China is Changing: Dilligence Key to Future Sino-American Relations

October 15-18th the Fifth Plenary Session of the 17^th Central Committee of the Communist Party of China, a 300 member Committee, met to prepare for the Oct/Nov, 2012 18^th Chinese Communist Party Congress and the 12^th Five-Year Plan (2011-2015).

We are entering a vastly changing generational period, perhaps a dangerous time, with US-China relations. We need to watch very closely changing relations in China, which even in normal times is a world of contradictions.

There will be a time of change in 2012 with major elections in US, Japan, Korea, India, and Taiwan. In China 2012 there will be an 18^th Congress of the Communist Party, which will change about 70% leadership members and select the new Politburo and Standing Committee. This will be a massive generational change. The most important institution is the State Council, China’s Cabinet. In three years President Hu Jintao, Premier Wen Jabao, Chairman National People’s Congress Wu Bangguo, and other senior government leaders will retire.

The issue is what changes will be the post-Wen State Council bring? Will there be reforms, the status quo, or reform retrogression? Who will be retired and who will get what positions? The key issue is to look for indicators of schism emerging between Wen and Hu. The conflict is between a softer road towards political reform or to act like the “ba dao” or aggressive “New Bully” on the block. What will be discussed is “inclusive growth,” especially how to deal with social unfairness during a once rapid, yet perhaps slowing economic transformation. The future leaders will come from the 62 provincial chiefs, Party secretaries and governors, of China’s 31 province level admistrative entities. Will Vice President Xi Jinping, a young general’s son, and Li Keqiang, a hardliner, succeed Hu and Wen? Will Li Yuanchao, Wang Qishan, Bo Xilai, Wang Yang, and Yu Zhengsheng be candidates for the Politburo Standing Committee? There have been reforms in low level and localized elections, but they are civic rather than political reforms. Before the 2012 transition, the safe approach is not to allow any major reforms. Five Year Economic Plans are not debated in China, they are announced. Only the broad guiding principles for the next five year plan will be subject to internal Politburo consideration.

The core future issue is the widely accepted Chinese attitude that the United States is in a period of major economic and political decline and China is in a period of major ascendancy. China is expanding its Military might rapidly with major expenditures in technology and advanced weapons, including a sophisticated aggressive cyber warfare capability. Previously the Chinese Military has been relatively isolated with little exposure to the real world. The Military increasingly can highjack key progressive foreign policy initiatives. China can have a hard line approach to Japan, a move to punish Vietnam for being to pro-American, increasing territorial demands in offshore areas, which create concerns especially in Japan, Korea, Vietnam, and Philippines. China maintains fraternal relations with North Korea, Iran, Venezuela, Cuba, and other anti-US states. A highly unpredictable issue is North Korea, with nuclear weapons, and how the Chinese Military will act or react to the coming political leadership transition. The concern is what conflicts will emerge when the inevitable Chinese Communist state controlled economic engine starts to slow down. In the Soviet Union the State forced great sacrifices with the promise present sacrifices would greatly benefit future generations. Future benefits never materialized for the masses and the Soviet Union communist state collapsed. Is the Chinese Communist leadership increasing expectations the State cannot deliver? Not every Chinese can have a secure job, an apartment, a car, education for children, and social justice. It may be difficult to predict when China will not meet its economic projections because previously many Chinese economic statistics have been state secrets. Chinese published data at times needs further scrutiny.

There is a current world wide Economic War. The goals are control of natural resources, especially crude oil and natural gas; technology; markets; strategic location such as canals and sea lanes, etc. How strongly will China increase its aggressiveness in the economic war is the question? During the recent world economic recession, China actually increased its export market share substantially. US monthly trade imbalance with China in August, 2010 was $28 billion. That is a trade imbalance increase from the year 1990 of $10.4 billion and in the year 2000 of $83.8 billion trade. As of September, 2010, China has accumulated $2.648.3 US trillion dollar reserves.

The past 30 years China has experienced an unprecedented economic growth. 2011 to 2015 the 12^th Five Year Plan China must address the widening gap between rich and poor, rising unemployment, migration from rural areas to growing metropolitan areas, corruption, environmental issues, and growing bureaucracy. Yet great transformation can create great “rootlessness.” Will there be more of a move to transform the economy to increase local consumption to benefit the masses? There is growing concern regarding a potential real estate bubble burst in China. Foreign businesses and manufacturers are experiencing increased labor, tax, environmental, and administrative difficulties.

One major change is the relaxation of the tensions between Taipei and Peking. With the return to power of the Taiwan KMT political party, President Ma has markedly increased economic and political relations with China. The Taiwan Independence movement now only has a 37% support. The 2012 Taiwan elections will determine whether or not the KMT will remain in power. The KMT this year negotiated what is in essence free trade agreements with China (Economic Cooperation Framework Agreement); increased numerous direct flights from Taiwan to many parts of China; increased tourism with 6 million Mainland tourists to Taiwan; and greatly reduced threat of military action between Taiwan and Communist China.

In the US there is political concern regarding the under valued Chinese currency, which hurts US manufacturing and massive jobs being lost to China. There are wide spread US charges of Chinese currency manipulation, with demands for meaningful economic retaliation against China. There is a potential for a US-China trade war with high tariffs and embargos on Chinese goods. The US Congress has resolutions regarding protective tariffs with China. Protective tariffs were one of the many reasons for the destructive trade war during the Great Depression.

The 18^th Chinese Communist Party must resolve the key issue: can a semi-capitalist system exist in the long term within a communist State demand economy to create wealth which can be justly distributed to 1.5 billion workers and peasants? In the Soviet Union Lenin in the 1920s created the National Economic Plan (NEP) to develop Russia. After Lenin’s death Stalin destroyed all of Lenin’s economic reforms. China has developed its infrastructure and that has benefited the people. But like in the USSR, Chinese economic results have benefited a few, not the masses. To create a consumer society to benefit the masses is a communist illusion which the USSR could not achieve. You must create mass wealth to create mass “inclusive growth.” That is the dilemma the 18^th Communist Party of China must resolve.

What is the likelihood of a relatively quick improvement or likelihood of a continued deterioration of US-China relations? Will the present serious US-China trade conflict and argument over China’s currency manipulation continue until the year 2012 or will they be resolved to the benefit of the US before then? There is also possibility trade conflicts will not be resolved to the satisfaction of either party and the US will implement retaliatory tariffs against Chinese imports starting in 2011. The 2012 Party congress may bring about a more aggressive China if US-China trade disputes are not resolved.

It is unrealistic to expect a “Bully” to cooperate and it is unrealistic to expect China to play any major role in rebalancing the global economy. Clearly, how China participates in and contributes to global economy will depend on China’s self interest rather than generosity.