but failed because the coalition of Chinese interestsand foreign powers was impossible to break. Instead he took the longmarch to the interior of China, where he raised a massive peasant armythat was both nationalist and egalitarian and, in 1948, returned to thecoastal region and expelled the foreigners. Mao re-enclosed China,recentralized it, and accepted the inevitable result. China becameequal but extraordinarily poor. China's primary geopoliticalissue is this: For it to develop it must engage in international trade.If it does that, it must use its coastal cities as an interface withthe world. When that happens, the coastal cities and the surroundingregion become increasingly wealthy. The influence of foreigners overthis region increases and the interests of foreigners and the coastalChinese converge and begin competing with the interests of the centralgovernment. China is constantly challenged by the problem of how toavoid this outcome while engaging in international trade.
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Controlling the Buffer Regions Prior to Mao's rise, withthe central government weakened and Han China engaged simultaneously inwar with Japan, civil war and regionalism, the center was not holding.While Manchuria was under Chinese control, Outer Mongolia was underSoviet control and extending its influence (Soviet power more thanMarxist ideology) into Inner Mongolia, and Tibet and Xinjiang weredrifting away. At the same time that Mao was fighting thecivil war, he was also laying the groundwork for taking control of thebuffer regions. Interestingly, his first moves were designed to blockSoviet interests in these regions. Mao moved to consolidate Chinesecommunist control over Manchuria and Inner Mongolia, effectivelyleveraging the Soviets out. Xinjiang had been under the control of aregional war lord, Yang Zengxin. Shortly after the end of the civilwar, Mao moved to force him out and take over Xinjiang. Finally, in1950 Mao moved against Tibet, which he secured in 1951. Therapid-fire consolidation of the buffer regions gave Mao what allChinese emperors sought, a China secure from invasion. ControllingTibet meant that India could not move across the Himalayas andestablish a secure base of operations on the Tibetan Plateau. Therecould be skirmishes in the Himalayas, but no one could push amulti-divisional force across those mountains and keep it supplied. Solong as Tibet was in Chinese hands, the Indians could live on the otherside of the moon. Xinjiang, Inner Mongolia and Manchuria buffered Chinafrom the Soviet Union. Mao was more of a geopolitician than anideologue. He did not trust the Soviets. With the buffer states inhand, they would not invade China. The distances, the poortransportation and the lack of resources meant that any Soviet invasionwould run into massive logistical problems well before it reached HanChina's populated regions, and become bogged down -- just as theJapanese had. China had geopolitical issues with Vietnam,Pakistan and Afghanistan, neighboring states with which it shared aborder, but the real problem for China would come in Manchuria or, moreprecisely, Korea. The Soviets, more than the Chinese, had encouraged aNorth Korean invasion of South Korea. It is difficult to speculate onJoseph Stalin's thinking, but it worked out superbly for him. TheUnited States intervened, defeated the North Korean Army and drove tothe Yalu, the river border with China. The Chinese, seeing thewell-armed and well-trained American force surge to its borders,decided that it had to block its advance and attacked south. Whatresulted was three years of brutal warfare in which the Chinese lostabout a million men. From the Soviet point of view, fighting betweenChina and the United States was the best thing imaginable. But fromStratfor's point of view, what it demonstrated was the sensitivity ofthe Chinese to any encroachment on their borderlands, their buffers,which represent the foundation of their national security.
cloud_zhou - 2008/6/18 14:32:00
Protecting the Coast With the buffer regions undercontrol, the coast is China's most vulnerable point, but itsvulnerability is not to invasion. Given the Japanese example, no onehas the interest or forces to try to invade mainland China, supply anarmy there and hope to win. Invasion is not a meaningful threat. Thecoastal threat to China is economic, and most would not call it athreat. As we saw, the British intrusion into China culminated in thedestabilization of the country, the virtual collapse of the centralgovernment and civil war. It was all caused by prosperity. Mao hadsolved the problem by sealing the coast of China off to any realdevelopment and liquidating the class that had collaborated withforeign business. For Mao, xenophobia was integral to natural policy.He saw foreign presence as undermining the stability of China. Hepreferred impoverished unity to chaos. He also understood that, givenChina's population and geography, it could defend itself againstpotential attackers without an advanced military-industrial complex. His successor, Deng Xiaoping,was heir to a powerful state in control of China and the bufferregions. He also felt under tremendous pressure politically to improveliving standards, and he undoubtedly understood that technological gapswould eventually threaten Chinese national security. He took a historicgamble. He knew that China's economy could not develop on its own.China's internal demand for goods was too weak because the Chinese weretoo poor. Deng gambled that he could open China to foreigninvestment and reorient the Chinese economy away from agriculture andheavy industry and toward export-oriented industries. By doing so hewould increase living standards, import technology and train China'sworkforce. He was betting that the effort this time would notdestabilize China, create massive tensions between the prosperouscoastal provinces and the interior, foster regionalism or put thecoastal regions under foreign control. Deng believed he could avoid allthat by maintaining a strong central government, based on a loyal armyand communist party apparatus. His successors have struggled tomaintain that loyalty to the state and not to foreign investors, whocan make individuals wealthy. That is the bet that is currently beingplayed out.
cloud_zhou - 2008/6/18 14:32:00
From apolitical and military standpoint, China has achieved its strategicgoals. The buffer regions are intact and China faces no threat inEurasia. It sees a Western attempt to force China out of Tibet as anattempt to undermine Chinese national security. For China, however,Tibet is a minor irritant; China has no possible intention of leavingTibet, the Tibetans cannot rise up and win, and no one is about toinvade the region. Similarly, the Uighur Muslims represent an irritantin Xinjiang and not a direct threat. The Russians have no interest inor capability of invading China, and the Korean peninsula does notrepresent a direct threat to the Chinese, certainly not one they couldnot handle. The greatest military threat to China comes from theUnited States Navy. The Chinese have become highly dependent onseaborne trade and the United States Navy is in a position to blockadeChina's ports if it wished. Should the United States do that, it wouldcripple China. Therefore, China's primary military interest is to makesuch a blockade impossible. It would take several generationsfor China to build a surface navy able to compete with the UnitedStates Navy. Simply training naval aviators to conduct carrier-basedoperations effectively would take decades -- at least until thesetrainees became admirals and captains. And this does not take intoaccount the time it would take to build an aircraft carrier andcarrier-capable aircraft and master the intricacies of carrieroperations. For China, the primary mission is to raise the priceof a blockade so high that the Americans would not attempt it. Themeans for that would be land- and submarine-based-anti-ship missiles.The strategic solution is for China to construct a missile forcesufficiently dispersed that it cannot be suppressed by the UnitedStates and with sufficient range to engage the United States atsubstantial distance, as far as the central Pacific. In orderfor this missile force to be effective, it would have to be able toidentify and track potential targets. Therefore, if the Chinese are topursue this strategy, they must also develop a space-based maritimereconnaissance system. These are the technologies that the Chinese arefocusing on. Anti-ship missiles and space-based systems, includinganti-satellite systems designed to blind the Americans, representChina's military counter to its only significant military threat. Chinacould also use those missiles to blockade Taiwan by interdicting shipsgoing to and from the island. But the Chinese do not have the navalability to land a sufficient amphibious force and sustain it in groundcombat. Nor do they have the ability to establish air superiority overthe Taiwan Strait. China might be able to harass Taiwan but it will notinvade it. Missiles, satellites and submarines constitute China's navalstrategy. For China, the primary problem posed by Taiwan isnaval. Taiwan is positioned in such a way that it can readily serve asan air and naval base that could isolate maritime movement between theSouth China Sea and the East China Sea, effectively leaving thenorthern Chinese coast and Shanghai isolated. When you consider theRyukyu Islands that stretch from Taiwan to Japan and add them to thismix, a non-naval power could blockade the northern Chinese coast if itheld Taiwan. Taiwan would not be important to China unless itbecame actively hostile or allied with or occupied by a hostile powersuch as the United States. If that happened, its geographical positionwould pose an extremely serious problem for China. Taiwan is also animportant symbolic issue to China and a way to rally nationalism.Although Taiwan presents no immediate threat, it does pose potentialdangers that China cannot ignore. There is one area in whichChina is being modestly expansionist -- Central Asia and particularlyKazakhstan. Traditionally a route for trading silk, Kazakhstan is nowan area that can produce energy, badly needed by China's industry. TheChinese have been active in developing commercial relations withKazakhstan and in developing roads into Kazakhstan. These roads areopening a trading route that allows oil to flow in one direction andindustrial goods in another. In doing this, the Chinese arechallenging Russia's sphere of influence in the former Soviet Union.The Russians have been prepared to tolerate increased Chinese economicactivity in the region while being wary of China's turning into apolitical power. Kazakhstan has been European Russia's historicalbuffer state against Chinese expansion and it has been under Russiandomination. This region must be watched carefully. If Russia begins tofeel that China is becoming too assertive in this region, it couldrespond militarily to Chinese economic power. Chinese-Russianrelations have historically been complex. Before World War II, theSoviets attempt to manipulate Chinese politics. After World War II,relations between the Soviet Union and China were never as good as somethought, and sometimes these relations became directly hostile, as in1968, when Russian and Chinese troops fought a battle along the UssuriRiver. The Russians have historically feared a Chinese move into theirPacific maritime provinces. The Chinese have feared a Russian move intoManchuria and beyond. Neither of these things happened becausethe logistical challenges involved were enormous and neither had anappetite for the risk of fighting the other. We would think that thiscaution will prevail under current circumstances. However, growingChinese influence in Kazakhstan is not a minor matter for the Russians,who may choose to contest China there. If they do, and it becomes aserious matter, the secondary pressure point for both sides would be inthe Pacific region, complicated by proximity to Korea. But theseare only theoretical possibilities. The threat of an American blockadeon China's coast, of using Taiwan to isolate northern China, ofconflict over Kazakhstan -- all are possibilities that the Chinese musttake into account as they plan for the worst. In fact, the UnitedStates does not have an interest in blockading China and the Chineseand Soviets are not going to escalate competition over Kazakhstan. Chinadoes not have a military-based geopolitical problem. It is in itstraditional strong position, physically secure as it holds its bufferregions. It has achieved it three strategic imperatives. What is mostvulnerable at this point is its first imperative: the unity of HanChina. That is not threatened militarily. Rather, the threat to that iseconomic.
cloud_zhou - 2008/6/18 14:32:00
The problem ofChina, rooted in geopolitics, is economic and it presents itself in twoways. The first is simple. China has an export-oriented economy. It isin a position of dependency. No matter how large its currency reservesor how advanced its technology or how cheap its labor force, Chinadepends on the willingness and ability of other countries to import itsgoods -- as well as the ability to physically ship them. Any disruptionof this flow has a direct effect on the Chinese economy. Theprimary reason other countries buy Chinese goods is price. They arecheaper because of wage differentials. Should China lose that advantageto other nations or for other reasons, its ability to export woulddecline. Today, for example, as energy prices rise, the cost ofproduction rises and the relative importance of the wage differentialdecreases. At a certain point, as China's trading partners see it, thevalue of Chinese imports relative to the political cost of closing downtheir factories will shift. And all of this is outside ofChina's control. China cannot control the world price of oil. It cancut into its cash reserves to subsidize those prices for manufacturersbut that would essentially be transferring money back to consumingnations. It can control rising wages by imposing price controls, butthat would cause internal instability. The center of gravity of Chinais that it has become the industrial workshop of the world and, assuch, it is totally dependent on the world to keep buying its goodsrather than someone else's goods. There are other issues forChina, ranging from a dysfunctional financial system to farm land beingtaken out of production for factories. These are all significant andadd to the story. But in geopolitics we look for the center of gravity,and for China the center of gravity is that the more effective itbecomes at exporting, the more of a hostage it becomes to itscustomers. Some observers have warned that China might take its moneyout of American banks. Unlikely, but assume it did. What would China dowithout the United States as a customer? China has placed itselfin a position where it has to keep its customers happy. It strugglesagainst this reality daily, but the fact is that the rest of the worldis far less dependent on China's exports than China is dependent on therest of the world. Which brings us to the second, even moreserious part of China's economic problem. The first geopoliticalimperative of China is to ensure the unity of Han China. The third isto protect the coast. Deng's bet was that he could open the coastwithout disrupting the unity of Han China. As in the 19thcentury, the coastal region has become wealthy. The interior hasremained extraordinarily poor. The coastal region is deeply enmeshed inthe global economy. The interior is not. Beijing is once againbalancing between the coast and the interior. The interests ofthe coastal region and the interests of importers and investors areclosely tied to each other. Beijing's interest is in maintaininginternal stability. As pressures grow, it will seek to increase itscontrol of the political and economic life of the coast. The interestof the interior is to have money transferred to it from the coast. Theinterest of the coast is to hold on to its money. Beijing will try tosatisfy both, without letting China break apart and without resortingto Mao's draconian measures. But the worse the international economicsituation becomes the less demand there will be for Chinese productsand the less room there will be for China to maneuver. Thesecond part of the problem derives from the first. Assuming that theglobal economy does not decline now, it will at some point. When itdoes, and Chinese exports fall dramatically, Beijing will have tobalance between an interior hungry for money and a coastal region thatis hurting badly. It is important to remember that something like 900million Chinese live in the interior while only about 400 million livein the coastal region. When it comes to balancing power, the interioris the physical threat to the regime while the coast destabilizes thedistribution of wealth. The interior has mass on its side. The coasthas the international trading system on its. Emperors have stumbledover less.
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Geopolitics is based on geography and politics.Politics is built on two foundations: military and economic. The twointeract and support each other but are ultimately distinct. For China,securing its buffer regions generally eliminates military problems.What problems are left for China are long-term issues concerningnortheastern Manchuria and the balance of power in the Pacific. China'sgeopolitical problem is economic. Its first geopolitical imperative,maintain the unity of Han China, and its third, protect the coast, areboth more deeply affected by economic considerations than militaryones. Its internal and external political problems flow from economics.The dramatic economic development of the last generation has beenruthlessly geographic. This development has benefited the coast andleft the interior -- the vast majority of Chinese -- behind. It hasalso left China vulnerable to global economic forces that it cannotcontrol and cannot accommodate. This is not new in Chinese history, butits usual resolution is in regionalism and the weakening of the centralgovernment. Deng's gamble is being played out by his successors. Hedealt the hand. They have to play it. The question on thetable is whether the economic basis of China is a foundation or abalancing act. If the former, it can last a long time. If the latter,everyone falls down eventually. There appears to be little evidencethat it is a foundation. It excludes most of the Chinese from the game,people who are making less than $100 a month. That is a balancing actand it threatens the first geopolitical imperative of China: protectingthe unity of the Han Chinese.
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JohnMauldin is president of Millennium Wave Advisors, LLC, a registeredinvestment advisor. All material presented herein is believed to bereliable but we cannot attest to its accuracy. Investmentrecommendations may change and readers are urged to check with theirinvestment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice.John Mauldin and/or the staffs at Millennium Wave Advisors, LLC andInvestorsInsight Publishing, Inc. (InvestorsInsight) may or may nothave investments in any funds, programs or companies cited above. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OFLOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGEDFUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS,YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOMEPRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENTPRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BEILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATIONINFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYSIN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAMEREGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND INMANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWNONLY TO THE INVESTMENT MANAGER. Communications from InvestorsInsight are intended solely forinformational purposes. Statements made by various authors,advertisers, sponsors and other contributors do not necessarily reflectthe opinions of InvestorsInsight, and should not be construed as anendorsement by InvestorsInsight, either expressed or implied.InvestorsInsight is not responsible for typographic errors or otherinaccuracies in the content. We believe the information containedherein to be accurate and reliable. However, errors may occasionallyoccur. Therefore, all information and materials are provided "AS IS"without any warranty of any kind. Past results are not indicative offuture results.
cloud_zhou - 2008/12/4 21:14:00
Summary In public, the Chinese government has sought to present a fairly confident picture of the country’s capabilities and response to the global financial crisis. But the internal assessment is very different, and the problem is not limited to the impact of a global financial slowdown. Analysis Related Special Topic Page     * China’s Economic Imbalance Chinese leaders and media recently have been proffering relatively upbeat assessments of Beijing’s ability to cope with the global financial crisis, suggesting that China not only can weather the crisis, but can perhaps even come out in a stronger global position. Beijing has been particularly eager to emphasize its 4 trillion yuan (US$585 billion) “stimulus” package — pledged not just as a boost for the Chinese economy, but also as a contributing factor to a global recovery. But behind the optimistic facade, there are much deeper worries in Beijing. There are concerns about the Chinese economy as well as about the government’s ability to handle problems at home given the international economic slowdown. Chinese economists recognize that the global financial crisis is not the direct cause of Beijing’s woes, but simply a compounding factor, exacerbating an already-existing and increasingly apparent domestic crisis. What the crisis has done, however, is bring China’s problems squarely into the light. Beijing had long managed the situation through a combination of continued support of the export-driven industries (or at least minimal controls on them) and supplementation of domestic demand via large infrastructure projects (the Tibet railway and the West-East natural gas pipelines being recent examples). In short, China relies on continued inflows of money from exports and investments to support its own domestic spending on its interior provinces. However, Beijing also has relied on a relatively stable or rising global economy to enable it to carry out the deeper reforms needed to strengthen its domestic economy, without also ripping the fabric of Chinese society. But with global economic stability slipping, China’s economic buffer is fast disappearing — raising fears that a long-delayed reckoning can no longer be pushed back. The Chinese Economy and the Threat of Unrest For Beijing, these efforts, and the recognition that the Chinese economic model is not sustainable, trace back much further than the current crisis. In the 1990s, as the Chinese economy recovered from the temporary international political setbacks triggered by the 1989 Tiananmen Square incident, Beijing happily continued down the path of the Asian tigers, promoting high rates of growth through economic programs that were resource-intensive, based around strong export growth, and heavily dependent on continued foreign investment. When the inevitable crisis struck East Asia in 1997 and 1998 — something that should have been foreseen after Japan’s descent into malaise a few years earlier — China was not immune. Its gross domestic product (GDP) growth rate fell as low as 6.8 percent for the second quarter of 1998, compared to 9.5 percent in the second quarter of 1997. This was a far cry from the double-digit negative growth rates seen in some Southeast Asian countries at the same time, and in many ways China appeared to dodge the bullet of the 1997 meltdown. Chart: Chinese GDP Growth But Chinese policymakers still heard alarm bells going off. They believed at the time that anything below 7 percent growth would not provide enough jobs to soak up the new workers joining the workforce, and they were afraid that rising unemployment could destabilize the country politically. Given the deep economic divisions between China’s wealthy coastal regions and its less-developed interior, Beijing has a deeply ingrained fear of anything (such as high unemployment) that increases social unrest, and thus Chinese economic policy is designed primarily with social stability in mind. It has not been all that many decades since these economic disparities brought the Chinese Communist Party to power, and Beijing is well aware that the same disparities could unseat the Party if they are not well-managed. This fear sent the government scrambling. The recognition that the Asian model — cheap capital and high export-driven growth — wasn’t all it was cracked up to be led to a reformation of Chinese thinking, at least in spirit. Beijing took a bipolar approach to the imminent crisis, seeking to address the short-term social crisis by ramping up exports just to keep funds flowing, while also trying to rectify the long-term contradictions in the Chinese economic model. When the Party’s Central Economic Committee met in December 1998, it announced an ambitious refocusing of the Chinese economic model. The new approach would emphasize profitability and sustainability of growth, rather than growth for its own sake. In practice, however, such plans were overtaken again and again by the fundamental need to maintain social stability through continued employment, the desire by various interests to maintain the high-growth-rate model for their own financial and political ends, and the underlying structure of the Chinese bureaucracy, which had grown flabby, unwieldy and resistant to change. Over the ensuing decade, there were occasional moves to streamline the Chinese economy and make it more sustainable: reform of state-owned enterprises (SOEs); accession to the World Trade Organization; banking reform; consolidation of heavy industry; and ultimately, the appreciation of the yuan. These initiatives often were peripheral, however, or only partially implemented. The question of social stability as a byproduct of high growth rates continued to drive political decisions on China’s economy. The concern for stability became even more important as China began noting that emerging efficiencies in its industries and agriculture were pushing the 7 percent GDP growth floor ever higher — to a minimum of 8 percent after the Asian economic crisis, and later to 9 percent. Basically, the more China developed its industries and agriculture and made the processes more efficient, the fewer workers were needed for the same amount of production. Advancements in technology ironically also led to higher unemployment, particularly in the low-skill sectors. This meant that policies intended to eliminate (or at least reduce) redundancies, and to reshape the economy to focus on domestic consumer-driven demand rather than on exports and foreign investment, rarely gained the sustained traction necessary to change China’s deeper economic structures. Postponing the Crisis By 2002, then-Premier Zhu Rongji was urging greater attention to statistics collection in China in order to draw a better picture of the real status of the economy. By early 2003, signs of internal inconsistencies were clearly apparent. As China underwent a leadership transition from the Jiang Zemin-Zhu Rongji government to the Hu Jintao-Wen Jiabao government, the picture was becoming clearer: China would face a future economic crisis along the lines of that suffered by the other Asian nations in 1997-1998 if it could not quickly reform its economic model. Beijing then began announcing a series of economic policies intended to stimulate the domestic economy, from plans to end lifetime employment for state workers to small-business loans for the unemployed and rural tax reform. At the end of 2003, however, when China’s top economic planners held their annual meeting, they came up with a very familiar assessment and an equally familiar plan: China needed to focus on quality, efficiency and sustainable growth rates, and the non-coastal economy needed to be bolstered through social spending and job creation to strengthen domestic demand and maintain employment levels. It was effectively the same thing the Jiang-Zhu team had said in 1998. But once again, recognition of the problem did not necessarily translate into actual solutions. A slowdown in economic growth, induced in part by rising oil prices in 2003 and the impact of the SARS crisis, led to continued resistance among policymakers to broader reforms that would have created social dislocation (at least in the near term) as part of a deeper restructuring. Beijing did take some steps 2004 to slow the unrestrained growth, including rumors of a temporary halt in commercial lending, increases in banks’ capital reserve requirements and an October hike in interest rates. But with annual official unemployment reaching 4.3 percent for 2003 — up 0.3 percentage points from a year earlier — the dragon was still breathing down Beijing’s neck. The general trend of economic policy continued to encourage exports and investment as the primary drivers of the economy in order to mitigate the risk of massive unemployment. Chinese GDP growth, which had slipped down to 7.9 percent in the second quarter of 2003, was quickly lifted back above the 9 percent threshold in the third quarter and then continued to climb, hitting double-digit growth rates briefly in the second quarter of 2005 and holding at that rate from 2006 onward. China’s stock market, which had begun surging in the latter half of 2006, reached a peak in October 2007. The boom was also reflected in a massive rise in property prices and real estate construction and speculation, and in ballooning trade surplus and foreign currency reserves. Attempts to rein in rapid growth had failed once again, as political considerations and bureaucratic stagnation undermined reform efforts. Contraction and Crisis The contractions that occurred in late 2007 and early 2008, then, might well have been corrections to an overheating system. But corrections or not, these contractions began triggering unwelcome consequences, once again bringing to a head conflicting factional debates over economic policy. By the second half of 2007, as international prices for oil and other key commodities began rising sharply, China started to feel the pinch. Inflation was increasing and margins in export-based industries were narrowing; this was compounded by the steady rise of the yuan, which discouraged demand in importing countries. Low-skilled export sectors such as the toy industry (suffering from a lead paint scandal) and textile industry were particularly hard-hit. Rising commodity prices also began affecting critical heavy industries like steel, though the full impact on metal and cement industries was buffered somewhat by the construction boom in Beijing ahead of the August 2008 Olympics. By early 2008, fuel shortages were occurring, transportation was being disrupted by blizzards, the Shanghai Stock Exchange was falling, and real estate values were slowing. The threat of social unrest once again began to rear its head, from farmers protesting over land seizures to airline workers striking, to the Tibetan uprising in March. Before the slowdown began, Beijing was already worried about the economic system — particularly the widening divide between the coastal areas and the interior, the latter accounting for between two-thirds and three-quarters of the population. Chinese leaders had sought to slow down overheated growth rates through various measures, including an acceleration of the appreciation of the yuan and several interest rate hikes in 2006 and 2007. By July 2008, however, the compounding crises were more than apparent. At a special Politburo meeting on July 25, China’s leaders finally admitted that the crisis was much more significant than the Olympics (which had been their near-obsession in the preceding year), and that action needed to be taken. As the economic crisis bubbled up, and as social stability began to weaken ahead of the Olympics, a political crisis was brewing in Beijing. Premier Wen Jiabao, though popular with the common people, was criticized strongly within the Party. He was seen by many in government and by China’s business community as lacking the skills necessary to maintain or reform the Chinese economy. At the special meeting of the Politburo in July, several of the economic policies implemented by Wen were suspended or reversed. Rumors even began to surface that Wen would “resign” at the National People’s Congress (NPC) session in March 2009. These rumors are now being quelled, because the Party is concerned that, given Wen’s public popularity, his resignation could trigger new social turmoil among the masses. (Social affection for similar popular leaders contributed to the 1989 Tiananmen Square incident.) In addition, pushing Wen out early would undermine a 15-year process of trying to stabilize leadership transitions in China. Around the same time as the July meeting, the precipitous spike in global commodity prices began to fall off, granting Beijing some breathing room during the Olympics. But China’s economic crisis (and Beijing’s political crisis) was far from over. Economic turmoil was once again brought to the forefront just a few weeks later, as the U.S. financial system slipped into crisis mode and was quickly followed by the rest of the world. If the Chinese economy does not see marked improvement — or at least stabilization — by the March 2009 NPC session, not only Wen but many others could be forced to resign, triggering a fairly substantial political reshuffling and competition for power, and throwing the stability of the Party itself into question. A Critical Moment China’s top economists, policy recommendation bodies and government officials are all searching for short-term fixes to maintain employment levels, seen as the key to social stability, amid the current downturn. At the same time, they are seeking to effect real change in the structure of the Chinese economy to strengthen it in the long term. That is much easier said than done. China’s present economic stimulus package is a cobbled-together combination of previously existing initiatives. Overall, it is focused almost exclusively on maintaining that magic 9 percent GDP growth rate seen as vital to maintaining employment and therefore social stability. Even at the top levels, complete political buy-in for deeper reforms is lacking due to patronage, personal gain, and a very strong uncertainty that the reforms will even work without triggering more pronounced and immediate crises. Chinese economists cannot even agree on what a stable economy should look like. They are split between Western-trained and Asian-trained camps, and their views frequently clash. This means economic policy from the center is fragmented, unreliable and poorly enforced; Beijing tends to implement programs piecemeal and drop them when they do not work quickly. Meanwhile, the bureaucratic mechanisms to implement real economic policy reform down through the provincial and local levels are simply not there. Enforcement, incentive and oversight are all lacking, and Party cadres face the entrenched reality that promotion up through the ranks is still based almost solely on the criterion of their ability to maintain high rates of economic growth. Truly changing the Chinese economic system will almost certainly mean a major unhinging of the social order. Change of this magnitude simply is not going to be smooth — it requires breaking the system and rebuilding it. Jiang’s reform of SOEs led to a significant rise in unemployment. Hu’s attempts to consolidate and make heavy industries more efficient triggered a similar problem. In other countries, there have been massive political and social upheavals that allowed partial reform of the system. In China, this path also has been used in the past (e.g., the Great Leap Forward, the Great Proletariat Cultural Revolution). But the current leadership is not sure the Party could survive another self-made crisis now that the economic and social evolution has come this far, particularly as there is no paramount leader like Mao Zedong to serve as a central point of unity. In short, the Chinese leadership is once again running as fast as it can simply to stay in place. The economic bailout package is a case in point of knee-jerk policy ideas thrown out in a muddled heap — few of which provide any clear direction other than to trying to keep growth high to avoid (or postpone indefinitely) a massive social dislocation, and none of which are likely to be carried out to completion. The Chinese system is reaching a critical moment. Many among the Chinese leadership see the next few years as the crisis point for China and the Party. Low-skilled export industries, which soak up a lot of migrant labor in China, were already closing down in 2007 and early 2008 as commodity prices rose and margins narrowed; now the European and U.S. slowdown is forcing even more to close their doors. Laid-off workers, frequently dismissed without pay, are beginning to protest, requiring local and central government intervention and payoffs to avoid widening unrest. The stock market has already crashed. The real estate market, another staple of Chinese middle-class investment and a field in which many of China’s SOEs have significant investments, is flagging. The steel industry, a bastion of Chinese heavy industry and an underwriter of many other segments of the economy, is facing a significant contraction. Beijing wants and needs to stimulate consumer spending, but economic uncertainties are prompting Chinese consumers to hold onto their money. On top of the financial woes, leaders in Beijing are raising concerns over potential social crises in 2009, triggered by anniversaries of key events including the 1959 Tibet uprising, the 1989 Tiananmen Square incident and the 1999 Falun Gong suppression. The Chinese also expect increased friction from the United States on trade issues as Washington faces its own economic problems and could be looking for a scapegoat. From Beijing’s perspective, an untested President Barack Obama and a Democratic-controlled Congress (with protectionist sympathies) only increase the uncertainty. The Chinese are uncomfortable with implementing economic reform, however badly needed, during a global economic downturn. Before embarking on such a project, Beijing would prefer to have as much cash on hand as possible in order to deal with the social dislocation caused by economic restructuring. But Chinese leaders will have to plan on the slowdown in the U.S. and European economies lasting a year or more. This means Beijing cannot count on continued investment flows into the export industry to prop up the economy while the central government pushes forward with initiatives to increase wages and bolster labor rights in the wealthier coastal region, in hopes of pushing foreign investment inland. Caught in the horns of a dilemma, Chinese leaders have no clear solution before them. The traditional method of putting a on a bandage to deal with the outward signs of the underlying cancer is likely to continue. For policymakers in Beijing, social stability takes precedence, as it has in the past. This means that, as before, reforms are likely to remain peripheral or short-lived, while the resource-intensive export industry will continue to get support. Beijing might be able to postpone a serious social and political crisis for a while longer, but every delay simply makes the ultimate crisis that much more catastrophic. Beijing’s policies are making it clear that the Chinese leadership does not really intend to let the current slowdown do what a slowdown is supposed to do: trim the fat and cull the weak, in the process increasing the efficiency of the economy and freeing up capital for new uses. Job security remains Beijing’s primary concern, which means increasingly inefficient and unprofitable businesses will continue to be propped up by government money, export rebates, and probably an expansion of bad loans. But these policies will only prolong and worsen the problems, no matter how many “new” infrastructure projects are launched in the stimulus package. At some point, China will have to pay the piper. And as the global financial crisis has shown, an added external pressure can quickly arise that the Chinese cannot control, but that forces them to respond while domestic problems rapidly deteriorate.
cloud_zhou - 2008/12/4 21:17:00
Chinese Social Security Minister Yin Weimin said Nov. 20 that the employment situation in China is critical and could get worse. Vice Minister Zhang Xiaojian added that unemployment levels could reach 4.5 percent by the end of the year, up from the current 4 percent, and could go higher still in 2009. The figure of 4.5 percent sounds low, and it in fact only represents officially registered urban unemployment. It does not take into consideration China’s migrant workers (some 200 million strong) or those laid off by state-owned enterprises. Employment levels have long been a critical measure of economic performance and a driver of economic policy in China. In recent years, Beijing has set its target gross domestic product (GDP) growth rate based on the estimated pace needed to keep up with new workers entering the workforce, and to absorb those laid off or made redundant as industries are restructured, made more efficient or move up the skill scale. Prior to the Asian economic crisis of 1997-98, Beijing pegged necessary growth at around 7 percent. It raised this figure to 8 percent after the crisis, and now puts the critical number at 9 percent. The infatuation with employment figures is seen clearly in the series of policy pronouncements coming out of Beijing, many of them reversing efforts to slow growth in recent years and shift away from the country’s overdependence on exports and investment flows. Chinese officials have implemented tax cuts and reforms to encourage export and high-employment industries. They have frozen the minimum wage, ending a fairly steady rise in wages. They have also increased export rebates for companies, in essence subsidizing exports — something that will likely raise complaints from other countries in the future. They have required government approval for any substantial layoffs in certain provinces. Finally, they have reduced loan quotas. There is still talk of shifting the economy to one driven by domestic consumption rather than one still dependent upon exports and investment flows; in practice, however, Beijing is focusing on propping up these less-efficient but more-reliable engines of money, growth and employment. While this may help China weather the crisis as it did in 1998-99 and in 2003, that comes at a cost. Beijing once again is pumping money and incentives into the low-skilled, labor-intensive export-based industries for the sake of maintaining employment levels. This means government-subsidized inefficiencies, selling at below cost to maintain employment, and probably a return of growing as companies borrow to keep employment despite falling profits. This intense focus on employment as the imperative is what has kept the Chinese from ever really restructuring to a more sustainable, rather than a growth-based, economy even when they knew the pitfalls of the model followed by Japan, South Korea and the Asian tigers. While China may hold employment and social stability in check with these measures, it may well come out of the immediate crisis weaker, flabbier and even less efficient than before.
cloud_zhou - 2008/12/4 21:17:00
Summary Strikes by taxi drivers in several Chinese cities raise the specter of coordinated protests and social unrest crossing provincial lines — one of Beijing’s biggest fears. Perhaps even more worrisome for Beijing are signs of growing coordination among petitioners challenging the government over land use and reimbursement. Such resistance is only going to increase as China begins to accelerate domestic infrastructure development. Analysis Related Special Topic Page     * China’s Economic Imbalance China has seen several strikes by taxi drivers in November, most recently in Shantou City, Guangdong province, where some 1,000 licensed cabbies protested competition from unlicensed drivers. The incident follows a series of strikes by cab drivers across the country, some of which turned violent. In early November, several thousand taxi drivers held a two-day strike in Chongqing over the availability of compressed natural gas, unequal sharing of profits between cab companies and drivers, competition from illegal cab drivers and perceived excessive fines for traffic violations. The Chongqing strike was followed by strikes in Sanya, Hainan province, and Yongdeng, Gansu province, both in part over competition from unlicensed drivers. Another taxi strike broke out in the Yongchuan district of Chongqing on Nov. 18 when the government announced plans to increase the number of cabs by a third, thereby reducing fares for existing drivers. The strikes themselves can be readily explained by the tightening economic situation in China, where unemployment is rising and operating a cab without a license is a readily available option for the unemployed. Even in cities where protests are not occurring, local cab-driver associations have expressed concerns to municipal officials about the rising competition from unlicensed drivers. But the regional dispersion of the protests, coupled with the short timeframe in which they have occurred (a couple of weeks), raises concerns in Beijing. A taxi strike can be seen as a reflection both of local conditions (something Beijing leaves for the local government to deal with) and of national dynamics (something Beijing must deal with). China’s central government has become more tolerant of short public protests in recent years, and even collective labor action, as long as the protests remain localized. Beijing’s biggest fear is the linking of common causes across provinces, creating the potential for a mass movement that could challenge government control. For the moment, the taxi strikes do not appear to be reaching a critical threshold. They remain locally organized, if inspired by reports of similar strikes in other regions, and for the most part are unable to generate much public sympathy. Nevertheless, there are other social issues being exacerbated by the current economic downturn that could evolve into a more coordinated movement, something Beijing will be watching closely. Over the past several years, as China embarked upon a massive infrastructure and real estate development boom, there has been a constant need for land. Since all land is technically owned by the state, the government has the authority to remove people from the property on which they reside and use the land for other purposes. The government is legally required to reimburse the resident for the value of the property, but the process is frequently mired in corruption and nepotism and payment is frequently delayed and far below market value. Protesting such land seizures has became more common as the unrestrained growth and construction boom has caused widespread and seemingly random dislocations, particularly along the urban-rural fringes but also well within the city limits as old housing was torn down for new apartment complexes, business towers and hotels. As the social dislocations grew — and recovering the value of the land remained difficult — protests became larger and more frequent. From Beijing’s perspective, these were isolated local problems, not strategic national concerns. But that began to shift as a number of rural and small-town protests apparently were organized or advised by lawyers from Beijing and other cities who came in and counseled local citizens about their legal rights. On the one hand, these lawyers represented the emergence of a new legal class, one that would be better able to guide a more rational implementation of economic and administrative regulation. On the other hand, if these lawyers turned into activists — even if justified by government corruption and bureaucratic neglect — the fine line between maintaining social stability (by ensuring proper payment and accountable government) and stirring up social unrest (by giving advice on the best way to coordinate mass demonstrations) would be crossed. This concern becomes even more significant as Beijing launches a massive expansion of domestic infrastructure development as a means to counter the economic slowdown and spur investment to keep the economy growing and employment levels up. More land is going to be requisitioned for construction and government projects, more people will be displaced and the chances for conflict will increase. For Beijing, this will be a manageable problem as long as conflict remains local. But coordinated protests across regions and social classes could quickly escalate, and this is something Chinese authorities will be watching very closely.
cloud_zhou - 2008/12/4 21:20:00
Summary China continues to take a very cautious approach in response to the rising tensions between India and Pakistan in the wake of the Mumbai attacks. Beijing has condemned the attacks but declared support for its ally Pakistan. Beijing’s relationship with Islamabad is a cornerstone of its South Asia and Middle East position, and as such, Chinese officials in some ways are locked into their response. Beijing is now stuck between supporting Pakistan in a potential conflict with India — something that could have its own repercussions in China — or losing a critical component of China’s future energy security plans. Analysis Related Special Topic Page     * Militant Attacks In Mumbai and Their Consequences As tensions rise between India and Pakistan in the wake of the Mumbai attacks, and as the United States takes an active role in trying to moderate New Delhi’s response, China has sat relatively quietly — though anxiously — on the sidelines. Beijing has adopted a cautious approach to a possible renewal of hostilities between two of its southwestern neighbors. Officially, China has condemned the attacks, sent condolences to India, and offered full support and assistance to Pakistan. Beijing in essence has thus condemned the act while simultaneously arguing against any Indian reprisal against the Pakistani state. In many ways, this fits the typical Chinese response to a regional crisis. But Beijing has deeper concerns about the current threat of hostilities, and few tools with which to shape the outcome. China and Pakistan have long been allies. Despite changes of government in Islamabad, Beijing has maintained steady support for its South Asian neighbor. The relationship, which initially emerged in part as a counterweight to India (for both China and Pakistan), has evolved over time. Now, Beijing sees Pakistan as a critical location for ensuring China’s interests in the Arabian Sea, including securing China’s energy supply routes. While shifting tensions between Islamabad and Washington in recent months have caused China to reassess how it supports Pakistan, the strategic benefits of the relationship still outweigh the problems. But the Mumbai attacks have added another layer of stress in China’s relationship with Pakistan. On one hand, Beijing agrees with the general views in Islamabad, New Delhi and Washington that it is in no one’s interest for the attacks to lead to a war between India and Pakistan. On the other hand, it appears that the political stresses in India suggest a response is forthcoming despite U.S. intercession. The Indian response might include airstrikes and shelling into Pakistani-controlled Kashmir or beyond, which could lead to another buildup of forces in Kashmir. It could also lead to Pakistan calling on China for diplomatic support and military supplies. This is dangerous territory for China. India could perceive Chinese support for Pakistan in the form of weapons and supplies (something China has done for quite a while) at this time as a hostile act. Even if New Delhi does not take official note of the support, it could exert pressure of its own on China by turning a blind eye to the activities of Tibetan activists and separatists in the border region. Beijing already fears a repeat of the March Tibetan uprising on an even grander scale in 2009, the 50th anniversary of the 1959 Tibetan uprising. Map: China, Pakistan and India (Click image to enlarge) Further complicating the situation, China and India have overlapping claims to parts of Kashmir, so a military escalation there will force China to expand its military presence to defend its own territorial claims. With several issues of border tensions rising between New Delhi and Beijing over the past year, a renewed focus on Kashmir could expand to other ill-defined or disputed parts elsewhere along the two nations’ long shared border. Finally, if India decides to call for some form of sanctions against Pakistan as part of its retaliation — perhaps to include sanctions against arms imports — Chinese ships traversing the Indian Ocean could face problems from the Indian navy if relations degrade further. Given Chinese military sales to Pakistan, which include the troubled FC-1/JF-17 fighter jet and potentially airborne early warning surveillance systems, Beijing could find itself in more direct confrontation with New Delhi than it would like. While China is concerned about the potential implications of angering India, it also sees a need to protect Pakistan. In the immediate term, Beijing is worried that a crisis in Pakistan triggered by India’s response could destabilize Pakistan and/or increase the movement of Pakistani and other multinational militants from Pakistan into perceived safe havens in China, particularly in Xinjiang. Beijing already has raised concerns with Islamabad that there are links between Uighur militants training in Pakistan and attacks in Xinjiang. Beijing also reportedly has stepped up its border patrols since the Mumbai attacks to keep fleeing militants or others out of Chinese territory. But Beijing’s long-term concern is that instability in Pakistan could undermine China’s broader strategy in North Africa and the Middle East. Pakistan’s location, plus its land border with China, gives Beijing a potential conduit through which to exert its interests and influence in the Arabian Sea, or at least to develop new ways to protect its increasing dependence on oil and other goods coming from the Middle East and North Africa. As part of securing its maritime supply routes, something China’s navy is currently not configured to ensure, Beijing has been looking to develop numerous alternative and redundant energy routes. These include pipelines, rail lines and highways through Central Asia, Myanmar and Pakistan. Many of these are not economically feasible, and some face daunting technological challenges. The idea is to use the developments that do work out to reduce China’s vulnerability at sea, particularly on the long run from the Middle East across the Indian Ocean, through the Strait of Malacca and up China’s eastern seaboard. But Beijing has also been developing Pakistan’s ports and naval bases. As the Chinese navy continues to evolve, there is the possibility of using Pakistan as a forward base of operations to provide Chinese maritime protection in the Arabian Sea. Geographically speaking, Pakistan is the best (if not the only) option for China, and with the relationship already well-established, there are really no comparable alternatives. China, then, is stuck between needing to support the Pakistani government and worrying about the implications of this support on India’s decision-making process while taking into account U.S. involvement. And all this is taking place while China lacks the tools or leverage to provide much in the way of direction or guidance to the outcome of India’s response.
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