The Rise of China and Future of the West

By G. John Ikenberry January/February 2008 Summary: China’s rise will inevitably bring the United States’ unipolar moment to an end. But that does not necessarily mean a violent power struggle or the overthrow of the Western system. The U. S. -led international order can remain dominant even while integrating a more powerful China — but only if Washington sets about strengthening that liberal order now. G. JOHN IKENBERRY is Albert G.

Milbank Professor of Politics and International Affairs at Princeton University and the author of After Victory: Institutions, Strategic Restraint, and the Rebuilding of Order After Major Wars. Discussion Questions The Rise of China and the Future of the West The rise of China will undoubtedly be one of the great dramas of the twenty-first century. China’s extraordinary economic growth and active diplomacy are already transforming East Asia, and future decades will see even greater increases in Chinese power and influence.

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But exactly how this drama will play out is an open question. Will China overthrow the existing order or become a part of it? And what, if anything, can the United States do to maintain its position as China rises? Some observers believe that the American era is coming to an end, as the Western-oriented world order is replaced by one increasingly dominated by the East. The historian Niall Ferguson has written that the bloody twentieth century witnessed “the descent of the West” and “a reorientation of the world” toward the East.

Realists go on to note that as China gets more powerful and the United States’ position erodes, two things are likely to happen: China will try to use its growing influence to reshape the rules and institutions of the international system to better serve its interests, and other states in the system — especially the declining hegemon — will start to see China as a growing security threat. The result of these developments, they predict, will be tension, distrust, and conflict, the typical features of a power transition.

In this view, the drama of China’s rise will feature an increasingly powerful China and a declining United States locked in an epic battle over the rules and leadership of the international system. And as the world’s largest country emerges not from within but outside the established post-World War II international order, it is a drama that will end with the grand ascendance of China and the onset of an Asian-centered world order. THE FUTURE OF CHINA AND NORTH ASIA MAINLAND CHINA, HONG KONG, TAIWAN, JAPAN, SOUTH AND NORTH KOREA. FROM HERE TO 2030 SUMMARY: Revision 2005

The global population of the North East Asia (China, Taiwan, Japan and the two Koreas ) attains 1,524 million in 2004. It would stabilize and reach about 1,542 million in 2030. The global GNI accounts for $7,565 Billion in 2004. We can expect about $28,000 Billion in 2030. Clearly, the future of China and North East Asia is bright. The region will be the main economic center in the world. China has quadrupled its GDP since 1980. Thanks to foreign investments and a fast transfer of technology, this country has realized in twenty years that Japan and South korea have realized in 45 years.

The Chinese GDP ($2,133 Billion in including Taiwan and Hong Kong) could attain $18,000 Billion in 2030. We must answer to three questions: 1-Is the Chinese growth expected to going on? Clearly, we answer Yes. Thanks to its population, China represents a huge market and the economy can still enjoy a very high growth rate in the next future. Despite political and social uncertainties, we are confident because of the quality of the Chinese youth. 400 Million are aged between 20 and 39 (Only 110 million in Western Europe ) and constitute the main labor force.

These people are well educated, enthusiastic about business entrepreneurship, eager to work as much as they can. They focus on ethics and values. They show a real openness to the world. The Chinese youth is better prepared than the European youth to the coming world. In our opinion, it is the most important asset of China. 2-What are the consequences for the world community? Today, a wave of panic is spreading through the world: Chinese textiles exports to the main western countries jumped by 80 to 90% in the first quarter of 2005. As a result, people campaign for protectionism or a change in currency.

In fact, China only represents 5. 6% of the world trade in 2003 and the Chinese positive trade balance remains quite constant (On average of 31 $Billion over 7 years ). China only gets a large surplus with the US (175 Billion). In this context, Protectionism or a change in currency could bring more problems than solutions. The best guess is the democratization of China and the increase of its labor costs. On the other hand, there is an hidden challenge: What should we produce in the future? Presently, China is a blessing for the consumers.

However, if current trends were going on, we could export wine, antiques and tourism and import all the machinery and technology from China. Clearly the free trade theory ought to be revisited! 3-Does a risk of conflict exist? In our opinion the answer is no, with a reservation about North Korea. The US-China relations should remain peaceful. The Taiwan-China conflict could find a pacific issue ( Despite the irresponsible French demand to lift the arm embargo on China ). The immediate threat comes from North Korea 1-CHINA As usual, this survey is not a worm book paper.

Regarding China, we visited Hong Kong, Guangzhou, Nanjing, Shanghai, Guilin, Beijing and Lhasa in Tibet. We met businessmen and students. Moreover, we have kept in touch with them through the Internet. We have currently more visitors from China than from France or Germany. Regarding Japan, we sojourned in Tokyo and Kyoto. Look at the next map (CIA source). 11-Introduction With an area of 9. 6 million square kilometers, China is the third largest country in the world ( Next to Canada and Russia). It is the most populated (1. 3 Billion). It is one of the oldest civilizations ( A written history of ,000 years. Inventions of compass, paper-making, gunpowder and printing). For centuries China stood as a leading civilization, outpacing the rest of the world in the arts and sciences. In the 19th and early 20th centuries, the country was stormed by civil wars, famines, military defeats, and foreign occupation. After World War II, the Communists established a totalitarian power that cost the lives of tens of million people. After 1978, the communists focused on market. As a result, living standards have improved and the room for personal freedom expanded. However, China is still a dictatorship.

According to the UN lower projection (Revision 2004-See world population prospects) the global population (Including Hong Kong and Taiwan) would grow slowly and then stabilize ( 1,346 million in 2030). Thanks to birth control, China has succeeded in reducing its fertility rate. Whatever the projections, China will be less populated than India in the future. China is a very homogeneous ethnic country ( Han represent 92% of the total population). People mainly worship Taoism and Buddhism. The day to day religion (Confucius) looks like a collection of ethical advices. 12-The present economic growth

The World Bank stats distinguish mainland China and Hong Kong. Regarding Taiwan, the only available stats can be found on www. gio. gov. tw (Government office of the Republic of China). 121-Mainland China In 1978, the communist replaced the collectivization, authorized private enterprises, and increased foreign trade and investments. As a result, China benefited of high growth rates over 25 years and quadrupled its GDP since 1980. The GNI attains 1,677 $Billion in 2004 (Gni per capita: $1,290). Measured on purchasing power parity (PPP) basis, China stands as the second-largest economy in the world after the US in 2004.

However, in current dollars, China remains far behind the USA (12,150 Billion) and behind Japan, Germany, the United Kingdom and France (About the purchasing power parity go to our standards for quality) The main figures of the Chinese economy are given by the next drawing (Yearly GDP growth rate in %, Gross capital formation in % of GDP, the exports and imports of good and services in % of the GDP, the % of high technology exports in manufactured exports and the amount of foreign investments received each years in $ Billion. DRAWING 1

Years———————- 1999– 2000– 2001– 2002– 2003– 2004 GDP growth rate ————-7%—-8%—-8%—–8%—9%—10% Gross capital formation——37%– 36%– 38%—-40%–44%–45% Exports——————— 22%– 26%—25%—-29%– 34%–40% High technology———— 17%– 19%—21%—-23%—27% –? Imports——————— 19%– 23%—23%—-26%– 32%—39% Foreign investments———39—-38—–44——49—–53 —-? The gross capital formation (Investments) is very high (45% in 2004). As a comparison, gross capital formation peaks about 30% in Korea, 25% in Japan and 20% in the US.

Compared to the growth rate (10%), it indicates a capital output ratio of about 20%. Such a profitable ratio can only be reached by an economy based on commerce, services, high technology, light industries rather than on heavy industry and agriculture: Value added by agriculture has fallen from 27% to 15% between 1990 and 2004. Since China accession to the World Trade Organization in 2001, exports and imports are rapidly increasing. China ranks in 2004 as the third largest trading country in the world after the US and Germany (See below). The % of high technology exports in manufactured exports has outpaced those of Japan in 2003.

It remains below the % of South Korea (On an average of 32% over the five last years). The transfer of technology is due to the impact of foreign investments. Since reform began in the late 1970’s China has been more open to foreign direct investments than Japan. China harbors four hundred billion US dollars of foreign investments coming from the U. S. , Japan, Taiwan and Europe. These investments upgrade the Chinese industry and boost its productivity. Finally, China has become the world’s low-cost manufacturer. It not only produces labor-intensive goods ( Footwear, textiles and toys).

It is increasingly a big producer of capital-intensive goods such as cars, machinery, power energy, telecommunications equipments and electronics. It will soon become a big producer of knowledge goods such as computers, softwares and so on. 122-Hong kong Hong kong has known a very fast growth during the British colonization as a gateway to China. Hong Kong became the Special Administrative Region (SAR) of China on 1 July 1997. In this agreement, China has promised that, under its “one country, two systems” formula, the socialist economic system will not be imposed on Hong Kong for the next 50 years.

The GNI attains 183 $Billion (GNI per capita : 26,810). The next drawing shows the Yearly GDP growth rate in % and the Gross capital formation in % of GDP. DRAWING 2 Years——————— — 2000— 2001— 2002— 2003—2004 GDP growth rate—————10%—–0%—–2%—–3%—–8% Gross capital formation——–28%—-26%—-23%—-23%—-22% Following the handover, Hong Kong suffered a 60 % fall in residential and commercial property prices. This fact and the financial Asian crisis explain the sluggish growth in 2001 and 2002. The economy rebounded in 2004 with a 8% growth rate.

However, Hong Kong faces an increased competition from Shanghai and other mainland cities 123-Taiwan Taiwan (36000 square kilometers, population 22 million) was an undeveloped countries in the sixties. It is today a bright economy with high technology exports. The GNI attains 273 $Billion in 2003 (GNI per capita $12,400). Taiwanese exports represent 130 Billion (quite half the GDP) and imports 112 Billion. As a result, the trade surplus is substantial, and foreign reserves are the world’s third largest. Bad bank loans had caused a depression in 2001 and 2003 but a strong rebound occurred in 2004 (5% growth rate). 24-Conclusion Thanks to foreign investments and fast transfer of technology, China has realized in twenty years that Japan and South Korea have realized in 45 years. The only bad note (As in other Asian countries) is related to the State banking sector which has many bad loans (About $700 billion! ). Under WTO obligations, Foreign banks will be able to enter into China in the form of joint ventures and could improve the sector. From a business point of view, China is going to allow foreign service-providers in many high technology sectors. It could be an opportunity for small business.

Consequently, our country rating guide gives the following ranks: Hong Kong: ****- and China: ***+ Anyway, recall that a good implementation could take a lot of time and money. What is more there are many uncertainties and risks that we must carefully examine. 13-Projections 2030: Threats and opportunities Considering the projections 2030, we suppose that just like Hong Kong, Taiwan will be integrated in China under the “one country, two systems” formula. Consequently, we may sum up the GDP: Mainland China (1,677)+ Hong Kong (183) +Taiwan (273)= 2,133 $Billion in 2004.

We have set up two projections: A high projection with a growth rate of 9% and a medium one with a growth rate of 9% from here to 2020, 8% from 2020 to to 2030. The next drawing shows the results ( Population in Million, GDP in Billion, GNI per capita in $). DRAWING 3 Years——————— 2004——–2030-9%/8%—– 2030-9% Population—————– 1,315——– 1,346———— 1,346 GDP———————— 2,133——- 18,300———–20,000 Per capita—————— 1,620——- 13,600———–14,800 We choose the medium variant (18,300 $Billion in 2030).

Thanks to its population, China represents a huge market and the economy can enjoy a very high growth rate in the next future. Whatever the hypothesis, China will remain behind the US (About 26,000 Billion with a 3% growth rate). However, we are aware that many risks exist. To evaluate them, we have to use the business matrix: Threats and opportunities. 131-Threats 1-Political Uncertainties: Of course, China is not a democratic country. In the past, the communist rule caused eighty millions dead (civil wars, famine, cultural revolution and so on). The communists backed the red Khmer genocide in Cambodia.

They never apologized these crimes. The Communist party sets governmental policy and hold all the offices. Until today, many labor camps are reported. About human rights in China, go to freedomhouse. org The main worry is the Lack of transparency. China history shows that many revolutions are not spontaneous and are in fact organized by some members of the power circle: For example, during the period 1860- 1900, China was yet open to foreign investments. This policy was encouraged by the government but the Empress did not agree with that and she encouraged the Boxer revolt (The 100 days of Beijing).

In this early wave of globalization, the westerners lost all the money invested in Shanghai or Canton. More recently, Mao Zedong was opposed to the alliance with the Soviet Union. Instead of openly disagree, he favored the cultural revolution with the Red Guards. Recent anti US or anti Japanese demonstrations may obey to the same hidden agenda. This lack of transparency represents a major uncertainty: Riots and revolutions may surge without any prior warnings. 2-Social uncertainties What is more, the Chinese society is not stable. Let’s us compare with India.

Beside its democracy, India is a very stable country that relies on a structured society with traditional classes: Nobody could reasonably expect a revolution or a landslide political movement in this country. Compared to India, what is the real Chinese society: You have the communist nomenclature, some capitalist tycoons, the new rich and a large unstructured population. Wars and revolutions ( Notably the the cultural revolution) have destroyed all the relish of the traditional society. The entire society is floating (See below).

Moreover, there are growing concerns about the consequences of massive inequalities. Firstly, 400 million live in the towns on the coastal area: The modern China. What about the 900 million living in small villages and countryside. Indeed, there is a rush of poor peasants coming to the towns and engaging themselves as laborers. A “floating population” of some 80 million to 130 million people, have left their rural homes in search of work in cities. Secondly, just like in all countries in transition, there are inequalities between the workers of state enterprises and the employees of foreign companies.

Millions of workers have been laid off from state-owned enterprises particularly in the Rust Belt provinces (heavy industry). Thirdly, inequalities are increasing between rich and poor’s. China has gone from being one of the most equal income distribution in the developing world to one of the worst. Globally, the inequalities may be larger than in India. However, we must take in account that poor people have increased their living over the period thanks for the high growth rate. They do not suffer any more of starvation and famine.

This situation already leads to unrest and civil troubles. Workers and farmers very often demonstrate in street protests. Some people think that China could implode and disintegrate like the former Soviet Union. We do not think so. The Soviet Union was a patchwork of ethnic and nationalities. On the contrary, China is an homogenous country. Along its history, China has known many revolutions, civil wars and chaos but by the end it has preserved its unity. 132-Opportunities 1-Some progress toward democracy. China has begun the process toward democracy at the local level.

The recent decision to admit “capitalists” to membership in the Chinese Communist Party is also an indication. Nevertheless, the process has not moved very far. Chinese leaders suggest that a moderate move is a guarantee of stability. Many western leaders seem to agree with that and favor a “gradual change”. Indeed, this argument has been used with the decision to hold the Olympics in Beijing in 2008. Moreover, China is not any more a totalitarian power. The economic reforms have freed millions of Chinese from party control. In day-to-day, people and notably women seem freer than in Saudi Arabia or Iran.

The regime restricts press freedom but you can find the US press. It is said that the government regulates access to interest, but we observe that freeworldacademy is currently visited in China. It is also said that Beijing restricts religious freedom but any traveler can observe that buddhist Protestant and Catholic worship freely. After China took control of Hong Kong, many people feared a communist pressure. Despite these concerns, everyone acknowledge that Hong Kong residents enjoy the same basic rights as they had before. 2-A vibrant Youth Finally, there is a fact that favors an optimistic diagnosis.

Any traveler is stunned by the quality of the Chinese youth: Young people born after 1980 and who have not known the communist period form today a very large cohort ( About 560 million people are before 25). 400 Million are aged between 20 and 39 and constitute the main labor force (Western Europe: 110 million aged between 20 and 39). These young people are well educated, enthusiastic about business entrepreneurship, very eager to work as much as they can. They are clean, polite, smiling, civilized, optimistic. They focus on ethics and values. Although patriot, they show a real openness to the world.

They are eager to travel. Most of them speak global english. They really represent the future of China. There is no possible comparison between the Chinese and the German or French youth. The Chinese youth is better prepared to the coming world. In our opinion, it is the most important asset of China. 133-Conclusion In summary, there are some political risks but the current trend is not so bad. However, in the present social situation, an economic slow down could have dramatic outcomes. It means that the regime is condemned to maintain a very high growth to managing inequalities.

China is addicted to hyper growth. 14-What are the consequences for the world There is today a panic in the western world about chinese exports. The world’s textile trading arrangements ended on January 2005 and with the disappearance of quotas, Chinese textiles exports to the main western countries jumped by 80 to 90% . in the first quarter of 2005. As a result, there is a campaign for protectionism. Some officials called on China to appreciate its currency. We have to examine the problems and the issues. 141-The chinese share in world trade.

What is the real importance of China as a global trader in the world competition? To calculate the trade rank you have just to sum up the imports and exports of goods and services. The next drawing shows the world trade evolution in $billion and the main countries share in % (EU means the Euro zone) DRAWING 4 Years————-1999——— 2000—– 2001—- 2002—– 2003 World trade—– 13,918———15,801— 15,215— 15,280—16,596 EU—————-4,340 (31%)— 4,828—- 4,628—– 4,354—4,479 (27%) USA ————–2,250 (16%)— 2,524—- 2,380—– 2,452—2,642 (15. %) Japan————-794 (5. 7%)—– 894—— 908—— 899——959 (5. 7%) Other countries–6,132 (44%)—- 7,035—- 6,754——6,895—7,582 (45. 6%) China————-402 (2. 9%)—- 520—— 545—— 680—— 934 (5. 6%) As you can see, China (imports +exports) only represents 5. 6% of the world trade. Since 1999, its share has doubled but remains far behind the euro zone (27%). Over the period, the shares of US and Japan are quite constant. Only China and “Other countries” have expanded at the detriment of the Euro zone which lost four points.

The world trade has increased by 19%, “Other countries” by 23% and china by 132%. However, when we take in account the volume we can see that the world has an incremental increase of 2,678 Billion: 1,452 from “Other countries” and only 532 Billion from China. It means that China only took 20% of the world increase. We are far from the apocalyptic descriptions. Nevertheless, with a global trade of 1,154 Billions China has outpaced Japan in 2004 and became the third world trader after US and Germany. In 2005, China is expected to attain 1,300 Billion.

It is really an exponential growth. However, the positive Chinese trade balance with the world remains quite constant (On average: 31 Billion over 7 years) because the increase of imports follows the exports. Just consider the next drawing (In $Billion) DRAWING 5 Years——– 1999— 2000— 2001— 2002— 2003— 2004— 2005 Exports——- 216—- 276—- 284—- 359—– 481—- 593—- 682 Imports——- 186—- 244—- 261—- 321—– 453—- 561—- 651 Balance——– 30—– 32—– 23——38——-28——32—– 31 The trade positive balance is not very high.

Let’s us compare with the main Countries: In 2003, Japan had a positive balance of 87 billion and the Euro zone of 139 billion. On the other hand, the US had a negative trade balance of -440 Billion 142-The Chinese trade balances: US-China relations In fact, the main problem is related to the US-China trade. The next drawing describes the Chinese trade balances in 2004 with its main partners (In $Billion-The negative trade balances are shown in red). DRAWING 6 ———————USA—-Japan—– Korea—-Taiwan— Singapore

China exports to —-210—– 73——— 27——–13———-12 China imports from– 35——94——— 62——– 64——— 14 China balance——-175—– 21——— 35——–51———- 2 — —————- Malaysia—-Germany—– Other———– Total China exports to —– 8———- 23———— 227———— 593 China imports from– 18———- 30———— 244———— 561 China balance——- 10———– 7————- 17————- 32 This table shows that China has a negative trade balance with quite the entire world (143 billions) compensated by a high surplus with the US (175 billion).

In 2005, China will continue to run a big trade deficit with Asian trading partners like Japan, Taiwan, South Korea, and oil countries. On the other hand, China is expected to have a surplus with European countries such as Germany. However, these figures show that the main problem is connected to the US-China trade relations. The next drawing shows the Chinese trade with the US (In $Billion). DRAWING 7 Years—————- 1995———2000———2004 Exports to US———-48. 5——– 107. 6——– 210 Imports from US——- 11. 8——– 16————35

Balance—————- 36———- 91——— 175 Chinese Exports to the USA double every five years. The deficit with China accounts for 39% of the US deficit in 2004. You can understand why the US are complaining! 143-uncertainties and Solutions 1-Uncertainties: Some people would like to adjust tariffs on the ground that China does not honor its obligations. In fact, China has fulfilled all its commitments since its accession to WTO in 2001. Right now, its tariffs are lower than those of Mexico or Brazil. By late this year, all no-tariff (For example, quotas for agricultural products) will be abolished.

Facing protectionist measures, China will have to reduce its exports to the US and then either to increase its exports to the rest of the world, either to restrict its own imports with a risk of global recession in Asia. Obviously, such an adjustment could bring a tide of protectionism and a world depression just like in the 1930. Moreover, we have to recall that much of Chinese exports are produced by western companies implemented in China. Another solution is to let the Yuan to appreciate (It is funny to recall that few years ago during the financial Asian crisis, economists prayed china to not devaluate! . The idea is to make Chinese products more expensive, to curb exports and to increase the imports. Unfortunately, this bright idea could be wrong: Firstly, the cost of labor is so low that a moderate rise would not be sufficient. Only a surge in China’s currency on the order of 25% could make a difference. Secondly, a drop in exports would hammer the weakest producers and the banking sector. A social crisis could follow. Thirdly, thanks to its positive trade balance, China buys extensively the US treasury bonds. It means that China contributes to the Dollar stability.

With a negative trade balance, China will not buy anymore. Then, the dollar will depreciate compared to the Euro and it is quite difficult to expect the consequences. Moreover, made in China products have prevented a revival of inflation in the U. S. and in Europe. Despite the huge US deficits, the cheap Chinese products have contributed to stabilize the global level of prices. On the other hand, China oil demand has make increase the price of oil and other raw materials. In short, a strong drop in Chinese exports may have unexpected consequences. In such matters, gradual changes are the only mean to avoid a world disaster. -Solutions Clearly, one side of the problem is related to the US public and trade deficits. The solution should be to limit US expenses. On the other hand, US deficits sustain the world economy. Moreover, the US military spending’s (500 $billion) represent the ultimate life insurance of the free world. In fact, the democratization of China represents the long term solution. Since labor is a merchandise like other goods and services, the bargaining power of the workers is an element of a free economy. Due to the lack of democracy, this bargaining power does not exist in China.

As a result, the salaries remain artificially low: The monthly cost of the shop floor worker ($100) is about 5% of the same labor cost in US and Western Europe. In a democratic country, people would demonstrate to rise their salaries. Then, the internal market would grow and both exports and imports could be reduced. In China, this free trade adjustment cannot work any more. Protectionism or a manipulation of the currency could bring more problems than solutions. The best guess is the democratization of china and the rise of its labor costs. 144-The hidden challenge Beside the trade balance problem, there is another question.

Considering the Chinese and Asian economic evolution, what should we produce in the future? The free trade theory can bring an answer but few people are aware of its long term implications and consequences. 1-Free trade theory revisited To explain the challenge, we have to say a word about the Ricardo’s comparative advantage. Sorry, we have to go to the specifics because the next explanation is once again a world web exclusivity. According to Ricardo, exchange is beneficial when the costs of goods in country A differ from the relative costs of the same goods in country B.

Look at the next drawing: One machine in Europe costs 20 man days of labor and only 6 in China. Likely, one barrel of wine costs 10 man days of labor in Europe and only 2 in China. At first glance, all the costs are lower in China than in Europe and any exchange should be impossible. DRAWING 8 ———————–Europe———— China ——————–Labor required by units in mandays One machine———- 20——————- 6 One barrel of wine—–10——————–2 Ratio——————– 2——————- 3

Now, examine how the Ricardo argument is working: If China exports wine to Europe and sells at European prices, China can get a machine for two barrels of wine (20/10=2). In China a machine would cost 3 barrels of wine (6/2=3): China has a comparative advantage in wine. China gets a machine with 6 days at home. In selling 2 barrels of wine (cost 4 days) it gets the same machine in Europe. The cost of the machine becomes 4 days rather than 6. On the other hand, if Europe exports machines to China at Chinese prices, Europe gets 3 barrels of wine for a machine rather than 2 barrels at home.

Europe has a comparative advantage in machine. Europe gets a barrel of wine with 10 days at home. In selling a machine (cost 20 days) it gets 3 barrels. The cost of the barrel becomes 20/3= 6,3 days rather than 10. The argument relies on the ratio between the costs of machine and wine in each country. If the ratio were the same there would be no benefit from an exchange. The classical theory postulates that the ratio are never the same and that exchange is always possible and brings a benefit. According to this scheme, the theory posits (Notably the Hecksher-Ohlin model-Go to internationalecon. om) that a richer country which have more capital, should export capital intensive goods and import raw materials and labor intensive goods from a developing country. Each time the developing country modernizes and climbs one rank, the developed country has to move up with a more added value products. For example, Europe sells textiles in exchange of raw materials. Then, it sells machinery in exchange of textiles. Then, it sells technology in exchange of machinery and finally it sells planes and financial services in exchange of high technology. In fact regarding China, this model does not work as expected above.

Although China is clearly a developing country (with a low income per capita) Chinese exports are not mainly composed with labor intensive goods (Such as pork, poultry, textiles). Firstly, electrical machinery and power generation equipments represent 240 $billion that is to say about 40% of the Chinese global exports in 2004. Secondly as we have seen above, the % of high technology in manufactured exports is higher in China (27%) than in Germany (16%) or France (19%). Thirdly, in recent years, Chinese manufacturers have rapidly moved up into semiconductors, telecom equipments, and other sophisticated digital devices.

By the end, what should we produce? 2-What should we produce? The Chinese trend does not contradict the theory. The Ricardo Comparative advantage was invented when Europe was the most advanced civilization. Backward countries such as in Africa or in the Middle East were expected to grow steps by steps. Implicitly, western economists thought that these countries would constantly stand behind Europe. It means that we have never expected a reversal move: Look at the next scheme: DRAWING 9 ———————–Europe———— China ——————-Labor required by units in mandays

One machine———— 20—————- 6 One barrel of wine——– 5—————- 2 Ratio———————-4—————- 3 We have only modified the ratio in Europe. According to this new scheme, the reasoning shows that Europe would be better to specialize in wine and China in machine. It means that the theory could move like that: Firstly, we import from China high technology and we export gross machinery (Such as Germany today). Later, we will export wines, antiques and tourism in exchange of basic apparels and so on. By the end, Europe could be an industrial desert.

Of course, the theory posits that our negative trade balance would be compensated by the inflow of dividends and other revenues from investments abroad ( The story implies that we are all becoming capitalist and only earning dividends for a living! ). The comparative advantage is not at stake. It works perfectly. In fact, it relies on a difference in relative knowledge that is the cause of the difference in labor cost. We have seen that the new generation in Asia is better motivated and educated than in Europe ( Better education includes all the components: Not only school knowledge but also character, logical thought and willingness).

As a result, the comparative advantage predicts the future of Europe compared to Asia. In Europe: The Jose Bove world. In Asia: The high tech world. Does it matter? If 1. 3 billion Chinese madly addicted to work produce all the basic needs for peanuts, it could be like a God blessing! The problem is the balance of power. As china experienced in 1900, you do not resist to predators with Ming potteries, fine philosophers, and antiques. Likely, we will not resist with dividend vouchers, museums, and the exports of Derrida and Bourdieu masterpieces! -CHINA 2-JAPAN 3-KOREA 4-WAR OR PEACE China’s Future Shock China has taken a enormous leap from rice paddies to space exploration, practically overnight. Already the world’s most mobile-phoning people, soon the Chinese will be buying the most cars, burning the most fuel. Yet, even as innumerable cities of 10 million install broadband and brash skylines, over a billion people are still submerged in those paddies. But for those in the  thick of it, though, the world has seen no faster jolt in history, no greater Future Shock. By Ron Gluckman /around China

WITH HIS BAGGY SWEATSHIRT and expensive mountain bike, Zhang Xiao-Guang might be a typical 28-year-old in practically any city. Until you sit down for a meal and hear him relate the kind of rags-to-riches tale you only hear in two places in the world anymore. At a story screening session in Hollywood. Or in China. Soon, Zhang will join Beijing’s brigade of suits, part of the parade of salary men chasing the  double-digit growth in the capital. Ten years ago, though, this scared, wiry teen had more in common with a different  demographic group: the enormous, 250-million strong migrant population.

Meaning, he lived like any homeless person, only while working his way through university. He hauled water by bucket to his single room in an enormous concrete housing bunker in Beijing. Unsanitary, unheated. “I was living like a migrant worker,” he recalls. “There was no water, no shower, no toilet. I had to go outside. The worst was winter. It was freezing. ”   Zhang burned coal in his unventilated room, a practice banned by Beijing authorities both because of the human and environmental risk, but a law largely ignored and gladly broken by Zhang whenever he had the means to.

Otherwise, he lingered in his university library, not so much to soak up knowledge as a few precious hours of warmth. Zhang had already battled his way to Beijing, like millions more from China’s vast hinterland. He had daringly also defied the government, rejecting a university posting in Shijiazhuang, capital of Hebei Province, where he was raised. Few from the farms in his hometown ever escaped, but Zhang had grander dreams. One view of  Shijiazhuang, and he was set. “It was dirty, ugly,” he recalls. “I wanted something different. I didn’t know what exactly, since I was young. Freedom, I guess.   He earned that in Beijing, but at a price, sleeping on floors until he found a place at one of the many private business colleges springing up to serve ambitious youth like Zhang. Even when he moved into his own room, there was little sleep. He worked nights at MacDonald’s, earning under $1 an hour. Every buck eased the burden on his parents back home. But what a difference a decade makes in the mainland. In 10 years, Zhang has moved from flipping burgers to management training. His salary at Siemens’ Management Institute in Beijing, will be more than the state railway pays teachers like his parents in a full year.

Such is the speed of change in China in less than a generation. “Things in China,” he says, “are moving like light-speed. ”   Faster still for Zhang and contemporaries like Yu Jin-Yan, 24, who was raised in a town outside Changchun, capital of northeastern Jilin Province. Her father drives a bus for a construction crew, at least he does when there is seasonal work in a dirt-poor region bordering Russia and North Korea. “If I had stayed, maybe I could have been a secretary,” says Yu, whose English degree had little  value in a place with few western businesses, or westerners.

Worst of all, she adds: “There would have been no chance for my development. ”   So she joined the throngs relocating to big cities like Beijing, where secretaries can earn five times the Changchun monthly salary of $75. More important, she says, was the potential for a better, fuller life. Yu worked odd jobs, looking for a lucky break. That came when she met an Australian entrepreneur used to spotting opportunities, such as this inexperienced but plucky young job seeker, who hired her on the spot. Currently, she’s an office assistant. “But she’s a fast learner,” says boss Alan Reid. The way she is going, look out. ”   Yu wants to work her way into project management. And she has big dreams, of buying a car and a house. Such dreams are commonplace in China these days. But, a decade ago, there was no real estate market; all housing was assigned by the state. Five years back, there wasn’t a single private car in her hometown of Yongji. Hence, such ambitions, to say nothing of mobility, represent revolutionary aspects of life to an equally novel new class in China – the Lucky Generation, coming of age in an era of unprecedented opportunity and choice.

Not just in terms of consumer goods, but every facet of life once dominated by a state that dictated where one lived, worked and studied. The exhilarating options sometimes make the future seem as bright as all the department stores opening along widened boulevards filled with new cars. Yet options can be daunting to a population that remains largely set in the past. Emancipation from the old state system brings excitement, but anxiety; call it Future Shock. “That’s a good name for it,” Zhang agrees. “Future Shock. That’s China sometimes. ”   The term might seemed dated, coined by Alvin Toffler in his 1970s book, “Future Shock. Yet the premise, that tomorrow dawns at an ever-faster – and shocking – pace, never seemed so spot-on as in today’s China, a nation with one foot rooted in a feudal age while the other kick steps into the 21st Century, with its own space program, cities of towering skyscrapers and the world’s largest network of mobile phones. All this denotes a genuine Great Leap Forward, unlike absurd propaganda campaigns of the past, with true quantum gains in everything from infrastructure and information technology to food, fashion, lifestyle, all in a single, frenzied generation. That’s the thing about China now,” says Pei Rong Ming, 37, a software expert for Oracle in Beijing. “It’s like we’re going through a new generation every five years. ”   Pei says it with a smile, because life is unquestionably better in all ways for his family of three. They have a Fu Kan (Rich and Healthy) car, and small, but comfortable flat in the new suburb of Wanjing (slang for Overlooking Beijing), subsidized by the university where his wife, Xiong Wei, works. Both earn good salaries, and Pei has had an unusual career, including a fling in Beijing’s dot-com boom.

He’s also been overseas, training in Germany in the mid-1990s while working for SAP, the Walldorf software firm. This makes them part of a privileged class in Beijing, where incomes and aspirations, until recently, lagged behind Shanghai and Shenzhen. While other cities modernized, Beijing seemed stuck in its stodgy role as national capital, until the award of the 2008 Olympics ignited an infrastructure and redevelopment spending spree that is remaking the capital. Still, 36-year-old Xiong says life is filled with anxiety. “The big questions are all about tomorrow.

Things today are good, but what about the future? We think of this all the time, and so do all of our colleagues. That is why everyone works so hard. It’s uncertainty. “Even if we can live comfortably now, what about tomorrow? ”   A generation ago, she knows, things were immeasurably tougher. Both her parents were engineers, but together earned 100 yuan (about $12. 50 nowadays) monthly, which had to support the family of four, plus her grandmother. The oldest child, her earliest memory is of shopping. “I only had a few cents, and I had to think about how to feed the whole family,” she recalls sadly. But there wasn’t much anyway. ”   Now, everything exists in excess: computers, cars, fancy clothes. Concerns, too. Over entirely new concepts like pension planning and life insurance. In the past, work units arranged it all – housing, food, hospital – complete life planning from birth to burial. “Resources are what we think of all the time,” she sighs, as she brushes the hair of daughter Pei Shu Lin. “The planning is endless. ”   Take a pressing family concern: space. The university-supplied flat is cheap, but only has two bedrooms.

Both parents regularly bring home work, a common trait in a China renowned until recently for its enormous lack of initiative. Now, it’s more like the People’s Republic of Competition. At the University of International Business and Economics, Xiong teaches marketing, a field so new, she was the first instructor and was largely self-taught, using the internet to communicate with colleagues overseas. “Now, we have 10 different courses at my university alone,” she says. “Everything in China expands like that. ”   The family hopes to do the same, moving to an apartment with enough bedrooms and office space to go around.

But the property market gives them pause. And provides a good example of how, with the new opportunities come unexpected anxieties. Beijing is booming like other gateway cities, where real estate sales have risen at rates nearly four times the economy’s 7-8 percent annual growth. Construction activity and prices have also skyrocketed. “We’re looking at the market constantly,” says, Xiong. Guessing trends in a such a maverick market is impossible. And forget turning to family members for advice about home buying or mortgages. Older generations never heard of such things.

The reality is, despite a refreshing air of renaissance in Beijing and other cities across New China, most rules are still being written. This becomes clear when Pei and Xiong discuss schooling for six-year-old Shu Lin. Moving house means changing schools, but they have no clue how that is done. Shu Lin attends a quality school, attended by children of college employees in the neighborhood. “In China, everyone can go to school,” Pei says. “But some schools are better. To find a good school can be difficult, and we have no idea of the cost. Then, the software solutions specialist scratches his head, baffled about the procedures. Computers come with manuals; not New China. Some assume the impact of all this upheaval has to weigh heaviest upon the elderly, suddenly overwhelmed by modern influences after a lifetime of isolation. Not so, insist the younger generation. The onus, they say, is on them to keep up-to-date in a nation essentially going through an Industrial Revolution simultaneously with its emergence into the Computer Age. “It’s like this,” explains Xu Qiong Ying, 29, a Shanghai reporter who recently moved to Beijing. My grandmother never had a car, but now my uncle does, so she just thinks that’s great, and she has him drive her everywhere. “She has no idea what kind of car it is, or what is involved in having a car, anymore than she understands the internet. So much of change is like that to older people. “They just look at whatever is new and say, OK. For us, all the changes have meaning, and are complicated. They are real developments that we have to deal with. ”   In modern China, that means learning on the fly, by whatever means. Increasingly – and despite Beijing’s efforts to censor it – the internet is a major source of information.

China has over 60 million internet users, 70 percent under the age of 30, according to China Internet Network Information Centre. Yet access was practically nil a decade ago. Wang Yi Jin, 28, a Beijing human resources worker, puts things in perspective when describing her student days at Qinghua University, Beijing’s top institution, often called China’s MIT. “It’s the best science school in the country and it had only one computer lab when I was there,” she says. “When I graduated from college, I had no email, I didn’t even know what the internet was. Information is the big change in China. In China, the media is in control of the government. With the internet, all of a sudden, we hear new voices, get different information,” she explains. “In China, it gives us a new view of the world. ” And of Chinese society. Wang describes how her own perspective changed after she worked for a German company and spent two years in Munich in the late 1990s. A discussion of the death penalty provided a shock. Expressing her views, she suddenly realized she didn’t have any of her own; she was reciting the Beijing position. “It made me realize, in China, you never doubt anything.    Going overseas alters that mind-set. While group travel is a fast-growing new trend, passports and visas are still tightly controlled in China. Yet the internet has no borders, offering a brave new wired world of enlightenment outside Beijing’s control. Hence, the scene one day last spring on Wangfujing Avenue, the main shopping street in Beijing. Nowhere in the capital, perhaps anywhere in the country, so defines China’s modern ambitions, or its recent transformation. A dozen years ago, the pedestrian-only boulevard was chaotic street markets and stone hovels.

Now the smart shopping street boasts scores of boutiques and fashion-conscious customers in henna-tinted hair. Signs shout slogans of the Consumer Revolution: Gucci, Esprit, Nike, Rolex and Omega. On one corner of this bustling shopping mecca, is the international cathedral of caffeine, Starbucks. Across the street, sits Saint Joseph’s, a more traditional church, at least by Chinese standards. Built on a site where Italian missionaries first held services 350 years ago, it was leveled by an earthquake in 1720, and has repeatedly been rebuilt and razed.

Shuttered in the Cultural Revolution, it was restored a few years back by Beijing. Now the surrounding square draws shoppers, sunbathers and skateboarders. Plus an odder new subculture: the wedding brigade. Up and down Wangfujing, window displays sport lacy western gowns. On weekends, long lines of wedding parties form at the church for photo sessions. On the last Sunday in March, Wangfujing was the scene of even more radical activity. American forces had stormed Iraq, sparking street protests everywhere. Except in China, perhaps the only nation that opposed the war, but hadn’t allowed its citizens to say so.

That was set to change this Sunday. Organizers detailed plans for a demonstration, but permits were refused. Organizers vowed to go on anyway. Hundreds turned out to see what would happen. The show didn’t last long. When anti-Bush banners were raised, secret police started making arrests. Watching was a crowd, including a Qinghua student who, despite his command of the sciences, admitted bafflement over this latest mystery of the Middle Kingdom. “This is really dumb. The views of the protesters are available for all to see,” he said, pulling out a pile of papers downloaded on the net. Why can they say what they want on the internet, but not on Wangfujing? ” he asked, not waiting for an answer. Beijing was censoring its citizens for agreeing with the government position, he pointed out. “It makes China look stupid. ”   Free speech, it seems, is one shock that the founding grandfathers hope to keep in the future. And no wonder, considering the topography. Around the corner and down the block is Tiananmen Square, site of student protests that vilified Beijing around the globe and set back reform, some here believe, by at least a decade. That was a huge lost opportunity for youth,” says Dong Jun, 36, a newscaster at Chinese Radio International (an English-language service that he likens to a mainland version of Voice of America). Dong Jun thinks the government was itself shocked after Tiananmen into a shift in approach, focusing less on overall reform and more on economic growth designed to assuage all the angst with opportunities. The results have been growth rates leading the world for a decade, and jobs for millions of college graduates. Yet, there has been a price to pay, he feels. People are much more materialistic,” he says. “People my age and older were educated that life was a struggle. Now, if you talk to kids, their top priority is to enjoy life. “When I was young, I was so eager to see China develop into a more open society. But now that it is so close, I’m not so passionate. I think we have added some good things, but lost other things. Like, when I was a kid, we caught fish and frogs in the little river by my house. ”   Not for his son, though. The river is gone. Anyway, he would rather eat Big Macs. “It’s a battle all the time,” says Dong. We really have to persuade him to eat Chinese by promising to take him to MacDonald’s or Kentucky Fried Chicken. ” Materialism is a common complaint these days, from young as well as old. Still, you hear other voices and the hint of changes blowing in the wind from every direction. Wang, the human resources worker, is a budding feminist bothered by the inequality of women not only in the workplace, but in marriage. Divorce, almost unheard of in the past, is soaring. And China seems to be joining the New World Disorder, if gains in psychology studies are an indication.

A decade ago, psychology graduates like Gong Wen were forever confused with fortune tellers. Early this year, 600 students competed for 80 places in the psychology department of the Beijing Normal University. Such are the trends that China watchers are tapped into. But radio man Dong warns of an enormous X-factor: the migrant population. Beijing alone admits to four million of them, unregistered and unregulated, casual workers on construction sites, bar girls, beggars. “People perceive that folk from the Chinese countryside as more traditional and conservative.

But these migrants have been freed of the traditional constraints of life, of land,” Dong says. “They are getting so free in big cities and we see the results, crime, violence, prostitution. ” Sex, drugs, maybe even rock ‘n’ roll. Yet there is also great hope in the future generations. Xue Jing Jing calls herself Bobo, but not after those trendy types in Shangri-la, but after an American cartoon clown. She’s 20 and studying international trade at Beijing Polytechnic University. By some measures, she’s almost a complete composite of restless Chinese youth culture, at least in the cities.

She’s already worked as a waitress, language tutor and travel agent. For a time, she played keyboards in a punk band. “I try different jobs because I want to find out what I can do, what I’m good at. People say life is short. I want to try lots of things. ”   She concedes: “My way of thinking is different from a lot of people at the university. All they think about is studying, finishing their degree, getting a comfortable job, and a good salary. It’s all so tedious. ”   Feeling estranged is perhaps the price of all this new freedom, say many at the frontlines of this changing society.

Zhang, the management trainer bound for Siemens, says he finds so many of his contemporaries “materialistic, interested in cars, fashion status. ”   Admittedly, it’s part of modernization, as Zhang himself realizes. Soon, he moves into a new flat, and what a shock: he’s still sleeping on a floor, of his old office. “I just never got around to looking for a new apartment,” he concedes sheepishly. Still, it takes him back to his uncertain arrival in Beijing. “Sometimes,” he says, “I think that was the best time. Everything was simple.   Then, he hops on his mountain bike and threads through the thickening traffic; another questioning, sometimes confused young mind. Like practically anywhere else in the world. But like so much else in China these days, that’s another shocking new reality. Surprising Forecast of China’s Energy Future Analysis by Tim Wall Fri Apr 29, 2011 01:14 PM ET During China’s dramatic and rapid rise to world prominence, pollution and resource use have rocketed up as well. Though some fear that as the Middle Kingdom’s economy continues to expand, the associated problems will, too, a recent analysis by researchers are the University of California and U.

S. Department of Energy’s Berkeley Lab suggests that by mid-century China’s demand for resources and electricity will plateau. “I think this is very good news,’’ says Mark Levine, co-author of the report, “China’s Energy and Carbon Emissions Outlook to 2050,” and director of the Lawrence Berkeley National Laboratory’s China Energy Group. “There’s been a perception that China’s rising prosperity means runaway growth in energy consumption. Our study shows this won’t be the case,” Levine said in a press release. BLOG: Could Wind Power China’s Energy Future?

Levine’s group predicts that between 2030 and 2035, China will be thoroughly covered by road and rail. The number of people buying new cars and appliances will also hit a peak. This phenomenon, known as saturation, should result in a dramatic decrease in demand for iron and other raw materials for construction and consumer goods. “Once nearly every household owns a refrigerator, a washing machine, air conditioners and other appliances, and once housing area per capita has stabilized, per household electricity growth will slow,’’ Levine explains.

As electricity growth slows, so too will the demand for new power plants. Along with the reduced demand for energy, the researchers also modeled two scenarios of China moving toward cleaner, more efficient electricity production. The result was two different pictures of how China, the Earth’s largest producer of greenhouses gases since 2007, could change its pollution habits in the years to come. BLOG: China Top of Orbital Garbage Heap, Study Shows The most optimistic forecast predicts that China’s emissions of the greenhouse gas are predicted to peak in 2027 at 9. billion metric tons. By 2050, they would fall significantly, to about 7 billion metric tons Under the more conservative scenario, emissions plateau at 12 billion metric tons by 2033, and reduce to 11 billion metric tons at mid-century. The optimist’s view of China’s future includes: — Less coal in the energy plan, to as low as 30 percent by 2050, compared to 74 percent in 2005 — More nuclear power from 8 gigwatts in 2005 to 86 gigawatts by 2020, followed by a rise to as much as 550 gigawatts in 2050 — Electric cars.

The assumption is that urban private car ownership will reach 356 million vehicles by 2050, under the optimistic prediction 70 percent will be electric. Levine believes the Berkeley Lab’s analysis to be deeper and more detailed than others. “Other studies don’t have this kind of detail,’’ said Levine. “There’s no model outside of China that even comes close to having this kind of information, such as our data on housing stock and appliances. For example in the two energy production scenarios, previous predictions were developed “without reference to saturation, efficiency, or usage of energy-using devices, e. . , air conditioners,’’ according to the Berkeley Lab report. “For energy analysts and policymakers, this is a serious omission, in some cases calling into question the very meaning of the scenarios,’’ continued the report. FEATURE PRINT  |   TEXT SIZE        |  EMAIL  |  SINGLE PAGE $123,000,000,000,000* *China’s estimated economy by the year 2040. Be warned. BY ROBERT FOGEL | JANUARY/FEBRUARY 2010 In 2040, the Chinese economy will reach $123 trillion, or nearly three times the economic output of the entire globe in 2000.

China’s per capita income will hit $85,000, more than double the forecast for the European Union, and also much higher than that of India and Japan. In other words, the average Chinese megacity dweller will be living twice… Growing strength of China masks doubts about future As Chinese around the globe celebrate the Year of the Tiger, many fear that the newly confident world power will try to thwart the west at every turn. But the leadership remains anxious about the true strength of its economy and society China last night heralded the lunar new year with the usual deafening, dazzling pyrotechnics.

But outside the country, some fear the year of the tiger will see another kind of fireworks, as a newly confident world power asserts itself globally. “China is getting stronger and stronger. You can see it from the happy faces coming to buy firecrackers,” declared stallholder Han Jing, as she handed out rockets and other wares from her busy booth in north Beijing. In the economic crisis, it was not affected as badly as other countries. Our Chinese people have confidence that it will overtake every other country. ” Grabbing a bumper packet of explosives, her customer Zhou Liyuan agreed. At least the British drug smuggler [Akmal Shaikh] was executed. In the past, there would have been more negotiations. There are a lot of conflicts between China and the US now, and we have a stronger point of view this time. ” Recent weeks have seen disputes with the west over everything from trade to climate change. In Europe and the US, business people and officials grumble privately of the increasing assertiveness – arrogance, say many – of this growing power. “I think 2009 has been a turning point,” said Professor Feng Zhongping, director of European relations at the China Institutes of Contemporary International Relations. If you say China is more confident, that would be accurate. But I think there have been misunderstandings by the US and European governments and especially the media. I don’t think China has become ‘prickly’. ” From the western perspective, China has been unwilling to shoulder the responsibilities that go alongside greater international power: failing to press Iran and North Korea on nuclear proliferation or to make a serious commitment to tackling climate change; punishing other countries with its artificially low currency.

It has brushed aside criticism on human rights and sought to export censorship, pressing overseas film festivals to drop documentaries on Tibet and Xinjiang. But some of the recent tension has been overplayed. President Obama’s predecessors also met the Dalai Lama and China objected in each case. The two are scheduled to meet on Thursday. Analysts also say Beijing has exerted more pressure on North Korea of late. From Beijing’s point of view, the west is making unrealistic demands – expecting it not only to understand other countries’ priorities, but also to compromise its own interests. Some people’s expectation of China was that, with economic development, foreign policy and political reform would become westernised,” said Feng. A lot of people don’t think a responsible great power just does what the US expects it to do. ” Victor Gao, director of the China National Association of International Studies, argued that the US shopping list was increasingly long. “The arms sales to Taiwan and the visit of the Dalai Lama take place at a time they need help on Iran… What are the top three issues for America?

If they put Tibet or Taiwan in there, I would be amazed,” he said. That helps to explain why China sees no point in yielding on certain issues. “Beijing’s new assertiveness is less the result of its growing economic clout than the realisation that [ultimately] western governments care far less about human rights than about trade and economics,” said Nicholas Bequelin, Asia researcher at Human Rights Watch. Elsewhere in the world, China’s rise is met with as much enthusiasm as fear. Neighbours may be alarmed by its growing might, but there is greater enthusiasm on other continents.

Professor Deborah Brautigam, whose recent book The Dragon’s Gift examines the Chinese presence in Africa, said that, while some there see China as “the new colonialist”, others have welcomed it. “African leaders and commentators expressing this view are not naive about Chinese interest in Africa. But they actually like to hear the Chinese talk about investment opportunities instead of aid [and] are intrigued by models such as the resource-backed infrastructure loans,” she said. Analysts predict further tension, rather than a spectacular confrontation, between China and the west.

Gao argues that the stakes are too high for both sides. “The decision-makers in this town are cautious, prudent people; not because they are afraid of the other side, but because they know increasing friction is bad for China, bad for the US and bad for the world,” he said. Beijing may be increasingly confident, but it does not yet believe its smooth ascendancy is a given. Underneath the veneer of confidence lie persistent anxieties about the true strength of its economy and society, and how to handle issues such as soaring inequality and endemic corruption.

Such domestic vulnerabilities enhance the appeal of promoting popular nationalism, yet also reinforce the potential dangers of international disputes. “What many observers see [as greater assertiveness] is in fact the product of a larger debate and policy struggle in Beijing about where China should be in the next 10 years and how it should get there,” argued Russell Leigh Moses, a Beijing-based political analyst. The only real agreement thus far is that China is not to be pushed around, and so you get over-reaction and elbowing and jersey-tugging from many officials here. And at street level, while many ordinary Chinese people celebrate their country’s rise with pride, others are deeply cynical about its prospects. “We’re a nuclear power, but are we prepared to use military power against anyone? ” complained another of Han’s fireworks buyers, who declined to give his name. “The statistics that China provides about its economy are all fake. A lot of graduates can’t get jobs. When outsiders come to Beijing it takes seven or 10 years to get a hukou [household registration], yet getting a US green card might not take them that long. I’m not sure whether China’s stronger as a country – but its citizens aren’t. If such pessimistic judg ments prove well-founded, the Chinese political establishment may face as much pressure from within as without, as it attempts to consolidate superpower status in 2010. The Future of China — By Kevin Drum | Tue Apr. 5, 2011 2:12 PM PDT A new paper suggests that countries start to experience growth slowdowns when their per capita incomes reach $17,000, a level that China will reach in about five years. Ryan Avent: The story this suggests is one that’s quite at odds with the prevailing view in much of the world—that China’s relentless growth will continue until it dominates the global economy.

Another possibility arises. Within a few years, we may be reading “What’s the matter with China? ” stories. A growth slowdown and demographic difficulties will challenge the policy status quo and could potentially expose serious weaknesses in the growth model (as Warren Buffet says, when the tide goes out, one sees who’s been swimming naked). India, on the other hand, will be ascendent. And that could make for a very different set of policy challenges and priorities within the rich world. I agree, and I’m surprised this isn’t a more common narrative.

Demographic problems alone put serious limits on China’s future growth path, and the slowdown in productivity once they hit the $17,000 income level will make things even worse. China will plainly be a big player on the global stage for the rest of this century, but they’re not going to take over the world quite as quickly as folk punditry often has it. This is something to keep in mind the next time some hawkish outfit releases yet another study trying to scare everyone into big Pentagon budget increases in order to stave off the future red menace. Previous Is China facing a Japanese future? Next » New York Stock Exchange and German Rival Merge Is the Chinese yuan becoming a rival to the dollar? Posted by Michael Schuman Tuesday, February 15, 2011 at 3:41 am 1 Comment • Related Topics: china, currencies, Well, not just yet. China’s controversial currency, the yuan or renminbi (RMB), is still too tightly controlled to be a major factor in international markets. But at the same time, Beijing has made a surprising amount of progress in recent months in its aim of internationalizing its currency.

The yuan is showing up a lot more often in trade and finance. The implications of that new reality are potentially huge. As China rises in economic power – it overtook Japan to become the world’s second-largest economy in 2010 – it seems inevitable that its currency will rise in importance as well, simply because the Chinese economy is becoming so large and so crucial in world trade. Recent advances in the yuan also show how much progress China could achieve in turning its currency into a major international player – if it reformed the distorted way in which the yuan is valued.

The most fascinating aspect of the rising yuan, in my opinion, is the emergence of the “dim sum” bond. These are bonds denominated in yuan and issued in Hong Kong. Though Chinese government allowed such bond to be issued since 2007, the market has really taken off in just the past several months. According to a Feb. 7 report from BofA Merrill Lynch, about $12 billion worth of “dim sum” bonds are on the market. The list of issuers is a surprising one. It includes HSBC, the International Finance Corp. , U. S. construction equipment-maker Caterpillar, and McDonald’s.

Why would anyone issue a “dim sum” bond? To tap the growing pool of funds available in RMB. That pool is likely to get larger and larger over time, which means “dim sum” bonds will likely become more widely issued and traded in the years ahead. An important part of that pool of RMB available for investment is the growing deposits of yuan held in bank accounts in Hong Kong. The size of those deposits increased by 400% in 2010, according to Goldman Sachs, to a total of RMB314. 9 billion (or $48 billion) at year end.

That growth is a measure of how Beijing has expanded the kind of services and transactions that can be conducted in yuan outside of the country, mainly in Hong Kong. In 2009, for example, China started an experiment in allowing certain cross-border trade transactions to be settled in yuan for mainland firms through Hong Kong banks. That scheme has been routinely expanded ever since to include more and more companies. Another liberalization in July 2010 allowed RMB to be more freely used in Hong Kong, and as a result, an offshore RMB market is developing in the city.

Some $400 million of yuan is traded a day, primarily in Hong Kong, according to The Wall Street Journal, and though that is still merely a tiny fraction of the trillions of dollars of currency traded each day around the world, it’s still a pretty impressive number given that the market is only a few months old. The emerging international RMB business is a huge boost to Hong Kong in its competition with New York and London in international finance. The city is becoming the primary offshore center for the yuan in the same way London is for the euro.

Despite these signs of progress, the fact is the yuan would probably have a much more prominent international role already if China didn’t wrap it up in so much regulation. Sure, Beijing is continually loosening its grip on the yuan with a steady stream of reforms. In January, the central banks announced plans to permit Chinese companies to conduct direct investments overseas in yuan. But the RMB is not fully convertible and does not trade freely around the world like the dollar, euro or yen, and that is a severe constraint on its use.

China also controls the value of the yuan through a mysterious process that limits the freedom of its movement against other currencies. Thus it is impossible to determine the yuan’s proper value. As long as such political interference continues, there will be a ceiling to how much the yuan can be used around the world. Some “liberalization” efforts taken with the yuan appear little more than public relations ploys at this point. The Bank of China announced recently that its American customers could trade RMB in the U. S. but as my colleague Zachary Karabell found out, there really nothing you can actually do with the account, beyond holding some of your savings in yuan. Beijing’s currency policy is working in two contradictory directions. On the one hand, Beijing wants the yuan to play a larger role globally, to decrease the country’s dependence on the dollar in its international business. But Beijing also wants to control the yuan to promote exports and protect the financial sector and other special interests at home. Eventually, one of those goals is going to have to go if the yuan is to reach the global status it rightly deserves.

Perhaps one day, we all will be investing in yuan. But until Beijing allows some real reform of its currency, the yuan’s power in the international economy will lag behind China’s economic power. Is China facing a Japanese future? Posted by Michael Schuman Monday, February 14, 2011 at 6:13 am 6 Comments So it’s official. China has become the second-largest economy in the world, overtaking Japan. Based on Japan’s 2010 GDP results, released on Monday, China’s economy is about 7% bigger. China’s ascension to No. 2 (behind the U. S. is yet another sign of the shifting fortunes of Asia’s two great economic powers, and yet another milestone in China’s march to superpower status. Japan was once the roaring tiger of Asia, but for the last 20 years, it has been trapped in an economic funk that has eaten away at its global influence. Now China, routinely defying gravity with 10%-plus growth rates, has replaced Japan as the premier symbol of a rising East. What is more interesting, though, is the fact that China today is using similar policies and practices to climb up the charts of the world’s biggest economies that Japan employed during its go-go years.

Both countries are “state capitalists,” which mix government control and free enterprise to produce rapid economic growth and industrial development. But as the case of Japan shows, that “state capitalist” system has as many flaws and dangers as benefits. The same system that drove Japan’s economic miracle ended up dooming the economy. Thus the big questions facing China are: Will Beijing’s version of state capitalism triumph where Japan’s has failed? Can China avoid Japan’s fate? Japan was, in fact, the original Asian state capitalist.

It started devising its state-led system back in the 19th century, and the model really hit its stride from the 1950s to the 1970s, when Japan produced China-style growth rates. Industrious bureaucrats determined how resources would get allocated in the economy by “picking winners” – selecting favored industries – then ensuring the banks funneled money to the preferred companies and projects. Though the government didn’t own many of the banks, it effectively controlled their lending practices. Large domestic savings was shoved into industrial investment.

The system generated giant current account surpluses by promoting exports at the expense of domestic consumption, and Japan was accused of keeping the yen artificially cheap to keep its exports extra competitive. Not only did Japan’s state capitalism produce remarkably rapid growth, it also fostered new, globally competitive industries, such as steel and semiconductors. Back in the 1970s and 1980s, it was popular in the U. S. to believe that Japan had created a superior economic model to that of the West, better able to absorb shocks, preserve growth and jobs during downturns and promote future industries.

Some experts advocated that the U. S. needed to copy Japanese methods in order to compete. China is following the same pattern. China’s government directs lending through a state-owned banking system to “pillar” industries, including steel and automobile manufacturing. The bureaucrats help develop new industries, like green energy, though special financial support. China runs up huge surpluses by keeping its currency super cheap to promote exports. Chinese consumers tend to be savers, not spenders, and the economy grows through investment.

And there is no shortage of pundits, businessmen and journalists who have become enraptured by China’s “state capitalism” in the same way they once were with Japan’s. While the U. S. and the euro zone struggle to maintain competitiveness and create employment, China is busily investing in the industries of the future and securing stores of natural resources around the world. The implied argument here is that the U. S. has to become more Chinese – to turn “state capitalist” and match China’s industrial policies in order to compete in the future – just as it once had to become more Japanese.

Yet the Asian state capitalist system also has inherent flaws – flaws that in the case of Japan proved to be its undoing. The way in which Japanese state capitalism worked was to lower the cost and risk of industrial investment, but that practice at the same time skewed the incentive structure within the Japanese economy, resulting in excess capacity. Bureaucratic meddling, combined with tight ties between government, business and banking, created a financial system that allocated funds based on government preferences or personal relationships.

In other words, the economy didn’t operate on clear “rules” based on credit risk or corporate governance. Eventually, the Japanese state capitalist system collapsed into crisis. Policymakers desperate to maintain soaring growth rates kept money too cheap for too long and inflated a stock-and-property bubble in the late 1980s. After it burst, debt-heavy companies with too much capacity that had lived on the easy-credit gravy train became incapacitated. These “zombie” companies represented the excess investment and capacity that probably had no reason to exist in the first place. The financial sector was left a ruined wasteland.

Other countries that copied aspects of the Japanese system faced the same disasters. South Korea employed a very similar model to Japan’s beginning in the 1960s, with similar results – incredibly high growth and the emergence of globally competitive industries, like shipbuilding. But Korea’s policies created similar problems to those in Japan, and the entire system broke down in the 1997 Asian financial crisis. Bank lending influenced by government preferences and historical personal connections had created what could be called a “factory bubble,” in which firms invested in industrial capacity way out of line with reality.

When the crisis hit, the corporate system collapsed under its debts. The most famous case was Daewoo, which built car factory after car factory for buyers that didn’t exist. It went under in 1999. The bottom line here is that Asian state capitalism generated some strong years of growth, created jobs and eliminated poverty, but also planted the seeds of its future destruction. What happened is that the state so altered the rules within the economy that investment became disassociated from risk. State capitalism resulted in the misallocation of resources that eventually was corrected at great cost.

There is good reason to at least ask if China is getting itself into the same mess today. The state capitalist system in China is arguably creating the same debt-driven excess capacity that got Japan and Korea into trouble. The Chinese government itself complains that there is too much capacity in certain industries like steel. There are clearly close links between government, finance and business in China — many companies and banks are outright owned by the state, and state banks often lend to state companies. Easy money aimed at propping up growth is fueling a giant surge in property investment and prices.

What’s happening? Loose money, directed lending and government support is twisting the incentives in the economy in ways that may be propelling the rapid advancement of industry, but also may be misallocating resources and inflating asset bubbles. In other words, China’s state capitalism is destroying the concept of risk just as it did in Japan and Korea. Of course, this doesn’t mean China will have an economic crisis. There is an argument out there that China is “different” — its home economy is so big that it can support all of the stuff being built.

China is also aware of the dangers its economic model is producing, and is proactively trying to reduce the economy’s dependence on investment by encouraging consumer spending. Such reform will prove crucial if China is to avoid the traps that caught Korea and Japan. Japan’s economy has been in the doldrums for 20 years because it has been unwilling to reform its state capitalist model enough to fix the problems that system created. The reason why South Korea is doing better is because the state has been receding from the economy, which is becoming freer and more open.

In other words, Korea is emerging from the rubble of its state capitalist practices by shedding those practices and becoming more “Western” in its capitalism. So the big issue facing China over the next 10 to 20 years is whether Beijing can maintain the benefits of state capitalism (high growth, rapid industrial progress) while avoiding or resolving the costs (misallocation of resources, excess capacity, asset bubbles). Now that China has overtaken Japan using Japanese economic techniques, China should learn something from the reasons Japan has fallen behind. Does the future really belong to China?

Will Hutton and Meghnad Desai 14th January 2007  —  Issue 130 If China does not abandon one-party rule, will it stumble under the stresses of state capitalism? Or will it show that there can be a successful authoritarian road to modernity? Dear Meghnad 29th November 2006 It is a commonplace to observe that the rise of China is transforming the world. Extrapolate from current growth rates and China will be the world’s largest economy by the middle of this century, if not before. If it remains communist, the impact on the world system will be enormous and very damaging.

Britain and the US are, for all their faults, democracies that accept the rule of law. This is not true of China. If an unreformed China takes its place at the top table, the global order will be kinder to despotism; the fragile emergence of an international system of governance based on the rule of law will be set back and the relations between states will depend even more nakedly on their relative power. All that, however, is predicated on two very big “ifs”—if the current Chinese growth rate continues, and if the country remains communist. I think there are substantial doubts about each proposition.

What is certain is that both cannot hold. China is reaching the limits of the sustainability of its current model, and to extrapolate from the past into the future as if nothing needs to change is a first-order mistake. Our concern in the west should be to help China face its enormous challenges without damaging us in the process. If Chinese communism can transform itself, then China could, like Japan before it, smoothly integrate into the world power system. If not, severe convulsions lie ahead. China’s economic growth is based on the state channelling vast under-priced savings into huge investment projects driven by cheap labour.

Some 200m of China’s 760m workforce are migrant peasants employed in factories, construction sites and offices in its new towns and cities—the biggest migration in history. The Communist party has permitted free movement of prices, encourages profit-seeking and has sharply lowered tariffs on imports and obstacles to inward investment. Its success in creating annual growth of some 9. 5 per cent for a generation, lifting 400m people out of poverty, is widely acknowledged. But the party keeps firm control of ownership, wages and company strategies—and of the state.

In other words, China occupies an uneasy halfway house between socialism and capitalism; its private sector, although growing, is still puny. It is a system of Leninist corporatism—and it is this that is breaking down. The breaches in the model are all around. How much longer can China’s state-owned banks carry on directing billions of dollars of savings into investments that produce tiny or even negative returns and on which interest is irregularly paid? Poor peasants’ ability to create the savings needed to fuel growth is reaching its limits.

And in any case, for how long can a $2 trillion economy save at more than 40 per cent of GDP? It is reaching the limit of its capacity to increase exports (which in 2007 will surpass $1 trillion) by 25 per cent a year; at this rate of growth they will reach $5 trillion by 2020 or sooner, representing more than half of today’s world trade. Is that likely? Are there sufficient ships and ports to move such volumes—and will western markets stay open without real reciprocity on trade? Every year China acquires $200bn of foreign exchange reserves, mainly dollars, as it rigs its currency to keep its exports competitive.

It is absurd for a poor country like China to be lending to a rich one like the US; in fact, it is unsustainable, and the financial markets seem to agree. China would like to lower the current feverish growth rates, but the tools available in the west—raising taxes, cutting spending and lifting interest rates—are not available to China. The party dare not trigger protests by raising taxes; officials in state enterprises and provincial governments ignore orders to lower spending because their careers depend on generating growth and jobs. And raising interest rates could create a credit crunch as loans go sour.

Nor are the limits solely economic. The 200m migrants resent seeing others grow rich as they languish in poverty. Inequality is soaring and corruption is endemic, infecting chief executives of banks, provincial governors and judges. About 400,000 people a year die of respiratory diseases caused by polluted air. China’s GDP is a fifth of America’s, but it releases nearly as much carbon dioxide into the air. To cap it all, the Communist party is in ideological crisis: it says the class war is over even while claiming monopoly power as the trustee of the 1949 revolution.

Without continued economic growth, the party’s legitimacy would be in question. Behind all these problems lies China’s only partial conversion to capitalism. Everything in China is subject to the party. Yet capitalism is much more than the profit motive and the freedom to set prices that China’s reforms have permitted. The effective use of resources also depends upon a network of independent processes of scrutiny and accountability, undertaken by people in multiple centres of power and backed by rights and private property.

A democratic election system is but the coping stone of this structure. Judges who rule on evidence to deliver justice, newspapers reporting events and even corporate whistleblowers are crucial to the operation of western capitalism. It is the interaction of these hard and soft processes—what I call an “Enlightenment infrastructure”—that allows technological progress to be exploited efficiently and relatively honestly. China had markets, property and technology in the 18th century; it fell behind because it didn’t have Enlightenment structures.

It lacked the “trinity” of pluralism (multiple centres of political and economic power), capabilities (rights, education, private ownership) and justification (accountability, scrutiny, free expression). The Chinese Communist party, despite local piecemeal experimentation, is repeating the mistake of the Confucian imperial system. It is the lack of independent scrutiny and accountability that lies behind the massive waste of investment and China’s destruction of its environment. The reason so few people can name a great Chinese brand or company, despite the country’s export success, is that there are none.

China needs to build them, but doing that in an authoritarian state is impossible. In any case, more than 55 per cent of China’s exports, especially high-tech ones, are made by foreign firms—another sign of China’s weakness. China needs to become a more normal economy. Chinese consumers need to save less and spend more, but people without property rights or state welfare are understandably cautious. Giving them more confidence would require secure property rights and taxation to fund a welfare system. That would mean creating an empowered middle class that would want to know how its taxes are spent.

This is a political impossibility. If this argument is right, the terms of debate about China must change. Instead of frightening ourselves about China’s rise, we need to recognise our own strengths and its weaknesses. We need to be confident about so-called western values and processes—and strengthen them at home and abroad. The best way to meet the China challenge is not to close our markets and build our armies—a strong impulse in the US. It is to stay open, confident that China will only be able to truly compete with the west if it becomes more like us. Yours Will Dear Will st December 2006 For a liberal pluralist, you sound oddly like a monist, if not a monotheist. For you, there is only one road to capitalism—the western one—and only one political system—ours. China has achieved rapid growth with a policy of under-consumption and over-saving, and exports rather than domestic consumption. But this is not an unusual path, nor one that China is stuck on. Japan and South Korea used the same model and are now part of the OECD club of rich countries. Moving millions of peasants to urban manufacturing centres is neither totalitarian nor sinister.

It was proposed as the standard development model by Arthur Lewis, a Nobel laureate, in 1954, and is indeed the classical model. (If it was less dramatic in parts of Europe, this is partly because a third of Europeans moved to North America in the second half of the 19th century. ) There are no other ways of shaking off poverty. The services sector alone will not do it, and nor will a green revolution, as India is finding out. China’s very large numbers do not in themselves make its development unsustainable. If India can achieve 8 per cent growth on a 25 per cent savings rate, China (which now has 10. per cent growth on a 44 per cent savings rate) will surely manage the same. Moreover, China has been reforming its banking sector and the world has shown its approval by buying up the shares of Chinese banks. China has a lot to learn about macroeconomic management, but its failings have nothing to do with totalitarianism. India is also shy about liberalising its capital account. The Asian financial crisis of 1997 taught China and India to keep a pool of liquidity handy, even at the cost of forgoing a better use for the money. Yes, there is a Leninist party in power within a state capitalist ystem. But capitalism has no unique path, nor does it require a liberal democratic infrastructure to flourish. Japan’s economic rise took place without a fully liberal infrastructure, and most European states, including Britain and Germany, were capitalist before they were democratic. What the most recent phase of globalisation has shown is that capitalism requires neither the Weberian Protestant ethic nor liberal democracy; any country with a decent savings rate, mass education and access to western markets can “do” capitalism. It is not a western Christian monopoly.

Indeed, some Asians are proving better at it than the Europeans. Many people simply find it hard to believe that countries like China and India, which were famine-stricken and miserable only 40 years ago, are now wiping out western industry. But this was the American complaint in the 1960s when facing European competition in the car market. How could these upstarts compete with Detroit? But compete they did, and they were soon followed by Japan and South Korea. Today the upstarts are China and India, and tomorrow they will be Ghana or Kenya. Capitalism is not, as you say, about “much more than profit. It is first and foremost about profit and capital accumulation. It has accommodated a variety of institutional arrangements and only in the most recent phase of globalisation have we thought that an Anglo-Saxon-style liberal democracy is its sine qua non. Let me now come to the political issue. The Chinese Communist party is at one level Leninist, but it is unlike the Russian Bolshevik party. The Chinese communists had to struggle to win the support of the peasantry for a decade and a half before they won power in 1949. They developed a philosophy of responding to popular needs within the confines of a single party.

This is what they call people’s democracy, and it is much more real than it was in eastern Europe. My colleague at LSE, Chun Lin, argues in The Transformation of Chinese Socialism that the Chinese concept of people’s democracy is viable. In her view, the tradition has some strength left in it, although the party will have to become even more responsive. Deng Xiaoping encouraged inegalitarian capitalist growth for a period, but there may now be a reaction against it. At the recent People’s Congress, Hu Jintao made some noises about the distress in the rural areas; the system can respond.

You fear that China’s arrival at the top table will be harmful for the international liberal order. Yet the UN security council had the Soviet Union as well as China at the top table for decades. And I scarcely need to remind you of the many times since 1945 that the US and Britain have deviated from liberalism and multilateralism. We do need a liberal multilateral order, but not one based on western hegemony. The arrival of China and India will compel the west to learn to be truly plural and multilateral rather than a liberal bully. Your rendering of history is the old Whig account.

Everything we do is progressive and liberal and has always been so; all our cruelties as colonial powers are forgotten. Yet your trinity of pluralism, capabilities and justification is both very recent and very Anglo-Saxon. Rights have been established only recently; ask any black or Native American or a Catholic living in Ulster. (And a large minority in the US, including its president, believe in the literal truth of the Book of Revelation about Jewish rights to Palestine. ) It would be nice if individualism, liberty and pluralism were necessary for capitalism.

But he fact is that it can manage without those things. Capitalism does release forces that undermine authoritarian regimes, but unevenly and never inevitably. China may yet move towards liberal individualism. But it does not have to, and it would be unwise to bet on any imminent move in that direction. Sincerely Meghnad Dear Meghnad 3rd December 2006 You have failed to address most of my points about Chinese weakness. Instead you suspend your critical faculties when it comes to China—dazzled by its growth and keen to show how China’s strength is proof of the frailties of western capitalism and liberal democracy.

But it isn’t. China requires ever more investment to secure the same growth rate. Qu Hongbin and Ma Xiaoping of HSBC calculate that the additional output produced by every extra dollar of investment is now below what it was in the late Mao years. Outside the foreign-owned private sector, China’s productivity is lamentable. In agriculture, the latest figures show that Chinese value-added is $490 per year per head compared with $1,040 in the Philippines and $4,851 in Malaysia. The labour productivity of China’s state-owned enterprises, still onstituting a third of GDP, is 4 per cent of US levels; one third of their workforce is only semi-employed. You liken China’s experience to the rest of Asia. But China is far more reliant on foreign direct investment (FDI) to deliver its export growth. Only 20 per cent of Taiwanese manufacturing exports and 29 per cent of Indonesia’s were made by foreign companies at parallel stages in their development; in 2005, 55 per cent of China’s exports were made by foreigners—and over 80 per cent of its telecommunication and electronic exports.

China needs FDI to make good the deficiencies of its indigenous institutional infrastructure. China set itself a target of 50 companies in the world’s top 500 by 2010. It will do well to have one. Capitalism is far more subtle than either free market fundamentalists or Marxists accept. Of course, China has to move its peasants to its cities in order to develop. But capital still has to be allocated efficiently. And if an economy is to produce self-sustaining productivity growth, its companies must do more than exploit cheap labour. They must develop the “soft” processes that spur productivity and innovation. China’s have not.

The political inequities in the way China handles migration—every worker has to have a licence to migrate and most migrants do not, thus rendering them illegal—and the frequent confiscation of peasant land have the same roots as the weaknesses in the enterprise system. China lacks the Enlightenment trinity. The growing peasant and worker protests (4m protesters and 800,000 strikers in 2005) suggest that many Chinese want enforceable property rights and the legal right to strike—these are not western idiosyncrasies. You are right to say that Hu is raising the issue of social justice—but efforts in this direction are tiny.

The tax burden on peasants was reduced by 0. 1 per cent of GDP in 2005. Hu dare not increase the tax burden in cities. Why? Because there would be a demand for accountability. Amartya Sen argues that many third world intellectuals are unable to get past the experience of colonialism to see the value of western institutions and values—and the parallels they have with the best of their own traditions. You conform to Sen’s model. Why don’t you include China’s 18th-century imperial land grab of central Eurasia—nearly doubling China’s land area—and the subsequent ethnic cleansing as part of your list of past robbery and state crime?

Because it wasn’t western? The paradox is that the best way to challenge the west is to beat it at its own game. Japan’s response to its economic crisis, the growth of democratic institutions in Taiwan and South Korea and the increasing success of an open India (sadly held back by caste and sexism, especially in the countryside) support my thesis. But I am not complacent about the west: the last third of my new book is about how the US, Britain and others fail to practise what we preach. Best Will Dear Will 4th December 2006 Whatever else I may be, I am not a third world intellectual, having spent two thirds of my life in Britain!

Nor am I a postcolonial postmodernist. I have a simple position: no nation, no region, no empire has any monopoly on virtue. East and west have both indulged in ethnic cleansing. China’s imperial past is like any other country’s, except the Chinese do not suffer from western amnesia. Back to economics. Chinese agriculture is not as bad as your figures imply. It has been concentrating on grains (it had a terrible famine 40 years ago) while Malaysia and the Philippines have been commercial crop growers for a long time. The latter are higher value-added items.

China doubled its manufacturing labour force between 1983 and 2003, to number slightly over 100m. But China’s rural economy, like India’s, still suffers from scarce land and surplus labour, and this is why many more millions need to be taken off the land—something only achievable by rapid manufacturing growth. Public enterprise in China, as in India, is capital-intensive and inefficient. But the private sector is not as puny as you imply. If productivity is low in public sector manufacturing and agriculture, town and village enterprises and the genuine private sector, plus the foreign-owned sector, must conversely be productive.

China exports low-tech products where there are few brand names, but that is where its expanding market is. China has chosen to invest in infrastructure, unlike India (or the USSR when it was growing fast). This is a slow process. When you go to China you see new airports and empty highways and the Shanghai maglev. In India, the airports are slums. China is also less centralised than it seems. It has large regional centres which run their own economic policies, with regional party bosses often disobeying the centre.

Beneath the Leninist facade, China is making a transition to an economy where the centre is nominally in charge of certain things—foreign exchange policy or defence—while the people do whatever they think will make them better off. And, yes, protests arise out of inequities, as they do in India. But the fact that they occur and that China has an active “new left” (see Chaohua Wang’s One China, Many Paths) tells me that China is not monolithic. It is just not a liberal democracy along Anglo-Saxon lines. I do not defend the inequities or brutalities thrown up by China’s growth. But I don’t think they are a sign of weakness.

Despite similar problems in most other economies in the past, none collapsed because of excessive growth. The USSR died because of stagnation. You do not think China can repeat Asian success. But I recall when Americans didn’t believe Japan could compete with them. They said that the Japanese could only copy and not innovate, because Japanese culture was too conformist. Yet China filed 130,000 patents in 2004, the fourth highest in the world (after Japan, the US, and South Korea), three times more than Britain. This represents a growth of 517 per cent since 1995, and equal proportions of residents and non-residents were responsible.

You see the inequities and brutalities of China’s growth as unique to China’s communist system, and it offends your liberal sensibilities. You want these inequities and brutalities to be swept away. I see them as part of the historic path of rapid accumulation that many economies pass through. This is how income growth occurs in capitalism. What’s new? Good wishes Meghnad Dear Meghnad 4th December 2006 China’s model may have served it well in mobilising the saving for industrialisation, but it is now reaching the limits of its possibilities. Your own figures show that half China’s patent applications come from foreign-owned companies.

China’s own resident patents place it 17th in the world league table, and only 30 per cent are for new inventions. Most of China’s new jobs since 1980 have come from services, not manufacturing as you imply, and productivity in services is nearly as poor as in agriculture and state enterprises. I am not predicting China’s collapse. What I am saying is that it faces a profoundly difficult transition to a more normal economy with normal levels of savings, investment and consumption and less dependence on exports. My argument is that the direction of change has to be the same as that emerging in the rest of Asia.

This means China needs to incorporate my three-cornered cluster of Enlightenment processes—pluralism, capabilities, justification—into its internal workings. They will look very Chinese and not western, but their function will be the same. It is in our interests for this change to happen—both to allow China to carry on growing and for it to have a greater vested interest in maintaining a rules-based international system. China’s indifference to Africa’s authoritarian despots, as it courts the continent for energy and raw materials, is a foretaste of what an unchanged China will be like.

You contrast the west’s amnesia about its past with China. But nobody in China knows about the doubling of China’s land area under the Qing, any more than they know about China’s war against Vietnam in 1979, or even Tiananmen. They are written out of the history books; the websites are blocked. It is shocking that a leading British intellectual like yourself can excuse such manipulation of the truth while being so ready to criticise the open society of which you have been part for most of your life. This debate would have been impossible in China.

Until it changes, it will be condemned to a colossally inefficient and socially cruel form of development, because it is disdainful of human dignities and the imperative of accountability. Yours Will Dear Will 4th December 2006 So anything China does which is good is foreign and everything else is sinister. So China is exploiting Africa’s resources, and this is an indicator of China’s authoritarianism. How unlike the Belgians and the French and the British, with their Enlightenment trinity and liberal freedoms, who nurtured Africa lovingly, never coveted its resources and cured its poverty!

You say services are generating more jobs in China than manufacturing. Perhaps, but the same is true of India and Britain. So what? Non-residents filed 50 per cent of China’s patents, 47 per cent of EU patents and 81 per cent of US patents. So what? China has just surpassed Japan in spending on R;amp;D but you will no doubt say that is all foreign. If China is weak in every sector—agriculture, manufacturing, services, innovation—why do you fear it will rise inexorably and pollute the global top table where only virtuous western powers should rule? You say China must join a rules-based international system.

Yet when it joins the WTO and exports bras and shoes to the EU, they are locked up in warehouses while Peter Mandelson soothes the Italian and French producers, telling them why they don’t have to obey the rules. China is going through a fascinating experiment of growth at rates never achieved by any other country for such a sustained period. It needs to go on doing so. It has the second or third largest GDP, yet it is desperately poor in per capita terms. It solved the problems of mass illiteracy and extreme poverty with a dictatorship. I am curious to see if it can achieve this impossible combination of capitalism with a Leninist party.

No one else has tried. It may fail, but why not let it go through the experiment and leave it to the Chinese people to revolt if they want a different regime? In the 18th century, Voltaire thought China was enlightened compared to France. Now you say China is benighted because it is not like us. It is easy to forget how we got from there to here. It is a bit like the environmental damage caused by development. We rich countries tell the latecomers that they cannot do what we did when we were poor: you must behave like us now, even if it condemns you to remain poor. We shall see. Merry Xmas Meghnad