Major Developments in China since last Leadership Change

How China Has Changed Since the Last Leadership Transition

Published: Thursday, 8 Nov 2012  

By: Rajeshni Naidu-Ghelani, CNBC

All eyes are on China this November as the country prepares for the once in a decade leadership transition within the ruling Communist Party.

The world’s second biggest economy has undergone a massive transformation within the last 10 years. From rapid urbanization and economic growth to social and political development, China has marked many milestones and firsts in the past decade — highlighting its significance on the global stage.

With this in mind, we look at six major changes that China has undergone since the last leadership transition in 2002. Focusing on factors like economic development to changes in consumer behavior, we look at how big of an impact China’s transformation has had on the rest of the world.

Rapid Economic Growth

The Work Bank

Riding the wave of rapid economic expansion, China’s growth engine has remained strong over the past decade. China’s economy grew from being the 5th largest in the world in 2002 to 2nd only to the U.S. by 2010. 

The country has seen an average annual gross domestic product (GDP) growth of 10.6 percent since the last leadership transition in November 2002. Yearly economic growth was in the double digits from 2003 to 2007 and hit a high of 14.2 percent in 2007 — levels not seen since the early 1990s. However, like the rest of the world, China was impacted by the global financial crisis in 2008 and saw its GDP fall to 9.6 percent that year. Since then, the superpower has been able to maintain strong economic growth of over 9 percent, but it continues to be plagued by fears of a hard landing. GDP in the second quarter of this year fell to 7.6 percent, hitting its slowest pace in three years.

Many economists now expect China’s annual GDP to fall below 8 percent in 2012, with even Beijing setting a target of 7.5 percent growth — marking China’s first drop to that level since 1999. Uncertainty over how the new leadership will deal with slowing growth is intensifying and several analysts have told CNBC that policymakers may be taking their eye off the ball when it comes to the economy to prepare for the once-a-decade leadership transition. The politics involved in the government change may be slowing the policymaking in China and deterring the government from making significant economic decisions, according to experts. 

Rising incomes

National Bureau of Statistics China

Economic development has led to rising incomes in China as workers demand higher wages to cope with soaring living costs in major cities.

In a 10 year period, the per capita income of urban residents rose from $827 in 2001 to $3,711 in 2011, according to the National Bureau of Statistics of China. That’s a nearly 350 percent increase. China’s average minimum wage has been rising an average 12.5 percent annually from 2006 to 2010, and the government announced earlier this year that minimum wages should grow by an average of at least 13 percent in the five years to 2015.

Rising wages has become a major concern for local and international manufacturers betting on “cheap” Chinese labor for growth. Many are moving production inland to save on costs, while others are looking into alternative manufacturing hubs in Asia like Vietnam, the Philippines and Indonesia. For example, Apple supplier Foxconn, in the news recently for labor unrest at its Chinese factories, announced in August that it would invest $10 billion in Indonesia to tap into one of the cheapest labor forces in Asia.

Stocks Outperform in a Decade

Thomson Reuters

China’s battered stock market, which was down more than 20 percent in 2011, and is lower by nearly 6 percent so far this year, has made headlines recently for being the worst performing major equity market in Asia — a sharp contrast to China’s growth story.

Still, taking into account the total gains made over the past decade paints a more bullish picture. The Shanghai Composite index rose 35 percent from 2002 to 2011, far outperforming the U.S. benchmark S&P 500 which only rose 9 percent in the same period. But, despite the substantial 10-year gain, it hasn’t been all smooth sailing for Chinese equities. The Shanghai Composite fell about 65 percent to 2,016 in October 2008 during the global financial crisis from a peak level of 5,725 in September 2007. While stocks continued to gain ground up until August 2009, it has been in a steady decline since.

Despite the downtrend in the last three years, several analysts are still optimistic about a turnaround in Chinese equities on the growing possibility of more easing by the government to spur growth. Japanese brokerage Nomura predicted in July that Chinese stocks could climb as much as 20 percent by the first quarter of 2013 after having bottomed in early June. Meanwhile, the notable head of Goldman Sachs Asset Management — Jim  O’Neill — said in September that Chinese equities present the “most attractive” investment opportunity in all of the BRIC markets.

Internet Explosion

China Internet Network Information Center

By sheer numbers, China is experiencing a technology boom unlike anywhere else in the world. Its internet population surpassed half a billion users in 2011 — making it by far the world’s biggest online market. That’s a more than 362 percent increase since 2005. Even then, the internet usage penetration remained at 38 percent in 2011, presenting further growth potential.

About four out of 10 Chinese use the internet, accounting for a total of 538 million users, according to state-run agency China Internet Network Information Center (CNNIC). That population is set to jump to 700 million users by 2015, according to the Boston Consulting Group (BCG), which is more than double the entire population of the U.S. The country’s fast growing online market provides a big opportunity for retailers and BCG predicts that China’s online retail sales will triple to more than $360 billion by 2015 to make it the world’s largest online retail market.

Smartphone makers are also looking to increase their presence in the country’s mobile phone market. Nearly 70 percent of China’s internet users connected to the web through their handsets in 2011, according to the CNNIC.

Mega Rich Get Richer

The Hurun Research Institute

China’s billionaire count has surged in the past decade, spurred on by the country’s rapid economic development.

In 2001, China had only one billionaire, but that number has jumped to 251 this year —according to the Shanghai based Hurun Report — making it second only to the U.S. in the world when it comes to most billionaires. Billionaires account for just 1.3 percent of wealth individuals with $30 million or more in China, but control nearly a quarter of the ultra-rich group’s wealth of $1.58 trillion, according to research firm Wealth-X. These billionaires are worth an average of almost $2.6 billion each.

China’s consumption and construction boom are two of the major drivers of wealth for the super-rich with a majority of billionaires counting on property as one of their main sources of wealth. The public listing of companies has also made business owners billionaires overnight. But recently, the stock market has also caused China’s billionaires to lose almost a third of their combined wealth with the benchmark Shanghai Composite falling 20 percent from August 2011 to July 2012, according to Wealth-X. In total, the population of China’s wealthy with assets worth $30 million and above shrank by 2.3 percent in the past year, while their combined wealth decreased nearly 7 percent to $1.6 trillion.

Consumption Boom

National Bureau of Statistics China

Consumer spending in China has seen double digit growth for a decade, creating a path for the country to become the world’s biggest consumer market by 2015, according to government authorities.

Its fast growing consumer class of about 130 million has given a big boost to markets from retail and housing to travel and other discretionary sectors. China’s consumer retail sales, for example, are expected to surpass $5 trillion in 2015, according to Commerce Minister Chen Deming. Rising incomes amid rapid urbanization are major reasons behind China’s consumption boom and the World Bank expects the growth to continue as income per capita climbs to more than triple to $16,000 by 2030 from about $5,000 now.

Businesses like carmakers, luxury retailers, and hotel chains have been flocking to the world’s second largest economy to target Chinese consumers. Italian fashion house Prada, for example, counts on China as its biggest market with 30 percent of its global sales in the fiscal year that ended in January 2012 coming from the country. The luxury retailer has 19 stores in China, but plans to open up to 15 more this year. The world’s largest premium carmaker BMW, meanwhile, increased sales of its flagship BMW brand in China by 55 percent in September compared to the previous year, while its Mini cars saw sales jump a whopping 121 percent in the same period.

But not all retailers have had a similar level of success in China. Home Depot, the world’s largest home improvement chain, struggled to win over Chinese shoppers with its U.S. style do-it-yourself model. The U.S retailer announced in September that it will close all seven of its big box stores to focus on specialty stores and e-commerce in China.

How Will China’s Changing Leadership Affect US Relations

Will U.S.-China Relations Change After China’s Historic Leadership Transition?

By Bernice Napach | Daily Ticker

The U.S. is not the only superpower facing political change this week. China begins its 18th Communist Party Congress on Wednesday and party leaders will decide who will lead the world’s second biggest economy.

“This is an historic time to be watching China politically now,” says Nicholas Consonery, Asia analyst for Eurasia Group, a global political risk research and consulting firm. “The Communist Party, which has been in charge since 1949, is going to see a big transition in the entire leadership of the party.”

Consonery tells The Daily Ticker that the Party’s standing committee, which leads the country, will almost completely turn over and may even be reduced in size from nine to seven members. These individuals will likely run China for the next 10 years.

It’s expected that Xi Jinping, China’s vice president, will be named the new head of state and Li Kequiang, the current executive vice premier, will become the new premier. Although the changes will announced by Nov. 11, they won’t take effect until March 2013.

Consonery says the changes are wide and deep — the equivalent in the U.S. to a change in the presidency, the Joint Chiefs of Staff, the Supreme Court and the governorships of most or all the states, all at once.

“It’s not just change at the top of the party, but the whole party structure,” adds Consonery.

Related: China’s Slow Growth ‘Marks an End of an Era’ But No Hard Landing China’s new government will face many domestic challenges including a slowing economy, a growing middle class and increasing demands for political reform. China’s economy grew at a 7.4% annual rate in the third quarter—its slowest since the first quarter of 2009.

China’s new leadership with also have to contend with an increasingly fraught relationship with the U.S. and its Asian neighbors.

The Obama Administration has been bringing more cases against China through the WTO, charging China with unfair trade practices.

Related: America vs. China: “Free Trade is Only for Friends,” Says Prof. D’Aveni “The U.S. is clearly headed in the direction of taking more forceful stances with China over trade and economic issues,” says Consonery.

In Asia, there’s a “growing level of concern about China’s rise…on the part of many of its neighbors and a clear determination on the part of the U.S. to increase its engagement there,” says Consonery. China and Japan both claim ownership of the uninhabited Senkaku Islands, which are currently controlled by Japan.

Chinese surveillance ships have been seen sailing in the waters around the islands. On Tuesday the U.S. and Japan began an 11-day join military exercise in the area.

Meeting the Future Chinese Leader, Xi Jinping

David Griffith’s Note: I went to the US-China Economic Forum yesterday in downtown Los Angeles as a guest of the Chinese Consul General to get a glimpse of the future Chinese leader, Xi Jinping, and I was encouraged by what I saw.  Xi appears to be a man who likes America and can in turn put a new face on China that Americans will embrace.  The American leaders there, Vice President Joe Biden, Governor Jerry Brown, and Mayor Antonio Villaraigosa looked very comfortable with the future president and their various counterparts from Chinese government at both the national and provincial levels.  Over 500 Chinese companies were part of a series of major trade announcements.  The event definitely confirms Southern California’s prominence in trade with China.

LOS ANGELES (Reuters) – China’s leader-in-waiting Xi Jinping on Friday swiped away fears that his country’s economic growth could stumble, and turned to courting American companies, film-makers and governors hungry for a slice of that growth on the final day of his U.S. visit.

At the end of Vice President Xi’s five-day trip, his U.S. counterpartJoe Biden announced China had agreed to make it easier for Hollywood to distribute movies to China’s expanding audiences. Xi (pronounced “shee”) told a business forum in Los Angeles that China would promote greater domestic demand and turn more to the United States to buy imports and send investment.

Despite recent economic slowing and persistent price pressures, Xi told the gathered business executives that China’s economic momentum would not falter as some economists warn.

“China’s economy will maintain stable growth,” he said “There will be no so-called hard landing.”

Xi is almost sure to succeed Hu Jintao as Chinese president in just over a year, and the final day of his tour of the United States featured commercial deals and reassuring talk intended to blunt American ire about the trade gap between the countries.

“We will further increase imports from other countries in the light of our economic and social development and consumer demand. We will actively expand imports from the United States,” Xi later told a midday meeting.

Biden, who accompanied Xi to Los Angeles, praised the Chinese Vice President‘s efforts to reach out to often wary Americans, but reminded him that rancor over trade imbalances and barriers had not evaporated in all the sunny goodwill.

“The crux of our discussion is that competition can only benefit everyone if the rules are fair and followed,” Biden told the midday reception for Xi.

The U.S. movie industry has long complained about China’s restrictions on the number of foreign films allowed into the country each year, a limit that they say boosts demand for the bootleg DVDs that are widely available in China.

The film announcement does not remove China’s quota system, but it might ease some of the ire.

The agreement allows more American exports to China of 3D, IMAX, and enhanced-format movies, and also expands opportunities to distribute films through private enterprises rather than the state film monopoly, the U.S. Trade Representative’s office said.

GETTING READY FOR NEXT DECADE

The two vice presidents both suggested that Xi’s diplomacy, deals and folksy public displays could pave the way for steadier ties between the world’s two biggest economies.

Xi said that he felt from his visit that “mainstream American opinion” supports stronger ties. “I can now say that my visit has been fully successful,” he said.

“We’ve established a personal friendship and a healthy working relationship,” he said of himself and Biden.

Xi is poised to become China’s next leader after a decade in which it has grown to become the world’s second-largest economy. Beijing wants to avoid tension with Washington while the Communist Party leaders focus on the power handover.

Xi’s visit to the United States was also intended to get both sides more familiar with each other for the decade that he could be in power. He will most likely succeed Hu Jintao as party chief in late 2012 and as president in early 2013.

Under Xi, China’s economic size and military capabilities are likely to grow closer to U.S. levels.

Washington and Beijing have often jostled over economic, political and foreign policy disputes from human rights to Taiwan and most recently Syria.

The U.S. trade deficit with China expanded to a record $295.5 billion in 2011, and many U.S. lawmakers complain China’s yuan currency is significantly undervalued, giving its companies an unfair advantage.

The Obama administration has also accused China of distorting trade flows by ignoring intellectual property theft, putting up barriers to foreign investors and creating rules that favor China’s state-owned behemoths.

Xi’s stop in Los Angeles was choreographed to blunt those complaints and make China’s case that its rapid growth presents the U.S. economy with opportunities, not threats.

Scores of executives from major U.S. and Chinese companies, from Intel to Microsoft, lined up to sign deals after Xi’s address at the economic forum on Friday.

They included “Kung Fu Panda” studio Dreamworks Animation’s venture to make films from Shanghai, and Chinese telecom giant Huawei’s pledge to award $6 billion in contracts over three years to Qualcomm Inc, Broadcom Corp and Avago.

“MISSION IMPOSSIBLE” FAN

More than the publicly stern Chinese President Hu, Xi has tried to put a friendlier face on his government during his U.S. visit, including revisiting the small town of Muscatine in Iowa where he visited in 1985 and stayed two nights with a family.

The 58-year-old also visited the International Studies Learning School in South Gate — a Los Angeles enclave of mainly Hispanics — where students learn Chinese.

At the school, Xi recalled his first visit to Muscatine: “They gave me the same impression that, like Chinese people, they are warm-hearted, friendly, honest and hard-working. Twenty-seven years have passed, but that remains my impression, and it has become a deeper one.”

Xi also offered a glimpse of his personal life, telling the students he enjoyed swimming and watching sports, including American basketball, baseball and gridiron football.

Showing his familiarity with Hollywood fare, Xi said it was difficult to find time to relax. “It’s like the name of that American movie — ‘Mission Impossible’.”

After their visit to the school, Biden told reporters the talks with Xi had been very forthright, and was also intensely curious about the workings of the American political system.

“This is a guy who wants to feel it and taste it, and he’s prepared to show another side of Chinese leadership,” said Biden. “He is intensely interested in understanding why we think the way we do, what our positions are, and the need to actually broaden this kind of understanding.”

Xi was due to watch part of an LA Lakers basketball game before he left for the next two countries of his international tour, Ireland and then Turkey.

 

Chinese Leader, Hu Jintao, Visiting US at Critical Time

US pomp meant to improve tone of China relations

Christopher Bodeen, Associated Press, On Sunday January 16, 2011

BEIJING (AP) — Chinese leader Hu Jintao is being feted in Washington this week with a lavish state banquet at the White House and other pomp usually reserved for close friends and allies — all intended to improve the tone of relations between a risen, more assertive and prosperous China and a U.S. superpower in a tenuous economic recovery.

The shaky trust between the United States and China has been eroding recently because of an array of issues — currency policies and trade barriers, nuclear proliferation and North Korea — and both sides seem to recognize the need to recalibrate relations.

The U.S. is one of China’s biggest markets, with $380 billion in annual trade largely in Beijing’s favor. Washington increasingly needs Beijing’s help in managing world troubles, from piracy off Africa to Iran’s nuclear program and reinvigorating the world economy.

Hu sounded a conciliatory tone in a rare interview with U.S. newspapers ahead of his visit, saying the two countries could mutually benefit by finding “common ground” on issues ranging from combatting terrorism and nuclear proliferation to clean energy and infrastructure initiatives.

“There is no denying that there are some differences and sensitive issues between us,” Hu said in written answers to questions submitted by The Washington Post and The Wall Street Journal that were published over the weekend. “We both stand to gain from a sound China-U.S. relationship, and lose from confrontation.”

Hu called for more dialogues and exchanges to enhance “practical cooperation,” stressing the need to “abandon the zero-sum Cold War mentality” in U.S.-China relations.

Center for Strategic and International Studies scholar Charles Freeman, a former trade negotiator in the George W. Bush administration, said, “It is absolutely critical for the two sides to be setting a tone that says ‘hang on a second, we are committed to an effective, positive relationship.'”

The state banquet President Barack Obama is hosting will be Hu’s first. In the days before his visit, senior officials from both countries have spoken publicly in favor of better ties.

Secretary of State Hillary Rodham Clinton said in a speech Friday that the countries needed to manage their conflicts but their shared interests were so entwined as to constitute entanglement.

“History teaches us that the rise of new powers often ushers in periods of conflict and uncertainty,” Clinton said. “Indeed, on both sides of the Pacific, we do see trepidation about the rise of China and the future of the U.S.-China relationship. We both have much more to gain from cooperation than from conflict.”

Chinese officials have emphasized what they see as common concerns while acknowledging the complexity of the relationship.

“When the relationship is strained we need to bear in mind the larger picture and not allow any individual issue to disrupt our overall cooperation,” Vice Foreign Minister Cui Tiankai said in a speech Friday.

Such maxims, however, don’t apply to issues China defines as its “core interests,” including Taiwan, Tibet and the overarching authority of the Communist Party. That’s a condition Hu’s visit won’t change.

In his interview for the U.S. newspapers, Hu said the two countries should “respect each other’s choice of development path,” an implicit rejection of U.S. criticism of China’s human rights record and other internal affairs.

Hu, whose four-day trip starts Tuesday, is expected to talk up China’s intended peaceful rise in a speech to business leaders and opinion-makers in Washington on Thursday and to highlight the benefits of China’s market and investment when visiting Chicago.

Aware of China’s plummeting image in American opinion, Chinese Foreign Ministry functionaries have in recent weeks been looking for ways to make the usually stiff Hu, and China as a country, appear more human, something akin to reformist patriarch Deng Xiaoping’s donning a 10-gallon hat in Houston in 1979 just after the opening of diplomatic relations.

For the protocol-obsessed Chinese leadership, a highlight of the visit will be Wednesday’s state banquet — an honor denied Hu on his last trip to the White House in 2006. President George W. Bush thought state banquets should be reserved for allies and like-minded powers and instead gave Hu a lunch. Even worse, a member of Falun Gong, the spiritual movement banned by China, disrupted Hu and Bush’s joint appearance, and an announcer incorrectly called China “The Republic of China,” the formal name of democratically ruled Taiwan.

In this visit, no major agreements are expected. Talks over a joint statement ran aground until last-minute negotiations in Beijing last week. But the shared recognition to put things right and the bumpy relations of the last year augur for a better outcome.

The U.S. wants Beijing to move toward faster appreciation of its currency to boost U.S. exports and reduce unemployment. But in his written answers to the U.S. newspapers, Hu did not signal any significant changes in China’s currency policy.

China now holds the world’s largest foreign currency reserves at $2.85 trillion and a major chunk of U.S. government debt. At current rates, economists estimate China will overtake the U.S. as the world’s largest economy within 20 years, possibly by the end of this decade.

Hu said “the current international currency system is the product of the past,” but he did not dispute the U.S. dollar’s role as the global reserve currency. He said it “will be a fairly long process” before the Chinese renminbi can become an international reserve currency.

Beijing has largely rebuffed U.S. appeals for help in reining in bellicose North Korea, curbing Iran’s nuclear program and dismantling of trade barriers. Chinese officials and the nationalistic state-run media have criticized Washington’s renewed attention to Japan, South Korea and Southeast Asia, its arms sales to Taiwan and its continued naval patrols in the Yellow and South China seas as attempts to constrain China’s influence in its backyard.

China’s Position on Korean Reunification

By CHRISTOPHER BODEEN, Associated Press

BEIJING – China knows less about and has less influence over its close ally North Korea than is usually presumed and is likely to eventually accept a reunified peninsula under South Korean rule, according to U.S. diplomatic files leaked to the WikiLeaks website.

The memos — called cables, though they were mostly encrypted e-mails — paint a picture of three countries struggling to understand an isolated, hard-line regime in the face of a dearth of information and indicate American and South Korean diplomats’ reliance on China’s analysis and interpretation.

The release of the documents, which included discussions of contingency plans for the regime’s collapse and speculation about when that might come, follows new tensions in the region. North Korea unleashed a fiery artillery barrage on a South Korean island that killed four people a week ago and has since warned that joint U.S.-South Korean naval drills this week are pushing the peninsula to the “brink of war.”

The shelling comes on the heels of a slew of other provocative acts: An illegal nuclear test and several missile tests, the torpedoing of a South Korean warship and, most recently, an announcement that in addition to its plutonium program, it may also be pursuing the uranium path to a nuclear bomb.

The memos give a window into a period prior to the latest tensions, but they paint a picture of three countries struggling to understand isolated and unpredictable North Korea.

In the cables, China sometimes seems unaware of or uncertain about issues ranging from who will succeed North Korean leader Kim Jong Il to the regime’s uranium enrichment plans and its nuclear test, suggesting that the North plays its cards close to its chest even with its most important ally.

Questioned about the enriched uranium program in June last year, Chinese officials said they believed that was program was “only in an initial phase” — a characterization that now appears to have been a gross underestimate.

China is Pyongyang’s closest ally — Beijing fought on the northern side of the Korean War and its aid props up the current regime — and its actions have often served to insulate North Korea from foreign pressure. It has repeatedly opposed harsh economic sanctions and responded to the latest crises by repeating calls for a return to long-stalled, six-nation denuclearization talks that the North has rejected.

But China would appear to have little ability to stop a collapse and less influence over the authorities in Pyongyang than is widely believed, South Korea’s then-vice foreign minister, Chun Yung-woo, is quoted telling American Ambassador Kathleen Stephens in February.

China lacks the will to push Pyongyang to change its behavior, according to Chun, but Beijing will not necessarily oppose the U.S. and South Korea in the case of a North Korean collapse.

China “would be comfortable with a reunified Korea controlled by Seoul and anchored to the US in a ‘benign alliance’ as long as Korea was not hostile towards China,” Chun said.

Economic opportunities in a reunified Korea could further induce Chinese acquiescence, he said.

The diplomatic cables warn, however, that China would not accept the presence of U.S. troops north of the demilitarized zone that currently forms the North-South border.

Chinese Foreign Ministry spokesman Hong Lei said China would not comment specifically on the cables.

“China consistently supports dialogue between the North and South sides of the Korean peninsula to improve their relations,” Hong said at a regularly scheduled news conference.

In the leaked cable, Chun predicts the government in Pyongyang would last no more than three years following the death of ailing leader Kim Jong Il, who is seeking to transfer power to his youngest son Kim Jong Un, a political ingenue in his 20s.

Chun also dismisses the possibility of Chinese military intervention if North Korea descended into chaos.

Despite that, China is preparing to handle any outbreaks of unrest along the border that could follow a collapse of the regime. Chinese officials say they could deal with up to 300,000 refugees, but might have to seal the border to maintain order, the memos say, citing an unidentified representative of an international aid group.

Chinese officials are also quoted using mocking language in reference to North Korea, pointing to tensions between the two neighbors in contrast to official statements underscoring strong historical ties.

Then-Deputy Foreign Minister He Yafei is quoted as telling a U.S. official in April 2009 that Pyongyang was acting like a “spoiled child” by staging a missile test in an attempt to achieve its demand of bilateral talks with Washington.

U.S. Secretary of State Hillary Rodham Clinton said Monday that WikiLeaks acted illegally in posting the leaked documents. Officials around the world have said the disclosure jeopardizes national security, diplomats, intelligence assets and relationships between foreign governments.

Five international media organizations, including The New York Times and Britain’s Guardian newspaper, were among those to receive the documents in advance. WikiLeaks is also slowly posting all the material on its own site.

China’s Role in the Korean Conflict

What Will China’s Next Move on North Korea Be?

 TIME MAGAZINE

By HANNAH BEECH / BEIJING Hannah Beech / Beijing – Wed Nov 24, 6:20 am ET

Smoke was still billowing from Yeonpyeong, the South Korean island that endured barrages of North Korean artillery fire on Nov. 23, when China’s state-run network CCTV led its news program with the conflagration on the Korean peninsula. A natural move, it would seem, given that it was one of the worst border conflicts between the two Koreas in half a century, in which at least two South Korean soldiers died. But even though video footage appeared to clearly show North Korea initiating the attack on Yeonpyeong island, the CCTV newscast took a different stance. Blame was not apportioned to the North. Instead, the news program quoted a North Korean official claiming that it was actually South Korea that had struck first. While a chorus of nations quickly condemned North Korea for its belligerence, China, as usual, had chosen to dissemble.

The rest of the world may consider North Korea the ultimate rogue state, but China has a long and close connection with its hermit neighbor. After all, during the Korean War, Beijing sent wave after wave of People’s Liberation Army soldiers to fight on the North’s behalf. Chairman Mao Zedong famously called the relationship between the communist bedfellows as close “as lips and teeth.” Even as North Korea’s intransigence and unpredictability has grown, China has hesitated to criticize its isolated ally too harshly. The reasoning has been simple: Not only do the countries share a historical ideological bond, but Beijing wants to avoid a collapse of the North Korean regime lest a deluge of refugees flood over into northeastern China. It’s also an important cushion between China and a major U.S. military ally, South Korea. In fact, relations between Pyongyang and its one and only ally are so close that North Korea’s leader Kim Jong Il – hardly a world traveler – has twice visited China this year.

But Beijing’s quiescent North Korea policy raises concerns that China is not willing to engage in regional affairs on a level commensurate with its rising-power status. In the wake of the Yeonpyeong attack, Australian Foreign Minister Kevin Rudd, who once served in China as a diplomat, said what many other nations have surely been thinking: “I believe it’s important now for China to bring all of its influence to bear on North Korea.” The island artillery fire comes just days after an American academic visited a North Korean facility, where he said he saw over a thousand centrifuges used for enriching uranium – a key step in eventually developing nuclear weapons. “This is a huge test for Chinese diplomacy,” says John Delury, an assistant professor at Yonsei University in Seoul, who studies Chinese-North Korean relations. “China needs to move quickly. It needs to find ways to acknowledge the severity of the situation and then do whatever it can to turn the focus back to dialogue and negotiation.”

For its part, China says it’s doing just that. On Tuesday, the Chinese Foreign Ministry again called for a resumption of the six-party talks that were aimed at dissuading North Korea from pursuing nuclear weapons. But the dialogue between North Korea, South Korea, China, Japan, Russia and the U.S. broke down two years ago when Pyongyang left the table and announced it would work on nuclear enrichment. Now, Washington says it won’t re-join talks until North Korea fulfills some of the earlier vows it made to dismantle its nuclear program. To rekindle talks amid reports of a working North Korean uranium enrichment facility, one White House official told ABC News, would be “rewarding [North Korea’s] bad behavior,” adding “we need to send a strong signal to the Chinese that they need to stand up to North Korea.”

The Chinese contend otherwise, hinting that the Americans’ and South Koreans’ rejection of further negotiations is counter-productive. “Washington and Seoul’s refusal to come to the table works to North Korea’s advantage,” says Shen Dingli, a professor of international relations at Shanghai’s Fudan University. “Then the North Koreans can say, the U.S. and South Korea aren’t coming, so why should we? Then what can China do to promote peace and stability in the region?”

Calling for six-party talks – dialogue that over the years didn’t accomplish much of anything – is one thing. Actively reining in an unruly communist cousin is another. In the same press conference in which the Chinese Foreign Ministry called for a return to six-party talks, spokesman Hong Lei also referred specifically to the island shelling, saying “China hopes that the relevant parties will do more to contribute to peace and stability in the region.” The implication was clear: China would assume a role of watching the “relevant parties.” If this was a moment for regional leadership, Beijing wasn’t willing to raise its hand.

Indeed, Beijing’s unwillingness to castigate North Korea – or, more to the point, consider cutting back China’s considerable economic aid to Pyongyang – stands in marked contrast to the nation’s increasingly interventionist foreign policy on other fronts. Although China says its overseas relations are guided by a philosophy of a “peaceful rise,” in which Beijing doesn’t interfere in other nations’ affairs, in recent months the country has taken an increasingly confrontational stance in disputed East Asian waters. Chinese navy boats have arrested Vietnamese fishing crews working in waters claimed by both nations. Separately, after the Japanese coast guard arrested a Chinese fishing trawler captain who had rammed a Japanese patrol boat in another disputed waterway, Beijing kept tensions on a trigger point by cutting off high-level diplomatic relations and halting the export of rare-earth minerals Japan needs to manufacture high-tech equipment.

China’s muted reaction to another Korean flashpoint, the sinking of a South Korean ship last March, certainly doesn’t raise hopes of more vigorous regional peacekeeping from Beijing. For days, while other nations lined up to blame North Korea for the attack, China maintained an uncomfortable silence over the sinking of the South Korean patrol ship, which killed 46 sailors. An international inquiry eventually concluded that the Cheonan was indeed sunk by a North Korean torpedo, but Pyongyang still denies any involvement in the attack. As a result, China also refuses to accept the report’s claims. When the issue was raised at the U.N. Security Council, China was instrumental in watering down an international condemnation of the Cheonan assault.

Beijing’s reticence to act may be because, for all the closeness between the two nations, Pyongyang doesn’t feel overly constrained by its economic patron. The Chinese Foreign Ministry, for instance, contends that it wasn’t notified in advance of the Yeonpyeong shelling. “I’m of the school that leverage is overrated,” says Yonsei University’s Delury. “North Korea will pursue its own strategy and isn’t going to be double-checking things with Beijing.” But the question still remains: If Pyongyang were to seriously believe that China would pull the plug on its aid to North Korea, wouldn’t that have some effect on Kim Jong Il or his son and presumed heir Kim Jong Un? And surely Beijing could use some of its political capital to press the Kims pÈre and fils? (China, of course, argues that stopping food aid could trigger the North Korean regime’s disintegration – and the last thing Beijing wants is chaos on its border.)

Meanwhile, Chinese geo-strategists are busy putting the island attack in regional perspective – with Chinese characteristics. The White House has already agreed to step up joint naval exercises with the South Koreans. Such military shows of might always irk Beijing, given their proximity to China. As tricky as North Korea is for Beijing, the hermit nation does serve one powerful purpose: as a buffer between South Korea, where thousands of American troops are stationed. In Japan, thousands more U.S. soldiers serve on American military bases. Chinese foreign-policy wonks contend that the American military presence in East Asia is already a sensitive enough issue for Beijing. Earlier this year, the Chinese blew a gasket when Washington pushed through a $6 billion-plus arms-sale package to Taiwan, an island that Beijing considers a breakaway province. “I can’t prove that the Chinese government makes a link between North Korea and American weapons sales to Taiwan,” says Fudan University professor Shen. “But I think, if the U.S. sells weapons to Taiwan, then it can’t expect China to act for Washington’s interests on the North Korean issue. Everything is connected.” With such geopolitical calculations playing out across East Asia, the Chinese chessboard just got a lot more complicated.

Why Foreign Businesses in China Are Getting Mad

Courtesy of TIME magazine.  [tweetmeme]

Foreign businesses in China are voicing growing frustration about the country’s heavily regulated market — a bureaucratic maze many say is deliberately designed to hamstring non-Chinese players to the advantage of their local competitors. Last week, the European Union Chamber of Commerce in China joined the chorus: its annual position paper, an unwieldy 650-page tome, lists hundreds of market access problems for foreign companies across a range of industries. By stymieing open competition between local and foreign business, China is hurting itself, too, says the organization’s president, Jacques de Boisséson. “The proportion of European investments to China, compared to the overall outbound investment from the E.U., is only three percent,” he says. “There is not enough European investment in China.”

Direct foreign investment in China has been growing in step with the nation’s booming economy, but not as quickly as many would like. Europe’s exports to China totaled € 78.4 billion in 2008, a rise of 9% from 2007. But, says the European Chamber, which represents 1,400 international businesses, trade with the small nation of Switzerland is still three times higher. Despite the 30 years that have passed since the Beijing swung open the doors to foreign investment, “China still remains excessively regulated and less open to competition compared to other major economies,” the paper reads. (See the top 10 Chinese knockoffs.)

Though international investors have complained for decades about the bureaucratic hoops they have to jump through to access the China market, their concerns have been sharpened in recent years by a series of regulatory changes that appear directly intended to shut out foreigners. It’s made European companies wary of committing more capital to the China market, says De Boisséson. “What we are telling [the Chinese government] is that our companies are willing to invest, and for that, they need to be sure that they will be treated equally. Today, they are concerned that this wouldn’t be the case.”

Their concerns are not unfounded. In early 2009, a set of policy proposals known as “Indigenous Innovation Accreditation” caused alarm among international businesses when early drafts appeared to shut the door to foreign products across the high-tech industry through a complicated licensing system that required companies to register their IPR in China before registering elsewhere in order to qualify. In a report this June, the Washington-based U.S. Chamber of Commerce said the policies were “considered by many international technology companies to be a blueprint for technology theft on a scale the world has never seen before.” (Watch a video about China’s knockoff electric carmakers.)

While subsequent drafts of the law have been more accommodating, foreigners have also complained loudly that they are being shut out of much of the lucrative government procurement sector. The U.S. and most other western markets are signed up to the WTO’s government procurement agreement (GPA) legally forbidding them to keep foreigners out. China, however, is not signed up. Last year, the European Chamber stated that government tenders in the fast-growing wind power sector were deliberately designed to keep foreign companies out of the running by inserting criteria that only Chinese companies could meet. The organization also noted that not one of 25 valuable contracts awarded to companies under the government’s $584 billion stimulus package went to a foreign-owned company. (See pictures of China’s infrastructure boom.)

The atmosphere does not appear to have improved. In July, the heads of two of Europe’s largest companies caught Beijing off guard by complaining directly to Premier Wen Jiabao that foreign businesses were being unfairly discriminated against. Jürgen Hambrecht, chief executive of BASF, told the Chinese leader that his company was being forced, by the regulations it had to accept in order to set up certain businesses, to transfer technology to China in order to access the China market. “This is not our idea of a partnership,” he was quoted as saying. At the same meeting, Peter Loescher, chief executive of Siemens, complained about the uncompetitive advantage given to domestic companies in the awarding of public procurement contracts.

That same month GE’s CEO Jeffrey Immelt, sparked a PR crisis when remarks he made in private about the deteriorating market environment in China were leaked: “I really worry about China … I am not sure that in the end they want any of us to win, or any of us to be successful,” he was quoted in the Financial Times as saying to an audience of top Italian executives in Rome.

The American Chamber of Commerce in China has also echoed these concerns. “For the high-tech sector, the ITC industry, and industries that are heavily dependent on intellectual property, there is a great concern about the operating environment in the future, because of the regulatory policy changes and narrowing of market access”, says Christian Murck, the organization’s president. “Companies say that China remains their top priority for future investment, but of course that future investment will depend on the degree to which there is scope in the market for foreign companies to operate.”

The very public airing of grievances has clearly rattled China’s leaders, who have made an equally well-broadcast showing of placating foreign investors in recent days. “China is actively engaged in making a more open and better investment environment for foreign businesses,” Chinese Vice President Xi Jinping assured international investors In a speech this week. “We have adjusted our definition of ‘indigenous innovation’ and confirm that foreign businesses are part of China’s manufacturing force.”

De Boisséson acknowledges that Beijing is talking a good game, but cautions that sweet words from the leadership do not always translate into law. “We would like to see concrete steps on the ground that show all China is united around this policy,” he says, adding that China can no longer assume that the lure of access to more than a billion potential customers will always trump foreign investors’ concerns about the market environment. “If one day conditions are unacceptable for European companies, I suppose they might change their plans,” De Boisséson says. “Nothing is there forever.”

See pictures of China and Google.

Read about how China is tightening its grip on Tibet’s business class.

Related Articles

• Group: China failing to keep WTO access pledges (seattletimes.nwsource.com)
• China responds to growing ‘protectionism’ complaints (telegraph.co.uk)
• Vodafone joins queue of firms to leave China (telegraph.co.uk)
• ‘Work with us China, not against us’, urge European businesses (telegraph.co.uk)

Labor Strikes and the Future of Chinese Social Policy

July 27, 2010 —
With Chinese labor strikes drawing international attention, Cheng Li, Director of Research, John L. Thornton China Center, suggests that it is too early to declare the country on the verge of a workers’ revolution as the strikes are localized and in only a few industries. In this video from the Brookings Institute, CLICK HERE, Li explains that the middle class will shape the future of China’s social policy.

From Singapore, an Optimistic Forecast

HOUSTON, July 12, 2010 – Prime Minister Lee Hsien Loong of Singapore delivered an upbeat assessment of prospects for growth and stability in East Asia, downplaying lingering effects of the global financial crisis and offering a benign take on China’s growing economic and political clout.

“I believe the fundamental transformations in East Asia will continue, and for a long time,” the Prime Minister told an audience of 350 at the Hyatt Regency Houston.

Houston Mayor Annise Parker introduced Lee for his luncheon address, which Asia Society Texas Center and Greater Houston Partnership co-hosted and which drew a cross-section of the city’s corporate and civic leadership.

To watch this video clip, CLICK HERE.

China News Group Bids for NEWSWEEK

[tweetmeme]

Courtesy of Fortune Magazine and CNN Money.com.

China is no longer content to merely be covered by American media. It now wants to own it.

China-based Southern Media Group confirmed last week that it partnered with Chengdu B-Ray Media for a bid to buy Newsweek magazine from its owner, the Washington Post Co. Perhaps not surprisingly, the offer was roundly rejected.

After losing nearly $30 million in print advertising revenues during the past two years and experiencing a 31% plummet in its first quarter revenue this year, the 77-year-old magazine was put on the auction block in early May. Washington Post CEO Donald Graham said Newsweek had no clear path to profitability.

Washington Post Co.’s (WPO, Fortune 500) reason for rejecting the Chinese media group’s bid remains undisclosed. Since the deadline for Newsweek bids on June 2, no other serious suitors have announced they’ve been rejected. A Washington Post spokeswoman declined to comment.

In an interview with The Hefei Evening News newspaper in Anhui province, China, Xiang Xi, the executive editor of Southern Weekly, a popular Southern Media Group publication, said there was no clear-cut reason for the rejection.

“Personally, I feel the reason is quite complex, but there is one point that can be made: The seller genuinely does not comprehend the desires of idealistic Chinese media workers and institutions,” he told the paper.

Southern Media Group is a state-owned media conglomerate that oversees a number of newspapers, magazines, and websites, including Southern Daily and Southern Weekly, two popular publications based in Guangzhou, China. It stands out from most Chinese news organizations in that it’s widely known for its liberal editorials and investigative journalism.

Following the recent string of suicides at a Foxconn manufacturing plant in Shenzhen, Southern Weekly published an expose written by an intern who lived and worked undercover in the plant for 28 days, giving both Chinese and international readers some insight into a Foxconn factory worker’s daily life.

But just because Southern Media Group is known to aggravate the political establishment won’t be enough for a U.S. media company like the Washington Post to consider brokering a deal. According to Reporters without Borders’ 2010 worldwide index of press freedom, China ranks 168th out of 175, coming in just before Burma, Iran, North Korea and other countries choked with free press limitations.

Unwelcome investment

And while there is no precedent for China taking stakes in American media outlets, its investments into other U.S. industries have been met with great skepticism. When Chinese-owned affiliates took significant stakes in Bear Stearns, Blackrock (BLK, Fortune 500) and Morgan Stanley (MS, Fortune 500) at the cusp of the credit crisis, investors and lawmakers questioned their intentions and some pushed to prohibit more investments.

If owning stakes in our banks created such backlash, the idea that the Chinese government could buy up Constitutionally-protected news organizations sounds downright preposterous.

But that’s not stopping Southern Media Group, at least not yet. “Even though the purchase of Newsweek failed, the search for investments will continue,” Xiang said. “Any media of global influence, regardless of medium, who has an interest to attract mainland Chinese shareholders, can get in touch with us.”

He even gave out his personal e-mail address to the interviewer, suggesting that interested parties should contact him. Xiang declined to comment for this story.

The news of the rejected bid leaves many questions unanswered. Not the least of which is why Newsweek? With its staggering losses and shrinking circulation, the magazine is not an opportunity for a quick turnaround on profit. Then again, neither was Bear Stearns.

Xiang says that Southern Media Group and B-Ray Media’s motivation to make a bid was “a spontaneous move” to seek a “global communications platform that everyone has always been striving for.”

It appears that China’s first-ever media bid for a U.S. household title was little more than a knee-jerk reaction to an open opportunity. It may come as a shock to some, but it shouldn’t. In 2009, Beijing announced that it set aside $5.6 billion for worldwide Chinese media expansion, although much of that is expected to fund the expansion of CCTV, a global multilingual news service similar to Al Jazeera from the Middle East.

As David Shambaugh, Senior Fulbright Research Scholar at the China Academy of Social Sciences Institute of World Economics and Politics in Beijing, notes in his June 7, 2010 International Herald Tribune editorial, the Chinese government is encouraging all state media organizations to zou chuqu — to go out and “establish a foothold in the international media environment and think-tank world.”

The American media industry may well be struggling, but even in these brutal times it’s hard to imagine a big publisher agreeing to Chinese control in exchange for a Chinese infusion.