13.04.2004
China Today: Challenge or Opportunity?
№2 2004 April/June

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the two countries’ similar, and largely outdated, views on critical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.