The rapid economic development of the People’s Republic of China is raising serious questions for Russia. The Chinese challenge is not so much an obvious, or rather imaginary, threat that powerful China may pose to Russia. The problem is much broader and stems from Russia being unprepared to assess the development of its large neighbor and to apply instruments of interaction that would be adequate to the situation inside China, and in the world.

The new China is beginning to play a major role in world policies and the world economy. This factor requires that Russia cease viewing it as a secondary state or as a threat. Russia needs to adopt a straightforward and comprehensive strategy with regard to China. Thus far, Russian-Chinese relations in politics and in international security have been reduced to declarations reflecting the two countries’ similar, and largely outdated, views on critical international issues, such as the future of the United Nations or the concept of state sovereignty in the 21st century. Russia and China should now proceed with continuous interaction at various levels and in large projects. This could include the development of depressive areas in Russia’s Far East or the formation of an international security system.

XIAOKANG SOCIETY AND POTENTIAL OF INSTABILITY

Almost two decades of reforms in China have brought about essential changes in its society and, at the same time, produced unprecedented problems, the kind of which the Chinese leadership had never faced before. On the heels of great success have followed new difficulties and disproportions. In other words, the ‘new China’ is a challenge not so much for its neighbors or external partners as for its own government.

It does not matter under which banner China’s future long-term development will be conceived – Communist, socialist, modernist, reformist or globalist – the options will boil down to a well-known Chinese maxim: “A strong state –  rich people.” Today, the way toward the implementation of this maxim lies in the “comprehensive construction of a xiaokang (modestly prosperous) society,” which the Chinese leadership believes will considerably consolidate its “strength.” If implemented, this strategy will transform China from a regional power, gradually increasing its influence in the world, into a global power capable of influencing the international community “even more actively and constructively.” To this end, China plans to quadruple its gross domestic product by the year 2020 from its 2000 figure.

The latter part of the above formula involving “rich people” has been given a broader interpretation. Now it means not only a marked increase in living standards (to the level of countries with a medium income, but also the elimination of dire poverty that has hit a large part of the rural population.

At the same time, China’s high rates of development over the last few years have aggravated a potential for instability. The experts are in agreement that the warning signs of crisis are already manifest at many levels, but they can still be overcome or controlled. The following factors have been cited as the causes behind the crisis phenomena.

First, the Chinese society and economy are still in a transitional phase. The country has retained elements of an authoritarian system, while social stratification and the development gap between the urban and rural areas have been increasing. There is an obvious conflict between free market relations and the Communist Party’s monopoly on power. China possesses no institutions that can uphold the interests of the new social groups that have emerged since the reforms were enacted. These circumstances have resulted in the ongoing covert, illegal and uncontrolled seizure of power by the new elite, as the Chinese oligarchs are infiltrating local government bodies.

The 16th National Congress of the Chinese Communist Party, held in Beijing in November 2002, confirmed that the party does not have a straightforward and transparent strategy for the political reform of its society in the wake of the economic reforms. This is, perhaps, the main conflict inside Chinese society. To consolidate its power in a country with a population of over one billion people, the Communist Party must keep the economy growing. As long as it is able to cope with this task, its positions will remain strong.

The main factors of China’s economic growth are its integration into the world market, the liberalization of its national financial market, the privatization of the state-owned enterprises and the growth of private capital. Meanwhile, economic development that is organized along these lines inevitably brings about a conflict between economic pluralism and the one-party monopoly on power. This conflict is fraught with a political crisis, although this option cannot be ruled out. The Chinese Communist Party has a chance to use its monopoly on power in order to ensure social stability, which would help overcome or postpone a potentially acute crisis as the Chinese economy grows and the government initiates ongoing reforms.

Second, many members of the Communist Party’s old leadership are displaying resistance, although weakening now, to the policy of accelerated reforms. China’s accession to the World Trade Organization requires liberalizing the political, or, at least, the administrative system of China. This further increases the pressure on the traditional government agencies.

Third, the ambiguity of the goals of China’s development is becoming ever more noticeable. “A strong state – rich people” slogan, used by various regimes in various state systems, is now undermined by the policy of “uneven development” proclaimed years ago by Deng Xiaoping. This policy inevitably produces gaps in development between different social groups and regions and, in the long run, undermines the stability of the entire country.

The status of the social classes in China has turned upside down. The working class, which at one time was the basis of the pre-reform system, has lost everything. Previously, poverty was seen only in the rural areas. Today, according to Asian Bank figures, the number of Chinese city dwellers with an income even less than the low subsistence level has reached 37 million people, eight percent of the country’s urban population. These include, above all, unemployed or partially unemployed people working at unprofitable or inefficient state- or collectively-owned enterprises, as well as people unable to earn a living for health or domestic reasons.

Unemployment continues to soar. In the urban areas, these figures may have reached ten percent of the population. The annual seven-percent growth rate of the GDP helps create approximately ten million new jobs per year. However, China has an annual demand for 25 million new jobs. The immediate factors behind this demand include the increase of workers dismissed from state-owned enterprises, and the registered unemployed people. Chinese unemployment has approached a socially and politically dangerous point, especially in old industrial areas, such as North-East China which borders on Russia. In the Liaoning Province, according to the 2000 census in China, unemployment has reached 17.68 percent. The social security system in the country is poorly developed and cannot compensate for the consequences of the reforms, while the Chinese leadership continues to reduce social spending in order to increase the country’s competitiveness.

The rapid growth of the Chinese economy has resulted in an equally fast stratification of its society and, since the mid-1990s, its polarization. The latter has reached dimensions that are already threatening social and political stability. This is resulting from huge gaps in remuneration, the growth in illegal incomes and rampant corruption. According to 1999 figures on the state of 16 major industries of the Chinese economy, the highest wage exceeded the lowest one by 245 times. Considering other sources of income, this figure increased by at least 100 percent. China’s 50 wealthiest people own 25 percent of all property in the country. The Gini Index, which shows the gap in income between the wealthy and the poor, has already surpassed the threshold that is considered to be tolerable.

During an exchange of views on exactly what role the Chinese peasants may play in a crisis, most of the experts agreed that the rural population is a source of instability. However, this factor does not pose an immediate threat since the Chinese peasants are timid and backward and live in poor conditions.

The increasing gap between the rural and urban areas is the main obstacle to China’s balanced social and economic development. The rural areas receive much less investment than the urban areas (this also refers to building loans). Since the mid-1980s, when the economic reforms moved from the rural to urban areas, the gap in incomes of the urban and rural population has been steadily growing, despite the increasing percentage of non-farm earnings in the rural population’s income. In 2002, a peasant’s net average annual income stood at 2,366 yuans (about U.S. $300) which, according to UN standards, is below the poverty line (poverty index) – U.S. $1 a day. More than half of the rural population (52 percent) earn less than 2,000 yuans a year, while 14.6 percent earn less than 1,000 yuans.

Another destabilizing factor mentioned by the experts was the side effects of the fast urbanization of the Chinese society, which has brought about the emergence of a large social group of people who have lost their traditional roots. This part of society, plus the working class which is rapidly becoming impoverished, can become the main source and scene of social and political upheavals.

RESPONSE OF THE AUTHORITIES

Most of the experts were confident of the Chinese ruling elites’ ability to control the situation in their country and find the means for solving their present problems for the next few years.

China is now ruled by a group of technocrats who understand the problems of the country and are ready to address them, relying on carefully planned programs. The excessively technocratic approach of the Chinese leadership to the reforms, which does not fully take into account their social and, possibly, psychological effects, should not be viewed as a systemic problem, though.

Besides, China is relatively protected from the cultural and political influence of the West, which played a crucial role in the Soviet Union’s collapse. From a cultural perspective, China does not consider itself part of the West, therefore, its reluctance to imitate it, and its more stable national consciousness. The experts discussed the sharp rise in the number of publications in the West which predict catastrophic developments for China in the foreseeable future. Twenty-five percent of the experts explained it by attempts to play down the attractiveness of the Chinese market. Another thirty-five percent attached this increase to fears of China’s growing political role and by the wish of some countries, especially the United States, to halt China’s political capitalization. But a higher percentage of the experts agreed that this was not an anti-Chinese policy, or a reflection of anti-Chinese sentiments, but a result of the greater openness characteristic of today’s China as a whole and broad discussions of its problems and future, which naturally provides more negative information for experts studying China. At the same time, these discussions assist the search for solutions to problems and therefore reduce the probability of a systemic crisis.

The experts were divided over the probability of a split in the Chinese leadership. Several participants saw the possibility for a conflict inside the government at the 17th National Congress of the Chinese Communist Party, due in 2007. This conflict may result in a removal from power of the ‘old’ elite personified by Jiang Zemin, or in a counter coup in which the conservatives would only consolidate their positions. However, 75 percent of the experts agreed that a counter coup, and the adoption of a more conservative and marxist policy, are highly unlikely.

The experts concluded that in the next four to six years China is not going to face a systemic crisis that would paralyze or ruin its government institutions. At the same time, a majority of the experts agreed that in the long term (7 to 15 years) the probability of such a crisis in China will grow, and if the Chinese authorities fail to reverse the developments, the country may be hit by a serious crisis. The probability of a systemic crisis during that period of time is not ruled out by 50 to 60 percent of the experts (the gap in percentage is explained by the experts’ different interpretations of the notion ‘systemic crisis’).

A CHANGING CHINA IN A CHANGING WORLD

In the next five years China’s economic growth rate is expected to be high and is estimated to be eight percent of the GDP per year. Yet China will not be able to approach the level of economic and technological development of the U.S.A., Japan or Europe. It may achieve occasional technological breakthroughs but the general level of the Chinese economy will impede the country’s development.

China already plays a serious role in the world economy and takes an active part in the globalization processes. However, the extent of its participation is not great enough for a crisis in China to have a major effect on the world economy. The negative effects from such a crisis in the medium term may manifest themselves only at the regional level. This crisis would seriously affect Russia only if the situation in China becomes irreversible, that is, if the state begins to disintegrate, and the Chinese population begins to migrate en masse. This is a possible scenario in the foreseeable future (in seven and more years).

The further development of the market economy in China, which is a must for the Chinese Communist Party if it wants to remain in power, makes inevitable China’s growing openness with the world. China will increasingly develop interdependence with the rest of the world and heightened participation in the international integration processes. As China grows increasingly ‘internationalized,’ its military threat – already insignificant – will continue decreasing. China’s economic achievements reduce the probability of a conflict with Taiwan.

Most of the experts believe that in the long term the Chinese leadership will not sacrifice economic progress in favor of a sharp increase in the country’s military might, and will only modernize its available military potential. Therefore, China does not and will not pose a serious security threat to Russia. Moreover, Russia is deeply interested that China entertains no serious fears for its security, nor fears an external threat (on the part of the U.S.).

China’s growing economic might and involvement in the world market has prompted its leadership to alter its foreign policy, bringing it closer to the model accepted by the leading international actors (the U.S., Europe, Russia and Japan). The Chinese diplomats are shifting to a forthright approach to international issues, including the North Korea problem. Some of the experts described this change in China’s foreign policy as a result of its growing awareness of its might. However, such conduct can pose a threat only to much weaker partners.

China seeks to play a more active role in international political and economic projects. Although all integration projects in the Asia-Pacific Region have only a declarative dimension, China’s interest in them has been growing. China’s accession to the WTO reflects the evolution of its position on economic globalization and the integration of its economy into the world economy. Examples of this evolution include the proposal to establish an ASEAN+3 free trade zone, which would involve the ASEAN countries plus China, South Korea and Japan; as well as China’s participation in the regular meetings of finance ministers and CEOs of the central banks in East Asia, which discuss the introduction of a common regional currency, activities of the central regional bank, and other issues. Another sign of the changes in China’s attitudes was witnessed by the attendance of its officials at the Group of Eight summit at Evian in 2003. The experts pointed out that most of the above actions would have been inconceivable even two or three years ago, and that the process of making the Chinese foreign policy ‘international’ and open was proceeding faster than could have been expected.

In the sphere of international security, China is not yet ready to propose a new agenda. Beijing still prefers to rely on ‘good old’ ideas, such as ‘the leading role of the UN’ or the ‘inviolability of state sovereignty.’ This position is already more than the traditional policy of non-involvement but still less than a position befitting a great contemporary power. Considering the rapid rate of changes in China’s foreign policy, its modernization may prove very fast.

RUSSIA AND CHINA: ANALYSIS OF THE AGENDA

The main characteristics at this stage of Russian-Chinese relations in international affairs is the coincidence of the two countries’ positions on the UN role, which both Moscow and Beijing believe must remain active, as well as their preference for the traditional interpretation of the notion ‘state sovereignty.’ Some of the experts noted, however, that this joint agenda has grown obsolete and is not adequate to the 21st century challenges. Second, it does not reflect China’s increased influence on the international stage, and third, it does not include vital problems of mutual interest. For example, Russia and China have different views on the Shanghai Cooperation Organization. The Chinese leadership views the SCO as an important project that could serve as a pilot attempt to implement regional integration involving China. However, Russia’s reception of the project has been lukewarm.

China is now actively looking for a new model for its global policy. This process is gradual and not at all obvious. But this factor makes it even more important for Russia to develop a broad dialog with the Chinese elite in order that it may influence a mutual search for answers to the new global agenda.

Russia and China are already competing in the import of capital. China is now a more attractive country for investment, and the planned liberalization of China’s stock market may make it even more attractive than Russia.

In the energy sector, China depends on Russia and needs more supplies of Russian energy resources. However, Russia would like to diversify its exports to China, which now consist mostly of raw materials. In some areas (e.g. hydro power engineering) China has given obvious preference to Russia’s rivals. China seems to be quite happy with the present structure of its imports from Russia. But Russia, too, has not been making any serious efforts to modernize its economic relations with China. The two countries have not launched a single large-scale economic project (arms trade is the only exception), while projects so far proposed for joint implementation look rather vulnerable from the point of view of profitability.

Commenting on military-technical cooperation between the two countries, the experts agreed that within the next eight to ten years Russia may lose its monopoly on the Chinese market. Arms sales to China have in the last few years been a major source of funding for key sectors of the Russian defense industry. Now, however, China has begun to reduce its purchases of Russian arms, launching instead licensed or own production of weapon systems and spare parts. The prospects for joint Russian-Chinese projects in military-technical cooperation are slim. This factor runs counter to global tendencies in this field of economic relations, and does not allow China to fully tap the opportunities for establishing a broad partnership with Russia.

The experts pointed to the need for Rssia’s multifaceted and straightforward strategy with regard to China, and that Russia has yet to define its attitude to the new China. The absence of a clear-cut position makes it difficult to suggest that Russia’s foreign-policy decisions are based on a comprehensive strategic approach. Indeed, Russia’s policy is partially reactive (responding to each particular challenge) and partially a continuation of the Soviet Union’s line in the last few years of its existence.

As concerns the prospects of Russia’s Chinese policy, Russia should not seek a rapid rapprochement with China. This mutual relationship must be balanced and take into account Moscow’s specific interests in the Asia-Pacific Region, as well as China’s relations with the U.S. and other Russian partners. At the same time, Russia should not seek to play an active role in a situation when Chinese-U.S. relations may become strained.

There are two factors that may compensate for the increasing imbalance of strength between the two countries. The first is Russia’s potential as a nuclear state. The second is the growing possibility for attracting Japan, the U.S. and South Korea for the development of Russia’s Far East. This project, if implemented jointly with China, may assume a still greater dimension and help integrate the entire region (Russia’s Far East, North-East China, both Koreas, and Japan).

Next, there is the question of a pipeline for transporting Russian oil to major countries in the Asia-Pacific Region. The panel of experts concluded that – from the political point of view – the best solution would be the construction of a single pipeline from Angarsk, which would then fork toward the Russian port of Nakhodka and China’s Daqing. Another possibility involves building two separate pipelines to those destinations. The experts argue, however, that Russia does not yet have enough oil for these pipelines to operate at full capacity.

Several experts argued that a decision not to build an oil pipeline to Daqing would seriously undermine Beijing’s trust in Moscow. It would strengthen suspicions that Russia’s Chinese policy is being led by Washington and Tokyo which, it is believed, seek to weaken the Chinese economy and keep China dependent on Middle Eastern oil. The construction of an Angarsk-Daqing oil pipeline may help launch large-scale industrial cooperation between North-East China and Russia’s Far East. It could also facilitate a major integration project in the whole of Northeast Asia.

Proponents for the construction of a pipeline to Nakhodka argue that it would boost the development of the region that is now deteriorating. Such a decision, it is argued, would create conditions for filling the economic, social and geopolitical vacuum which is threatening Russia’s interests. Also, oil can be transported from Nakhodka on to North-West China, where it would breathe life into inactive oil refineries.

The experts noted that the pipeline to Nakhodka may attract advantageous Japanese loans and assist Russia’s attempts to enter the Japanese and U.S. energy markets. Furthermore, the pipeline would provide the impetus for implementing the international development of the depressive areas in Russia’s Far East and East Siberia.

The panel failed to reach a consensus as to which route is more preferable. Most of them gave preference to the Angarsk-Nakhodka route. An overwhelming majority of the experts concluded that the choice of this route is more probable for political reasons. At the same time, they said it would be unwise to rule out the construction of a pipeline to Daqing.

The participants in the situation analysis included: Yakov Berger, senior researcher at the Institute of Far Eastern Studies (IFES); Timofei Bordachev, vice-president of the Institute on Foreign and Defense Policy; Olga Borokh, IFES leading researcher; Anatoly Vishnevsky, head of the Center for Demography and Ecology; Vagif Guseinov, director general of the Institute of Strategic Assessment and Analysis; Alexander Lomanov, IFES leading researcher; Sergei Luzyanin, professor at the Institute of International Relations (MGIMO); Alexander Lukin, director of the Institute of Political and Legal Studies, MGIMO professor; Fyodor Lukyanov, editor-in-chief of Russia in Global Affairs; Konstantin Makienko, deputy director of the Center for Strategy and Technology Analysis; and Vassily Mikheyev, IFES deputy director.