Bear in a China shop - Arthur Kroeber (Foreign Policy)

Bear in a China Shop

It's not the booming economy that's about to burst -- it's bigger than that. Social discontent and, yes, income inequality could rip China apart at the seams.

BY ARTHUR KROEBER | MAY 22, 2012

Time and again, China has defied the skeptics who claimed its unique mixed model -- an ever-more market-driven economy dominated by an authoritarian Communist Party and behemoth state-owned enterprises -- could not possibly endure. Today, those voices are louder than ever. Michael Pettis, a professor at Peking University's Guanghua School of Management and one of the most persistent and well-regarded skeptics, predicted in March that China's economic growth rate "will average not much more than 3% annually over the rest of the decade." Barry Eichengreen, an economist at the University of California, Berkeley, warned last year that China is nearing a wall hit by many high-speed economies when growth slows or stops altogether -- the so-called "middle-income trap."

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No question, China has many problems. Years of one-sided investment-driven growth have created obvious excesses and overcapacity. A weaker global economy since the 2008 financial crisis and rapidly rising labor cost at home have slowed China's vaunted export machine. Meanwhile, a massive housing bubble is slowly deflating, and the latest economic data is discouraging. Real growth in GDP slowed to an annualized rate of less than 7 percent in the first quarter of 2012, and April saw a sharp slowdown in industrial output, electricity production, bank lending, and property transactions. Is China's legendary economy in serious trouble?

Not just yet. The odds are that China will navigate these shoals and continue to grow at a fairly rapid pace of around 7 percent a year for the remainder of the decade, overtaking the United States to become the world's biggest economy around 2020. That's a lot slower than the historical average of 10 percent, but still solid. Considerably less certain, however, is whether China's secretive and corrupt Communist Party can make this growth equitable, inclusive, and fair. Rather than economic collapse, it's far more likely that a decade from now China will have a strong economy but a deeply flawed and unstable society.

China's economic model, for all its odd communist trappings, closely resembles the successful strategy for "catch-up growth" pioneered by Japan, South Korea, and Taiwan after World War II. The theory behind catch-up growth is that poor countries can achieve substantial convergence with rich-country income levels by simply copying and diffusing imported technology. In the 1950s and 1960s, for instance, Japan reverse-engineered products such as cars, watches, and cameras, enabling the emergence of global firms like Toyota, Nikon, and Sony. Achieving catch-up growth requires an export-focused industrial policy, intensive investment in enabling infrastructure and basic industry, and tight control over the financial system so that it supports infrastructure, basic industries, and exporters, instead of trying to maximize its own profits.

China's catch-up phase is far from over. It has mastered the production of basic industrial materials and consumer products, but its move into sophisticated machinery and high-tech products has only just begun. In 2010, China's per capita income was only 20 percent of the U.S. level. By most measures, China's economy today is comparable to Japan's in the late 1960s and South Korea's and Taiwan's around 1980. Each of those countries subsequently experienced another decade or two of rapid growth. Given the similarity of their economic systems, there is no obvious reason China should differ.

For catch-up countries, growth is mainly about resource mobilization, not resource efficiency, which is the name of the game for lower-growth rich countries. Historically, about two-thirds of China's annual real GDP growth has come from additions of capital and labor. Mainly this means moving workers out of traditional agriculture and into the modern labor force, and increasing the amount of capital inputs (like machinery and software) per worker. Less than a third of growth in China comes from greater efficiency in resource use.

In a rich country like the United States -- which already has abundant capital resources and employs all its workers in the modern sector -- the reverse is true. About two-thirds of growth comes from efficiency improvements and only one-third from additions to labor or capital. Conditioned by their own experience to believe that economic growth is mainly about efficiency, analysts from rich countries come to China, see widespread waste and inefficiency, and conclude that growth must be unsustainable. They miss the larger picture: The system's immense success in mobilizing capital and labor resources overwhelms marginal efficiency problems. 

All developing economies eventually reach the point where they have moved most of their workers into the modern sector and have installed roughly as much capital as they need. At that point, growth tends to slow sharply. In countries that fail to make the tricky transition from a mobilization to an efficiency focus (think Latin America), real growth in per capita GDP can virtually grind to a halt. Such countries also find themselves stuck with high levels of income inequality, which tends to rise during the resource mobilization period and fall during the efficiency phase. Some worry that China -- which for the last decade has had by far the highest capital spending boom in history -- is already on the edge of this precipice. But the data do not support this pessimistic view. First, much surplus agricultural labor remains. Just over one-third of China's labor force still works in agriculture; the other northeast Asian economies did not see their growth rates slow noticeably until the agricultural share of the workforce fell below 20 percent. It will take about a decade for China to reach this level.

And despite years of breakneck building, China's stock of fixed capital -- the total value of infrastructure, housing, and industrial plants -- is not all that large relative to either the economy or the population. Rich countries typically have a capital stock a bit more than three times their annual GDP. For China, the figure is about two and a half. And on a per capita basis, China has about as much fixed capital as Japan did in the late 1960s and less than a third of what the United States had as long ago as 1930. Further large-scale investments are still required. So China's economy can continue to grow in part based on capital spending, though a gradual transition to a consumer-led economy does need to begin soon.

One illustration of China's enduring capital deficit is housing. Scarred by the catastrophic U.S. housing bubble, many observers see an even scarier property bubble in China. Robert Z. Aliber, who literally wrote the book on financial manias, called China's housing boom "totally unsustainable" this January. And it's true: Since 2005, land and housing prices have rocketed, and the outskirts of many cities are dotted by blocks of vacant apartment buildings.

But China's housing situation differs dramatically from that of the United States. The U.S. bubble started with too much borrowing (mortgages issued at 95 percent or more of a house's supposed market value), which caused a rise in housing prices far beyond the well-established trend of the previous 40 years and sparked the construction of far more houses than there were families to buy them. In China, mortgage borrowing is modest; price appreciation was mainly a one-off growth spurt in an infant market, rather than a deviation from established trend; and there is a desperate shortage of decent housing.

Since 2000, the average house in China has been bought with around 60 percent cash down, according to research by my firm, GK Dragonomics, and the minimum legal down payment has been something in the range of 20 to 30 percent -- a far cry from the subprime excesses of the United States. House prices rose rapidly, but that's partly because they were artificially low before 2000, when state-owned enterprises allocated most of the housing and there was no private market. Much of the home-price appreciation of the last decade was simply a matter of the market catching up with underlying reality. And despite articles about "ghost cities" of empty apartment blocks, the bigger truth is that urban China has a housing shortage -- the opposite of what typically happens at the end of a bubble.

Nearly one-third of China's 225 million urban households live in a dwelling without its own kitchen or toilet. That's like the entire country of Indonesia living in factory dormitories, temporary shelters on construction sites, basement air-raid shelters, or shanties on city outskirts. Over the next two decades, if present trends continue, another 300 million people -- equivalent to nearly the entire population of the United States -- will move from the countryside to China's cities. To accommodate these new migrants, alleviate the present shortage, and replace dilapidated housing, China will need to build 10 million housing units a year every year from now to 2030. Actual average completions from 2000 to 2010 were just 7 million a year, so China still has a lot of building to do. The same goes for much basic infrastructure such as power plants, gas and water supplies, and air cargo facilities. 

Yet the housing market also illustrates China's true problem: not that growth is unsustainable, but that it is deeply unfair. The overall housing shortage coexists with an oversupply of luxury housing, built to cater to a new elite. Although most Chinese have benefited from economic growth, the top tier have benefited obscenely -- often simply because of their government or party connections, which enable them to profit immensely from land grabs, graft on construction projects, or insider access to lucrative stock market listings. A 2010 study by Chinese economist Wang Xiaolu found that the top 2 percent of households earned a staggering 35 percent of national urban income. A handful of giant state firms, secure in monopoly positions and flush with cheap loans from state banks, has almost unlimited access to moneymaking opportunities. The state-owned banks themselves earned a staggering $165 billion in 2011. Yet private firms, which produce almost all of China's productivity and employment gains, earn thin margins and suffer pervasive discrimination.

At the root lies a political system built on a principle of unfairness. The Communist Party ultimately controls the allocation of all resources; its officials are effectively immune to legal prosecution until they first undergo an opaque internal disciplinary process. Occasionally a high official is brought down on corruption charges, like former Chongqing party secretary Bo Xilai. But such cases reflect elite power struggles, not a determined effort to end corruption. In a few years' time, China will likely surpass the United States as the world's top economy. But until it solves its fairness problem, it will remain a second-rate society.

The Revenge of Wen Jiabao - John Garnaut (Foreign Policy)

The Revenge of Wen Jiabao

John Garnaut

Foreign Policy, March 29, 2012

The ouster of Chongqing boss Bo Xilai was 30 years in the making -- a long, sordid tale of elite families and factions vying for the soul of the Chinese Communist Party.

If Premier Wen Jiabao is "China's best actor," as his critics allege, he saved his finest performance for last. After three hours of eloquent and emotional answers in his final news conference at the National People's Congress annual meeting this month, Wen uttered his public political masterstroke, reopening debate on one of the most tumultuous events in the Chinese Communist Party's history and hammering the final nail in the coffin of his great rival, the now-deposed Chongqing Communist Party boss Bo Xilai. And in striking down Bo, Wen got his revenge on a family that had opposed him and his mentor countless times in the past

Responding to a gently phrased question about Chongqing, Wen foreshadowed Bo's political execution, a seismic leadership rupture announced the following day that continues to convulse China's political landscape to an extent not seen since 1989. But the addendum that followed might be even more significant. Indirectly, but unmistakably, Wen defined Bo as man who wanted to repudiate China's decades-long effort to reform its economy, open to the world, and allow its citizens to experience modernity. He framed the struggle over Bo's legacy as a choice between urgent political reforms and "such historical tragedies as the Cultural Revolution," culminating a 30-year battle for two radically different versions of China, of which Bo Xilai and Wen Jiabao are the ideological heirs. In Wen's world, bringing down Bo is the first step in a battle between China's Maoist past and a more democratic future as personified by his beloved mentor, 1980s Communist Party chief Hu Yaobang. His words blew open the facade of party unity that had held since the massacres of Tiananmen Square.

This October, the Communist Party will likely execute a once-in-a-decade leadership transition in which President Hu Jintao and Premier Wen hand over to a new team led by current Vice President Xi Jinping. The majority of leaders will retire from the elite Politburo Standing Committee, and the turnover will extend down through lower tiers of the Communist Party, the government, and the military. Wen hopes his words influence who gets key posts, what ideological course they will set, and how history records his own career.

Wen Jiabao and Bo Xilai have long stood out from their colleagues for their striking capacities to communicate and project their individual personalities and ideologies beyond the otherwise monochromatic party machine. The two most popular members of the Politburo, they are also the most polarizing within China's political elite. They have much in common, including a belief that the Communist Party consensus that has prevailed for three decades -- "opening and reform" coupled with uncompromising political control -- is crumbling under the weight of inequality, corruption, and mistrust. But the backgrounds, personalities, and political prescriptions of these two crusaders could not be more different.

Bo has deployed his prodigious charisma and political skills to attack the status quo in favor of a more powerful role for the state. He displayed an extraordinary capacity to mobilize political and financial resources during his four and a half year tenure as the head of the Yangtze River megalopolis of Chongqing. He transfixed the nation by smashing the city's mafia -- together with uncooperative officials, lawyers, and entrepreneurs -- and rebuilding a state-centered city economy while shamelessly draping himself in the symbolism of Mao Zedong. He sent out a wave of revolutionary nostalgia that led to Mao quotes sent as text messages, government workers corralled to sing "red songs," and old patriotic programming overwhelming Chongqing TV.

From his leftist or "statist" perch, Bo has been challenging the "opening and reform" side of the political consensus that Deng Xiaoping secured three decades ago. Wen Jiabao, meanwhile, who plays the role of a learned, emphatic, and upright Confucian prime minister, has been challenging the other half of Deng consensus -- absolute political control -- from the liberal right. He has continuously articulated the need to limit government power through rule of law, justice, and democratization. To do this, he has drawn on the symbolic legacies of the purged reformist leaders he served in the 1980s, particularly Hu Yaobang, whose name he recently helped to "rehabilitate" in official discourse. As every Communist Party leader knows, those who want a stake in the country's future must first fight for control of its past.

Until last month Bo appeared to hold the cards, with his networks of princelings -- the children of high cadres -- and the gravitational force of his "Chongqing Model" pulling the nation toward him, while Wen's efforts had produced few practical results. Bo earned his reputation as a rising star until Feb. 6 when his police chief and right-hand man, Wang Lijun, drove to an appointment at the local British consulate to shake his official minders and then veered off and fled for his life down the highway into the U.S. Consulate in Chengdu. He carried with him allegations of sordid tales of Bo family criminal behavior including in relation to the death of British businessman Neil Heywood, according to Western government officials. In Beijing's eyes, this was the highest-level known attempted defection in 40 years, and it occurred on Bo's watch. Wang "betrayed the country and went over to the enemy," said President Hu Jintao, according to a Chinese intelligence official.

Wen, the son of a lowly teacher, saw his family constantly criticized and attacked during the Cultural Revolution, and rose to power by impressing a series of revolutionary veterans. Bo, in contrast, was born to rule. The son of revolutionary leader Bo Yibo, he studied at the nation's most prestigious middle school, Beijing No. 4. Bo had not yet turned 17 when a rift between the princeling children and those with "bad class backgrounds" erupted into class warfare. In June 1966, in the early months of the Cultural Revolution, one of Bo's school mates invented the rhyming ditty that became the anthem for the princelings that led the early Red Guard movement: "The father's a hero, the son's a brave lad; the father's a reactionary, the son's a bastard."

The student red guards at Beijing No. 4 turned an old eating hall into a gruesome incarceration chamber for the teachers and other reactionaries they captured. They painted the popular slogan "Long live the red terror" on the wall, in human blood.

Within months, however, Mao directed his Cultural Revolution toward his comrades-in-arms and unleashed a coterie of lesser-born red guards against the old "royalist" ones. Bo Xilai spent six years in a prison cell. His father, Bo Yibo, was tortured. Red Guards abducted Bo's mother in Guangzhou and murdered her, or she committed suicide; if any records exist, they remain sealed.

Since former leader Deng Xiaoping's 1981 "Resolution on History," the Cultural Resolution has officially been a "catastrophe," but the Communist Party never explained what happened. It was left as little more than a name, signifying bad but unknown things. By raising the specter of the Cultural Revolution, Wen Jiabao has opened a crack in the vault of Communist Party history: that great black box that conceals the struggles, brutality, partial truths and outright fabrications upon which China has built its economic and social transformation. Beneath his carefully layered comments is a profound challenge to the uncompromising manner in which the Chinese Communist Party has always gone about its business. And to grasp what the Cultural Revolution means to Wen Jiabao requires taking a journey through the life of his mentor, the 1980s reformist leader Hu Yaobang who ran the Communist Party in its most vibrant era.

Hu Yaobang was struck down from his job at the helm of the Communist Youth League on Aug. 13, 1966, five days before Chairman Mao presided over the first mass rally of the Cultural Revolution. Detained for six weeks, Red Guards beat and abused him and forced him to stand for hours with a huge wooden placard hanging from his neck and his arms wrenched behind his back. Six weeks later, as they retired for their national holidays, they called Hu's eighteen year-old son Hu Dehua to pick him up. "I cried when I saw his appearance," Hu Dehua told me. "He told me 'don't be such a good-for-nothing, let's go home, it doesn't matter.'"

Hu Yaobang was already back at work when Mao died, in 1976, and the Communist Party united behind the idea of moving on from the Cultural Revolution but lacked any further road map. Appointed head of the powerful Organization Department, Hu led a crusade to "seek truths from facts" -- for ideology to yield to reality -- and to rehabilitate fallen comrades. Deng, who by 1980 had secured his position as paramount leader, elevated Hu to general secretary of the Communist Party.

By the early 1980s the Communist Party was rapidly retreating from everyday social life. As the economy grew, Chinese people began to enjoy a degree of personal freedoms, but the essential norms of internal party politics remained unchanged. At crucial junctures there were no enforceable rules, no independent arbiters, only power.

In 1985, while most elders had been appointing each other or each other's children to important positions, Hu Yaobang recruited Wen Jiabao, the teacher's son, to run his Central Office -- a position akin to cabinet secretary. The following year Hu Yaobang's elder son, Hu Deping, spoke in terms uncannily similar to Wen Jiabao's of two weeks ago. "The Cultural Revolution was a tragedy," he said to the then propaganda minister, at a time when his father was at the height of his power. "It will not appear again in the same form, but a cultural revolution once or even twice removed cannot be ruled out from once again recurring."

Perhaps he had an inkling of what was coming. By 1986 the tensions between an increasingly market-oriented economy and more liberal social environment began to clash with Communist Party elders' demand for absolute political control. Hu Yaobang tried to limit corruption among the elders' children, studiously ignored conservative ideological campaigns, and tolerated student protests. By the end of that year the elders had had enough.

Then, as during the Cultural Revolution, and as remains the case today, no rules governed Hu Yaobang's downfall; just a group of backstage power brokers who judged that he had gone too far. In January 1987, 21 years after his purging in the Cultural Revolution, party elders subjected Hu to a torrid five-day criticism and humiliation session called a "Democratic Party Life meeting." The harshest of Hu's critics was Bo Xilai's father.

Hu Dehua, the youngest son, lives at home with his wife in the same large but rundown courtyard home, just west of Beijing's closed-off leadership district Zhongnanhai, where he has lived nearly all of his life. His recollections about what the Cultural Revolution meant to his family and his father, Hu Yaobang, informs the story that Wen Jiabao is telling today.

Hu Dehua tells how his father was pained, but not surprised, when Communist Party elders used his own political demise to drive an "anti-bourgeois liberalization" campaign across China. Party apparatchiks instructed Hu Dehua to show his ideological opposition to his own father's political platform, but he refused.

"It was the same as 1966. If someone was said to be 'liberalized', then everyone would line up to criticize them," Hu Dehua said. "The country was turning back at a time when it should be have been democratizing and transitioning to rule of law."

Hu Dehua told his father how pessimistic he felt about his country's future. Hu Yaobang agreed that the methods and ideologies of the 1987 anti-liberalization movement came straight from the Cultural Revolution. But he told his son to gain some historical perspective, and reminded him that Chinese people were not joining in the elite power games as they had 20 years before. He called the anti-liberalization campaign a "medium-sized cultural revolution" and warned that a small cultural revolution would no doubt follow, Hu Dehua told me. As society developed, Hu Yaobang told his son, the middle and little cultural revolutions would gradually fade from history's stage.

It is fortunate, perhaps, that Hu Yaobang could not see how his death in April 1989 triggered an outpouring of public grief at Tiananmen Square, as Chinese students held him up his honesty and humanity in contrast to their perception of other leaders of the time. The protests morphed into a mass demonstration for liberalization and democratization and against growing corruption among children of the political elite.

Wen Jiabao remained in charge of the Communist Party Central Office, now working for Hu Yaobang's increasingly reformist successor, Zhao Ziyang. A famous photo shows Wen standing behind Zhao's shoulder as his boss declared the haunting words "I've come too late" to students who refused to leave the square. Shortly afterward, Deng and the party elders ordered in the tanks, triggering another Cultural Revolution-style convulsion and adding a new bloody file to the Communist Party's vault of history. Bo Yibo moved to have Wen purged, according to a source whose father was a minister at the time, but other elders were impressed with how Wen shifted his loyalty from Zhao (who spent the rest of his life under house arrest) and supported martial law. Wen played by the rules of a ruthless system, his family -- especially his wife and son -- leveraged his official status for their own business interests, while his career progression resumed.

Hu Yaobang was largely airbrushed from official history after his purge in 1987. But because he did not publicly challenge the Communist Party, he maintained his legacy and his supporters, including all of the current and likely future party chiefs and premiers: Hu Jintao, Wen Jiabao, Xi Jinping, and Li Keqiang. All four regularly visit the Hu family home during Spring Festival. But only Wen Jiabao has publicly honored his mentor's legacy.

Two years ago, on the 21st anniversary of Hu Yaobang's death, Wen penned an essay in thePeople's Daily that was remarkable in a nation whose leaders rarely give any public hint of their personal lives. "What he taught me in those years is engraved on my heart," wrote Wen. Of the four top leaders who regularly pay homage to Hu Yaobang's old home, Wen Jiabao has the warmest connection with Hu Yaobang's widow and four children.

Hu taught his children to resist the idea, wired into the Communist Party psyche, that they had any particular hereditary right to high office. Nevertheless the eldest son, Hu Deping, rose to vice minister rank in the United Front Department. And last year he used his princeling heritage and networks to organize and say things that would have banished lesser-born men to jail. He published a book about his father, with a forward written by Wen. He organized a series of closed-door seminars for leading intellectuals and other princeling children of reformist leaders to try and build a consensus for reform.

The first and most low-key seminar, in July, ignited what became a raging public debate about Bo Xilai's "Chongqing Model" versus its possible antidote, the more liberal "Guangdong Model." The second, in August, celebrated the 35th anniversary of the arrest of Mao's radical "Gang of Four," which slammed the door shut on the Cultural Revolution just weeks after Mao's death in August 1976. The third, in September, explored the 30th anniversary of the 1981 Resolution on History, which had confirmed the Cultural Revolution as a catastrophe that must never occur again.

It was at the September gathering that Hu Deping set down the themes that Wen later referred to in his press conference, and published his comments on a website dedicated to chronicling the life and times of his father: "The bottom line is making sure to adopt the attitude of criticizing and fundamentally denouncing the Cultural Revolution ... In recent years, for whatever reason, there seems to be a 'revival' of something like advocating the Cultural Revolution. Some people cherish it; some do not believe in the Cultural Revolution but nevertheless exploit it and play it up. I think we must guard this bottom line!"

The subtext, only barely concealed, was that Bo Xilai must be stopped from dragging Communist Party back toward its most radical, lawless past. How, one could be forgiven for asking, could Bo grasp for power by praising a movement that killed his own mother?

Hu Deping honed in on the need to forge mechanisms to institutionalize the power games between party leaders. He told his princeling and intellectual friends in the seminar audience that the remnants of feudal aristocracy -- old fashioned despotic power -- might again emerge as the party had said it had during the Cultural Revolution. He foreshadowed the ructions that are now taking place:

"If we really want to carry out democratization of inner-party political life, the cost is going to be enormous. Do we have the courage to accept that cost? If we do it now, there is a cost certainly. Do we dare to bear the cost? Is now the right time? I cannot say for sure. However, I think it might create some 'chaos' in some localities, some temporary 'chaos', and some localized 'chaos'. We should be prepared."

Hu Deping has been stepping forward, with some reluctance, to draw on his father's legacy to help shape China's future. He is a member of the standing committee of one of China's two representative-style bodies and mixes with senior leaders. He discussed the Cultural Revolution with both President Hu Jintao and his expected successor, Xi Jinping, not long before Wen Jiabao's news conference and Bo Xilai's demise, according to a source familiar with those conversations. China's politically engaged population is watching the battle now under way within the Politburo to frame the downfall of Bo Xilai and set the lessons that will shape China's future.

"So far we cannot identify whether Wen Jiabao is representing himself or representing a group," says a recently retired minister-level official, who had confidently predicted Bo's sacking to me 10 days before it happened. "Maybe it's 80 percent himself and 20 percent the group. We still have to watch."

It remains far from clear whether the Communist Party's webs of patronage and knots of financial and bureaucratic interests can be reformed. But with China's leftist movement decapitated by the purge of Bo Xilai, and Bo's critics now talking about his reign of "red terror" after daily revelations of political and physical brutality under his command, Wen has begun to win over some of his many detractors.

"In the past I did not have a fully positive view of Wen Jiabao, because he said a lot of things but didn't deliver," says a leading media figure with lifelong connections to China's leadership circle. "Now I realize just to be able to say it, that's important. To speak up, let the whole world know that he could not achieve anything because he was strangled by the system."

Hu Yaobang's most faithful protégé, who carried his funeral casket to its final resting place, is building on the groundwork laid by Hu and his children ostensibly to prevent a return of the Cultural Revolution. Wen Jiabao is defending the party line set by Deng Xiaoping's 1981 historical resolution against attack from the left. Between the lines, however, he is challenging the Communist Party's 30-year consensus from the liberal right.

Hu Dehua, the youngest son, spelled out the gulf between these positions in a rare Chinese media interview one month ago: "The difference between my father and Deng is this: Deng wanted to save the party; my father wanted to save the people, the ordinary people."

Wen Jiabao sees Bo's downfall as a pivotal opportunity to pin his reformist colors high while the Communist Party is too divided to rein him in. He is reaching out to the Chinese public because the party is losing its monopoly on truth and internal roads to reform have long been blocked. Ironically, he is doing so by leading the public purging of a victim who has no hope of transparent justice, because the party to which he has devoted his life has never known any other way.

John Garnaut is China correspondent for the Sydney Morning Herald and the Age. He is writing a book on the princelings shaping China's future.

Beijing's Most Embarrassing Allies

Beijing's Most Embarrassing Allies
BY JOSHUA E. KEATING
Foreign Policy, MAY 24, 2010

As China has grown into a major economic and military power in the last two decades, its mad scramble for energy resources and trading partners has led it into alliances with some of the world's most unsavory governments. Here are five regimes that couldn't survive without Beijing.

NORTH KOREA
Beijing's interests: Stability, bilateral trade, and a buffer between China and South Korea

The relationship: Chinese support for North Korea dates back to the 1950s, when Beijing loaned military aid and fighters to Kim Il Sung's communist government during the Korean War. China quickly became North Korea's primary benefactor and trading partner, a relationship that has continued under the rule of Kim Jong Il. Ninety percent of North Korea's energy imports, 80 percent of its consumer goods, and 45 percent of its food now come from China.

The relationship isn't all one-sided. An increasing number of Chinese firms are investing in North Korea to take advantage of its rock-bottom labor costs and large coal and mineral deposits. Bilateral trade between the two countries reached $2.79 billion in 2008, up more than 40 percent from the year before. More importantly for Beijing, North Korea provides a friendly buffer zone between China's northeast and capitalist, democratic South Korea -- as well as the 37,500 U.S. troops based there.

China has frequently used its position on the U.N. Security Council to block harsher sanctions against Kim's regime. Since North Korea began its pursuit of nuclear weapons, Beijing has seemed more exasperated with Kim's belligerence and at times, has even supported international sanctions. Although the support is not as unconditional as it once was, China remains North Korea's most important ally, as evidenced by the reclusive Kim Jong Il's recent trip to Beijing, where he met with President Hu Jintao and Premier Wen Jiabao and reportedly suggested once again that he might be willing to return to the negotiating table.

Most embarrassing moment: China was instrumental in cajoling North Korea into participating in the 2003-2005 six-party talks aimed at denuclearizing the Korean Peninsula, which culminated in a 2005 agreement by North Korea to dismantle its nuclear program in exchange for foreign aid. So when Pyongyang tore up the agreement and tested a nuclear weapon in October 2006, it was widely perceived as a "slap in the face" to a Chinese government that had repeatedly stuck its neck out for its troublesome southeastern neighbor. One week after the tests, China agreed for the first time to support U.N. sanctions on North Korea, and the political relationship between the two countries has been strained ever since. Fearing the chaos and potential refugee crisis that might result if the Kim regime were to fall, however, China is still wary about applying too much pressure, and trade between the countries continues to increase.

IRAN
Beijing's interests: Oil and gas
The relationship: The economic relationship between Iran and China dates back to the days of the Silk Road, but has taken on a new geopolitical importance in the last decade, as China has sought out reliable sources of oil to fuel its growing economy, and an increasingly isolated Iran has looked eastward as relations with the United States and Europe have deteriorated.

Iran is China's third-largest source of oil, supplying about 11.4 percent of its oil imports. Bilateral trade between the two countries totaled $21.2 billion in 2009, up from 10.1 billion in 2005. The China National Petroleum Corp. (CNPC) has reached deals to develop new oil and natural gas fields throughout the country. Because Iran lacks the capacity to refine its own oil into gasoline, it's also a major importer of Chinese petroleum products.

As Iran has, over strong U.S. and European opposition, continued to develop its nuclear program, China has repeatedly opposed, on the Security Council, international sanctions against its new business partner, generally proposing that diplomatic efforts be given more time.

Most embarrassing moment: China's stated position, that the Iranian nuclear issue could be resolved through negotiations, took a hit in November 2009, when Iran rejected a deal to ship its uranium abroad for enrichment. China joined with the other members of the Security Council in expressing disappointment with Iran's decision and has publicly urged Iran to accept the new agreement. China welcomed a similar fuel-swap deal negotiated by Brazil and Turkey this May, but it was apparntely too little too late. The United States quickly announced that China had finally agreed to tougher sanctions, but the devil is in the details, and it's still unclear whether Beijing will sign on to the most punitive measures backed by the other big powers.

SUDAN
Beijing's interests: Oil
The relationship: As China's insatiable demand for energy has led it to invest more and more in Africa, it has come under frequent criticism for its relationship with unstable and unsavory regimes -- but none has been more controversial than Sudan. Cooperation between the two countries began during the 1970s, when Mao Zedong provided the country's then-Marxist government with loans and medical aid. But it wasn't until the 1990s that energy cooperation between the two countries took off, after American oil companies pulled out due to U.S. sanctions.

The international sanctions applied to Sudan following the country's bloody civil war and the ongoing violence in Darfur have allowed China overwhelming dominance over the country's energy sector. CNPC is the largest investor in Sudan's state-owned oil company, and China purchases 40 percent of the country's oil output, accounting for about 6 percent of China's imports.

Even more controversially, human rights groups allege that China has sold Sudan more than $55 million in small arms -- weapons that have been used to kill more than 300,000 people in the Darfur region. Chinese cooperation with Sudan has continued even as Sudanese President Omar Hassan al-Bashir has been charged with crimes against humanity by the International Criminal Court. China, along with Russia, has blocked sanctions against Sudan on the Security Council.

Most embarrassing moment: Next to Tibet, China's relationship with Sudan is the most frequent cause of anti-Chinese ire from human rights activists. In the run-up to the 2008 Beijing Olympics, for instance, Darfur activists disrupted the the Olympic torch relay and then U.S. Senator Hillary Clinton called on President George W. Bush to boycott the opening ceremony. Bush went, but another high-profile guest, American film director Steven Spielberg, who had signed on as a consultant to the opening ceremonies, pulled out of the project over his objections to China's policies in Sudan.

BURMA
Beijing's interests: Natural gas and mining
The relationship: Burma has traditionally exported raw materials like timber and gemstones to China, but nowadays Beijing has its eyes on a much bigger prize: Burma's estimated 21.19 trillion cubic feet of natural gas reserves. CNPC signed a 30-year natural gas deal with Burma in 2008, and a pipeline carrying gas to China's Yunnan province is expected to come online in 2012. China has also begun work on an oil pipeline through Burma that will save Chinese tankers a costly trip through the politically sensitive Strait of Malacca. China gave Burma about $2 billion in military aid between 1995 and 2005, including fighter jets and naval vessels.

Although China has been more than willing to turn a blind eye to Burma's crackdowns on political opposition and has stood up for the Burmese junta in the Security Council, there are signs that the relationship has begun to deteriorate. Burma's long-running military campaign against ethnic minorities in its northeast has sent thousands across the border into China, bringing narcotics and HIV/AIDS with them. China expressed its "deep concern," in August 2009, prompting the junta to issue a rare apology. Above all, China is looking for stability from its southern neighbor and energy provider, and the increasingly isolated junta seems unable to provide it.

Most Embarrassing moment: Burma's 2007 anti-government protests were a wake-up call to China. The images of Buddhist monks taking to the streets en masse to challenge the junta's authority was not a sight that Chinese leaders particularly wanted to see replicated throughout the region, particularly in Tibet. Burmese Foreign Minister U Nyan Win was publicly admonished on a trip to Beijing that year by senior Chinese diplomat Tang Jiaxuan, who told him to "restore internal stability" and "push forward a democracy process that is appropriate for the country." Perhaps hedging its bets, China has lately begun to reach out to imprisoned Burmese democracy leader Aung San Suu Kyi. China's wavering commitment to the junta will likely be tested again later this year, when the government has tentatively planned to hold elections with Suu Kyi's party banned from participating.

ZIMBABWE
Beijing's interests: Precious metals
The relationship: Zimbabwean President Robert Mugabe is a long-time Sinophile, dating back to his days as a rebel leader fighting the white-dominated Rhodesian government, when he received arms, training, and funding from Beijing. Mugabe made a point of visiting China in 1980, the first year of his leadership, to thank the Chinese for their support.

The Chinese government has publicly supported Mugabe's controversial land-reform policies and has granted the country billions in agricultural aid. China has also sold Mugabe's regime the latest military technology, including FC-1 fighter jets, 100 military vehicles, and a state-of-the-art radar system at Mugabe's mansion in the suburbs of Harare.

In exchange, Mugabe has opened up Zimbabwe's vast mineral deposits, including the world's second-largest supply of platinum, to Chinese investment. Chinese companies have pumped millions into rebuilding the country's struggling mining sector, expanding economic cooperation as Western governments have slapped increasingly harsh sanctions on Mugabe's regime.

Most embarrassing moment: During the Zimbawean government's 2008 crackdown following a disputed presidential election, China was caught red-handed when a ship carrying small arms intended for Zimbabwe -- including 3 million rounds of ammunition and 1,500 rocket-propelled grenades -- was turned away by South African authorities at the port of Durban. After it was prevented from unloading at several African ports, the ship was eventually forced to return to China.