FP-CHINA.docx

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The Year the Training Wheels Came

Of China

Economic reforms are transforming this burgeoning superpower, but Beijing

needs to get used to the world watching and judging its every move.

BY DAME! MA

DE"EMBE# $%, &'%(

A mini)milestone is upon "hina* t is li+ely to end &'%( with a %' trillion

economy, ma+ing "hina only the second country after the -nited tates to

join the league of double)digit)trillion economies. ronically, that milestone

will be met with muted reaction from Beijing / similar to the way it

dismissed the recent projection from the nternational Monetary 0und that in

&'%( "hina would eclipse the -nited tates as the world1s largest economy

in purchasing power parity 23334 terms. 5!o matter if "hina wears the

biggest economy hat or the number)two economy hat, the "hinese public

doesn1t feel comfortable wearing either hat,6 read an article published

in 7inhua, "hina1s state media conglomerate.

But the preoccupation with the si8e of the "hinese economy seems beside

the point. 9hether it1s 333 or e:change rates, ;D3 clearly fell from its

e:alted perch in &'%(. t was, in the words of 3resident 7i


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been the e:pectation at the outset. n he central

government began levying a higher resource ta: on coal to raise its cost, a

move that simultaneously adds a revenue stream for local governments.

>hese actions were pushed forward in the name of battling air pollution,

which in reality is a pro:y justi?cation for refashioning the economic and


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energy landscape into one that is more ecient and much less carbon)

intensive.

Hne area that did not see a sense of urgency was cleaning up local

debt, which stood at just under $ trillion, according to the last ocial audit

in &'%$. Beijing seems to be projecting con?dence that its current actions,combined with decent growth prospects, can reduce the debt level over the

ne:t several years.

"reating a legitimate municipal bond mar+et / a policy option being

discussed / should help alleviate the debt problem. And Beijing may even

be prepared to let a few small, local state ?rms collapse / in order to

reduce moral ha8ard. But none of this will have an immediate impact on

public debt levels that hover around I' percent of ;D3, which analysts have

li+ened to a time bomb that could further depress the property mar+et.

0or many observers, one of the biggest economic reform disappointments of&'%( was the hanghai 0ree >rade Cone 20>C4, which was created as a test

bed for ?nancial reforms, including the free Jow of capital, currency

convertibility, establishment of foreign ?nancial institutions, and ease of

investment and doing business, among others. t is also was meant to

prepare "hina to complete a bilateral investment treaty with the -nited

tates by opening up more sectors to foreign investment.

Did the 0>C lead to transformative ?nancial reforms in a single yearK !o. But

the declaration of its failure is premature, for several reasons.

0or one, the purpose of the 0>C is larger than simply piloting a few ?nancial

reform initiatives. >he hanghai party secretary, Gan Cheng, vigorously

defended the 0>C as a laboratory for e:perimenting with better governance.

n other words, the 8one was designed to e:periment with how to transform

from an interventionist government to a more hands)o@ regulatory state.

>herefore, as Gan insists, notable achievements will ta+e longer than a

single year / in fact, Beijing apparently gave hanghai a three)year time

frame to show comprehensive results.

And as speculated in C will be spread nationally as best practices, meaning there is a goodchance that similar 0>Cs will be replicated in other parts of "hina. >hat

happened in December, when "hinese 3remier Fi Le=iang announced the

establishment of three more 0>Cs, in the provinces of ;uangdong and 0ujian

and in the city of >ianjin.

Tal! sotly and carry a large purse

A notable omission in my &'%( forecast was what a banner year it was for

"hinese economic diplomacy. #egional tensions too+ a bac+seat to a more

proactive, forward)leaning "hinese strategy of pursuing global interests.


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Beijing1s increasing support for capital outJows also deserves watching. As a

once capital)starved developing country, "hina has long been a leading

recipient of foreign capital.

$ow# a capital%abundant China is prioriti&ing outbound in'estment#

le'eraging its deep poc!ets and ample oreign echange reser'es.

>he 5go out6 strategy isn1t new, but Beijing is now pursuing it at a more

ferocious pace and larger scale than ever before, in part tied to the new

foreign)policy initiatives announced. 7i has said that "hina could see up to

%.&I trillion of outbound investment over the ne:t decade &'%$ saw %'N

billion in outward investment, up a whopping &$ percent from the previous

year. According to estimates from the "hinese Ministry of "ommerce, the

country1s outbound direct investment could soon surpass the amount

coming in, which was about %% billion in &'%$.

(eorms still lac! credibility

Many observers have suggested that a year since the >hird 3lenum in

!ovember &'%$, the momentum behind economic reforms is already

sapped. But that assessment may be premature, as Beijing intends to forge

ahead with some of the major plan+s in its reform agenda.

>wo of those plan+s are the ?nancial and ?scal systems, both of which are

li+ely to see deeper reforms in &'%I. Hn the ?nancial side, a formal, e:plicit

deposit insurance is e:pected to become reality, setting the foundation forliberali8ing deposit rates.

Meanwhile, the hanghai)Gong Long stoc+ connect, an investment channel

that ma+es it much easier for mainland and Gong Long residents to buy and

sell stoc+s in the respective mar+ets, mar+ed an important step toward

integration with global ?nancial mar+ets. t was li+ely also partially

responsible for the late)&'%( rally in the "hinese stoc+ mar+et. >his lin+age,

aimed at facilitating the freer Jow of capital between Gong Long and the

mainland, will li+ely deepen in &'%I. hen8hen and Gong Long could be

ne:t in implementing similar stoc+ mar+et integration, further embedding

the mainland stoc+ mar+ets into global capital mar+ets.


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>he ?scal system, too, will continue to be overhauled to enhance local

co@ers and increase budgetary transparency. Dwindling ?scal revenue and

the misallocation of capital at the local level are some of the thorniest issues

for Beijing to address. 9ithout ?:ing this admittedly complicated problem,

Beijing will perpetuate local development based on debt ?nance and heavy

bias toward investment and infrastructure.

>he ?nancial and ?scal systems are closely intertwined. #eforming them

aims to achieve dual objectives* raising eciency and improving the

allocation of capital, and encouraging investment to Jow into preferred

areas such as social welfare, services, innovation, and environmental

improvements. More signi?cant movement on these fronts will increasingly

convince the mar+et and the "hinese public that Beijing is not dithering on

reforms.

)is *'e%year plan

!e:t year will mar+ the simultaneous conclusion of the %&th 0ive)Year 3lan

20Y34 and the unveiling of the %$th 2li+ely in the fourth =uarter4, of which 7i

will have full ownership. As with most ?nal years of the 0Y3 period, &'%I

could see a redoubling of e@orts to meet central energy and environmental

targets. 0or instance, from &'%% to &'%$, "hina managed energy intensity

reductions of & percent, $.O percent, and $. percent, but will need a

reduction of about ( percent for &'%( to &'%I to hit its overall %O percent

target.

Geavy industry and coal producers ought to prepare for another dismal year*>he %$th 0Y3 will further marginali8e energy)intensive production. ince a

major component of "hina1s economic restructuring is to achieve an energy

transition toward high eciency and cleaner fuels, it appears that the sun is

setting on the previous 5golden era6 of the "hinese coal industry.

uch a priority is necessary if "hina hopes to meet the 5pea+ carbon6 &'$'

timeline that it announced with the -nited tates at the Asia)3aci?c

Economic "ooperation 2A3E"4 summit in !ovember. >he %$th 0Y3, which

ta+es the country through &'&', will o@er more clarity on "hina1s pathtoward pea+ carbon. Either way, the transition from an energy)intensive

growth model will li+ely ta+e place in the conte:t of even slower economic

growth. ndeed, potentially a O percent average ;D3 growth rate will be

announced in the new ?ve)year economic blueprint.

"witching gears

9hile the gradual ratcheting down of growth e:pectations is ?tting with the

5new normal6 paradigm that the top leadership hopes will ta+e root, the

actual economic and psychological adjustment isn1t going to be easy or

painless. !evertheless, the message is sure to echo loudly and consistently


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from Beijing to the rest of the world. 0or instance, a ;oogle search ofxin

changtai2new normal4 yielded nearly half a million hits.

Already, that message is being delivered by the unli+eliest of vessels. #arely

does the party mouthpiece the Peoples Daily=uote Bobby Lennedy when it

wants to ma+e a point about moving past ;D3. n a %ON speech, Lennedysaid, 5But even if we act to erase material poverty, there is another greater

tas+, it is to confront the poverty of satisfaction / purpose and dignity /

that aPicts us all.6

"hina agrees with that sentiment. !ow indisputably an economic behemoth,

it parado:ically no longer wants to be de?ned by ;D3 growth. nstead, it is

pivoting to focus on a set of post)growth problems / basically, how to meet

the changing e:pectations of a wealthier middle class and how to behave as

a legitimate global power.

ndeed, this is the year that the training wheels came o@ "hina. But here1sthe rub* An active global player will now be endlessly judged in the court of

global public opinion. f "hina wants to play in every corner of the globe, it

had better get used to the world watching and judging its every move.

+ppetite or ,estruction9hy feeding "hinaQs %.$ billion people could leave the rest of the world

hungry.

BY DAME! MA, 9FFAM ADAM

H">HBE# %, &'%$

Hn Aug. &', the Australian mining giant BG3 Billiton announced that it will

pump nearly $ billion into developing a deposit of "anadian potash, a

mineral used in the manufacture of fertili8er destined for farms ?elds acrossthe world. And in late eptember, "hinese por+ producer huanghui


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ocially purchased mith?eld 0oods in the largest "hinese ac=uisition ever

made in the -nited tates. >he companies1 investments are both decisions

that spea+ to a vote of con?dence in global food consumption growth over

the ne:t decade / and nowhere will bellies be ?lling up faster than in "hina.

0or three decades, resource)intensive manufacturing fueled "hina1sspectacular economic rise. By &'%&, the countrywas consuming nearly half

of the world1s coal and producing (O percent of its steel, ($ percent of its

aluminum, and about O' percent of its cement. >he "hinese economy has

slowed in &'%$in part because of the government1s recognition thatsuch a

resource)intensive growth model has become unsustainable. As a result,

Beijing is trying to rebalance away from e:ports and investments and

toward domestic consumption. "ompanies li+e BG3 Billiton are betting that

"hina1s rebalancing will spur rapid growth in demand for food and the

inputsneeded to produce it.>he underlying economic logic / "hina as

demand driver / is the same, but it reJects the resource scarcity that isstarting to replace maintenance of rapid growth as "hina1s foremost

economic challenge.

An ironic legacy of economic success, "hina1s resource scarcity is worsening

as its ;D3 grows, incomes rise, and standards of living improve, placing

new, daunting pressures on the domestic food supply. >his is not necessarily

because the "hinese agricultural industry is underperforming. >he sector

has long faced a daunting tas+* ?lling the stomachs of &' percent of

humanity with just N percent of the world1s arable land and only about $'

percent of the world1s per capita availability of fresh water. But the tas+ is

further complicated by Beijing1s grain security policy, which insists on near

self)suciency of production in spite of a scarce resource base, preventing

imports from playing the same role as domestically produced food.

Beijing1s food security policy is an uncharacteristically impractical choice

from a usually pragmatic government. t is motivated by the psychological

legacy of repeated, disastrous famines that scarred the "hinese public over

the last %I' years, the most recent being the policy)induced famine during

the ;reat Feap 0orward that led to tens of millions of deaths in the late

%I's and early %O's. 0ood is central to the national mindset, especially

for the many "hinese alive today who have personally e:perienced cripplingscarcity.

0ood became more plentiful in the decades following Mao Cedong1s death in

%O, when the "hinese government adopted liberal agricultural policies

that allowed farmers to sell their products into the mar+et. "alled the

Rhousehold responsibility system,R this reform, as well as sustained

investments in agricultural sciences and technology, prevented "hina from

descending into the Malthusian nightmare of ?nite resources outstripped by

e:ploding population growth that seemed to threaten the developing worldin the %'s. ince the early %N's, "hina has been able to produce most of


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>hese trends will have important global implications. >a+e rice, for e:ample.

Although "hinese rice yields rose dramatically in the &'th century, "hina

found it necessary to import &.O million tons of rice in &'%&. 9ith the global

mar+et accustomed to a wea+ "hinese buying presence / the country has

been a net e:porter of rice almost without fail for the last half)century /

"hina1s rice purchases may have helped send global prices to a near all)time high.

t seems too early to say that"hina1sdomestic rice production has hit the

same supply)side bottlenec+s that have re=uired the country to become a

huge soy importer. But the recent discovery of cadmium)tainted rice

produced in central "hina / only the latest in a series of food scandals /

certainly does not help alleviate pressures. An:ious "hinese consumers

could opt out of the domestic rice mar+et and demand to buy the staple of

their diet in the global mar+et, further eroding "hina1s self)suciency.

Another revolution in agricultural technology could mitigate these scarcities

however, this is very unli+ely in the near term. >he fruits of the ;reen

#evolution, from which "hina bene?ted tremendously a generation ago,

seem e:hausted / not only in "hina, but globally. As economist >yler "owen

noted in his &'%& boo+,-.. farming productivity growth leveled o@

between %' and &''&. A similar dynamic may be at play in "hina, where

burgeoning imports suggest agricultural productivity growth is stagnating.

All these factors point to a harrowing decade ahead for "hinese food

security. he "hinese government is e:perimenting with rural land

reforms and industrial farming to encourage higher eciency and promote

economies of scale. But between ideological opposition to allowing rural

land to function as a form of productive capital and pragmatic concerns over

the livelihoods of landless rural peasants, progress will li+ely be too slow to

prevent "hinese food demand from outstripping supply.

"hina will li+ely become a reluctant and ever)larger presence in global food

mar+ets. >his will bene?t economies li+e the -nited tates that are major

food e:porters. But just as "hina1s industrial and property booms of the last

decade buoyed prices of oil, coal, and iron ore, in this decade "hinese food

demand growth could raise food prices in the -nited tates and elsewhere.

"hina already consumes O' percent of the rest of the world1s soybean

e:ports. And as it +eeps growing, "hina could fundamentally alter global

food supply and demand.

Hf course, Beijing does not ma+e policy for the countries from which it

imports agricultural products, but as Ama8onian rain forests are cleared for

soybean production or if global rice prices spi+e again, "hina could see a

bac+lash. "hinese policyma+ers are certainly concerned about the impact oftheir country1s food demand on the rest of the world, which is one reason


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they insist on grain self)suciency. >he less "hina buys on the mar+et, the

less it will be in the international spotlight.

>oeing such a line will be dicult. "hina1s unmatched combination of scale

and need means it cannot be an anonymous participant in global mar+ets.

>he "hina price that today describes the country1s cheap manufacturede:ports could soon refer to higher)priced food on dinner tables across

America.

The -ital (ole o Chinas or! rices

9hile property values go through the roof in "hina, the price of an important

consumer staple is plunging* por+. t1s roiling farmers, but ma+ing some

economic policyma+ers =uite happy.

3or+ prices have fallen %( wee+s in a row according to "hina1s Ministry of

Agriculture, their lowest level in four years, and cheaper even than some

vegetables. n the ?rst wee+ of April, the average hog price was .($ yuan

2%.$N4 a +ilogram.

>he porcine price plummet has forced the government to add to its much

vaunted fro8en por+ reserve, a series of icy warehouses around the country

it set up a few years ago to stabili8e por+ prices.

Hne "hinese press report, citing government statistics, says live pig prices

have dropped &%S this year. Another report says por+ prices have fallen

below the lowly lentil. 2n Chinese4

>he hope is that by adding to the fro8en por+ hoard, the government

demand will ta+e enough meat o@ the mar+et to drive prices bac+ up.

9hy does the government want higher pricesK 0armers are complaining.

According to several stories in the "hinese press too many slaughtered pigs

are coming to mar+et, driving farmers to despair.

3or+ plays a vital role in "hina1s commerce. >here are almost half a billion

pigs in "hina, one for every three people. n gross terms, li+e in humans,

"hina dwarfs other countries in pigs. And there1s no ndia of pigs to rival"hina. >he ne:t biggest producer is the -.., which has OI million pigs,

according to the -nited !ation1s 0ood and Agriculture Hrgani8ation. n fact

"hina produces more pigs than the ne:t ($ por+ producing countries

combined.


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>he cause of the recent glut of pigs was a reaction to a shortage just a few

years ago. An epidemic of blue pig ear disease wiped out pigs across the

country and sent por+ prices s+yroc+eting, leading inJation to dangerous

levels. >he virus attac+s pigs1 reproductive systems.

After the &'' and &''N price spi+e, the government set up the fro8en por+

reserve and o@ered subsidies to pig farmers to get the pig population bac+

up. t seems to have wor+ed too well.

A Ministry of Agriculture report also says changes in the economy have also

curbed the growth in the nation1s por+ appetite. Demand for por+ from

migrant wor+ers in big cities has ebbed as more country fol+ stayed home

after the economic slowdown.

>here are two bright sides. 0irst, the lower prices are great for "hina1s many

por+ consumers.

And falling por+ prices have +ept a lid on inJation, a major worry now that

the economy is, according to some economists, running too hot. "hina grew

%%.S in the ?rst =uarter and had a &.(S inJation rate in March. 0ood

ma+es up one)third of "hina1s inJation ?gures, according to GB" estimates.

"hina1s economic leaders have ac+nowledged the positive economic e@ect

of the por+ glut. 3eople1s Ban+ of "hina deputy governor Chu Min cited

government e@orts to boost pig populations at an investment conference in

Gong Long last month.

5>wo years ago "hina had a total of (&' million pigs. >oday it1s (N' million

and that O' million ma+es a huge di@erence,6 in ?ghting inJation, he said.


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Will Chinas /conomy Be $o. 0 by

,ec. 102

A conversation on "hinaQs economy, and on how much si8e matters.

BY CGA DAHG-# #.

L#HEBE#

MAY %, &'%( ) %'*I( 3M

On April 30, data released by what the Financial Ties calls !the worlds

leading statistic agencies! showed that "hinas estiated #0$$ purchasing

power parity %PPP& exchange rate was higher than pre'iously thought( The

sexiest iplication o) this statistical tweak is that "hinas econoy couldbecoe the worlds largest by the end o) #0$*, unseating the +nited tates

-'e years ahead o) earlier predictions by the .nternational /onetary Fund(

e asked contributors to explain what this eans and why it does 1 or

doesnt 1 atter(

3ha ,aojiong

9hen the 9orld Ban+ formally adopted the 333 methodology bac+ in the

early %'s and thus elevated "hina1s ran+ing, there were two general

reactions in the "hinese media. Hne was that this represented 9estern

recognition of "hina1s real bargaining power, against the bac+drop of

sanctions imposed in response to Beijing1s handling of domestic instability in

the summer of %N. >he other was that the new ran+ing might as well be a

9estern propaganda ploy to tric+ "hina and the "hinese people to be less

hard)wor+ing and, by e:tension, "hina should instead double its e@orts to

grow its economy.

"hina1s leaders, throughout the %'s, constantly championed the notion

that "hina needed the rest of the world to continue to develop and, by the

same to+en, the rest of the world needed "hina just as much. >ranslated

into policy, "hina wor+ed to join the 9orld >rade Hrgani8ation, applied,twice, to host the Hlympic ;ames, and constantly used Rlin+ing up with the

international trac+R as a domestic slogan to drive home the necessity

of reform.

>hen, in &'%', "hina supposedly passed


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ome pundits, both "hinese and foreign, may begin to connect the new

ran+ing with "hina1s status, role, and responsibility in global and regional

economic and political systems. But it is hard to see those articulations

resonate with choices on the ground. n this sense, "hina / both its

government and people / has indeed matured.

>his does not mean that the time has come for "hina to disembar+ itself

from the international trac+. As "hinese government leaders li+e to repeat

these days, reform has to be an agenda in a continuous tense, not the past

perfect. 0or the reform agenda to be e@ectual, "hina has to continue

to internationali8e.

William +dams

>here are two really fundamental challenges to coming to terms with

"hina1s place in the global ;D3 ran+ings* ignorance and apathy. 9e don1t

+now, and we don1t care.

0irst our ignorance* ;D3 is really hard to measure. om Hrli+, Bloomberg1s "hina economist, who told me he

once heard a "hinese local government ocial say that the government

measures the economy using ?scal revenue instead of ;D3 because R;D3 is

opinion, ?scal revenue is fact.R

#an+ing "hina1s ;D3 against that of other countries is messier still, since it

re=uires pic+ing an e:change rate to convert this s+etchily)measured

aggregate into -.. dollars. >he -.!. nternational "omparison 3roject1s

estimate of the 333 e:change rate is the product of admirable and

interesting research, but is still just one of many estimates. >he research

organi8ation >he "onference Board, where used to wor+, was projecting in

&'%' that, using their best estimate of a 333 e:change rate, "hina would

overta+e the -.. as the world1s largest economy in &'%&.

9hich ta+es us to the second challenge, our apathy. -sing a mar+ete:change rate to compare "hina1s economy with that of the -nited tates

would ma+e its economy around two thirds of the si8e of the economy of the

-nited tates. o whatK "hina would still be superlative in many ways* the

world1s largest producer and consumer of steel, the largest consumer of

energy, the largest importer of soybeans, and the largest emitter of

greenhouse gases.

#egardless of whether "hina ma+es a smooth transition to domestically)

oriented growth or ma+es a hard landing, its footprint is such that focusing

on ;D3, or growth, has become a distraction from more fundamental issues.

Damien Ma and collectively call these scarcity* insucient natural

resources to feed an investment) and energy)intensive economy insucient


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land to produce the food "hinese consumers demand a shrin+ing labor

supply that forces wages up, s=uee8es low)end manufacturers, and pushes

the economy out of e:port)oriented industries. >here is more insight to be

gained from thin+ing about these issues than in wondering whether "hina

becomes the world1s largest economy today, ?ve years from now, or ?ve

years ago.

,amien 4a

Fet me piggybac+ on Bill1s comments with a couple points. 0irst, in

hindsight, perhaps we should have titled our boo+ the more tongue)in)chee+

R"hina as !o. %* o 9hatKR >hat a country four times the si8e of the -nited

tates would, short of cataclysmic economic fallout, someday grow into the

world1s largest economy should not elicit surprise / it1s basically a matter

of when, not if. But whether "hina is still a trillion economy in mar+et

e:change rate terms or closer to %( trillion in 333 terms doesn1t say

anything about how to thin+ about "hinese political economy. Aggregate

;D3 is but one indicator reJecting general welfare, but is far from sucient

to e:amine where "hina stands economically, socially, and politically.

econd, "hina has had a tremendously successful record in adding ;D3

every year for as long as can remember. But when tal+ to "hinese

interlocutors, policyma+ers, and others, nobody seems particularly

concerned about growth in and of itself. !o one is obsessing over ;D3

?gures, e:cept maybe certain bureaucrats in the !ational Bureau of

tatistics. And even the government itself is trying to slowly e:tricate itself

from recent decades of ;D3 fetish.

5 suspect many Chinese will see this news and retort that 6yeah#

well# by per capita 7, were still about one%sith that the 8nited

"tates.6

suspect many "hinese will see this news and retort that Ryeah, well, by per

capita ;D3 we1re still about one)si:th that the -nited tates.R >his is one

problem in loo+ing at "hina, it can be both an enormous economy and an

unbalanced country in terms of development. t1s somewhat a+in to the

European -nion / both 3oland and ;ermany can e:ist at the same time.


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>hird, instead of worrying themselves over ;D3, the "hinese, both the

public and ocialdom, are preoccupied over all sorts of other sociopolitical

issues. 0rom accessing healthcare and higher education to safe mil+ and

clean water 2even core values4, these are the central challenges that the

Rworld1s biggest economyR now has to urgently deal with. Bill and referred

to them collectively as various dimensions of scarcity / some are policy)induced, some are

secular trends / that will determine how"hina actually develops, rather

than whetherit grows in ;D3 terms.

9hen a country gets wealthier and heftier economically, a di@erent set of

problems tend to arise that re=uire a di@erent set of policies. #icher

countries have to deal with the costs of the Rgangbuster growthR era and the

dramatic social changes that have accompanied that growth. >he tric+y

thing for "hina is that it is both wealthy and poor simultaneously, and it is

being as+ed to grow and clean up at the same time.

+rthur (. 9roeber

agree with Bill and Damien that this is a Rwho caresKR moment. t has been

obvious for =uite some time that "hina would soon overta+e the -.. in

sheer economic si8e. f one doesn1t accept the current 333 conversion rate

then just wait ?ve or %' years and "hina will be bigger at mar+et e:change

rates. But basically, all that this shift tells us is that "hina has way more

people than the -. / (.& times as many, to be e:act. o, as soon as "hina

stopped being fantastically poorer 2per capita4 than the -.., and became

simply a lot poorer, its total economy surpassed that of the -.. 2And still

lags that of the European -nion, which is arguably the world1s biggest

economy, if one ta+es economic integration rather than political boundaries

as the criterion.4

taying in the league)tables discussion for a moment, there are two major

economic dimensions in which "hina still lags the -.., Europe, and he ?rst is living standards.

/'en i we accept the current measurement# per capita 7, in

China is only roughly one%:uarter that in the 8.".

Even if we accept the current 333 measurement, per capita ;D3 in "hina is

only roughly one)=uarter that in the -..#and the gap in average livingstandards is even greater, because in the -nited tates about two)thirds of


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;D3 consists of household consumption whereas in "hina that ?gure is

barely over one)third. n other words, for a given amount of per)capita ;D3

2at mar+et e:change rates4, the average -.. household consumes twice as

many goods and services as its "hinese counterpart. "hina has recorded a

lot of economic growth by installing a huge amount of capital e=uipment,

the fruits of which accrue mainly to the small number of capital)owners /many of them foreign companies. t still has a lot to do in spreading the

bene?ts of growth more broadly to its citi8enry.

>he second is what generally goes under the name of innovation / the

ability to create new sources of economic growth and vitality. ome

headlines have declared that "hina is now the world1s top economic power.

>his is false. t is the biggest national economy by volume. But the center of

technological change in the world is still the -nited tates, and arguably the

-nited tates1 centrality in this role is even more pronounced now than it

was %' or %I years ago. >here is little evidence that "hina is anywhere closeto becoming the engine)room of the global economy.

But Damien is right that this Rwho1s on topKR discussion misses all that is

truly interesting / namely how "hina and other countries manage social

tensions, income distribution, and other problems arising from high speed

economic growth. Because of its sheer bul+, "hina is indeed wealthy and

poor at the same time, and the responses to that parado: are a far more

fascinating target of study than the mere si8e of the economy.

China is unhappy

BY DA!EF BF-ME!>GAF

MAY , &'%$ ) %%*I$ AM

Gappiness research is a growing discipline in social science that is ta+enmore seriously in the academy and increasingly among policyma+ers as

well. AE 3resident Arthur Broo+s has done research on the subject, ?nding

the happiest people are those who have earned their success. >hat does not

always mean ma+ing a lot money, but rather achieving success of any +ind

through enterprise, perseverance, creativity, and so on. Hthers, such as

authors of the famous ;rant tudy, have found that Rhappiness is love,R

including family, friendships, and social relationships. >his is only a small

sampling of the literature. 9hy are these ?ndings of relevance to

policyma+ersK As #onald nglehart and Gans)Dieter Llingemann have

written*


18/25

!A societys le'el o) sub2ecti'e wellbeing4(is intiately related to the

legitiacy o) the socioeconoic political syste4i) sub2ecti'e wellbeing o)

an entire society )alls sharply below its noral baseline, it can destabili5e

the entire political order(!

f nglehart and Llinemann are correct, "hina watchers and policy analystsneed to start thin+ing di@erently about the legitimacy of the "hinese

"ommunist 3arty 2""34. >here is something close to a consensus among

9estern observers of "hina that the ""31s legitimacy rests on two pillars.

>he ?rst is performance / sustained economic growth that translates into

better living standards for all "hinese people. >he second is a distinct +ind

of nationalism / the ""3 convinces the "hinese people that it and it alone

can right the many wrongs of the past and restore "hina to its proper place

of greatness.

>he latter pillar actually ma+es more obvious sense than the former. >he

idea that legitimacy is based on growth in material well)being implicitly

assumes that man can be reduced to hoo econoicus)that is, that man is

interested in the material alone. >he latter pillar, on the other hand, seems

to be grounded in a better understanding of human nature. >hat is, man is

driven by honor, pride, and anger as well as other emotions or virtues.

>he ?ndings of two social scientists,


19/25

a@orded to the well)connected, it is doubtful that "hinese feel that they can

truly earn success without somehow cheating or gaming the system. >here

is a serious loss of dignity / a profound human desire / in living in a

society where people feel compelled to cheat to get ahead or that no justice

e:ists when others cheat.

>hen there is the issue of social and family relationships. >hrough the one)

child policy, the "hinese government is destroying the traditional "hinese

family. A generation of "hinese is growing up without siblings, cousins,

uncles, and aunts. ;iven the importance in "hinese history of the e:tended

family for social insurance and security as well as for the proper ordering of

one1s place in society, its destruction has broad repercussions for societal

happiness. Add to that a general trust de?cit in "hina and the ?ndings of

social scientists focused on happiness ring true.

Many thought the ""31s days were numbered after the fall of the oviet

-nion. ;iven the patterns of democrati8ation in East Asia, most "hina

watchers and policyma+ers thought that more wealth would bring greater

demands for political participation and democracy. 3olicyma+ers needed an

e:planation for why the ""3 continues to monopoli8e power in "hina,

despite the fall of other Mar:ist)Feninist regimes and more wealth. But now

it may be time to develop other indicators to measure the regime1s

resilience / societal happiness is a good place to start.

Ci'il 4ilitary 5ntegration ; The Coming

roblem or 5nternational


20/25

received relatively little attention in the broader media. 9hile much of the

strategy is of no big surprise 2broad and sweeping claims to reuni?cation of

>aiwan with mainland "hina, "hina1s rights to territorial integrity, self)

defense of 5"hina1s reefs and islands,6 a nod to 5provocative actions6 by

some of its 5o@shore neighbors6 2read he 3#" views the intertwining of civilian science and technology sectorswith its military as necessary to gain a leading edge over any potential

adversary. ndeed, 5"hina encourages joint building and utili8ation of

military and civilian infrastructure, joint e:ploration of the sea, outer space

and air, and shared use of such resources as surveying and mapping,

navigation, meteorology and fre=uency spectra.6 n short, it plans on

imbedding the military with everything.

>his strategy e:tends even the scope of the -.. military industrial comple:.

9hile the -.. version see+s to unite the interests of national government,

the military, military)industrial ?rms and policy ma+ers, the "hinese versionactually see+s to intertwine the entire economy and the people into one

5holistic6 vision. >he worry, particularly when viewed from the joint)

ventureTjoint)enterprise version is that e'erythingbecomes dual use.

nternational humanitarian law has wor+ed over the past century to

disentangle to the best e:tent possible the military from the civilian sphere.

ndeed, the principle of distinction in customary international law re=uires

that at all times parties to a conJict shall ma+e a distinction between the

civilian population and combatants. >his includes civilian objects. As Article

I% of Additional 3rotocol of the ;eneva "onvention states, indiscriminate

attac+s are prohibited, and they are considered indiscriminate if 5those

which employ a method or means of combat the e@ects of which cannot be

limited as re=uired by this 3rotocol and conse=uently in each such case, are

of a nature to stri+e military objectives and civilians or civilian objects

without distinction.6

!ormally, we thin+ of indiscriminate attac+s as either indiscriminate by

means 2munitions that cannot discriminate between combatants and

civilians4 or as the result of a particular method 2indiscriminately using

weapons that can by their nature discriminate, such as ?ring on civilian

centers4. >he "hinese version, however, turns the 5methods6 on its head.


21/25

0or here, the state policy is to turn any method of war into one that is

inherently indiscriminate because the state is intertwining everything, and

thus everything becomes 5dual use.6 Yet if everything is 5dual use,6 then

nothing is either civilian or military. Dual use becomes a meaningless

term everything is a military target, and there is no longer a protected

civilian sphere. >he state policy perverts the protections of international lawin such a way to either endanger its own people 2for they are all e@ectively

now targets4 or to e@ectively use them as human shields.

Hne might object here and claim that just because the 3#" is attempting to

+ill two birds with one stone by investing all monies into civil and military

industries, this does not in fact ma+e civilian populations and

infrastructure legitimate targets in war. >here is still the rule that one is only

permitted to attac+ military objectives, and those objectives are dictated by

an object1s 5nature, purpose, location and use6 and its 5e@ective

contribution6 to the war e@ort and if by destroying that object one gains adistinct military advantage. >an+s are still tan+s, jets are still jets and aircraft

carriers are still aircraft carriers.

>his is at best a very hopeful reading of international law, and at worst a

dangerous one. 0or it ignores the ?rst prong of the test U that an object by

its nature, purpose, location or usema+es an e@ective contribution. f the

"hinese military re=uires all semi)conductors to be built by a particular

company in "hina, then it ma+es perfect sense to attac+ that company and

its factories, for this will e@ectively diminish the "hinese military1s ability to

create new weapons systems, manage command and control and logistics.

Yet, it could also disrupt much of the ability of the #epublic to function

economically as well. Gowever, we are not just discussing semi)conductors

but the integration of infrastructure and almost all technology. n short, it is

almost everything.

>he fact that "hina is purposively intertwining its sectors in this way

threatens to turn much of the wor+ of international law on its head. By

trying to 5improve6 its 5systems and mechanisms of national defense

mobili8ation6 "hina is in e@ect claiming that if anyone goes to war with it, it

will have to be a total war there is no possibility of anything else.

n a timely, though perhaps not direct response, the -nited tates1 new

Defense Department 6aw o) ar /anualrecently declared that the - is

permitted to +ill civilians if 5a commander determines that ta+ing a

precaution in attac+ Vthe 5precautionary principle6W would result in an

operational ris+ 2i.e., a ris+ of failing to accomplish the mission4 or an

increased ris+ of harm to their own forces.6 Moreover, in addition to

completely abandoning the precautionary principle, the new /anualalso

ta+es a new twist on the +illing of civilians regarded as 5human shields.6 As

one commentator on the DoD1s new policy sums up, the new policy entails

that 5harm to human shields, no matter how e:tensive, cannot render an

attac+ unlawfully disproportionate6 because human shields U whether


22/25

actively or passively shielding/do not count against a proportionality

calculation when attac+ing.

#eturning to "hina1s new military strategy and how it results in either

ma+ing distinction impossible 2and meaningless4 or e@ectively ma+es the

entire country one large human shield, the counter)strategyUat least fromthe -1 new reading of international lawUwould lead one to a reductio ad

absurdu* f the - and "hina were to go to war against one another, then

all of "hina is a target because it is all dual use, and the civilians and civilian

property are merely shields, and since they are shields, the - can +ill the

entire population without it being a disproportionate warX

>he major powers are on the move in rede?ning how they would li+e to

maneuver militarily, and as usual, it is threatening some of the international

legal bedroc+s that see+ to limit the destructiveness of war and the

su@ering of peoples.


23/25

China ,estroyed 5ts "toc! 4ar!et in

Order to "a'e 5t

>he enormously invasive measures Beijing used to stem trading losses may

have damaged the hanghai and hen8hen e:changes for years to come.

BY 3A>#"L "GHA!E"


24/25

li=uidate their positions, pushing prices down further in a +ind of death

spiral.

"hinese regulators, who had been trying 2ine@ectually4 to rein in ris+y

margin lending, now suddenly reversed course. >hey waved rules re=uiring

bro+erages to as+ for more collateral when stoc+ prices fall and allowed

them to accept any +ind of asset / including people1s homes / as collateral

for stoc+)buying loans. >hey also encouraged bro+erages to securiti8e and

sell their margin)lending portfolios to the public so that they could go out

and ma+e even more loans.

All these steps +nowingly e:posed major ?nancial institutions, and their

customers, to much greater ris+. Yet no one will borrow if no one is con?dent

enough to buy, and the mar+et continued to fall, wiping out nearly all its

gains since the start of the year.

By this point last wee+, "hina1s state media was tal+ing openly of a 5war on

stoc+s.6 And in that war, "hina1s leaders chose to employ the nuclear

option* n e@ect, they closed down the mar+et and outlawed selling. As of

the morning of


25/25

5mar+et forces will be decisive6 as the guiding principle behind a much)

lauded push for reforms needed to reinvigorate "hina1s slowing economy.

>hat principle now lies in ashes.

0or years, "hina has dreamed of hanghai1s becoming a global ?nancial

center. !ow, one analyst at the global investment ?rm oday, with a mere rump of

"hina1s stoc+ mar+et trading at all, and with investors afraid they will be

thrown in prison for selling at the wrong time for the 5wrong6 price, it1s

inconceivable.

t didn1t have to be this way. ome compare "hina1s intervention to the -..

>roubled Asset #elief 3rogram 2>A#34, but the di@erence is stri+ing. >A#3

didn1t try to stop mar+et prices from falling it focused on containing the

damage. f "hinese authorities identi?ed a large securities ?rm that was at

ris+ of failing from bad margin loans and stepped in to prevent a chain

reaction, that would ma+e more sense / and do a lot less damage / than

trying to prop up the entire stoc+ mar+et by fair means and foul. Memories

are short, but in &'', "hina allowed an e=ually large stoc+ bubble to

collapse without its economy su@ering irreparable harm. "aixin, one of

"hina1s most prominent ?nancial maga8ines, argued recently that this time

around, the government 5had no reason to intervene6 to prevent a much)

needed mar+et correction and had grossly overreacted.

"hina needs a functioning stoc+ mar+et that allocates investors1 capital to

the most promising enterprises. >his means prices that aren1t obedient to

the whims of the state, or the party. "hina may have arrested the stoc+

mar+et1s fall by threatening to arrest sellers. But when it did that, it

destroyed the town it was trying to save.

Documents

FP-CHINA.docx