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    CHINAS

    RISECHALLENGES AND OPPORTUNITIES

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    CHINAS

    RISECHALLENGES AND OPPORTUNITIES

    C. FRED BERGSTEN

    CHARLES FREEMAN

    NICHOLAS R. LARDY

    DEREK J. MITCHELL

    PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS

    CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES

    WASHINGTON, DC

    SEPTEMBER 2008

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    PETER G. PETERSON INSTITUTE

    FOR INTERNATIONAL ECONOMICS

    1750 Massachusetts Avenue, NWWashington, DC 20036-1903(202) 328-9000 FAX: (202) 659-3225www.petersoninstitute.org

    C. Fred Bergsten, DirectorEdward Tureen, Director of Publications,

    Marketing, and Web Development

    CENTER FOR STRATEGIC

    AND INTERNATIONAL STUDIES

    1800 K Street, NWWashington, DC 20006(202) 887-0200 FAX: (202) 775-3199www.csis.org

    John J. Hamre, President and CEOJames Dunton, Director of Publications

    Typesetting by BMWWPrinting by United Book PressCover design by Sese-Paul Design

    Copyright 2008 by the Peter G. PetersonInstitute for International Economics and

    the Center for Strategic and InternationalStudies. All rights reserved. No part of thisbook may be reproduced or utilized in anyform or by any means, electronic or me-chanical, including photocopying, record-ing, or by information storage or retrievalsystem, without permission from theInstitute.

    For reprints/permission to photocopyplease contact the APS customer servicedepartment at Copyright Clearance Center,Inc., 222 Rosewood Drive, Danvers, MA01923; or email requests to:info@copyright.com

    Printed in the United States of America10 09 08 5 4 3 2 1

    Library of Congress Cataloging-in-

    Publication Data

    Chinas rise : challenges and opportunities /C. Fred Bergsten . . . [et al.].

    p. cm.

    Includes bibliographical references andindex.

    ISBN 978-0-88132-417-4 (alk. paper)1. ChinaEconomic conditions2000

    2. ChinaForeign economic relations.3. DemocratizationChina. 4. ChinaPolitics and government2002I. Bergsten, C. Fred, 1941 II. PetersonInstitute for International Economics.III. Center for Strategic and InternationalStudies (Washington, D.C.)

    HC427.95.C4566 2008330.951dc22

    2008028925

    The views expressed in this publication are those of the authors. This publication is

    part of the overall program of the Institute and the Center, as endorsed by their Boards

    of Directors, but does not necessarily reflect the views of individual members of the

    Boards or the Advisory Committees.

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    Contents

    Preface vii

    Chronology of Main Events xiii

    Introduction 1

    1 Chinas Challenge to the Global Economic Order 9

    2 China Debates Its Future 33

    3 Democracy with Chinese Characteristics? Political Reformand the Future of the Chinese Communist Party 57

    4 Center-Local Relations: Hus in Charge Here? 75

    5 Corruption in China: Crisis or Constant? 91

    6 Sustaining Economic Growth in China 105

    7 Energy Implications of Chinas Growth 137

    8 Why Does the United States Care about Taiwan? 169

    9 Chinas Military Modernization 191

    10 China and the World 209

    11 Conclusion 235

    Bibliography 241

    About the Authors 245

    About the Organizations 249

    Acknowledgments 253

    Advisory Committee 255

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    vi

    Index 259

    Tables

    Table 6.1 Government expenditure on social programs, 200207 122Table 7.1 Energy demand by sector, 2005 142Table 7.2 GDP by sector, 2005 142Table 7.3 Industrial profit margins, on an earnings-before-tax

    basis 148Table 7.4 Global steel industry: Production, market share,

    and industry concentration, 2006 149Table 7.5 Industry concentration in China 150Table 9.1 Competing statistics on Chinas military expenditure,

    2006 200Table 10.1 Chinas top trading partners, 2007 210Table 10.2 Chinas rank among countries top trading partners 221Table 10.3 Chinas top five sources of crude oil imports, 200307 222

    FiguresFigure 5.1 Perceived level of corruption in China, 19842006 93Figure 6.1 Investment as percent of GDP, 19782007 107Figure 6.2 Household consumption as percent of GDP,

    19782007 107Figure 6.3 Government consumption as percent of GDP,19782007 108

    Figure 6.4 Net exports of goods and services, 19922007 109Figure 6.5 Manufacturing and services share of urban

    investment, 19952007 111Figure 6.6 Losses of unprofitable industrial enterprises,

    19952007(e) 113Figure 6.7 Industry profits as percent of GDP, 19982007(e) 113

    Figure 6.8 Current account balance as percent of GDP,19942007 115Figure 6.9 Household savings and interest income, 19922003 119Figure 7.1 Energy intensity of the Chinese economy, 19532007 139Figure 7.2 Energy demand, historic and recent forecasts,

    19742030 140Figure 7.3 Chinas share of global production, 2006 143Figure 7.4 Industrial electricity prices, 2006 145

    BoxesBox 1.1 Other economic superpowers? 10Box 1.2 Will China dump its dollars? 18Box 2.1 Emancipation of the mind campaigns 43Box 9.1 Chinas defense budget 192Box 9.2 Aircraft carriers 198

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    Preface

    China remains a country of complexity and contradiction. It has becomean economic powerhouse and an increasingly influential global player,raising the prospect that it will be a future rival to the United States inworld affairs. At the same time, Chinas unbalanced growth fuels unsus-tainabilities and inequities in its political and social system, raising longer-term questions about its domestic stability. Abroad, China is widely wel-

    comed as an engine of economic growth, even as its military modernizesand its increasing footprint creates palpable discomfort about its impacton global stability and the international system.

    For Americans and others in the international community, coping withthe rise of China has emerged as the key challenge of the 21st century. For-mulating an effective strategy to do so, however, demands a far richer andmore nuanced understanding of Chinas fundamental social, political, andeconomic context than that shaping the current public debate in the UnitedStates and elsewhere.

    The China Balance Sheet Project, a joint endeavor by the Center forStrategic and International Studies (CSIS) and the Peterson Institute forInternational Economics, was established in 2005 with the intention ofproviding a balanced and objectively reasoned source of information onChina for government officials, business and other private-sector leaders,the media, and the interested public alike. Our first book, China: The Bal-ance SheetWhat the World Needs to Know Now about the Emerging Super-power, was published in April 2006. Translated into several languages, thatbookand the one-page issue summaries derived from it provided on

    www. chinabalancesheet.orghas become a standard reference for poli-cymakers, journalists, and students around the world, fulfilling an un-mistakable need for authoritative and balanced discussion of Chinas con-temporary economic, military, political, social, and international policiesand perspectives. It has been widely quoted by top officials of both gov-

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    viii

    ernments, including US Secretary of the Treasury Henry Paulson, Jr. andformer Chinese Vice Premier Wu Yi.

    In May 2007, the two institutions held a full-day national conference to

    continue the discussion of China and US-China relations. At that session,we released The China Balance Sheet in 2007 and Beyond, a compilation ofpapers that delved into topics including Beijings internet censorship poli-cies, the rule of law in China, and Chinas relations with India and Rus-sia. Keynote presentations were delivered by Secretary of the TreasuryHenry Paulson, Jr.; Robert Zoellick, president of the World Bank and for-mer US deputy secretary of state; and Craig Mundie, chief research andstrategy officer for Microsoft.

    This book seeks to take the analysis several important steps further by

    connecting Chinas development directly to US and global interests, andoffering a series of possible policy responses. It begins by looking at theglobal economic challenge posed by China, a central theme throughoutthe volume, in a chapter written by Dr. C. Fred Bergsten, director of thePeterson Institute. It then turns to the emerging policy debates on all theseissues in China, where an intellectual climate is forming that is moreopen, diverse, and creative than many outsiders realize.

    As in the earlier two publications, the book then assesses the likely de-velopment of China itself under three headings: domestic political and so-

    cial affairs, economic policy, and foreign and security policy. The authorsdivided lead responsibility for the discussion according to their expertise.Charles Freeman, holder of the Freeman Chair in China Studies at CSIS,took primary responsibility for the chapters devoted to Chinas domesticpolicies. Dr. Nicholas Lardy, senior fellow at the Peterson Institute, ad-dressed Chinas domestic economy. Trevor Houser and Daniel Rosen of thePeterson Institute coauthored chapter 7 on Chinas energy issues. DerekMitchell, senior fellow in the International Security Program at CSIS, tookon the multifaceted challenges of Chinas foreign and security policy. All

    these authors have published extensively on their areas of expertise.In the process, we would like to thank many people for their contribu-