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China: A Look at Economy, Military and Politics

Interview (28 July 2008) given by Director, Chennai Centre for China Studies to “New Indian Express”, Chennai, India.

Economic

Qn: Is China’s 2020 vision of quadrupling the size of its economy attainable?

Answer: In May 2005, China announced its plan to quadruple the country’s GDP of 2000 to approximately 4 trillion US dollars by 2020 with a per capita level of some 3,000 US dollars. In October 2007, the target was redefined as quadrupling the per capita GDP by 2020 (US$3200) as against the figure for 2000 (US$800).

China claims that the target is attainable. As per Chinese estimates, if the country is able to register an average annual growth of above 7.2% till 2020, the quadrupling can be assured. The average growth in China during 1990-2004 was around 10%. In 2006-10 period, the average growth is planned to be around 8%. In 2007 itself, the growth has been 11.3%. With the expected growth remaining above 7.2% till 2020, China feels that it may not be difficult to attain the target. It aims to achieve the target by reducing consumption of resources and making greater efforts to protect environment.

Independent estimates however point out constraints for quadruplication: China is still a developing country, not yet industrialized, the transition from a centrally planned economy to a market economy is yet to be completed and the country continues to have only limited per capita inputs (resources).

The resource factor above could be important. At this moment, some key areas of concern for China in connection with quadruplication task, may include the oil supply gap, limited savings rate, inefficient banking sector with huge amount of Non-Performing Loans, sustainability of export growth, ratio of FDI to capital formation and last but not least, reform of State-Owned Enterprises. A clear answer to the question as to whether China will be able to attain the target can not be given at this stage, as the same would very much depend on the government’s ability to succeed in tackling these issues.

Qn: What are the major challenges, fault lines (oil price shock, FDI shortage, military conflicts) and potential adversities that China’s economic development will encounter in the next decade?

Answer: Areas of major economic challenges are (i) bridging the income gap (urban-rural; coastal-interior areas), (ii) energy-intensive economy and impact of global oil price rise, (iii) Food security, (iv) Global Warming, (v) banking and financial sector reforms and (vi) imbalanced economy relying mostly on investment and net export, with no role for domestic consumption. Another challenge could involve the performance of the present collective leadership in China in implementing its new course of ‘balanced development’ for the country jettisoning the old GDP centric approach; Politically, the regime faces the influences coming from neo-liberal and neo-left thoughts in the country. Potential adversities could include ‘separatism’ and ‘extremism factors’ concerning the provinces of Xinjiang and Tibet and the Taiwan reunification issue, all of which can derail the economic progress.

Qn: As China’s energy consumption is rising instead of falling; won’t it affect the 2020 vision?

Answer: The level of China’s energy consumption per unit of GDP, in 2005, was three times of US, five times of Germany and 8 times of Japan. The level has however been falling since then. It dropped in 2007 to 6.4%. Beijing’s target is to reduce this level by 20% and the level of pollutant emission by 10%, in the year of 2020. It is closing down the energy-intensive coal powered units. There are thus chances of energy consumption not affecting the 2020 vision. Beijing should however substantially reduce its energy subsidy system, like holding down the electricity prices.

Qn: Global warming is getting more severe. How much China has affected the current situation and what is the country’s responsibility for improving the situation?

Answer: China surpassed the US as largest producer of Carbon-Di-Oxide in 2007. Showing some responsibility, it took its first “Climate Initiative” in June 2007. The National Climate Change Programme, under the initiative, called for reducing energy use by 20% in the year 2020.The Initiative included promotion of carbon sink technologies and raising of efficiency of coal fired power plants. China’s aim is to reduce CO2 emissions by moving away from a labour intensive economy to a technology driven economy. Beijing however wants emission reduction to follow the principle of “ common, but differentiated responsibilities”, which imposes major responsibilities on the developed nations, with which China will discuss the issue though ‘cooperation and dialogue’.

Qn: There has been a wave of labour unrest sweeping China in recent years. Why is it so?

Answer: China has not officially admitted labour unrest. The official All China Federation of Trade Unions, a party outfit, looks after workers’ welfare. China’s new labour regulations, which came into force on 1 January 2008, codified rights of workers and approved written contracts for all employees. They in fact strengthened government’s ability to mediate and arbitrate. People’s Daily (27 August 2007) has admitted increase in labour disputes; it has revealed that for 19 years since till 2005,China arbitrated on 1.72 million labour disputes. Unrest is however reported by independent observers. A Hongkong analyst Han Dongfang, has revealed strikes every day by 1000 workers, mostly in manufacturing bases in Southern China. The disputes mostly concerned the wages for labourers, both in State Owned Undertakings and foreign funded factories.

Qn: How far the one-child policy has benefited China? Won’t it result in rising graying population?

The “ One Child” policy (with concessions to minorities), introduced in 1979, has been helpful in limiting the population growth. The policy is to continue in the 11th Five Year Plan period (2006-10) also. On one side, the curb on population growth was beneficial to China’s reforms and opening up programme being implemented since 1979. On the other hand, it has caused shrinkage in the working age population. In 2000, it is estimated that persons above 60, formed 11% of the country’s population. There are signs that China realizes the impact coming from rising graying population. It foresees a ‘demographic liability’ around 2015 (a projection of the State Economic Research Institute).

Qn: How uneven is the growth in China? Won’t it generate migration and unemployment issues?

Answer: There is a wide gap in the economic standards of people in rural and urban areas and in coastal and interior areas. An average worker in Shanghai earns ten times more than his counterpart in rural interior areas. This has been the result of over concentration by earlier regimes over urban and coastal areas for development. It is a fact that such situation is leading to rural migration to urban areas, besides contributing to unemployment. By shifting to a ‘balanced development’ strategy discarding the earlier GDP-centric approach, the present Hu Jintao-Wen Jiabao leadership, aims at addressing this serious issue. Specific projects under this strategy under implementation include Western Development Strategy (2000), Revitalisation of Northeast China programme (2003) and rise of Central China policy (2004)

Qn: What is the rate of unemployment in China and how economic growth is expected to make a dent in unemployment?

Answer: By end of 2007, urban unemployment stood at 4%, according to Labour Ministry statistics. That was a drop by 0.1% from end 2006. A reason for unemployment now is pruning of State-Owned Enterprises leading to workers’ lay-offs. A slowdown in export is also causing unemployment. This slow down has been due to appreciation of the Chinese currency, increase in production costs and decrease in international demand. According to Ministry of Human Resources of China, domestic and international economic situation may negatively influence the unemployment rate. Government’s anti-unemployment measures include providing new jobs for retrenched workers, extending unemployment insurance benefits and imparting retraining for workers with outdated skills.

Qn: Will the rising population cause China to import more grains to mitigate the food crisis as feared by monetary agencies?

Answer: Yes. China is already a net importer of food grains since late 90s.The reasons are dwindling water resources in China and fall in crop yields due to global warming. In January 2008, China announced food price controls in response to the food price rise in the world. China’s population growth and the changes in the country’s dietary trends, for eg rising demand for meat, may necessitate more food imports. Any effort in China to produce grain based bio fuels, may also add up as a factor compelling food imports. Government’s control of such efforts is anticipated. Also, if green house gas emissions are not controlled in China, China’s rice, wheat and corn crop may drop, necessitating imports.

Qn: What are the major problems in China’s financial system? Could it escalate into a financial crisis and stifle economic growth in the next decade?

Answer: High inflation (7.1% in January 2008), foreign exchange risks, stock market volatility, non-performing assets and international currency crisis are among factors, which can affect China’s financial system. Adding to the problem would be the bad loans of China’s four big banks and the imperfect pension system. A crisis is possible if root causes for the main problem of inflation- RMB appreciation, rising food and metal prices in the world and the rising energy cost, could not be tackled effectively.

Qn: How vulnerable is Aids scenario in China? How is it trying to counter the menace?

Answer: According to the data released by the Ministry of Health in China, there are 100,000 persons living in the country with HIV/AIDS; there are 85,000 AIDS patients. The Government has launched a three-year AIDS prevention programme to cover the period 2008-10; aspects of education, community mobilization and prevention of further AIDS infection are to be covered under the programme.

Military

Qn: What do you think of Chinese military’s new strategic vision (for e.g blue water navy etc)

Answer: The vision hinges on the concept aimed at maximizing and managing Comprehensive National Power (CNP); this concept encompasses not only military aspect, but also the factors of political, social and technological developments. The main thrust in the vision is to prevent the emergence of a dominant power or alignment of powers opposed to China. Specifically, the military’s strategic goals include attaining capabilities to meet any contingency arising on the Taiwan question, resist US-Japan encirclement of China in East Asia and secure sea lanes of communication to protect oil transport security. The Chinese military modernization, which is going on side by side with economic reforms, under the declared framework of “ Fu Guo Qiang Jun’ (making China prosperous while strengthening army), is being viewed as indicative of Chinese intentions to project their power far beyond East Asia. China’s development of blue water navy needs to be seen in this context.

Politics:

Qn:What do you think of China’s Africa Policy?

Answer: A 2006 official paper defined China’s Africa policy as follows: China will establish new type of strategic partnership with Africa on the basis of political equality and mutual trust, economic win-win cooperation and cultural exchange. The root cause behind China’s getting closer to Africa lies in the new imperatives that have emerged for Beijing to diversify its sources for oil, essential for sustaining its economic development. So far, China has been dependent on the Middle East oil sources. China is the second largest consumer of oil in the world after the US and a Sino-US competition in the matter of securing oil resources in Africa is likely.

Qn: What is the biggest remaining stumbling block for resolving India-China border issue and in what time frame this issue can be solved?

Answer: The biggest stumbling block is China’s stubborn territorial position. Beijing considers that the Simla Convention of 1914 had resulted in the illegal annexation of a large chunk of Chinese territory including the 90000 Sq Km area in Northeast, by the British India and that Independent India came to inherit the British legacy. China thus does not recognize the McMahon line, a product of the Convention and claims the entire Arunachal Pradesh as Chinese territory. A number of recent reports have suggested that China insists on the return of Tawang in Arunachal Pradesh to it, during the ongoing Sino-Indian border negotiations. China has admitted that the Sino-Indian border problem is complicated and cannot be solved immediately. The recent Tibet unrest centering round the Dalai Lama factor has further complicated the Sino-Indian relations, particularly the border problem. Also, both Beijing and New Delhi are now in favour of improving bilateral ties looking beyond the border dispute. The border talks can under the circumstances, be prolonged. No timeframe is visible for a final solution to the boundary question.

Qn: Could there be a formidable economic and political bloc between China and India once the border issue is settled?

Answer: The answer is theoretically yes. But, it is going take a long time to find a solution to the border issue. Building a political bloc therefore seems to be impractical. A Sino-Indian trade partnership is however being built now. Bilateral trade is in the upswing and both the nations are on their way to conclude a ‘regional trade arrangement’. China has emerged as an important component of India’s Look East policy. Beijing has offered civil nuclear cooperation to India, for the first time. The two countries are actively cooperating in the fields of climate change, non-traditional security and WMDs and WTO. Joint military exercises have been held. Thus, short of a bloc, both the nations are proceeding carefully in promoting bilateral ties. But without solving the core issues like the border, a real breakthrough in Beijing-New Delhi ties cannot be expected.

Qn: What do you think of separatism in Eastern Turkistan in the northwestern China?

Answer: I do not think the separatist movement in Xinjiang (called Eastern Turkistan) is organized. There had indeed been sporadic violent incidents, but the authorities have been able to control them; there is heavy presence of Army and Police in Xinjiang. Han migration into Xinjiang is continuing, which has altered the population ratio in Xinjiang, raising fears on Uighurs becoming a minority. The Government is heavily investing in development projects in Xinjiang to win over the population. But, anti-Han feelings among Uighurs are being found genuine by many observers.

Qn: How could the Tibet issue to be solved?

Answer: Beijing considers that its sovereignty over Tibet cannot be questioned. In its views, the Tibet issue relates only to the Dalai Lama factor and is ready to hold talks with the spiritual leader, not on China’s sovereignty over Tibet, but on the Dalai Lama’s personal status once he returns. The Dalai Lama factor has complicated Sino-Indian ties as the Tibetan leader is living in India on exile. Chinese Premier Wen Jiabao has himself admitted that the Tibet issue (meaning the Dalai Lama factor) is ‘sensitive’ one in bilateral ties. A solution to the Tibet issue can come only if the Dalai Lama and the Chinese side could reach an agreement. The unofficial talks between them, have so far failed to produce any result and the immediate picture appears to be not bright. Meanwhile, Western pressure is mounting on China on the Dalai Lama issue. Till Olympics, China is not expected to take any meaningful initiative towards the Dalai Lama. Post-Olympics period could however witness some movement on Beijing’s part, which will in any case be without giving up its present tough policies inside Tibet.

Qn: Will China’s slow mix of democratic reforms (special zones of political reforms) be beneficial in the long run?

Answer: There is no political reform in China as conceived abroad. There are groups in China with neo-liberal thoughts, asking for political reforms side by side with economic reforms. Their voice is however not strong. The ruling Chinese Communist Party (CCP) has introduced inner-party democracy and direct elections to the party posts are being held in selected counties. This does not mean start of political reforms in a Western sense. The CCP’ stand is that its ‘socialist democracy’ prescription is superior to Western political models which cannot be applied to China. Even in Special Economic Zones, set up to promote reforms, the Party remains supreme. But admittedly, economic rise is fastly producing political expectations in China. What can be said at this juncture is that future directions of political reforms in China remain unclear.

( The writer, D.S.Rajan, is Director of Chennai Centre for China Studies, Chennai,India.Email:dsrajan@gmail.com)

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