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February 06 China's New Dictatorship Diplomacy , January/February 2008 - NYtimesChina's New Dictatorship DiplomacyBy STEPHANIE KLEINE-AHLBRANDT AND ANDREW SMALL
Published: January 28, 2008
From the January/February 2008 issue of Foreign Affairs. China is often accused of supporting a string of despots, nuclear proliferators, and genocidal regimes, shielding them from international pressure and thus reversing progress on human rights and humanitarian principles. But over the last two years, Beijing has been quietly overhauling its policies toward pariah states. It strongly denounced North Korea's nuclear test in October 2006 and took the lead, with the United States, in drafting a sweeping United Nations sanctions resolution against Pyongyang. Over the past year, it has voted to impose and then tighten sanctions on Iran, it has supported the deployment of a United Nations-African Union (UN-AU) force in Darfur, and it has condemned a brutal government crackdown in Burma (which the ruling junta renamed Myanmar in 1989). China is now willing to condition its diplomatic protection of pariah countries, forcing them to become more acceptable to the international community. And it is supporting -- in some cases even helping to create -- processes that chart a path to legitimacy for these states, such as the six-party talks on North Korea, thereby minimizing their exposure to coercive measures. China's changing calculation of its economic and political interests has partly driven this shift. With its increased investments in pariah countries over the past decade, China has had to devise a more sophisticated approach to protecting its assets and its citizens abroad. It no longer sees providing uncritical and unconditional support to unpopular, and in some cases fragile, regimes as the most effective strategy. An even more important motivator has been the West's heightened expectations for China's global role. Faced with the 17th Party Congress last October, the Beijing Olympics in 2008, and presidential elections in Taiwan also later this year, Chinese officials would have preferred to think about avoiding trouble at home rather than about developing a new foreign policy. But the nuclear crises in North Korea and Iran and international outcry over developments in Darfur and Burma have forced their hand: Beijing has no choice but to worry about its international image. China's fears about a backlash and the potential damage to its strategic and economic relationships with the United States and Europe have prompted Beijing to put great effort into demonstrating that it is a responsible power. Beijing's relationships with pariah states vary greatly, but the government is beginning to handle them more consistently. It would be premature to call this a new Chinese foreign policy doctrine, but a new Chinese foreign policy practice is emerging. With this change also comes a chance for greater cooperation with the United States. China's leverage over some difficult regimes, as well as the apparent willingness of Beijing's top leadership to use it, has already created the possibility of progress on a number of previously deadlocked issues, such as nuclear proliferation in Iran and political repression in Burma. And the debates in Beijing have moved on from how to defend the principle of noninterference to the conditions under which intervention is justified. But there are important limitations. China has not undergone an underlying shift in values. Its economic interests remain paramount, and it still does not share Washington's views about human rights or democracy. The United States has its own track record of providing support to friendly autocracies, of course, but these regimes have been under no illusions about the United States' real preferences or about their vulnerability to changes in the calculation of realpolitik. With China, however, they have been able to establish relationships free from tensions or discomfort over issues such as democracy. Even when China presses pariah states toward (limited) political and economic reform, for example, it holds up its own experience to show that reform and economic opening need not lead to democracy. Respect for state sovereignty remains the bedrock of many of China's key alliances -- alliances that it cultivates not only because they are economically important but also because they are a hedge against a possible breach in its relations with the West. The challenge for the United States and its allies will therefore be to make the most of China's shifting sense of its interests while realizing that China's broader policies toward authoritarian regimes do not align with their own. Beijing is not likely to become a consistent partner of the West's in dealing with dictatorships, but it is becoming an increasingly important part of the solution in many problematic cases.<p /> MARRIAGES OF FORTUNE Within years of coming to power in 1949, the Chinese Communist Party instituted a foreign policy to promote "peaceful coexistence" that was based on five principles, including noninterference in the internal affairs of other states and respect for those states' territorial integrity and sovereignty. In practice, however, these principles were often subordinated to Cold War considerations and then also, in the 1960s and 1970s, to Mao Zedong's support for revolutionary insurgencies. Whereas North Korea was a client state of China's, in Burma, Beijing backed the Burmese Communist Party's insurgency against the military regime that seized power in 1962 (and whose successor rules today). China's support for revolutionary movements in Africa and the Middle East placed Beijing on the side of Robert Mugabe in Zimbabwe. But in Iran, principles did not prevent it from siding with the shah against the Soviet-aligned Tudeh Party, the main opposition force, for fear that Moscow might extend its influence in the Persian Gulf. After 1978, Deng Xiaoping put Chinese policy on a new footing. His policy of "reform and opening" subordinated the revolutionary and anti-imperialist elements of China's foreign policy to the overriding imperative of economic development. Beijing suspended its support for Maoist insurgencies throughout the world, and its general approach to diplomacy became nonideological. Following the Tiananmen Square crackdown in 1989 and the collapse of the Soviet Union in 1991, China feared the advent of a U.S.-dominated global order, and its relations with pariah states deepened -- after all, in those days it had veered toward pariah status itself. Still, Western policymakers' concerns about China's dealings were largely restricted to nuclear proliferation and arms sales. China's interest in economic growth and, increasingly, in rehabilitating its international reputation kept it from openly confronting the West. It rarely used its position on the UN Security Council to shield pariah states from international pressure. It compromised on proliferation issues. Unlike today, its economic and political support packages were no rival for Western development efforts. China's foreign policy in the 1990s basically followed Deng's so-called 24-character strategy: "Observe calmly; secure our position; cope with affairs calmly; hide our capacities and bide our time; be good at maintaining a low profile; and never claim leadership." All this started to change in the late 1990s with China's extraordinary economic expansion and its corresponding need for energy and natural resources. China began to take advantage of its long-standing friendships with pariah regimes and the minimal competition in such countries from Western companies (whose activities there were limited by their governments, multilateral sanctions, or domestic pressure); it became one of the largest investors and trading partners of rogue states. At the instigation of some authoritarian governments eager to count Beijing as a sponsor, China sent its state-controlled companies to make massive investments, sweetening the deals with significant loans and military assistance. In 1996, with Western oil companies pulling out of Sudan, then a sponsor of terrorism, Chinese companies purchased a 40 percent majority share in the Greater Nile Petroleum Operating Company. (They have since increased their stakes in Sudan's oil sector, including with substantial investments in Darfur, and in recent years have bought as much as two-thirds of the country's oil exports.) Such activities intensified after Beijing announced a new "go out" strategy in 2001, which promoted Chinese investment in the developing world. In 2004, Iran, already one of China's primary suppliers of crude oil, agreed to sell to a Chinese corporation $20 billion worth of natural gas per year for 25 years -- representing then the world's largest natural gas purchase. The discovery of a new gas field off the coast of Arakan, in Burma, that year set off feverish Chinese efforts to negotiate exploration rights. By 2007, China had become the largest trading partner of Iran, North Korea, and Sudan and the second-largest of Burma and Zimbabwe. All these investments, in turn, altered China's sense of its national interest. In September 2004, Beijing threatened to veto UN resolutions imposing sanctions on Sudan. And as the Iranian nuclear crisis began to escalate in the summer of 2004, China suggested that it would be inappropriate for the Security Council to consider the matter. For good measure, it (along with Russia) invited Iran to be an observer at the Shanghai Cooperation Organization, which promotes military and security cooperation among six Asian states. By late 2004 and early 2005, China's support for pariah regimes had taken a defensive -- even ideological -- turn. Beijing had grown anxious about the spread of "color revolutions" throughout the Caucasus and what it saw as the Bush administration's increasingly assertive democratization agenda. At the beginning of George W. Bush's second term -- as Washington criticized China's military buildup, pressed U.S. allies to restrict arms transfers to Beijing, tightened its ties with India and Japan, and upgraded its forces in the western Pacific -- Beijing worried that U.S. policy toward China was moving closer to containment. During this period, China openly defended authoritarian governments that were under pressure from the West. North Korean leaders who had seen their relations with China cool under Chinese President Jiang Zemin suddenly found themselves being embraced by President Hu Jintao. In 2005, two weeks after Uzbek government troops killed dozens of protesters in Andijan, the Chinese government welcomed Uzbek President Islam Karimov with a 21-gun salute and praised his handling of the uprising. That July, at the height of international outrage over the Zimbabwean government's Operation Drive Out Trash -- a campaign to demolish the homes of hundreds of thousands of Zimbabweans living in opposition strongholds -- President Mugabe enjoyed a weeklong state visit to China. Meanwhile, Chinese diplomats in New York tried to block a Security Council discussion of a damning UN report on the Zimbabwean crisis. At about the same time, China also held its first joint military exercises with Russia and supported a statement by the Shanghai Cooperation Organization demanding a timetable for the closure of U.S. military bases in Central Asia.<p /> A RESPONSIBLE STAKEHOLDER The United States decided to address these developments head-on in September 2005, when Deputy Secretary of State Robert Zoellick called for China to become a "responsible stakeholder" in the international system. Zoellick warned Beijing that its ties with "troublesome" states would "have repercussions elsewhere" and that it had to choose whether "to be against us and perhaps others in the international system as well." But if China adopted a constructive global role, Zoellick said, the United States would welcome its rise, while still hedging in its relations with Beijing given "uncertainties about how China will use its power." The message, which came in the midst of a fevered debate in Beijing about the concept of China's "peaceful rise," was broadly reassuring. Beijing realized that its fears of a cascade of U.S.-instigated democratic revolutions across Eurasia had been misplaced, especially given the United States' weakening position in Iraq. By calling on China to become a "responsible stakeholder," Washington was only asking that it cooperate on formulating policies toward a small group of problem countries: potential nuclear weapons states, such as North Korea and Iran, and countries that were attracting broad international outrage, such as Sudan. Following President Hu's visit to Washington in April 2006, Beijing drew another conclusion: with the United States increasingly entangled in the Middle East, it had a growing need for China's help. Beijing might have seen this change as a burden, but the opportunity to secure a more cooperative U.S. stance on key Chinese priorities, including Taiwan, was unmistakable. At the very least, Chinese officials believed that working with the United States in this way would reduce the likelihood of confrontation and allow China to focus on challenges at home. But China's initial foray into a new "dictatorship diplomacy" foundered, most notably with respect to North Korea. The Chinese government had helped convene the six-party talks in Beijing in 2003, but for some time it preferred to play the part of host rather than broker. It assumed an active role in drafting the joint statement of September 2005, in which North Korea agreed to abandon all nuclear weapons and nuclear weapons programs. But then China was unwilling to either tighten the screws on Pyongyang to ensure that it would live up to the deal or try to convince Washington to soften its hardening stance. On the one hand, Beijing supported U.S. bilateral financial sanctions: the Bank of China froze North Korean accounts. On the other, it continued to defend Pyongyang even after its missile test of July 2006. This approach was the worst of both worlds: it weakened Pyongyang's trust in Beijing and failed to persuade U.S. diplomats that Beijing was serious about restraining North Korea's nuclear ambitions. The situation finally came to a head in October 2006, when, during the Chinese Communist Party's annual Central Committee plenum, Hu was informed with just 20 minutes' notice that North Korea was about to test a nuclear weapon. Beijing was quick to denounce Pyongyang's behavior as "brazen." It immediately cooperated with the United States on imposing sweeping UN sanctions and dispatched a Chinese official to warn North Korean leader Kim Jong Il about the consequences of further testing. Chinese analysts we interviewed in Beijing after both the July 2006 missile test and the October 2006 nuclear test said they believed that the leadership had learned its lesson. As one of them put it, "We used to treat this as a problem between North Korea and the U.S. We should have treated it as our problem." The experience with North Korea left Chinese officials with mixed feelings: they were more confident of their diplomatic clout but doubted Pyongyang's willingness to disarm and regretted having squandered much of their leverage. Above all, they learned that fence-sitting can be more damaging than decisiveness. That growing realization seems to have informed China's policy toward Iran as early as the summer of 2006, even as Beijing was only starting to question its approach to North Korea. In July 2006, China decided to actively support the multilateral effort to confront Iran over its nuclear ambitions: it voted for UN Security Council Resolution 1696, which demanded the suspension of Iranian enrichment activities and threatened sanctions in case of noncompliance. It has since supported resolutions imposing and then tightening sanctions on Iran and backed a rare condemnatory statement from the Financial Action Task Force, the international standard setter on money laundering and counterterrorist finance issues. It also sent its foreign minister, as well as a special envoy, to Tehran to urge the Iranian government to stop enriching uranium. Even more notable was China's recasting of its approach to Sudan. Whereas it had seen North Korea and Iran as posing traditional international security problems, China had long insisted that the massacres in Darfur were an internal matter. In April 2006, it had abstained from voting on a UN Security Council measure imposing targeted sanctions on four Sudanese government officials. But by the summer of 2006, the risks to Chinese interests on the ground had become much greater. A peace deal struck in May had unraveled, and the fighting in Darfur had escalated, spreading across the border into Chad, in whose nascent oil sector Beijing had just promised to invest. Amid growing public demands to halt the genocide in Darfur, talk of Western military intervention increased China's fears about instability there. And so in September, China urged the Sudanese government to accept a plan devised by then UN Secretary-General Kofi Annan, which provided for the deployment of a hybrid UN-AU peacekeeping force of 20,000 troops to Darfur. At a special UN Security Council meeting in November, the Chinese UN ambassador, Wang Guangya, made crucial interventions to secure the Sudanese government's agreement to the plan. Hu then raised the issue with Sudanese President Omar al-Bashir at the Chinese-African summit later that month and again during his own trip to Khartoum in early 2007. Describing the latter visit, Wang stated, "Usually China doesn't send messages, but this time they did." Plans were already under way for Chinese Assistant Foreign Minister Zhai Jun to visit Sudan when the nongovernmental campaign advocating a boycott of the so-called Genocide Olympics in Beijing began in early April. Soon afterward, Zhai toured refugee camps in Darfur -- a rare event for a high-ranking Chinese official. Within a week, Khartoum had agreed to the deployment of more than 3,000 UN troops, including 275 Chinese military engineers, to Darfur. With pressure still building, in May, China appointed Liu Guijin, a former Chinese ambassador to South Africa and Zimbabwe, as its first special envoy for African affairs. And on July 31, 2007 -- the last day of its Security Council presidency -- China supported the establishment of the 20,000-strong UN-AU force. Although the proposal had been considerably diluted, it did call for the cessation of aerial bombings by Sudanese government forces and mandated the protection of aid workers and civilians. Beijing privately demanded that the Sudanese government implement the resolution. The following day, Khartoum issued a statement promising that it would. The U.S. deputy secretary of state, John Negroponte, said that China had "played a pivotal role in brokering the agreement." Beijing's recent handling of the situation in Sudan shows that it is learning the limitations of noninterference, however much that principle remains part of its official rhetoric. The concept may have been useful when China was relatively weak and trying to protect itself from foreign interference. But China has found noninterference increasingly unhelpful as it learns the perils of tacitly entrusting its business interests to repressive governments. This is the reason that Beijing has also recently scaled back its support for Mugabe's government, even in the absence of strong international pressure to do so. Chinese officials have complained that the economic situation in Zimbabwe -- where inflation is at 8,000 percent -- is "the worst" in the world and that Chinese deals with the Zimbabwean government over power stations, railways, and coal mining are a "headache." Multibillion-dollar projects announced with great fanfare have foundered. Harare has defaulted on Chinese loans. Hu skipped over Zimbabwe during a February 2007 trip during which he visited almost all of its neighbors. After publicly supporting Mugabe's brutal slum-clearance operation in 2005, Beijing remained icily silent during another opposition crackdown last year and intensified its efforts to cultivate ties with Mugabe's possible successors. Last September, the Chinese envoy Liu said that given the deteriorating situation, China would pare down its substantial development aid to Zimbabwe and limit itself to humanitarian assistance. Beijing's rapidly growing support for UN peacekeeping operations is another example of its shift from pure noninterference to a more pragmatic foreign policy. China is now the second-largest supplier of personnel to UN missions among the permanent members of the Security Council (trailing France by 139 troops), and it has been discussing deploying Chinese combat troops with the UN for the first time. This both feeds into China's overall public diplomacy strategy and allows China to monitor and stabilize countries and regions where its economic interests are at stake, particularly in Africa. Beijing now contributes to seven of the UN's nine missions on the continent. <p /> BOYZ N THE HOOD A more stringent test of China's shifting stance, however, is how it behaves in its own backyard, where concerns about promoting stable borders and avoiding encirclement by U.S. allies feed far more actively into Beijing's calculus. Like North Korea and Sudan, Burma is both a strategically important client and an embarrassment for China. But Beijing has far more vested interests in Burma, a neighbor, close ally, and home to one million Chinese nationals. In addition to worrying about long-standing problems such as the drug trade, cross-border crime, and the potential spillover of ethnic insurgencies from Burma, Beijing is hoping to use Burma's ports and new transport links to India to develop China's poor and landlocked southwestern provinces. In an effort to facilitate the shipment of oil supplies from Africa and the Middle East while bypassing the energy-supply route that runs through the Strait of Malacca chokepoint, China is also planning the construction of a gas and oil pipeline from western Burma to Yunnan and Sichuan. Nonetheless, China's patience with the Burmese junta has been wearing thin recently. For several years, Beijing encouraged it to undertake Chinese-style economic and political reforms in order to help the regime consolidate its rule, ensure stability, and regain international acceptability. It supported former Prime Minister Khin Nyunt, whom it considered a Deng-style reformist -- only to see him ousted in 2004. As the Burmese regime hardened further, China's confidence in the junta's capacity or willingness to reform faded. But Beijing moved from providing encouragement to exerting pressure on the regime only after its support for the regime was exposed in the UN Security Council. In mid-2006, the United States circulated a resolution in the Security Council demanding the release of political prisoners, condemning Burma's human rights practices, and calling for the establishment of a political process that would lead to a genuine democratic transition. China twice managed to prevent the measure from being considered, and when the United States and the United Kingdom finally brought it to a vote, last January, China vetoed it (as did Russia) -- the first time since 1973 that Beijing vetoed any matter unrelated to Taiwan. At the same time, however, Beijing called on the regime to "listen to the call of its own people . . . and speed up the process of dialogues and reforms." Soon after, Beijing signaled to the junta that China's protection depended on its greater willingness to move forward with political reforms and take a less confrontational stance with the UN and other international institutions. Chinese State Councilor Tang Jiaxuan was sent to Burma last February to convey this message directly to Burma's leader, General Than Shwe. The Burmese government then signed a new agreement with the International Labor Organization, which it had been threatening to throw out of the country. A few months later, following the visit of acting Burmese Prime Minister Thein Sein to Beijing, the junta unexpectedly announced the resumption of the long-stalled national convention, which was supposed to pave the way for a new constitution and elections. Even as China was pushing the regime to accommodate the demands of the country's minority ethnic groups, it started managing those relationships itself, for example, by convening in Kunming the leaders of various armed Burmese ethnic groups and pressing them to consider disarming. Chinese officials also intensified their efforts to reach out to the democratic opposition by hosting its representatives for meetings in China. And in July, they sponsored talks between the U.S. government and the Burmese government in Beijing. But when the Burmese national convention failed to establish a credible political settlement and massive public protests broke out in Burma last fall following hikes in fuel prices, Beijing was forced to adapt its strategy. And so even while it was fending off multilateral sanctions against Burma at the UN, it supported a statement from the UN Security Council strongly deploring the junta's use of violence against peaceful demonstrators, acquiesced (uncharacteristically) to the passing of a condemnatory resolution in the UN Human Rights Council, and pushed the Burmese government to receive the UN special envoy Ibrahim Gambari and grant him access to senior generals and the opposition leader Aung San Suu Kyi. Throughout the demonstrations, the Chinese government urged restraint on the junta but made it clear that its first priority was to prevent another color revolution. However concerned it may be about tending to its international reputation, Beijing neither wants nor really can ask the Burmese regime to "commit suicide," as one Chinese analyst put it. Moreover, with the pipelines yet to be constructed and fierce interest from India in access to Burma's resources, the junta still has considerable economic leverage: three days after China vetoed the punitive Security Council resolution last January, the Burmese government granted a Chinese company a major oil and gas exploration contract, even though it had been outbid by an Indian competitor. Ultimately, China's leaders acted largely in response to the threat to China's energy security and the potential loss of a closely allied neighboring government to what they saw as a pro-U.S. democracy movement. Rather than alienate the Burmese junta when it had its back to the wall, Beijing decided to act as its protector and then use the political capital thus gained to exert pressure on it once the situation had calmed down. If political change is going to come to a country of real strategic significance to China -- a Burma rather than a Zimbabwe -- Beijing wants to shape when and how that happens.<p /> MONEY MATTERS As China's dealings with Burma suggest, Beijing's new approach to pariah states is inherently limited. For one thing, China's shifting diplomacy reflects not a fundamental change in its values but a new perception of its national interests. Its main motivations remain energy security and economic growth, and Chinese leaders still swear by Deng's 24-character strategy. Beijing is not subordinating its economic aims to other goals; it is simply devising more sophisticated means to secure them. Thus, it should come as little surprise that China has avoided supporting tough penalties against Tehran and Khartoum or that even though it has removed Sudan from its list of countries with preferential trading status, few analysts in Beijing believe the move will substantially curb China's activities in that country. Hu's decision to chill ties with Zimbabwe last year was an economic calculation: any further investment there would yield little return while the economic crisis raged and Zimbabwe was defaulting on Chinese loans. And when it comes to countries on China's periphery, such as North Korea, Burma, or the Central Asian states, the prospects of regime change unleash deep anxieties in Beijing about being encircled by new democracies -- and about the United States' ultimate strategic intentions in welcoming democratization throughout the world. In addition, the shift is not underpinned by the consensus in Beijing that would be necessary for a more comprehensive change in China's approach to pariah states. Beijing's moves have been piecemeal, with its top leaders debating in detail the merits of their every decision. China's old guard still opposes pressuring Sudan or imposing sanctions on Iran, for instance, in the name of developing-world solidarity. The hard-liners want to support pariah regimes in order to counterbalance U.S. power. Many Chinese arms and energy companies, and their powerful supporters in government, frequently oppose a more responsible Chinese foreign policy or try to circumvent the costly restrictions that come with it. And without an open civil society, a free press, or an independent judiciary in China, it is exceedingly difficult to hold the Chinese government, the Chinese military, or Chinese companies accountable for their actions. The central leadership has made efforts to align key Chinese business interests with its new diplomacy. Most notably, in August 2006, it convened the Politburo, government ministers, Chinese ambassadors, provincial governors, party secretaries, officials from state-owned enterprises, and senior officials from the People's Liberation Army at the Central Foreign Affairs Work Conference, the largest foreign policy gathering in China's recent history. Participants discussed how the behavior of Chinese companies abroad risked damaging the country's image, the need to establish a more coherent grand strategy, and how to strengthen China's soft power. But these efforts have had little discernible effect on China's arms sales or the activities of Chinese energy companies in pariah states. Although China's record has undoubtedly improved with respect to sensitive nuclear and missile technologies over the last decade, Burma, Iran, North Korea, Sudan, and Zimbabwe continue to receive small arms and dual-use and conventional weapons technologies from economic and military actors in China. China has been the largest arms supplier to Sudan since 2004, for example; and in 2006 a UN panel of experts found that "shell casings collected from various sites in Darfur suggest that most ammunition currently used by parties to the conflict in Darfur is manufactured either in the Sudan or in China." The Chinese energy company CNOOC negotiated a $16 billion investment in natural gas fields in Iran at a critical juncture in international negotiations over Tehran's nuclear program. Washington has repeatedly asked Beijing to restrain such economic activities in Iran and has punished Chinese companies attempting to transfer technologies that would support Iran's missile programs. But even when the culprits are identified, China's opaque system makes it hard to determine whether these activities are instigated by companies operating outside the control of the central government, rogue elements in China's military and intelligence services, or decision-makers in Beijing. <p /> WEIGHING IN China will continue to set its own agenda, of course, but the United States and other concerned countries can play an important role in shaping its calculations. If other countries want China to become a more significant part of the solution in pariah states, they will have to start by developing both a realistic view of when and how China is likely to help and a clear sense of how their interests do (and do not) overlap with China's. This will mean, in part, recognizing that cooperation with Beijing will sometimes come at a cost. It may require, for example, allowing distasteful regimes an extended lease on life or refraining from using coercive measures against them. China's ability to assume a greater role as a broker between pariah regimes and the international community means that it can define the bottom line in negotiations. In many instances, China will prefer to nudge these countries along, doing the minimum necessary to avoid acute instability or sustained international opprobrium. The West is also likely to find itself struggling with these issues in new places: the economic calculations that have brought China to its influential position in so many pariah states are already being replicated in other countries. China is investing ever greater sums in resource-rich countries with autocratic governments and histories of instability: it has sunk $3 billion into Angola since 2004, and last September it authorized a $5 billion loan to the Democratic Republic of the Congo. It is also making substantial new investments in the energy sectors of Chad, Equatorial Guinea, and Turkmenistan, among others. Still, even the limited political and economic reform that China is usually prepared to encourage is preferable to the status quo, and it could contain the seeds of serious change in the future. In a case such as Burma, where the United States and Europe have limited diplomatic and economic leverage, China is an indispensable player. Its military, economic, and political relationships with these countries are qualitatively different from the West's and provide it with unique influence over, as well as insight into, the intentions of their leaders. With respect to states such as North Korea and Sudan, where some of the West's options -- such as military intervention -- are highly undesirable, China's privileged relationship with the regimes has been crucial to improvements. And in cases where U.S. and Chinese interests overlap, say, regarding nuclear proliferation, cooperation would be advantageous for both Washington and Beijing. Beijing was instrumental, for example, in (finally) brokering a denuclearization plan with Pyongyang last February. Again, however, being realistic will be essential to making the most of Beijing's influence. With respect to Iran, for instance, China has largely decided to hide behind Russia on the diplomatic track. One crucial question will be the extent to which China is willing to cooperate with efforts to exert economic pressure on the Iranian government. One important way to persuade China to cooperate will be to assuage its fears about the consequences of change in pariah states. Whether formally or through track-two channels, Washington should hold detailed discussions with Beijing to reduce its concerns about possible state collapse, political upheaval, or other major crises in Burma, North Korea, and Sudan. The outreach effort should not be restricted to official players: opposition groups and civil-society organizations from pariah states should seek out dialogue with Beijing, both to reassure Beijing about the implications of political transitions and to enlist its help in facilitating them. Meetings with Burmese opposition groups and officials from the Government of Southern Sudan have played an important role in helping to moderate the Chinese government's position with respect to both Burma and Sudan. Of course, such moves will require firm support from Hu and the rest of China's top brass. Of all the parties involved, the Chinese Foreign Ministry is generally the most supportive of China's evolving dictatorship diplomacy, but it is rarely able to assert its position over the Ministry of Commerce or the military. To achieve real traction on the issue of pariah states, the United States and its allies need to maximize the effect of their calls for greater cooperation by consistently delivering them at the highest political levels in Beijing. Moreover, their requests need to be as specific as possible. Although there is much creative thinking taking place in Beijing about China's global role, the Chinese leadership remains reluctant to take the initiative, placing the onus on others to suggest new actions. This strategy has already paid off. President Bush made a priority of raising the cases of Iran, North Korea, and Sudan during Hu's first presidential visit to Washington, in April 2006, and kept them on the U.S.-Chinese agenda in subsequent phone calls and bilateral meetings. The mechanisms for structured discussions established since 2005 -- talks on strategic issues at the deputy-secretary-of-state level, on regional issues at the assistant-secretary level, and on Iran among the five permanent members of the Security Council and Germany (the P-5 + 1), as well as regular visits of U.S. special envoys on Sudan and North Korea to Beijing -- have allowed Washington (and other Western countries) to express concerns about China's policy toward pariah states and permitted Beijing to take a greater part in joint decision-making regarding these countries. In the process, the United States and China have developed greater practice in strategic cooperation. It is difficult to imagine how the current degree of U.S.-Chinese coordination on Sudan could have been achieved without the experience of North Korea or the cooperation on Burma without both those precedents. As Assistant Secretary of State Christopher Hill put it, the six-party talks on North Korea's nuclear program have "done more to bring the U.S. and China together than any other process that I am aware of." At the same time as it seeks China's cooperation, however, Washington should be willing to pressure China when it is too lax on rogue regimes. Beijing is keen to avoid confrontation and does not want to lose control over such issues to decision-making structures in which it is not represented. In some circumstances, pressure will be most effective when it is applied indirectly or implicitly. It is considerably easier to convince China to act against pariah states when their neighbors and relevant regional organizations are already condemning them: the broader the criticism of a regime, the greater the pressure on Beijing to join in and the lesser its concern that by complying it will be seen as capitulating to U.S. or European demands. The AU's tough position on Sudan (it denied Khartoum the organization's chairmanship in 2007) and the Association of Southeast Asian Nations' growing exasperation with Burma (ASEAN strongly denounced the regime's crackdown in the fall) were critical factors in China's decision to shift its policy toward both countries. Conversely, the failure of the AU and the Southern African Development Community to condemn Mugabe last year reduced Beijing's incentives to get involved: by way of explaining Beijing's position, the special envoy Liu said, "We know that African countries, including South Africa, don't want to internationalize the issue of Zimbabwe." Shifts in China's policy toward pariah states have been experimental, tentative, and incremental -- and are likely to remain so in the near future. But the strength of China's position with respect to many pariah states is a reality -- and an opportunity. Although there is little reason to believe that China is moving toward full alignment with Western policy, it may be prepared to distance itself from the worst autocracies and rogue states. Even if Beijing's list of such states is likely to remain short, it is bound to include a number of states that pose important security and humanitarian problems to the United States. In just two years, China has moved from outright obstructionism and a defensive insistence on solidarity with the developing world to an attempt to balance its material needs with its acknowledged responsibilities as a major power. And so when Washington and its allies formulate their policies toward pariah states, they should assume that China, although in some respects an obstacle, is now also a critical partner. The Rise of China and the Future of the West, January 28, 2008- NYtimesThe Rise of China and the Future of the WestBy G. JOHN IKENBERRY
Published: January 28, 2008
From the January/February 2008 issue of Foreign Affairs. The rise of China will undoubtedly be one of the great dramas of the twenty-first century. China's extraordinary economic growth and active diplomacy are already transforming East Asia, and future decades will see even greater increases in Chinese power and influence. But exactly how this drama will play out is an open question. Will China overthrow the existing order or become a part of it? And what, if anything, can the United States do to maintain its position as China rises? Some observers believe that the American era is coming to an end, as the Western-oriented world order is replaced by one increasingly dominated by the East. The historian Niall Ferguson has written that the bloody twentieth century witnessed "the descent of the West" and "a reorientation of the world" toward the East. Realists go on to note that as China gets more powerful and the United States' position erodes, two things are likely to happen: China will try to use its growing influence to reshape the rules and institutions of the international system to better serve its interests, and other states in the system -- especially the declining hegemon -- will start to see China as a growing security threat. The result of these developments, they predict, will be tension, distrust, and conflict, the typical features of a power transition. In this view, the drama of China's rise will feature an increasingly powerful China and a declining United States locked in an epic battle over the rules and leadership of the international system. And as the world's largest country emerges not from within but outside the established post-World War II international order, it is a drama that will end with the grand ascendance of China and the onset of an Asian-centered world order. That course, however, is not inevitable. The rise of China does not have to trigger a wrenching hegemonic transition. The U.S.-Chinese power transition can be very different from those of the past because China faces an international order that is fundamentally different from those that past rising states confronted. China does not just face the United States; it faces a Western-centered system that is open, integrated, and rule-based, with wide and deep political foundations. The nuclear revolution, meanwhile, has made war among great powers unlikely -- eliminating the major tool that rising powers have used to overturn international systems defended by declining hegemonic states. Today's Western order, in short, is hard to overturn and easy to join. This unusually durable and expansive order is itself the product of farsighted U.S. leadership. After World War II, the United States did not simply establish itself as the leading world power. It led in the creation of universal institutions that not only invited global membership but also brought democracies and market societies closer together. It built an order that facilitated the participation and integration of both established great powers and newly independent states. (It is often forgotten that this postwar order was designed in large part to reintegrate the defeated Axis states and the beleaguered Allied states into a unified international system.) Today, China can gain full access to and thrive within this system. And if it does, China will rise, but the Western order -- if managed properly -- will live on. As it faces an ascendant China, the United States should remember that its leadership of the Western order allows it to shape the environment in which China will make critical strategic choices. If it wants to preserve this leadership, Washington must work to strengthen the rules and institutions that underpin that order -- making it even easier to join and harder to overturn. U.S. grand strategy should be built around the motto "The road to the East runs through the West." It must sink the roots of this order as deeply as possible, giving China greater incentives for integration than for opposition and increasing the chances that the system will survive even after U.S. relative power has declined. The United States' "unipolar moment" will inevitably end. If the defining struggle of the twenty-first century is between China and the United States, China will have the advantage. If the defining struggle is between China and a revived Western system, the West will triumph.<p /> TRANSITIONAL ANXIETIES China is well on its way to becoming a formidable global power. The size of its economy has quadrupled since the launch of market reforms in the late 1970s and, by some estimates, will double again over the next decade. It has become one of the world's major manufacturing centers and consumes roughly a third of the global supply of iron, steel, and coal. It has accumulated massive foreign reserves, worth more than $1 trillion at the end of 2006. China's military spending has increased at an inflation-adjusted rate of over 18 percent a year, and its diplomacy has extended its reach not just in Asia but also in Africa, Latin America, and the Middle East. Indeed, whereas the Soviet Union rivaled the United States as a military competitor only, China is emerging as both a military and an economic rival -- heralding a profound shift in the distribution of global power. Power transitions are a recurring problem in international relations. As scholars such as Paul Kennedy and Robert Gilpin have described it, world politics has been marked by a succession of powerful states rising up to organize the international system. A powerful state can create and enforce the rules and institutions of a stable global order in which to pursue its interests and security. But nothing lasts forever: long-term changes in the distribution of power give rise to new challenger states, who set off a struggle over the terms of that international order. Rising states want to translate their newly acquired power into greater authority in the global system -- to reshape the rules and institutions in accordance with their own interests. Declining states, in turn, fear their loss of control and worry about the security implications of their weakened position. These moments are fraught with danger. When a state occupies a commanding position in the international system, neither it nor weaker states have an incentive to change the existing order. But when the power of a challenger state grows and the power of the leading state weakens, a strategic rivalry ensues, and conflict -- perhaps leading to war -- becomes likely. The danger of power transitions is captured most dramatically in the case of late-nineteenth-century Germany. In 1870, the United Kingdom had a three-to-one advantage in economic power over Germany and a significant military advantage as well; by 1903, Germany had pulled ahead in terms of both economic and military power. As Germany unified and grew, so, too, did its dissatisfactions and demands, and as it grew more powerful, it increasingly appeared as a threat to other great powers in Europe, and security competition began. In the strategic realignments that followed, France, Russia, and the United Kingdom, formerly enemies, banded together to confront an emerging Germany. The result was a European war. Many observers see this dynamic emerging in U.S.-Chinese relations. "If China continues its impressive economic growth over the next few decades," the realist scholar John Mearsheimer has written, "the United States and China are likely to engage in an intense security competition with considerable potential for war." But not all power transitions generate war or overturn the old order. In the early decades of the twentieth century, the United Kingdom ceded authority to the United States without great conflict or even a rupture in relations. From the late 1940s to the early 1990s, Japan's economy grew from the equivalent of five percent of U.S. GDP to the equivalent of over 60 percent of U.S. GDP, and yet Japan never challenged the existing international order. Clearly, there are different types of power transitions. Some states have seen their economic and geopolitical power grow dramatically and have still accommodated themselves to the existing order. Others have risen up and sought to change it. Some power transitions have led to the breakdown of the old order and the establishment of a new international hierarchy. Others have brought about only limited adjustments in the regional and global system. A variety of factors determine the way in which power transitions unfold. The nature of the rising state's regime and the degree of its dissatisfaction with the old order are critical: at the end of the nineteenth century, the United States, a liberal country an ocean away from Europe, was better able to embrace the British-centered international order than Germany was. But even more decisive is the character of the international order itself -- for it is the nature of the international order that shapes a rising state's choice between challenging that order and integrating into it.<p /> OPEN ORDER The postwar Western order is historically unique. Any international order dominated by a powerful state is based on a mix of coercion and consent, but the U.S.-led order is distinctive in that it has been more liberal than imperial -- and so unusually accessible, legitimate, and durable. Its rules and institutions are rooted in, and thus reinforced by, the evolving global forces of democracy and capitalism. It is expansive, with a wide and widening array of participants and stakeholders. It is capable of generating tremendous economic growth and power while also signaling restraint -- all of which make it hard to overturn and easy to join. It was the explicit intention of the Western order's architects in the 1940s to make that order integrative and expansive. Before the Cold War split the world into competing camps, Franklin Roosevelt sought to create a one-world system managed by cooperative great powers that would rebuild war-ravaged Europe, integrate the defeated states, and establish mechanisms for security cooperation and expansive economic growth. In fact, it was Roosevelt who urged -- over the opposition of Winston Churchill -- that China be included as a permanent member of the UN Security Council. The then Australian ambassador to the United States wrote in his diary after his first meeting with Roosevelt during the war, "He said that he had numerous discussions with Winston about China and that he felt that Winston was 40 years behind the times on China and he continually referred to the Chinese as 'Chinks' and 'Chinamen' and he felt that this was very dangerous. He wanted to keep China as a friend because in 40 or 50 years' time China might easily become a very powerful military nation." Over the next half century, the United States used the system of rules and institutions it had built to good effect. West Germany was bound to its democratic Western European neighbors through the European Coal and Steel Community (and, later, the European Community) and to the United States through the Atlantic security pact; Japan was bound to the United States through an alliance partnership and expanding economic ties. The Bretton Woods meeting in 1944 laid down the monetary and trade rules that facilitated the opening and subsequent flourishing of the world economy -- an astonishing achievement given the ravages of war and the competing interests of the great powers. Additional agreements between the United States, Western Europe, and Japan solidified the open and multilateral character of the postwar world economy. After the onset of the Cold War, the Marshall Plan in Europe and the 1951 security pact between the United States and Japan further integrated the defeated Axis powers into the Western order. In the final days of the Cold War, this system once again proved remarkably successful. As the Soviet Union declined, the Western order offered a set of rules and institutions that provided Soviet leaders with both reassurances and points of access -- effectively encouraging them to become a part of the system. Moreover, the shared leadership of the order ensured accommodation of the Soviet Union. As the Reagan administration pursued a hard-line policy toward Moscow, the Europeans pursued détente and engagement. For every hard-line "push," there was a moderating "pull," allowing Mikhail Gorbachev to pursue high-risk reforms. On the eve of German unification, the fact that a united Germany would be embedded in European and Atlantic institutions -- rather than becoming an independent great power -- helped reassure Gorbachev that neither German nor Western intentions were hostile. After the Cold War, the Western order once again managed the integration of a new wave of countries, this time from the formerly communist world. Three particular features of the Western order have been critical to this success and longevity. First, unlike the imperial systems of the past, the Western order is built around rules and norms of nondiscrimination and market openness, creating conditions for rising states to advance their expanding economic and political goals within it. Across history, international orders have varied widely in terms of whether the material benefits that are generated accrue disproportionately to the leading state or are widely shared. In the Western system, the barriers to economic participation are low, and the potential benefits are high. China has already discovered the massive economic returns that are possible by operating within this open-market system. Second is the coalition-based character of its leadership. Past orders have tended to be dominated by one state. The stakeholders of the current Western order include a coalition of powers arrayed around the United States -- an important distinction. These leading states, most of them advanced liberal democracies, do not always agree, but they are engaged in a continuous process of give-and-take over economics, politics, and security. Power transitions are typically seen as being played out between two countries, a rising state and a declining hegemon, and the order falls as soon as the power balance shifts. But in the current order, the larger aggregation of democratic capitalist states -- and the resulting accumulation of geopolitical power -- shifts the balance in the order's favor. Third, the postwar Western order has an unusually dense, encompassing, and broadly endorsed system of rules and institutions. Whatever its shortcomings, it is more open and rule-based than any previous order. State sovereignty and the rule of law are not just norms enshrined in the United Nations Charter. They are part of the deep operating logic of the order. To be sure, these norms are evolving, and the United States itself has historically been ambivalent about binding itself to international law and institutions -- and at no time more so than today. But the overall system is dense with multilateral rules and institutions -- global and regional, economic, political, and security-related. These represent one of the great breakthroughs of the postwar era. They have laid the basis for unprecedented levels of cooperation and shared authority over the global system. The incentives these features create for China to integrate into the liberal international order are reinforced by the changed nature of the international economic environment -- especially the new interdependence driven by technology. The most farsighted Chinese leaders understand that globalization has changed the game and that China accordingly needs strong, prosperous partners around the world. From the United States' perspective, a healthy Chinese economy is vital to the United States and the rest of the world. Technology and the global economic revolution have created a logic of economic relations that is different from the past -- making the political and institutional logic of the current order all the more powerful.<p /> ACCOMMODATING THE RISE The most important benefit of these features today is that they give the Western order a remarkable capacity to accommodate rising powers. New entrants into the system have ways of gaining status and authority and opportunities to play a role in governing the order. The fact that the United States, China, and other great powers have nuclear weapons also limits the ability of a rising power to overturn the existing order. In the age of nuclear deterrence, great-power war is, thankfully, no longer a mechanism of historical change. War-driven change has been abolished as a historical process. The Western order's strong framework of rules and institutions is already starting to facilitate Chinese integration. At first, China embraced certain rules and institutions for defensive purposes: protecting its sovereignty and economic interests while seeking to reassure other states of its peaceful intentions by getting involved in regional and global groupings. But as the scholar Marc Lanteigne argues, "What separates China from other states, and indeed previous global powers, is that not only is it 'growing up' within a milieu of international institutions far more developed than ever before, but more importantly, it is doing so while making active use of these institutions to promote the country's development of global power status." China, in short, is increasingly working within, rather than outside of, the Western order. China is already a permanent member of the UN Security Council, a legacy of Roosevelt's determination to build the universal body around diverse great-power leadership. This gives China the same authority and advantages of "great-power exceptionalism" as the other permanent members. The existing global trading system is also valuable to China, and increasingly so. Chinese economic interests are quite congruent with the current global economic system -- a system that is open and loosely institutionalized and that China has enthusiastically embraced and thrived in. State power today is ultimately based on sustained economic growth, and China is well aware that no major state can modernize without integrating into the globalized capitalist system; if a country wants to be a world power, it has no choice but to join the World Trade Organization (WTO). The road to global power, in effect, runs through the Western order and its multilateral economic institutions. China not only needs continued access to the global capitalist system; it also wants the protections that the system's rules and institutions provide. The WTO's multilateral trade principles and dispute-settlement mechanisms, for example, offer China tools to defend against the threats of discrimination and protectionism that rising economic powers often confront. The evolution of China's policy suggests that Chinese leaders recognize these advantages: as Beijing's growing commitment to economic liberalization has increased the foreign investment and trade China has enjoyed, so has Beijing increasingly embraced global trade rules. It is possible that as China comes to champion the WTO, the support of the more mature Western economies for the WTO will wane. But it is more likely that both the rising and the declining countries will find value in the quasi-legal mechanisms that allow conflicts to be settled or at least diffused. The existing international economic institutions also offer opportunities for new powers to rise up through their hierarchies. In the International Monetary Fund and the World Bank, governance is based on economic shares, which growing countries can translate into greater institutional voice. To be sure, the process of adjustment has been slow. The United States and Europe still dominate the IMF. Washington has a 17 percent voting share (down from 30 percent) -- a controlling amount, because 85 percent approval is needed for action -- and the European Union has a major say in the appointment of ten of the 24 members of the board. But there are growing pressures, notably the need for resources and the need to maintain relevance, that will likely persuade the Western states to admit China into the inner circle of these economic governance institutions. The IMF's existing shareholders, for example, see a bigger role for rising developing countries as necessary to renew the institution and get it through its current crisis of mission. At the IMF's meeting in Singapore in September 2006, they agreed on reforms that will give China, Mexico, South Korea, and Turkey a greater voice. As China sheds its status as a developing country (and therefore as a client of these institutions), it will increasingly be able to act as a patron and stakeholder instead. Leadership in these organizations is not simply a reflection of economic size (the United States has retained its voting share in the IMF even as its economic weight has declined); nonetheless, incremental advancement within them will create important opportunities for China.<p /> POWER SHIFT AND PEACEFUL CHANGE Seen in this light, the rise of China need not lead to a volcanic struggle with the United States over global rules and leadership. The Western order has the potential to turn the coming power shift into a peaceful change on terms favorable to the United States. But that will only happen if the United States sets about strengthening the existing order. Today, with Washington preoccupied with terrorism and war in the Middle East, rebuilding Western rules and institutions might to some seem to be of only marginal relevance. Many Bush administration officials have been outright hostile to the multilateral, rule-based system that the United States has shaped and led. Such hostility is foolish and dangerous. China will become powerful: it is already on the rise, and the United States' most powerful strategic weapon is the ability to decide what sort of international order will be in place to receive it. The United States must reinvest in the Western order, reinforcing the features of that order that encourage engagement, integration, and restraint. The more this order binds together capitalist democratic states in deeply rooted institutions; the more open, consensual, and rule-based it is; and the more widely spread its benefits, the more likely it will be that rising powers can and will secure their interests through integration and accommodation rather than through war. And if the Western system offers rules and institutions that benefit the full range of states -- rising and falling, weak and strong, emerging and mature -- its dominance as an international order is all but certain. The first thing the United States must do is reestablish itself as the foremost supporter of the global system of governance that underpins the Western order. Doing so will first of all facilitate the kind of collective problem solving that makes all countries better off. At the same time, when other countries see the United States using its power to strengthen existing rules and institutions, that power is rendered more legitimate -- and U.S. authority is strengthened. Countries within the West become more inclined to work with, rather than resist, U.S. power, which reinforces the centrality and dominance of the West itself. Renewing Western rules and institutions will require, among other things, updating the old bargains that underpinned key postwar security pacts. The strategic understanding behind both NATO and Washington's East Asian alliances is that the United States will work with its allies to provide security and bring them in on decisions over the use of force, and U.S. allies, in return, will operate within the U.S.-led Western order. Security cooperation in the West remains extensive today, but with the main security threats less obvious than they were during the Cold War, the purposes and responsibilities of these alliances are under dispute. Accordingly, the United States needs to reaffirm the political value of these alliances -- recognizing that they are part of a wider Western institutional architecture that allows states to do business with one another. The United States should also renew its support for wide-ranging multilateral institutions. On the economic front, this would include building on the agreements and architecture of the WTO, including pursuing efforts to conclude the current Doha Round of trade talks, which seeks to extend market opportunities and trade liberalization to developing countries. The WTO is at a critical stage. The basic standard of nondiscrimination is at risk thanks to the proliferation of bilateral and regional trade agreements. Meanwhile, there are growing doubts over whether the WTO can in fact carry out trade liberalization, particularly in agriculture, that benefits developing countries. These issues may seem narrow, but the fundamental character of the liberal international order -- its commitment to universal rules of openness that spread gains widely -- is at stake. Similar doubts haunt a host of other multilateral agreements -- on global warming and nuclear nonproliferation, among others -- and they thus also demand renewed U.S. leadership. The strategy here is not simply to ensure that the Western order is open and rule-based. It is also to make sure that the order does not fragment into an array of bilateral and "minilateral" arrangements, causing the United States to find itself tied to only a few key states in various regions. Under such a scenario, China would have an opportunity to build its own set of bilateral and "minilateral" pacts. As a result, the world would be broken into competing U.S. and Chinese spheres. The more security and economic relations are multilateral and all-encompassing, the more the global system retains its coherence. In addition to maintaining the openness and durability of the order, the United States must redouble its efforts to integrate rising developing countries into key global institutions. Bringing emerging countries into the governance of the international order will give it new life. The United States and Europe must find room at the table not only for China but also for countries such as Brazil, India, and South Africa. A Goldman Sachs report on the so-called BRICs (Brazil, Russia, India, and China) noted that by 2050 these countries' economies could together be larger than those of the original G-6 countries (Germany, France, Italy, Japan, the United Kingdom, and the United States) combined. Each international institution presents its own challenges. The UN Security Council is perhaps the hardest to deal with, but its reform would also bring the greatest returns. Less formal bodies -- the so-called G-20 and various other intergovernmental networks -- can provide alternative avenues for voice and representation.<p /> THE TRIUMPH OF THE LIBERAL ORDER The key thing for U.S. leaders to remember is that it may be possible for China to overtake the United States alone, but it is much less likely that China will ever manage to overtake the Western order. In terms of economic weight, for example, China will surpass the United States as the largest state in the global system sometime around 2020. (Because of its population, China needs a level of productivity only one-fifth that of the United States to become the world's biggest economy.) But when the economic capacity of the Western system as a whole is considered, China's economic advances look much less significant; the Chinese economy will be much smaller than the combined economies of the Organization for Economic Cooperation and Development far into the future. This is even truer of military might: China cannot hope to come anywhere close to total OECD military expenditures anytime soon. The capitalist democratic world is a powerful constituency for the preservation -- and, indeed, extension -- of the existing international order. If China intends to rise up and challenge the existing order, it has a much more daunting task than simply confronting the United States. The "unipolar moment" will eventually pass. U.S. dominance will eventually end. U.S. grand strategy, accordingly, should be driven by one key question: What kind of international order would the United States like to see in place when it is less powerful? This might be called the neo-Rawlsian question of the current era. The political philosopher John Rawls argued that political institutions should be conceived behind a "veil of ignorance" -- that is, the architects should design institutions as if they do not know precisely where they will be within a socioeconomic system. The result would be a system that safeguards a person's interests regardless of whether he is rich or poor, weak or strong. The United States needs to take that approach to its leadership of the international order today. It must put in place institutions and fortify rules that will safeguard its interests regardless of where exactly in the hierarchy it is or how exactly power is distributed in 10, 50, or 100 years. Fortunately, such an order is in place already. The task now is to make it so expansive and so institutionalized that China has no choice but to become a full-fledged member of it. The United States cannot thwart China's rise, but it can help ensure that China's power is exercised within the rules and institutions that the United States and its partners have crafted over the last century, rules and institutions that can protect the interests of all states in the more crowded world of the future. The United States' global position may be weakening, but the international system the United States leads can remain the dominant order of the twenty-first century. Great Firewall of China Faces Online Rebels , Feb 4,2008- NYtimesGreat Firewall of China Faces Online RebelsPublished: February 4, 2008
WUHAN, China — As an 18-year-old student with an interest in the Internet, Zhu Nan had been itching to say something about the country’s pervasive online censorship system, widely known here as the Great Firewall. When China’s censors began blocking access to the popular photo-sharing site Flickr, Mr. Zhu felt the moment had come. Writing on his blog last year, the student, who is now a freshman at a university in this city, questioned the rationale for Internet restrictions, and in subsequent posts, began passing along tips on how to evade them. “Officials in our country claimed that Internet censorship is done according to the law,” Mr. Zhu wrote. “If so, why not let people know about this legal project, and why, instead, ban the Web sites that publicize and examine those legal policies? If you’re determined to do this, you shouldn’t be afraid of criticism.” Mr. Zhu’s obscure blog post and his subsequent activism is a small part of what many here regard as a watershed moment. In recent months, China’s censors have tightened controls over the Internet, often blacking out sites that had no discernible political content. In the process, they have fostered a backlash, as many people who previously had little interest in politics have become active in resisting the controls. And all of it comes at a time of increasing risk for those who choose to protest. Human rights advocates say the government has been broadening its crackdown on any signs of dissent as the Olympic Games in Beijing draw near. For a vast majority of Internet users, censorship still does not appear to be much of a factor. The most popular Web applications here are games and messaging services, and the most visited Internet sites focus on everyday subjects like entertainment news and sports. Many, in fact, seem only vaguely aware that China’s Internet universe is carefully pruned, and even among those who know, a majority hardly seems to care. But growing numbers of others are becoming increasingly resentful of restrictions on a wide range of Web sites, including Flickr, YouTube, Wikipedia, MySpace (sometimes), Blogspot and many other sites that the public sees as sources of harmless diversion or information. The mounting resentment has inspired a wave of increasingly determined social resistance of a kind that is uncommon in China. This resistance is taking many forms, from lawsuits by Internet users against government-owned service providers, claiming that the blocking of sites is illegal, to a growing network of software writers who develop code aimed at overcoming the restrictions. An Internet-based word-of-mouth campaign has taken shape, in which bloggers and Web page owners post articles to spread awareness of the Great Firewall, or share links to programs that will help evade it. In almost every instance, the resistance has been fired by the surprise and indignation when people bumped up against a system that they had only vaguely suspected existed. “I had had an impression that some kind of mechanism controls the Internet in China, but I had no idea about the Great Firewall,” said Pan Liang, a writer of children’s literature and a Web site operator who first learned the extent of the controls after a friend’s blog was blocked. “I was really annoyed at first,” Mr. Pan said. “Then the 17th Party Congress came, and I received an order that my Web site, which is about children’s literature, had to close its message board. It made me even angrier.” Like others, Mr. Pan used his Web page to post solutions for overcoming the restrictions to some banned sites, and then he used a historical allusion to mock his country’s censorship system. “Many people don’t know that 300 years after Emperor Kangxi ordered an end to construction of the Great Wall, our great republic has built an invisible great wall,” he wrote. “Can blocking really work? Kangxi knew the Great Wall was a huge lie: just think how many soldiers are needed to guard those thousands of miles.” A 17-year-old blogger from Guangdong Province who posted instructions on how to get to YouTube, overcoming the firewall’s restrictions, was no less philosophical. “I don’t know if it’s better to speak out or keep silent, but if everyone keeps silent, the truth will be buried,” wrote the girl, who uses the online name Ruyue. “I don’t want to be silent, even if everyone else shuts up.” The Chinese government seems particularly wary of video-sharing sites like YouTube, and has recently tightened regulations on domestic Internet providers in ways that are aimed at controlling such services. Others, meanwhile, have gone beyond launching Internet-based responses like these and taken more direct action. One such person is Du Dongjing, 38, an information technology engineer in Shanghai who sued a branch of China Telecom for contract violation because of the service provider’s unacknowledged restrictions on Web content. In this case what initially angered Mr. Du was the surprise blocking of his own business Web site last February. The site markets personal finance software, and had no editorial content of any kind. When the service provider failed to explain why the link went dead, Mr. Du took the phone company to court. His lawsuit was rejected by a Shanghai court in October, but the case has been heard in appeal. “The Americans have an expression, ‘You can’t fight City Hall,’ ” Mr. Du said. “However, I believe that with the help of today’s Internet, the mood of the public, I can win this case. I can even make a contribution to improving Chinese democracy.” Even as anticensorship activism spreads, views are divided about whether a grass-roots campaign can prevail. Some see strong continued popular resistance to the limits imposed by tens of thousands of well-financed government technicians operating powerful computers and predict a breakthrough. Yuan Mingli, who created an anti-Great Firewall evasion group because of his love for Wikipedia, said the government was already at work on new generations of Internet technology aimed at insulating Chinese users even more from the rest of world. But he predicted its failure. “That’s impossible, fundamentally, because people’s hearts have changed,” he said, adding that the system would “eventually break down precisely because China cannot be completely disconnected to the outside world anymore.” For some of the anticensorship activists, creating a broader awareness of censorship is itself a victory. “If you don’t know what’s on top of you, than you won’t fight back against it,” said Li Xieheng, a blogger who wrote a program he named Gladder, meaning Great Ladder, to help users of the Firefox browser overcome Great Firewall restrictions. “It’s just like many people not feeling that China isn’t free. They’re not aware of it and feel things are natural here, but that’s just the power of media control.” Mr. Li said he expected the Great Firewall to continue adapting to the tactics of its opponents. The movement, though, has proved the power of public opinion as an important limitation of the censor’s power, he said. “Why don’t they just take Google down?” he asked. “It’s because they don’t want to have a scene and have everybody know. A lot of people came to know about the system because of Flickr, and that is something the system needs to weigh.”
Fan Wenxin contributed reporting from Shanghai. Prisoners in Freedom City http://www.youtube.com/watch?v=6mHrfE_1yf4 China Accuses Online Activist of Subversion, February 1, 2008- NYtimesChina Accuses Online Activist of SubversionBy JIM YARDLEY
Published: February 1, 2008
BEIJING — A prominent Chinese human rights advocate who has been in custody since late December was issued a formal arrest warrant this week on charges of subversion despite calls from prominent Chinese intellectuals and lawyers for his release. International human rights groups have criticized China for the arrest of the advocate, Hu Jia, and accused the Chinese government of cracking down on dissidents before Beijing plays host to the Olympics in August. Mr. Hu, 34, was first detained on Dec. 27, when security agents burst into his suburban Beijing apartment and dragged him away on suspicion of subverting state power. The authorities formalized charges against him this week when police officers delivered an arrest warrant to Mr. Hu’s wife on Wednesday night, one of Mr. Hu’s lawyers said. “Hu Jia is under formal arrest on charges of subverting state power,” said Li Fangping, the lawyer, paraphrasing the arrest warrant. Mr. Hu has gained international attention for his advocacy on behalf of AIDS patients, farmers and the environment. He and his wife, Zeng Jinyan, also are well-known Internet bloggers who have faced official scrutiny for years for their writings on human rights in China. During a long period under house arrest in 2006, Mr. Hu filmed a documentary, “Prisoners in Freedom City,” which he posted online. More recently, Mr. Hu was outspoken in saying that China had not fulfilled its promises to improve human rights conditions in advance of the Olympics. The authorities still have not specified any details about the charges against Mr. Hu. His lawyers have been forbidden to meet with him because the authorities say that the case involves a state secret. Under the next stage of the legal process, the police may continue investigating Mr. Hu’s case for two to seven months before handing it over to Chinese prosecutors. Prosecutors must eventually decide whether to indict Mr. Hu and take him to trial. Mr. Li said Mr. Hu could face at least three years in prison. International human rights groups have characterized Mr. Hu’s detention as part of a roundup of troublemakers before the Olympics. Last November Mr. Hu criticized China’s human rights record and Beijing’s Olympic organizers when he testified via webcam to a committee of the European Parliament. “Whether or not these criticisms triggered his arrest, it is clear that the action taken against Hu Jia cannot escape being connected to the Olympics,” said the Dui Hua Foundation, a human rights group based in San Francisco that is involved with Chinese political prisoners. “From the perspective of the authorities, the opportunity to take this high-profile rights activist out of action in the final months before the Olympics may have been too good to pass up.” The statement, posted on Dui Hua’s Web site on Thursday, added that Mr. Hu’s arrest posed a major public relations problem for China as it prepared for the Olympics. The group noted that Mr. Hu was likely to remain behind bars through the Games — and might not even be allowed to meet with his lawyer by the time of the closing ceremony. Mr. Hu and Ms. Zeng were accustomed to tight surveillance from Beijing’s security apparatus. Mr. Hu was detained for 41 days in 2006 without charges and then released. He and his wife spent much of the rest of the year under effective house arrest. Surveillance of the pair loosened somewhat last year until agents took Mr. Hu into custody on Dec. 27. The authorities also severed the couple’s telephone line and Internet connection to prevent Ms. Zeng from continuing to write on her blog. The couple had their first child late last year. The newborn, Qianci, recently turned two months old. But police have been stationed outside the family’s apartment in a complex known as Bo Bo Freedom City, so that mother and daughter remain under effective house arrest. Friends, supporters and journalists have been turned away from the apartment. The parents of Mr. Hu and Ms. Zeng are the only people allowed to visit and have provided a lifeline of food and baby formula for Qianci and Ms. Zeng. Zhang Jing contributed research. China Tries to Reassure U.S. About Its Investing Plans,February 1, 2008- NYtimesChina Tries to Reassure U.S. About Its Investing PlansPublished: February 1, 2008
WASHINGTON — The head of China’s $200 billion government investment fund, seeking to reassure Americans nervous about the possibility of foreign takeovers, said Thursday that China would invest mostly in portfolios rather than individual companies — except when a “big fat rabbit” like the investment banker Morgan Stanley came along. Skip to next paragraph
Lucas Schifres/Bloomberg News
Lou Jiwei of China Investment says he is seeking portfolios. “We are like farmers — we want to farm our land well,” said Lou Jiwei, chairman of the China Investment Corporation, a so-called sovereign wealth fund established last year to invest some of China’s foreign exchange reserves. Like funds from Asia and the Middle East, the corporation has gone on a shopping spree. Sovereign funds have bought stakes in firms like Merrill Lynch and Citigroup. Referring to the $5 billion stake in Morgan Stanley that the fund purchased in December, Mr. Lou added: “Of course when there is good market opportunity, we can also make some direct investment, such as the Morgan Stanley deal.” Mr. Lou said Morgan Stanley had approached the Chinese fund rather than the other way around and that “after analysis we realized that this was a good opportunity.” He added: “If there is a big fat rabbit we will also shoot it. Some people may say we were shot by Morgan Stanley. But who knows?” China made headlines last May when it announced it would purchase a $3 billion stake in the Blackstone Group, a private equity fund. But Mr. Lou said only a third of the fund’s $200 billion in assets would be used to buy foreign assets. The other two-thirds are to be used to shore up three Chinese commercial banks, he said. Mr. Lou, a former finance ministry official in Beijing, was on a visit to the United States to tell American officials that China had no intention of gaining controlling interest in any companies, and that it would be a “good corporate citizen” and not invest in companies that damage the environment, waste energy or produce tobacco. He said he understood that Americans “have concerns about the size of our capital and also people have concerns about our motives” but that his fund was established to invest part of China’s estimated $1.4 trillion in foreign exchange reserves, most of which is in dollar-denominated Treasury securities, to meet Chinese monetary policy needs. Echoing what he said was a pledge by Prime Minister Wen Jiabao, Mr. Lou said that the Chinese government would not interfere in the operations of the Chinese fund or dictate its investment decisions, and that the fund would have its own corporate governance structure. He also said the fund would disclose more of its investment decisions and more about its portfolio composition, consistent with good financial practices. “We will be a very good local citizen,” he added, saying that if any country receiving investments had misgivings, China “may choose to leave” or look elsewhere. Concerns have been voiced in Congress that China and Persian Gulf countries might invest in strategic assets or to further political agendas. That was the worry two years ago when a Chinese company tried to buy Unocal. The Unocal deal fell apart around the same time that a Dubai company backed away from buying a company that manages American port facilities. Mr. Lou said it was obvious to him that there could be no political motives in China’s investing practices. “I need to make money,” he said. “If I don’t I cannot survive. So how can I have political motives?” While in Washington, Mr. Lou met with Treasury officials, but the Treasury declined to say with whom. Mr. Lou also met with officials at the International Monetary Fund, which is trying to draw up a code of “best practices” for use by the world’s sovereign wealth funds. China’s Inflation Hits American Price Tags,China’s Inflation Hits American Price Tags
Jason Lee/Reuters
Shoes from China, like those made at Diamond Standard Footwear in Dongguan, above, could cost 10 percent more this year. Published: February 1, 2008
SHANGHAI — China’s latest export is inflation. After falling for years, prices of Chinese goods sold in the United States have risen for the last eight months. Soaring energy and raw material costs, a falling dollar and new business rules here are forcing Chinese factories to increase the prices of their exports, according to analysts and Western companies doing business here. The rise was a modest 2.4 percent over the last year. But even that small amount, combined with higher energy and food costs that also reflect China’s growing demands on global resources, contributed to a rise in inflation in the United States. Inflation in the United States was 4.1 percent in 2007, up from 2.5 percent in 2006. Because of new cost pressures here, American consumers could see prices increase by as much as 10 percent this year on specific products — including toys, clothing, footwear and other consumer goods — just as the United States faces a possible recession. In the longer term, higher costs in China could spell the end of an era of ultra-cheap goods, as well as the beginning of China’s rise from the lowest rungs of global manufacturing. Economists have been warning for months that this country’s decade-long role of keeping a lid on global inflation was on the wane. “China has been the world’s factory and the anchor of the global disconnect between rising material prices and lower consumer prices,” said Dong Tao, an economist for Credit Suisse. “But its heyday is over. We’re going to see higher prices.” Chinese imports constitute 7.5 percent of spending by Americans on consumer goods, but they make up much bigger shares of several popular categories, including about 80 percent of toys, 85 percent of footwear, and 40 percent of clothing. Even when the market share held by Chinese goods is relatively small, their low prices put pressure on other producers to keep costs down. Whether Chinese factories will succeed in making wholesalers pay more for their goods and whether retailers will be able to pass much of their higher costs on to American consumers is unclear, analysts say. But companies that operate in China or buy from here are already reeling from mounting cost pressures that they say will weaken their profits and could disrupt their supply chains. Those supply lines were already called into question by large-scale recalls of Chinese exports last year, involving everything from toys to pet food to tires. “This is what I call the perfect storm,” said Alan G. Hassenfeld, the chairman of Hasbro, one of the world’s largest toy makers, during a recent visit to China. “We’ve got higher labor costs and labor shortages, plastic prices have gone way up and we’re doing more safety testing.” While no reliable figures exist on average Chinese wages, experts say that factory wages have risen 80 percent or more in many coastal areas in recent years, with the lowest wage about $125 a month. Some of the current cost pressures are actually by design — Beijing’s design. After years of complaints from the United States and Europe about China’s growing trade surplus, authorities here have removed incentives that once favored exporters of cheap goods. Starting last June, for instance, China removed or reduced tax rebates on hundreds of items for export, including toys, apparel, leather, wood and other goods, effectively taxing those industries. But the actions are also part of Beijing’s desire to move China higher up the global manufacturing chain — away from the least- finished products, like plastic children’s toys, toward more advanced exports that require skilled labor, like small electronics and even automobiles. Whatever the government’s motivation, many Chinese exporters say the timing of the rebate cut was disastrous. Their factories had been struggling to cope with problems that included power shortages, higher raw material costs, rising wages and inflation in other areas. For instance, the cost of some types of plastic has risen more than 30 percent in the last few years because of higher oil or petroleum costs. Plastic is a major component in toys and other consumer goods. Many Chinese factory owners say a tough new labor law, which went into effect on Jan. 1, complicates the hiring and firing process and threatens to raise labor costs even more, at a time when parts of the country are already plagued with labor shortages. Some factory owners say there have already been strikes and other turmoil over the interpretation of the new law and how it should be applied. “We have seen lots of brawls between employees and employers,” said Hong Jiasheng, vice president of the Taiwan Merchant Association, which represents investors in China. “We think the enactment of the new labor law is too hasty.” Analysts say Beijing is also stepping up its enforcement of environmental laws, putting added pressure on factories that had long skirted regulations. Adhering to those often ignored rules increases cost, too. These changes take place against the backdrop of a dollar falling modestly against the Chinese currency. The dollar is down about 7.6 percent in the last year against the yuan and is expected to fall further this year. The weaker the dollar, the more expensive Chinese and other goods become when their prices are converted to dollars. All in all, toy producers are among the hardest hit by the changes in law and prices. They rely on large quantities of plastic. They face heightened regulatory scrutiny after the product safety scandals last year. Indeed, some toy factories went bankrupt, squeezed between rising local costs and pressures from foreign customers to deliver a better product at an even lower price. “I’ve been in the toy industry for almost 20 years, but these past two years have been the hardest time,” said Guo Jinshen, manager of the Fenggang Fengyuan Plastic Toys Company. “Costs are rising, there are recalls, stricter regulation, more complicated inspection — all these things make it difficult.” To reduce costs, some factory owners are considering moving to inland China, where wages are lower, or to other parts of Asia, like Vietnam and Indonesia. Li & Fung, one of the biggest companies for supplying products worldwide, says its customers are already responding to Chinese inflation. “There’s a shift in sourcing driven by higher prices in China,” says Bruce Rockowitz, president at Li & Fung. “We’ve already seen a big move in furniture to Indonesia.” But while relocating production to cheaper countries could keep prices low for Western consumer goods, moving factories and complex supply chains is difficult. Such changes can take years and cost millions of dollars. In the meantime, makers of toys, apparel and footwear — highly labor-intensive industries — are being forced to consider raising prices even as growth in the United States slows, a rare confluence of events not seen in decades. Companies that began outsourcing production to China in the 1990s mostly benefited from lower costs, which translated into both higher corporate profits and lower consumer prices. Now, many Western companies have to rethink pricing. “Companies are now ordering for the spring of 2009,” says Nate Herman, director of international trade at the American Apparel and Footwear Association, based in Arlington, Va., that represents some big clothing and footwear makers. “Factories are coming back and asking for 20, 30, 40, 50 percent price increases.” Will importers pass those costs on to consumers? “It’s going to be hard to avoid some increase,” he said. Blizzards and Coal Shortages Strain China’s Rail Network,February 1, 2008- NYtimesBlizzards and Coal Shortages Strain China’s Rail Network
Vincent Yu/Associated Press
A sick passenger was carried from the crowd of travelers on Thursday at the train station at Guangzhou, China. By DAVID LAGUE
Published: February 1, 2008
BEIJING — After blizzards disrupted coal deliveries, acute electricity shortages across a swath of central and southern China have exposed the fragility of transportation networks in the world’s fastest-growing major economy. In addition to causing chaos at transportation hubs as up to 200 million migrant workers and other travelers try to return home for the Lunar New Year festival next week, the ice and snow have also restricted coal shipments along critical rail arteries feeding power stations in the southeast, China’s densely populated manufacturing heartland. Food prices are increasing in major cities, as distribution bottlenecks hamper deliveries of vegetables and meat, the official Xinhua news agency reported Thursday. In a sign of the Communist Party’s nervousness about widespread resentment just before the country’s most important holiday, senior leaders, including Prime Minister Wen Jiabao, visited train stations to assure frustrated travelers that the authorities were working to solve the delays. The huge crowds waiting in freezing cold at some railway stations in southern China began to clear Thursday, the state news media reported, as rail service to central and inland provinces became more frequent. But electricity shortages were expected to continue after supplies were disrupted to 17 provinces, or about half the country, in recent weeks. The provinces of Guangdong, Guangxi, Guizhou, Hunan, Anhui and Jiangsu had the worst problems, with more than 30 million people affected by blackouts or brownouts, according to government estimates. Steel and aluminum output is also expected to suffer, analysts said. “I think the current weather-related problems have major ramifications for the manufacturing sector and therefore the economy, let alone the fact you have a lot of unhappy people,” said Victor Shum, an analyst based in Singapore for the energy consultants Purvin & Gertz.
China mined about 2.5 billion tons of coal last year, according to government statistics, and burning that fuel supplies more than 80 percent of the country’s electricity. Despite the severe air pollution in urban and industrial centers and international pressure to reduce greenhouse gas emissions, most analysts expect China’s coal consumption to increase for decades if rapid economic growth continues. The bulk of China’s coal is mined in the western provinces of Shaanxi and Shanxi and the northwestern region of Inner Mongolia. But many coal customers are clustered in the industrialized southeastern and central coastal provinces, so coal must be hauled on China’s vast but overextended rail network. More than 40 percent of rail capacity is devoted to moving coal, and the authorities have been investing heavily in new lines and cargo-handling facilities in an attempt to keep up with demand. Despite these efforts, China has suffered persistent power shortages in industrial centers for more than five years as electricity output has failed to meet the demand from a booming economy.
This problem became much worse when heavy snow and ice over the past two weeks damaged electricity grids and cut power supplies to the rail networks in central China that carry the bulk of coal to power stations. Some power stations in southern China were operating with only a few days of fuel in reserve, government officials said. Fuel stocks at power plants operated by the State Grid Corporation of China, which account for more than 10 percent of the country’s installed generation capacity, fell to record lows, the official news media reported. Officials warned this week that coal supplies could be further hit when some mines closed over the Lunar New Year holiday. In response, the authorities have diverted extra rail cars to moving coal and sharply increased the volume shipped south by sea from the major northern port of Qinhuangdao. In an effort to limit shortages, the government last week ordered the port authorities to halt coal exports for two months. Some analysts have said that government policy had contributed to the power shortages. Trying to contain rising inflation and to avoid antagonizing consumers, the authorities have capped the prices that utilities can charge for power, even as coal prices have been soaring. Without the incentive of adequate profits, power producers have been reluctant to increase output, analysts say. “If there had not been this mismatch,
power producers, particularly in Guangdong, might have been more
aggressive in importing coal,” Mr. Shum, the analyst in Singapore,
said. China and Alcoa Buy Stake in Rio Tinto,February 1, 2008- NYtimesChina and Alcoa Buy Stake in Rio TintoBy DAVID LAGUE
Published: February 1, 2008
BEIJING — The state-owned Aluminum Corporation of China joined Alcoa on Friday in taking a 12 percent stake in Rio Tinto. The Chinese company also said it might buy more shares to derail a hostile takeover attempt by BHP Billiton, a merger that China fears could drive up prices for raw materials even further. Chinese officials have expressed concern that combining Rio Tinto and BHP Billiton, the world’s two biggest commodities companies, would create a giant with a dominant position, particularly in iron ore, which China needs to sustain strong economic growth. Other big commodity customers in Japan and South Korea have also objected to the BHP proposal. China’s move came less than a week before the deadline for BHP to make a formal offer for Rio Tinto. Both miners are listed in London and Melbourne, Australia. Chinalco, as the Chinese company is known, described its $14.05 billion stake in Rio Tinto as China’s biggest foreign investment. The company said it did not intend to make an offer for the rest of Rio but reserved the right to do so if another suitor made a firm bid. Alcoa contributed about $1.2 billion to the Rio stake purchase, with Chinalco paying the rest. It is unclear whether any eventual Chinese bid for Rio Tinto would run into the same kind of opposition that emerged for proposed deals like Cnooc’s unsuccessful bid in 2005 for Unocal, the United States oil company. Beijing has sought to reassure foreign governments that it would focus on portfolio investments rather than entire companies. “This strategic stake in Rio Tinto shows our positive outlook for the quickly developing mining sector and also our positive outlook for Rio Tinto’s value and its management’s ability to realize shareholder value,” Chinalco said. “It is a strategic stake for Chinalco becoming a multinational and multi-metals company.” BHP, the world’s biggest mining conglomerate, proposed a share swap with Rio Tinto shareholders in November that would merge the companies to form a sprawling resources empire worth about $350 billion. The company argued that the product of a merger would have the capacity to expand output more rapidly and reduce costs for its major customers. Rio Tinto’s management has repeatedly rejected the offer on the grounds that it undervalued the company’s portfolio of its main resources and its prospects for strong growth in a global commodities boom. The company said the Chinalco investment vindicated its assessment. “This reinforces our position that BHP’s proposal undervalues Rio Tinto,” said Faeth Birch, a spokeswoman in London for Rio Tinto. Illtud Harri, BHP Billiton’s spokesman in London, declined to comment on the stake purchase. London regulators have set a deadline of Wednesday for BHP to make a formal offer. China’s opposition to the merger had led to speculation that Beijing would attempt to block the deal or make a rival bid. But senior mining industry executives in China were skeptical that Beijing would be prepared to take the risk with an investment of that size. They note that a Rio Tinto takeover would dwarf China’s recent foreign investments. Those investments include the $5 billion that China’s government investment fund, the China Investment Corporation, injected into Morgan Stanley and its purchase of a $3 billion stake in the Blackstone Group, a private equity fund. As commodity prices have climbed in recent years, in large part because of soaring demand from China and India, Chinese metals manufacturers and senior government officials in Beijing have become increasingly frustrated as the big miners have successfully negotiated big price increases. China depends heavily on imported metals for its manufacturing and export industries. Construction of housing and public infrastructure, to support a huge migration of rural Chinese to the cities, is also driving demand for metals like steel, copper, zinc and nickel. Senior Chinese government officials have been openly critical of steep price increases. In particular, there has been considerable tension between BHP and the Chinese authorities over its determination, along with other mining companies, to extract the maximum profit for shareholders while the boom lasts. But industry analysts said Chinese investment in mineral resources overseas would not automatically lead to lower prices for China’s steel mills and other metals producers. They said a new Chinese owner would come under the same pressure to maximize returns from its resources holdings. Chinalco is one of China’s biggest mining and metals companies involved in exploration, extraction and processing of aluminum, copper and other metals. It operates in 21 provinces in China and has investments in Australia, Canada, Peru, Fiji, Guinea and Myanmar. The company said it earned a $2.99 billion profit in 2007 on revenue of $18.3 billion. Julia Werdigier contributed reporting from London. |
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