New flashpoints facing China show as tens of thousands of pro-democracy protesters march in Hong Kong on January 1, 2020. Photo: Yat Yeung / NurPhoto / AFP

The following story was published almost 20 years ago, before the September 11 terrorist attack, and before the April 1st 2001 incident when a US surveillance airplane collided with a PLA fighter and crash-landed on China’s Hainan Island. We would like to republish it to show that two decades ago China was facing some of the same strategic challenges it faces now. These challenges were shelved for a long time, thanks to September 11 which changed priorities for the US and wasted possibly trillions in useless wars which helped to trigger the 2008 financial crisis. Yet, for almost 20 years, Beijing forgot many of its strategic problems as if they stopped existing.

Certainly, in Tibet or in Xinjiang, tensions are waning, but new flashpoints have been kindled, for instance in Hong Kong, and in the South China Sea. In a nutshell, either China will manage to follow international order or it will be broken by it. One wonders whether China, oblivious of this for two decades, can still afford facing head on the issue.

Asia Times March 2, 2001

In the middle of the ’90s the question was: Can a country as populous and large as China remain united in the face of all the various centrifugal tendencies? There were no historical precedents. No state had ever governed 1.3 billion people. The other geopolitical mammoth, India, was living proof of the impossibility of governing almost a billion people without perennial ethnic-religious strife in different parts of the country. The case of China seemed analogous. Tension in Xinjiang (in the far west), where a portion of the Muslim, Turkish-speaking minority had taken up arms, and in Tibet, where the followers of the Dalai Lama were on the warpath, were two factors that made it seem as if China was destined to be plagued by strong internal tension, to the point where its territorial unity could be threatened.

Yet, years after these alarms surfaced, today’s China appears to be more solid and united than ever. A number of unresolved issues still hang over its future, and these could open old wounds in the immense body of the Middle Kingdom. But Beijing seems to have halted the process of fragmentation, reversing the centrifugal trends and even exercising a centripetal force on the entire continent, with the result that it currently stands at the center of the affairs of Asia and its 3.5 billion inhabitants (1). The geo-political and economic consequences for Asia and for the rest of the world are of fundamental importance. Let us examine, therefore, how China has blocked the centrifugal forces inside the country and reversed them.

From Repulsion To Attraction

The initial signs of a reversal in the trend were already evident during the two-year period 1995-96. At that point the central power used the threat of force to stop two strong movements pushing in the direction of fragmentation and threatening, each in its own way, if not the very unity of China, then at least Beijing’s leading role: Taiwan and Tibet. Taiwan was attempting to give more marked expression to its independence; the Tibetan followers of the Dalai Lama wished to win more space for their political-religious activities. Though the two phenomena were independent of each other, both contributed to undermining the authority of Beijing on the Chinese sub-continent on the eve of an event of historic importance: the return of Hong Kong to the motherland on July 1, 1997.

In part, the centrifugal trend of Taiwan ran in parallel to its process of democratization and to the effort made to heal the wounds of 50 years before when around 1 million Chinese from the mainland invaded the island under the leadership of nationalist general Jiang Jieshi (Chiang Kai-shek). This minority ferociously repressed the resistance of the island’s native people, imposing its rule over the majority. For decades Taiwan claimed to be the true repository of Chinese tradition, in contrast to the betrayal perpetrated by the communists on the mainland. Such an ideological operation was able to function when hope still existed for regaining the mainland from Taiwan. But as this prospect faded, the ideology began to appear merely a ruse to maintain the mainland-born minority in power. Over the years, the result was a gradual loss of legitimacy on the part of the government party – the KMT – and a strengthening of the opposition forces which wanted to bring to the fore the distinguishing characteristics of the island, initially with the tacit support of Beijing.

President Lee Teng-hui, a native of Taiwan, in office since 1988 and winner of the first direct suffrage election in 1996, tried to redress the old wrongs in the mid-’90s by restoring importance to the native Taiwan identity, with the goal of returning the power of the KMT to a firmer footing. By doing so, he upset the strategy of Beijing, which had been aiding the opponents of the KMT through appeals to the pride iof the islanders. Lee became the standard-bearer of the island’s specific nature, to the point where he called for formal recognition of the independence of Taiwan from mainland China. Lee’s turnaround appeared extremely threatening to the very unity of the People’s Republic of China. In fact, if Taiwan, the bulk of whose population belongs to the Han ethnic group, which also accounts for a great majority of the rest of China’s population (93%), were allowed to declare its formal independence, how then could the same right be denied to the independent provinces and regions of China populated by non-Han majorities, such as Tibet and Xinjiang? Beijing had to reassert its authority over Taipei in order to put an ideological stop – even more important than halting armed opposition – to the secessionist whims of the other regions. A further reason was that the centrifugal force of Taipei was having a dangerous effect on the province of Fujian in the southeast, facing the Taiwan Strait. The dialect of Taiwan is spoken in the southern portion of Fujian, which also holds a large concentration of Taiwanese investment – to the point where it favors the circulation of the island’s currency, the new Taiwan dollar.

China’s southeastern flank appeared to be a particularly delicate situation, not only on account of Taiwan. Hong Kong’s movement toward democracy, stimulated by the British Governor Chris Patten, gave increasing power to the Legislative Council, the territory’s mini-parliament, making it a more broadly representative body. On the eve of its return to Chinese sovereignty, Hong Kong threatened to become a pole of attraction for the rich and dynamic province of Guangdong, pulling it away from Beijing’s sphere of control. The risk was that Guangdong, after the return of Hong Kong to Chinese sovereignty in 1997, could become the geopolitical jumping-off point for the destabilization and division of mainland China, rather than serving to establish a close bond between Hong Kong and Beijing in line with the expectations of the leadership of the People’s Republic.

In Tibet the situation was even more dangerous. The death in 1989 of the Panchen Lama, the region’s second spiritual authority after the Dalai Lama, had created an immense vacuum for Beijing. In fact, the Panchen had been close to the communist regime, which had been counting on him to help establish a relatively benign form of control over the region. After his death, Beijing and the Dalai Lama did actually cooperate in the religious-political process of searching for the reincarnation of the Panchen. Both sides stood to gain from the joint effort. The communists gained a patina of religious orthodoxy for their efforts to control the region; the religious leader, even from exile, would take part in the delicate process of discovering the new Panchen Lama and have a certain amount of influence over the choice. In 1995, however, this undeclared cooperation was interrupted by the unilateral proclamation of the Panchen Lama by the Dalai Lama. This development was politically unacceptable to Beijing, which saw the proclamation as a challenge to its domination of Tibet.

Alongside the most significant problems – Taiwan, southeast China and Tibet – mention should be made of Xinjiang. Here the militants of the Uighur minority began to feel the pull of Islamic fundamentalists. Having drawn some useful lessons from guerrilla fighters in the Middle East and Central Asia, in particular Afghanistan, they eventually organized an aggressive independence movement which, in 1996, went so far as to carry out the first terrorist attacks in Beijing.

Apart from these extremely pronounced fault lines, there were more subtle divisions of an essentially economic nature which, combined with the more substantial of the independence movements, could also have posed a threat. The southeastern part of the country was attracted by the dynamism of the Asian “tigers”, while the growth of the Mekong area pulled Yunnan toward Thailand. The dynamic nature of Japan and Korea created potentially troublesome relations with the three Chinese provinces of Jilin, Heilongjiang and Liaoning. The end result could have been the Balkanization of China. In 1996 scholars such as Hu Angang (2) brought to light the parallel between the centrifugal tensions in China and the break-up of Yugoslavia, placing the emphasis on the tax-related aspects of the crisis, and in particular the distribution of revenue between the central government and the provincial governments. Armed with these figures, Hu pointed to the dangers – which could extend to the political and geopolitical spheres – arising from the fact that an increasingly large portion of resources were being transferred from the center to the provinces, weakening the economic, and therefore the political, power of the capital.

In the mid-’90s, the tendency toward division proved to be both a geopolitical problem – the confirmation of Beijing’s sovereignty over China – and a political issue – namely the crisis of legitimacy faced by communist power. These were simply two sides of the same coin. In order to reinforce its position and find new legitimacy, the Communist Party had to reassert Beijing’s hegemony over the provinces.

The first step toward reversing the centrifugal trend was suggested by circumstances rather than planned on the drawing board (3). In 1995 the president of the Republic of Taiwan, Lee Teng-hui, despite assurances given to Beijing by the US State Department, was given a visa for a trip to America by Congress. This represented an enormous political victory for Lee, who was able to point to himself at home as the champion of Taiwan’s independence, in this way taking the wind from the sails of the progressive Democratic Party and its stance in support of the island’s independence. For Beijing, the event was an unprecedented challenge to the legitimacy of its claim to govern the island. The communist regime reacted by threatening to use force against the heirs to Jiang Jieshi (Chiang Kai-shek), unleashing a harsh rhetorical offensive accompanied by the deployment of a military force which, though decidedly plethoric, at least possessed efficient missile capabilities.

On the one hand, Beijing wanted to scare the population of Taiwan by showing itself ready to invade the island should it dare to declare independence; on the other hand, it wanted to convince the skeptical businessmen of Taiwan that diplomatic-military pressure could result in enormous damage to their ventures. During this phase of pressure, Taipei spent about US$20 billion defending its stock market, the price paid including a drop of 2% in its gross national product. But in addition to the stick, Beijing also offered Taiwan’s businessmen a carrot: excellent business opportunities would open up for them on the continent if they discouraged the independence-based stance taken by Taiwan (4). The same tactic was used with Hong Kong at the end of the year, with the choice of Tung Chee-hwa, a shipping magnate from a Taiwan family, to be governor of the territory following the transfer of power: an unequivocal signal to the rich businessmen of Taiwan (5). In this way, between 1996 and 1997, Beijing established a close relationship with the commercial and economic elite of Hong Kong and at the same time it began creating similar ties with similar groups in Taiwan. What is more, the fiercely patriotic rhetoric also had a centripetal effect on domestic public opinion, largely because it expressed a widely held sentiment and not merely the propaganda of the regime.

The overwhelming success of Zhang Xiaobo’s book Zhongguo keyi shuo bu (China Can Say No) was a sign of this wave of patriotism. The volume is a rather superficial, at times simplistic, mix of anti-US, xenophobic prejudices. But the millions of copies sold, together with the dozens of books which followed in its wake, demonstrated the public’s interest in the topic. The disputes with America over the protection of copyrights on intellectual property (6) and the controversy with Japan over possession of the Diaoyu/Senkaku Islands (7) reinforced the populace’s patriotic sentiments. It was the beginning of a change in direction which accelerated at a tumultuous pace in 1977 as the return of Hong Kong to Chinese sovereignty drew near.

The approach of the Hong Kong hand-over deadline of July 1, 1997, generated an upsurge of nationalist-patriotic sentiment. Surveys not made public pointed to a rise in nationalist sentiment which went well beyond the expectations and needs of Beijing, to the point where it could transform itself into something else. For historically, intense patriotic sentiment represents a double-edged sword for China: demonstrations of patriotism traditionally start as opportunities for mobilization against a hostile outside world, only to wind up as opposition to Chinese governments which have not done enough against the foreigners. An apt example is the movement of May 4, 1919, which set off the nationalist revolution that gave birth to both the China of Beijing and that of Taipei. Proof of how dangerous such sentiments can be for the regime is the fact that Beijing prohibited a number of anti-Japanese demonstrations, in addition to preventing Zhang Xiaobo’s second volume, Zhongguo hai keyi shuo bu (China Still Says No), from being published. At that point, nationalist sentiment was moving independently of any stimulus from the government, beyond what Beijing had originally had in mind.

While the policies applied to Taiwan and Hong Kong had a positive effect, putting a stop to the secessionist temptations while laying the structure for relations between the different Chinas, Jiang Zemin and his men turned their efforts to mending the divisions inside the People’s Republic. A number of studies led to a revision of the initial analyses of Hu Angang, emphasizing that the political and geopolitical effect of the tax load should be examined less hastily, and that, in any event, Beijing maintained significant powers of control over the provincial governments thanks to its prerogative of appointing or removing officials at all levels of the administration (8).

The effect of the alarms of the early ’90s was seen in 1997, when the regime drew up a program of economic reforms presented to the 15th Party Congress that September. The congress removed roughly half the members of the Central Committee and presented a wide-ranging program of divestments and restructuring efforts involving state industry, accompanied by a project for bureaucratic reform which became official in March 1998 and called for 4 million state employees and officials to lose their jobs. The objective of the transformation was also to reinforce Beijing’s lines of command and its control over Chinese territory.

The administrative reform was also the result of the predominance of centripetal tendencies in the country. The best demonstration of this new atmosphere, under which the centrifugal clouds appeared to have moved off for the moment, came from the most unruly of the autonomous regions, Tibet, where the followers of the Dalai Lama found themselves in a difficult situation, while the spiritual leader himself entertained the idea of a compromise with Beijing (9).

But success on the domestic scene can also be traced to the progress made by China in asserting its position on the world scene, a success achieved by skillfully taking advantage of a number of favorable circumstances.

Hungry Tigers And The Shadow Of The Bomb

In July 1997, on the eve of the outbreak of the financial crisis in Thailand, an event which was shortly to involve all of the “Asian Tigers”, the position of China in the region was not optimal. During the preceding year Japan had signed a new accord with the US. The two countries agreed to maintain stability in the region. The formula used was vague to the point where the sphere of action referred to could include the Taiwan Strait, through which the Japanese oil routes pass. Despite the insistence of the Chinese, the Americans did not wish to clarify whether Taiwan should be considered as falling under the pact of stability (a circumstance which would have greatly irritated Beijing) or not. The memory of the Chinese military maneuvers carried out near the island, as well as the resulting tension which eventually led to the arrival of two American aircraft carriers in the strait, still hangs over the entire region.

Though China’s patriotic upsurge reduced many of its domestic fracture lines, a number of disputes persisted in the area of foreign affairs, from the modest, though still worrisome friction with Vietnam or with the Philippines over this or that reef of the Nansha Islands (Spratlys) to the disputes with Japan over the Diaoyu/Senkaku Islands. To complete this less than favorable outlook, there arose in the summer of 1997 the accusation that the financial crisis had been set off by Chinese exports which were competing with those of Southeast Asia and South Korea. These exports had wrested large shares of the market, both real and desired, from the Tigers, depriving them of the liquidity needed to finance the high growth rates which they had projected for themselves. The Chinese made no mystery of the fact that they wanted to launch their consumer electronics industry on world markets in competition with Korean and Japanese products.

The treasures of Asia

The atmosphere was to undergo a radical change in the months that followed. From September on, Hong Kong repulsed the attacks of speculators attempting to place its currency in difficulty, while at the same time China committed itself to not devaluating the yuan. In October, for that matter, China’s proposal to create an Asian aid fund to overcome the crisis was abandoned. The US officially opposed the initiative for reasons of efficiency, but in reality geopolitical influence in the region was an important factor. From an economic-financial perspective, Washington feared that aid supervised by China and Japan would have covered up economic shortcomings rather than reforming them. In geopolitical terms, it was obvious that a Sino-Japanese support partnership in Asia would have reinforced ties between Beijing and Tokyo, to the detriment of Washington’s strategic influence. Only economic reform led by the International Monetary Fund would have created an economic environment suitable for the initiatives of US companies, as well as for those of Chinese and other Asian enterprises. Nor was the partnership proposal congenial to the leading figures in Singapore, who recognized the need for reform in certain countries of the region, but held that an approach imposed by the US would be more acceptable than one proposed by Singapore’s neighbors.

Nevertheless, the approach suggested by the IMF did not stop the shockwave of the regional crisis. As the months passed, the wave bowled over South Korea and even hit Japan, the world’s second largest economy. The guidelines of the IMF also failed in Indonesia, and this giant with a population of 200 million – the planet’s largest Muslim nation – sank into a financial, social and political crisis to which there is still no end in sight. In just a few months, 30 years of gradual economic development was washed away. Today, the Indonesian crisis remains the region’s most serious element of instability.

At the beginning of 1998, China was the lone Asian country still on its feet, while all around the economic crisis resulted in the disintegration of the myth of the Tigers. Within this context, Beijing offered what many of the governments of Southeast Asia recognized as being a contribution to the containment of the crisis: keeping the exchange rate of both the yuan and the Hong Kong dollar stable in relation to the US dollar. On more than one occasion Chinese economists had explained that, apart from worries over the financial stability of the region, the government of Beijing held that there were no economic motives for devaluing the yuan. A devaluation would have triggered a series of competitive devaluations in the region, with the result that the advantage obtained by the first devaluation would quickly have been cancelled. For that matter, given that more than 50 percent of Chinese exports consist of re-exports, a devaluation would have raised the costs of imports, meaning that China would have wound up importing inflation. Instead, at the end of 1998, inflation in China was negative.

In reality, many economic reasons could have been found for devaluation. It is true that China had ended 1998 with yet another significant trade surplus, amounting to almost $40 billion according to Chinese statistics. But it is also true that many of these billions were not transformed, as had always happened in the past, into currency reserves, because they were transferred abroad. According to certain reports, up to $20 billion had fled abroad. The fact is that the yuan was under pressure to move in a downward direction, as demonstrated by the return of the black market, which offered the dollar at 9.2 yuan compared to the official exchange rate of 8.3.

The single most compelling reason for devaluation would have been the crisis afflicting Hong Kong, which finished 1998 immersed in the worst recession of the postwar period. The Special Administrative Region (SAR) was mired with an exchange rate which was too high compared with the rest of Asia, where all countries had devaluated by 20% or more. But a devaluation in Hong Kong would also have meant inserting a wedge in relations between the SAR and the mainland. Bilateral trade is expressed in US dollars, but it normally takes place in Hong Kong dollars. An adjustment in the exchange rate would have created serious commercial and political problems between Beijing and the territory. Finally, a devaluation in Hong Kong would easily be imported into China. In reality, the reasons which kept China from devaluing in 1998, and which seems to keep it intent on following the same course even today, are essentially geopolitical in nature.

A series of competitive devaluation operations in Asia would have enormously complicated relations with Hong Kong while eliminating the geopolitical advantages accumulated by Beijing in the region following the crisis. A downward adjustment in the value of the yuan would have given new impetus to the dangerous centrifugal tendencies which lay dormant both inside and outside China. Shortly after the return to the motherland, Hong Kong would have found itself involved in something much worse than a financial crisis – the former British colony would have been swamped by a sea of commercial, and then political, controversies with the mainland. And similar disputes would, in turn, have given rise to new friction with Taiwan, Guangdong and other parts of the country.

As can be seen, the attacks of the speculators against the Hong Kong dollar extended beyond the financial framework, amounting to nothing less than attacks against the unity of China. By refraining from devaluing, China let Asia and the rest of the world know that it would stand as the last bulwark of stability in a region suffering from a crisis, even at the price of making its exports non-competitive compared to those of its neighbors – indeed, even if it meant breathing new life into the exports of its neighbors, allowing them to accumulate liquidity and thus accelerate their economic recoveries (10). And so Beijing presented itself as a strategic alternative to the overweening power of America, cultivating an Asian identity and demonstrating that it was not willing to sit idly by in the face of Washington’s hegemony.

The role of the People’s Republic as the hub of Asian stability was reinforced by the nuclear tests carried out by India and Pakistan. At the beginning of May 1988, following a visit to India by the head of the Chinese Military Chiefs of Staff, Fu Quanyou, the Indian Minister of Defense, George Fernandes, stated that China posed a strategic threat to India. The statement amounted to a slap in the face for China. Just a few days later New Delhi performed five nuclear tests (May 11-13). There followed the inevitable counter-tests on the part of Pakistan, which were not viewed with approval by Beijing. Indeed, Chinese diplomats had made an effort to convince Islamabad to forego this counter-move, knowing that it would prevent the total isolation of India as a result of international condemnation.

The Indian and Pakistani tests made major changes to the region’s geostrategic map. It was no longer so easy to isolate China as the lone major “threat”. For that matter, the countries of Southeast Asia appreciated the calm, calculated reaction of Beijing to the Indian “provocation”, as well as China’s attempt to persuade Pakistan not to respond in kind. Also appreciated was the self-control shown by Beijing’s reaction to the anti-Chinese “witch-hunt” set off in Indonesia by the economic disaster and the fall of Suharto.

Japan, whose anti-nuclear sentiments were offended by the South Asian tests, had to interrupt the development of a line of collaboration with India. Even the US, in the wake of the tests, was forced to postpone President Clinton’s 1999 trip to New Delhi, initially scheduled, with significant symbolic meaning, to occur immediately after his trip to China set for that June. In this way the encounters between Clinton and Jiang Zemin in Beijing became the US seal of recognition of China’s role as a vehicle of financial and geopolitical stability in Asia. In private, Japanese diplomats confessed that they were surprised by the scope of the strategic accord which the Americans were willing to propose to the Chinese.

The fact is that, for Washington, the combined effect of the financial crisis and the Indian and Pakistani nuclear tests were proof of the importance and the central position of China in the region. No other country could fill this role. Certainly not Japan: Tokyo still has to overcome its as yet unresolved imperialist past (11) which precludes any aspirations to hegemony in Asia. Nor does its geopolitical trade policy please its Asian partners, being based on direct investments in loco which, however, always have the ultimate aim of achieving the economic integration of the industrial sectors of the countries in question with Japanese industry.

No one challenges the fact that China represents the major centripetal force able to preserve the regional geopolitical balances of power. What remains to be seen is whether this is merely a passing success gained by exploiting two fortuitous events – the financial crisis and the Indo-Pakistani atomic tests – or if it will prove to be something more solid. Much depends on how Beijing will handle three fundamental challenges in the future. The first is a geopolitical quandary: how to assert its central position in the balance of power in Asia while assuaging Japan’s fears of remaining in isolation, India’s fears of the threat posed by China, and Russia’s fear of losing control of Siberia due to Chinese demographic and economic pressure. The second challenge is economic: can China succeed in becoming an industrial giant capable of taking a place alongside Japan, and therefore exercising an economic-commercial influence of primary importance in Asia? The third challenge is ideological: what power attraction can be exercised by a country that continues to exhibit a Marxist facade, while the heady concepts of “Asian thought” have simply evaporated under the harsh test of reality?

If China succeeds in meeting these challenges, then it will not only have found a stable solution to its internal problems, but it will also have confirmed its place as the key power in Asia, capable of standing alongside the American superpower on a worldwide scale. Should it fail to pass the test, then it will not only lose influence in the region, but it will also run the risk of seeing its unity as a nation threatened. Let us examine, therefore, the strategies which Beijing intends to follow in each of the three proving grounds.

‘Honest matchmaker’ or imperial power?

Japan has been tormented for much of its contemporary history by a complex of isolation which is artificially fueled during periods of crisis to the point where its becomes the quintessence of the national identity (12). The Chinese, who certainly feel no love for the Japanese, nevertheless perceive the sense of solitude which haunts Tokyo, whose fears in the final analysis regard the forging of close ties between Beijing and Washington in a repetition of the alliance which doomed Japan’s dreams of victory in World War II (13). These underlying fears were made all the more intense in 1998 when Clinton, during his visit to China, spoke of a strategic partnership with Beijing and, even more significantly, did not stop in Tokyo on his return journey: an attitude which, to a certain extent, was imposed on him by China. In fact, on June 17 the Hang Seng index of the Hong Kong stock exchange fell beyond even the worst forecasts, while at the same time a number of Chinese economic daily newspapers launched virulent attacks against Japan and the US, accused them of not having taken action in response to the fall of the yen (14). Hong Kong fell by 5.72%, closing at 7,462 points, below the barrier of 7,500 which only a few weeks earlier had seemed the worst scenario imaginable. The immediate cause of the collapse was the continued slippage of the yen against the dollar, with the Japanese currency heading toward the threshold of 150. If Washington did not take action to support the yen, explained Liu Ji, economic counselor to President Jiang Zemin on June 22, then Beijing would have to view America as an adversary (15). China threatened to cease defending the yuan and to place the blame for the further complication of the crisis on Japan and the US. It would be easy for Beijing to demonstrate the price it had paid to defend the yuan, and to engage in a propaganda war whose consequences were unpredictable. The very next day, Washington and Tokyo spent $6 billion, bringing the yen back to roughly 130 against the dollar.

Jiang’s visit to Tokyo in November 1998 was meant to reconcile the two countries through a written declaration in which Tokyo was to offer a formal apology for the atrocities committed in China by the invading Japanese troops during the war. Most importantly, the two countries were to discuss the issues of security which were of such interest to Beijing. But nothing of the kind took place (16). The encounter produced no concrete results. Japan remains isolated and insecure. And this sensation was heightened by the launch of a North Korean missile which flew over the Japanese archipelago. This led to the start of a Japanese rearmament effort which, though undeclared, was nevertheless very real. In December 1998 Tokyo approved a feasibility study for a Theater Missile Defense system to be developed together with the US (17). The underlying assumption of the study is that, sooner or later, Japan must look after its own defense needs; it cannot go on delegating the task to Washington forever. Nor did the Japanese consider the US strategic guarantee to be as strong as it was at the time of the Cold War. The collapse of the Soviet enemy and the deepening crisis in North Korea laid the altars of East Asian security bare. One hundred thousand American troops are amassed in Japan and South Korea, ostensibly to counter a possible threat from Pyongyang. But if and when Korean reunification takes place, the US will have lost its strategic alibi for its presence in the region. Japan will be forced to take direct responsibility for its own security, a task delegated up to this point to the US, with the tacit consent of China. Beijing prefers an armed Yankee to an armed Japanese.

China knows that it must avoid heightening Tokyo’s feeling of isolation. But what does this mean in concrete terms? In Beijing no one seems to have found a fitting solution. On the other hand, the mistrust between the two major Asian capitals is all to the advantage of Washington, not only in geostrategic terms but also in purely economic terms. Tokyo and Beijing are the world’s largest creditors, with approximately $220 billion of reserves each, for the most part in American Treasury bonds. Washington is the world’s leading debtor, with a total of roughly $1 trillion in foreign debt. In other words, Japan and China control 20-40 percent of America’s foreign debt. It is true that a portion of these receivables are turn-around entries, with the Chinese and Japanese financing American purchases which favor their own balances of trade, thus enabling them to accumulate reserves. And it is also true that, in this bizarre intermingling of debits and credits, trade surpluses and deficits, what counts in the end is the strategic and geopolitical weight of the country in question. For this very reason Washington is fearful of a rapprochement between the two Asian capitals, in part because Taiwan and Singapore, between the two, hold another $180 billion of reserves: too much US money in too few Asian hands, making it possible to exercise forms of blackmail against Washington.

It is understandable, then, that two geopolitical alternatives face Beijing at present: it is all well and good to be fiercely independent of what is known as “American hegemony”, but the result is that closer relations must be established with Tokyo. Or, at least for the moment, is it wiser to act as the Asian arm of the American superpower, in which case the main competitor becomes Tokyo? The same dilemma, with the terms reversed, is faced by Japan.

But there are two more players in the Asian game who cannot be ignored: India and Russia. Let us begin with India. In the eyes of Beijing, the Indian subcontinent is a less weighty concern than Japan. Following China’s victory in the 1962 border war, it had been clear that New Delhi was not able to cause China serious trouble. The Indians still complain that the Chinese fail to take them seriously. In the wake of India’s nuclear tests, however, China’s nonchalant attitude could be expected to show signs of change. In truth, there does exist a de facto “containment” of India on the part of China. It consists of the close alliance with Pakistan to the west, while to the east China counts on a good relationship with Myanmar. This form of “containment” does not function very well. Pakistan is influenced by China, but it does not always follow Beijing’s lead, as shown by the episode of the nuclear tests which, though Beijing strongly advised against them, were ultimately carried out in order to provide an outlet for internal pressures. Similar problems exist with Myanmar. The Chinese are dissatisfied with the military junta, which has failed to revive the nation’s economy. This only adds to the social and political instability of a country already divided by fierce ethnic struggles: a country which the Chinese look to as a jumping-off point for future penetration in the Indian Ocean.

The result is that the brunt of the Sino-Indian strategic confrontation continues to weigh on Tibet, a region where it is difficult to maintain significant numbers of troops for lengthy periods of time on account of the environmental conditions and internal social and political unrest (an excessively large presence of troops would exacerbate the already delicate relations with the ethnic Tibetan population). To install modern armaments and surveillance systems in Tibet would prove both politically and economically costly. New radar stations and additional troop deployments would be seen as evidence of warlike intentions on the part of the Chinese.

But after the nuclear tests and the inflammatory declarations of George Fernandes, could China refrain from becoming more attentive to its large neighbor? In fact, negotiations over their disputed border have now taken place. It is often forgotten that a portion of Kashmir is occupied by China. Future border negotiations could contribute to resolving the Indo-Pakistani dispute over the area. In more general terms, a wide-ranging dialogue between India and China could lay the groundwork for a strategic rapprochement between the two countries resting on a much more solid foundation than the brotherly relationship proclaimed in the 50s by Zhou Enlai and Nehru. While the chief concerns in those years were ideological, today the two countries could find themselves brought closer together by their pursuit of shared strategic and economic objectives. Both need stability in the rest of the region in order to proceed with rapid economic development. In reality, both share the same agenda when it comes to facing international pressure regarding the environmental impact of their economic growth. What is more, over the last 17 years India has shown a growing interest in the Chinese model of growth, which it would like to emulate. For its part, India, with its bureaucracy, its courts and its democratic political system, is an unequaled example for the delicate, gradual transition toward democracy which Beijing intends to follow. Even Tibet, a thorn in the side of China, could once again take on the role it played for 1,000 years: a bridge between the Indian and Chinese cultures. On the other hand, no culture has had as much influence on China as Indian culture. These could be the guidelines for the development of a new relationship in Asia, capable of bringing the planet’s two demographic giants (2.3 billion inhabitants between the two of them) closer together.

As for Russia, apart from former president Yevgeny Primakov’s proposal for a “strategic triangle” involving China-Russia-India, Moscow appears to be relegated to the margins of the great Asian game. Demographically, with its 147 million inhabitants (a figure which falls by an average of a million a year), and the vast majority of them concentrated in the European portion of the country, the Russian Federation is a midget next to China and India. China already exercises significant influence over the former Soviet republics of Central Asia, using this influence to its advantage. For example, it led Kazakhstan to understand that it was not wise to back the Uighur secessionist forces in Xinjiang; what is more, since 1997 Beijing has been developing oil fields in Kazakh territory, with the intention of building a gigantic oil pipeline leading back to China.

So far, China has not shown the same degree of enthusiasm when it comes to investing in Siberia. In the eyes of the Chinese, the far eastern portion of Russia remains a vast desert of ice with the same population as that of Mongolia, a country which returned to the Chinese sphere of influence without Beijing having to lift a finger. Despite the pressure of the Chinese population – in Vladivostok it is such that the “yellow” people are normally granted entry visas in a matter of hours – Beijing does not seem interested in asserting its hegemony over the Siberian region, both out of traditional geostrategic prudence, and on account of its scarce interest for the far north. The fact is that Chinese priorities at present – and probably for quite some time to come – do not involve indiscriminately enlarging its area of influence but rather accelerating economic development.

Toward The Great Domestic Market

The road to making China an economic superpower is still a long one. Though China is the world’s most populous country, the dimensions of its domestic market remain relatively modest. China has grown by relying on direct investments and foreign trade, which by 1998 represented, respectively, roughly 20 and 40% of gross domestic product. Savings play a central role in the Chinese model. Thanks to the economic development of the last 20 years, significant quantities of money have accumulated in banks. At the end of the third quarter of 1998, the sum total of all bank deposits was 9.422 trillion yuan, up 18.2% compared to the same period for the previous year, which made for a growth rate double that registered by GNP. Deposits by businesses were equal to 3.153 trillion yuan, up 16.1% from the previous year, while the total for private deposits reached 5.295 trillion, for a rise, on an annual basis, of 18%. Chinese savers have had only one option for investing their savings: putting them in the bank. As a result, the banks monopolized the allocation of funds for investment, but at the same time they bore all the risks, to the point where, in 1997, payment on roughly 20% of all outstanding domestic loans was late.

Not until 1999, with the implementation of a new framework law on the stock exchange, were savers able to diversify their investment choices, given that the banks would no longer monopolize the flow of savings, and nor would they continue taking on all the risk. The stock exchange law was a fundamental step toward the creation of the vast domestic market without which China can neither grow nor add to its influence in Asia and the world. Consisting of 214 articles divided into 12 chapters, the new set of norms was designed to guarantee transparency and open transactions in a market spoiled up to then by insider trading, corruption, under-the-table deals and unscrupulous speculation, all of which had driven away the majority of honest savings holders.

The stock market reforms were a crucial part of the strategy for the country’s economic transformation. On one hand, the law was meant to serve in the collection of funds from savers, with these monies then serving to begin the privatization of industrial firms. On the other hand, the stock market law was also designed to serve the entry onto the stock exchange of private enterprises in need of financing to launch their operations. What is more, there is no reason why the pension funds which were already being established in China, and which are destined to take on an increasingly significant role in the years to come, cannot go shopping on the stock market. This will help create the beginnings of a welfare-state system after the failures of more than 50 years of “socialism”. Still, as of 1999, peasants had no form of pension or health coverage, while social assistance for blue-collar and white-collar workers was not paid for by the government but by the company for which they worked. The result was that the liquidation of a hopeless company not only meant that its active employees were placed on the unemployment rolls, but also that those who had already retired suffered drastic cuts in their pensions.

And so the stock market law wrested significant chunks of power from the state industrial concerns and their top managers. This explains the long years of clashes which preceded such a critical reform. The other big losers were certain financial agencies, such as the “Itics” which operated on a regional level with very vaguely defined powers, and which no longer had the operating margins they needed to play the stock market with funds whose origin was always something of a mystery. If the stock market manages to achieve a certain degree of transparency and efficiency, then private and institutional savers looking for the level of security offered by bank deposits will be able to make other investments relatively safely. But it is the entire state apparatus which controls the banking system that must take a step backward. It will no longer hold its de facto position as the lone manager of savings, but will have to face competition with more efficient concerns. Of course, the stock market law will not result in complete liberalization. Shanghai and Shenzhen will not magically be transformed into Wall Street, and not merely on account of operating problems, but first and foremost because of the continuing exclusion of foreigners from the domestic market.

The catch phrase was to increase domestic consumption “through any means needed”, though definitely not by opening a gusher of easy credit and currency devaluation which leads to high inflation (18). On this point the introduction to the Blue Book on the Economy, edited by a senior economic adviser to Prime Minister Zhu Rongji, was blunt: growth without inflation. To justify this decision, the writer pointed out that, in the eight years preceding the outbreak of the 1997 crisis, the differential in inflation between Thailand and the US created a situation under which the fixed exchange rate of the baht to the dollar became impossible to sustain. There is no such thing as an acceptable rate of inflation, concluded the writer, in part because US growth of recent years has cancelled Keynes’s assumption that growth must go hand in hand with inflation. The US and the rest of the world have grown during these years while defeating inflation. And so China wished to grow in a healthy manner, along the lines of US or European capitalism.

The combination of the Asian financial crisis and the arrival on the scene of the euro (19), together with the Chinese economic reforms and the ongoing pressure which must be sustained by the US as a result of its trade and budget deficits, seemed in 1999 to be leading to an economic, strategic and geopolitical turning point in international relations. Asia was the grand field on which the maneuvers involving this change in paradigm would take place, with China standing at the center of the game.

The war of the worlds

But the decisive test for the future of China as a major power is ideological rather than geopolitical or economic. One could use the term “soft war” to describe the weapon needed to win the global competition. I use this term to refer to the ability to propagate a socio-economic-political model capable of conquering new sectors of influence and new markets. The formidable weapon used by the US to dismantle the “Evil Empire” was less a renewed arms race with the Soviets than the culture industry. The communist world lost because it accepted the superiority of the Western model – focusing its gaze more closely on Coca-Cola than on liberal democracy.

Following the Cold War, we have entered a new phase, the “Soft War”, with the stakes of the game being the immense Chinese market, and with it the possibility of “globalizing” China and gradually bringing it in line with the Western model.

And so the cultural front is the most important for understanding what will become of China, a country which still takes its formal bearings from Marxist-Leninist ideology. In a world based on a knowledge economy, on software with standardized production costs and offering the possibility of potentially infinite reproduction (copying a film onto a cassette or a digital disk costs almost nothing), enterprises attempt to conquer culturally uniform markets. From this perspective, the US is the ideal market. Europe is a bit less suitable, divided as it is by languages and tastes which often differ significantly. India could become of interest once it reaches a certain level of development, but it remains fragmented both in terms of language (Indo-European languages to the north, Dravidic idioms to the south) and religion (Hindus versus Muslims). Instead the real prize to be won in the 21st century will be China, with its 1.3 billion potential consumers and its high degree of linguistic and cultural unity. Seen in this light, China’s efforts to enlarge its domestic market acquire their full ideological and geopolitical significance.

No one can afford to miss this opportunity. Even if the benefits may only be reaped in 20 years’ time, the major corporations of the culture industry are already jockeying for position with the aim of conquering the Chinese market, with all the resulting risks of ideological subjugation and loss of political control which such a prospect holds for the Chinese leadership. The game has immediate geopolitical repercussions. In order to preserve the unity of the country, the regime must avoid losing ideological-cultural control. But in order to bring China to the point where it can engage in the global competition among economic and cultural models, Beijing must guarantee freedom of research and expression, adjusting the Chinese credo to modern times. A hopeless contradiction? Possibly. In any event the regime is aware of the problem. As one of its most intelligent intellectuals, Li Shulei, states, Mao won because in the 1940s he succeeded in defeating his internal enemies, who were bound to Soviet orthodoxy, by using the right instruments at the right time: in other words, every political-cultural battle is defined by its historical context; when the times change, the instruments needed to come out victorious must also change (20). For that matter, Chinese strategic thought has always owed much to the theories of Sunzi, for whom the first rule of war, be it a hot, cold or soft war, is deception: in other words, the ideological process of conquering the mind of the other before resorting to the brutality of arms (21). Will China manage to accomplish this high-wire act, balancing itself between surrender to the pervasiveness of the US model, an act which would drastically reduce its international status, and a move toward an ideological and political rigidity which would cut it off from the field of global competition? In the final analysis, the very existence of China as a geopolitical entity will depend on the outcome of this challenge.


1. Cf. F. Sisci, “Una, dieci, mille Cina”, Limes, no. 1/1995, “La Cina e un giallo”, pp. 19-32, where I hold that the only way to counter the risk of internal fragmentation is to activate the existing centripetal tendencies. This is exactly what has happened in recent years.
2. See Hu angang-Wang Zhaoguang-Kang Xiaoguang, Zhongguo dichu chaju baogao (Report on Regional Differences in China, 1996, Liaoning Publishing House; also Hu Angang, “Fenshuizhi: pingjia yu jianyi” (“The System of Tax Distribution: evaluations and suggestions”), Strategy and Management, issue no. 5/1996. For an historical overview of the issue see Ge Jianxiong, Tongyi yu fenlie (Unity and Division), 1991, Sanlian Publishing House.
3. Further on we will return to Beijing’s tendency to “follow events”, turning them to its own purposes, rather than forcing developments.
4. Cf. the series of editorials in the People’s Daily and in the New China Agency of September 1996, where the potential benefits for Taiwan’s economy from a closer relationship with the continent are explained. Also cf. “China gets down to Business over Taiwan”, Asia Times, 16 September 1996.
5. Cf. “Tung’s Election: A Barter of Business Skills for Political Safeguarding”; Asia Times, 27 December 1996.
6. It should be observed that, on the occasion of the trade war, the interests of the Chinese government were in keeping with those of the people of China, while there was a clear-cut contrast between both these sets of interests and those of the American government and American businesses. The claim of the Usa that the defense of intellectual property rights was actually in the long-term interests of China and the Chinese people did not appear convincing, given that the Usa was working not to protect the interests of Chinese enterprises damaged by violations of such rights, but rather to oblige China to permit the entry of a number of major American corporations into its market, such as Microsoft.
7. At the end of 1996, when an inhabitant of Hong Kong died in an incident which took place during a demonstration near the Diaoyu Islands, all of Hong Kong’s papers ran front-page photos of the body wrapped in a red flag. In the days that followed, the Apple Daily, the newspaper of the Territory, accused the government of Beijing of having sold out the national interests for the sake of establishing a good-neighbor pact with Japan.
8. Cf., for example, Yasheng Huang, Inflation and Investment Control in China, 1996, Cambridge University Press.
9. Cf. Ajay Singh, “Fires of Frustration”; Asiaweek, 11 September 1998.
10. Confirmation of this role is the magnificent welcome given to the Chinese Vice President Hu Jingtao at the Asian summit in December 1998 in Hanoi.
11. All the countries of the region harbor strong suspicions with regard to Japan, given that it has not yet offered an official, written apology for the invasions and massacres of the Second World War. Not until the end of 1998 did Tokyo offer its apology to Seoul for the forced colonization imposed on Korea between 1910 and 1945. In exchange, South Korea eliminated restrictions on imports of Japanese cultural products.
12. It should be remembered that Japan’s modern history begins when American ships under the command of Commodore Perry force the country to open its ports in 1861. Until then, for almost a century, these same ports had virtually been closed to exchanges with the outside world.
13. From the author’s talks with high-ranking officials of the Chinese Foreign Ministry.
14. Cf. Financial News. 17 June 1998.
15. Cf. The Workers’ Daily, 25 June 1998.
16. Cf. The Nation, 4 December 1998.
17. “Japan Approves Theater Missile Defense System Study with US”, Japan Times, 25 December 1998.
18. 1999 Nian Jingji Lanpi Shu (Blue Book on the Economy, 1999). Beijing 1998. Academy of the Social Sciences.
19. There can be no ignoring the fact that significant differences exist between Frankfurt and New York in terms of the characteristics of the market to come ; cf. W. Pfaff, ” Putting On a Brave Face, the US Welcomes the Euro “, International Herald Tribune. 7 January 1999.
20. Cf. 1942 Zouxiang Minjian (1942 Towards the People), Beijing 1998.
21. The term translated here as ” deception ” is “gui”. In Chinese it consists of two parts : “word” and “danger” ; the meaning is “to place in danger with words”.

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