Mr. Hu Comes To Washington

When he sits down with Bush, the challenges he faces at home will cast a long shadow

Chinese President Hu Jintao heads to Washington on Sept. 7, representing an economically ascendant nation that many in the West think is destined for superpower status. Hu's tightly scripted tour through the U.S. will include plenty of face time with President George W. Bush, the pomp of a 21-gun White House salute, a speech at Yale University, and visits to the U.N. in New York and to Microsoft Corp. (MSFT ) headquarters in Redmond, Wash. As he meets with America's political, business, and intellectual elite, Hu will project an image of a rapidly modernizing China that offers huge commercial benefits to the U.S.

The usual goodies will be exchanged. Bush will probably praise Hu's government for its recent moves to liberalize trading in the yuan, and Hu may whip out his checkbook following August announcements that China's state-owned airlines will spend $6.2 billion to buy 52 Boeing 787 planes. And China could also announce a deal to buy nuclear-power technology from Westinghouse Electric Co.

All in all, the expectation is that Hu's visit will be a relatively friendly affair that will paper over a far more complex reality governing Sino-American ties. "China and the U.S. share important common interests in the Asia Pacific region, and we are willing to work together to make the Asia Pacific more peaceful, stable, and prosperous," says a senior Chinese official in Beijing. "The whole world acknowledges that our countries are the two major engines for economic growth."

Yet few in the West fathom the contradictory development challenges China confronts -- and how they limit and shape its dealings with the U.S. and others. Yes, it is home to a potentially vast consumer market and abundant and cheap labor, but it has equally vast income inequality, joblessness, environmental wreckage, and a rapidly aging population. Hu is trying to balance high-speed economic growth with social stability, and more transparency in government with authoritarian, single-party political control. China is not only a dynamo whose companies are increasingly assertive in moving abroad -- witness the purchase of IBM's (IBM ) PC business by Lenovo Group Ltd. (LNVGY ) -- but also an extremely fragile place. "They have a lot of fingers in a lot of dikes. They're just trying to maintain stability," says a Bush Administration insider.

Just how deftly Hu manages these challenges will shape China's relations with the U.S. and also its long-term prospects of breaking into the rich-country club. Just as the U.S government is full of China skeptics who suspect that Beijing's future role in global affairs will be far from benign, many in the Chinese Communist Party and military think the U.S. will block any Chinese company that tries to acquire U.S. corporate assets and will exaggerate any move by China to improve its defense posture. This bilateral relationship is anything but simple. It's important for the Bush team to understand the constraints China is operating under -- as well as what motivates leaders such as Hu. That may make it easier, in the longer run, for the U.S. to get more of what it wants from Beijing.

Who is Hu? Even though he has been the top leader in Beijing for two-plus years, the 62-year-old President is still seen as hard to read by many observers. "He wears a public face even in private," says Kenneth Lieberthal, a China expert at University of Michigan and a former Clinton Administration official. "I don't know any Chinese who can say with confidence what he is thinking about." Still, it's possible to draw conclusions from his tenure so far. Although some analysts in China and the West hoped he would be a democratic reformer, Hu is turning out to be a cautious and often conservative pragmatist who stresses party discipline. He has cracked down on the media, including jailing journalists, is trying to control Internet use, and recently used the People's Daily's front page to threaten arrest for citizens holding unauthorized protests. Moreover, Hu isn't as enthusiastic about things American as his predecessor, Jiang Zemin.

The backgrounds of Hu and Premier Wen Jiabao differ radically from those of Jiang and former Premier Zhu Rongji. Jiang and Zhu spent much of their pre-Beijing careers in the go-go coastal city of Shanghai, where their official duties included hosting foreign business bigwigs. Hu and Wen, by contrast, spent years in the poorest, most remote provinces, including Guizhou, Gansu, and the autonomous region of Tibet, where they had little contact with foreign investors and struggled to lift incomes in the sometimes restive hinterland.

Hu and Wen are staking their reputations on being populists, despite their sometimes heavy-handed ways. They rarely meet with foreign CEOs, unlike their predecessors. Instead, the detail-oriented technocrat Hu -- who by all accounts is very smart -- has focused more on domestic economic policies. He and his team have offered preferential taxes to boost development in northeastern and western China, reined in real estate markets, and curtailed loans to temper the torrid growth on the coast.


Now, Hu's government, in a bid to alleviate the burden on the poor even further, is considering raising the threshold for income taxes. Says Cheng Li, a professor of government at Hamilton College in Clinton, N.Y.: "He has moved China from GDP-driven growth to people-centered growth." That shift could prove crucial given the rising pressures on Chinese society. According to official estimates, some 74,000 major protests involving 3.7 million Chinese took place last year. Workers, farmers, and even retired soldiers are taking to the streets. Fear of unrest by laid-off workers is one reason Beijing is unlikely to move fast with the further revaluations of the yuan that Washington seeks. Hu's caution is "motivated by [worries about] increasing social tensions," says Shi Yinhong, a professor of international relations at People's University in Beijing.

It's also a reflection of the fact that Hu is still consolidating his power. Six of the nine members of the Politburo Standing Committee owe their positions to Jiang, so Hu must tread carefully during this first of what will almost certainly be two five-year terms. "He's going to be restrained in the near term so he can retain influence, put in place people he can trust, and deflect potential criticism from more conservative elements," says Bates Gill, a scholar at the Center for Strategic & International Studies in Washington.

Hu and Wen are also proving less reflexively pro-Western than the exuberant Jiang, who once donned a tricornered hat when visiting Philadelphia. While Jiang relished his meetings with U.S. Presidents, he ultimately was accused of being too willing to compromise with the West, particularly when he and Zhu agreed to throw open China's economy to enter the World Trade Organization.


By contrast, Hu and Wen have spent a great deal of time cultivating relations with less developed countries. China's so-called "good neighbor policy" has opened its market to imports from Southeast Asia and strengthened Beijing's influence in the region. Hu has traveled extensively in the European Union, Russia, Central Asia, Latin America, and Africa. "His diplomacy is more aggressive than Jiang's. He has been more active in pursuing trade deals in Asia," says Nicholas R. Lardy, a China hand at the Institute for International Economics. These efforts challenge Washington's position in key regions, particularly Asia and Latin America. China has replaced the U.S. as the biggest market for countries such as South Korea. Trade between China and Latin America is soaring.

Hu's economic diplomacy is part of China's frantic race to lock up future supplies of energy -- also a source of tension with Washington. China's dependence on foreign oil is expected to jump from about 42% now to 67% by 2020. Under Jiang, China inked energy deals with Australia and Africa, but Hu has been stepping up the pace. After his visit to Washington, Hu is expected to head for Canada to discuss natural resource cooperation, among other issues. More irritating to Washington, Beijing is cultivating closer relations with oil-rich nations that the U.S. would like to isolate, including Burma, Iran, Sudan, and Venezuela. "Energy concerns in many ways now dominate China's strategic thinking," says Zhu Feng, director of the International Security Program at Beijing University.

China really touched a raw nerve in June, when state-owned oil giant CNOOC Ltd. (CEO ) made a bid for U.S. oil producer Unocal Corp. (CVX ) The Chinese leadership is still smarting from the ferocious congressional reaction, which prompted the company to withdraw its offer. Hu is hoping he can convince Washington that China's push for energy resources overseas should not be feared. He also wants to discuss ways the two sides can cooperate on energy efficiency and the use of renewables. He will remind Americans that they and their companies benefit from the two countries' economic relationship, whether in lower prices for clothing or access to the fast-growing mainland market. "You can see that the Chinese people are quite able to accept the U.S. presence in our economy," says a Chinese official.

It's not clear how Bush will react to Hu's arguments: The White House has kept its expectations for the meeting under wraps. In fact, the buzz in Washington is that the Administration has been playing down the visit's importance since the burst of anti-Chinese sentiment over the CNOOC bid and the debate over surging Chinese textile imports. The Chinese are calling the occasion a state visit, while the White House is not.

Some critics argue that the Bush Administration's China policy has been drifting, partly because of the focus on Iraq and partly because Washington needs China to play a key role in persuading North Korea to give up its nuclear weapons program. "There is an attempt at the most senior levels to paper over problems, but they're not going to go away," complains Michael R. Wessel, a member of the U.S.-China Economic & Security Review Commission, which is charged by Congress to make recommendations on U.S.-China policy.

Wessel and other commission members worry about everything from China's longtime violations of intellectual property rights to rising military spending. The Pentagon recently pegged China's defense spending at some $90 billion, more than three times the $29.9 billion 2005 budget figure disclosed by China. If the report is right, the mainland is the third-largest defense spender. Only the U.S. and Russia spend more.


Another volatile issue is the massive U.S. trade deficit with China, which is expected to reach $200 billion this year. Hu's Boeing deals and possible Westinghouse contract are aimed at deflecting attention from the deficit -- and he'll probably succeed at least for the duration of his U.S. trip. He will also push for an end to U.S. restrictions on high-tech exports to China, arguing that this would also help ease the deficit, although he's unlikely to win that concession. On currency, it would be difficult for Bush to criticize Hu too harshly after the Treasury Dept. reacted positively to Beijing's move to revalue the yuan by 2.1% in July. Don't expect Hu to announce another revaluation while in Washington, either. That would be greeted poorly at home since it would be seen as hurting already fragile social stability. And Hu wouldn't want to appear to be bowing to U.S. pressure.

Hu may well fly away from Washington with a public relations victory to take back to Beijing. But any lessening of tensions is likely to be temporary unless he and Bush figure out a modus operandi for dealing with economic problems. (Ironically, the issue that usually divides Beijing and Washington -- the question of Taiwan -- is not a key source of irritation right now.)

As China hawks in Congress return to Capitol Hill, the pressure is likely to grow on the Administration to take a tougher line. "China has 40% of the U.S. trade deficit. There is going to be more friction. That is guaranteed," says David A. Wyss, chief economist at Standard & Poor's (MHP ). This fall, the Senate may vote on a bill by Senators Charles E. Schumer (D-N.Y.) and Lindsey Graham (R-S.C.) that would threaten punitive tariffs on Chinese imports unless Beijing sharply revalues the yuan. The Treasury Dept. may also step up its criticism of China in its semi-annual report on currency regimes in October. With the two economies increasingly intertwined, managing U.S.-China ties will demand thoughtful, determined statesmanship by both Bush and Hu.

By Dexter Roberts in Beijing and Brian Bremner in Tokyo, with Stan Crock in Washington, and bureau reports

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