The ICAS Lectures


How to Hedge Against Rising China

Michael Pillsbury

ICAS Spring Symposium
Humanity, Peace and Security
May 22, 2007 1:00 PM -- 5:00 PM
National Press Club
Washington D.C. 20045

Institute for Corean-American Studies, Inc.

965 Clover Court, Blue Bell, PA 19422


Biographic Sketch & Links: Michael Pillsbury

How to Hedge Against Rising China

Michael Pillsbury

Thank you very much. I interpret your orders to me to sort of review current thinking about what is U.S. policy and strategy toward China and give some idea of the debate that's going on in Washington, DC. It seems to me there are a number of very good books that have appeared in the last few years about China that are worth talking about. In terms of what the future of China is because after all it should be an axiomatic principle that U.S. policy or strategy toward China in the long term is to be grounded in what we think about the future.

The problem there is that it's quite difficult to design a strategy if you don't know at all what the future is likely to bring. So I have divided the books and articles that I respect the most about China's future into four scenarios, four ways that China could go in the next 10 or more years, and then I'm going to talk about the strategies that would fit these four different scenarios. Just to preview my conclusion for you it is almost impossible, almost impossible for the United States to develop a strategy for China in the long term given the lack of consensus among our scholars about the direction in which China is going. So that is part of the debate that you read about in the books and articles on China this lack of consensus about the future. And I don't speak for the Defense Department. I'm just an advisor to them, so no one has to worry that anything I say represents the U.S. Government. But I'll try to reflect for you as best as I can what the Clinton Administration tried to do with China in its policy and strategy, and what President Bush is trying to do now.

The first of the four scenarios is quite popular. I picked out one book as an example on this slide. The book's formal title is "The Coming Collapse of China" by Gordon Chang, and he is only one of many who have written a lot about this scenario. Another quite popular author is a Professor at the University of Pennsylvania named Arthur Waldron who's had a couple of articles in Commentary magazine, spelling out how the collapse will take place, and then expressing his optimism about what will happen that out of that collapse will come a sort of constitutional assembly a meeting and China will design a new government for itself.

Other people when they talk about the collapse, the coming collapse, stress the negative aspects refugees, poverty, crises, an army of unemployed, maybe China breaking into different regions with civil war, battles over China's nuclear weapons. So the first scenario of the collapse of China can lead to a happy ending, as Arthur Waldron has discussed in his articles that it becomes part of democracy and a new Chinese government. It can also be seen as a catastrophe for China itself and then for its neighbors. And as all of you know, in the 1920s and 30s, Japan's debate about what to do in China had a great deal to do with Chinese instability and the belief that the protection of Japan's people and investments, the railroad all required the Japanese military. Some said they ultimately won the debate to stage incidents and to go into China to make China stable. So a catastrophic collapsing China that breaks into pieces and has a civil war could be a cause of enormous trouble for decades to come.

This collapse scenario which has a name I don't know if there's any Chinese anyone here speak Chinese? Anybody? This scenario is discussed a lot in China. It has a name. It's called the B L ... B ... implies bankruptcy. Bankruptcy and break-up theory. And the Chinese press does not completely dismiss this idea. In other words, it's considered to be a problem by the Chinese experts in China.

It has a strategy there is an American strategy to deal with this that you can detect in the speeches of the Secretary of the Treasury Hank Paulson who, as we all know, is meeting across the street with half of our Cabinet and half of the Chinese Cabinet today and tomorrow. And I'm very sympathetic I support Secretary Paulson's concern. What he's said in some speeches is that the danger of Chinese reforms failing is a concern of his, and he's suggesting that the strategic economic dialogue that's taking place is an effort by the United States to help China succeed with its economic reforms. And I'll come back to this in a little while in a few minutes but the U.S. Government has about 15 or 16 programs to help China remain stable, to help Chinese grow, in some sense to help China become a strong power. And I would suggest that these programs in some way deal with this problem of a collapse in China. In other words, there is a way to prevent it from happening. There is a hedge against it happening.

The second scenario is probably the most popular of these three, and I picked Bruce Gilley's book on Chinese democracy and how it will happen. I could have also picked Jim Mann's book which argues against this possibility. But this is a mainstream view that Jim Mann's new book called "The China Fantasy" provides more than 100 quotations of people who hold this view, that if present trends continue and China remains prosperous, it will become some kind of a democracy with a political opposition movement, some kind of national elections, quite different from what China is today.

And there's some policies that go with this scenario as well. This scenario tends to suggest that the United States should not aggressively pursue either human rights or the democracy movement in China. And I think I realize some of you are very young, but if you think back to the 70s, and especially the 80s under President Reagan, the White House was frequently the host of dissidents and famous human rights advocates from the Soviet Union. They were guests on Radio Free Liberty, the radio for Russia; they were hosted in the White House, they were hosted in Congress. I guess an American verb that's sometimes used is "lionized." They lionized by American Presidents and Congressional leaders.

What you find with China policy over the last 15 or 20 years is that China's most famous dissidents are not really welcome in the White House. They are not described by Congressional leaders as heroes. They're pretty much ignored. They have very small organizations. There's one at Princeton. There's a very small one here in Washington. But they are not treated by any American President I don't think ever at least not for 30 years they're not treated as heroes. Their pictures, therefore, one might say are not on the cover of Time and Newsweek. They're not known to scholars. There are such people they write books they have very thoughtful papers on the future of China. But by logic, if China's democracy is inevitable and automatic, American policy should not put pressure on to bring this about for two reasons: first it's going to happen anyway, and second pressure might hurt reformers inside China or might cause friction in U.S.-China relations. So this scenario of the inevitable democracy coming to China has its own powerful logic about what our long-term strategy and policy should be. And in a way it's consistent with the first scenario.

The third scenario is only held by a few people except for the Communist party of China. The third scenario I would call the Chinese Communist Party Scenario. That's about 70 million people. That's a lot. That's more than American scholars of any type put together on any subject. The third scenario says that the Communist Party of China is almost certainly going to remain in power for the foreseeable future 10, 20, 30 years for various reasons, and that it does a good job in bringing prosperity to China and helping the Chinese people. It's popular, in other words. And secondly, that it does a very good job in suppressing dissent, making sure that dissenters don't succeed in China. And one of the really most brilliant things, excellent policies that Hu Jin Tao has adopted Hu Jin Tao has made it very clear in the last two years that peasants and farmers and people who are angry in China, who have demonstrations and the government says it's more than 70,000 a year they've released statistics about this Hu Jin Tao has said that those demands and those people must be accommodated; that it's the local party officials who have done wrong, who have antagonized the protesters. So he has sided with the protesters publicly, and he's attacked his own local party officials. And this is really quite extraordinary in the history of the Communist movement. It's hard to imagine Stalin, for example, during the crackdown on the Gulags and others in the Soviet Union, it's hard to imagine Stalin taking sides with protesters against his own Communist party at lower levels.

So we could spend a lot of time on the so-called resilient authoritarianism scenario, but I think it's important to suggest that a number of professors in our country have drawn this out in some detail. That is, they have stressed the effectiveness of the Chinese Communist party in both suppressing dissent, as I put it, of certain types those things that go against the four cardinal principles are suppressed, but also in a very agile manner, in putting the center and the senior leaders in Beijing on the side of the protesters.

And there's really a third part of this which is the effort of the Chinese Community party leaders to incorporate the wealth and talent in China as opposed to the old approach that only the poor without property are qualified to join the Communist party. The old theory was a term that we translate as "Proletariat," but actually in Chinese Uchan . Uchan means "no property." The property-less class. They were to be members of the party, and to lead the party, and to some degree, the poorer you were, there were competitions if I was from a peasant family that had $20 a month income, and someone else had only $5 a month income, I would not do as well rising in the party. This was the 50s and 60s. So the poorer you were, the better off in the party you were. First, Jang Ji Min, and now President Hu Jin Tao have stressed instead the so-called "Three Represents" theory and the "Harmonious Society" theory that opens the gates of party leadership to the wealthiest people in China. People with the most advanced degrees in Engineering or Science are welcome in the party, and they've gone one step further just in the past month. For the first time, they named a Cabinet minister, the minister in charge of what for us would be the National Science Foundation and the White House Office of Science and Technology Policy they've name a non-Communist Party member to be the Cabinet minister in charge of science and technology which is quite important because Yung Chou P's (inaudible) contribution to Marxism/Leninism was to say that the main source of production, the main source of prosperity for a country is science and technology. So now we have a non-Communist cabinet minister in charge of what Yung Chou P (inaudible) said is the main source of prosperity.

There's another part of this policy from the Chinese point of view that they say they need peace and development around China to continue maintaining the Communist party in power, and obtaining prosperity. This gives them a very interesting foreign policy strategy which, to put it in four words my words, not the Chinese government the four words are: "Be Nice To Everyone." "Be Nice To Everyone." China has been seeking friends and what they call "partnerships" or even "strategic partnerships" with any country that's of interest to China, or any country that's willing to engage in such relationships. This is really quite startling. In other words, traditional rivals or enemies of China have been for the last at least 10 years this probably began in the early 90s, this "Be Nice To Everyone" strategy, and the reason for it one reason for it is it gives legitimacy to the Chinese Communist Party. In other words, every time a country, let's say, sends a military delegation to China and they have a big media event as part of it, it's showing the Chinese people, "You see, we are well thought of by the other major powers. They even send the chiefs of their military services to our country." It has a so-called legitimizing effect on the Communist party. "We are delivering prosperity to you; we support your reform efforts, and ..," in a phrase they often use, "we have friends all over the world."

I believe this is correct: there's no country today that China condemns or attacks for its policies toward China, with the possible exception of one country, and I don't know if you'd like to guess that country, but even that country is often referred to by a code name: it's called Hegemony. There's a country today that's seeking Hegemony. It seeks to dominate the world. And China has grave concerns with this country's effort to seek Hegemony. But generally speaking, "Be Nice to Everyone" and have no enemies is part of this third scenario and the strategy of obtaining prosperity and harmony and legitimacy for the Communist party.

There's another dimension of it that is manifested by a scholar name E ... (inaudible) is quite a brilliant scholar. He's published several books in China. He's on the Central Committee staff. His books have focused really on comparing political systems in the world, European political systems especially, and talking about the kind of political system China might evolve toward. And he had a recent essay on why democracy is a good idea, why democracy is important in a specially defined way. So part of this long-term Chinese approach to having a successful party rule continue in China is to look at democracy inside the Communist Party, ways of strengthening what they borrowed from the World Bank the word "governance." And in general, ways to make the Communist Party management of Chinese society and the economy and everything, more effective. And to some degree, this suggests all of these complex factors that make up the resilient authoritarianism scenario, also suggests an American strategy, but it's very difficult for some in the U.S. to accept this strategy.

The strategy would be the United States should seek to maintain authoritarianism in China and take whatever steps are necessary to aid the Chinese leaders in their search for prosperity and stability and legitimacy. And as you I think as you all know this is a large of the American policy that although President Clinton and President Bush both criticize Chinese policies and the specific nature, neither one of them ever said anything about the overthrow of the Chinese Communist Party in China. There are almost no voices in our Congress or in our academic world that openly call for the overthrow of the Chinese Communist Party.

Now we're going to skip to the fourth scenario, which is in many ways a more finely crafted version of some of the factors in the first three scenarios. The fourth scenario is in a new book that came out this year or the middle of last year called "Tracked Transition" hard to put into Chinese "Tracked Transition" by Pei Minxin who had previously done books and articles more on the Chinese democracy issue. But his new theory he went to the provincial governments all around China and he studied their journals and interviewed their officials, and he reached a rather fascinating conclusion that there's so much negative information in the provincial press about corruption, mismanagement, the way the State wealth was transferred in various privatization efforts the way the whole system works that he believes that it's so corrupt, so decayed here are some of the words he uses in the book so corrupt, so decayed, that it's unable to rescue itself. And he borrows some of the World Bank literature on what used to be called "A Crony Capitalism" or "The Seeking of Rents" -- sort of a Nobel Prize in Economics about 20 years ago on rent-seeking behavior, that if you show somebody or even a laboratory animal which is how economic experiments sometimes are done if you show them a way that they can make a lot of money but do nothing to help their society, they will do it. It's called "rent-seeking behavior." And the Paei Minxin book describes in more than 250 pages hundreds of examples of this internal decay of the Chinese government, and his assessment is that the center cannot overcome this decay and corruption.

So he doesn't go so far as to predict the collapse because he thinks the system has self-governing aspects to it, but he sees it as a permanent decay with therefore a much slower growth rate not the 10% we've been seeing for 25 years but a much slower growth rate, and at the end of the book, in the last two or three pages, he specifically attacks the U.S. Department of Defense. He says there are irresponsible people in the U.S. Pentagon who are always looking for an enemy and they want a new Cold War. They lost the Soviets as their enemy. So they're trying to turn China into an enemy. And Pei Minxin's argument is: this is very foolish of the Pentagon because a trapped transition or a decaying China cannot pose a military threat; in fact it will lack the means to find the military modernization, and the growth of protests will so preoccupy the Chinese leaders, and in the 10 or 20 or more years ahead, we'll see a Chinese leadership preoccupies with maintaining stability sort of against the odds not quite collapsing, and certainly not becoming a democracy, but internally focused, lacking resources to modernize their own forces.

So it's quite a spirited attack he gives in his last two or three pages against the Pentagon always seeking an enemy and so forth. So I have about two minutes left? So obviously the China strategy, facing a decaying China or a trapped China would be somewhat similar to that first set of policies as I mentioned the Secretary of the Treasury and his team are following now that we don't want China to fail in its reform process, we don't want a decaying, corrupt China. It may not be as bad as a collapse, but it gives the U.S. Government strong incentives to support Chinese growth, maybe to support anti-corruption programs which Hu Jin Tao is doing. He's made a lot of comments and following very strict policies against corruption firing the leader of Shanghai a few months ago, even though the leader of Shanghai is very tied in with the previous leaders. So Hu Jin Tao obviously is concerned about corruption and this decay theory, and is pursuing various measures, and I think what you see in the talks going on across the street is that the U.S. Government is committing itself to help President Hu in this struggle against corruption and decay in China as a specific part of the Chinese reform program.

So if you accept my argument so far, that these are the four main scenarios, that each of them has a sort of logic to it about what U.S. strategy should be over the long term, and you see that there's some elements in common for U.S. strategy for all four scenarios they all suggest an American strategy that does its best to maximize Chinese growth, to maximize Chinese stability, to help provide legitimacy to the Community Party in China, to give the impression to the Chinese people that the U.S. is quite supportive of Chinese leaders. And I think because of that logic, that's obviously why U.S. policy is the way it is. There are I made a list of more than 15 U.S. programs that are aimed at strengthening Chinese stability and growth. I won't read all 15 off now. They're in a paper I wrote which is on our website. But some of them are quite startling.

You remember several years there was concern about non-performing loans in China, and the theory part of collapse scenario is that non-performing loans are so widespread and their financial system could collapse, their banks could collapse. Well, the U.S. Treasury Secretary sent a team over many teams on many times to help improve the Chinese bank regulation system to be able to detect non-performing loans and how they could be reduced, how they could be in some sense privatized on the international market trying to help China in this quite serious challenge they faced a few years ago.

The same thing is true in the energy area. The Department of Energy has sent, I believe, more than 100 teams to China to help with energy efficiency, to help sell technology, to strengthen the Chinese they don't have an energy department, but to strengthen that structure of the government. So each of these 15 or 16 examples are efforts by the U.S. Government to strengthen China's economy and government. Now, sometimes it can be relatively small mining safety. You may have read about mining safety tragedies in China. The Department of Labor has been sending teams to improve Chinese mining safety management. You may know that many of the rural protests have to do with pensions and occupational safety, privatization issues. The Department of Labor has sent teams for each of these problems in China the U.S. Government has sent teams to help them do better. There's even something that we have called the "Federal Mediation Institute" to kind of mediate labor conflicts, and since there are a lot of labor conflicts in China, that team has been part of the U.S.-China cooperation. Environmental policy the same thing.

So to sum up my first main to you the scenarios, the strategies, the fact that there's probably a different system on the (inaudible), there's still a large consensus in the U.S. about helping the Chinese that sort of grows out of all four. I would close with a mystery for you a really big mystery. I don't know the answer to it. And that is: why the Chinese leaders for 15 years, continuing up until today, speak to often about in America, they say, there's a China threat theory. There are people in America who want to dismember China divide it "dismember" is a special Chinese word to divide China into seven parts. It's called the C.. 7-part theory. There are people in America and in the American Government who want to turn India against China by selling arms like the P3 aircraft or F16s, long-range weapons, to India that will help India either control the Indian Ocean where Chinese energy shipping passes, or that will help India directly. They make the same comments about Japan that the U.S. strategy toward Japan is to turn Japan somehow against China and to arm it. They even some Chinese scholars have even suggested that the U.S./North Korea strategy is to bring North Korea into the American orbit and to work with Kim Jong Il against China. This came after Kim Jong Il's famous comment as reported by (inaudible) Sherman in 2000 that Kim Jong Il had said to them, after Korean unification it's okay if the U.S. continues to maintain forces on the Korean peninsula. The Chinese scholars' reaction to this was mild alarm that the U.S. appeared to be trying to establish itself establish a military presence even after Korean unification.

So I won't bore you with this material a lot of it's in one of my books, but we have this strange phenomenon that the Chinese government seems to perceive the U.S. as a threat, and seems to perceive at least elements of the U.S. Government as a threat to China in spite of this enormous what can only be called a kind of foreign aid program to China. And why this should be the case, as I said to you earlier, is a mystery. And there are a number of possibilities.

One is that someone is exaggerating someone who reports these matters to the Chinese leadership is exaggerating the power and influence of the so-called "China Threat Theory." Now, there's no doubt that there's 10 or 20 people in America who say China is a threat. Some of them have published books. The books sell 20,000 copies. There's one called "The China Threat." It sold about 30,000 copies almost 10 years ago. It was mainly about espionage inside the U.S. Occasionally there are articles that have the words "China threat." There are two or three Congressmen who've spoken of a threat from China. But generally speaking, out of 300 million Americans, I don't know how many scholars and government officials it's almost no one. And yet when you read most of the Chinese writing or comments, there's two main themes: The U.S. no matter who's President President Clinton was equally attacked, if not actually more severely attacked than President Bush the U.S. is seeking to dominate the world, and will use any ruthless means to do so. And one of the most extreme examples of this was the front page of the Chinese Communist party's newspaper called "People's Daily," in 1999 it had a long article, big headline, and of course this is China says this party newspaper is controlled by the leadership, the Central Committee in fact, Chu En Lai was known to look at particular articles when he was Prime Minister and (inaudible) this article said there are 7 ways that the U.S. is worse than Nazi Germany. It went into details about how the Nazis had used a certain kind of gas to kill people, and that President Clinton's Administration was worse than Nazi Germany.

So the second theme besides the U.S. seeks its enemy is that the U.S. Government and many in the U.S. have a threat theory of China. From my point of view, this is simply absurd. Our Chairmen of the Joint Chiefs the last four of them, when they visited China, went out of their way to say China is not a threat. Our Secretaries of Defense, going back 15 years every one of them has said China is not a threat. It's hard to see any particular steps the U.S. Government takes in which it's treating China as a threat. So this is my mystery for you to think about why do the Chinese have this rather deeply held perception that in many ways their best friend in the world is out to get them?

Thank you very much.

MODERATOR: Mike, you will entertain a few questions?

QUESTION: (inaudible for transcription)

PILLSBURY: That's an excellent question. The strategic economic dialogue so far has been a bilateral-only approach. In fact, ironically, the European Union and Japan do not seem to have this same effort to want to aid China with legitimacy and prosperity. The European Union policy stresses human rights actually quite a bit. They've got a new dialogue that stresses human rights, and Japan has a whole separate policy toward China different from ours in the sense of not necessarily supporting prosperity. So I have not seen the Treasury Secretary seek to internationalize this dialogue so far at all. It's rather seen as something that has to do with American-Chinese trade and investments and our future together, not a multilateral approach.

QUESTION: (Inaudible)

PILLSBURY: Well, we certainly found that out a couple years ago when the European Union wanted to lift the arms embargo and was quite surprised when the U.S. cared so much about not lifting the arms embargo.

QUESTION: (INAUDIBLE) a fifth scenario in this direction. There's a potential for an answer to the question about why China perceives and why the U.S. perceives a threat The U.S. it's a label when we say the U.S., (inaudible) China has a capitalist sector that is run and is part of the government. The U.S. has a relatively independent private sector and a relatively independent government as regards decision-making and control. And the United States when the government is doing something for China, at the same time, the private sector's interest is long-term profit, it will engage in lawsuits against Chinese companies, will tend to go to the WTO with issues, but the private sector does not support China in business relations except when it is in the mutual interest of both.

MODERATOR: What's the question, quickly?

QUESTION: The question is: the fifth scenario is there a fifth scenario where there's a regression to the (inaudible), where China becomes more democratic than it is, and the United States becomes less democratic than it is because of partnerships, joint ventures; the private sector of the United States working with the Chinese government and the Chinese private sector together reaching a regression to the means in terms of how government operates (inaudible) ...

PILLSBURY: It's possible. I'm not saying these are the only four scenarios. So I welcome more scenarios. (inaudible) ... write up the idea and publish it!

MODERATOR: Again, in the interest of time, let's Michael have a break and let's introduce the next speaker.


This page last updated 9/9/2007 jdb

ICAS Fellow
ICAS Speakers
& Discussants