The China No One Talks About

Below the economic miracle are explosive pressures, from labor unrest to spontaneous riots. If chaos erupts, the U.S. and its allies better have a plan

By Stan Crock

Once again, you can feel the rising Sturm und Drang in Washington over a China that's 10-feet tall and growing. This summer, Congress erupted over China National Offshore Oil Corp.'s (CEO ) bid for Unocal (UNCL) , which lawmakers called a threat to national security. In the face of that opposition, CNOOC withdrew its bid.

In July, the Pentagon issued its annual report on China's military buildup, concluding that Beijing's defense spending could be as much as three times the published $30 billion amount. That would mean China's defense budget is the world's third-largest, after the U.S. and Russia. (The published figure puts it in fifth place, according to the Stockholm International Peace Research Institute.)


  Then there's the congressionally appointed U.S.-China Economic & Security Review Commission. It held a hearing on Aug. 11 to examine China's role in global capital markets and links between publicly traded mainland companies and China's military-industrial complex.

The panel notes that Chinese listings on the New York Stock Exchange dropped significantly from 2004 to 2005, while the Hong Kong Stock Exchange now accounts for 73% of new funds raised for Chinese companies. Hawkish China watchers used to worry when these companies were listed on the Big Board because American investors might be indirectly bankrolling China's military. Now they seem concerned that the companies aren't on the exchange. Go figure.

But there's another view. While China's surge certainly may continue, it's also possible that the awakening giant may stumble badly, a notion not on enough radar screens in Washington. And a failed China could damage American interests to a greater extent than a strong China. That's hardly the conventional wisdom, but it's worth examining.


  All of this heartburn over the latest potential 800-pound gorilla from Asia assumes a straight-line continuation of China's economic performance and military spending for years to come.

The Pentagon report projects that, based on past growth rates, China's economy could reach nearly $6.4 trillion by 2025. That would put China roughly on a par with Japan, but well below the U.S., with an expected figure of $22.3 trillion. China's military would be an expected beneficiary of the country's economic expansion.

But with surprising candor, the Defense Dept. acknowledged that such growth would be a challenge for China. And that's precisely what gets insufficient attention. Kenneth Lieberthal, a veteran Asia hand who toiled at the National Security Council during the Clinton Administration before returning to teaching at the University of Michigan, has thought long and hard about the Middle Kingdom. What he sees are enormous strains plaguing China -- pressures that could mean trouble for the U.S. and the rest of the world.


  Lieberthal notes that the country is undergoing the largest rural-to-urban migration in history. It has been underway for a decade and will continue for two more. Chinese society also is changing from highly egalitarian to one increasingly marked by unequal incomes as the economy shifts to a market-driven one. "From every other case in human history, this is a socially traumatic transition," Lieberthal says. One possible consequence of such change: Regimes can fall.

Beijing also is moving from a state that provided a safety net for urban dwellers to one scrambling to knit a wholly new one. "They're trying to do in 20 years what it took the West 100 years," Lieberthal says. "Chinese political leaders always say their greatest fear is instability. They are not just blowing smoke."

If the government fails to handle these challenges well, the impact would be enormous. "We're talking about governing a continent," he says. "This is not Taiwan or the Republic of Korea. It has a population 70 times as large as Taiwan's." He notes that the U.S. counts on China to stimulate the global economy, to provide a reasonable standard of living for 20% of the world's population, to prevent global pandemics, and to make sure global criminal organizations and terrorist groups can't use the country's vast territory as a base of operations.


  "We count on the Chinese to be reasonably effective," Lieberthal says. "Those who raise alarms focus too much on the problems of success and too little on the problems of failure."

Richard Aboulafia, an aerospace analyst at Teal Group, also wonders whether there's too much emphasis on the 10-foot-tall China. He remembers that in the 1980s and early 1990s, many analysts thought Japan's industrial capability would leave U.S. aerospace and other industries in the dust.

Well, America's obituaries were hardly dry when Japan's economic paralysis set in. Aboulafia says in his August newsletter that he wouldn't be surprised if China experienced a similar economic setback, perhaps a crisis of its weak banking system "that will make the U.S.'s troubles look insignificant."


  Aboulafia attributes this periodic hysteria to Asiaphobia. But I don't find that reasoning entirely satisfying. It doesn't explain why we also thought that the Soviets were goliaths. Something more than a "yellow peril" phenomenon is at work. I think it's the need to have a demon out there to justify policies ranging from protectionism to defense spending.

It's time for Washington to put the hysteria aside and consider all kinds of scenarios, including a possible dustup over Taiwan. But policymakers also have to make judgments about probabilities, because there simply isn't enough money to prepare for every possible outcome.

Based on the Pentagon's report, we have a pretty good idea of what weapons Beijing is buying, though we don't completely understand its intentions. Monitoring such purchases is prudent. After all, Washington does need to know if it must counter ominous trends.


  But the Pentagon also should acknowledge procurement trends that run counter to the buildup bias. For example, Aboulafia says that the Pentagon report doesn't note that the Chinese surprised outsiders recently when they ended license production of cutting-edge Russian Su-27 fighters. Hawks thought Beijing would make so many they would blacken the skies.

While it's smart to watch China's military modernization, it also would be wise for Washington to prepare for another outcome -- a China on its back. Riots on a regular basis and such incidents as the recent drowning death of more than 100 miners suggest the ruling regime is indeed fragile, as laborers rebel against the government's callousness to workplace safeguards and political rights.

The solution isn't a U.S. effort to prop up a repressive regime. But Washington must start thinking about how to handle a health pandemic or widespread hunger or a province that becomes a haven for terrorists. Washington can't be expected to tackle these issues by itself. An international effort would be needed. But the thinking and planning should start well before disaster strikes. We need to plan for both a 10-foot-tall China and one cut down to size.

Crock is BusinessWeek's chief diplomatic correspondent

Edited by Patricia O'Connell

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