Changing China

Stephen DeAngelis

February 12, 2009

China really didn’t receive much attention during the U.S. presidential transition until Obama’s pick for Treasury Secretary, Timothy Geithner, accused China of “manipulating” its currency. Pundits fear that Geithner’s remarks could be the first shot in a trade war between the world’s largest and third-largest economies. The Chinese were quick to deny the allegations of currency manipulation [“Chinese Ministry Denies Geithner’s Currency Claims,” by Ian Johnson and Shen Hong, Wall Street Journal, 25 January 2009].

“A Chinese ministry … strongly denied Obama administration claims that China ‘manipulates’ its currency, as the first contact between the new administration and China takes a markedly sour tone. … Some Chinese commentators say the verbal sparring is a sign of greater trade friction to come with Washington. They noted that both sides’ comments were written, not spoken — and therefore should be taken as a serious view of intent. … Chinese officials are deeply concerned that the global economic downturn could spur protectionist moves in the U.S. and elsewhere that could further damage China’s trade-dependent economy. Mr. Geithner’s comments marked a significant escalation in U.S. criticism of China’s exchange-rate system.”

Strategists who view China as America’s next great adversary are no doubt thrilled at this turn of events. They have been bolstered in their views by increases in Chinese defense spending and the release of a new Chinese defense policy paper [“China fears containment as defense spending rises,” by Ben Blanchard, Washington Post, 20 January 2009].

“China fears containment abroad and separatist groups at home, [asserts] a defense policy paper, … justifying a drive to increase military spending and push the People’s Liberation Army into the high-tech era. China’s security has been improving as its economy grows and the PLA embraces modernization, the defense ‘white paper’ said, but pro-independence forces in Taiwan, Tibet and the energy-rich western region of Xinjiang still ‘pose threats to China’s unity and security.’ ‘On this issue, there can be no compromise and no concessions,’ Defense Ministry chief spokesman Hu Changming said at a news conference to launch the document. China has pointed to its recent deployment of navy ships to police pirate-troubled seas off Africa as a sign of benign military intentions. Analysts say the mission shows a rising but cautious power’s desire to project its growing global influence without alarming neighbors. But China’s increased spending on arms has been criticized as opaque by other countries, including the United States and Japan. Beijing says its defense budget is purely for defensive purposes and is quite open, and it notes its budget is much smaller than the Pentagon’s. Experts estimate China’s true defense spending could be as much as triple the stated figure.”

Although Chinese defense spending has risen, most of that spending can be explained by its obsession with Taiwan and internal security concerns. However, there are some Chinese strategists who seem perched in the starting gates of a new arms race. These militants argue that “there’s a large gap with the levels of the world’s developed countries” — meaning, of course, with the United States. I suspect that cooler heads will prevail in Beijing, especially since an arms race could hurt China’s long-term economic plans. But it is a situation that needs watching. Economically, China is in a much better financial position to weather the current crisis than is the U.S. according to Jim Rogers is co-founder, along George Soros, of the Quantum Fund [“Despite crisis, Jim Rogers is still a China bull,” Reuters, Washington Post, 19 January 2009].

“Rogers, who is now an independent investor living in Singapore, said … high saving rate and solid fundamentals in China make it a powerful force to be reckoned with.”

Although the current financial crisis is affecting the Chinese economy (exports were down by 17% last month and imports were down a staggering 43%), the Chinese are still sitting on a pile of money. In another sign of strength, China’s financial sector has been recruiting employees while financial institutions in the West are dumping them [“China’s Financial Industry Recruits Abroad,” by Jimmy Wang, New York Times, 25 December 2008].

“With jobs quickly disappearing from Wall Street and the boom in global finance over for the foreseeable future, China still offers opportunity, even as its own economy slows. Worldwide, thousands of financial service jobs have been erased because of the credit crisis, with London and New York suffering large losses. Now, in a reverse miniature brain drain, Chinese financial institutions are taking advantage of the downturn and focusing on the newly unemployed to diversify and upgrade their own staffs. … In another reversal of fortune, China, because of its closed financial sector — which Washington and the West have been insisting China open — has been largely shielded from the toxic mortgage-backed securities that brought down many of the world’s banks. Capital flows in and out of China are tightly controlled, and China’s capital markets are closed to foreign companies. But China’s insular financial system has also kept it underdeveloped. Although employees of large Chinese financial institutions usually graduate from top Chinese universities, they lack practical market experience. That lack of experience has sometimes led to poor decisions, and in some cases outright blunders.”

In addition to hiring employees from overseas, China’s financial sector is trying to beef up Chinese employees by insisting that they pass increasingly stringent exams [“Qualifying Tests for Chinese Financial Workers,” by Keith Bradsher, New York Times, 25 December 2008].

“Chinese regulators have stepped up their policing of banks, ordered them to limit their counterparty risk in overseas derivatives transactions and reviewed trust companies to make sure that they are not taking inappropriate risks. But China’s most unusual response to international financial turmoil has been the government’s decision to increase rapidly the number of qualification tests that are required for workers in the financial sector. The government has also increased the number of people required to take these tests. The improvements that China is starting to make in its financial regulatory system are likely to be tested heavily in the next few months. Recently Chinese banking regulators have taken a series of steps to encourage banks to lend much more heavily, as part of a broader government effort to halt an economic slowdown unfolding with alarming speed. State-controlled banks — and almost all banks in China are still majority-owned by the government — are being told to lower the required down payments on home mortgages, lend more money to exporters and provide much greater financing for local and provincial governments engaged in building new roads and other infrastructure projects. Yet the longer-term health of the Chinese economy may depend on regulators’ and bank managers’ ability to accomplish all of this without impairing the credit quality and risk management systems still being introduced here. Failure could expose Chinese banks to the kinds of problems now bedeviling their Western rivals.”

Chinese officials understand that isolating China’s economy from the global economy is not the path to long-term prosperity. They tried that course for three decades with disastrous results. They also understand that connecting to the global economy holds some risks, but those risks pale in comparison to the risks of isolation. One of the international concerns about the Chinese economy has been rampant piracy and theft of intellectual property. Although concerns remain, the Chinese are making some in-roads [“China Sentences Ringleaders Of Software-Counterfeiting Gang,” by Jordan Robertson, Washington Post, 1 January 2009].

“The alleged ringleaders of a Chinese counterfeiting gang that sold at least $2 billion worth of bogus Microsoft software were sentenced [on December 31, 2008,] to prison terms of up to 6 1/2 years, in what is believed to be the harshest penalties yet under China’s tightened piracy laws. The punishments meted out against the 11 defendants, and announced by the software company, could help China improve its image as a country that doesn’t crack down hard enough on copyright violators, though technology and entertainment industries still say China has a long way to go. … Research commissioned by the Business Software Alliance, an industry trade group, found that 82 percent of the software used in China in 2007 was not legitimately purchased, more than double the worldwide piracy rate of 38 percent.”

Financial and legal reformations in China are likely to outpace political reformation; but that, too, is coming [“In China, a Grass-Roots Rebellion,” by Ariana Eunjung Cha, Washington Post, 29 January 2009]. Cha’s article highlights the fact that political change is generally preceded by economic and social changes. In China’s case, technology plays a large role in on-going changes. Cha begins her article with the story of a shy, but typical member of China’s Net Generation.

“When Tang Xiaozhao first saw a copy of the pro-democracy petition in her e-mail inbox, she silently acknowledged she agreed with everything in it but didn’t want to get involved. Tang, a pigtailed, 30-something cosmetology major, had never considered herself the activist type. Like many other Chinese citizens, she kept a blog where she wrote about current events and her life, but she wasn’t political. A few days later, however, Tang surprised herself. She logged on to her computer and signed the document by sending her full name, location and occupation to a special e-mail address. ‘I was afraid, but I had already signed it hundreds of times in my heart,’ Tang said in an interview. Hers is the 3,943rd signature on the list that has swelled to more than 8,100 from across China. Although their numbers are still small, those signing the document, and the broad spectrum from which they come, have made the human rights manifesto, known as Charter 08, a significant marker in the demands for democracy in China, one of the few sustained campaigns since the 1989 Tiananmen Square protests. Those who sign the charter risk arrest and punishment.”

The reality is that 8,100 people in a country with an estimated population of 1.3 billion people hardly register a blip on the political radar. Chinese officials, however, have demonstrated great concern about grass-root efforts in the past. Their response to this effort was predictable.

“When the document first appeared online in mid-December, its impact was limited. Many of the original signers were lawyers, writers and other intellectuals who had long been known for their pro-democracy stance. The Chinese government moved quickly to censor the charter — putting those suspected of having written it under surveillance, interrogating those who had signed, and deleting any mention of it from the Internet behind its great firewall. Then something unusual happened. Ordinary people such as Tang with no history of challenging the government began to circulate the document and declare themselves supporters. The list now includes scholars, journalists, computer technicians, businessmen, teachers and students whose names had not been associated with such movements before, as well as some on the lower rungs of China’s social hierarchy — factory and construction workers and farmers. ‘This is the first time that anyone other than the Communist Party has put in written form in a public document a political vision for China,’ said Xiao Qiang, an adjunct professor of journalism at the University of California at Berkeley, a human rights activist and director of the China Internet Project, which monitors conversation on China’s vast network of electronic bulletin-board systems, blogs and Web sites. ‘It’s dangerous to be associated with dissidents, so in the past, other, ordinary people have not signed such documents. But this time it is different. It has become a citizens’ movement.’ The party in China maintains a monopoly on power, but its authority is now being challenged in the charter and on a number of other philosophical fronts.”

Other movements are also afoot that challenge Chinese citizens ability to speak openly and think freely.

“On Jan. 13, a group of more than 20 Chinese intellectuals signed an open letter calling for a boycott of state television news programs because of what they said is systematic bias and brainwashing, and separately, a Beijing newspaper ran a commentary that argued that freedom of speech is written into the constitution and that the authorities cannot solely decide whether something is ‘absurd versus not, or progressive versus reactionary, or progressive versus reactionary.’ On Jan. 7, a prominent Chinese lawyer, Yan Yiming, went to the Finance Ministry and filed an application demanding that it open to the public its 2008 and 2009 budget books, including information about its $586 billion economic stimulus plan. ‘Our government must exercise its power in the open sunlight,’ Yan wrote. And early [in January], the editors of the newspaper Southern Weekend echoed text from Charter 08 but did not directly refer to it when the paper expressed worry about the future of the state and said it supports ‘progress, democracy, freedom, human rights.’ … Charter 08 lays out a comprehensive overhaul of the current political system by ending one-party rule and introducing freedom of speech, an independent court system and direct elections. It is modeled after Charter 77, which was put together by scholars and demanded rights for Czechoslovakia in 1977, preceding the collapse of communism by 12 years.”

No one seriously believes that China is will dump its single-party system anytime soon. But Charter 08 and other efforts do reflect cracks in the communist’s great political wall.

“The evolution of Charter 08 is being closely monitored outside China to see how far the government will go to squelch it. China’s No. 4 official, Jia Qinglin, warned in the party’s theoretical journal Qiu Shi in mid-January that the country should ‘build a defensive line against interference by incorrect Western thinking.’ Jia dismissed the ideas of a multiparty system and separation of powers as erroneous. At Beijing University’s law school, students who are party members have been warned not to get involved with Charter 08, as have researchers at the country’s top government-funded research group, the Chinese Academy of Social Sciences. At least one man — Liu Xiaobo, 53, a literary critic and dissident who spent 20 months in jail for joining student protesters in Tiananmen Square — has been detained on suspicion of being one of Charter 08’s organizers. His detention prompted an international outcry. Writers including Salman Rushdie and Margaret Atwood have called for Liu’s release.”

As the summer Olympics demonstrated, Chinese leaders, despite protestations to the contrary, are extremely sensitive to outside perceptions about China. The reason that Charter 08 has grabbed international headlines is because it has started to attract common citizens as well as Chinese luminaries.

“State Department spokesman Sean McCormack said the United States was ‘deeply concerned by reports that Chinese citizens have been detained, interrogated and harassed’ since the document was posted. Chinese Foreign Ministry spokesman Liu Jianchao has responded that Washington should stop interfering in the domestic affairs of other countries. Other prominent people who have signed the document include Ai Weiwei, son of Ai Qing, a famous pro-government poet well-known for his art and architecture. He Guanghu, a professor of religion at People’s University who specializes in Christianity, also signed, as did Bao Tong, formerly a high-ranking party member. Mao Yushi, 80, an economist who is credited with helping to keep the government on a path of market-oriented reforms, has publicly said that while he has not signed the document, he gave advice to its drafters and supports it. ‘China is at a critical moment of transition. We must recognize the general values of the world and follow the trend of democracy,’ said Teng Biao, a Beijing-based lawyer. Teng was summoned by police after signing and was warned not to take further action related to Charter 08. One significant aspect of Charter 08 is its less famous signatories, such as Tang.”

One of the reasons that Tang signed the Charter was because she was aware of problems in the country, like infant deaths caused by tainted baby formula. In the past, the media was so tightly controlled that she wouldn’t have known about such tragedies. That’s just one sign of the moderating changes sweeping China. Tang says, “I was afraid, but I had already signed it hundreds of times in my heart.” Her support, however, does not signal a lack of patriotism.

“By most measures, Tang is a model citizen. The spunky, 4-foot-10 Sichuan native who lives in Shanghai loves her country, pays her taxes, volunteers at a school for migrant workers’ children and is a major fan of one form of traditional Chinese opera. She grew up the eldest of three girls in a rural area where she says the schooling was weak but she taught herself by reading everything she could get her hands on, from Japanese novels to political treatises about the Middle East. … She posted a blog entry in December titled “I signed my name after a good cry,” which Chinese censors have repeatedly knocked offline. Nevertheless, it has been widely circulated via e-mail and on Web sites outside China. … Tang said in an interview that her fear turned to anger after she noticed that her blog entries and other references to Charter 08 kept being deleted by censors. One night, she said, she was hit by a great sadness that she did not have freedom of expression. So she took action.”

Chinese leaders know that world is now watching. They can no longer hide their actions behind a bamboo curtain. For the most part, Chinese leaders want what is best for the country and, at the moment, they believe that means continued one-party rule. Like any country, some politicians are corrupt and others are power hungry. They will not give up China’s one-party system lightly because it is the system in which their careers flourished. That is understandable and very human. We should applaud the changes that have already been made in China and look forward to changes that will be made in the future. Crises have a way of increasing cooperation or increasing tensions. Progress in a globalized world requires more of the former and less of the latter. How countries behave during the current financial crisis is likely to foreshadow how they will get along once it is over. I’m betting that cooperation will win the day.