New Statesman
17 April 1998
Speak Plainly to the Paper Tiger
China's reputation far exceeds its military, political or economic power. The world has nothing to fear from a country punching above its weight.
Gerald Segal

On 3-4 April 1998 something unique in diplomacy happened--the leaders of Asia came to Europe. But the Asia-Europe Meeting (ASEM) in London was the second time these leaders had met--the first having been in Bangkok in March 1996. Bangkok??? What happened to the greatest Asian power--China? In fact, China's back seat at both ASEM meetings is a sign of the times. China is not a terribly important country. It is a country that appears to punch so far above its real weight that it is best described as a virtual power.

This may seem a strange argument to hear from one of those piranha who swim in the threat-rich waters of a strategic studies think tank, and even more odd from someone who began his career in the China-watching business. Surely a country with a permanent seat on the United Nations Security Council and arguably the world's most glorious continuous civilisation must be ranked among the world's greatest powers. Listen to the piranha from of the American think tanks and you would believe that China is a 'near peer competitor' of the United States getting reading for 'the coming war'.

Forget it…at least for a decade or two. China is a fragile state, in some sense a mirror of Japan, that quintessential power that punches well below its weight. Consider the three main features of modern power and China's ranking. In military power, China is mostly a paper tiger. It has lost or drawn virtually every war it has fought since 1960. Since it failed to 'teach Vietnam a lesson' in 1979, it has understood the need to modernise its peasant army from the deepest of its grassroots. But by doing so with paltry resources it has made little headway. China is a second-rate (albeit not third-rate) military power.

China can seize rocky reefs from 'great powers' such as the Philippines but when a great power says 'boo', the Chinese blink. In recent years China has backed away from confrontation with Japan over the Senkaku islands. When rabid nationalism got the better of their senses in 1996 and China threatened Taiwan with missiles, the United States scared the living daylights out of China by wiggling the radars and cruise missiles in its high-tech navy. China watched in horror when the United States implemented some of its 'revolution in military affairs' in Iraq in 1991 and destroyed massed armour (including hundreds of Iraqi tanks bought from China). China may be a power when it picks on its smaller neighbours, but it is no match for any real great power.

In terms of international political power, China is an even punier pygmy. This country exerts no ideological pull on anyone; it cannot even nudge North Korea to pursue China-like market reforms. Beijing's remnant of a Communist Party is headed for the dustbin of history and the only interesting ideological question is whether its Communist play-actors can re-make themselves into capitalists fast enough to survive the tides of history. When President Clinton lectured visiting President Jiang Zemin in 1997 about being 'on the wrong side of history', he was stating a fact, not even hazarding a guess about China's future. It will not be long before Chinese start asking that most fundamental of questions--was the 1949 Communist revolution really necessary. If there is a contribution that Chinese people will make to the world's test-bed of ideas it will come from Taiwan--the place that held the first free presidential election in the history of Chinese civilisation.

China is one of those hobbled powers (like Japan) that has no real friends (Japan at least has formal allies). Its sense of nationhood even exerts little appeal for wealthy ethnic Chinese who live in Asia and around the world. The ethnic Chinese like the opportunity to make money out of China, but few would contemplate living in a decaying Communist regime. China's current flirtation with 19th century nationalism makes it increasingly out of step with a world that is becoming interdependent and open. China's leaders still believe they can manage the power of the information age and can produce an innovation economy in an authoritarian state. This is a country whose leaders look backwards even as they speak vacuously of the coming century belonging to them. China takes pride in its creeping experimentation with village-level democracy which, however admirable, will merely make the country ready for the late 20th century when its competitors in Asia and the developed world will have sped into the information and innovation age. Without a much deeper democracy and more open economy and society, China is ill placed to produce the next Microsoft or even Intel.

The picture of China is only marginally more impressive in economic terms. The truth is that China could disappear off the map of the world economy and one would hardly notice. It accounts for less of world trade than the Asian countries that melted down in the recent crisis, and the impact of the Asian crisis on European and American prosperity has been negligible. China is a smaller export market for developed countries than the Netherlands. Americans invest more in Colombia than in China. As was the case at the end of the previous century, Western business leaders dream of the China boom that supposedly lies just around the next bend; the reality is nearly every non-ethnic Chinese investor in China loses money. The power of the myth of the China market is the only sensible explanation for the fact that China regularly comes high on the table of foreigners expectations of future returns on investment, and yet near the bottom of the table of actual returns. A remarkably persistent triumph of hope over experience!

The story is unlikely to improve for some time, if only because of the depths of China's current economic woes. One might think it odd to describe an economy with an official growth rate of 8% as woeful, but numbers, especially Chinese numbers, are deceptive. The growth in the Chinese labour force of just over 3% a year requires a growth rate of the same size just to stand still. A further 3% of China's growth rate is useless production by state owned industries (SOEs) producing the un-saleable that piles up in rusting inventories. Even official figures say that 43% of China's SOEs were unprofitable in 1995. An 8% growth rate soon seems to be less impressive, especially with inflation below zero and deflation taking its toll.

The problems of the Chinese economy can be described as those associated with a transition from a planned to market economy. SOEs are the remnants of an old economic philosophy of controlling the commanding heights. In that ancient and now literally bankrupt model, SOEs were not just supposed to be producing the industrial base of Chinese power, they were the providers of welfare. Come down from the commanding heights and you need to build a welfare system. But building welfare systems and coping with large numbers of unemployed requires money and China's financial system has dire problems. Put off providing a welfare system and the more than 120million unemployed migrants will swell, bringing serious risks of social unrest. Even Chinese officials admit that its banking system is bankrupt; bad loans are 30% of GDP, twice the level of the Southeast Asian countries that crashed and called in the IMF. Some 90% of Chinese bank loans are to these SOE dinosaurs that often use the funds simply to pay wages arrears.

So on comes the Great Reformer--the new Prime Minister Zhu Rongji--to break through into a more market economy. To hear the adulation for Zhu at the ASEM summit in London, one would think that 'one-chop Zhu' as he likes to be known can put his chop to a decree for reform of the SOEs and all will be well. But we have heard this before. Zhu was supposed to have got a grip on uppity provinces and township enterprises that were rejecting central control of the economy, but the reality has been that Zhu chose discretion over valour and came to terms with powerful regional forces running a much more decentralised economy. The result, among other things, has been the banking crisis. Although Zhu is no Gorbachev, he is like the ill-fated but still necessary Soviet leader in talking seriously about reform and probably forcing a process that will end up somewhere very different than first planned.

It is hard to be sure where Zhu Rongji thinks he is taking the Chinese economy, and without such certainty, it is impossible to be optimistic about his chances for success. His reformist circles have spoken of the Korean Chaebols as a model for reformed SOEs and a new-fangled banking sector. God help China! South Korea's recent economic crash has led to a hasty re-think but the result seems to be something pretty similar to Chaebols-with-Chinese characteristics. One could be more optimistic about the Chinese economy if one thought that China had learned the lessons of Asia's recent crash. What is more likely is that China will learn the wrong lessons. It will slow up China's opening to the outside world for fear of being swamped by the hurricanes of an open global economy. You can certainly forget about the convertibility of the Chinese currency any time soon. Neither will China hurry to make market-opening concessions to gain WTO entry.

One can have some sympathy for the new Chinese caution. It was China's close analysis of Asia's earlier economic success through an embrace of the global market that first stimulated China's own reforms in the early 1980s, and so setbacks in Pacific Asia will naturally make China think twice. China will have seen a regional economy devoid of indigenous leadership and at the mercy of American-organised, Western institutions such as the IMF and private banks. China will have also seen the death of 'Asian Values' and the notion that there is a distinctive form of Asian capitalism. A China that until recently used to crow about the fading of American power and the creeping decrepitude of the West, has now gone silent. The proud boasts of quickly overtaking the US in GDP are gone. Some Westerners talk about how China 'had a good crisis' because it did not devalue its currency and has sounded supportive of its neighbours and even the IMF. But China has merely demonstrated the power of the passive--a promise not to fail or foul-up the plans of others is not active leadership that shapes, let alone re-shapes the region. Once again, China gets inordinate credit for doing something ordinary.

Of course China is not necessarily crippled for all time. Sustained reforms can gradually bring the reality of Chinese power up to something like its reputation. But the power gap will be with us for at least a generation and in the meantime there are clear implications for the world beyond the great walls of China. The first challenge is to learn how to treat China in a realistic fashion. If this really is a fragile and flawed power, then we need be less neuralgic in the way we tiptoe around the country 'for fear of waking the sleeping giant'. Speak plainly to China. Tell them what is in our interest and what we feel about them. Tell them they are on the wrong side of history. Speak plainly about human rights.

It is also safe to engage more closely with this country. Encourage people-to-people contacts. Contaminate the Communist regime with Baywatch and Mickey Mouse. Help their middle classes aspire to the wealthy life of their fellow ethnic Chinese in Hong Kong, Taiwan or Singapore. Explain how Asians grow rich in a more democratic Korea, Japan and especially Taiwan.

But it is also safe to temper engagement with constraint of unwanted action--a policy of constrainment rather than simple-minded containment or engagement. If you don't want China to capture Taiwan, then send in the American fleet. If you do not want to lose your islands in the South China Sea, then ask the Americans and other allies to help. If China sells component of weapons of mass destruction to Pakistan, Iran or Iraq, then punish their companies and withhold the sale of our high technology.

In short, treat China with a view towards how you want it to behave. It is in our interest that China becomes rich and interdependent with us all, but only if it plays by the rules and is constrained from using force. Yes, this is a Western agenda, but China would expect us to have nothing less. By pretending that modern China is strong we do ourselves, and the Chinese people, a serious and potentially dangerous injustice.

Gerald Segal is Director of Studies at the International Institute for Strategic Studies and Director of the ESRC's Pacific Asia Programme.