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China: a power for the 21st century

A Note by the Director (Ditchley 2004/10)
 
29-31 October 2004
The autumn colours were turning a deep gold as we met to discuss China’s impact on the world over the coming period.  But there was nothing end-of-season about the subject-matter.  We were fortunate in having a Chairman who drove for practical outcomes and there was an impressive range of expertise spread around the Library table.  Everyone agreed that we were no longer talking about China’s potential.  Its size and impact were already a current phenomenon, bound to grow even greater with time. 
This Note cannot do justice to an excellent discussion, which covered a vast amount of detail on the Chinese scene and on Chinese policy options.  There was a distinct tone of optimism in the exchanges.  Again and again we focussed on problems which the Chinese state and people will have to confront – problems in the economy, the environment, the unequal distribution of wealth, the ageing population, water scarcity and energy requirements;  problems perhaps especially of political and social evolution.  The conference nonetheless concluded that China has the capacity, with its record of maintaining cohesion and progress against the odds and with its ability to generate huge remedies for huge challenges, to overcome difficulties which would be too much for most other societies.  But it would not be a smooth passage and the shocks along the way would reach far beyond China’s borders.
The conference carefully examined the possibility that sheer economic expansion and modernisation would create unmanageable political and social tensions.  We briefly debated but dismissed the suggestion that Confucius was opposed to wealth creation.  It was agreed that there were bound to be increasing inequalities in the distribution of wealth, the availability of jobs and the spread of opportunities for different parts of the population.  Agriculture and other rural activities would not be able to create employment to match the growth of activity in the cities;  and there would be a continuing, perhaps massive, flow of migration from the countryside into the urban areas.  This would create strains within the cities themselves, not least in the provision of public services, which would not necessarily be remedied by a giant urbanisation or city-building programme.  But we judged that the State had the capability to absorb many of these strains, to organise responses on an enormous scale and to maintain the latent discipline in the population while they implement their decisions.  The continuing interest of the Chinese population in the maintenance of stability was an important factor in this.  If the possibility of popular unrest had to be allowed, it was more likely to be connected with economic polarisation than collective deprivation. 
Another potential source of popular dissatisfaction was considered to be the corruption which is considered to be endemic in many parts of the Chinese system.  It would be necessary for central government to keep this within bounds.  But stability would also require the state to show confidence and strength at the senior levels of leadership.  Unrest could flow from disappointed expectations and unsolved problems, but  only if there was a perceived weakness in central government.  Participants expected the Chinese leadership to have learnt the lessons of the collapse of the Soviet Union and to be rather more successful in choosing a practicable path within an ideology that was firm in tone but flexible in substance. 
This led the conference to speculate about the future of the Chinese Communist Party.  They foresaw a continuing strong motivation for the CCP to stay in power, and to have the will to do so.  It was unlikely to run out of steam just because of the strains and pressures of economic growth.  To continue successfully, it would have to deliver not just growth but also an improved quality of life for Chinese citizens (involving particularly the environment, education, health and pensions).  The paradox was noted that the CCP needed successful economic growth to retain popular support, but growth would lead very probably to the CCP ceding central authority.  If the quality of the leadership was maintained, collectively and individually, legitimacy should not be a problem over, say, the next twenty years, even if corruption continued. 
The conference expressed considerable concern over the environmental challenges which China faces.  The redistribution of water resources was a big enough headache in itself, even if it was already being addressed.  But the increasing pollution of air and water and the miseries which this could cause in both urban and rural life were problems that had not yet been fully confronted.
In the economic area, our working group decided that the growth of the Chinese economy would probably be sustainable, if at a slightly lower rate of 6-8%, over the next 10 years.  They did not dismiss the possibility of a financial crisis, perhaps over bank debt, but this would not be fatal for the medium-to long-term growth trajectory.  The experience from other models strongly suggested that the ratio of foreign direct investment to domestic capital as sources for capital accumulation would move in favour of the latter over time.  FDI would probably shift towards high-quality transfers of technology and knowledge. 
The conference considered the potential sources of value creation in the Chinese economy, and whether value creation would hold its own against the forces of disruption and waste.  The lynch-pin would be the evolution of a performing financial sector, which participants thought was developing the right scope and expertise to modernise.  We saw a need for flexibility in both Chinese economic policy decisions and in the response of the outside world.  There was a risk that China might over-focus on a drive for exports, when the strength of the internal market was probably the right priority.  China-watchers could not see evidence of any clear Chinese vision in these areas at the moment.  There was no shortage of Chinese capital to put into new directions.  But they were still in the era of experimentation.  This made it all the more important that China’s trading and investment partners should engage in discussion of next steps and look for constructive ways of assisting the Chinese state to go in sensible directions.  This might also enable the right points to be made about commercial trust, intellectual property and the rule of law, even if expectations had to remain modest in these areas.
In that respect, the conference was cautiously optimistic about China’s bilateral and regional/multilateral trade agreements.  ASEAN+3 would probably serve as the basis for exploring rule-making in advance of WTO commitments and help to handle non-trade issues such as the recognition of professional credentials and the movement of people within the region.  As regards the exchange rate, participants did not recommend the free floating of the RMB only to ameliorate American trade deficit pressures.  Since China had trade deficits with other regions, and since the full implications of RMB movements were not sufficiently understood, it would be better for the banking sector to make more progress with reform before this solution was used.
The working group examined the energy field with particular care.  One body of thought believed that China’s energy thirst was likely to plateau within the next few years as energy prices persuaded people to look for technology which lowered demand.  Others pointed to the inevitable consequences of sheer economic growth and considered that the Chinese market was likely to grow strongly for the foreseeable period.  China would continue to rely predominantly on coal for power generation over the coming period.  But in the medium to long term greater efficiency and diversification from coal would be essential policy goals.  This would mean looking at policy changes in the area of fossil fuel subsidies, market-priced electricity, rebates for pollution and tax laws generally.  Otherwise there would not be the incentives for energy-saving technologies.  There ought to be considerable opportunities for foreign investors in this general area.  China needed to examine in much greater depth the potential for promoting a regulatory environment for energy use and pollution reduction, either at the state or the local level, although devolution might well not work efficiently in this area.  As for meeting China’s oil and gas import needs, this would be heavily influenced by the evolution of the global market. Conversely, China’s needs were bound to influence the evolution of the global energy market.  Chinese outsourcing of oil and gas supplies would generate a good deal of political and commercial competition, if not some deliberately aggressive behaviour at times.  International cooperation in mitigating the worst effects of this would be advisable. 
In the international field, the conference believed that there had been an extraordinary change in China’s set of international relationships.  There could be no remaining doubt that China now mattered across the globe.  To some extent, it was bound to be regarded as a disruptive force which had to be accommodated.  Questions should continue to be asked about human rights, but progress would be smoother if the outside world understood the Chinese emphasis on human obligations as opposed to rights.  Some progress had already been made in persuading China to adapt to international systems.  But it would be wrong to fashion an approach which relied on containment.   The conference was clear that engagement was a much more constructive way forward.  China was not deliberately causing discomfort in its relationships.  It was a country deeply interested in peaceful and rational ways of taking relationships forward and solving problems;  and it was the rest of the world’s job to look for comfortable ways of having China in the global family.  Participants recognised that this would not necessarily be the universal view from outside China.  While the EU arms embargo was not a major factor in itself, the debate over whether or not to terminate it served as a reminder of differences of approach between Western Europe and the United States.  The conference thought it right to encourage the two sides of the Atlantic to discuss this in depth before too long. 
Did we believe that China should be regarded as a threat in any respect?  Taiwan came up as one obvious context in which this question had to be asked.  We wisely steered clear of the detail of the Taiwan issue.  The strength of emotion about it in China made it difficult to examine the options from outside.  But we were confident that China would make every effort to find a peaceful resolution if that was possible.  It was noted in passing that only Washington and Tokyo made an effort to counsel moderation in Taipei.  Could the EU not add its voice?  More broadly, the conference found it difficult to determine China’s intentions in the foreign policy area.  Motives and interests could be described, but it was hard to see where they might lead against the pressures.  What was visible was an effort to manage the situation rather than the pursuit of any clear aims. 
Against that background, we looked at Chinese priorities and the main drivers of change.  We were clear that in the top category had to be placed China’s immediate national interests on security and territorial integrity, including Taiwan.  Next, China’s economic needs were growing and had to be of high importance.  The theory of “peaceful rise” underpinned by China’s economic potential was a commanding one and appeared to be substantiated by China’s actions.  China needed the outside world and, subject to her immediate national interest, could not afford to make enemies of it.  The key drivers included:  energy needs, with China seeking to diversify its energy supplies and to extend its involvement in new geographical areas of oil and gas production;  metals, to the point where China was becoming the major factor in steel and most base metal markets;  food, on which the leadership was showing (perhaps an exaggerated) concern over food security and dependency on external supply;  free trade, with China becoming a driving force in WTO for free trade in manufacturing;  and science and technology, where China was increasingly likely to be looking outside for access to this.  While these drivers of change were to a great extent logical and predictable, the Chinese leadership had to take public opinion into account in certain areas.  Taiwan was an obvious example.  But the government would also have to watch deep-rooted feelings such as anti-Japanese sentiment, when the logic of interests suggested that the increasingly businesslike bilateral relationship with Japan was the sensible course.  Indeed, Beijing was showing that it took Japan seriously, while also nurturing the relationship with Washington.  It might have to be Tokyo that came to terms with this. 
We were encouraged to note the improvement in Chinese external relationships in the past few years.  China-US relations were probably at their  most constructive since 1989, even if potential frictions remained over the trade deficit and over human rights.  Participants thought that the two countries’ new economic interdependence would militate for continuing stability in the relationship.  Elsewhere we could note more energetic Chinese diplomatic activity generally, especially around the immediate periphery, but increasingly with a regional perspective also.  Historical factors meant variations in this, but China was clearly willing to accept new realities, for instance India’s regional and indeed global impact.  The cold war antagonism seemed to have gone, particularly with Russia, although some cautiousness remained in this relationship and there was a lack of real substance outside the energy and arms sales areas.  China’s involvement in promoting the six-party talks on North Korea was a significant new departure, which would be a test of Chinese capacity to contribute to the solution of international problems and perhaps also of their willingness to take sensitive initiatives.  With the EU the relationship was deepening, with a sharp rise in activity across the board and evidence of increasingly sophisticated handling of the EU by the Chinese (though perhaps less so in the opposite direction). 
While the conference was hesitant to assume too definite a trend in Chinese exchanges with the outside world, we thought that China was responding well to its higher global profile and was showing an interest in normalising its relationships across the board.  At the UN, where quite recently China was visibly constrained from playing a prominent role on anything other than its immediate interests, the beginning of a rather more forthcoming and collective approach was observable.  All of this reinforced the conference’s inclination to recommend a deepening engagement with China, while maintaining a certain degree of vigilance while it remains unclear precisely what role China is seeking in the medium to long term.  As one participant put it, China is changing the world, but does it want to? 
Analysis of where China may be heading, both internally and in its foreign and security policy, has to admit to some uncertainty.  The conference was all too conscious of the need for follow-up work, which Ditchley will try to organise in the coming months. 
This Note reflects the Director’s personal impressions of the conference.  No participant is in any way committed to its content or expression.
 
 
PARTICIPANTS

Chairman : Sir John Boyd KCMG
Master, Churchill College, Cambridge (1996-);  Trustee: GB Saskawa Foundation (2001-);  HM Diplomatic Service, retired.  Formerly:  Ambassador to Japan (1992-96).  Political Adviser, Hong Kong (1985-87)
CANADA
Professor Maurice Copithorne QC
UN Special Representative on Human Rights, Iran (1995-2002).  Formerly:  Director-General and Legal Adviser to the department of Foreign Affairs and Trade.
Ms Margaret Cornish
Executive Director, Canada China Business Council.
Dr David T Fung
Director, Canadian Manufacturers & Exporters Association.
Professor Ralph W Huenemann
Professor International Business, University Victoria.  Formerly:  consultant to the World Bank;  Canadian International Development Agency.
CHINA
Dr Cao Qing
Senior Lecturer, School of Languages, Liverpool John Moores University.
Dr Hua Han
Director, Centre for Arms Control and Disarmament Studies, School of International Studies, Beijing.
EUROPEAN UNION
Mr James Moran
Head of Unit, China, Hong Kong, Macao, Taiwan and Mongolia, European Commission.
FRANCE
Mr Marc Abensour
Sous-Directeur, Asia & Far East, Ministry of Foreign Affairs.
Mr François Lagrange
Chairman, National Commission for Privatisation (1998-).  Formerly:  President, Institut National de Propriete Industrielles (Patent Office);  a Governor, The Ditchley Foundation.
 
GERMANY
Ms Katinka Barysch

Chief Economist, Centre for European Reform.
 
INDIA
Dr W Pal S Sidhu
Senior Associate, International Peace Academy.
JAPAN
Mr Masafumi Ishii
      
Minister, Head of Political Section, Embassy of Japan in the UK (2004-).  Formerly:  Assistant to Foreign Minister (2002-2004);  Director, Second Southeast Asia Division, Asian and Oceanian Affairs Burea, MOFA (1999-2002).
UNITED KINGDOM
Dr Greg Austin
Director of Research, Foreign Policy Centre.
Dr Arnab Banerji
Senior Policy Adviser, Prime Minister’s Policy Unit.
Mr Jasper Becker
Correspondent for The Independent, Beijing.
Mr Guy de Jonquieres
Word Trade Editor, The Financial Times;  Asia columnist and commentator, The Financial Times (2005-).
Professor Harriet Evans
President, British Association for Chinese Studies.
Mr Denis Keefe
Head of Department Far Eastern Group, Asia Pacific Directorate, Foreign and Commonwealth Office.
Mr James Kynge
China Editor, Financial Times.
Mr Christopher Lockwood
Asia Editor, The Economist.  Formerly:  Diplomatic Editor, Daily Telegraph.
Mr Nicolas Maclean CMG
Chief Executive, MWM Consultancy (1999-);  Member, UNICE, Asia Working Group and Rapporteur for India.
Dr Rana Mitter
Lecturer in History and Politics of Modern China, University of Oxford.
Dr Rachel Murphy
Research Fellow, Contemporary Chinese Studies Programme, Pembroke College.
Mr Peter Nightingale
Chief Executive, China-Britain Business Council.
Ms Elizabeth Padmore
Global Director, Policy and Corporate Affairs, Accenture (1995-);  member of the Council, Royal Institute for International Affairs;  a Governor, The Ditchley Foundation.
Dr Julia Sutherland
Head of China Section, Asia Pacific Directorate, Foreign and Commonwealth Office.
Mr Peter Wilson
Head of Strategic Policy Team, Directorate for Strategy and Information, Foreign and Commonwealth Office.
Mrs Elizabeth Wright
Executive Chairman, The China Policy Institute.
Mr Rod Wye
Head, North Asia & Pacific Research Group, Foreign and Commonwealth Office.
UNITED STATES OF AMERICA
Mr Joe Hurd

Managing Partner, The Katama Group LLC.
Dr Kun-Chin Lin
Research Fellow, Institute for Chinese Studies, St Cross College.
Mr Herbert Levin
Director, United Nations Association, New York.  Formerly:  Executive Director, American China Society (1994-99);  Special Adviser to UN Under-Secretary General Ji Chaozhu (1991‑94).
Ambassador Nicholas Platt
President Emeritus, The Asia Society (2204-).  Formerly:  Ambassador, Philippines (1987-91); and Pakistan (1991-92).
Professor David Shambaugh
Director, China Policy Programme, and Professor of Political Science and International Affairs, George Washington University.
Dr Denis Simon
Provost, Levin Institute for International Relations and Commerce
Dr Ashley Tellis
Senior Associate, Global Policy Programme, Carnegie Endowment for International Peace.  Formerly:  Senior Director, Strategic Planning and South West Asia, National Security Council.