China heading for a fork in the road

Peter Hartcher
August 16, 2008

The West made a huge strategic bet in deciding to engage China rather than contain it. The punt? That the world would change China faster than China could change the world.

Now, as China's high-growth, high-filth capital is on Olympic display to a curious world, it also happens to be 30 years since Deng Xiaoping launched China's modernisation. It's a good time to revisit the question at the heart of the world's relations with China.

When Deng emerged from his exile at a tractor factory in the provinces to take control in Beijing and begin the era of economic reform in 1978, China's economy was not much bigger than Australia's - 10 per cent bigger, to be exact.

Today, it is four times the size of Australia's. This year, China's economy will outstrip that of Germany to become the world's third biggest, after the US and Japan.

Its growth has not only been extraordinary, but it is expected to roll on. Until 1840, China accounted for fully half the global economy. There is a gathering expectation that it will return to its place as the world's leading economy within a generation.

This is a huge leap of faith - it is still only one-quarter the size of the US economy - but governments and companies around the world behave as if its supremacy is preordained.

And so China is treated as if it is already a much bigger power than it really is. Its true power is big; its imagined power is vast. In the jargon of the market, it trades at a big premium to its face value.

Even the Europeans, who subjugated China in the colonial era, could ignore it no longer.

"At some indeterminate point around the turn of the millennium," wrote the head of the European Council on Foreign Relations, Mark Leonard, "I remember noticing how - all of a sudden - almost every global challenge had acquired a Chinese dimension: from African development to the reform of the UN system, the Doha global trade talks to the Iranian nuclear program, genocide in Darfur to oil prices in Venezuela."

And when Deng ended economic communism to allowed China to pursue what he called "socialism with Chinese characteristics", the internet had not been conceived. Today, China has the world's biggest online population.

China's growth had been much dreaded. By now, it was supposed to have eaten the world into starvation. Instead, China became a net exporter of food in 1996 as the market worked its magic. It has been helping feed the rest of the planet, rather than starve it.

Other problems, not foreseen even a decade ago, attend China's rise. It is now the world's biggest emitter of greenhouse gases. Of the half-billion Chinese who live in its cities, only 1 per cent breathe air considered safe by the standards of the European Union.

The wind carries its toxins to Japan and South Korea and its haze darkens the smogs as far away as California.

The Chinese Government tried to temper the emphasis on industrial output by creating a new measure - a green gross domestic product, adjusting economic growth for the costs of pollution.

In its first year, this was calculated to recalibrate China's GDP growth of 10 per cent down to 7 per cent. But for the leaders of some provinces, whose economic growth fell near zero under this measure, it was too depressing. The idea has been canned.

And China's strident nationalism and burgeoning arms budget were expected to have resulted in any amount of strife. It shares land and sea borders with 22 nations, so bellicosity from Beijing would be destabilising across three continents.

Earlier signs were troubling. It sent gunboats to lay claim to contested islands and reefs in the South China Sea, threatening conflict with half the countries of South-East Asia. And it seemed good and ready to fight Japan over a contested island.

But China has sheathed the sword, pledged to negotiate its differences, and smiles beatifically on its neighbours. Rather than threatening them with guns and rockets, China now offers them free trade agreements and big investment projects. This is the policy that China's leaders called its "peaceful rise". The word "rise", however, was considered too intimidating. The approved rubric is now "peaceful development".

Certainly, Beijing has emerged as a responsible force, an indispensable influence, in helping negotiate an end to North Korea's nuclear program. Instead of sheltering its embarrassingly deranged one-time ally, it started to pressure it in the interests of regional peace.

And Beijing, which was one of the world's biggest aid recipients until just a few years ago, is now a big aid provider itself. It will give aid of more than $US10 billion ($11.4 billion) to poor countries over the next two years.

China has become the world's factory, filling shops around the globe with extraordinarily cheap manufactures. These goods are so cheap and so plentiful that they helped keep global inflation quiescent for a decade.

And the money that China earned through these exports? It put them aside as international reserves. Its surpluses are so big that its foreign currency reserves are now worth over $US1 trillion, by far the biggest in the world. China has as much spare change in these surpluses as the value of Australia's total annual economic output.

China didn't simply sit on them, however. It invested them in financial instruments, mainly US Treasury bonds. Together, these two outward signs of China's fast-spinning economic dynamo - its cheap exports of manufactures and its outflow of capital - has been a tremendous benefit to the world economy.

How? Didn't China's cheap exports force uncompetitive factories in other countries to close down? Well, yes, but the net benefit to the world economy has been huge.

With cheap imports and low-cost flows of capital from China, the world has been able to enjoy very low inflation, very low interest rates and an era of stable economic growth that came to an end only with the collapse of the US housing and credit sectors.

China signed up to the rules and rigours of the World Trade Organisation, too, a threshold moment in China's rise. This signalled that it would accept the rules of the international order, even though it meant a good deal of trouble for Chinese companies and officials.

So surely this great, rising power is taking shape as a benign force? Surely it is moulding itself to the international system rather than trying to reshape it?

Even in its problem areas, such as greenhouse emissions, it is joining global negotiations. Where the US under George Bush, with its ally Australia, was guilty of unprovoked aggression in invading a sovereign state, where Washington and Canberra stood truculently outside the global climate change negotiation, surely China behaved as a responsible stakeholder in the new international order?

Not always, not exactly. While it has a restrained military posture with its conventional forces, it has been conducting a systematic program of extraordinarily aggressive cyber attacks on the governments and defence forces of the world.

While its foreign policy towards it neighbours is benign, its behaviour further afield, notably in Africa where it gets a lot less scrutiny, has been harsh. China has not relinquished its vision of a mighty military. It is cutting the size of its standing army, but it is investing heavily in building a cutting-edge navy and air force. It is the only nation that is competing with the US in seeking to build space-mounted weapons systems to orbit the Earth.

Its intolerance of some basic human freedoms is notorious. And it is hard to get around the brutal reality that, no matter how enlightened it may be in some of its dealings with the world, China is still an authoritarian dictatorship.

China's people enjoy incomparably greater freedom today than they did a generation ago. The state stipulated where every Chinese had to live and work. Neighbourhood spies kept detailed tabs on every detail. Most Chinese had barely enough to eat. Culture was so threadbare that the arrival of a new movie from North Korea was considered to be a big event.

Today, ordinary people eat better and live better than at any time in 5000 years of Chinese civilisation. They live and work where they please and the neighbourhood spies are a thing of the past.

Yet in a country run by a tiny, unelected clique, we cannot know whether China will continue its benign evolution or be convulsed by internal ructions.

Among ethnic Chinese nations, there are two existing models. If China's political evolution comes to resemble democratic Taiwan, we can expect a China that looks very much like the rest of the world. But if it chooses to model itself on the tight state control and the quasi-democratic trappings of authoritarian Singapore, the picture is far murkier.

Deng, who may yet go down as the single most important historical figure of the 20th century, predicted in 1987 that China would be a democracy within 50 years; it's now 21, and counting.

Alan Ramsey is on leave.