What Could Go Wrong for China

What Could Go Wrong for China?

Remarks to Le Cercle

June 23, 2007, Washington, DC

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

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Lord Lamont asked me to consider what could go wrong for China. I have concluded, first, that China is a nice place to carp at but you wouldn’t want to have to run the place. Second, that a great deal could go wrong with it and some of it will, but most of it won’t. And, third, we better hope both that things go right for China and that we don’t push it into a posture of hostility toward us. That’s the summary. Let me speak to it.

Lord Lamont’s question is a vitally important one. By now it’s a commonplace that what happens this century will be determined in large measure by developments in China and India. They are recovering their ancient wealth and power, this time in a globalized environment with few economic or cultural barriers.

Many factors suggest caution about the prospects for India, with its unbridled population growth, communal tensions and fissiparous tendencies, widening gap between highly educated plutocrats and illiterate peasants and proletarians, bureaucratism, nuclear confrontation with Pakistan, and vulnerability to climate change, for example.

In contrast, it’s easy to be optimistic about China. Perhaps too easy.

After all, in the nearly thirty years since Deng Xiaoping replaced Mao’s utopian dogmatism with eclectic pragmatism, China has enjoyed almost uninterrupted domestic tranquility amidst truly remarkable economic and social transformation. It has emerged as one of the world’s greatest economic powers. The Chinese are at long last building the legal and institutional underpinnings of a modern state. The People’s Republic has come to expect orderly successions in its leadership. It is creating a meritocratic technocracy and acquiring a vast property-owning middle class. Chinese citizens have expanding freedom to make decisions about how to order their own lives, to travel abroad, and to experiment with unconventional ideas and opinions. The People’s Liberation Army, once famously “low tech,” is building an increasingly modern capacity to defend Chinese sovereignty, territorial integrity, and national interests. China is becoming a power in space and in the seas along its coast. The eyes of the world are upon it.

The world used to worry that misgovernance in China would cause its collapse. Now people worry that China’s growing strength may lead it to throw its weight around. But the fact that things have mostly gone spectacularly right for China over the past thirty years does not guarantee they will do so in the decades to come. And if things do go wrong for China, the consequences for all of us could be very great indeed. In fact, that could also be the case even if things continue to go right.

For one thing, the world cannot afford the emergence of another self-indulgent, credit-card-financed consumer society along the lines of the one we have built here. Given the size of its population, a China that emulated the United States would, among other things, have 1.1 billion cars on its roads, import more oil than the entire world now consumes, emit ten times the greenhouse gases the Chinese economy currently does, and generate 7.5 billion pounds of garbage every day. Consider, too, the implications of a Chinese decision to seek national security, as we have, through military primacy or preemptive intervention abroad! In these and other respects, the notion of a future China with current American characteristics is unnerving.

Many Americans are frustrated and annoyed by China’s obstinate insistence on doing things its way rather than ours. But it may well be that the very worst thing that could happen would be for us to succeed in persuading China to become like us. Arguably, Americans should instead be working with our allies across the Atlantic and Pacific and with progressive-minded people in China to help them avoid our most injurious practices even as we correct them ourselves. In this regard, the prospect that a powerful China might follow us in seeking to exempt itself from the constraints of international law and comity is a reminder of the stake we all have in insisting that every country, including our own, accept and abide by the same standards of conduct in its relations with others.

A truly powerful China is, of course, not an inevitability. Despite much progress over the past decade, China’s government revenues are still too small and its civil service too feeble and freewheeling to carry out all the responsibilities of a modern state. Total spending by all levels of government in China this year – though it has almost sextupled over the past decade – will come to only 20.8 percent of GDP. (By way of comparison, in the United States government spending amounts to 36.4 percent of GDP. In the UK, the figure is 44 percent, more than twice as high as in China.) And China doesn’t have much margin for error. It’s skating pretty close to the edge in many areas. With only one-fourteenth of the world’s arable land, it must feed one-fifth of humanity. (Not for nothing does Chinese cuisine extol the use of ingredients that are elsewhere considered inedible.)

Huge and politically disturbing imbalances in economic development have emerged in China. Some regions of the country now enjoy European levels of affluence, while others remain among the most primitive and poor in the world. Hundreds of millions of people in rural areas are trying to move to cities in which they will live in Dickensian conditions that stimulate crime and invite social unrest. There are over one hundred Chinese cities with populations of one million or more. Each now has expanding slums overflowing with migrants from the countryside.

In addition to having the world’s largest human population, China is home to over half the world’s hogs and more than one-fourth of its domestic fowl. Their interactions with exceptionally dense concentrations of people subject Chinese – and, ultimately, everyone else – to the constant risk of crossover by new and often fatal diseases. Meanwhile, China’s largely unregulated economic development is placing an immense burden on its environment. In some respects, China’s environment may already have reached the stage of self-sustaining ecological degradation, placing it beyond the possibility of future remediation. Almost 90 percent of the Chinese water supply is polluted, and even that is drying up under the combined impact of deforestation, overuse, and climate-change-induced reductions in snowfall on the Tibetan Plateau. Environmental issues are now the cause of most instances of public disorder in China.

China has a rapidly aging population but no assured funding for the pensions, health insurance, and other elements of the social safety net its elders and their children need. Each Chinese child from a one-child family – as most still are – must prepare to support two parents and as many as four grandparents over their lifetimes. The result is the world’s highest rates of individual savings, the suppression of domestic economic demand, an unhealthy dependence on exports for growth, and resultant vulnerability to the consequences of economic missteps in major foreign economies like our own.

The fact that the government that must deal with these and other issues won a civil war nearly sixty years ago no longer confers legitimacy on it. Nor can the Chinese government claim the legitimation of democratic elections. The mandate of the Chinese Communist Party now depends on its performance – its ability to meet rising expectations and to do something about the widening gap between urban and rural incomes. Failure at either of these tasks could cost the Communist Party its power. Yet the political order in China provides no alternative to the Communist Party other than anarchy, of which the Chinese people have long since had their fill.

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Then there’s the challenge of assuring national security. Chinese recall their country’s subjugation by Western and Japanese imperialism in the 19^th and 20^th centuries. Within living memory, more than thirty million Chinese perished at the hands of seaborne invaders from Japan. China has land borders with fourteen countries. Since the People’s Republic was stood up in 1949, it has faced limited wars with American-led international forces in Korea, the Indian Army in the Himalayas, the Soviet Red Army in inner Asia, and both American and Vietnamese Communist forces in Indochina. China itself remains divided by an unfinished civil war in which overwhelmingly powerful foreign forces assert a residual right to intervene.

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All this is to say that, if you’re among those trying to govern China, you have a great many things on your mind and not much inclination to pick fights with foreigners. Not surprisingly, China’s leaders have made the maintenance of a peaceful international environment the organizing principle of their foreign policy. They want to get on with domestic development without becoming embroiled in foreign affairs.

China is still the homeland of the great strategist, Sunzi, and it takes seriously his insight that the best wars are those that are never fought. Though China has been prepared to use limited force for political effect, as with India in 1962 and Vietnam in 1979, Beijing’s strong preference has been to settle borders and other disputes through negotiation, not military coercion. Over the past decade, this approach has achieved the peaceful reassertion of sovereignty over Hong Kong and Macau, the demarcation of both the Russian and Vietnamese land borders, the settlement of borders with the newly independent Central Asian states, and significant progress toward establishing an agreed frontier with India, the only border dispute still unresolved. China is quietly pursuing the same approach to the settlement of its maritime boundaries with its Southeast Asian, Korean, and Japanese neighbors.

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The recent sharp increases in Chinese defense budgets do not contradict this focus on the management of national security by measures short of war. Spending on the military is, of course, an important indication of the extent to which a nation expects to have to rely on the use of force to secure its defense and foreign policy objectives. Coming after a long period of stagnation in funding for the People’s Liberation Army, recent defense budget increases are truly striking. While a good deal of the money has gone into long overdue pay raises, the net effect is – as intended – the rapid modernization of a previously very backward military establishment. But, to put this in proper perspective, one must realize that other elements of China’s political economy are being modernized even more rapidly than the PLA. Increases in the Chinese defense budget, impressive as they are, lag behind even more rapid and larger budget increases for non-military programs and activities in China. The military has yet to seize pride of place in the Chinese budgetary process as it has here.

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It is, of course, true, as is often stated, that the official Chinese defense budget does not include all military and military-related spending. This sounds alarming – until one recalls that this is not at all unusual in other nations. The United States, for example, has an official defense budget of $499.4 billion. The press routinely uses this figure to report that we are spending 3.6 percent of our GDP on our military. But defense-related spending in other parts of the federal budget adds at least another $435.5 billion or so, bringing projected military or military-related outlays this fiscal year to at least $935 billion. Adding in the amount we spend on intelligence, which remains a secret, would push the figure even higher. As it is, $935 billion comes to 6.8 percent – not 3.6 percent – of our GDP.

The proportion of military-related spending that is outside the Chinese defense budget seems in fact to be somewhat less than in the United States, though no one – not even the PLA – has been able to come up with a reliable figure in this regard. For the sake of argument, if the proportion of extra-budgetary military-related expenditures were as high in China as in the United States, Chinese spending on defense could be as much as $84 billion – some $39 billion more than the $45 billion in China’s official defense budget – or about 3 percent of GDP, versus the 1.7 percent implied by the defense budget alone. Mirror-imaging is not, of course, a recommended method of extrapolating foreign realities. But it suffices to make two points: first, that Beijing continues to assign a lower budgetary priority to its military than to its domestic development, and second, that defense budget increases in China provide somewhat less cause for concern than alarmists and advocates of defense spending in other countries like to claim.

Despite the rapid improvement in PLA capabilities, Chinese defense spending remains modest. In relative terms, it is a good deal less than half of the proportion of GDP we spend on our military. Of course, our GDP is also much larger than China’s, so in absolute terms – at nominal exchange rates – we are spending more than ten times what China is on defense. Some peer competitor! China is simply not in our military league.

But budgets do not constitute capabilities, and capabilities – not how much they cost – are what count strategically and on the battlefield. In this regard, given its size and the speed of its military modernization, China obviously invites special vigilance. It is important for both the United States and China’s neighbors to understand what capabilities China is investing in, other than a better educated and more professional group of officers and enlisted personnel. Does the direction of Chinese military spending suggest a pending shift in the roles and missions assigned to the PLA over the next decade or so?

In point of fact, the ways in which the Chinese military is modernizing seem fully consistent with its traditional roles and missions. China remains engaged in a systematic effort to acquire the capabilities necessary to deter Taiwan secession or the return of American or Japanese forces to that island. This has involved building the capacity to inflict convincing damage on Taiwan or on any foreign force that might intervene to shield Taiwan from the military consequences of an attempt to gain independence. No one has been able to identify a weapons system or doctrine being developed by China that cannot be clearly related to this mission or to the security of China’s other land and sea borders.

China’s defense modernization efforts are therefore impressive but fall well short of mobilization for war. China does not accept the logic of mutually assured destruction; its nuclear arsenal is being upgraded but remains deliberately modest. China is not procuring the strategic lift, bomber forces, carrier strike groups, amphibious warfare, or command, control, communications, intelligence, surveillance, and reconnaissance capabilities and so forth that give the United States armed forces their unrivaled capacity to conduct offensive operations in faraway places.

There are, of course, those in the United States who wish the Chinese would get on with building aircraft carriers, a fleet of nuclear submarines, and other means of global power projection. Without such a threat from China it is increasingly difficult to justify perpetuation of the huge force structure and defense industrial base we developed to do battle with the USSR. So there is a lot of selective listening going on among American securocrats and pundits, who filter out Chinese explanations of what China is doing and replace these with their own speculation and conjecture about what the Chinese ought to be doing to be able to contend with us for global hegemony. But there is no need to manufacture elaborately speculative explanations for modernization programs whose projected outcomes are entirely consistent with the far more limited purposes the Chinese proclaim. Occam’s razor applies: all things being equal, the simplest explanation is almost always the best.

Of course, if there is no evidence that Beijing is tempted to recapitulate the Soviet Union’s suicidal effort to seek military parity with the United States, it does not follow that China’s rapid military modernization should be of no concern. Quite aside from its impact in the Taiwan Strait, the growth in Chinese military strength is altering the military balances between China and regional powers like Japan, Russia, India, Indonesia, and Australia. With the exception of Japan, which seems perplexed and uncertain about what security role it should take up in this century, the region is accommodating these shifts reasonably smoothly. But they are especially challenging to the United States and fully justify a high degree of American attention. China is, after all, a giant. The only Pacific nation – perhaps the only nation in the world – with the scale to match what China may be in the process of becoming in economic and cultural terms and what it could become, should it want to do so, in military terms, is America.

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For most of the past sixty years, the United States has relied on its military power to frustrate China’s efforts to bring the Chinese civil war to a conclusion by using force to reincorporate Taiwan into the rest of China. For China, the most important defense task has long been the maintenance of territorial integrity by putting sufficient military pressure on Taiwan to cause it to think seriously about political accommodation and to rule out any thought of permanent separation from the rest of China. China’s current military modernization is directed in large measure at achieving military superiority over Taiwan that is sufficiently convincing to deter the island from making decisions that would compel the use of force against it. As the United States has thrown its weight more openly behind Taiwan in an effort to balance growing Chinese capabilities, China has also become increasingly focused on how to counter American intervention. While neither China nor the United States wants war, each has become heavily engaged in contingency planning for a war with the other.

The Taiwan issue pits Chinese nationalism and the legitimacy of the Chinese government against Taiwanese identity politics and the American sense of national honor. It remains the only conceivable cause of a future Sino-American armed conflict. A shared sense of this risk has given Beijing and Washington a common interest in deterring Taipei from making rash decisions that could provoke a conflict, but neither can actually prevent Taipei from making such decisions. A war over the question of Taiwan’s relationship or non-relationship to the China mainland would not be a trivial event. It could easily escalate to the level of nuclear exchanges or protracted global conflict between China and the United States. Whatever the outcome for Taiwan’s status, its democracy and prosperity would be destroyed. Fortunately, long-term trends in the Taiwan Strait are enhancing the prospects for a peaceful resolution of the unsettled relationship between its two sides. The danger of war is thus declining. But our European friends present here today need to understand how very serious the Taiwan issue is for both the United States and China. American allies and friends of China alike must act cautiously when their actions might affect it.

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Beyond the possibly apocalyptic consequences of missteps over Taiwan, China’s advance could be derailed by several possible scenarios only indirectly related to all the problems I mentioned at the outset. I don’t expect any of these to happen but they bear consideration. Among the negative possibilities to guard against, let me single out the following four scenarios (in no particular order):

First, global depression or a failed attempt at currency and capital market reform in China.

The undervaluation of the Chinese currency has made China unduly dependent on exports for the continued economic growth necessary to sustain political stability. But while China piles up reserves the world has been playing American roulette with an overvalued US currency and dollar debt instruments. That’s a game where the last one standing gets to hold a bagful of devalued greenbacks. The risk of a sudden dollar collapse, though seldom mentioned in polite company, is on the mind of all the players. The consequences of one for the global economy would be severe. For the Chinese government and its reform policies, they could be fatal.

So China does not have to make a mistake to be taken down. It, the United States, and the world have yet to chart a path to the realignment in currency values and reform of the international monetary system needed to ensure continued economic health. With the United States Senate conducting a remarkably illiterate debate on Chinese currency reform and China still excluded from some of the key global institutions that deal with these issues, how confident can we be that we will to do so?

A related problem arises from the self-destructive gambling instincts of Chinese small investors and the shakiness of China’s newly established equity markets. The immaturity of China’s capital markets and financial system as a whole skews the economy in unhealthy directions; it is a drag on Chinese efforts to develop an innovative society. It also poses a risk to the country’s stability. A 19^th Century-style market crash in China, followed by widespread unemployment and unrest, is not impossible to imagine. A halt in economic advance, regardless of its cause, could severely erode domestic Chinese support for continued economic opening and reform. That, in turn, could have very adverse effects on the prospects for the global economy and injure the livelihood of many who have no idea where China is or why they should care about it.

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A second scenario could involve China failing to secure enough energy and raw materials to continue economic growth.

The world is having a hard time adjusting to China’s sudden emergence as the largest consumer of many of its natural resources – first in iron, steel, aluminum, copper, and so forth, and second in overall energy consumption. The flip side of this problem is that China is finding it difficult to line up the supplies it needs to feed its booming economy. The steady appreciation of the Chinese currency will help temper the effect of rising costs. But the disruption of shipping by natural or man-made disaster or severe constraints on energy and raw materials imports could bring the Chinese economy to its knees, with many of the same political consequences as a global economic collapse or a stock market crash.

Inevitably, moreover, as a late-comer to investment in global mining and fossil-fuel exploration and production, China must look to sources from which established – mainly Western – mining and energy companies are absent. This is already drawing China into countries the West has sought to isolate with sanctions and blockades. The resulting reduction in Western leverage over such countries increases friction over China’s concomitantly rising influence.

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A third set of difficulties could arise from a failed Chinese attempt at democratization.

The Chinese have watched closely as sudden attempts to introduce democracy in places without a tradition of the rule of law or much of a middle class – like the former Yugoslavia, Iraq, or Russia and the Caucasus – have destabilized these societies, triggered ethnic separatism, religious strife, and civil war or led to kleptocracy or one-man rule. So China is very unlikely to be incautious in reforming its own political system, as its rising middle class demands and as its leaders recognize it must.

But it is worth noting the risks that mismanagement of political transition could pose to the surprising political, economic, and cultural diversity of greater China or to responsible Chinese behavior on international issues. A citizenry prematurely empowered to do so might well ask:

– why Hong Kong and Macau should not pay taxes to Beijing as other Chinese cities must;

– why minorities should continue to be exempted from the one-child-per-family policy that most agree is necessary to limit population growth;

– why China should compromise with weaker neighbors as it attempts to fix its maritime borders;

– why China should not use its growing military ascendancy in the Taiwan Strait to settle the issue once and for all;

– or why government policies should not more fully reflect popular anger against foreign governments when they – for example – bomb Chinese embassies abroad, operate spy planes in aggressive patrols along China’s coasts, sell weapons to Taiwan, or come up with particularly florid examples of history denial.

Laudable as it may be, no one has claimed that democratization increases sang-froid. And we now have a lot of evidence that it can be very destabilizing.

Lastly, there is the somewhat related danger of severe nationalist overreaction to perceived insults from the United States or Japan.

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Without being at all aware of how we sound, we Americans – including our political leaders – daily insult our Chinese counterparts through statements denigrating their legitimacy, expressing contempt for their political system, condemning them as evil “communists,” barring them from international gatherings because they do not represent a democracy, attributing malevolent intent to them, branding them as current or prospective enemies who should not be allowed to import technology from us, and so forth. From the Chinese perspective, dealing with the United States is now a constant exercise in forbearance in the interest of avoiding quarrels and contests that could mire the country in zero-sum games with a rhetorically strident and militarily aggressive opponent. And, with all due respect to our Japanese allies, on occasion they seem even more tone deaf and less empathetic than we.

Our gratuitous put-downs of the Chinese make domestically appealing sound-bites but they accumulate ill will amongst a pragmatic but proud people. Despite the best intentions of leaders on both sides, an incident could cause the dam to break, releasing a torrent of angry condemnation and sweeping away Chinese willingness to cooperate with us. All we or the Japanese have to do to make China an enemy is to treat it like one. In some ways, we are both perilously close to doing that.

Frankly, I remain optimistic about both China and the prospects for Sino-American relations. I do not expect any of these scenarios to unfold. China is rich in both human and natural resources. Chinese are neither xenophobic nor hostile to the current world order. China has got its domestic policy environment mostly right and it is working with all deliberate speed to improve it further. Its people are blessed with an entrepreneurial culture, show no fear of change, and are willing to learn from their mistakes. China’s leaders have so far been up to the immense challenge of managing transition on a scale that is unprecedented in human history. Collectively, they are very likely the most economically literate leadership on the planet. Politically, they have demonstrated an impressive degree of self-control, steady nerves, and a patient instinct for avoiding premature initiatives. There is every reason to expect they will continue to do so.

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So, titillating as it is to imagine the worst for China – as I was asked to do today – I do not predict it. Contemplating the worst serves instead to underscore the very great stake the world has in avoiding it by encouraging China’s continuing success. And, if it is self-defeating to assume the worst, it is more harmful still to act as if the worst is inevitable. Pessimism all tooWhat Could Go Wrong for China?

Remarks to Le Cercle

June 23, 2007, Washington, DC

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

In contrast, it’s easy to be optimistic about China. Perhaps too easy.