Harvard Asian Quarterly

Harvard Asia QuarterlySPRING 2011, Vol. XIII, No. 1

A Publication of Current Affairs Affiliated with the Harvard Asia Center

Realigning Global Governance · GreGory Chin

COMMENTARY: The Investments of China’s State-owned Enterprises in Brazilian Infrastructure · Charles ho & lap Chan

COMMENTARY: Chinese Investment in Brazil · dani k. nedal

Dimensions of Ambivalence in Indonesia–China Relations · evan a. laksmana

China’s Relations with South Asia: Why is India Weary? · Gunjan sinGh & avinash Godbole

Evolution of the Policy Process in China · jessiCa C. teets

COMMENTARY: The Current Status of the Korean Peninsula: A Chinese Perspective · ZhanG lianGui

I N S I D E

THE

ofINTERNATIONAL PERSPECTIVES

Harvard Asia QuarterlySPRING 2011, Vol. XIII, No. 1

EDITOR-IN-CHIEfIacob Koch-Weser

DEPUTY EDITOR-IN-CHIEfMarc Szepan

MANAGING EDITORAllan Hsiao

AREA EDITORS

CHINA AREAElla Chou

Bin Ouyang Jennifer RyanYing Xiaofei

JAPAN AREACharlie McClean

Dan Sofio

KOREA AREAJasmine Barrett

Robert Lee

SOUTHEAST ASIA AREAIvan Boekelheide

Julie Sheetz

lAyOuT EDITOR

Gary Norris

The present issue of Harvard Asia Quarterly is being published as Japan faces its most severe national crisis since World War II. The Sendai earthquake has wrought unprecedented destruction. Such events help us to put things into perspective – culture, politics, and economics ultimately belong to the realm of human affairs, and we humans are quite small in the face of nature. Our condolences go out to all those who have suffered.

Nonetheless, just as Japan must forge on, we have gone ahead with our publication as planned. The “rise of China” has been widely debated in media, academia, and policy circles in recent years. In particular in the wake of the 2007-09 global financial crisis, China seems to have emerged stronger than ever. True to great power theory, the “rise of China” has been variably used to characterize China’s growing influence on security, global governance, and the world economy. But in spite of its pervasiveness, the term is fraught with ambiguity. As the authors assembled here illustrate, in practice, this process has varying implications for different sectors and regions.

In our first section, we consider the political economy of China’s growing involvement in the developing world. Gregory Chin, an assistant professor of political science at York University in Canada, conducts an in-depth study of China’s support of regional development banks. Chin suggests that China is pursuing the dual aims of establishing its place in multilateral institutions outside of Bretton Woods, while also using this position to promote its trade and investment interests in the South.

Building on Chin’s article, we then move on to Brazil, where China became the largest foreign investor in 2010. We invite industry insiders based in Brazil to analyze this process. Lap Chan of the US energy firm AES and Stanley Ho of Standard Bank look at how the investment of power supplier State Grid augurs a new generation of infrastructure investments by Chinese firms in Brazil. They are optimistic that this is a positive game-changer over the commodities-for-manufactures pattern of commerce that has characterized China’s relationship with the Latin America region. Dani Nedal, formerly of the Brazil-China Business Council and the author of numerous articles on Chinese investment, provides a more sober assessment. He argues that Chinese investment has not lived up to expectations, and faces considerable obstacles in Brazilian government, industry, and civil society.

Moving across the Pacific, we consider the implications of China’s growing role in trade and investment for India and Indonesia. Gunjan Singh and Avinash Godbole, researchers at the Institute for Defense Studies and Analysis in New Delhi, find that China’s expanding commercial relations with South Asia pose a strategic challenge to India, adding to preexisting diplomatic and security disputes. Evan A. Laksmana, a researcher at the Center for Strategic International Studies in Jakarta, argues that Indonesia’s evolving relationship with China is characterized primarily by ambivalence – while bilateral trade and diplomacy have evolved, feelings of distrust toward Beijing remain among both the elite and the wider public.

Having surveyed “China’s rise” in terms of political economy and bilateral relations, our final section looks more generally at policymaking. Jessica Teets, a professor of political science at Middlebury College, examines the growing role of civil society in informing China’s international relations. In a short commentary piece, Zhang Liangui, a Professor of International Politics at the Center for International Strategy at the Central Party School of the Communist Party of China, assesses the status of the Korean Peninsula conflict from a Chinese perspective. Instead of emphasizing China’s role in this process, Zhang argues that South Korea is becoming a more assertive negotiator with North Korea. At the same time, the US risks adopting unilateral policies that may undermine the progress that the Six-Party Talks have achieved thus far.

This edition of Harvard Asia Quarterly constitutes the first of two editions on the “rise of China”. Our next issue in June 2011 will continue to explore this broad and vital topic.

Please enjoy!

With kind regards,

Iacob Koch-WeserEditor-in-Chief

LETTER fROM THE EDITOR

Our hearts and thoughts are with the victims of the recent earthquake in Japan, their families and friends, and the

Japanese people.

With our deepest sympathies,

The Harvard Asia QuarterlyThe Harvard University Asia Center

The Reischauer Institute of Japanese Studies

I. EDITOR’S NOTE

II. COMMERCIAL INROADS INTO THE DEVELOPING WORLD

Realigning Global Governance: Regionalism in China’s Financial Rise · GREGORy ChIn

COMMENTARY The Investments of China’s State-owned Enterprises in Brazilian Infrastructure: Assessing the Implications of State Grid’s Entry · ChARlES hO & lAp ChAn

COMMENTARY Chinese Investment in Brazil: Cum Grano Salis · DAnI k. nEDAl

III.CHANGING RELATIONS WITH SOUTHERN NEIGHBORS

Variations on a Theme: Dimensions of Ambivalence in Indonesia–China Relations · EvAn A. lAkSmAnA

China’s Relations with South Asia: Why is India Weary?· GunjAn SInGh & AvInASh GODbOlE

IV. POLICY MAKING IN “CHINA’S RISE”

Evolution of the Policy Process in China: The Impact of the Color Revolutions and Global Economic Crisis on Civil Society Participation in Public Policy · jESSICA C. TEETS

COMMENTARY The Current Status of the Korean Peninsula: A Chinese Perspective · ZhAnG lIAnGuI

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The global financial system has been undergoing important shifts over the past decade. Scholars have analyzed a system rendered more complex by increasingly sophisticated financial markets and the dispersion of regulatory authority; or more recently, by the decentralization in international monetary power and the fragmentation of the global financial architecture.1 One dimension that has received less attention is the expanding role of regional development I thank Jeffrey Legro, Saori Katada and Wang Yong for their suggestions. I am grateful to the officials of the Asian Develop-ment Bank, the African Development Bank, and the Inter-Amer-ican Development Bank for their comments.1 For example, see Louis Pauly, Who Elected the Bankers?: Surveillance and Control in the World Economy (Ithaca: Cornell University Press, 1997); Benjamin J. Cohen, “The International Monetary System: Diffusion and Ambiguity”, International Affairs 84, no.3 (May 2008): 455-470; Ngaire Woods, “Global Governance after the Global Financial Crisis: A New Multilater-alism or the Last Gasp of the Great Powers?”, Global Policy 1, no.1 (2010): 51-65.

banks in the global system. Over the past decade, the Asian Development Bank (ADB) and the Inter-American Development Bank (IDB) have lent more than either the IMF or the World Bank in their own regions. The African Development Bank (AfDB) has seen steady increases in its lending as well. Amid what one might call institutional “devolution” or “fragmentation”, China’s contributions to regional development banks have increased dramatically over the past half-decade. This is seen in several areas: Growing financial and technical support to Asian programs of sub-regional integration, fund-raising drives of the AfDB and IDB, and regional trade and investment financing in all three regions. China’s financial rise has stirred interest in how the country may be reshaping the global economy.2 2 Peter Bottelier, “China, the Financial Crisis, and Sino-Ameri-can Relations”, Asia Policy, 9 (January 2010): 121-29; William Overholt, “China in the Global Financial Crisis: Rising Influ-ence, Rising Challenges”, The Washington Quarterly 33, no.1 (January 2010): 21-34; Gregory Chin and Eric Helleiner, “China

REALIGNING GLOBAL GOVERNANCE:REGIONAlISM IN ChINA’S FINANCIAl RISE

GreGory Chin · YORK UNIVERSITY

5 HARVARD ASIA QUARTERLY | Commercial Inroads into the Developing World

IntroductIon

Gregory Chin is an Assistant Professor in the Department of Political Science and Faculty of Graduate Studies at York University (Canada), where he teaches global politics, comparative politics, and East Asian political economy

The central questions for this article are: What factors have motivated China’s increased regional financial activism? What are the implications for the regional development banks and for the global financial system more broadly? The article suggests that China’s rising regional financial activism has been motivated by two main considerations. On the one hand, there is a growing perception among Chinese authorities that regional development banks have unique advantages over global multilaterals in supporting sustainable long-term growth. On the other hand, Beijing has a strong interest in pursuing trade diversification, particularly through emerging or new export markets in the South. More recently, China has been moved by hard currency diversification and foreign investment leverage objectives. Beijing’s interest in reducing China’s vulnerability from over-reliance on the US and EU markets by pursuing increased South-South economic cooperation has only intensified since the onset of the 2007-09 global financial crisis. new role In the IMF and world Bank China’s emergence as a major creditor country has provoked debate over whether its growing international clout now extends beyond the realms of trade and manufacturing into international finance. Some analysts have focused specifically on whether Beijing exerts influence over US economic policy, and if so, how and to what degree.3 To casual observers, China has emerged as a major creditor, and the 2007-09 global financial crisis has accelerated China’s financial rise. China actually became a net creditor in 2003, but its net foreign assets have accumulated very rapidly since then, totaling US$1.022 trillion by the end of 2007.4 The most dramatic symbol of China’s growing creditor position has been its foreign exchange reserves, which rose to a total of US$2 trillion by the close of 2008, and close to US$3 trillion by the start of 2011. China’s creditor status has emerged alongside the country’s rapidly growing current account surplus that is presently the largest in the world (at approximately 11% of GNP). The emergence of this surplus has been attributed to a number of developments whose relative importance

as a Creditor: A Rising Financial Power?”, Journal of Interna-tional Affairs 62, no.1 (Fall-Winter 2008): 87-102.3 Brad Sester, “Creditor to the Rich”, China Security 4, no.4 (Autumn 2008): 16-23; Daniel Drezner, “Bad Debts: Assessing China’s Financial Influence in Great Power Politics”, Interna-tional Security 34, no.2 (Fall 2009): 7-45.4 “China End-2007 Net Foreign Financial Assets Up 67 Per-cent”, Reuters, June 20, 2008.

is hotly debated: the country’s increasing savings rate, declining barriers to Chinese exports, increasing productivity of Chinese firms, an undervalued currency, and speculative capital inflows.5 Whatever its cause, China’s new financial surplus position has provided means for a boost in Beijing’s financial contributions to the International Financial Institutions (IFIs). Prior to the crisis, China was already taking, in the words of World Bank president Robert Zoellick, “modest but significant steps” to becoming a multilateral creditor. China made its first ever IDA contributions through the World Bank in December 2007. This occurred just eight years after China had stopped receiving loans from the IDA. According to Zoellick, “it is a significant breakthrough to have China become a contributor” because it “signals China’s intention to help shape the international aid architecture through multinational channels.” In a meeting with Li Ruogu, Chairman of China Eximbank, Zoellick pursued the idea of cooperation between the World Bank and China Eximbank via joint projects in Africa in the fields of urban and rural development, health care, pension insurance, education, and finance. Zoellick pledged that China, as a new contributor, would have a greater say in the decisions of the Bank. The Bank would also recruit more Chinese staff.6 Since China was already investing heavily in Africa, Zoellick hoped that Beijing would contribute to joint development projects with the World Bank in the region. Although China no longer needed financial aid, Zoellick stated that the World Bank could nonetheless provide China with needed expertise to help “shape” - i.e. improve - its external development assistance agenda in a number of areas. Building on Zoellick’s comments, the World Bank and China Eximbank established a Memorandum of Understanding on cooperation in 2008. To insiders, the MOU signifies that both sides have agreed in spirit to coordinate some of their aid efforts.7

In the wake of the crisis, Beijing has also thrown more support behind the IMF. An important realization

5 See for example Morris Goldstein and Nicholas Lardy, “China’s Exchange Rate Policy.” In Debating China’s Exchange Rate, edited by M. Goldstein and Nicolas Lardy (Washington DC: Peterson Institute for International Economics, 2008).6 The World Bank increased China’s voice in the institution when it appointed Justin Yifu Lin as the Executive Vice Presi-dent and Chief Economist of the World Bank in 2009. 7 The details of this MOU are discussed in Gregory Chin, “China’s Rising Institutional Influence.” In Rising States, Rising Institutions: Challenges for Global Governance, edited by Alan Alexandroff and Andrew F. Cooper (Washington, DC: Brook-ings Institution Press, 2010).

Commercial Inroads into the Developing World | HARVARD ASIA QUARTERLY 6

that emerged out of the crisis was that Beijing was not ready (or willing) to take on global lender-of-last-resort functions. When the global crisis hit, Beijing therefore joined with the members of the G20 in strengthening the financing capabilities of the IMF. Around the time of the London G20 Summit in April 2009, it was reported that China had agreed to contribute to boosting the coffers of the IMF by investing at least US$40 billion in bonds denominated in Special Drawing Rights (SDR). In September 2010, the IMF reported that the People’s Bank of China had signed a “note purchase agreement” of SDR 800 million (US$1.2 billion) out of a total purchase of SDR 5.3 billion (which also involved Japan, France, and Britain). This agreement targets the IMF’s lending to low-income countries hit hard by the global financial crisis.8 China has pushed for enhancing the role of the SDR mechanism as a supplemental reserve currency option. Here, in the realm of currency, we see how China has been working with other great or rising powers - especially Russia and Brazil - to advance reforms within the existing international monetary system. As a result, these reforms actually strengthen existing multilateral mechanisms. But in so doing, China is encouraging a shift toward a more diverse, multiple reserve currency scenario beyond the current de facto dollar order. H o w e v e r , notwithstanding its new contributions to the IMF and increased activism in the World Bank, Beijing has exercised a significant degree of caution in contributing to IFIs. Beijing’s support for the IMF has been measured and conditional. While the Chinese leadership stated that China was “ready to play its part” to bring the crisis under control, it also attempted to manage international expectations by emphasizing that China would “contribute to this effort within its ability”. In a well-timed op-ed in The Times of London, Chinese Vice Premier Wang Qishan deflected pressure from his country by suggesting that the IMF should mobilize new resources through its quota-based system, as well as through voluntary contributions. It should strike an “appropriate balance between the rights and obligations” of the contributing countries. He added: “It is neither realistic nor fair to set the scale of contribution simply by the size of foreign exchange reserves.”9 8 “IMF Signs Agreements Totaling SDR US$5.3 billion with Japan, the Banque of France, the United Kingdom, and the People’s Republic of China to Support Lending to Low Income Countries”, IMF Press Release 10, no. 340 (September 17, 2010), accessed on Feburary 22, 2011, http://www.imf.org/external/np/sec/pr/2010/pr10340.htm.9 Wang Qishan, “The G20 Must Look Beyond the Needs of the

Wang’s statements about the “fairness” of the relative contributions were also aimed at a Chinese domestic audience increasingly concerned with Beijing’s purchases of US debt. Like Brazil and Russia, China has made purchases of the IMF’s SDR-denominated bonds conditional on gaining an “appropriate” voice inside the IMF. Beijing hopes to use the purchases as an opportunity to enhance its influence in the institution.

early Support For regIonal developMent BankS, 1997-2008 The conditionality and caution that Beijing exercised toward the Bretton Woods institutions was a reflection of the growing frustration of Chinese authorities in dealing with the major IFIs. It was also a response to the rising popular criticism in China over the government’s lending to “rich countries”. But it is important to note the international dimension of China’s motivations as well. In the aftermath of the 1997-98 Asian financial crisis, China already began working with its regional neighbors to establish a regional emergency reserve pool. The Chiang Mai Initiative served as a hedging option for crisis liquidity provision. But the disenchantment

of Chinese officials towards the major IFIs intensified as global macroeconomic conditions worsened from 2003 onwards. From Beijing’s vantage point, neither the IMF nor the World Bank was willing or able to curtail rising financial imbalances by containing the loose fiscal policy of the

United States. Li Ruogu, then Assistant Governor of China’s Central Bank, warned at the annual meeting of the International Monetary and Financial Committee - the joint Committee that precedes the annual “spring meeting” of the IMF and World Bank - that the IMF needed to “tighten its surveillance of the macroeconomic and financial policies of the major industrial countries”.10 Although China’s foreign currency reserves were only starting their dramatic ascent at the time, Chinese authorities were already expressing concern about the potential for growing imbalances. At a later stage of the meetings, China’s Central Bank representative stated:

Top 20”, The Times (London), March 29, 2009, accessed on February 22, 2011, http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article5982824.ece.10 Li Ruogu, “Statement by the Assistant Governor of the Peo-ple’s Bank of China at the Seventh Meeting of the International Monetary and Financial Committee”, April 12, 2003, accessed on February 22, 2011, http://www.imf.org/external/np/exr/facts/groups.htm#IC.

An important realization that emerged out of the crisis was that

Beijing was not ready (or willing) to take on global lender-of-last-resort

functions.


[The IMF should examine the] flaws in the existing international monetary system, and gradually establish a more equitable, fair and just international monetary system that more fully reflects the interests of the many developing countries, and provides institutional safeguards for the sustainable growth of the global economy.11

It was not until the 2007-09 global financial crisis that Beijing saw a serious response to these calls. In the meantime, the growing disenchantment of Chinese authorities toward IFIs gave rise to a multi-dimensional “routing-around” strategy or what some see as “hedging options”. A key component of this strategy was China’s increasing involvement in regional development banks. Chinese authorities began to see these banks as focal points for regional cooperation and economic integration. Due to the dearth of strong national financial institutions in many regions of the South, Beijing found that regional development banks could act as additional financial intermediaries connecting national-level financial institutions in developing regions to the world’s financial centers. But it appears that Beijing envisages a role for these institutions that goes beyond financing - they can also help instill a philosophy that places national projects in the “mini-countries” of the South in a (sub)-regional context. For more than a decade, China has already been involved in two regional programs coordinated by the ADB: the Greater Mekong Subregional (GMS) and the Central Asian Regional Economic Cooperation (CAREC) projects. The GMS Program, an ADB facilitated initiative that started in 1992, aims to promote development via stronger economic linkages and regional cooperation between the six Mekong River countries of Cambodia, China, Laos, Myanmar, Thailand, and Vietnam. The GMS Program has sought to reduce poverty by enhancing interconnectivity and competitiveness and encouraging regional community building.12 China continues to be an active participant in the GMS Program through the involvement of Yunnan Province and Guangxi Zhuang Autonomous Region.13 By the start of 2008, GMS had mobilized US$10 billion for 180 projects in nine key

11 Ibid.12 Asian Development Bank, “Mekong Leaders: Building Capac-ity in the GMS Countries” (June 2006), accessed on February 22, 2011, http://www.adb.org/GMS/phnom-penh-plan/PPP-200808.pdf.13 China’s participation in the GMS Program helps support its policy of striving for “balanced and harmonious development”. The sectors are: (1) economic corridors, (2) energy, (3) telecom-munications, (4) trade facilitation, (5) investment, (6) human resource development, (6) environment, (7) agriculture, and (8) tourism. Asian Development Bank, “The People’s Republic of China in the Greater Mekong Subregion” (2007).

fields: transportation, energy, telecommunications, environment, agriculture, human resource development, tourism, trade facilitation, and investment.14 This may soon expand to other sectors such as healthcare and drug prevention. China is also a leading actor in CAREC, a Eurasian regional integration program that aims to accelerate economic growth and poverty reduction through regional cooperation in transport, trade, energy, and other key areas of mutual interest.15 Launched in 1997, CAREC was elevated to the ministerial level in 2002. It involves nearly all major Central Asian states - Afghanistan, Azerbaijan, Kazakhstan, Kyrgyz Republic, Mongolia, Tajikistan, and Uzbekistan. In China, it focuses primarily on those regions bordering on Central Asia (Xinjiang and Inner Mongolia Autonomous Regions). In addition, CAREC includes a set of supporting multilateral institutions, comprised of Bretton Woods institutions as well as regional development banks like the ADB, the European Bank for Reconstruction and Development, and the Islamic Development Bank. It is noteworthy that Russia participates as an observer country. By 2006, CAREC had mobilized close to US$2.3 billion for a series of initiatives in transport, energy, and trade. Through the “Poverty Reduction and Regional Cooperation Fund”, China has provided technical assistance to some CAREC countries to support agricultural development, environmental protection, and capacity building activities. Some of this assistance is also of direct benefit to China’s economic interests in the region: China provided RMB 60 million in concessional assistance to the Kyrgyz Republic to support the construction of the China-Kyrgyz-Uzbekistan road corridor; and another US$900 million in preferential export credit to certain CAREC member countries under the Shanghai Cooperation Organization framework to support projects in the energy and transport sectors.16

While China’s growing financial contributions in its own region were somewhat predictable,17 Beijing’s growing outreach in Africa caught more analysts by surprise. The African Development Bank (AfDB) became a key part of this policy. Although China’s ties with the AfDB date back to 1996, relations only grew closer

14 “Country Report on China’s Participation in Greater Mekong Subregion Cooperation”, joint report of China’s National Devel-opment and Reform Commission, Ministry of Foreign Affairs, Ministry of Finance (April 2008), accessed on February 22, 2011, http://en.ndrc.gov.cn/newsrelease/t20080430_208063.htm.15 Asian Development Bank, “Comprehensive Action Plan: CAREC” (2007). 16 Zeng Peiyan, “Building a Harmonious Region by Strength-ening Partnership and Improving Cooperation Mechanism” (speech): Urumqi, October 20, 2006.17 David Shambaugh, “China Engages Asia: Reshaping the Regional Order”, International Security 29, no.3 (Winter 2004-2005): 64-99.


after May 2007, when China hosted the AfDB’s Annual Meetings in Shanghai.18 The priority Beijing assigned to these meetings is illustrated by the fact that China’s Central Bank Governor Zhou Xiaochuan was present as chair for the full three-day duration. At the conclusion, China pledged about US$20 billion of contributions to Africa over five years.19

role In regIonal developMent BankS SInce 2008

China in East Asia The trends above suggest that, heading into the global financial crisis, China was already interested in regional collective action and regional development banks. At the Boao Forum for Asia in April 2009, Central Bank Governor Zhou Xiaochuan stated that the global multilaterals had “failed to give alarm or diagnosis, let alone remedies, when problems occurred in developed countries”, and therefore had failed to preempt the crisis.20 He acknowledged that it was a formidable challenge for any research institution to monitor global markets. He therefore recommended greater cooperation among global and regional organizations; in particular, the ADB could play a greater role in alleviating the crisis by increasing spending and boosting regional cooperation. Another reason why Beijing gave greater support to regionalism was due to pressure from other developing countries in the region. Indonesia wanted regional development banks to receive a portion of the US$1.2 trillion the G20 had mobilized to respond to the global crisis.21 Indonesian officials successfully lobbied China (along with Japan and Korea) to support the devolution of funds to the ADB. The ADB, in turn, would provide “well-managed” governments in the region with credit to offset the liquidity freeze. A number of Asian states are calling to lock-in some of these devolved lending responsibilities to regional development banks in the post-crisis period. After the global freefall was stemmed, Indonesia agreed to support China’s call for a greater voice for major emerging countries in the IMF. Indonesia agreed to do this as long as Beijing was willing to lobby for reform of the lending practices in the IMF. It primarily

18 This was only the second time that the Bank had held its annual meetings outside of Africa in one of its 24 non-regional member countries. The other time was in Valencia, Spain in 2001.19 “China Pledges US$20 Billion for Africa”, Financial Times, May 18, 2007.20 “China’s Central Bank Governor Says IMF Needs Improve-ment”, Xinhua, April 18, 2009, accessed on February 22, 2011, http://news.xinhuanet.com/english/2009-04/18/con-tent_11210468.htm.21 For details on the Indonesian role see Gregory Chin, “China’s Rising Institutional Influence”.

sought changes in “conditionality” and easier access to credit for counter-cyclical policy.22 Since the onset of the crisis there has been a marked increase in Chinese support for East Asian financial cooperation. In particular, China has joined with Japan in setting new precedents for joint leadership.23 Beijing and Tokyo agreed to be the largest “co-equal contributors” in two areas of financial and monetary cooperation. Before the global financial crisis was fully contained, states in Asia agreed to increase the total amount of pooled emergency funds from US$90 billion to US$120 billion. Japan and China each contributed 32% of the total to the CMIM, or US$38.4 billion of the US$120 billion pool.24 Important diplomatic precedent was set on regional bond markets when the two most powerful economies in the region agreed that they would each contribute US$200 million to the new Credit Guarantee Investment Fund.25 The ADB has played a crucial role in supporting and, at times, guiding these processes of institutional innovation for regional collective action, especially in backstopping the risks that are involved in experimentation. China’s growing role in the ADB is part and parcel of its trade and investment interests in the Asia region. In May 2009, China Eximbank and the ADB inked an agreement to jointly prepare at least US$3 billion for projects in developing Asia, especially in the area of infrastructure. China Eximbank is acting as the “organizational vehicle” on the Chinese side.26 The 22 I thank an Indonesian finance official who participated in the G20 process for this point.23 Gregory Chin, “Asian Regionalism and the Global financial crisis: The Evolution of Economic Globalization.” In The Politi-cal Economy of Asian Regionalism, edited by M. Kawai and G. Capannelli (forthcoming).24 China’s contribution actually consists of US$34.2 billion from the Mainland and US$4.2 billion from Hong Kong.25 The ADB agreed to contribute US$130 million, the Republic of Korea US$100 million, and the ten ASEAN countries US$7 million each. See Asian Development Bank, Institutions for Asian Regional Integration: Toward an Asian Economic Com-munity (2010): 69.26 “China Eximbank, ADB Sign Co-Financing Agreement”, China Daily, May 4, 2009, accessed on January 19, 2011,http://www.chinadaily.com.cn/bizchina/2009-10/23/content_114.

After the global freefall was stemmed,

Indonesia agreed to support China’s call

for a greater voice for major emerging

countries in the IMF.


agreement signed at the 42nd ADB annual meeting in Bali became effective in June 2009, and is being utilized for three years. Dr. Schaefer-Preuss, Vice President of Knowledge Management and Sustainable Development at ADB, stated:

Access to sanitation, power and transportation links is still very poor in many parts of Asia. Massive amounts of funds are needed to address that if we are to reduce poverty in the region […] This agreement with China Eximbank will ensure funds get systematically directed towards those and other urgent projects that will help the region weather the current global downturn.

The “massive amount of funds” alluded to here Schaefer-Preuss have in fact been calculated by the ADB. It estimates that the region would need US$4.7 trillion between 2006 and 2015 if it is to meet its developmental potential. Related to trade finance are China’s latest currency internationalization goals. Here the ADB is also proving to be helpful to China, as the latter transitions from a trading and manufacturing power to also being an international financial and monetary force. The ADB is playing a key institutional facilitation role for experimentation on RMB regionalization, where Chinese authorities are allowing the RMB that is earned from the settling of trade accounts to be reinvested into newly created offshore RMB-denominated financial products. In October 2010, the ADB announced its issuance of RMB1.2 billion (US$180 million) in RMB bonds on the Hong Kong bond market. The ADB 10-year issue is the longest tenor RMB bond issued in Hong Kong. Bindu Lohani, ADB Vice President of Finance and Administration, stated:

[The bonds are] a useful benchmark for other potential borrowers, helping develop the offshore RMB bond market into an important source of funding for borrowers as well as an investment destination.27

China in Africa Beyond its own region, Beijing has also increased support for financial regionalism since the crisis. This can be seen in its fast-growing relations with the AfDB and IDB. Rather than lauding its new co-donor arrangements with the World Bank (discussed above), Chinese Vice Premier Wang Qishan instead highlighted that China values the AfDB as its “leading partner on development

27 Andy Lau, “ADB, IFC Issue RMB Bonds in HK, Yuan Market”, International Business Times, October 19, 2010, accessed on February 23, 2011, http://www.ibtimes.com/arti-cles/73637/20101019/adb-ifc-hk-yuan-renminbi-rmb-china.htm.

financing in Africa”.28 The Chinese government recently established the China-Africa Development Fund with a US$14.59 million initial contribution hosted by the AfDB. China promised a contribution of US$122 million to African Development Fund XI (2008-2010). In response to requests from the AfDB for China to help replenish its main lending facilities, Wang pledged that “China will take an active part in the General Capital Increase and African Development Fund processes”. The Chinese Vice Premier also complimented the bank for the “active role” it played in responding to the global financial crisis. It is no secret that China’s closer relations with the AfDB go hand-in-hand with its growing trade, finance, and investment activities in the region. At the AfDB’s Annual Meeting in Shanghai in May 2007, Chinese authorities announced that the country would invest in African infrastructure and trade to the tune of US$20 billion over the next five years. In May 2008, the AfDB and China then followed-up by signing a Memorandum of Understanding to further leverage their future efforts. China Eximbank was given a pipeline of AfDB projects in transport, ICT, and agriculture for consideration. China’s economic ties with African countries have taken a quantum leap of late. Chinese official statistics indicate that trade has increased tenfold to US$110 billion over the past decade. China’s ties with the AfDB have also seen dramatic expansion. During AfDB President Kaberuka’s visit to Beijing in February 2010, Chinese leaders referred to the AfDB as the “bridge” and “platform” for strengthening Sino-African relations.29 At a follow-up meeting in Tunis in December 2010, senior representatives of the AfDB and China Eximbank discussed concrete plans to strengthen cooperation between the two sides. Liu Liange, Executive Vice President of China Eximbank, emphasized that his bank was looking to co-finance projects with the AfDB, particularly in infrastructure and agriculture. He expressed his bank’s willingness to learn from AfDB in areas such as multinational project finance, regional integration, environmental safeguards, and social protection programs.30 Chinese analysts have also noted 28 “President Kaberuka on Official Visit to China”, African De-velopment Bank website, February 4, 2010, accessed on January 31, 2011, http://www.afdb.org/en/news-events/article/president-kaberuka-on-official-visit-to-china-5585/.29 African Development Bank, “China Sees AfDB as Bridge for Sino-African Cooperation” (February 9, 2010), accessed on January 31, 2011, http://www.afdb.org/en/news-events/article/china-sees-afdb-as-bridge-for-sino-african-cooperation-5602/.30 The China Eximbank delegation that met with senior repre-sentatives of the AfDB on December 16, 2010 in Tunis was led by its Executive Vice President, Liu Liange, and also comprised the General Manager of the Legal Department, Li Jian, and the Assistant to the Executive Vice President, Liu Yang. Source: “AfDB and Export-Import Bank of China Strengthen Coopera-


that China benefits from its membership in AfDB by gaining opportunities to bid on infrastructure projects inside the recipient regions, and to deepen economic relations more generally. Senior officials of the AfDB themselves state that the bank is an “important bridge” for China-Africa investment cooperation, especially in the fields of renewable energy and technology.”31 According to AfDB Vice-President Ordu, formal institutional ties have led Chinese firms to have the largest share in the procurement for Bank-financed projects. In the second quarter of 2011, Ordu will lead a delegation to China that will aim to deepen cooperation with China Eximbank. It will do so by formalizing staff exchanges and other arrangements. AfDB is also aiming to attracht more investment by Chinese companies to Africa. Ahead of an official visit to China in February 2010, AfDB President Kaberuka stated:

Given the considerable progress made by this country [China], I would like to see more Chinese companies invest more in Africa…We want to strengthen our relationships and learn from their experiences.32

In line with this policy, Kaberuka used his February trip to meet with the senior management of Huawei and ZTE, two high-profile Chinese ICT firms located in Shenzhen. Both companies have become major investors in Africa’s IT sector.33 China in Latin America

tion”, African Development Bank website, December 20, 2010, accessed on January 31, 2011, http://www.afdb.org/en/news-events/article/afdb-and-export-import-bank-of-china-strengthen-cooperation-7613.31 “AfDB President: Sino-African Cooperation Common Desire of Both Sides”, African Development Bank website, February 2, 2010, accessed on January 31, 2011, http://www.afdb.org/en/news-events/article/afdb-president-sino-african-cooperation-common-desire-of-both-sides-5577/.32 “Bank Group President on Official Visit to China”, African Development Bank website, February 2, 2010, accessed on January 31, 2011, http://www.afdb.org/en/news-events/article/bank-group-president-on-official-visit-to-china-5561/.33 The AfDB President was accompanied by Bobby Pittman, AfDB Vice President for Infrastructure, Private Sector and Regional Integration, and Bruce Montador, the Bank’s Executive Director for China. Source: Ibid.

China’s moves into Africa have caught the attention of NGOs and established world powers. But at the same time, China has moved quietly into Latin America and the Caribbean. Initial inroads into the region were made in the Caribbean when China took

a 5.77% capital stake in the Caribbean Development Bank (CDB) in 1998. In 2002, it contributed a modest US$1 million to a new cooperation fund established by the CDB. In 2009, China took the more dramatic step of formally joining the much larger Inter-American Development Bank (IDB). The Washington D.C.-based IDB is the single largest source of long-term lending in Latin America and the Caribbean, significantly exceeding the World Bank. In 2008, the IDB took steps to help

member companies tackle the global financial crisis. It approved US$12.2 billion in loans, credit guarantees, and grants, a record level that reflected the requirements of its members. It also approved a special US$6 billion emergency liquidity program. At the accession ceremony, Chinese diplomats pointed out that China’s entry into the IDB had required “15 years of effort”.34 One reason for this long delay was the reluctance of the United States. Similar to China’s efforts to gain “observer nation” status in the Organization of American States, China had to overcome long-standing resistance from the paramount power in the region to get into the IDB.35 To join the IDB, China purchased 184 shares, or 0.004 percent, of the bank’s ordinary capital. This share had become available after the breakup of Yugoslavia in the 1990s. China is now the IDB’s third Asian member after Japan and South Korea, which joined in 1976 and 2005 respectively.36 Although its shares are not large, China has acquired a seat on the Board of Governors, the IDB’s top decision-making body that meets once a year to review the Bank’s operations and to make major policy decisions. China’s representative on this board is the Governor of China’s Central Bank. China also sits on

34 “China Joins IDB in Ceremony at Bank Headquarters”, IDB News Release, January 12, 2009, accessed on January 31, 2011, http://www.iadb.org/news-releases/2009-01/english/china-joins-idb-in-ceremony-at-bank-headquarters-5095.html.35 China’s entry was approved after a month-long voting process ended on October 15, 2008. The 26 Latin American and Carib-bean borrowing nations together own 50.01 percent of the IDB, while the United States holds just over 30 percent of the shares.36 China became the IDB’s 48th member nation. Beijing agreed to contribute US$350 million to various IDB programs.

Although its shares are not large, China has acquired a seat on the Board of Governors, the IDB’s top decision-making body

that meets once a year to review the Bank’s operations and to make major policy decisions.


the Board of Executive Directors, sharing a chair with other donor nations. Executive directors oversee day-to-day operations, approve loans, establish policies, and set interest rates. Once it joined, China immediately made its presence felt. It agreed to contribute US$350 million to various IDB programs. The Chinese funds are being distributed as follows:

• US$125 million to the IDB’s Fund for Special Operations37 that provides soft loans to Bolivia, Guyana, Haiti, Honduras, and Nicaragua;

• US$75 million to multiple IDB grant funds to strengthen the state institutional capacity of Latin American and Caribbean countries, including municipal governments and private sector institutions;

• US$75 million for an equity fund to be administered by the Inter-American Investment Corporation (IIC) that lends to small and mid-sized private businesses;38

• US$75 million to be administered the Multilateral Investment Fund (MIF): an entity administered by the IDB that promotes growth and poverty reduction through private sector investment, focusing on micro and small enterprises and microfinance.39

For IDB representatives China’s contributions to these programs have come at an opportune time when growth is slowing and liquidity is scarce. The IDB estimated in early 2009 that the region’s economic growth would slow to around 2 percent during the year – its lowest level in six years. According to an IDB press release, China could help the IDB “assist its borrowing member countries to deal with the impact of the global financial crisis”.40 As is the case in Africa, China’s growing role in the IDB has occurred in conjunction with its trade finance and investment agenda in Latin America. In less than a decade China has become a major commercial partner for many countries in the region, as trade increased 13-fold from US$8.4 billion in 1995 to US$110 billion in 2007. China is the largest trade partner of Brazil and Chile and the second largest of Argentina,

37 The Fund for Special Operations is the IDB’s soft-loan win-dow for its poorest member countries.38 With this US$75 million contribution, China acquired 110 shares in the IIC, or 0.16% of its subscribed capital.39 “China to Join Inter-American Development Bank”, IDB News Release, October 23, 2008, accessed on January 31, 2011, http://www.iadb.org/news-releases/2008-10/english/china-to-join-the-interamerican-development-bank-4828.html.40 “China Joins IDB in Ceremony at Bank Headquarters”, IDB News Release, January 12, 2009, accessed on February 1, 2011, http://www.iadb.org/news-releases/2009-01/english/china-joins-idb-in-ceremony-at-bank-headquarters-5095.html.

Costa Rica and Cuba. As a result, it is now the region’s second biggest trading partner after the United States, while it was ranked just 12th in 1995. The IDB has been glad to note that this trade relationship has maintained its dynamism in spite of

the crisis. In a period when the IDB has been aiming to replenish its finances, IDB President Luis Alberto Moreno said:

We are thrilled to bring a large and growing economy like China into a community of nations that are working together to resolve the complex development challenges facing Latin America and the Caribbean. It is a historic decision that takes China’s thriving commercial relationship with our region into the development sphere.41

Just one year after China joined the IDB their partnership was further strengthened when two of China’s major banks, the Agricultural Bank of China (ABC) and China Eximbank, joined the IDB Trade Finance Facilitation Program (TFFP) as “confirming banks”.42 The TFFP comprises a network of 227 “confirming banks” which belong to 87 different international banking groups in more than 53 countries and 62 “Issuing Banks” in 18 LAC countries with US$1.01 billion in approved credit lines. As of March 2010, the IDB had issued guarantees in support of 876 individual international trade transactions totaling US$830 million.

41 “China to Join Inter-American Development Bank”, IDB News Release, October 23, 2008, accessed on January 19, 2010, http://www.iadb.org/news-releases/2008-10/english/china-to-join-the-interamerican-development-bank-4828.html.42 ABC Executive Director Yang Kun, China Eximbank Vice President Su Zhong, and IDB President Luis Alberto Moreno signed the agreement during the IDB 2010 Annual Meeting in Cancun, Mexico. Source: “IDB Strengthens Partnership with China”, IDB Press Release, March 23, 2010, accessed on January 31, 2011, http://www.iadb.org/news-releases/2010-03/english/idb-strengthens-its-partner-ship-with-china-6853.html.

Just one year after China joined the IDB their partnership was further strengthened

when two of China’s major banks, the Agricultural Bank of China (ABC) and China

Eximbank, joined the IDB Trade Finance Facilitation Program (TFFP) as “confirming

banks”.


Joining TFFP gives the Chinese banks a multilateral channel to further expand their trade finance activities with the region. On the other hand, the TFFP arrangement helps the IDB to position itself as a key platform for facilitating bilateral trade flows between the two regions. In October 2010, China Eximbank and the IDB agreed to finance up to US$200 million worth of trade activity between China and the region over the next two years. IDB President Luis Alberto Moreno stated that the partnership between China Eximbank and IDB is a “groundbreaking initiative to support increased trade activity”. Representatives of the IDB’s Outreach Office believe that the strengthening of the IDB’s partnership with ABC and China Eximbank allows it to act more effectively as the “platform” for economic and financial integration between China and the region. In October 2010, the IDB co-hosted the China-LAC Business Summit in Chengdu city (Sichuan province, China) together with the China Council for the Promotion of International Trade (CCPIT), China’s Central Bank, and the Sichuan Provincial Government. Wan Jifei, Head of the CCPIT, told reporters that China intends to build on its partnership with the IDB and further accelerate trade with Latin America, by signing more free trade agreements (FTA), especially with the regional powerhouses Brazil and Mexico. Wan added:

China now has FTAs with Chile, Peru, and Costa Rica. Once more FTAs are signed with other LAC countries, it may be possible for China to sign a FTA with the region, resembling the one between China and the Association of Southeast Asian Nations (ASEAN).

chIna and regIonal developMent BankS: a wIn-wIn? Krasner (1981) suggests that Japan’s influence has been particularly strong in the ADB, while others suggest that this influence is exercised through lending, policy, and staffing decisions.43 By the same token, the United States is said to play the dominant role in the IDB.44 Because it challenges these paradigms, China has had to overcome American congressional opposition to Chinese membership in both the ADB and the IDB. It

43 Barbara Upton, The Multilateral Development Banks: Improv-ing U.S. Leadership (Washington, D.C.: The Center for Srategic International Studies, 2000): 68, 70; Robert Wihtol, The Asian Development Bank and Rural Development: Policy and Prac-tice. Basingstoke: MacMillan, 1988.44 In contrast, the AfDB has limited the participation of non-re-gional countries, and attempted to prevent any regional member from dominating the institution, in terms of formal voting power and operations. See Karen A. Mingst, Politics and the African Development Bank. Lexington: University of Kentucky, c1990.

was only in 1986 that China was granted membership in the ADB, and in 2009 for the IDB.45 China may not directly reduce the influence of the dominant powers inside the regional banks by joining or increasing its financial contributions. However, it is also tenable to suggest that the Chinese Foreign Ministry’s official narrative of a “win-win decision that will serve everyone’s interest”46 may not speak to great power relations inside these regional institutions. It would be reasonable to expect that some “soft balancing” intentions are at play. The depiction of China’s IDB accession as simply providing both sides with a platform for increased two-way trade and investment and greater technological cooperation deflects attention from the real shifts in power that this implies. As a rising donor country, China is gaining much broader influence inside both the development banks and their member countries. However, there are a number of ways in which the regional banks have also gained from China’s increased involvement in regional development cooperation. First, Beijing has thrown its diplomatic clout behind the developmental cause of these banks, thereby helping to raise the stature of their objectives. For example, in his welcoming speech at the annual meeting of the AfDB which China hosted in 2007, Chinese Premier Wen Jiabao noted the importance of AfDB-China-Africa relations, but also urged the developed countries to take more concerted action to help the region through measures such as delivering aid assistance, canceling debts, improving terms of trade, and transferring technology.47 Second, China’s financial contributions have helped to strengthen the financial capabilities of the regional banks. At the AfDB’s meeting in Shanghai (2007), AfDB President Kaberuka stated that, while the bank has a “solid financial record”, its first priority “is to consolidate its financial strength” in order to fulfill its fundamental mission of fighting poverty and promoting economic development in Africa.48 This may explain

45 See Wihtol, The Asian Development Bank and Rural Develop-ment, 102.46 These statements by Zhou Wenzhong, China’s Ambassador to the United States, are cited in “China to Join Inter-American Development Bank”, IDB News Release, October 23, 2008, accessed on January 31, 2011, http://www.iadb.org/news-releas-es/2008-10/english/china-to-join-the-interamerican-develop-ment-bank-4828.html.47 Wen also took the opportunity to assure the large audience of African officials that the “Chinese government and people are committed to peace and development in Africa”. This indi-rectly countered the view of some that China has a neo-colonial agenda.48 “Annual Meetings: Creating an Enabling Environment for In-vestments”, African Development Bank website, May 17, 2007, accessed February 2, 2011, http://www.afdb.org/en/news-events/article/annual-meetings-creating-an-enabling-environment-for-investments-2626/.



why, in February 2010, Kaberuka made sure to emphasize the importance of China’s contributions to replenishing the AfDB’s funds in meetings with China’s Central Bank Governor and the President of China Eximbank.49 The

AfDB president reinforced this message at meetings with senior representatives of the China Development Bank and China’s Deputy Central Bank Governor Yi Gang, who oversees the China-Africa Development Fund.50 In Latin America, some traditional powers are concerned that China’s entry into the IDB is providing it with another foothold into the region. However, senior IDB representatives view the relationship as helping to boost the capacities of regional institutions and regional multilateralism. Thanks in part to China’s involvement, the IDB expected to approve about US$10 billion in new programs in 2008, and US$12 billion in 2009. IDB President Moreno summed up China’s role in the following terms:

China’s welcome addition to the IDB family will further strengthen our institution at a critical moment for the world economy, when countries need to protect recent social and economic gains. These challenging times require bold and unified actions that will be a key part of the agenda leading up to our Annual Meeting in March in Medellin, Colombia. China is an essential partner in the road ahead.51

Third, China has much to offer by way of its own development experience to other developing countries. This has been stated time and again by senior

49 “China Sees AfDB as Bridge for Sino-African Cooperation”, African Development Bank website, February 9, 2010, accessed on February 2, 2011, http://www.afdb.org/en/news-events/article/china-sees-afdb-as-bridge-for-sino-african-coopera-tion-5602/.50 “President Kaberuka’s Visit to China’s Silicon Valley”, African Development Bank website, February 8, 2010, accessed on February 2, 2011, http://www.afdb.org/en/news-events/article/president-kaberukas-visit-to-chinas-silicon-valley-in-shenzhen-5591/.51 “China Joins IDB in Ceremony at Bank Headquarters”, IDB Press Release, January 12, 2009, accessed on February 2, 2011, http://www.iadb.org/news-releases/2009-01/english/china-joins-idb-in-ceremony-at-bank-headquarters-5095.html.

representatives of the three regional development banks. During his February 2010 visit to Beijing, Kaberuka gave a talk at the International Poverty Reduction Center of China (IPRCC). The IPRCC is a new agency that aims to transfer China’s own development lessons to other countries. Kaberuka stated that he welcomed the IPRCC meeting as a high-level policy dialogue on poverty reduction and development cooperation as it could help forge a new consensus on global development with leading African representatives. China’s experience in rapidly reducing poverty through rapid economic growth could indeed provide relevant lessons to Africa, even if these lessons would not be completely transferrable.52

Finally, regional development banks have gained from China’s management of the global financial crisis. As China’s Central Bank Governor Zhou Xiaochuan has noted, China intends not only to expand its trade and investment in Latin American countries as a member of the IDB but also to help both regions “jointly tackle the ongoing financial crisis”.

aMId MultIlateralISM, BIlateralISM perSIStS Even as China’s presence inside the ADB, AfDB and IDB has grown, however, it has – at the same time - offered large sums of financial assistance via the bilateral track to counterpart governments in the developing world. Immediately prior to increasing their financial contribution to the AfDB, Chinese authorities pledged (in a speech at the UN) in September 2005 to provide US$10 billion for the 2005–08 period in concessional loans and preferential export buyers’ credits to developing countries to improve infrastructure and promote economic cooperation. At the Forum on China-Africa Cooperation (FOCAC) meeting in October 2006, Chinese authorities promised US$3 billion in preferential loans and US$2 billion in export credits to Africa over the 2006–09 period. China further announced that it would double its 2006 grant assistance to build hospitals, malaria prevention and treatment centers, and rural schools as well as a conference center for the African Union.53

In the same year that it joined the IDB, China also negotiated deals to double a development fund in Venezuela to US$12 billion, lend Ecuador at least US$1 billion to build a hydroelectric plant, provide Argentina with access to more than US$10 billion in Chinese

52 “President Kaberuka’s Visit to China’s Silicon Valley”, African Development Bank website, February 8, 2010, accessed on February 2, 2011, http://www.afdb.org/en/news-events/article/president-kaberukas-visit-to-chinas-silicon-valley-in-shenzhen-5591/.53 At the 2006 FOCAC meeting, the Chinese government also announced it was canceling all interest-free loans owed by eli-gible African countries that had matured by the end of 2005.

In Latin America, some traditional powers are concerned that China’s entry into the IDB is providing it with another

foothold into the region.


currency to pay for Chinese imports, and lend Brazil’s national oil company Petrobras US$10 billion to secure long-term oil supplies. These deals focus largely on China locking in natural resources and energy supplies in the years to come. China also signed a US$10 billion arrangement that grants Argentina access to Chinese currency to help pay for imports from China. Although exact figures for China’s external bilateral lending have not been made public, it is clear that external assistance and commercial lending have increased substantially and perennially over the past decade. The upward trend appears set to continue for the foreseeable future. In brief, Beijing’s bilateral assistance not only outweighs its contributions to the regional development banks but also dwarfs its contributions to the World Bank. However, despite the marked increases in China’s contributions to regional multilateral institutions, officials in the AfDB, for example, have noted delays in the delivery of China’s financial commitments as well as some inconsistency in China’s support. Officials in the World Bank have likewise noted that its joint financing of major development projects with China in Africa have not been realized, three years after a Memorandum of Understanding was signed by the World Bank and China Eximbank.54 The patterns in China’s application of its growing creditor power, specifically its relative contributions at the bilateral versus multilateral level, suggests that the Chinese state is still a somewhat hesitant and constrained power that must give careful consideration to ensuring that its contributions are tied to securing immediate or medium-term interests, both for domestic and international reasons. This helps to explain why AfDB senior representatives have felt the need to continue to press Beijing for more support on co-financing of projects to “meet the huge infrastructure needs on the continent”.55

54 Discussion with World Bank official: Beijing, September 2010.55 “AfDB and Export-Import Bank of China Strengthen Coop-eration”, African Development Bank website, December 20, 2010, accessed February 27, 2011, http://www.afdb.org/en/news-events/article/afdb-and-export-import-bank-of-china-strengthen-cooperation-7613/.

concludIng thoughtS China’s rise as an international creditor – at all three levels – provides momentum in the shift toward a more diverse, multi-layered, and multi-centered global financial system. China’s contributions to regional development banks help achieve its goals of diversifying development policies, trade relations, and supplies of raw materials and energy supplies. More broadly, it encourages a shift in the balance of power

in a direction more favorable to China and arguably also to other developing countries. At the same time, Beijing’s contributions help strengthen the capabilities of regional development banks as lenders and providers of technical assistance. Is China also pursuing a more comprehensive, long-term objective of strategic realignment? The analysis suggests that it is acting more

confidently in the international sphere and advancing realignments that are beyond the “status quo”. Chinese authorities have consistently highlighted that China wishes to promote reforms of the main Bretton Woods institutions to create a more “fair, just, equitable” and “multi-polar” global order. However, even as China has pursued reform of the multilateral system, it has directed the lion’s share of its foreign assets through bilateral channels. A primary objective of this has been to secure international procurement deals for long-term supplies of raw materials and energy. This suggests that China is at a watershed moment in its evolution. It is becoming more involved in realigning the structure of the world economy and in reshaping international rules and norms. At the same time, it continues to selectively internalize established global practices. China’s growing contributions to financial regionalism strengthen its influence in the regional development banks, and in process, also raise the stature of these banks within the global financial system. Most importantly, China is adding momentum to the shift toward a more diverse, multi-layered, and multi-centered international system.

China’s rise as an international creditor – at all three levels –

provides momentum in the shift toward a more diverse, multi-layered, and multi-centered

global financial system.


a new phaSe oF chIneSe InveStMentS In BrazIl State Grid Corporation of China is the world’s largest power transmission and distribution company. Its recent $1.8 billion acquisition of electric power transmission lines in Brazil indicates the possibility of a new phase of Chinese investments in Brazil. This phase is characterized by long-term investments in critical infrastructure assets. Previously, Chinese investments in Brazil were motivated primarily by

the need to secure raw materials for China’s supply chain, and by the search for new markets for China´s manufacturing/export machine. The new investment trend would help mitigate some of the potential long-term economic distortions of these well-established trade flows, in which natural resources are exchanged for manufactured goods. The new trend can also be characterized as a transfer of Chinese technology and low-cost engineering capability to Brazil. In certain fields, such as ultra-high

THE INVESTMENTS Of CHINA’S STATE-OWNED ENTERPRISES IN BRAzILIAN INfRASTRUCTURE:ASSESSING ThE IMPlICATIONS OF STATE GRID’S ENTRY

Charles ho · STANDARD BANK IN BRAzIL

lap Chan · AES CORPORATION

C O M M E N TA RY


voltage electricity transmission, Chinese companies not only possess cutting-edge technology but have the most experience starting up, operating, and maintaining these technologies. In addition, Chinese technology advancements are often accompanied by cost-effective engineering and manufacturing capabilities to enable these technologies. This may come in the form of competitively priced equipment or services. Also in December 2010, a consortium that has 40% participation by Zhejiang Insigma United

Engineer, a Chinese firm, won an auction to build 102 kilometers of transmission lines in the south of Brazil. Although the estimated US$460 million investment is smaller than the State Grid deal, it is another data point to support the theory of increasing commitments by Chinese companies into longer-term infrastructure investments.

State grId coMeS to BrazIl

State Grid Corporation of China currently operates the world’s largest network of Ultra-High Voltage (UHV) transmission lines. Their network in China utilizes technology to transmit electricity at 1,000 kV for alternating current and 800 kV for direct current, compared to 500-765 kV for traditional transmission found in Western countries. At ultra-high voltages, lines losses can be reduced 25% from the typical 6-7%. In addition, more power can be transmitted per line, reducing the number of required lines. This is particularly applicable where there are great physical distances between generation and consumption points. Such is the case for China as in most countries in Latin America. Since Brazil already has some of the highest electricity rates when compared with its developing country peer group, any cost savings from efficiency is a welcome change. In addition,

more advanced transmission technologies will help address the frequent supply and demand imbalances by allowing better linkage of far away generation sites. Instead of the traditional, passive, minority shareholding positions, Chinese companies are also starting to consider a controlling stake to establish an independent entity in the new markets. State Grid`s interest in purchasing the Spanish-owned transmission assets was predicated on the ability to achieve complete ownership and control. This allows State Grid to first establish an operating beachhead in Brazil in order to more effectively plan their strategy for expansion into the market. Control allows for an independent assessment of future “greenfield” investments and other potential local partnership opportunities.

overcoMIng local challengeS Along with shareholding controls comes the challenge of managing a local operation. This is no small challenge considering the language, cultural, and time differences. Ultimately, the ability to bridge these barriers and manage the people to make day-to-day, working-level decisions will have a great impact on the success of Chinese companies. Chinese company culture does not make it easy for its employees to understand and adapt to local cultures. Besides the language and cultural differences, Chinese companies are also concerned with the uncertainties of dealing with foreign governments and regulatory bodies to seek approval for their investments. In the case of State Grid, this was of particular concern given the critical role that the target transmission lines had in the overall Brazilian power grid. The target company, Plena, owns and operates several major power transmission lines that connect many major Brazilian metropolitan centers. At the outset, it would have been conceivable to State Grid that these assets would have been considered too strategically sensitive to be sold to foreigners. However, in Brazil, there is already a long history of foreign investments into critical infrastructure assets. Plena was being sold by a consortium of Spanish companies including Elecnor, Cobra, and Isolux, and Abengoa. These companies have been investing in, owning, and operating key infrastructure assets in Brazil for decades. To many Chinese companies, the State Grid acquisition was a real test of how open Brazil and its authorities really are to foreign investments in key infrastructure areas. The deal illustrated that Brazil

Instead of the traditional, passive, minority shareholding positions, Chinese companies are also starting to consider

a controlling stake to establish an independent entity in the new markets.

Charles Ho is the Head of the China Desk at Standard Bank in Brazil. Standard Bank is a South African Commercial and Investment Bank partly owned by ICBC of China. Standard Bank acted as the sole financial advisor to State Grid in its December 2010 acquisition of Brazilian transmission assets.Lap Chan is the former Head of Latin America Business Development at AES Corporation.


actually turns out to be quite open given the lack of any real interference from government quarters. In fact, the Brazilian electricity regulatory agency, ANEEL, was quick to recognize the potential technology benefits to the country. As a result, it approved the State Grid transaction rather quickly. It should be noted that BNDES, Brazil’s state-owned development bank, did not extend to State Grid the line of credit it had provided to the previous Spanish consortium of owners. However, this is a reflection of their policy to support “greenfield” investments as opposed to buying and selling existing “brownfield” assets, since the latter does not create as many employment opportunities as new projects. State Grid can still apply to BNDES to receive credit support for future “greenfield” projects. How much of this “openness” will remain the same under the newly elected administration of President Dilma Rousseff is uncertain. Bilateral trade disputes are intensifying, as Brazil has filed an increasing number of anti-dumping cases against China in recent years. However, these cases have mostly pertained to isolated consumer goods such as tires and electronic toys. Whether or not these protective concerns spread to Chinese suppliers of equipment to infrastructure investors remains to be seen. State Grid’s continued investment in Brazil will no doubt be accompanied by imports of equipment manufactured in China, especially inputs that are technology-specific.

FInancIng ISSueS

In addition to technology, engineering, and operational experience, Chinese companies can also bring strong financial support to their investment approach. In the State Grid acquisition, the ability to self-bridge acquisition financing was critical to its confidence in closing the deal. Because of the long cycle of infrastructure investments, some stemming from auctions won years ago, some Spanish and Portuguese companies are finding themselves committed to projects that will challenge their financing capabilities. This is precipitated by what is happening in their home capital markets and its effect on the rising cost of capital. As a result, it is a natural fit for these companies to look for Chinese capital and technology partners. Although eager to finance business opportunities in Brazil, many of the major Chinese banks, including Industrial and Commercial Bank

of China (ICBC), China Exim Bank, and China Development Bank (CDB), require that any transaction be given acceptable guarantees (sovereign and corporate). The transactions that have been financed so far have involved companies like Petrobras, Statoil, Abengoa, and others with high credit ratings. Despite the strong capitalization of Chinese Companies and deep foreign reserves of its financial institutions, it is still preferable for these companies to raise a significant portion of financing locally. This is primarily in order to match the currencies of its revenues with the cost of capital. To hedge currency

exposures over 15 to 30 years can become quite expensive. As a result, BNDES will still play an important role in providing low-cost financing. Despite its low cost, there are drawbacks to BNDES financing. There are various restrictions, such as audited financials, local content requirements, and limits on share sales. In addition, the disbursement of funding can take quite long, sometimes necessitating an expensive bridge loan in the process. For Chinese

companies, there is the option of circumventing BNDES restrictions via the support of Chinese banks and the Export Credit Agency. This allows Chinese companies to avoid local content restrictions by importing their own equipment or sourcing it from established supplier networks in China. In addition, the time-to-funding lag is much shorter in the case of Chinese financial institutions. In addition, there are some alternative currency hedging techniques that do not offer full protection against currency swings, but can be implemented in a cost-effective manner. Standard Bank of South Africa is also actively involved in developing financing solutions for Chinese companies looking to enter the Brazilian and South American markets. Many of these solutions involve structuring domestic Chinese ECA and policy bank support along with hedging solutions. In addition, Standard Bank has developed other competitive financing solutions denominated in local Brazilian currency. Since October 2007, the bank has been 20 percent owned by ICBC of China, and has been actively helping Chinese companies invest in Africa.

chIneSe hydropower coMpanIeS In BrazIl

All of China’s largest state-owned hydropower companies, including Hydrochina, Sinohydro, and China Three Gorges Corporation, have already established subsidiaries in Latin America. But surprisingly, they

All of China’s largest state-owned hydropower companies,

including Hydrochina, Sinohydro, and China Three Gorges

Corporation, have already established subsidiaries in Latin

America.


have opted for Colombia and Peru as their entry points into the region, even though Brazil has the largest market for hydropower. One of the reasons is that these state-owned companies have identified too many competitors in the Brazilian market. Companies such as Camargo Correa, Odebrecht, and Queiroz Galvão have long dominated the domestic market, and compete for projects in the rest of the Latin America region as well. In view of this, Chinese companies are targeting markets where they can more easily outcompete the local players. Given the nature of competition, an alternative way for Chinese companies to enter the Brazilian energy generation and distribution sector is via indirect investment. Most notably, in 2009, China Investment Corporation (CIC) invested US$1.58 billion in AES Corporation, a US multinational listed on the New York Stock Exchange. The investment was made by a wholly-owned subsidiary of CIC through the acquisition of 125.5 million shares of AES stock for US$12.60 per share for an approximate 15 percent stake in the company. AES has a significant presence in the Brazilian energy generation and distribution sector, and is also active in other Latin American countries, as well as in China.

concluSIon

Critical to the successful, long-term economic relationship between China and its South American trading partners such as Brazil, is the evolution of Chinese companies interest into becoming investors and operators of local infrastructure assets. By investing into long-term infrastructure, Chinese companies bring critical capital, technology, and operating experience

into sectors where it is needed the most. In return for these investments, Chinese companies will enjoy the benefits of opening new markets for their industrial products and services, in addition to addressing some of the supply chain challenges faced when exporting goods back to the Mainland. It is the area of greatest potential mutual benefit between the trading partners. Sany Heavy Equipment of China may be a harbinger of things to come. It has committed to investing US$200 million to build a factory in Brazil to produce its excavating, construction, cement, and road maintenance equipment locally. Like many other companies, it is betting on the likelihood that other Chinese infrastructure companies will soon invest in Brazil. However, getting to the next stage of local investments involves more than one type of challenge. Local operations and management necessitate an even deeper ability to bridge cultural and language differences. Regulatory and public opinion challenges must be managed in a sophisticated and effective manner. In addition, structuring the investment, arranging the financing and achieving the optimum cross-border risk exposure can have a big impact on the long-term financial viability of the investment. This last set of challenges can be mitigated with advice and solutions from an experienced cross-border financial advisor such as Standard Bank. The sectors with the most potential for future long-term Chinese investments include electric power, rail and port, ship and offshore operations. These are sectors where Chinese capital, cost-effective engineering ability, and operating experience can make the biggest impact to the developing infrastructure of South American countries.


China-Brazil relations have attracted a great deal of interest in recent years.1 This is due to significant changes in the intensity of bilateral relations in the last decade - with China becoming Brazil’s largest trade partner in 2009 - and China’s growing presence in Latin America. It is also due to the hype surrounding so-called “emerging countries”. I argue that while China’s economic presence in Brazil is unmistakably increasing, this should be interpreted neither as a consequence of close political ties nor as a development that invariably contributes to this end. In fact, the intricacies of

1 This article draws heavily on Nedal, D. and Maciel R. China and Brazil: Two Trajectories of a “Strategic Partnership” In: Hearn, A. and Manríquez, L. (eds.) China and Latin America: Tracing the Trajectory (Lynner Rienner, 2011, forthcoming).

managing the complex and asymmetric interdependence that results from this increase, especially its domestic political reverberations, have actually worked against Brazil-China political relations. Some of the similarities that were supposed to bring them together, such as their partial rejection of “liberal” norms and principles and the adoption of more state-centered, nationalistic and mercantilist development models, actually create friction and push them apart. The global financial crisis amplified and cast a light on these ambivalences and paradoxes that were already present in the Brazil-China relationship. The increased competition Brazil faces from China in its domestic and third markets has sparked fears of “de-industrialization” or “primarization”. Even if this

CHINESE INVESTMENT IN BRAzIL:CuM GRANO SAlIS

dani k. nedal · GETULIO VARGAS fOUNDATION

C O M M E N TA RY


anxiety is largely unfounded,2 it has empowered already strong protectionist voices and fueled resistance to China, making it harder to sustain a strategy of non-confrontation, mainly where trade and currency issues are concerned. A particularly useful illustration of this strained relationship is the controversy surrounding Chinese investments in Brazil. Lauded by many as a sign of new times, the surge of Chinese investment last year didn’t assuage Brazilian grievances regarding bilateral trade, but instead reflected the general anti-China feeling predominant in Brazil. To fully understand Brazilian misgivings about Chinese investment, some context is useful.

FaIled expectatIonS

In 2004, an exchange of presidential visits marked the inflation of a “China bubble” in Brazil, with announcements that Chinese companies were ready to invest enormous sums in the country. The high expectations were captured by President Lula’s speech at the time. He stated:

The awaited US$7 billion in Chinese investments in Brazil will help the country regain its competiveness in strategic sectors such as infrastructure, energy, steel and telecommunications.3

Chinese investments, however, failed to materialize. China’s Foreign Direct Investment (FDI) stock in Latin America and the Caribbean in 2007 reached US$25 billion, 21% of the country’s total investment abroad, but 96% of that FDI went to the Cayman Islands and British Virgin Islands, both well-known “tax havens”, meaning that great part of that amount was probably redirected to other countries (some in other regions) or even back to China. China’s FDI stock in Brazil as late as 2009 was still lower than US$600 million (see Figure 1 below). The only major investment project during this period, a US$3 billion joint venture signed in 2004 between Baosteel Shanghai and Vale (then CVRD) was held-up in negotiations for five years before finally being cancelled in late 2008. As the years passed, the enthusiasm that marked the exchange of presidential visits turned into

2 Brazilian industrial activity has not declined, and domestic consumption and exports of Brazilian industrial goods have increased, albeit slightly losing market share.3 President Lula’s speech during a reception dinner for Hu Jintao on November 12, 2004. Translation is the author’s.

increasing disappointment. Enter the Global Financial Crisis. China quickly became an important source of liquidity in global markets, taking advantage of the retraction of more traditional investors and the depreciation of assets worldwide. Though this was visible as early as 2008, it was only in May 2009 during President Lula’s visit to China that it became clear that China was ready to start investing heavily in Brazil. Petrobras and China Development Bank (CDB) announced a US$10 billion loan agreement and, in exchange, Petrobras signed a ten-year oil supply contract with Unipec Asia, a subsidiary of China Petroleum & Chemical Corporation (Sinopec). The loan, granted by CDB at a time when liquidity was scarce, reignited hope about Chinese investment. When in February 2010 the Brazilian Central Bank announced that China already figured as one of the top ten sources of FDI in Brazil, expectations were again at a high. This feeling, once more, turned out to be very short-lived. The excitement with Chinese investments lasted exactly until Brazilians realized that Chinese companies would not invest only (or even predominantly) in the sectors the Brazilian government deemed most important to increase its export capacity, contrary to what President Lula had indicated in 2004. Instead, China came to Brazil with an eye to invest in the sectors that offer the most opportunities and match China’s economic needs. The most publicized of these investments happen to be related to natural resources such as iron ore and oil. In only a few months there were announcements that Chinese companies would acquire a stake in Brazilian miner MMX, an iron ore mine controlled by Votorantin in the State of Bahia, and a mining company, Itaminas, in Minas Gerais. There were also reports

Dani K. Nedal is a regular contributor for the Center for International Relations at the Getulio Vargas Foundation, in Brazil, and co-editor of O Que a China Quer? (FGV Press, 2010). He is also co-author, with Rodrigo Maciel, of China and Brazil: Two Trajectories of a “Strategic Partnership” in the forthcoming book China and Latin America: Tracing the Trajectory (Lynner Rienner, 2011)

8 724 38

83

020406080

100

2005 2006 2007 2008 2009

Chinese Foreign Investment in Brazil- US$

millons

FIGURE 1

8 724

38

83

0

20

40

60

80

100

2005 2006 2007 2008 2009

Chinese Foreign Direct Investment in Brazil (US$ mn)


that it would install a steel plant at the Açu Superport industrial complex under construction in northern Rio de Janeiro. Rumors also began circulating that Chinese companies were interested in purchasing land (although most reports of this are undocumented) and buying into the oil sector. As predicted, in May 2010 Sinochem acquired 40% (US$3.07 billion) of Norwegian Statoil’s operations in the Peregrino oilfield and in October Sinopec obtained 40% (US$7.1 billion) of Spanish oil major Repsol’s Brazilian subsidiary.

a leSS-than-warM receptIon

Enthusiasm gave way to deep suspicion of Chinese intentions and the prospect of Chinese companies holding a relevant stake in Brazilian natural resources and critical industries. The anti-China lobby, which used to complain about the lack of Chinese investment in Brazil, started to vocally denounce these investments as attempts by the Chinese government to buy up Brazilian land and resources, distort markets and destroy Brazilian industry “from within”. Sinophobia has also played a part in recent legislation approved by the Brazilian Congress limiting land purchases by all foreign companies and individuals. These actors argue that Chinese FDI is qualitatively different from that of traditional sources because of the controlled nature of the Chinese economy, China’s selectivity in allowing inbound FDI, and the close association between the investing companies and the Chinese state. This discussion benefits from a closer and more sober look at the numbers and facts. First, it is clear by now that Chinese investment in Brazil will be considerably smaller than the US$20-25 billon figure that has circulated in the press. Not all investments that were announced will be executed this year, and some may never be concluded. Chery, a car manufacturer from Anhui, announced that it will establish a factory in São Paulo estimated at US$700 million but that will probably take some time. Votorantim’s, sale of its mining asset to Honbridge Holdings and subsequent investments (appraised at up to US$2.6 billion) are conditioned upon the results of studies pertaining to the project’s quantitative and qualitative potential. The Itaminas deal, valued initially at US$1.2 billion, is rumored to be in danger of falling through. Accusations that China is bent on “colonizing” Brazil are unfounded. Contrary to common belief, Chinese investments in Brazil are actually quite diverse in nature. Chinese companies have targeted not only Brazilian natural resources but also the country’s booming consumer market and, more recently, basic infrastructural demands. China’s State Grid acquired seven Brazilian electricity transmission assets from Spain’s Plena Transmissoras for $1.72 billion. Two large Chinese machinery manufacturers, Sany Heavy Industry

and XCMG, announced plans for assembly plants in Brazil. Chinese carmakers SAIC and JAC will probably join Chery in establishing plants in Brazil in the next few years. Chinese electronic manufacturers have also opened assembly plants in Manaus, and telecom majors Huawei and ZTE have operations in São Paulo. But even these ventures face serious political hurdles. Despite smooth and quick approval by regulatory organs, there was actually a lot of negative talk about the State Grid deal in 2010, as the Brazilian media and some key anti-China lobbyists (intentionally or unintentionally) lumped it together with other “energy sector” (namely oil) investments, inflating fears of a Chinese takeover of Brazilian natural resources. Also, other key projects like the high-speed rail have very strict built-in local content clauses. Chinese companies looking to invest in large greenfield infrastructure projects will also probably face the same problems regarding the use of Chinese workers that CITIC faced in the ThyssenKrupp CSA plant in Santa Cruz. They will also have to cope with fierce competition with state-owned companies and local monopolistic and oligopolistic players with strong government ties, in sectors such as construction, energy generation and transmission (especially nuclear and hydropower), shipbuilding, railways, etc. In all, it very much remains to be seen whether future Chinese investments in infrastructure will be welcomed or if State Grid was an outlier mainly due to the fact that it was acquiring assets that already belonged to a foreign company.

Finally, although it is true that some of the investing companies are state-owned or national champions, discrimination against them on this basis is flawed in three fundamental ways. First, Brazil’s own state-owned companies (e.g. Petrobras) and national champions (e.g. Vale, Odebrecht, Embraer) have been very active in South America, Africa and even, to a much lesser extent, China, with strong backing from the Brazilian government and its policy bank, the BNDES. Second, there is a solid literature questioning the assumption that strategic considerations and government directives dominate corporate investment decisions, even for state-owned companies in the most “strategic”

Accusations that China is bent on “colonizing” Brazil are unfounded.

Contrary to common belief, Chinese investments in Brazil are actually quite

diverse in nature.


sectors.4 To the extent that these factors do play a part in Chinese FDI, it is far from clear exactly how different they are from Japanese, American, European or other companies.5 In fact, Brazilian authorities, true to the tradition of dependency theory, have traditionally been wary of foreign economic interests of all nationalities. This leads us to the third problem: These arguments against Chinese FDI are usually followed, ironically enough, by suggestions that Brazil should start imposing limits to foreign investment, just like China.6

the road ahead

Apart from the contentious issues of bilateral trade and investment, Brazil and China are finding themselves pressed to abandon grandstanding rhetoric and abstract notions of “multipolarization” and South-

4 See Trevor Houser, “The Roots of Chinese Oil Investment Abroad”, Asia Policy 5 (2008); Erica Downs, “Business Interest Groups in Chinese Politics: The Case of the Oil Companies.” In China’s Changing Political Landscape: Prospects for Democra-cy, edited by Li, Cheng (Washington, DC: Brookings Institution Press, 2008); Tunsjø, Øystein, “Hedging Against Oil Depen-dency: New Perspectives on China’s Energy Security Policy”, International Relations 24, no. 1 (2010): 25-45.5 See, for example, Paul N. Doremus, William W. Keller, Louis W. Pauly, and Simon Reich, The Myth of the Global Corpora-tion (Princeton: Princeton University Press, 1998); Robert Gil-pin, US Power and the Multinational Corporation: The Political Economy of Foreign Direct Investment (New York: Basic Books, 1975); Sally Razeen, “Multinational Enterprises, Political Economy and Institutional Theory: Domestic Embeddedness in the Context of Internationalization,” Review of International Political Economy 1, no. 1 (Spring 1994): 161–92.6 “The Chinese are selective with the capital they let in. They don’t accept every kind of investment. After the election, we should consider if the same shouldn’t happen here.” Sergio Amaral, president of the China-Brazil Business Council quoted in BBC Brazil, September 17, 2010. Accessed March 12, 2010, http://www.bbc.co.uk/portuguese/noticias/2010/09/100915_brasileleicoesasia_mw.shtml.

South cooperation in favor of a more pragmatic discussion of the issues at hand, such as the rules of international trade, currency, nuclear non-proliferation, UN Security Council reform, climate change and human rights, where interest clearly don’t respect an imaginary “North/South” divide. Furthermore, both countries’ growing capabilities and interests abroad could also create new frictions. Some Brazilian officials are wary of China’s growing economic presence in South America, a region that Brazil has come to consider as its own sphere of influence, and in Africa, where Brazilian companies are falling behind the Chinese in the rush for resources, business deals, and markets. These problems are unlikely to dissipate or be resolved, and in fact seem poised to worsen in coming years. China’s continued growth and persisting domestic imbalances will make sure that its demand for commodities, exports of industrial goods, and outward expansion of capital maintain a rising trajectory. Internal political dynamics, including the coming leadership succession, will probably make China less prone to compromise and more nationalistic. Brazil’s own economic and political environment also seem to be moving in ever more nationalistic and protectionist directions. President Dilma Rousseff and most of her new staff are generally more hawkish on China than their predecessors and have declared rethinking relations with China a top priority. At first glance, this contrarian view of Brazil-China relations seems very gloomy but what it suggests is actually not extraordinary. What it means is that there are very real opportunities for cooperation and mutual benefit in trade, bilateral investment, and cooperation in various fields; yet before they can seize these opportunities, there are daunting challenges that need to be addressed and legitimate disagreements with which both countries will just have to learn to live. Their success or failure in doing so will have an important impact on political and economic relations in Latin America and, to some extent, in the world.

Changing Relations with Southern Neighbors | HARVARD ASIA QUARTERLY 24

When Indonesia signed a Strategic Partnership with China in 2005, many believed that it was finally moving away from its historically strong ties with the United States and straight into Beijing’s arms. The growth in military-to-military ties that followed, coupled with an incredible expansion in economic ties, seemed to vindicate this argument. Following the implementation of the China–ASEAN Free Trade Agreement in 2010, China even became Indonesia’s largest trading partner. This development is remarkable considering that Indonesia did not resume formal diplomatic ties with China until 1990. Is it finally joining the Chinese bandwagon?

Upon taking a closer look at the evolution in bilateral relations, however, the answer to this question is not so straightforward. Indeed, the picture of Indonesia’s policy towards China is not a simple question of hedging, balancing, bandwagoning, or some variation of the three - though many analyses of Southeast Asian responses to “China’s rise” focus on these specific strategies.1 This article

1 See Evelyn Goh, “Meeting the China Challenge: The U.S. in Southeast Asian Regional Security Strategies,” Policy Studies

argues that, when located within the broader evolution of Indonesia-China relations, Jakarta’s policy towards China is characterized by persistent ambivalence. Scholars have made this argument before.2 But they seldom break down the components or dimensions of that ambivalence and explore the rationale behind it.

This article aims to explain the ambivalence in Indonesia-China relations by assessing its four main dimensions: domestic politics, economics, strategic security, and foreign policy. Each of these dimensions is shaped by deeply entrenched sentiments and perceptions of China that pervade both the wider public and the elite in Indonesia. They are influenced by a long history of mutual interaction, the place of ethnic Indonesian Chinese in

16 (2005); Denny Roy, “Southeast Asia and China: Balancing or Bandwagoning?” Contemporary Southeast Asia 27, no. 2 (2005): 305-322.2 See for example Rizal Sukma, “Indonesia’s Response to the Rise of China: Growing Comfort Amid Uncertainties.” In The Rise of China: Responses from Southeast Asia and Japan, edited by Jun Tsunekawa (Tokyo: The National Institute for Defense Studies, 2009): 139.

VARIATIONS ON A THEME:DIMENSIONS OF AMBIVAlENCE IN INDONESIA–ChINA RElATIONS

evan a. laksmana · CENTRE fOR STRATEGIC AND INTERNATIONAL STUDIES

25 HARVARD ASIA QUARTERLY | Changing Relations with Southern Neighbors

Indonesian society, and China’s geographic proximity. One could argue that the Indonesian elite believes that China is gigantic, arrogant, and expansionist - which would explain why the vast majority (78 percent)3 are concerned about the future implications of China’s ascendancy. On the other hand, perceptions of China among the wider public are shaped by views of Indonesia’s ethnic Chinese as the “other” - a separate “race” with a different religion and special economic privileges, unwilling to change and only concerned with its own well-being.

As such, Indonesia’s perception of China is often the projection of its image of domestic ethnic Chinese, a situation compounded by a lack of knowledge about China. While these images may not necessarily be realistic, they still influence how Jakarta engages Beijing. Indeed, one scholar has argued that such perceptions, both within the elite and among the wider public, serve as the most important factor in determining how Indonesia formulates and implements its China policy.4

the doMeStIc polItIcal dIMenSIon In domestic politics, ambivalence in Indonesia–China relations initially centered on three factors: The spread of Communism, the role of the Indonesian Communist Party (PKI), and the loyalty of the small but economically powerful Indonesian Chinese. As a result, China has traditionally been viewed as a threat to Indonesia’s domestic political stability and national security. This argument prevailed for much of the first four decades of bilateral relations after 1950, which included a period of “frozen” diplomatic relations from 1967 to 1990. China’s rise in the 1990s and the advent of democratization in Indonesia in 1998 changed, but did not fundamentally overhaul, this domestic threat perception. For the first two decades of bilateral relations,

3 Daniel Novotny, Torn Between America and China: Elite Per-ceptions and Indonesian Foreign Policy (Singapore: Institute of Southeast Asian Studies, 2010): 181, 281.4 Rizal Sukma, “Indonesia’s Perceptions of China: The Domestic Bases of Persistent Ambiguity.” In The China Threat: Percep-tions, Myths, Reality, edited by Herbert Yee and Ian J. Storey. (London: Routledge, 2002): 138.

Jakarta’s ambivalence vis-à-vis China stemmed from two countervailing issues. On the one hand, Jakarta was a newborn state in need of Beijing’s support to secure international legitimacy. On the other hand, Jakarta was concerned by Beijing’s support for the PKI, and by its potential influence over Indonesian Chinese. These concerns seemed vindicated by numerous incidents in the 1950s where Beijing sought to reorient the loyalty of Indonesian Chinese towards Beijing while providing excessive protection to the PKI leadership.5 This apprehension lingered despite the close political alliance between Beijing and Jakarta in the late 1950s and early 1960s.

The alliance was in fact more of a “marriage of convenience”. Sukarno used Beijing - which he never fully trusted – to achieve his domestic political goals of balancing the military by strengthening the PKI.6 Sukarno was also privately concerned about how Indonesia’s economic assets were “controlled from abroad”-referring to the financial strength of the Indonesian Chinese whose loyalty he doubted.7 Moreover, Muslim groups and the military were concerned with China’s capacity to influence domestic subversion. It is not surprising that by the 1970s nearly

two-thirds of the Indonesian elite saw China as a serious threat to Indonesia.8 Even so, Sukarno’s alliance with Beijing at the time illustrates the pragmatic foundation of Indonesia’s engagement.

These concerns over Beijing’s intentions and possible interference reached their peak after the attempted coup of September 1965. It was attributed to the PKI, allegedly with the assistance of Beijing and Indonesian Chinese. While the

precise details of the event remain shrouded in mystery, the New Order under President Suharto subsequently 5 In 1951, for example, a serious row erupted when the Chinese embassy condemned Jakarta for a raid against PKI and granted diplomatic protection to a PKI leader who had taken refuge there.6 See Franklin B. Weinstein, Indonesian Foreign Policy and the Dilemma of Dependence: From Sukarno to Suharto (Ithaca, NY: Cornell University Press, 1976): 297-8.7 Novotny, Torn Between America and China, 175.8 Franklin Weinstein, “The Indonesian Elite’s View of the World and the Foreign Policy of Development,” Indonesia 12 (October 1971): 2.

Evan A. Laksmana is a researcher with the Centre for Strategic and International Studies, Jakarta, and an adjunct lecturer at the Indonesian Defense University. He was previously a Visiting Associate Fellow at the S. Rajaratnam School of International Studies, Nanyang Technological University (Singapore), an ASC Fellow at the Asia Pacific Center for Security Studies (Honolulu), and an analyst at the Institute of Defence and Strategic Studies (Singapore).

As such, Indonesia’s perception of China is often the projection

of its image of domestic ethnic Chinese, a situation compounded by a lack of knowledge about China.


labeled communism in general and Beijing in particular as the main threats to Indonesia’s national security. Bitter diplomatic exchanges ensued. On October 23, 1967, Jakarta “froze” relations with China. Given that the New Order in its initial phase was premised on the regime’s ability to maintain social and political order, the perception of the “triple China threat” (Communism, Indonesian Chinese, and Beijing) never fully dissipated.

This argument stood for well over two decades, until Suharto decided to un-freeze diplomatic relations in 1990. Four domestic factors led to Suharto’s decision: (1) a change in the domestic basis of legitimacy from political stability to economic development, informed by a need to adjust to China’s growing economic power; (2) a change in economic interests, as the drop in oil prices forced Indonesia to emphasize industrialization and manufacturing, partly oriented toward China’s growing market; (3) a change in domestic power relations, as Suharto’s unchallenged political rule in the 1980s allowed him to go against the anti-Beijing camp in the military; and (4) a desire for Suharto’s Indonesia to play a more assertive global role, which necessitated normal relations with China.9

However, even after ties were restored, Indonesia remained “vigilant” in its relations with China. Several prominent military figures continued to harbor doubts, while conservative Muslim groups still distrusted China due to tense relations with the ethnic Chinese - though this may be related more to historical business rivalries between Muslim entrepreneurs and ethnic Chinese businessmen than to political factors.10 As such, suspicion and sensitivity remained prevalent. A rebuke by Beijing over an anti-Chinese riot at Medan in 1994 reminded Jakarta that China was still willing to interfere in its domestic affairs.

Indonesia therefore tended to take a wait-and-see approach in developing the newly restored relations. Indeed, rather than developing direct political-security relations, Jakarta preferred to deal with China within a multilateral framework through either ASEAN or the ASEAN Regional Forum (ARF).11 This reflected Jakarta’s concern over Beijing’s potential influence among Indonesian Chinese, as well as its growing assertiveness in the South China Sea in the 1990s.

9 For more details, see Rizal Sukma, Indonesia and China: The Politics of a Troubled Relationship. London: Routledge, 1999.10 See Irman Lanti, “Indonesia in Triangular Relations with China and the United States.” In China, the United States, and Southeast Asia: Contending Perspectives on Politics, Security, and Economics, edited by Evelyn Goh and Sheldon W. Simon (London: Routledge, 2008), 131.11 The Association of Southeast Asian Nations or ASEAN was established in 1967 and now consists of all ten Southeast Asian states except Timor Leste. The regional grouping established the ASEAN Regional Forum in 1993 as a multilateral security dia-logue to promote regional confidence building. It now consists of 28 participants, including all the ASEAN states, China the United States, Japan, India, Russia, Australia, and other regional players.

Although China remained a complex political issue in Indonesia for much of the 1990s, the advent of democracy in 1998 significantly changed perceptions. In general, post-Suharto governments have been more inclusive in their outlook. The abolition of discriminatory practices against Indonesian Chinese effectively removed what had been a “pebble in the shoe” of Indonesia-China relations for decades. The lifting of travel and immigration restrictions enhanced human and cultural exchanges. Still, some members of the elite remained concerned that this would again shift the allegiance of Indonesian Chinese to China.12 This has led to widespread reluctance to work with China, despite the fact that the old “triple China threat” has diminished considerably.

Among the general public, perceptions of China are more varied and contradictory than among the elite. A 2005 poll by the Pew Research Center noted that 60 percent of Indonesians welcomed the idea of a strong China that could rival American military strength. Seventy percent thought that China’s growing economy was good for Indonesia.13 A 2006 poll by the Lowy Institute suggested that over half of Indonesians thought that China could “somewhat be trusted”.14

However, in a 2010 Pew poll, only 58 percent of respondents had a “favorable” view of China, down from 73 percent in 2005.15 In a 2008 survey by the Chicago Council on Global Affairs, nearly half of respondents worried that

China could become a military threat in the future. Only 27 percent were comfortable with the idea of China being the leader in Asia in the future.16 These two sets of figures suggest strong ambivalence toward China among the wider public, even a decade after the resumption of diplomatic

12 Novotny, Torn between America and China, 206.13 See The Pew Research Center, “American Character Gets Mixed Reviews” in 16-National Pew Global Attitudes Survey (Washington, DC: The Pew Global Attitudes Project, 2005): 33.14 Murray Goot, Australians and Indonesians: The Lowy Insti-tute Poll 2006 (Sydney: Lowy Institute for International Policy, 2006): 6.15 See Pew Global Attitudes Project, “Key Indicators Data-base,” accessed on February 24, 2011, http://pewglobal.org/database/?in dicator=24&survey=12&response=Favorable&mode=chart. 16 See Soft Power in Asia: Results of a 2008 Multinational Sur-vey of Public Opinion (Chicago, IL: Chicago Council on Global Affairs, 2008): 2.

A rebuke by Beijing over an anti-Chinese riot at Medan in 1994 reminded

Jakarta that China was still willing to interfere in its domestic affairs.


ties.

the econoMIc dIMenSIon

The economic dimension of the ambivalence in Indonesia-China relations has internal and external facets. Internally, the elite and general public often argue that Indonesian Chinese (five to seven percent of the population) control 70 percent of the economy - though there has never been conclusive evidence to support this myth. The fact that Indonesian Chinese figured among

the closest partners and most rewarded businessmen of Suharto’s New Order certainly did not help to dispel it.17

Externally, economic relations were muted for much of the first three decades of the bilateral relationship. Indeed, up until the 1980s, China was not seen as a significant contributor to the country’s economic development.18 However, China’s growing economic power and openness in the late 1980s changed this. By then, Indonesia’s economy was experiencing a downturn and was in danger of losing out to Malaysia and Thailand in terms of exports to China. Therefore, when relations were reestablished between Beijing and Jakarta in 1985, trade was the primary catalyst. With economic ties slowly expanding, Indonesia’s China threat perception began to take on an economic dimension: China’s international competitiveness and economic dominance, given the lack of complementarity between the two economies, posed a danger to Indonesia’s growth. This threat perception is due in part to Jakarta’s prioritization of economic over political relations since the 1990s. From 1991 to 1998, Indonesia’s exports to China, excluding oil and gas, increased from roughly US$580 million to over US$1.32 billion, while imports from China

17 For a discussion on ethnic Chinese businessmen in Indonesia before and after the New Order and their role, see for example, Marleen Dieleman, Juliette Koning, and Peter Post (eds.), Chi-nese Indonesians and Regime Change. Boston, MA: Brill Press, 2010.18 Ian James Storey, “Indonesia’s China Policy in the New Order and Beyond: Problems and Prospects,” Contemporary Southeast Asia 22, no. 1 (2000): 147.

grew from around US$800 million in 1991 to over US$1.2 billion in 1997.19 In the early 2000s, energy started to feature more prominently in overall economic relations. In 2002, Petrochina acquired six oil fields in Indonesia from Devon Energy. In the following year, it bought a 45 percent stake in ship operators in Indonesia’s oil fields. By 2004, it owned 25 percent of operational rights at the Sukowati oil field, along with several others in Jambi, Papua, and East Java.20 It also launched an official bid to operate or control ten oil and gas blocks by 2012 and aims to operate 58 oil wells by then. Another Chinese oil company, Sinopec, signed a joint oil exploration agreement in East Java in 2005 and recently focused on deals for developing alternative energy sources and oil exploration infrastructure.21 Its total investment in biofuels, for example, has reached US$5 billion. In 2007, it announced an additional US$14 billion in oil and natural gas investment. China National Offshore Oil Corporation (CNOOC) has also been increasing its presence by taking over five of seven oil fields controlled by RepsolYPF in 2002 and simultaneously investing in the US$8.5 billion-worth liquefied natural gas project in Tangguh, Papua. By 2008, it controlled or had shares in 33 gas fields and 85 offshore facilities, and produced crude oil from 420 wells. This placed CNOOC among the top five oil and gas companies operating in Indonesia.

Bilateral trade has also expanded. China went from Indonesia’s fifth largest trading partner in 2004 to its largest in 2010 - with an annual trade volume of over US$40 billion.22 However, Jakarta is concerned by the fact that its trade deficit with China in the first 11 months of 2010 was more than US$5.3 billion.23 Local industries specializing in textiles, food processing, electronics, and other manufactures are losing out to Chinese products. With the fear of Chinese economic dominance looming large, Indonesia listed nearly 400 categories of sensitive and highly sensitive goods to be excluded from the 2010 China-ASEAN Free Trade Agreement (CAFTA).

More than 800 Chinese-owned businesses worth around US$2 billion were operating in Indonesia by 2004. By 2005, China had invested in 84 major projects worth over US$200 million and ranked eighth in the list 19 Raymond Atje and Arya B. Gaduh, “Indonesia–China Eco-nomic Relations: An Indonesian Perspective,” CSIS Working Paper Series 52 (Jakarta: Centre for Strategic and International Studies, 1999): 9. 20 See Tirta N. Mursitama and Maisa Yudono, Strategi Tiga Naga: Ekonomi Politik Industri Minyak Cina di Indonesia (Ja-karta: Center for East Asian Cooperation Studies, University of Indonesia, 2010): 117-8.21 Figures in this paragraph are from Mursitama and Yudono, Strategi Tiga Naga, 138.22 See “Perdagangan Indonesia – China,” Kompas, February 2, 2011, 44.23 See “Produk Cina Mengancam Industri Lokal,” Gatra, Febru-ary 3-9, 2011, 40.

With the fear of Chinese economic dominance looming large, Indonesia listed

nearly 400 categories of sensitive and highly sensitive goods to be excluded

from the 2010 China-ASEAN Free Trade Agreement (CAFTA).


of the country’s largest investors.24 But China seems most interested in natural resource investments, particularly in oil and gas. These investments are undertaken by state-owned enterprises (SOEs), not private companies.25 This adds to anxieties about Beijing’s control over the Indonesian economy.

While China presents huge economic opportunities, surveys indicate that over half of the domestic elite views it as a competitor.26 Given Indonesia’s underdeveloped economy, many fear that a growing engagement with China might someday translate into dependency, especially if China’s SOEs gain control of Indonesia’s energy sector. Others worry about the increasing number of Indonesian Chinese investing in Mainland China. An Indonesian diplomat stated that, thanks to the ethnic Chinese community, “China already controls Indonesia’s economy to a certain extent”.27 Anthony L. Smith, an influential scholar on the subject, finds that China’s economic prowess may become “conflated with economic jealousy” in Indonesia.28

However, these concerns are largely offset by China’s economic aid to Indonesia. During the 1997 Asian financial crisis, it contributed US$500 million to the IMF’s US$43 billion bailout package and provided US$200 million in export credits.29 It provided US$3 billion worth of emergency aid after the 2004 Tsunami. It has also used soft loans to finance 40 percent of the total cost (over US$500 million) of a major bridge linking Java and Madura, and will help finance a US$1 billion railroad project in Kalimantan.30 China has agreed to invest in five major power plants across Java that will have a combined capacity of over 3,300 megawatts.31

China’s dual role as economic competitor and provider of assistance underpins the “economic ambivalence” in Indonesia–China relations. It further suggests that, while pragmatic concerns have compelled

24 Syamsul Hadi, “Engaging the Dragon: The Dynamics of Indonesia-China Relations in the Post-Suharto Era,” Indonesian Social Science Review 1, no. 1 (2010): 63.25 David M. Lampton, The Three Faces of Chinese Power: Might, Money, and Minds (Berkeley, CA: University of Califor-nia Press, 2008): 187.26 Novotny, Torn between America and China, 214.27 Ibid.28 Anthony L. Smith, “From Latent Threat to Possible Partner: Indonesia’s China Debate,” APCSS Special Assessment (Honolu-lu, HI: Asia Pacific Center for Security Studies, 2003): 5.29 Storey, “Indonesia’s China Policy,” 150.30 See “Berburu Fulus dari Utara,” Tempo, May, 2, 2010, 70.31 See “Capailah Listrik Sampai Cina,” Tempo, May 2, 2010, 77.

the Indonesian elite and public to take advantage of China’s booming economy, longstanding apprehensions still loom large.

the StrategIc SecurIty dIMenSIon

Ambivalence in strategic security centers on the potential threat that China’s military force poses to Indonesia. It may be characterized in the following terms: (1) a conventional assault by the People’s Liberation Army (PLA) from the north, (2) maritime disputes in the South China Sea, where China’s claims affect regional stability and Indonesia’s Natuna Islands, and (3) China’s role in inciting domestic instability in Indonesia.32 As mentioned

before, the first decades of Indonesia-China relations were primarily driven by the domestic security concerns inherent in the “triple China threat”: Beijing’s support for the PKI, its attempts to spread communism, and its connection with the small but economically powerful Indonesian Chinese. Such perceptions were more prevalent within Indonesia’s military and defense establishment, which dominated much of the policymaking towards China until the late 1980s.

After the resumption of diplomatic ties in the 1990s, however, the primary concern was no longer domestic stability but China’s territorial ambitions in the South China Sea. As discussed above, the perception of Chinese expansionism had initially taken a back seat to domestic political concerns in the 1970s and 1980s. But doctrinal developments within the military in the same period suggest that the legacy of the Pacific War in the 1940s left a lingering wariness toward incursions from the north.33 China’s attack on Vietnam in 1979, interpreted as an indication that Beijing was willing to use force to achieve its interests, reinforced this perception. China was also involved in many of the 17 military clashes in the South China Sea between 1974 and 2002.34

It is therefore not surprising that China’s aggressive behavior in the South China Sea in the 1990s revived the specter of a “China threat” among Indonesian defense and military planners. The 1995 Defense White Paper warned that growth in economic and technological capacity could allow China to become the preeminent military power in 32 Smith, “From Latent Threat to Possible Partner,” 2.33 Denny Roy, “Southeast Asia and China: Balancing or Band-wagoning?” Contemporary Southeast Asia 27, no.2 (2005): 317.34 See Energy Information Agency, “South China Sea Dispute,” accessed on February 23, 2011, http://www.eia.doe.gov/e meu/cabs/South_China_Sea/pdf.pdf.

After the resumption of diplomatic ties in the 1990s,

however, the primary concern was no longer domestic

stability but China’s territorial ambitions in the South China

Sea.


the region.35 Jakarta has associated China’s expansionist agenda in the South China Sea with attempts to dominate the region. Thus, by the mid-1990s, the military seemed to have reached the conclusion that China is “the greatest potential direct threat to [Indonesia’s] sovereignty”.36

Beijing’s attempts to assert hegemony across Southeast Asia, including over ancient Javanese kings, in the pre-modern era lend historical legitimacy to these concerns.37 Indonesia’s relations with China, dating back to the third century, have rarely been smooth sailing. During the Yuan Dynasty (AD 1279-1368), for instance, Kublai Khan sought to extend China’s territory and influence to Java. Stories of Javanese “resistance” to Chinese “expansionism” are still passed down through school textbooks. This narrative constitutes a small but formative element in Indonesia’s perceptions of China. As such, in the eyes of many Indonesians, China has always wanted to create a “sphere of influence in Southeast Asia”, and it is believed that it will continue to do so.38

In contrast to the New Order, current military leaders tend to describe China as a “challenge” rather than a “threat”. However, the substance of their security concerns has not changed much, especially not in regard to geopolitics. Nothing is more sensitive than China’s ambitions in the South China Sea. This concern stems from the publication of a controversial map by Beijing in 1993 laying claim to parts of the territorial waters surrounding Indonesia’s Natuna islands, and extending the demarcation of China’s territory to include major natural gas fields in Indonesia’s jurisdiction.39 Jakarta has sought clarification from Beijing but has received no clear or consistent response until now.

Consequently, the Indonesian military organized a large-scale tri-service military exercise in 1996 around the Natuna islands involving some 20,000 troops, 40 aircraft, and 50 warships. According to a former high-ranking officer, the exercise reflected the military’s concern about “the defense of the Natuna islands against a potential Chinese military incursion”.40 Indonesia’s force development in the mid- to late 1990s was also influenced by the Natuna

35 See Ministry of Defense and Security, Kebijakan Pertahanan Keamanan Negara Republik Indonesia (Jakarta: Ministry of Defense and Security, 1995): 4-5.36 Cited in Robert Lowry, The Armed Forces of Indonesia (St. Leonards, NSW: Allen & Unwin, 1995): 4.37 See Alan Whiting, “ASEAN Eyes China: The Security Dimen-sion,” Asian Survey 37, No. 4 (1997): 302.38 Sukma, “Indonesia’s Perceptions of China,” 191. 39 Details on how the map affects the Natunas are in Chi-Kin Lo, China’s Policy Towards Territorial Disputes: The Case of the South China Sea Islands (London and New York: Routledge, 1989): 44.40 Cited in Novotny, Torn between America and China, 176.

flashpoint. Jakarta not only increased surveillance and patrols in the area, but also purchased twelve Russian Sukhoi SU-30K fighter jets in 1997. Although this purchase was only completed in 2007, military officials have stated that it will be deployed to “assist the maritime defense of the Natunas”.41 Major General Subiyakto, former governor of the National Resilience Institute, has suggested that Indonesia’s straits should be closed to Chinese vessels in the event that China becomes too aggressive in its claims over the Spratly Islands.42

This line of thinking is bolstered by China’s secretive defense spending and its growing naval arsenal. In recent years, it has acquired second-generation nuclear and conventional submarines, frigates, destroyers, and various platforms for amphibious force projection. Viewed in conjunction with the PLA’s strategy of extending strategic

depth for offshore maritime operations, China seems to be gearing up for a preponderant naval and air presence in the South China Sea.43 This reinforces the concerns among defense planners that “if the Chinese want, they can take the Natunas”.44 China’s assertiveness in the area has also led Indonesia

to defend a very narrow interpretation of its obligations under the United Nations Convention on the Law of the Sea (UNCLOS), which designates sea-lanes for unimpeded passage (or “innocent passage”) in Indonesian waters.45 In particular, the prospect of a future Chinese navy penetrating the Java Sea has been an underlying consideration in withholding access in the east-west sea-lane.46

With this in mind, in 2008 the military organized the largest ever combined tri-service military exercise in several areas bordering on or near the South China Sea:

41 Cited in Michael Leifer, “Indonesia’s Encounters with China and the Dilemmas of Engagement.” In Engaging China: The Management of an Emerging Power, edited by Alastair Iain Johnston and Robert S. Ross (London: Routledge, 1999): 105.42 Cited in Michael Leifer, “Indonesia’s Encounters with China and the Dilemmas of Engagement.” In Engaging China: The Management of an Emerging Power, edited by Alastair Iain Johnston and Robert S. Ross (London: Routledge, 1999): 105.43 See John Garofano, “China – Southeast Asia Relations: Prob-lems and Prospects.” In Asia Looks Seaward: Power and Mari-time Strategy, edited by Toshi Yoshihara and James R. Holmes (Westport, CT: Praeger Security International, 2008): 167-84.44 Cited in Novotny, Torn between America and China, 221.45 “Innocent passage” amounts to the right to pass promptly through a country’s territorial waters, doing nothing that is not directly related to that passage. Trading, fishing, surveying and military display are from the understanding of innocent passage under UNCLOS.46 See Leifer, Indonesia’s Encounters with China, 99. And perhaps explains why the official designation for Indonesia’s archipelagic sea-lane passages was legally ratified by Jakarta only in 2002.

Stories of Javanese “resistance” to Chinese “expansionism” are

still passed down through school textbooks.


Batam Island, Natuna Islands, the waters near the Riau Archipelago, Western Kalimantan, the waters near the Makassar Strait, and the Sangatta islands. The first such exercise since 1996, it involved more than 30,000 soldiers and was based on a foreign maritime invasion scenario.47 The specific campaign exercises focused on addressing future challenges on Indonesia’s northern frontier, which borders on the South China Sea. Moreover, the military recently announced that it would increase troop deployment in the small islands bordering the South China Sea.

Other actions appear to reinforce Indonesia’s growing vigilance in its archipelagic waters. First, maritime

patrols have been stepped up. Although concerns over Malaysia’s incursions into Indonesian waters have certainly played a role in this, so has the increasing frequency of illegal fishing and maritime piracy. It is alleged that two more submarines and four frigates have been ordered due to the growing tension in the area. Second, since the 1990s, Jakarta has increased the population in the Natuna islands through its transmigration program to “help protect the Natuna islands from any would-be rival claimants”.48 Finally, Jakarta has sought to ensure that a “friendly” power helps develop its gas fields in the area. In January 1995, state-owned oil company Pertamina signed a contract with the US oil company ExxonMobil to develop the Natuna gas field. The contract was renewed in December 2010.

Despite all these strategic and security concerns, however, Indonesia realizes that China is not only a balancer for American military influence, but also a more dependable supplier of weapons than the West. This was among the key reasons why the 2005 Strategic Partnership Agreement between Indonesia and China included defense cooperation. In July 2006, the first Indonesia–China Defense Dialogue came into being, and by 2007, an agreement was signed to enhance technological cooperation. High-level visits of senior security officials and military officers have also become more frequent. Chinese-made missiles are slowly making their way into the inventory of the military, and there is a possibility of a joint-production venture in

47 See “Presiden akan Saksikan Latgab 2008,” Kompas Daily, June 15, 2008.48 Cited in Storey, “Indonesia’s China Policy,” 159.

Indonesia.49 In return, Indonesia hopes to sell military supplies such as domestically made SS-2 assault rifles to China.50

These increasing military-to-military ties have primarily been driven by the need to modernize the Indonesian military’s ageing equipment and to diversify its weapons suppliers to avoid repeating the traumatic arms embargo of the 1990s. It would also appear that it was motivated by Jakarta’s desire to get Washington’s attention. In this sense, the partnership does not manifest an abiding faith in common strategic interests with China, or even a genuine acknowledgement of peaceful intentions toward it - this is still contingent upon how China behaves in the South China Sea in the future.

This suggests that behind the warming of bilateral defense relations, pragmatic considerations and apprehension over Chinese regional ambitions, especially in the South China Sea, still loom large in the minds of policymakers. As former Defense Minister Juwono Sudarsono stated over 15 years ago:

Barring the possibility that China can gain access to resources other than the South China Sea, then ASEAN countries will have to face the possibility of imminent military confrontation with China.”51

the ForeIgn polIcy dIMenSIon

In foreign policy, the ambivalence in Indonesia-China relations is related both to China’s relations with ASEAN, as well as to Indonesia’s goal of balancing the major powers. With regards to the former, the degree, pace, and scope of China’s engagement with ASEAN are critical for Indonesia. This is not just because Jakarta co-founded the regional grouping and uses it to project regional leadership; for defense planners, ASEAN has also served as a “security shield of friendship”, a cordon sanitaire protecting the archipelago from possible threats emanating from outside the region. Moreover, ASEAN and its related institutions such as the ARF are seen by Jakarta as key tools for engaging and balancing major powers in the region.

China’s relations with ASEAN have expanded considerably since Vietnam’s withdrawal from Cambodia in 1989. They have become more complex, involving interdependent economic and political-security interests, and a mix of bilateral and multilateral activities.52 China has increasingly engaged multilateral security arrangements in the past two decades, especially through ASEAN and ARF.

49 See “Chinese Missile Aid for Indonesia: How Strategic a Part-nership,” IISS Strategic Comments 11, no. 6 (2005): 1-2.50 See “Indonesia, China Set to Boost Military Relations,” The Jakarta Post, May 22, 2010.51 Cited in Sukma, “Indonesia’s Perceptions of China,” 202.52 For a detailed discussion, see Alice D. Ba, “China and ASEAN: Re-navigating Relations for a 21st-Century Asia,” Asian Survey 43, no. 4 (2003): 622–47.

Despite all these strategic and security concerns, however, Indonesia realizes that China is not only a balancer for

American military influence, but also a more dependable supplier of weapons

than the West.


In 2003, it signed the Treaty of Amity and Cooperation (TAC) and the Joint Declaration on Strategic Partnership for Peace and Prosperity. Beijing considers these multilateral security mechanisms valuable in three respects: (1) to dampen tensions in China’s external security environment, (2) to help China extend its regional influence without upsetting its neighbors, and (3) to counter or circumvent US influence and power on the Chinese periphery.53

However, given China’s recent assertiveness in the South China Sea, as well as its stonewalling in the discussions surrounding a legally binding Code of Conduct in the area, Southeast Asian states remain unsure of Chinese intentions in the long term. In economic terms, of course, they see China as a vital partner. But there is concern that China might be trying to drive a wedge between those states generally considered to be closer to the United States (Indonesia, Philippines, Malaysia, Singapore, Brunei, Thailand), and those that seem more receptive to Beijing’s overtures (Myanmar, Cambodia, Laos, Vietnam). In this regard, there is especial concern with China’s economic initiatives in the Greater Mekong Sub-region.54 Given this uncertainty, ASEAN will continue to encourage multilateralism in an effort to mitigate Chinese influence.

This line of thinking also prevails among Indonesia’s foreign policy elite, albeit in a more specific context. China’s rise and its growing relations with ASEAN are embraced insofar as they provide Indonesia with more room to maneuver vis-à-vis the United States and other major powers.55 This is manifest primarily in three ways. First, in the post-9/11 world, China is often seen as a balancer to American unilateralist designs in the region, especially following the invasions of Afghanistan and Iraq. This builds on the legacy of the Suharto regime, when China was also a useful ally against Western human rights pressures. Second, in investment, trade, and defense cooperation, China could reduce Indonesia’s dependence on the United States, at least to a certain degree. Finally, China’s willingness to participate in regional multilateral security mechanisms and institutions has raised the gravitas and profile of ASEAN and further solidified its centrality in the region.

However, even here, Indonesian policy is not one-dimensional. Due to the ambivalent nature of China-ASEAN relations, Jakarta has sought to formalize its bilateral security relations and strategic partnerships with other major powers, including not just China and the United States, but also Australia, Russia, and India. Thus, Indonesia sees multilateral engagement and bilateral partnerships with China and the other major powers as complementary 53 Bates Gill, Rising Star: China’s New Security Diplomacy (Washington, DC: Brookings Institution Press, 2007): 29.54 See Geoff Wade, “Could ASEAN Drift Apart?,” Yale Global Online, February 25, 2011, available at http://yaleglobal.yale.edu/content/could-asean-drift-apart.55 Novotny, Torn Between America and China, 174.

rather than mutually exclusive. Ultimately, it seeks a “dynamic equilibrium” – the new label for “balance of power” coined by the Ministry of Foreign Affairs. In fact, during Indonesia’s chairmanship of ASEAN, one of its top three priorities was to ensure that any future architecture for regional cooperation would be based on this “dynamic equilibrium”.56

concluSIonS

The preceding analysis assessed four dimensions of ambivalence in Indonesia-China relations. It has shown that deep-rooted sentiments toward and perceptions of China pervade both the elite and the wider public in Indonesia. These are shaped primarily by a long history of bilateral interaction in the Asian neighborhood, as well as by the difficult place of ethnic Chinese Indonesians in Indonesian society. Whether one looks at domestic politics, economics, strategic security, or foreign policy, all these dimensions suggest that Indonesia’s responses to a rising China cannot be neatly categorized as strategies of balancing, bandwagoning, or hedging. The dynamics of Indonesia-China relations at the official level essentially reflect a variation of a more pervasive ambivalence toward China in Indonesian society.

At the same time, history shows that Jakarta has always been very pragmatic and flexible in its relations with China. This helps explain many aspects of the relationship that may seem contradictory: despite the persistence of a Chinese security threat perception, there is a warming bilateral defense relationship; despite concerns over Beijing’s growing influence over Indonesia’s economy, trade and investment continue to expand; and despite the uncertainty surrounding China’s regional ambitions, Indonesia retains a preference for multilateral engagement with China in an inclusive regional architecture.

However, the reality of these domestic-driven dimensions of ambivalence implies that there should not be any illusion regarding the warming of overall bilateral relations. For the foreseeable future, Indonesian policy will continue to reflect a negotiation between pragmatic security and economic factors. The government must remain responsive to domestic perceptions, real or imagined, of the potential implications of China’s rise to Indonesian prosperity. In the short term, it would behoove China to tread carefully, both in the South China Sea and in bilateral economic relations. If not, it may once again incite deep-rooted anxieties in Indonesia.

56 Presentation of Djauhari Oratmangun, Director General for ASEAN Cooperation, Indonesian Ministry of Foreign Affairs, at a public seminar on “Indonesia and ASEAN in 2011,” organized by the Centre for Strategic and International Studies, Jakarta, January 13, 2011.


South Asia is projected to become the next flashpoint in the emerging great power politics of Asia. India and China, as rising powers with unsettled territorial and border disputes, continue to vie for influence in the region. India has traditionally considered South Asia to be within its sphere of influence. It has been wary of China’s engagement in the region.

This article analyzes the clash of perceptions between India and China. It argues that India is a regional power that waits for normalization before engagement, while China, on the other hand, is a regional power that engages to benefit from normalization. Two issues form the core of this argument: India’s negative experience with China’s involvement in South Asia in the past; and second, China’s involvement in South Asia over the last decade. These issues have altered the paradigm of India’s security policy and South Asia strategy.

the rISe oF chIna

As China’s weight in the global economy has

grown, debates about the “rise of China” have gained momentum. The world has become keener to engage China both economically and politically. Growing economic capacity has been accompanied by an increase in Chinese military expenditures, and changes in its strategic doctrines to develop advanced warfare capabilities. China’s military projections, from the ASAT test of January 2007 to the test flight of the stealth aircraft J-20, have been noted as landmark developments in its military modernization.1 Thus, the rise of China has had a major impact on the regional balance of power across the world.

Today, China is heavily involved in the resource-rich regions of Africa, Latin America, and Central Asia. Resources are required to maintain the level of economic growth China needs to maintain stability and to ensure 1 For example, see Joseph E. Lin, “Regional Reactions to ASAT Missile Test & China’s Renewed Activities in the East China Sea”, China Brief 7, no.3 (October 17, 2007). http://www.jamestown.org/single/?no_cache=1&tx_ttnews[tt_news]=4026 and Eric Hagt, “China’s ASAT Test: Strategic Response”, China Security (Winter 2007): 31-51.

CHINA’S RELATIONS WITH SOUTH ASIA:WhY IS INDIA WEARY?

Gunjan sinGh & avinash Godbole · INSTITUTE fOR DEfENSE STUDIES AND ANALYSIS


the legitimacy of Chinese Communist Party (CCP) rule.2 Without growth, social unrest and discontent may increase to an extent that the CCP is not ready to handle.

China’s rise has also assumed different dimensions since the onset of an economic slowdown in late 2007. China’s GDP growth fell below 7 percent between 2008 and 2009 but rebounded swiftly to double digits last year.3 During this recovery period, there has been substantial focus on the relative decline of the United States and the corresponding rise of China. By 2008, China possessed foreign reserves in excess of US$ 1.8 trillion.4 Beijing clearly showed that it was better prepared to deal with the financial crisis than the United States and the European Union. This event also brought to the forefront the extent of interdependence between

2 Ian Burma, “China’s Best Hope”, Project Syndicate, January 7, 2009, http://www.project-syndicate.org/commentary/buruma21/English3 China GDP Growth Rate, Trading Economics, accessed on March 4, 2011, http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=CNY 4 C. Fred Bergsten et al., China’s Rise: Challenges and Oppor-tunities (Washington D.C.: Peterson Institute for International Economics and Center for Strategic and International Studies, 2009): 209.

China and the United States. Chinese confidence was boosted as the country achieved a certain degree of economic parity, bringing it a step closer to becoming a great power.

In sum, China’s economic advances, and the concomitant expansion in military capability and increase in resource-seeking investment, have led it to pose a challenge to the international system. But it should be emphasized that this challenge is also paradigmatic - China is not just rising, but also changing the rules of the game by adopting a foreign policy that is qualitatively different from other established powers.5 This implies that the dominant paradigm of the Western liberal order will eventually have to accommodate and adjust to the Chinese model.

chIna’S ForeIgn polIcy In aSIa: where doeS South aSIa FIt In?

An important landmark in China’s foreign relations involved the 1989 pro-democracy movements in Tiananmen Square. When Western countries imposed sanctions on China after the Tiananmen Square incident, China was forced to look for alternative sources of investment and engagement. The opening up of the economy in 1978 had kick-started economic development, and there was a need to maintain this process. As a result, China improved trade and investment relations with its Asian neighbors, who had largely refrained from condemning Tiananmen.6 The large presence of Overseas Chinese in these countries worked as a catalyst in transforming China’s diplomatic influence.

Hu Jintao’s Report at the 17th Party Congress summarized China’s foreign policy objectives with reference to different countries in the following words:

“For developed countries, we will continue to strengthen strategic dialogue, enhance mutual trust, deepen cooperation and properly manage differences to promote long-term, stable and sound development of bilateral relations. For our neighboring countries, we will continue to follow the foreign policy of friendship and partnership, strengthen good-neighborly relations and practical cooperation with them, and energetically engage in regional cooperation in order to jointly create

5 For more see Eva Paus, Penelope B. Prime and Jon Western (eds.): Global Giant: Is China Changing the Rules of the Game? New York: Palgrave Macmillan, 2009.6 Zhiqun Zhu, China’s New Diplomacy: Rationale, Strategies and Significance (Farnham: Ashgate, 2010): 1.

Gunjan Singh and Avinash Godbole are researchers at the Institute for Defense Studies and Analysis, New Delhi, India


a peaceful, stable regional environment featuring equality, mutual trust and win-win cooperation. For other developing countries, we will continue to increase solidarity and cooperation with them, cement traditional friendship, expand practical cooperation, provide assistance to them within our ability, and uphold the legitimate demands and common interests of developing countries. We will continue to take an active part in multilateral affairs, assume our due international obligations, play a constructive role, and work to make the international order fairer and more equitable”.7

This statement illustrates that the South Asia region is not a high strategic priority for China. In China’s order of preferences, engagement with the United States remains a top priority, followed by relations with its neighbors, and only then with other developing countries.

One should further note that Chinese engagement with developing countries through major infrastructure development projects is fairly recent. It began only after the Asian Financial Crisis in 1997, and really took off during the presidency of Hu Jintao. This policy differs from China’s former South Asia policy of Official Developmental Assistance (ODA), where its involvement was limited to monetary aid or aimed to support revolution. China has used this new policy partially as a way to gain access to raw materials in underdeveloped markets. Such policies increase its direct competition with the United States. However, China has used its identity as a “developing country” to make other developing countries comfortable with its growing influence.

This background is important for understanding China’s growing role in the South Asia region. Initially, China’s engagement in South Asia was focused mainly on Pakistan, China’s “all weather friend”. For a long time, India feared that it was fighting a “two-front war”. Chinese involvement in the Kashmir dispute has remained particularly sensitive, because it challenges Indian sovereignty. Recent instances in which stapled Chinese visas were issued to Indian citizens from the provinces of Jammu and Kashmir only added to these fears.

7 Hu Jintao’s report at the 17th Party Congress, “Hold High the Great Banner of Socialism with Chinese Characteristics and Strive for New Victories in Building a Moderately Prosperous Society in All Respects”, accessed on February 1, 2011, http://www.china.org.cn/english/congress/229611.htm#11.

But in addition to Pakistan, India is now concerned with Chinese engagement with other South Asian countries as well. These interactions are occurring not only at the diplomatic level, but also involve increasing volumes of trade and investment. Because India has traditionally been the major trading partner in the region, it is very concerned with these developments. Over the past decade, China has surpassed India as the main exporter to the region. This trend has been particularly pronounced since 2004. At the same time, there has been a decline in the share of exports from South Asian countries to India. Moreover, China has made inroads into the textile, machinery, and chemical industries traditionally dominated by Indian firms.8

China has also been providing aid to a number of countries in the region. The major recipients are Pakistan, Bangladesh, Sri Lanka, and Nepal. While India is concerned with how Beijing is using aid to build diplomatic relations with several South Asian countries, its main preoccupation in this regard remains Pakistan. China has long sought to counter Indian influence by providing aid to Islamabad. The most worrying aspect of this is its assistance in developing Pakistan’s nuclear program. This occurred in spite of Pakistan’s history of

nuclear proliferation to support rogue regimes. Pakistani nuclear scientist A.Q. Khan has recently confessed that in 1982, Pakistan received enriched uranium and other material from China. As far back as 1966, China provided Pakistan with a critical nuclear weapons design.9

Under these circumstances, New Delhi was not pleased with President Barack Obama’s remarks in 2009 calling for China to play a

more meaningful role in South Asia. From New Delhi’s perspective, the United States appeared to be legitimizing China’s military engagement with Pakistan.

whIther IndIa’S South aSIa polIcy?

The increasing interest Beijing has shown towards South Asian countries challenges India’s primacy in the region. China has developed numerous infrastructure development projects in the region, ranging from Sittwe, Dawei, and Mergui in Myanmar, to Hambantota in Sri

8 Pravakar Sahoo and Nisha Taneja, “China’s Growing Presence in India’s Neighborhood”, February 5, 2010, accessed on Janu-ary 17, 2011, http://www.eastasiaforum.org/2010/02/05/chinas-growing-presence-in-indias-neighborhood/.9 “Whither Pakistan, IDSA Task Force Report”, Institute for Defence Studies and Analyses (2010): 107-109.

In China’s order of preferences, engagement with the United States remains a top priority, followed by relations with its neighbors, and only then with

other developing countries.


Lanka and Gwadar in Pakistan. It is debatable whether these dual-use projects form part of China’s supposed “string of pearls” strategy, by which China aims to encircle India militarily in the Indian Ocean Region in case of a border conflict between the two.10 In any case, the level of infrastructural growth that the region has witnessed as a result of Chinese efforts is phenomenal.

In the past, India took a less proactive and more benign policy approach toward the region. Since there was always a fear of a spillover effect into provinces on the Indian border, India shied away from taking positions on the intern al issues of its neighbors. For instance, policymakers were particularly cautious in the aftermath of the assassination of Rajiv Gandhi, former Prime Minister of India, by the Liberation Tigers of Tamil Elam (LTTE), which at the time was a separatist Tamil group in Sri Lanka.

China entered the scene when several countries in South Asia were suffering from economic woes. It looked for path-breaking projects that would boost local and national economies. As a result, India’s regional strategy suddenly looked inadequate and weak in the wake of Chinese advances. New flight routes are emblematic of this shift: while there is talk of connecting Nepal and Pakistan to the Chinese Mainland by air, there are very few direct flights and other means of transport between India and her neighbors.

In addition, a slow pace of engagement and a poor track record of delivering on promises have led smaller neighbors to mistrust India. The more India has failed to integrate the region, the more those countries have started looking for other options. Even if there are ideas in India on how to better engage its neighbors, these rarely materialize due to the lack of initiative at the decision-making level in the Indian bureaucracy. By contrast, China has acted swiftly.11 Due to its experience of facilitating business on the Mainland over the past three decades of Open Reforms, China may now have an upper hand over India, which has long suffered from an inefficient and complicated bureaucracy.

Historically, the countries of the region have been wary of Indian influence because the country’s geographic preeminence is perceived to translate into

10 Gurpreet Khurana, “China’s ‘String of Pearls’ in the Indian Ocean and Its Security Implications”, Strategic Analysis 32, no.1 (2008): 1-39.11 S. D. Muni, “Engagement with Emerging Asia”, in India and China: The Next Decade, edited by S.D. Muni and Suranjan Das (New Delhi: Rupa, 2009): 94.

strategic predominance. India’s neighbors have been reluctant to establish free trade agreements for fear that Indian companies would flood their small domestic markets. This is where India faces the paradigmatic challenge of China in its neighborhood. China’s growing interest in the region, along with capital and technology superior to India’s, has come as an unexpected boon to South Asian states.

While China’s interest in South Asia might be purely economic, an absence of clear communication with India, coupled with repeated questions over India’s territorial integrity, is creating a serious perception gap in bilateral security policies. With an ongoing border issue and the changing stance of Beijing with respect to the Kashmir issue, Delhi feels it is being arm-twisted by Beijing. During the Mao era, China’s insistence that smaller South Asian countries like Sri Lanka follow an independent foreign policy was part of an effort to assume leadership of all of Asia.12 This trend has continued even in recent times as Beijing has endorsed Sri Lanka’s “struggle to protect its sovereignty and territorial integrity” and has opposed “any outside intervention” in Sri Lanka.13 Therefore, from an Indian perspective, the bilateral relations of India and China are at the core of China’s South Asia policy.

BIlateral relatIonS Between IndIa and chIna

Both India and China are growing at phenomenal rates since instituting economic reforms in the 1980s. Over the last decade, this growth has been matched by an increase in the level of interaction and economic engagement between the two countries. Heads of state have conducted mutual visits at regular intervals since

2003, when Prime Minister Atal Bihari Vajpayee made a landmark visit to Beijing.14 Prior to 2003, there had been a ten-year gap in visits, most likely due to India’s nuclear tests in 1998.

Since the 2003 visit, there has been an increasing flow of business-related travel between Indian and China. There has also been an increase in the number of Indian tourists visiting China. Indian people tend to perceive China as an economic success story, and there have been calls to use it as a model for India’s own

12 Swaran Singh, “Sino–South Asian Ties: Problems & Pros-pects”, Strategic Analysis 24, no.1 (2000): 12. 13 J. Mohan Malik, “South Asia in China’s Foreign Relations”, Pacific Review 13, no.1 (February 2001): 89.14 Harsh Pant, The China Syndrome: Grappling with the Uneasy Relationship (New Delhi: HarperCollins India, 2010): 16.

It is debatable whether these dual-use projects form part of

China’s supposed “string of pearls” strategy, by which China aims to

encircle India militarily in the Indian Ocean Region in case of a border

conflict between the two.


development. The many authors comparing India to China in terms of economics and politics are testimony to the increase in interest on the subject.15

India-China bilateral trade rose from $2.2.billion in 2000 to $50 billion in 2008 and was projected to exceed $60 billion by the end of 2010.16 During this period, India’s exports also rose substantially. However, in terms of both volume and quality, trade is still heavily stacked in favor of China. When China recognized Sikkim as part of India in 2006, border trade began in the Nathu La Pass, signaling positive momentum in bilateral relations. So on the economic front, one could argue that China-India relations have been moving in a fairly positive direction, with both sides pushing for further improvements.

However, despite burgeoning trade relations, the trust deficit created by the 1962 War has not been overcome yet. In fact, this deep-seated mistrust helps explain the lack of bilateral contact in recent decades. The fourteen rounds of talks between the representatives of India and China for the settlement of the border issue have remained inconclusive. Though China and India have cooperated on a number of international issues like climate change and the WTO, they leave the contentious bilateral issues to the next generation, simply because they are not able to reach an acceptable solution.

China’s attempt to obstruct loans by the Asian Development Bank (ADB) to India for infrastructure projects in Arunachal Pradesh, a province in Northeast India still claimed by China as southern Tibet, have raised alarm bells among India’s strategic planners. Border incursions in the western regions, as well as stapled Chinese visas for residents of Jammu and Kashmir, further fuel nationalist sentiments in India. From the Indian perspective, border incursions amount to violations of peace. The issuance of stapled visas is considered a challenge to India’s territorial sovereignty.17 China is unwilling to recognize that all these tactics will only limit its bargaining capacity in negotiations with

15 See for example, Raghav Bahl, Super Power? The Amazing Race Between China’s Hare And India’s Tortoise. New York: Penguin, 2011. Also Edward Friedman and Bruce Gilley (eds.): Asia’s Giants: Comparing China and India. New York: Palgrave Macmillan, 2008; Pranab Bardhan, Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India. Princ-eton: Princeton UP, 2010.16 Dean Cheng, “China’s View of South Asia and the India Ocean”, Heritage Lecture 31 (August 2010), accessed on Febru-ary 1, 2010, http://www.heritage.org/research/lecture/china-s-view-of-south-asia-and-the-indian-ocean.17 Vineeta Pandey, “Stapled Visas by China Not Acceptable: India”, January 14, 2011, accessed on March 6, 2011, http://www.dnaindia.com/india/report_stapled-visas-by-china-not-acceptable-india_1494203. Also see Reuters, “Border Incursions Strain China-India Ties”, September 18, 2009, accessed on March 6, 2011, http://ibnlive.in.com/news/border-incursions-strain-chinaindia-ties/101648-3.html.

India. Consequently, India effectively sees two Chinas:

an economic China viewed with a sense of awe, and a political China that is treated with caution. Therefore, any act that challenges India’s political sovereignty, like the stapled visa issue, garners bad publicity for China

in the Indian press. Amidst all this, the perception gap that led to the 1962 War has begun to recast its shadow on India-China relations. This is compounded by the absence of an objective narrative on the causes of the war in India’s official history. China’s willingness to walk the extra mile for India’s neighbors, combined with its challenge to India’s territorial sovereignty, will remain sources of tension in the years to come.

chIna’S relatIonS wIth other South aSIan countrIeS

In this section, we analyze China’s bilateral relations with other South Asian countries to see if there are any common trends. India’s strategic community feels that all the countries in the region provide China with a platform for exerting pressure on India.

PakistanSince the founding of Pakistan in 1947, India-

Pakistan relations have been a contentious international issue. Meanwhile, Pakistan’s friendship with China has grown in almost direct proportion to its deteriorating relations with India. According to Sumit Ganguly, “Pakistan will remain central to China’s South Asia strategy“.18 Pakistan was one of the first countries to recognize the PRC, as the countries established diplomatic relations on May 21, 1951. This friendship also emerged from the fact that Pakistan was pretty close to China even during the decades of international isolation, primarily during the 1960s and 1970s, following the country’s wars with India in the 1960s. Additionally, Pakistan’s role in facilitating Kissinger’s secret visit to the PRC is well known.19 China has 18 Jamal Afridi and Jayashri Bajoria, “China-Pakistan Relations”, July 6, 2010, accessed on February 1, 2011, http://www.cfr.org/china/china-pakistan-relations/p1007019 William Burr, “The Beijing Washington Back Channel and

From the Indian perspective, border incursions amount to violations of

peace. The issuance of stapled visas is considered a challenge to India’s

territorial sovereignty.


helped Pakistan to build a number of missiles and other military assets like the jointly developed JF-17 aircraft. It has also provided Pakistan with the technology for its current nuclear reactors in accordance with the 1974 Sino-Pakistan agreement on nuclear cooperation, which occurred immediately after the first nuclear test by India in May 1974. There are also talks about a civil-nuclear deal similar to the one between Washington and New Delhi. China’s willingness to look the other way when it comes to Pakistan’s history of proliferation, as well as its offer of a nuclear deal, have raised serious security concerns in India.

China and Pakistan have also been working on a large number of infrastructure projects. During a 2010 visit by Pakistani President Asif Ali Zardari to Beijing, the Chinese government pledged to build a railway line connecting Pakistan with China, via the Pakistan Occupied Kashmir (POK), that would facilitate energy transit between the two countries. The project would also include construction of an all weather highway. The two countries have also been cooperating on power plants, highways, telecommunications, mines, and other development projects.

Besides the railway line, the most important strategic development has been China’s involvement in the building of Gwadar port, which is located in Balochistan province. The port is fully operational now. It provides industrial facilities, warehouse support, and a deep-sea port servicing more than 20 countries. Using this port, China gains quick and direct access to the Persian Gulf. It will try to use it as a way to overcome the current insecurity of its sea-lanes of communication (SLOCS) and the Malacca Dilemma. Via Gwadar, China can use multiple transit routes to the province of Xinjiang.20

Henry Kissinger’s Secret Trip to China”, National Security Achieve Electronic Briefing Book 66 (February 27, 2002), accessed on March 6, 2011, http://www.gwu.edu/~nsarchiv/NSAEBB/NSAEBB66/. 20 China’s Malacca Dilemma is about concerns over the possible blockade of trade of the Malacca Strait through which major-ity of the Chinese energy transits. Beijing has been worried about a future blockade by the United States in case of any standoff in the Taiwan Strait. This could cripple the Chinese economy in no time given China’s dependence on energy imports from West Asia. For details see Ian Storey, “China’s ‘Malacca Dilemma’”, China Brief 6, no.8 (April 12, 2006), accessed on February 1, 2011, http://www.jamestown.org/programs/chinabrief/single/?tx_ttnews[tt_news]=31575&tx_ttnews[backPid]=196&no_cache=1.

It is also noteworthy that there is a sizable population of Chinese in Pakistan. It is estimated that there are approximately 10,000 Chinese engaged in over 120 projects. This population increased significantly after the Free Trade Agreement (FTA) between Pakistan and China came into effect in October 2009. The FTA included provision for opening Pakistan’s service sector.21 In addition to Chinese engaged in trade, there is some indication that the People’s Liberation Army (PLA) has stationed some 11,000 troops in the Gilgit Baltistan region of Pakistan Occupied Kashmir (POK) for infrastructure projects.22 This development is particularly worrisome for India.23

NepalOfficial diplomatic relations between China

and Nepal began in 1955.24 Initially, Beijing followed a policy of non-interference in the internal affairs of Nepal.25 But more recently, it has shown greater willingness to engage. In 2009, China announced 62.5 million rupees in military aid, a 50 percent increase from the previous aid package. In exchange, Nepal agreed to curb any anti-China (pro-Tibet liberation) activities on its soil.26

There is an increasing consensus in Nepal that Chinese investments can make the country become more “self-

sustained and independent”.27 By 2008, Chinese investors

21 “China-Pakistan FTA on Trade in Services Comes into Force on October 10”, China FTA Network, September 13, 2009, ac-cessed on January 17, 2011, http://fta.mofcom.gov.cn/enarticle/enpakistan/enpakistannews/200911/1454_1.html. 22 People’s Liberation Army (PLA) is the national army of the People’s Republic of China.23 Selig Harrison, “China’s Discreet Hold on Pakistan’s Northern Borderlands”, New York Times, 26 August 2010, accessed on February 2, 2011, http://www.nytimes.com/2010/08/27/opinion/27iht-edharrison.html.24 Government of Nepal, Ministry of Foreign Affairs, Nepal China Relations, accessed on February 1, 2011, http://mofa.gov.np/bilateralRelation/nepal-china.php.25 Nihar Nayak, “Nepal: New ‘Strategic Partner’ of China?”, IDSA Strategic Comment, March 30, 2009, accessed on January 18, 2011, http://www.idsa.in/idsastrategiccomments/NepalNew-StrategicPartnerofChina_NNayak_300309.26 “China Announces Rs 62.5 Million Military Aid for Nepal”, India-Server, September 27, 2009, accessed on February 2, 2011, http://www.india-server.com/news/china-announces-rs-62-5-million-4044.html.27 Prithvi Man Shrestha, “China’s Political and Economic Mis-sions in Nepal: Investment- Yes, Interference- No”, Septem-ber 18, 2010, accessed on January 16, 2011, http://blog.com.np/2010/09/18/chinas-political-and-economic-missions-in-

China’s willingness to look the other way when it comes

to Pakistan’s history of proliferation, as well as its offer

of a nuclear deal, have raised serious security concerns in

India.


in Nepal numbered around 200.28 There has also been a perennial increase in bilateral trade, which reached US$257 million in October 2010.29 In order to promote trade, China has promised Nepal that it would lengthen the existing Qinghai-Tibet Railway, connecting Beijing and Lhasa, to Kathmandu.30 China has also promised to invest in the hydropower and tourism sectors.31

Considering this increasing engagement between Nepal and China, it was not a surprise when Nepal proposed Chinese membership in the South Asian Association for Regional Cooperation (SAARC) in 2010. This move was also supported by Pakistan and Bangladesh. This is a significant development, since China’s full membership would alter the structure of this fragile grouping.32 India has considered SAARC as its primary sphere of influence, so there is concern that any initiative to bring China into the group will undermine India’s regional leadership. If such a move is being supported by three of India’s neighbors, it is definitely a cause of concern for New Delhi.

Some observers of Nepalese politics believe that closer ties between China and Nepal are motivated by China’s aim to distance Nepal from India. India has regarded Nepal as a traditional sphere of influence and a buffer state between India and China. With the increase in the level of interaction between China and Nepal, this traditional buffer zone could cease to exist. Once China begins the proposed railway line from Lhasa to Zhangmu, it will alter the character of the landlocked Nepalese economy and subsequently transform China-Nepal relations. This is occurring in the context of recent infrastructure developments in Tibet, as well as China’s

nepal-investment-yes-interference-no/. 28 “Nepal Welcomes Chinese Investment”, Xinhua, January 12, 2009, accessed on January 16, 2011, http://news.xinhuanet.com/english/2009-01/12/content_10642332.htm. 29 “Nepal, China Sign MOU for Promotion of Trade”, People’s Daily, December 21, 2010, accessed on January 16, 2011, http://english.peopledaily.com.cn/90001/90776/90883/7237260.html.30 “96% of Netizens Support Qinghai-Tibet Railway Ex-tension to Nepal”, People’s Daily, October 15, 2009, ac-cessed on January 16, 2011, http://english.peopledaily.com.cn/90001/90776/90883/6784371.html.31 “China Increases Aid to Nepal by 50%”, Express India, April 19, 2009, accessed on January 16, 2011, http://www.expressindia.com/latest-news/China-increases-aid-to-Nepal-by-50/448796/. 32 Archis Mohan, “SAARC Drops Move to Upgrade China Status”, The Telegraph, April 23, 2010, accessed on January 16, 2011, http://www.telegraphindia.com/1100424/jsp/foreign/story_12375430.jsp.

recent military exercises aimed at quick mobilization and movement of troops.

Sri LankaIndia’s bilateral relations with Sri Lanka have

been affected by China’s activism in the subcontinent as well. As mentioned above, due to coalition politics in India and spillover effects of Tamil ethnic struggle in Sri Lanka, India could not take any firm stand on the Sri Lankan crisis in the past. It is generally believed that Colombo was not happy with the refusal of the Bhartiya Janta Party (BJP) to provide arms in 1999, when the Sri Lankan government was

dealing with the insurgency of the Liberation Tigers of Tamil Eelam (LTTE). At that time, Pakistan and China came to Colombo’s assistance.33 In 2009, China provided Sri Lanka with a billion dollars in aid.34 In 2010, China finished work on the Hambantota Port in Sri Lanka. Beijing has also has been investing in roads, railways, airports, and a coal power station near this port.35

Such investments are a matter of concern for India. China does not have operational rights in Hambantota, and there is no provision for oil storage or refining there.36 Therefore, any Chinese activity in Hambantota will have to be watched carefully, since it may be strategically motivated. The building of the port provides China with access to the Indian Ocean. China has been working towards building a blue water navy and its forays into the Indian Ocean are a clear sign of that intention. China has also been arguing in no uncertain terms that the Indian Ocean is not India’s ocean.37 There is no disputing that these are international waters and that there is scope for India-China maritime cooperation on the issues of piracy and east-west SLOCs.38 However,

33 Madhav Malapt, “EU Pushing Sri Lanka Toward China”, The Diplomat, January 14, 2011, accessed on January 16, 2011, http://the-diplomat.com/2011/01/14/eu-pushing-sri-lanka-toward-china/. 34 “China, Sri Lanka Agree to Deepen Military Ties”, DNA India, September 16, 2010, accessed on January 16, 2011, http://www.dnaindia.com/world/report_china-sri-lanka-agree-to-deepen-military-ties_1438977.35 “Sri Lanka Opens China-funded Hambantota Seaport”, August 16, 2010, accessed on January 16, 2011, http://truthdive.com/2010/08/16/Sri-Lanka-opens-China-funded-Hambantota-seaport.html. 36 Khurana, “China’s”, 15.37 Andrei Chang, “Indo Power Afloat In The 21st Century Part One”, Space War, March 6, 2009, accessed on January 16, 2011, http://www.spacewar.com/reports/Indo_Power_Afloat_In_The_21st_Century_Part_One_999.html. 38 Siddharth Varadarajan, “Time to Reset the India-China

Some observers of Nepalese politics believe that closer ties between China and Nepal are motivated by China’s aim to distance Nepal from India.


in the absence of any cooperative initiative on China’s part, coupled with the usage of aggressive posturing and showing of strength (an increase in the number of nuclear submarines which are used for patrolling), India will continue to feel threatened.39 Improving relations with Sri Lanka, a vital cog in easing China’s Malacca Dilemma, provides Beijing with an important step in its defensive capacity. However, if one believes in the “string of pearls” strategy, its offensive capacity cannot be overlooked.

BangladeshThe other Indian neighbor with which India has

always had troubled relations is Bangladesh. In the past decade, there has been an upward trend in the level of warmth between Dhaka and Beijing. Bangladesh

has always been worried about Indian influence since its formation in 1971 as a result of the long-running liberation struggle. Since China has started showing greater interest in the South Asia region, Bangladesh has also been trying to attract Chinese investment. Last year Dhaka asked China to invest in the ceramics, textiles, machineries, footwear, and fertilizer sectors.40 China has also shown interest in helping Bangladesh to construct a seaport at Chittagong. In addition to this, China has also been showing interest in investing in the telecommunications and infrastructure sectors in Bangladesh.41 Although China and Bangladesh currently

Relationship”, The Hindu, December 15, 2010, accessed on January 16, 2011, http://www.hindu.com/2010/12/15/sto-ries/2010121553741400.htm39 Manu Pubby, “China’s Submarine Patrols Raise Eyebrows in India”, Indian Express, February 7, 2009, accessed on January 21, 2011, http://www.expressindia.com/latest-news/Chinas-submarine-patrols-raises-eyebrows-in-India/420466/.40 “China’s Help Sought for Deep-Sea Port, Road Link”, The Daily Star, March 20, 2010, accessed on January 16, 2011, http://www.thedailystar.net/newDesign/news-details.php?nid=130836 41 Faheem Haider, “Bangladesh China Move Closer on Invest-

do not have an FTA, Bangladesh has shown interest in an agreement ever since China granted Bangladesh the status of most favored nation in 1984.

While Beijing has been very successful in providing attention and cooperation, India has been more concerned with the presence of Indian separatist groups there. It is rumored that some of these groups are aided and abetted by Pakistan’s Inter Services Intelligence (ISI).

MyanmarAlthough Myanmar is generally considered part

of Southeast Asia, it deserves mention here, mainly because it shares borders with both India and China, and also because both have similar economic and strategic interests in Myanmar. For China, apart from the other South Asian countries, Myanmar is very important geo-strategically, as it provides China with the shortest access route to the Indian Ocean. Despite being one of the first countries to recognize the PRC in 1949, the upward momentum in this relationship occurred only in the 1990s. Since then, economic and defense exchanges have risen dramatically. China is the third-largest trading partner of Myanmar after Singapore and Thailand. China is also the largest foreign investor in Myanmar.42 Some suspect that Beijing has helped the Military Junta bring nuclear technology to Myanmar in return for development and access to Sittwe port and an oil pipeline that runs to Kunming, the provincial capital of Yunnan province in southwest China.43 From India’s perspective, Chinese FDI helps sustain the military regime in Myanmar, and this regime harbors leaders from terrorist groups in northeast India. India does not want to isolate the Myanmar junta and let that be an excuse for continuance of anti-India activities in Myanmar. Therefore, in order to balance the Chinese presence, India recently hosted Senior General Than Shwe despite serious criticism from home and abroad. In this visit, some of the companies from the Indian private sector managed to gain access to some of the oil fields that are in the territorial waters of Myanmar.

The MaldivesChina-Maldives trade relations are relatively small

and favor China by more than 300 percent.44 However,

ment in Infrastructure and Trade”, June 15, 2010, accessed on January 16, 2011, http://bangladesh.foreignpolicyblogs.com/2010/06/15/bangladesh-china-move-closer-on-investment-in-infrastructure-and-trade/.42 Khaled Iqbal Chowdhury, “China-South Asia Relations: A Dynamic Contour”, BIPSS Focus, accessed on January 12, 2011, http://www.bipss.org.bd/download/csr.pdf.43 C. S. Kuppuswamy, “China-Pakistan-Myanmar: The triangular relationship needs careful watch”, January 29, 2002, http://www.southasiaanalysis.org//papers5/paper401.html44 Embassy of Maldives in China, “Maldives China Relations”, n.d., accessed on February 4, 2011, http://www.maldivesem-

India does not want to isolate the Myanmar junta and let that be an excuse for continuance of anti-India activities in Myanmar. Therefore, in order to balance

the Chinese presence, India recently hosted Senior General Than Shwe

despite serious criticism from home and abroad.


there have been a number of important bilateral visits since 2001, when Premier Zhu Rongji visited Male. Around the time of that visit, there was news of China getting rights to develop and operate a submarine base

on one of the Maldivian Islands, Marao. This deal was to be for 25 years. This project was subsequently reported to have been delayed but has not been shelved yet.

China and the Maldives continue to insist that their joint hydrographical surveys are for environmental purposes only.45 These surveys could very well be for seabed exploration for future port development in the area. In general, India might have fewer reasons to worry about China’s interest in the Maldives. India-Maldives relations have grown since Indian forces helped in ending a coup there in 1988.46

concluSIon

Two points emerge from China’s present-day engagement with South Asia that may point to a broader strategy. First, the Chinese perspective of South Asia

bassy.cn/Maldives&china.asp.45 Sudha Mahalingam, “Maldives: Tiny Islands, Big Intrigue”, Asia Times, April 7, 2006, accessed on February 3, 2011, http://www.atimes.com/atimes/South_Asia/HD07Df01.html.46 Ibid.

is now fundamentally different from the Mao era. Second, infrastructure is the centerpiece of this new strategy. China’s interests in South Asia appear to be purely strategic. As Kaplan argues, “Instead of hardened military bases of the Cold War and earlier eras, there will be dual-use civilian-military facilities where basing arrangements will be implicit rather than explicit, and completely dependent on the health of the bilateral relationship in question”.47

Despite repeated assurances under the dictum of a “harmonious world”, China has taken a more aggressive stance toward its neighbors in order to pursue its core interests.48 There are questions concerning China’s commitment to peace that remain unanswered. In fact, from New Delhi’s perspective, rhetorical statements of a win-win strategy begin to appear like mere lip-service.

New Delhi has come to view China’s recent engagement in South Asia as a strategy of encirclement to confine India within the limits of South Asia. The strongest evidence of this is China’s challenge to Indian sovereignty over Kashmir and its conduct vis-à-vis the claimed states of Arunachal Pradesh. It seems that China’s South Asia policy is partially aimed at gaining a stranglehold over India’s strategic maneuverability. Economic engagement from the point of view of Beijing becomes strategic displacement from the point of view of New Delhi. Management of this regional game will depend in all likelihood on how Beijing and New Delhi manage the strategic perception gap in future.

47 Srinath Raghavan, “Indian Ocean Currents”, The Indian Express, January 29, 2010, accessed on February 3, 2011, http://www.indianexpress.com/news/indian-ocean-currents/743352/0. 48 “Hu Makes 4-point Proposal for Building Harmonious World”, Xinhua, September 16, 2005, accessed on January 16, 2010, http://www.china.org.cn/english/features/UN/142408.htm.

New Delhi has come to view China’s recent engagement in South Asia as a

strategy of encirclement to confine India within the limits of South Asia.

41 HARVARD ASIA QUARTERLY | Policymaking in “China’s Rise”

Given the rapid expansion of Chinese economic and military power, many analysts predict the existence of a new bipolar world with the United States and China as reigning superpowers. While the timing of China’s ascension to superpower status might be in question, it is clear that China is integral to post-Cold War international politics. Thus the question that many scholars grapple with is what does China’s rise mean for international politics? The answer to this question would shed much light on the debate over how the world should interact with an ascendant China; however, the key to understanding this question relies on how policy is made in China—who is involved, does public opinion matter, and what factors most influence policy decisions?

Great divergence exists in our understanding of the policy process in China due to the opaque nature

of policy making in this authoritarian, single-party system. In the past, many scholars contended that policy decisions are primarily made in an insular fashion by a small group of Communist Party (CCP) elites in response to domestic factors like perceived regime instability, nationalism, and economic growth.1 While I agree with this analysis, the policy-making process in China has been changing rapidly over the last decade, with new individuals and groups participating in the process and international factors playing a larger role than in the past. Bonnie Glaser and Evan Medeiros find that even the 1David Lampton, The Making of Chinese Foreign and Security Policy, Stanford, CA: Stanford University Press, 2002; Lu Ning, The Dynamics of Foreign Policy Decision-Making in China, Boulder, CO: Westview Press, 1997; Susan Shirk, Fragile Su-perpower, Oxford: Oxford University Press, 2008.

EVOLUTION Of THE POLICY PROCESS IN CHINA: ThE IMPACT OF ThE COlOR REVOluTIONS AND GlOBAl ECONOMIC CRISIS ON CIVIl SOCIETY PARTICIPATION IN PuBlIC POlICY

jessiCa C. teets · MIDDLEBURY COLLEGE

Policymaking in “China’s Rise” | HARVARD ASIA QUARTERLY 42

Jessica C. Teets is an Assistant Professor of Political Science at Middlebury College.

foreign policy-making process has changed to include new ideas from outside of the formal bureaucracy such as those from think-tank analysts and university scholars, and that these new ideas have substantially changed “peaceful rise” policies to a “peaceful development” ones.2 Regarding domestic policy, I argue that civil society groups increasingly participate in the policy process in a similar role to that which Glaser and Medeiros find think tanks and universities playing in foreign policy. The process of neoliberal reform in China throughout the 1990s created legitimate space for private individuals and groups to participate in some aspects of government policy making, and this participation expanded the policy sphere to include new voices from society, which increasingly introduced public opinion into the policy process. While China is still an authoritarian state, the policy sphere has slowly liberalized to allow for more participation in the process of creating both domestic and foreign policy.

In addition to the expansion of the policy process to include civil society groups such as private business associations, non-profit organizations, and even international non-governmental organizations (INGOs), international factors play an increasingly important role in domestic policy decisions. In this article I analyze this changing policy environment by examining growing civil society participation in the policy process and the impact that international factors like the color revolutions in the former Soviet Republics and the global economic crisis have had on the more inclusive policy process in China. I find that these two international events reinforced the ideas of a faction called the New Left and influenced changing civil society regulations on the ease of group registration and foreign funding.

A policy process that is more open to both societal participation and international influence has important implications for understanding how China’s rising prominence might impact the current international system. First, a more inclusive process allows public opinion, not just elite preferences, to be reflected in public policies. Depending on the dominant public opinion, hyper-nationalism or cosmopolitanism, policy decisions might become more aggressive or more liberal toward the international community. Second, growing international influence might help transfer international norms about democracy or provoke a backlash to perceived foreign meddling in domestic affairs. While impossible to predict the outcomes of this new policy process, understanding how policy is made

2 Bonnie Glaser and Evan Medeiros, “The Changing Ecology of Foreign Policy-Making in China: The Ascension and Demise of the Theory of ‘Peaceful Rise’,” The China Quarterly, 2007.

in China helps other states respond to a rising China in a constructive way.

cIvIl SocIety developMent In chIna: IncreaSIng partIcIpatIon In the polIcy proceSS

Beginning in 1979 with the advent of economic reform, many party leaders believed that this process of economic reform required restructuring state institutions designed to produce market goods to those designed to regulate a combination of state-owned and private firms producing market goods. These reforms consisted of developing regulatory institutions and policies, building a professional and technocratic civil servant corps, decentralizing fiscal and public welfare functions to local governments, and expanding the private sector composed of both firms and civil-society organizations. The central government initiated the “small state-big society” reforms in the late 1980s (xiao zhengfu, da shehui), which envisioned a substantial downsizing of the party-state apparatus accompanied by the rise of associational activity to replace the role formerly played by state institutions.3 As the government withdrew from society as a producer, it focused on a smaller number of functions, such as the provision of public goods, infrastructure development, security, and regulating both market and society, which created more space for civil society organizations, ranging from neighborhood committees to industrial associations and professional organizations.4

This institutional streamlining included the decentralization of fiscal and welfare functions to local governments as a way to place former central-state responsibilities with either local government or the private sector.5 Beginning in the 1980s, the central state increasingly decentralized fiscal policy to local government under the slogan of “cooking in separate kitchens” (fenzao chifan). As the central government continued to decentralize fiscal responsibility for public-goods provision to local government, it generated a resource gap between funding and responsibilities—“unfunded mandates.” By the early 1990s, the central government transferred primary responsibility for the provision of public goods to local governments, such as

3 Richard Baum, “The Limits of Consultative Leninism,” Woodrow Wilson International Center Asia Program 131, (June 2006): 13-20.4 Shenjing He and Fulong Wu, “Property-Led Redevelopment in Post-Reform China: A Case Study of Xintiandi Redevelopment Project,” Journal of Urban Affairs, 2005.5 Yingyi Qian and Barry Weingast, “China’s Transition to Mar-kets: Market-Preserving Federalism, Chinese Style,” Journal of Economic Policy Reform, 1996.


education, health care, infrastructure, and social security programs like unemployment insurance. Consequently, the Chinese fiscal system is highly decentralized with the central government accounting for only 30 percent of total budgetary expenditures, and the remaining 70 percent distributed among four sub-national levels.6 In comparison, sub-national governments account on average for only 14 percent of total budgetary expenditures in developing countries, and 32 percent in developed countries.7 Despite the transfer of responsibility, local governments do not possess much fiscal autonomy to meet these unfunded mandates.8 The central government restricts the ability to tax local populations and to secure bonds or loans; and since 2006, the central government prohibited the collection of agricultural taxes, which significantly decreases local state revenue in rural provinces. According to China’s fiscal budget law, local governments cannot issue debt and should not run fiscal deficits; however, in reality, with the demands on local governments increasing while fiscal transfers from the central government remain low, most provinces operate a budget deficit or borrow using special financial vehicles to fund social programs.9 Funds raised by illicit local government borrowing or taxation enter the budget as extra-budgetary revenue, which is especially prone to corruption or mismanagement.10

The pressure created by these unfunded mandates is intensified by the cadre evaluation system which requires that local officials consistently attain

6 Albert Park, Scott Rozelle, Christine Wong and Changqing Ren, “Distributional Consequences of Reforming Local Public Finance in China,” The China Quarterly 147 (1996): 751-778.7 Ibid. 8 Christine P. W. Wong, “Central–Local Relations in an Era of Fiscal Decline: The Paradox of Fiscal Decentralization in Post-Mao China,” The China Quarterly 128 (1991): 691-715; Hongbin Cai and Daniel Treisman, “State Corroding Federal-ism,” Journal of Public Economics, October 2002.9 Christine Wong, “Budget Reform in China,” OECD Journal on Budgeting (2007): 33-56.10 David D. Li, “Large Domestic Non-Intermediated Investments and Government Liabilities–Challenges Facing China’s Finan-cial Sector Reform,” World Bank Working Paper, 2006.

performance goals in order to gain raises or promotions. In the 1980s, the central government began a series of civil service reforms to replace the loyalty-based cadre system with one based on performance—the Target Management Responsibility System (gangwei mubiao guanli zerenzhi). Although there is debate over which performance criteria actually result in promotion, the two most important goals are economic development and social order.11 Leading cadres ranked as ‘excellent’ under the Responsibility System receive bonuses, pay raises, medals, honorary titles, and merit records.12 While promotion is not officially considered a reward under this system, officials who receive ‘excellent’ evaluations for two or more years in a row are normally promoted: “In short, today almost all Chinese local officials have been structured into a highly personalized, individualized incentive scheme.”13 The gap between responsibilities and funding represents one mechanism motivating local government to view an emerging civil society as potential partners in bridging the resource gap to meet development promotion goals.14

Civil society organizations help local officials meet promotion goals by running pilot programs to deliver public goods, generating research and policies for the use of local officials, and acquiring international funding and resources to use for government projects. In fact, many local officials mentioned this as a reason to partner with civil society groups; not only do groups offer international best practices in poverty alleviation, community participation, and environmental conservation, they also offer financial and technical resources to help implement these ideas.15 Both the 11 Susan Whiting, Power and Wealth in Rural China: The Politi-cal Economy of Institutional Change, Cambridge: Cambridge University Press, 2001; Pierre Landry, “The Political Manage-ment of Mayors in Post-Deng China,” The Copenhagen Journal of Asian Studies 17, 2003.12 Maria Edin, “State Capacity and Local Agent Control in China: CCP Cadre Management from a Township Perspective,” The China Quarterly 173, 2003.13 Han Tian, ed., Lingdao ganbu kaocha kaohe shiyong quanshu (Practical Comprehensive Handbook of Reviewing and Evaluat-ing Leading Cadres), Beijing: China Personnel Press, 1999: 131, as cited in Shu-Yun Ma and Wai-Yin Chan, “The Provision of Public Goods by a Local Entrepreneurial State: The Case of Preservation of the Nanyue Relics in China,” The Journal of Development Studies, November 2002.14 Kiril Tochkov, “Interregional Transfers and the Smoothing of Provincial Expenditure in China,” China Economic Review 18, 2007: 54-65; Dali Yang, “Rationalizing the Chinese State: The Political Economy of Government Reform.” In Remaking the Chinese State: Strategies, Society, and Security, edited by Chao Chien-min and Bruce J. Dickson, London: Routledge, 2001.15 Author interview with local official, Chengdu, Sichuan, 10 July 2008. Note: interviews conducted in China follow the common practice of protecting the identity of individuals by listing titles, locations, and dates of interview but not names. If the group or individual has made public statements or indicated

The gap between responsibilities and funding represents one mechanism

motivating local government to view an emerging civil society as potential

partners in bridging the resource gap to meet development promotion goals.


central and provincial governments create “innovation awards” to encourage policy innovation at lower levels that can then be tested and disseminated by provincial leaders.16 Recognition of social innovation by superiors helps secure promotion to the next level of government, as illustrated by the famous example of Zhao Ziyang pioneering the use of the Household Responsibility System for privatizing farmland before being promoted to Premier in 1980 and General Secretary of the Communist Party in 1987.17 However, as the example of Zhao Ziyang who endured house arrest for 15 years after the 1989 Tiananmen protests also illustrates, the idea of civil society groups assisting local government in solving development issues must be balanced with social stability concerns. The Target Management Responsibility System prioritizes both economic development and social order, and the paramount goal of the party leadership is preventing unrest that might threaten economic development and its political hegemony.18 Thus, while this analysis does not question the still powerful status of both central and local state in China, I find that the “limited government” and “small state-big society” reforms created the space for civil society expansion throughout the 1990s.

Civil society organizations not based on temples or lineages are fairly new in China.19 Beginning in the mid 1980s and accelerating in the early 1990s, an associational revolution has been occurring in China, with the number of civil society groups and participation rates in these groups increasing dramatically. The Ministry of Civil Affairs reports that registered groups have increased from less than 5,000 in 1988 to over 400,000 in 2009, with informal or unregistered groups greatly exceeding this number. The number and scope of Chinese civil society groups (gongminshehui or shiminshehui) have dramatically increased since the mid-1990s, consisting of

a willingness to be quoted, I have used the actual name of the individual or group.16 For example, the Innovations and Excellence in Chinese Local Governance Program: Keping Yu, Innovations and Excellence in Local Chinese Governance, Beijing: Social Science Literature Press, 2002.17 David Zweig, Freeing China’s Farmers: Rural Restructuring in the Reform Era, Armonk, NY: M.E. Sharpe, 1997.18 Thomas Heberer and Gunter Schubert, “Political Reform and Regime Legitimacy in Contemporary China,” Asien 99 (April 2006): 9-28.19 William Rowe, “The Problem of ‘Civil Society’ in Late Impe-rial China,” Modern China 19 (April 1993): 139-157.

social organizations, business and industry associations, charities, foundations, and non-profits that formed to deliver services and advocate for vulnerable populations in society. In addition to the growth in the number of domestic groups, Chinese branches of international non-governmental organizations (INGOs) proliferated during this time period. For example, The Nature Conservancy alone opened three offices in Western China and Beijing, and helped write the initial policy banning thin plastic bags, adopted nationally in 2008.

The Ministry of Civil Affairs regulates all civil society groups through a three-step process known as the “dual management system” (shuangchong guanli tizhi): groups register with the local Civil Affairs bureau, secure a government agency as a sponsor (colloquially called a mother-in-law), and undergo an annual review.20 This system is so expensive and difficult for most groups to navigate that many simply register as a for-

profit organization and pay taxes, or operate informally without any legal status resulting in great variation in the legal status of these associations. Although registration is difficult, lack of legal status does not completely inhibit group formation and activity. In fact, Jude Howell finds that groups appearing to have political goals will be repressed, but if appearing beneficial local officials will cast a blind eye towards registration.21

Without securing legal status as a non-profit and being added to a list of “charities and foundations” which allows them to raise funds domestically, many groups depend on membership dues and local government grants or international sources of funding. While membership dues increasingly constitute a larger portion of overall group funding, small memberships mean that this source alone cannot support most groups.22 Mass organizations (and other government-sponsored groups) are most likely to secure funding from the government, although grass-roots groups sometimes

20 Supervisory agencies are often called “mother-in-laws” to de-note their perceived role of monitoring and controlling groups. This is an important but tricky relationship to navigate, with asymmetric power and information.21 Jude Howell, “New Directions in Civil Society: Organizing around Marginalized Interests” In Governance in China, edited by Jude Howell (Lanham MD: Rowman & Littlefield Publish-ers, Inc., 2004): 151.22 Xiong Wei and Qin Meng, “An Analysis of Chinese NGO’s Weak Capacity and Solution to this Predicament”, Chinese Thought Network, June 17, 2008.

Beginning in the mid 1980s and accelerating in the early 1990s, an associational revolution has

been occurring in China, with the number of civil society groups

and participation rates in these groups increasing dramatically.


secure limited funding from their supervising units.23 Many groups illegally fundraise inside of China, but only raise small amounts of money due to the need for low exposure of the fundraising events or activities.24 Most large groups rely almost exclusively on foreign funding from organizations like the Ford Foundation and World Bank.

In addition to legal challenges with registration and funding, many scholars question the autonomy of these groups from the state.25 For example, X.L. Ding contends that civil society groups are parasitic on the state, meaning they formally are attached to official institutions (guakao danwei) and have overlapping responsibilities and staff with formal government institutions.26 Since the mid-1990s, groups in Chinese civil society have developed varying relationships with the state, ranging from complete autonomy matching an ideal Western grass-roots model to complete cooption matching a state corporatism model. As a prominent civil society scholar argues,

Due to funding sources and relationship with the government, two models of NGOs exist: one from above to below and one from below to above. The first one usually serves as a branch of the government, sharing its functions, people and funding. However, recently these groups have had conflict between serving as the government’s assistant and the interests of the social groups they serve. The other type of NGO has more autonomy, but less money and less access points (mostly informal) to government.27

23 Author interview with member of indigenous knowledge NPO, Lijiang, Yunnan, April 5, 2007.24 Author interview with foreign volunteer for health-related NPO, Kunming, Yunnan, June 6, 2007.25 Timothy Brook and B. Michael Frolic, “The Ambiguous Challenge of Civil Society.” In Civil Society in China, edited by Timothy Brook and B. Michael Frolic (New York: ME Sharpe, 1997); Heath Chamberlain, “On the Search for Civil Society in China,” Modern China 19 (April 1993): 199-215; Gordon White, Jude Howell, and Xiaoyuan Shang, In Search of Civil Society, Oxford: Clarendon Press, 1996.26 X. L. Ding, “Institutional Amphibiousness and the Transi-tion from Communism: The Case of China,” British Journal of Political Science 24 (July 1994): 293-318.27王名(Wang Ming), “China’s NGO and Civil Society Devel-opment,” Caijing (Finance and Economy Magazine), 2002: 350-352.

In short, the civil society sector is rapidly evolving, with a great deal of diversity in group types, activities, funding sources, and registration status.

Despite the diversity of this sector, a common trend emerges which is the increasing participation

by these groups in the policy process. In fact, many scholars have found that civil society groups participate in both service delivery and policy advocacy, even if only informally as part of the service-delivery role, in policy areas as diverse as education, health care, environment, poverty alleviation, business regulation and international trade.28 The environment has emerged as a policy area with the most civil society participation, with groups such as Friends of Nature and the Natural Resources Defense

Council (NRDC) assisting the government by drafting regulations, exposing cases of environmental degradation, and conducting assessments to measure policy effectiveness.29 For example, after the Chinese government adopted disclosure regulations which for the first time required that local governments make pollution information publicly available in 2008, the Institute of Public & Environmental Affairs (IPE) and the NRDC developed a Pollution Information Transparency Index (PITI) to carry out an assessment of the first year of implementation. In response to this NRDC assessment, many local governments, like the city of Hefei in Anhui Province, were forced to publish lists of pollution violators to comply with this new regulation.30 Jonathan Schwarz and Shawn Shieh contend that group participation in the policy process is even more influential during times of crisis, such as SARS, the 2008 Sichuan earthquake, and the AIDS epidemic in some

28 Jonathan Schwartz and Shawn Shieh, State and Society Re-sponses to Social Welfare Needs in China: Serving the People, Routledge, 2009; Andrew Mertha, China’s Water Warriors, Ithaca NY: Cornell University Press, 2008; Scott Kennedy, The Business of Lobbying in China, Cambridge MA: Harvard University Press, 2008; Jessica Teets, “Civil Society Participa-tion in Local Governance: Outsourcing Migrant Education in Shanghai.” In China’s Search for Good Governance, edited by Sujian Guo (Palgrave Macmillan. Forthcoming December 2011).29 Peter Ho, “Greening Without Conflict? Environmentalism, NGOs and Civil Society in China,” Development and Change 23 (November 2001): 893–921. 30 See Cutting Through the Fog with China’s First Pollution Information Transparency Index (PITI) at http://www.nrdc.org/international/piti/files/chinapiti.pdf.

Many scholars viewed this growing civil society activity

as an encouraging sign that the Chinese government is “less likely than in the past to consider civil society a threat and more likely to see it as a useful partner for

the sociopolitical transition that seems inevitable.


provinces.31

Many scholars viewed this growing civil society activity as an encouraging sign that the Chinese government is “less likely than in the past to consider civil society a threat and more likely to see it as a useful partner for the sociopolitical transition that seems inevitable.”32 However, the debate within central government centers on how to balance the need for strengthening civil society with the need for political stability which groups might challenge. These competing interests are evidenced by fluctuations in government policies toward civil society, especially throughout the 2000s in response to international events like the color revolutions and global economic crisis.

challengIng SMall State-BIg SocIety: the rISe oF the new leFt

The institutional changes and ideas about the role of the state that dominated policy discourse in the 1990s are not uncontested.33 In the mid-1990s, the “New Left (xin zuopai)” emerged as a reaction against the neoliberal policies blamed for many of the negative externalities of rapid growth.34 Leading New 31 Jonathan Schwartz and Shawn Shieh, eds., State and Society Responses to Social Welfare Needs in China: Serving the People, London: Routledge, 2009.32 Julia Greenwood Bentley, “Survival Strategies for Civil Society Organizations in China,” The International Journal of Not-for-Profit Law 6, January 2004.33 Yang Cao and Victor Nee, “Controversies and Evidence in the Market Transition Debate,” American Journal of Sociology 105 (January 2000): 1175–89. 34 Pankaj Mishra, “China’s New Leftist,” The New York Times

Left thinkers, such as Wang Hui, the former editor of the influential magazine Dushu (Reading), argued for a return to socialist principles in the form of greater social welfare provision, particularly for those groups left behind by rapid modernization – namely workers and peasants.35 New Left advocates believe the role of the state should be an expansive one, with the state mitigating undesirable market consequences such as income inequality; while regulatory-state advocates believe the state should pursue a limited role of simply refereeing or regulating the market and allow social actors to undertake collective and individual action.36

During this decade, the New Left has seen its intellectual influence, and more recently its political influence, consistently rise. It has gone from a fringe intellectual group with little political clout, to an elite movement that increasingly informs state policy. In terms of economic policy, the New Left supports continued state ownership and greater developmental-state intervention in directing the market. However, unlike the old left of hardliner socialists, there is no question that the market is the fundamental driver of economic growth. The increasing policy influence of the New Left is optimized by the current government’s overarching policy framework of building a “harmonious society” (hexie shehui), first introduced in 2005.37 This

Magazine, 15 October 2006.35 Joseph Fewsmith, “China Under Hu Jintao,” China Leader-ship Monitor 14 (Spring 2005): 3.36 See Fewsmith on elite conflicts over market reforms: Joseph Fewsmith, Elite Politics in Contemporary China, Armonk NY: M.E. Sharpe, 2001.37 Leslie Hook, “The Rise of China’s New Left,” Far Eastern Economic Review, April 2007.


slogan essentially refers to a package of populist policies that seek to address the concerns of those “disadvantaged groups” (ruoshi qunti) that were left behind by the regulatory state policies of rapid development and the dismantling of the state-owned enterprise sector and the social welfare state. Such policies have shifted the balance in favor of greater equity to address the concerns of groups critical of neoliberalism and better manage the societal impact of economic transition. For example, in discussing the 11th five-year plan unveiled in 2005, Mark Leonard argues that it is “a template for the new Chinese model. From the new right, it keeps the idea of permanent experimentation – a gradualist reform process rather than shock therapy. And it accepts that the market will drive economic growth. From the new left, it draws on concern about inequality and the environment and a quest for new institutions that can marry co-operation with competition.”38

The New Left is characterized by an emphasis on state power to redress the problems of injustice and other negative effects of privatization, marketization, and globalization. Regarding civil society, New Left theorists highlight the negative effect of the market on civil society. Following the Marxist tradition, new left theorists believe that the capitalist mode of production is grounded in exploitation, and that a civil society developed under capitalism is simply a vehicle for ensuring the dominance of capitalist interest groups. As Wang Hui points out, the current civil society developed from a state-sponsored system where many members of the “political elite or their families directly participate in economic activity and have become agents for large corporations and industries. Can we call them representatives of civil society?”39 Thus, the New Left advocates the development of state mechanisms for participation, and distrusts current civil society in China as simply representing dominant capitalist interests at the expense of social justice.

IMpact oF the color revolutIonS and gloBal econoMIc crISIS

While policy shifts towards the New Left were already underway before the color revolutions and 38 Mark Leonard, “China’s New Intelligentsia,” Prospect Maga-zine 144, March 2008.39 Wang Hui, “Contemporary Chinese Thought and the Question of Modernity.” In Whither China? Intellectual Politics in Con-temporary China, edited by Xudong Zhang (Durham NC: Duke University Press, 2001): 185.

global economic crisis, these international events clearly accelerated this trend. The color revolution model from the former Soviet Republics provides examples of foreign-funded civil society mobilizing protests and helping overthrow the government. The color revolution model was developed from the Bulldozer Revolution in Serbia in 2000, where the United States spent $41 million on a democracy-building campaign in the months prior to presidential election, including US-funded consultants running tracking polls, training thousands of opposition activists, and helping to organize a parallel vote count.40 The Serbian model is characterized by collaboration between international democracy promoters and domestic opposition groups to overthrow the existing regime, and was transmitted by Serbian activists and democracy-promotion groups to other post-Soviet republics such as Georgia for a Rose

Revolution in 2003, Ukraine for an Orange Revolution in 2004, and Kyrgyzstan for a Tulip Revolution in 2005. Chinese analysts note that the color revolution model contains efforts to infiltrate both from outside and within the designated state, using foreign aid, special Western democracy-promotion programs, Western media, the instigation of what the Chinese referred to as ‘street politics’ (jiedao zhengzhi ), and

youth mobilization.41 In China, civil-society groups were identified as a chief transmission mechanism: “NGOs are an instrument that the Western states like to use. They are a “Trojan horse” planted by the Western intelligence agencies.”42

In response to the color revolutions, in 2005, President Hu Jintao was reported to have issued a report at an internal Party conference that called for ‘vigilance’ against US efforts to launch a color revolution in China, and directed researchers to examine the circumstances surrounding the color revolutions.43 The lesson of this model for a government desiring to retain power is repression or revolution, which establishes a confrontational relationship between state and society. In

40 Michael Dobbs, “U.S. Advice Guided Milosevic Opposition: Political Consultants Helped Yugoslav Opposition Topple Au-thoritarian Leader,” Washington Post, December 11, 2000.41 Jeanne L. Wilson, “Colour Revolutions: The View from Mos-cow and Beijing,” Journal of Communist Studies and Transition Politics 25 (June 2009): 369-395.42 Pan Rulong and Dai Zhengqin, “’Yanse Gemin’ yu Guoji Fei Zhengfu Zuzhi [Color Revolutions and NGOs],” Dianzi Keji Taxue Xuebao Shekeban 7 (2005): 78. 43 Frank Ching, “No Changing Colors in China,” The Japan Times, November 2, 2005.

The color revolution model from the former Soviet Republics

provides examples of foreign-funded civil society mobilizing

protests and helping overthrow the government.


the wake of the tulip revolution in Kyrgyzstan in March 2005, Chinese authorities ordered a comprehensive review of all registered civil society groups receiving foreign funding. While the color revolutions sparked fears about foreign funding of civil society as a path to democratic revolution among Chinese cadres, both the color revolutions and the global economic crisis reified New Left ideas about the superiority of state guidance of market and society.

Additionally, the perceived failure of US-style capitalism has greatly undermined neoliberals in China who would like to see a more complete dismantling of the state-owned sector. On November 10, 2008, China announced a historic $586 billion stimulus package to encourage growth and domestic consumption ranging from infrastructure investment to environmental protection. When the State Council representative announced the stimulus package, he said, “As long as we take the right measures in a resolute and timely way to grasp the chance and rise to the challenges, we will surely secure steady and relative fast economic growth.” As predicted, this stimulus was largely successful; and while the US economy suffered from decreased production and high unemployment, the Chinese economy quickly rebounded and by the first quarter of 2010 posted 11.9 percent growth rate—5.7 percent higher than the first quarter of 2009 during the crisis and higher than its average quarterly GDP growth of 9.31 percent from 1989 until 2010.

According to elite politics experts Bo Zhiyue and Chen Gang, the crisis opens up avenues for the New Left to promote a “state capacity” view of economic policy, where heavy state regulation and involvement in the economy are necessary to manage development.44 The critical juncture represented by the global economic crisis may play a role similar to the one played by the Great Depression in the United States, where the failure of free market ideology created the political conditions for New Deal policies. The rising influence of the New Left illustrated in the Harmonious Society policies and 2008 stimulus represent in part the influence of these international events on the policy environment in China.45

IMplIcatIonS For the polIcy proceSS: SuStaIned lIBeralIzatIon or reverSal?

The color revolution model and successful weathering of the global economic crisis generated increasing confidence in New Left ideas that imagined

44 Zhiyue Bo and Gang Chen, “Global Financial Crisis and the Voice of the New Left in China,” East Asian Institute Back-ground Brief 443, 26 March 2009.45 He Li, “Debating China’s Economic Reform: New Leftists vs. Liberals,” Journal of Chinese Political Science 15, (2010): 1–23.

a larger, more active state role than under the regulatory-state idea dominant in the 1990s, which was delegitimized by the decline in the US economy during the economic crisis. In response, the CCP has changed the regulations governing civil society to restrict foreign funding and increase registration.46 This first regulation, Notice of the State Administration of Foreign Exchange (SAFE), attempts to control and decrease foreign funding for groups by adding more bureaucratic approvals to the transfer of funds. This regulation seeks to avoid the supposed catalyst of the color revolutions—foreign democracy promotion via domestic groups—while simultaneously providing government funds for these groups through local government grant competitions.

The second regulation, currently only operating in Yunnan Province, establishes a documentation system for INGOs to better track group activities and interactions. However, this new policy is paired with the easing of the registration process in several provinces like Beijing, Shenzhen, and Shanghai. These regulatory changes attempt to control group activity in some ways, like making foreign funding more onerous and requiring registration, but do not attempt to restrict this participation in the policy process, as seen by increasing other sources of funding and easing registration.

Returning to the questions posed at the beginning of this article about how policy is made in China—who is involved, does public opinion matter, and what factors most influence policy decisions—I find that the policy process is still open to civil society participation and that international events increasingly influence domestic policies, in ways that both encourage and undermine this participation by civil society in the policy process. While impossible to predict the outcomes, this new policy process in China increasingly functions in a more open way with influence from both society in the form of civil society participation and the international community through events like the color revolutions and global economic crisis. In fact, recent protests across the Middle East and North Africa have triggered a response similar to the color revolutions in China, with increased scrutiny of civil society activities and funding sources. However, civil society groups are still functioning and participating in this more liberalized policy sphere. As China’s international prominence grows, understanding this new policy process is increasingly important for comprehending and responding to Chinese policy choices.

46 Karla W. Simon, “Recent Developments in Chinese Law Af-fecting CSOs/NGOs.” In Reinvigorating Civil Society in China: A Socio-Legal Analysis (Oxford: Oxford University Press, forthcoming 2011).


Translation by Iacob Koch-Weser

The Cheonan Incident and Yin Ping Island Shelling Incident in 2010 pushed the Korean Peninsula to the brink of war. At the decisive moment, North Korea retreated and evaded conflict, thus restoring some sense of calm. At the beginning of this year, North Korea actively worked toward peace negotiations with South Korea by proposing an “unconditional” revival of dialogue. But in February, the bilateral military discussions fizzled out – it without ever having really begun. This illustrates that South Korea has adopted a tactic of vigilance and avoidance in peace negotiations with its neighbor. This foreshadows a status quo of “cold peace” for many years to come – the two Koreas will neither adopt aggressive defense measures, nor make

any grand gestures to ease tensions. Beneath this façade of “tranquility”, however, North Korea will actively and progressively upgrade its nuclear and missile arsenal. This will draw the Peninsula and even Northeast Asia into a still greater crisis. Below, I discuss four important aspects of the situation on the Korean Peninsula.

1. aMId StaleMate, relatIonS BecoMe More Balanced

The many casualties claimed by the two Incidents last year, coupled with the ongoing arms race and North Korea’s threat of “fighting total war, fighting nuclear war”, has imbued South Korean society with a deep sense of failure in its policy toward North Korea. It

THE CURRENT STATUS Of THEKOREAN PENINSULA: A ChINESE PERSPECTIVE

ZhanG lianGui · CENTRAL PARTY SCHOOL Of THE COMMUNIST PARTY Of CHINA

C O M M E N TA RY


Zhang Liangui is a Professor of International Politics at the Center for International Strategy at the Central Party School of the Communist Party of China.

has rejected the “sunshine policy”, arguing that the US$7 billion in aid provided to North Korea over the past ten years have not only failed to improve relations, but on the contrary have made the South more vulnerable to the North’s military threat. This has already become mainstream opinion in South Korea. As a result, the “sunshine policy” has lost popular backing. There is widespread support for the policy stance of the Lee Myung-bak administration, which makes aid provision, closer bilateral ties, and promotion of economic cooperation contingent upon denuclearization by North Korea. In view of this, bilateral relations are likely to remain at a stalemate for some time to come. Looking back at the past ten years of the “sunshine policy”, South Korea certainly had the upper hand in terms of comprehensive national power. But because South Korea is afraid to lose the war with North Korea, and even more afraid to win it, it has very ambivalent strategic aims and limited policy choices. North Korea, on the other hand, has clear and resolute strategic aims, as well as flexible and shifting tactics. As a result, it has had a firm grip on steering bilateral relations. Tension or detente, conflict or dialogue - North Korea has called the shots in accordance with its own needs. Even when dialogues have taken place, the time, place, and subject of the meetings, as well as their success or failure, have largely been premised on the notion that North Korea has the final say. However, after the Lee Myung-bak administration assumed office, and especially after the two Incidents last year, South Korea has hardened its stance. In military affairs, it adopted a posture of total opposition and showed no hesitation to go to war; in bilateral dialogue, it insisted on naming the conditions, showing no fear of a renewed breakdown of talks. After North Korea proposed the 3rd North-South Summit, President Lee was adamant that “we need real results, and we will not hold a summit just to hold a summit”. He further insisted that, since the last two South Korean presidents had made the journey to Pyongyang, the next summit should be held in South Korea. Evidently, South Korea is fighting for equality and balance in bilateral ties, and this is beginning to bear fruit. Going forward, this will have an important impact on the situation in the Peninsula.

2. In SpIte oF the “BrInk oF war polIcy”, the two koreaS MaIntaIn “cold peace”

In the Korean Peninsula conflict, North Korea has consistently adopted a policy of “meeting toughness with toughness”. It frequently uses threats like “fighting total war, fighting nuclear war” and “turning Seoul

into a sea of flames” as a way of exploiting the fear of war prevalent in South Korean society. Its aim is to coerce the South Korean government into retreat. Past experience shows that South Korean accommodation has achieved the opposite of its intended effect, incentivizing North Korea to resort to aggressive behavior even more frequently. The situation last year forced South Korea to adopt a “brink of war policy” toward the North in order to “meet toughness with toughness”. The government revised its principles of military defense from “peaceful status quo” to “enhanced counterattack”; revamped the organizational bodies of the military; converted the former five-island chain from a “base of defense” into a “base of attack”; and greatly increased defense expenditures in order to upgrade its military equipment.

At the same time, it strengthened military cooperation with the United States, thus making the United States an even more decisive factor in ongoing developments on the Peninsula. South Korea and the United States have perpetually engaged in large-scale military exercises to exert pressure on North Korea. These exercises have already grown from a simple “show of force” into a form of military mobilization. Should North Korea indeed declare “military resistance actions”, the joint exercises would immediately switch into attack mode. North Korea is fully aware of this. This is an important reason why it suddenly changed its policy from “inspiring fear” to “avoiding war” twelve years ago. It also explains why it adopted an “active peace negotiation” policy this year. It is certain that, as long as North Korea makes sober and rational judgments about the Peninsula situation, it will blunt its edge and proceed carefully. So in spite of the “brink of war policy” adopted by both sides, they are likely to maintain a “cold peace” amid tense standoff.

3. aS SIx-party talkS Stall, partIcIpantS Should alSo Be prepared For FaIlure

To peacefully resolve the North Korea nuclear conflict, and to maintain peace and stability in the region, China has actively sought to reinitiate the Six-Party Talks. But until now, it has made no progress. Meanwhile, the United States, Japan, and South Korea

Evidently, South Korea is fighting for equality and balance in bilateral ties,

and this is beginning to bear fruit.


have already set out two preconditions for resuming talks: first, the two Koreas must resume bilateral dialogue in order to improve bilateral relations; second, North Korea needs to reaffirm its promise to denuclearize.

Of these two preconditions, the former is merely tactical - it aims to satisfy South Korean demands and to elevate South Korea’s status in the Six-Party Talks. The latter precondition, however, has real substance. When North Korea announced in April 2009 that it would “forever withdraw from the Six-Party Talks”, it also announced that it “would not accept any restriction placed on it by an agreement reached at the Six-Party Talks”. This has given the United States, Japan, and South Korea some reasonable expectation that North Korea can be returned to the path of denuclearization on the basis of results already achieved at the Six-Party Talks. North Korea has stated that it has “already made preparations to return to the Six-Party Talks”, but thinks the “Six-Party Talks are incredibly harmful and completely unbeneficial”. Although this statement was issued by a North Korea foreign affairs spokesperson at the first Six-Party Talks in August 2003, it remains current.

North Korea’s position is that, if the Six-Party Talks were to be resumed, the general purpose, the items to be discussed, and the form of talks would all have to change. The Talks should, first of all, be a debate on a bilateral peace treaty with the United States, rather than on North Korean denuclearization. And even if the nuclear issue were discussed, North Korea should be treated as a “great nuclear power” that is negotiating with the United States, Russia, China, and other nuclear states “on equal terms” about nuclear disarmament and a “nuclear-free world”, rather than discussing only the North Korean nuclear issue.

Regarding the form of the meeting, North Korea thinks that its bilateral talks with the United States should be held alongside the Six-Party Talks. The intention is to deliberate on important issues bilaterally first before submitting them to the other parties for enactment. Of course, the other parties find it difficult to accept this position. Therefore, it has been a very arduous process to reinitiate the Six-Party Talks; even if the six parties were again able to sit down together, the talks would be acrimonious from start to finish. This makes it extremely difficult to stick to the purpose and task of prompting denuclearization and keeping the Peninsula nuclear-free.

4. aS north korea contInueS arMS developMent, eaSt aSIa enterS a deeper crISIS

North Korea conducted nuclear tests in 2006 and 2009, in complete disregard of the widespread opposition among countries from around the world. In September 2009, soon after the second test, it sent a letter to the UN Security Council publicly acknowledging that it had been engaged in nuclear enrichment for several years. This illustrates that North Korea’s nuclear program has already progressed from the plutonium to the enrichment stage. Last November, North Korea showed its nuclear enrichment infrastructure to a US

scientist. It thus sought to exert pressure on the United States and international society, and to force official recognition of North Korea’s status as a nuclear state. Last May, it announced that its nuclear fusion program had achieved breakthroughs, revealing its interest in hydrogen bombs. R e c e n t l y , the international media released a report claiming that North Korea had just finished construction of an even larger-scale missile launch base in the vicinity of the Sino-Korean border. The report further

stated that North Korea was preparing to engage in a new round of nuclear tests. If these reports are true, it illustrates that North Korea is actively and progressively upgrading its nuclear arsenal. It would also lend credence to North Korea’s earlier statement that it “will never denuclearize”. Not long ago, the US Secretary of Defense Robert Gates stated that, five years down the road, North Korea’s nuclear capability would pose a security threat to US territory. The United States is unlikely to sit back and watch North Korea’s nuclear stockpile expand. Japan and Korea will also adopt a series of countermeasures. The situation in the Korean Peninsula and Northeast Asia is facing significant shifts. If this crisis situation should arise, the United States should be held directly accountable. There are several reasons why. First of all, there is a clear difference between the North Korea problem as such and the North Korea nuclear conflict. They differ in terms of their nature, urgency, and broader geopolitical relevance. But for a long time, the United States and other countries made no clear distinction between them. There are two categories of problems that countries face in international relations today. The former concerns conflicts of interest and cooperation between specific countries. In the case of the Korean

North Korea thinks that its bilateral talks with the United

States should be held alongside the Six-Party Talks. The

intention is to deliberate on important issues bilaterally first before submitting them to the

other parties for enactment.


Peninsula, this type would pertain, for instance, to bilateral relations between the two Koreas, Sino-Korean and Japan-Korean relations, as well as domestic political stability and development in North Korea. These problems are certainly very complex and important; but ultimately, they only affect particular sectors of certain countries. These problems must be dealt with calmly and diplomatically, with frequent adjustments, in order to gradually explore the most appropriate distribution of benefits. These are not matters of serious urgency. However, a second category pertains to comprehensive issues that affect the future and destiny of mankind. These issues include not just climate change, environmental degradation, and the like, but also nuclear proliferation. The North Korea nuclear conflict falls into the latter category. It is not just urgent, but to some degree also irreversible. Once you loosen your grip, there may be a point of no return. However, for a long time now, the United States and others have viewed the North Korea conflict as an issue of international relations rather than nuclear proliferation. As a result, they lack the sense of urgency and decisiveness needed to resolve it.

Secondly, because of qualitative misjudgments, the methods chosen by the United States to resolve the conflict have been problematic. For example, from the very outset, the Six-Party Talks have circled around the notion of “purchasing” – an offer of substantial “compensation” in return for North Korea’s denuclearization. As a result, just like the purchases of false currency by a bank will incentivize the production of false currency, the “purchasing” policy has induced North Korea to step up its nuclear program. Moreover, some officials have proposed a “wholesale solution” to the crisis, when this in fact only conflates the nuclear conflict with the North Korea problem. This can only result in a web of problems that will be difficult to disentangle.

Finally, and most importantly, the United States is tending towards an appeasement policy that is detrimental to resolving the conflict. In August 2009, soon after former President Bill Clinton visited North Korea, a scholar in North Korea said in a statement to the Hong Kong press that North Korea would start promoting “Plan C”. This basically makes improvement of relations with the United States and other countries contingent upon recognition of North Korea as an “established nuclear power”. The reason why North Korea adopted

this plan is that Clinton revealed during his visit that the United States planned to tacitly recognize North Korea’s position as a nuclear power.

Last November, Professor Siegfried Hecker, a nuclear scientist at Stanford University who had been invited to visit North Korea, revealed to North Korea that the United States was contemplating a policy of “Three Do Not’s and One Do”. This policy outlines that if Korea no longer produces, develops, and exports nuclear weapons, the United States would no longer consider it to be a security threat. North Korea responded by agreeing to refrain from both “vertical proliferation” and “horizontal proliferation” of nuclear weapons.

The United States is currently the only country in the world that can resolve the North Korea nuclear crisis. Its “new line of thinking” on the crisis has evidently had a detrimental effect on North Korea’s decision to denuclearize, as well as on the policy direction of the other countries involved, including China. These countries are concerned that, while they are maintaining the well-established policy of incentivizing North Korea to denuclearize and maintain a nuclear-free Peninsula, the United States is brokering peace with North Korea without consulting its allies. As a result, in the wake of the Clinton visit to North Korea, some countries have begun to modify their North Korea policy. If the “Three Do Not’s and One Do” policy were incorporated into US government policy, it would represent the utter failure of all efforts that have been made to maintain a nuclear-free Peninsula. Needless to say, a nuclear-free Peninsula is in the fundamental interest of all parties involved, including North Korea itself.

For a long time now, the United States and others have viewed the North Korea

conflict as an issue of international relations rather than nuclear

proliferation. As a result, they lack the sense of urgency and decisiveness

needed to resolve it.

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