Remarks on Change in China to the American Management Association

Ambassador Chas W. Freeman, Jr., USFS (Ret.)

New York, New York, 11 October 2002

For most of the past three millennia, China accounted for between 1/3 and 2/5 of the global economy.  After falling to only a fraction of that level in the mid-20th Century, the Chinese seem now to be in the process of returning to their traditional weight in regional and world affairs.  The past two centuries have accustomed Chinese, other Asians, and Americans to dealing with the problems presented by a poor, weak, and divided China.  As China grows in wealth and power and reintegration of the rest of China with Hong Kong, Macao, and Taiwan proceeds, Chinese as well as other Asians and Americans are being forced to make difficult psychological, political, economic, and military adjustments.

Next month, a new generation will formally come to power in China.  They will inherit a country in which income is increasingly unequally distributed.  Some areas of China are now almost completely integrated into the world economy and enjoy living standards approaching those of southern Europe.  Others remain isolated, poor, and much less dynamic.  China is now second only to the United States as a destination for foreign investment but, in investment terms, it is several economies, not one.  The economic potential of some regions has yet to be tapped at all, suggesting that the rapid growth of China overall as a destination for investment has every prospect of continuing.  China’s domestic economic imbalances are a factor in allowing the country to prosper despite trends in the global economy.  They are also politically stressful.

China’s new and younger rulers -- Hu Jintao, Wen Jiabao, and others -- will inherit a country that is increasingly open politically and committed to the rule of law but troubled by corruption, and discomfited by the lack of transparency in government decision-making.  Their predecessors in power have wrought a major transformation of China but the process of assimilating international norms of economic organization and behavior is far from complete.  The restructuring of the banking sector and capital markets, in particular, are matters of growing urgency.  So is the erection of a social safety net, including a viable pension system and unemployment insurance.  Of special concern, China’s implementation of WTO rules in the agricultural sector will require about 150 million peasants to leave the farm for more urban environments.

Nor is China without foreign policy challenges. Japan’s assertion of an independent regional security role for the first time since World War II is one such challenge.  Intra-Korean and Indo-Pakistani dynamics are others.  Most vexing to the Chinese, however, are unwelcome instabilities in their relations with the United States.  On the one hand, US images of China now lag well behind Chinese realities.  On the other, the superficial cordiality of Sino-American relations masks rising tensions over Taiwan’s drift toward independence and the deepening American defense commitment to the island.  China’s policy toward Taiwan now combines enticements for cross-Strait economic integration and political convergence with a military build-up premised on the need to use force against Taiwan even if this means war with the United States. Such a war is not likely soon but it can no longer be ruled out in the longer run.