WilliamH.OverholtReassessingChina:AwaitingXiJinpingIntheHuJintaoera(20022012) Chinas politics, economics, andnational security policies have changed almost beyond recognition. The ongoingtransformation has been largely obscured by images that dominate manyWestern minds: Manichean democrats see a jasmine revolution waiting tohappen; hedgefundmanagersseeagiganticbubblewaitingtoburst; nationalsecurityexecutives seeChinaas havingperfectedanenduring, dynamicstatecapitalismwithLeninistpoliticalmanagementthatthreatenstooverwhelmus.Thesecontradictoryimages shareonething: lackingroots inChinesereality,theyprojectthehopesandfearsoftheirrespectivebelievers.Twodecadesago,whenwritingThe Rise of China, I couldconfidentlypredict ChinesesuccessbasedonDeng Xiaopings emulationof similar policies inSouthKorea andTaiwan.1After threedecades of that success, Chinas futureis far less certaintoday.ChinasNewPoliticsFrom1978through2002, Chinasleaders(DengXiaoping, HuYaobang, ZhaoZiyang, Zhu Rongji, and Jiang Zemin) were charismatic, entrepreneurial,decisive, andrisk-taking. Theythought bigthoughts, madebigchanges, andtookgreatrisks. Sometimestheylostbig(HuYaobangandZhaoZiyang)andsometimestheywonbig(DengXiaoping,JiangZemin,andZhuRongji),butitwas always big. Beginning in 2003, China shifted from charismatic toinstitutionalized leadership. Todays leaders are administrators, risk-averse,incremental,pragmatic,unemotional,andcolorless.William H. Overholt is Senior Research Fellow at Harvards Kennedy School of Governmentand is the author ofThe Riseof Chinaand Asia,America and the Transformationof Geopolitics,amongotherworks.Copyright # 2012CenterforStrategicandInternationalStudiesTheWashingtonQuarterly35:2pp.121137http://dx.doi.org/10.1080/0163660X.2012.666496THEWASHINGTONQUARTERLYjSPRING2012 121Their predecessors were Chinas cosmo-politans. Deng Xiaoping was the leader who,unlike Mao, had spent formative years abroad, inFrance. JiangZeminandZhuRongji hadtheircore career experiences in Shanghai, Chinas mostcosmopolitan, relativelymarket-orientedcity. Incontrast, HuJintaoandWenJiabao, withcoreexperiences inTibet and Gansu, represent thelocalist reaction against Shanghai-style globa-lization. They speak for the equivalent of Michigans resentment of NewYork-styleglobalization,competition,stress,andinequality.The years prior to 2002 saw central power strengthen. In 1990, Beijing couldnot control the money supply, nor could the prime minister easily fire animportant governor or transfer an important regional commanding general. Thecentral government could not collect taxes effectively. By the end of theJiangZhuperiodatthebeginningof2003, itcoulddoallthesethings. Since2003, however, interestgroupsincludinglargestateenterprises, themilitary,and the provincesas well as netizens and citizen groups willing to stagedemonstrations, have greatly enhanced their influence. Beijings top leadersconstantlyfindthemselvesonthedefensive.Onecauseof risinginterest groupinfluenceis thecurrent leaders needtogather support to get their allies into positions of power for an uncertaintransitionin2012. Previous reform-era presidents and prime ministers weredesignated by Deng Xiaoping, and the succession was clear. Even in 2002, Dengruledfromthegraveashischoicefortopleader,HuJintao,washonored. Thechoices for the decade starting in 2012 are the first in three decades notcontrolledbyDeng, andtheresultinguncertaintyhasincitedstruggle, notforthetopjobbutforcontrolofthePolitburoStandingCommittee, theMilitaryCommittee,theStateCouncil,andtheCentralCommittee.Thisnewleadershipstyleandpowerdistributionalsoreflectsdeepertrends.Deng, Jiang, andZhudrewsupport froma populationtraumatizedby MaosCultural Revolution, fearful of imminent financial collapse, andwoundedbymorethanacenturyof divisionandimpoverishment. Theytriedgreat thingsbecause anything less would entail certain failure and because the sense of crisismustered popular support for tough decisions. Todays leaders governincrementally because they can, and because dissipation of the sense ofnationalurgencyhasdepletedpublicsupportforstressfulchange.The new power of interest groups has led not just to administrativeincrementalismbutalsotofearful curtailmentof botheconomicandpoliticalreform. Political reformwasveryrapidfrom1978through2002, transformingChina from a country ruled by the contradictory personal whims of Mao to oneAfterthreedecadesofsuccess,Chinasfutureisfarlesscertaintoday.WilliamH.OverholtTHEWASHINGTONQUARTERLY jSPRING2012 122ruled through institutions and rules. In theprocess, freedoms blossomed, affectingeverythingfromclothingtohaircuts tojobormarital choices tosocial andpolitical speech.Totalitarianismchanged into authoritarianism.Similarly,themarketprogressedandtheprivateeconomyseemedtobegatheringmomentumtoovertake the state enterprise economy in themannerofTaiwanstransformation.Since2002,however, rapidpolitical andeconomicreformshavelargelyceasedandsometimespartiallyreversed.The social backgrounds of the leaders are also changing. Until recently, therewere severe restrictions on the roles of the offspring of Chinas greatrevolutionaryleaders (knowninChinaas princelings). Now, theprincelingswill dominatethePolitburoandtheCentral Committee, whichistosaythattheywillruleChina.With this change comes a transformation of popular political attitudes. Whileearlier top leaders obtained support for tough measures from a scared population,bythelast18monthsof theJiangZhuera, thepopulacewaswearyfromthestress of marketization and globalization and deeply resentful of Zhu. In response,Hu Jintao appeared, promising a harmonious society without the stresses of theZhuera.2Incontrast, Huwill leavebehindresentmentthathefailedtopushforward on economic and political reform. The advent of the princelings bringsto power a leadership team whose position derives from political inheritance andwealthrather thanheroictransformational leadership. Popular resentment ofwhat is seenas thearroganceof theemergingpolitical andfinancial eliteisalready high and will create serious problems unless the new leaders deliver somekindofdecisiveimprovements.What thenewleaders will doremains agreat enigma. Xi Jinping, whoisassumedtobethenextparty leaderandpresident,hasbeen extremelycautiousaboutarticulatinghisopinionsinordertoensurethathispathtothetopjobdoes notlead off a cliff. But unlike his predecessors,he hasthe confidencethatcomes from being a princeling and from having some military background. (Husopponentshave clubbedHumercilessly, albeitunfairly,for allegedweaknessonnationalsecurityissues.)Ontheotherhand,Xiwilltakeofficeatatimewhenpressurestoresumepoliticalreformaresowidespreadthat evenPrimeMinisterWenscallsfordemocratizationhavetobecensored. BelowXi will beleaderswhodohaveambitiousandoutspokenagendas,suchasLiYuanchaosimageofChina leading the world through a globalization of talent and othersdetermination to showthat socialismcan work. Their visions are partiallyTodaysChineseleadersareadministrators,risk-averse,incremental,andpragmatic.ReassessingChinaTHEWASHINGTONQUARTERLYjSPRING2012 123inconsistent and the tensions betweenthosevisions couldbeeither creativelydynamicorimmobilizing.To be clear, this is not a polity vulnerable torevolutionlike, forinstance, Egypts. Inhalfacentury, Chinese life expectancy has risen fromthelow40s to73, andsince1979all majorsocial groups have increased their real incomesbyat least 600percent. UnlikeinIndia, theroadsgetbuiltandthechildrengeteducated.EvenbeforetheWesternfinancial crisis, thePewsurveysrevealedthatChinastoodfirst intheworldinsatisfactionwithnational conditions (72percent),with the United States tenth (39 percent).3But neitheris it a country that hasfound an equilibriumin Leninist state capitalism. The most fundamentalstructures are changing fast. The mood in Beijing is one of profound impatienceoverthereformhiatus.ChinasNewEconomyChinas economyinthe1990s was dominatedbyadesperateeffort toavoidfinancial collapse, with the banks dragged down by money-losing stateenterprises. Now, Chinahas four of theworlds tenlargest banks andthebigstateenterprisesareobscenelyprofitable. ZhuRongjissuccessful efforttosavethe banks by imposing market discipline or selling off their state enterprisecustomers saw 50 million state enterprise jobs and 25 million manufacturing jobslost in a decade. Growing out of these problems and reducing poverty seemed tojustifygrowthatanycosttotheenvironmentandsocialfairness.Incontrast,currentleadershaveimplementedanamazinglysuccessfulefforttobringgrowthtotheformerlyneglectedinterior,andtheirconcernabouttheenvironment has left Westernleaders fearful that Chinawill seizeleadershipacross the range of green technologies. Replacing the collapsed social safety netof the oldcommunes withmodernpensionsystems, medical insurance, andsocial securityprogramshasbecomeapriority. Themilitary, starveduntil themid-1990s, is makingupfor lost time. Whereas thepriorityof the1990s wasmarketization, inordertocurtail thelossesofthestateenterprises, duringtheglobal financial crisis thecurrent leaders discoveredthevalueof state-ownedbanks and state enterprises in managing a crisis. Even after the crisis, they havecontinuedtoemphasizethevalueof thestateenterprises, whichbenefitfromimplicit credit guarantees, belowmarket interest rates, little taxation, andnegligible pressure to pay dividends. Meanwhile, the smaller and privateenterprises, which had previously expanded in a manner reminiscent ofA dissipatedsenseofnational urgencyhasdepletedpublicsupportforstressfulchange.WilliamH.OverholtTHEWASHINGTONQUARTERLY jSPRING2012 124Taiwana generationearlier, are being crippled by a lack of credit. Marketreformshavebecomeasdormantaspoliticalreforms.Adecadeago,Chinaseemedtohavealimitlessreservoirofcheaplabor.Inperhaps the single most transformative economic change of recent years, Chineseindustry now faces labor shortages, particularly of skilled labor. The 12th Five-YearPlan calls for the minimumwage to increase by no less than 13 percent annually4andexportindustrywagesarerisingatamuchfasterrate.5Theemerginglaborshortage,foodsupplychainissues,andthehangoverfromthemassivestimulusthat got the country through the financial crisis have left China with problems ofinflation, property price inflation, and imminent bank problems.Havingsaidthat, Chinaisnotatriskof aJapan-orU.S.-scalebubble. AsFigure 1 shows, Chinese leverage is far less than what occurred in Japan. Chinesehousingprices arenot that far out of linewithother major Asiancities, itsmortgages require a minimum 30 percent down payment, and a high proportionof properties are still sold for cash. Chinese central government public debt wasonly16.3percent of GDPin2011.6If thegovernment absorbedall thelocaldebt, totalcentralgovernmentdebtwouldstillbeonly60percentofGDP,farbelowtypicalU.S.andEUindebtedness.7Figure1.Source:ChinaBankingReformCommissiondata,graphicfromKumikoOkazaki,Masazumi Hattori and Wataru Takahashi, The Challenges Confronting theBankingSystemReforminChina: AnAnalysisinLight of JapansExperienceofFinancial Liberalization, InstituteofMonetaryandEconomicStudiesDiscussionPaperSeries2011-E-6,March2011.ReassessingChinaTHEWASHINGTONQUARTERLYjSPRING2012 125Having said this, Chinas successful management of the financial crisisobscured its deeper structural problems. By 20072008, China was experiencinga paradoxical combinationof rapidly rising inflationandrapidly-multiplyingbankruptcies. This combination signaled the equivalent of a Jimmy Cartermomentatimewhentheeconomyneededprofoundstructural changes, notjust fiscal and monetary tinkering. Chinas success was making obsolete the twogreat drivers of its previous economic success. Investments in infrastructure hadonce focused primarily on enormously productive projects like building the firstsuperhighway between Beijing and Shanghai; now, they increasingly buildwasteful large shopping malls in small cities. Most of the infrastructure has beenfinancedby re-zoning agricultural landandselling it at very highprices, aprocess that is reachingits limits as propertyprices comeoff their peakandpeopleprotest expropriationof their land. Similarly, theexplosivegrowthofexports basedoncheaplabor was exhausting boththe cheaplabor andthewillingness of foreignmarketstoabsorbmoreChineseexports. Chinaneedednewdrivers.Theobvioussolutionwasavastshifttohigher-valueconsumptionproductsdirected primarily at the domestic market, a vast expansion of the service sectorandof masshousing, andashiftof manufacturingawayfromstateenterprisesandheavyindustrytomoreinnovativesmall,medium,andprivateenterprises.Instead, thefinancial crisis highlightedtheabilityof state-ownedbanks andstate-owned enterprises to ramp up production and jobs quickly in order to offsetthe crisis. The global crisis itself discreditederroneouslythe model ofmarketizationthat had enthralled previous Chinese leaders. The result wasencapsulatedinaslogan,Thestateadvancesandtheprivatesectorretreats.8That slogan, andthefinancial policies that areperpetuatingit, raiseseriousquestions about where Chinas future jobs and innovation will come from.Everywhereintheworld, giantenterpriseseventuallyshrinkemploymentandproveweakatfundamental innovation. By2011, theparadoxof simultaneousinflationandaserioussqueezeonsmall andmediumenterpriseshadreturned.Chinas economy is now like a school of fish where the big fish are very energetic(generating810percentGDPgrowth)becausetheyareeatingthesmallfish.Buteatingthesmallfishendangersthefuture.The Chinese administration does not intend to kill off its smaller and privateenterprises,andinfact,hasimportantprogramstosupportthem.Indeed,alongwithothersupports,inDecember2011itapprovedamassiveinfusionoffundsintothesmallandmediumenterprise(SME)sector,alongwithpreferencesforprocurementfromSMEsandreductionoftheirtaxesandfees.9However, thatinfusionistoolittle,verylate,adhoc,andunlikelytobedispensedefficiently.Priortothelate2011stimulusprogram, Chinasfinancial systemhadlefttheoverwhelmingmajority of SMEs in financial distress. This is because it controlsWilliamH.OverholtTHEWASHINGTONQUARTERLY jSPRING2012 126inflation not mainly through interest rates, but primarily by forcing the banks tohold extremely high reserves (21 percent). So the banks cut off all but their bestcustomers, the big state enterprises, which get money at state-controlled interestrates (6.5 percent) that until recently roughly equaled the rate of inflation. Theyinturn use thatessentiallyfreemoney totakeoverall sectorsand tospeculate.Hence, theparadoxofspeculativeinflationandwidespreadbankruptcy: thesmaller enterprises typically pay rates from 25 percent up to 400 percent, and as aresultmanythousandsaredying.10If thegovernmentwouldmoveforwardonreform,freeinginterestratesandusingthemtocontrolinflation,theeconomywould be more balanced, there would be more innovation and jobs in the future,speculationwouldbereduced, andamajor sourceof political dissatisfactionwoulddecline. Butthesocialistinstinctsofthecurrentadministrationhavesofarpreventedthis.Another noteworthy cost of the reformhiatus has beenanexplosionofcorruption.Inallemergingeconomies, graftisomnipresent, butmajorpoliciesunder Jiang Zeminand Zhu Rongji limited it. The late 1990s sawa hugeemphasis on enhancing competition in the major state-dominated sectors of theeconomy, great expansion of more competitive smaller businesses, drasticcutbacks of military enterprises, halving government employmentcomplemented by quadrupling salaries, and slashing regulations. All thesestructurally curtailed corruption. In the past decade, however, governmentemploymenthasnearlydoubled,theavailabilityofeffectivelyfreemoneyfromthe banks has meant that political influence translates directly intowealth,competition in the state and private sectors has weakened, foreign directinvestment has beenmorerestricted, andtheinvolvement of senior militaryofficers in business has once again flourished. The most sincere police campaignscannot offset the weakening structural impediments to corruption. It isimportantnottoexaggeratethis, however. Chinahasoneof theworldsmosteffective government management systems, and many aspects of thatmanagement haveimprovedunderHuandWen. Butthetrendof corruptionissharplyinthewrongdirection,andthatworsenspublicdiscontent.At the deepest level, economic management under Hu Jintao and Wen Jiabaoreflects the structural shift inChinese politics. Deng, Jiang, and Zhu wereobsessed with efficient growth at all cost because they feared China facedcollapse. The Asian economic miracles are products of fear: Japan after wartimedefeat, SouthKorea after the KoreanWar, Taiwanafter Chiang Kai-sheksdefeat, and Singapore confronting larger neighbors. When fear subsides, normalpolitics resumes. The HuWen decision to eschew fundamental reforms in favorof the status quo has its political parallel in the ObamaBoehner andMerkel Sarkozy decisions toplay politics as normal withdebt crises, ratherthan embrace painful but necessary decisions. While normal, this marks aReassessingChinaTHEWASHINGTONQUARTERLYjSPRING2012 127decisive shift inChinese economic management and raises questions aboutwhether,andhow,Chinasswiftrisewillcontinue.Hu Jintaos administration demonstratedtactical brilliance in rescuing the economyfromtheglobal financial crisis. Its success indeveloping Chinas interior has beenastonishing. It has consolidated a remarkablegovernment administrative system thatmanages China as if it were GeneralElectric. But it has failed to address thestrategic dilemma of simultaneous highinflation and high bankruptcy that appearedin 20062007 and has reappeared in 2011.That failure worsens the emerging disconnect inChinese politics. The stateadvancesandtheprivatesectorretreats translatespoliticallyintoresentmentofthe power andarrogance of giant institutions andtheir well-connected, oftenfabulously-wealthy bosses. Nowthat hubris is beginning toreplace the earliersense of crisis, the interest groups and localities no longer suffer gladly thedominationof asocial eliteunderwrittenbypreferential policies.Givenall thesechanges, thecommonWesternnational securitymanagersview of a China that has found the formula for a permanently dynamic Leniniststatecapitalismis risible. Chineseleaders viewof their situationis far morebalancedadevelopingcountrymanagingrapidchange. Althoughreformhasstalledrecently, oneof thestrengths of Chineseleadershiphas beenthat itcontainednoBrezhnevs, Chernenkos, or Andropovs whobelievedthat theircountryhadalreadycreatedapermanent,satisfactorystructure.WhatofthehedgefundmanagerswhoseeaJapaneseorU.S.-stylebubble?China certainly has significant challenges in managing inflation, property prices,and looming bank problems, but the bubble problems are generally exaggerated.The acute problemof bubbles is serious, and will likely slowthe economysubstantially for a time, but hardly fatal. Focus onthe bubble problems hastendedtoobscure the chronic needfor reinvigoratedreformif China is tomaintaindynamicgrowth.ChinasNewGeopoliticsThe Westernworld has beenstartled by Chinas apparent newgeopoliticalposture in 2010 and 2011. (But read further before making firm judgments abouthowmuchofthechangeactuallyresultsfromnewassertivenessonthepartofthe Chinese government.) Seemingly overnight, China has evolved fromacountry with a lack of confidence to one laced with hubris, from the old sloganThecommonviewthatChinahasfoundtheformulafordynamicstatecapitalismisrisible.WilliamH.OverholtTHEWASHINGTONQUARTERLY jSPRING2012 128ofneverlead toanassertiveforeignpolicy. Insteadofprotestingmildlyoverimportant arms sales toTaiwan, BeijingturnedObamas first innocuous armssales in 2010 into a crisis. Whereas it once settled most of its land borders to thesatisfaction of the other party, nowit confronts virtually all of its oceanneighbors inassertingits indisputablesovereignty, sometimes withmilitaryforce.11WhereitusedtobeflexibleindiscussingNorthKorea, ithasbecomerigid.Whereas the Obama administration tookofficeat atimeof widespreadAmericanbeliefinthepossibilityofwiderangingU.S. Chinesecooperation (symbolized in the phrase G-2), andObamaprofferedsucharelationshipinhisfirstmeeting with Hu Jintao, by 2011 most Americancommentators believed that China hademphaticallyrejectedsuchmutual cooperationinfavorofanassertivepolicyattheexpenseoftheinterests of theUnitedStates andChinascoastal neighbors. Chinas relationships havedeclined with Japan because of ahyper-reactiontotheJapanesearrest of aChinesefishingboat inSeptember2010, withSouthKoreabecauseChinablockedall butminimal internationalresponsestoNorthKoreanattacks,withtheUnitedStatesinteraliabecauseofBeijings hugereactiontoinnocuous U.S. arms sales, withASEANcountriesbecause of greater assertiveness over sovereignty claims in the South China Sea,withtheforeignbusinesscommunitybecauseof agrabforforeigncompaniestechnologiesandrestrictionsonrareearthexports,andwithAustraliaandtheEuropean Union (as well as the United States) because of an overallcombinationof thesefactors. In18months fromJuly2009December 2010,Chinalostmanyofthebenefitsoftwodecadesoffriendshipdiplomacy.Thisstartlingshiftindiplomaticrelationshipshadmultiplecauses. Chinassuccesswasreplacingfearandovercautiousnesswithconfidenceandassertion.The Westernfinancial crisis andsubsequent mismanagement inthe UnitedStates andtheEuropeanUnionpuncturedtheimageof Westernmanagerialsuperiority, and the contrast between U.S. EU mismanagement andChineseIndianBrazilian growth seemed to many, not just in China, topresageanacceleratingattenuationof threecenturies of Westerndominance.UnlikeChina,theU.S. andGermanpolitiesseemedincapableofrisingabovepetty politics ina crisis. Chinas regional military capability had reached athreshold where its increasingly modern air, naval, and missile capabilities couldpotentially impose politically unacceptable costs on a U.S. naval effort tocontrol the seas near China ina conflict. Moreover, notwithstanding loudFromJuly2009December2010,Chinalostmanybenefitsoftwodecadesoffriendshipdiplomacy.ReassessingChinaTHEWASHINGTONQUARTERLYjSPRING2012 129assertions tothe contrary inWashingtonabout a pivot toAsia,12the U.S.budget mismanagement entails an eventual end to U.S. military hegemony alongthebeachesofChina.As with Japan a generation ago, simultaneously alongside emerging big powerhubris,asmall-countrymentalitycontinuestopervadeChinesepolicy.Asenseof big power obligation to invest in maintaining a stable internationalsystemhelping inhibit nuclear proliferation by Iran, helping curtailinternational financial imbalances, helpingensurethat NorthKoreanattacksonSouthKoreaareunprofitablelagsbehindtheassertionofChinasnewbigpowerprerogatives.Themost important reasons for theshift lieinChinesedomesticpolitics.From the beginning, the Hu administration has been vulnerable to assertions byfactional opponents that its leaders lackedmilitary experience andnationalsecurity toughness. In a succession campaign, this naturally leads toovercompensation. Rising interest-group influence transformed themanagement of foreign policy. Powerful enterprises and individualsincreasingly won protection of their interests. The coastal exportersoverwhelmedthenational interest inusingstronger currencyappreciationtomovemanufacturingindustryup-market, toshift the basis of growthtowarddomestic consumption, to control inflation, and to curtail the senselessaccumulationof trillions of dollars of loss-making foreigncurrency reserves.Military and public security officers resumed flaunting their wealth in a way thatJiangZeminhadcurtailed.Asthe20122013successionapproached,leaders fearoflosingthesupportof key domestic political allies overwhelmed policy discipline. Nowhere was thismore evident than in the assertion by a few officers and officials that dominanceoftheSouthChinaSeawasacoreinterest alongsideTaiwanandTibet. AnarmyofChinesediplomatsandacademicsspreadthemessagethatthiswasnotnational policy, but topleaders refrainedfromopenlycontradictingpotentialallies in the competition for post-2012 power. This perfectly mirrored thedemagoguery about China that occurs in U.S. presidential campaigns (including2012), but it was far more consequential because the world was not accustomedto Chinese policy indiscipline. Senior retired officers promised that policydisciplinewouldbereinstatedafterthetransition,butthatremainstobeseen.OneseniorChineseofficersaidtotheauthor, Fordecades, youAmericanshave told us that we just have to understandthat the Pentagon has one foreignpolicy, the State Department another, the White House another, and theCongress and the media some more. Now we are becoming more like you. Dealwithit.13MostnationalsecurityconversationsinWashingtonstilloperateontheimplicitassumptionthat, if oneortwoprominentChineseassertapolicyWilliamH.OverholtTHEWASHINGTONQUARTERLY jSPRING2012 130stance, for instance about core interests, that constitutes anauthoritativearticulationofanagreedpolicy.Notso,anymorethanitdoesinWashington.ThenewChinesestancealsorespondstoadecadeof stored-upgrievances.Under George W. Bush, the United States sought to restore Japan as the pivot ofallU.S.Asiapolicy,andtopressJapanintoamoreactivemilitaryrole,justasJapanfell underthe(fortunatelybrief)swayofright-wingnationalistJapaneseadministrations that were determinedtokeepChina downandsponsor therewritingof historytosay, inter alia, that ChinaandtheUnitedStates wereresponsible for World War II. Working with one such administration, inFebruary 2005, the United States explicitly brought Taiwan under the purview ofthe U.S. Japan alliance. For the first time, the United States promised to defendthe disputedSenkakuDiaoyuIslands as analliance obligation. The UnitedStates, Japan, India, andAustraliaheldfour-powernaval exercises, whichtheUnitedStatesdisingenuouslydeniedtobedirectedatChinabutwhichJapantrumpetedas anaspect of mobilizing countries withcommonvalues againstopponents (i.e., China). TheUnitedStates gaveIndiaafreerideonborderconflicts, claims of a right to dominate large parts of the worlds oceans,investments in Sudan, deals with Iran, claims to be a great power, and much else,while severely criticizing China for similar or sometimes (particularly on borderissues)muchmilderbehavior.Inparticular, theUnitedStates encouragedIndianambitions intheSouthChina Sea, where New Delhi has negligible legitimate interests, while criticizingChinas claims. Inthe SouthChina Sea, where all claimants have pursuedexaggerated and dishonest claims, the United States chose to criticize onlyChina. Nowhere was this more blatant than in the case of drilling for oil and gas:a 2002 agreement pledged China and ASEAN countries to joint development inthedisputedareas whileshelvingsovereigntydisputes. AccordingtoChinesefigures, ASEANcountries subsequently drilled more than 1,000 wells indisregard of the understanding, while China drilled none, but whenChinareasserted its claims, the United States treated China as the only party behavinginappropriately.14Most importantly, the U.S. Navy and Air Force conduct a continuous intenseintelligence-gathering campaign with ships and aircraft along the Chinese coast,monitoringChinesecommunicationsandmilitarymovements. Thesemissionsincludesimulatedattacksonimportantlocationsalongthecoast, designedtotrigger Chinese defenses and allow the United States to understand every aspectof Chinese responses to a military situation. China has responded byoccasionally harassing these missions and by insisting that the UNConventionontheLawof theSeagivesittherighttoexcludesuchmilitaryoperations in its exclusive economic zonean interpretation that is a)consistent with the wording of the law; b) inconsistent with the originalReassessingChinaTHEWASHINGTONQUARTERLYjSPRING2012 131intent of the drafters; and c) strongly supported by other countries such as IndiaandBrazil,whichwouldregardthiskindofU.S.behavioralongtheircoastsasintolerable. The U.S. military has treated Chinese resistance to U.S. intelligencegatheringandsimulatedattacks as aggressive, andU.S. mediahavegenerallyreportedonlytheU.S.militaryviewpoint.Chineseislandandterritorial watersclaimsarecertainlyexcessiveasare,proportionately, theclaimsof Vietnam, thePhilippines, Malaysia, TaiwanandIndia.Atthesametime,U.S.militaryactionsareclearlyinconsistentwiththeacknowledgmentbyall recentpresidentsthat, if wetreatChinaasanenemy,then we ensure that it will be an enemy, so we should be careful not to do that. Ifthe Chinese Navy and Air Force were closely monitoring U.S. communicationsfrom12milesoffourcoast, andrunningsimulatedattacksatWashington, ourleaders wouldtreat it as somethingclosetoanact of war. ExcessiveChineseclaimsandexcessivelyantagonisticU.S. militarypolicieshavelockedthetwocountries intoaspiral that risks coldwar. Onbothsides, domesticpoliticalgamesareworseningtheconflicts.Chinas claimsrisk permanentlyalienatingamajority of its smaller neighbors. U.S. naval aggressiveness risks turning much oftheworldagainstourinterpretationofthelawoftheseas.WhitherChina?ThecertaintyexpressedaboutChinasfuturebyManicheandemocrats, hedgefund bubble detectors,and nationalsecuritypredictorsof permanentlydynamicLeninist state capitalismfails tocapture the range of possible outcomes forChinasuncertainfuture. TheworstscenarioforChinaisadilutedversionofJapans gradual decay. Japan after 1955 was a typical mobilization system:frightenedbydefeatinwar,thecountryunified(despiteoppositionpartiesandnoisy dissidents) around a dominant partys determination to build the economyatwhatevercostwasrequired.TherulingLiberalDemocraticParty(LDP)hadsuchdominanceofpoliticalfundingandorganizationalcapabilitythatitcouldforce through whatever policies were necessary. The LDP, governmentministries, and leading businesses were strongly allied. Half of governmentrevenues were off-budget, beyonddemocratic scrutiny. Corrupt funding frommany sectors ensured LDP electoral dominance. The governments wartime-styleability to channel the policies of banks and major corporations throughadministrativeguidancegavetheLDPtheabilitytoshapetheeconomy.Japan reached out all over the world for best practices. It gradually marketizedmuchof its economy. As the economy developed and markets changed, itproactively forcedadjustmentsfor instance, forcing the aluminumindustryoffshore after rising energy costs made it unprofitable at home, or accepting andevenpromotingagradual shift overseas of industrieslikebasictextiles whichWilliamH.OverholtTHEWASHINGTONQUARTERLY jSPRING2012 132hadbecomeobsoleteathome.Adeterminednationembracedwhateverwouldspeedrecovery.After1975, complacencyreplacedurgency. Interest-grouppowerdominatedthe legislature, which became divided into tribes (zuko in Japanese). WhereasbuildingtheroadsandbullettrainshadoncedrivenJapansrapidgrowth,nowthepower of theconstructionlobbyledtounproductivelybuildinghighways,trains, and bridges to nowhere, paving nearly every streambed and river bottom.Many industries arranged for protection, often in subtle forms, against domesticandforeigncompetition. Thebigconglomeratessocompletelydominatedtheeconomy that the creativity of smaller companies was stifled. Instead ofacknowledging globalized best practices as the key to success, Japanesepoliticians convinced themselves that their success flowed from uniqueJapanesecultural practices. (Ironically, thepractices inquestionwereinfactcopiedfromtheprewarmobilizations of GermanyandtheSovietUnion, notfromancient Japaneseculture.) Japaneseleaders becameconfident that Asiawouldleadthe world, andJapanwouldleadAsia. As Japanturnedinward,growth slowed and productivity declined. The financial crisis of 1990 was just apunctuation mark on an economy that has flatlined ever since. By 2015,Japaneselivingstandards will besurpassedbySouthKorea, whichhas all ofJapans problems andfewer advantages, but has beenmore successful at thetransitiontoafullycompetitivepolityandeconomy.15China exhibits some signs of the Japan syndrome: premature hubris, emergentinterest group power, an increasing predominance of the interests of thepartygovernment bigcompanytriangleovernationaleconomicinterests,andsnuffing small-company dynamism. Without resuming reform, it will suffer someof the same gradual loss of dynamism. Because China is much more open to bothdomesticandinternationalcompetitionthanJapan, andcontinuestopromoteglobalization,aChinesedecayscenariowouldbeeconomicallylessseverethanwhatJapanhassuffered. Butitwouldoccuratamuchlowerlevel of income,technology, and politicaldevelopment, sothe social and political consequenceswouldbemoresevere.While a gradual Japanese-style decay is the worst case scenario, the best casewould catapult China into global leadership. Visionary reformists (see the writingsof Wang Huiyao)16envision China as a successor to British and U.S. leadershipthrough globalization. The first phase of globalization was industry, led by Britain,resulting in the British Empire. The second phase was finance, led by the UnitedStates, resulting in a half century of U.S. dominance. The third phase isglobalizationoftalentandthat,ifChinasreformershavetheirway,willbeledbyChina.Thisprocessiswellunderway.AllChinesemusttakesevenyearsofEnglish to graduate fromhigh school. Fromits airline regulation to its stock marketregulation to its bank credit management, China has been emulating best foreignReassessingChinaTHEWASHINGTONQUARTERLYjSPRING2012 133practiceandoftenimportinghigh-levelforeigntalent toimplement thenewways. NearlyallChinese elite families have children orgrandchildreninU.S. IvyLeagueuniversities,andnumerous Chineseviceministers spendasemester at Harvard to ensure theirunderstanding of global best practice.Seventy-eight percent of Chinese universitypresidents have their Ph.D. degrees fromforeign institutions, as do 72 percent ofresearch lab heads. China has 150entrepreneurial parks for returnees from abroad who want to start businesses.17This determined emulation of global best practice is the core secret of Chinesesuccess so far. But as the reformers understand, to go fromhere to global leadershiprequirestransformationalreforms.Today,82percentofChinesestudentsintheUnitedStateschoosetoremainintheUnitedStates,contributingprimarilytoAmericas economy rather than to Chinas. To get them back, to attract the mosttalented Europeans and Americans, and to get the benefits of all that talent, Chinamust provide an attractive and fertile environment for them. That means a legal,financial, andintellectualpropertysystemwhichfacilitatestheirsuccess. Thatrequires financial-system reform based on market interest rates rather than bankreserve ratios and administrative guidance of lending. It requires taking away thespecial privileges of the state enterprises by withdrawing privileged access to thebanksandmakingthempayappropriatetaxes, interestrates, anddividends. Itmeans full access to the Internet and freedom to express controversial views. Inshort, it requires a vigorous resumptionof the market andpolitical reforms thatwere underway in the 1990s.Some of this positive scenario will happen. Many of the globalizationinitiatives havealreadybeenapprovedandpartiallyimplemented. But, giventhe scale of Chinese society, the extreme formof globalization of talent,exemplified by Singapore, is impossible. Moreover, the resumption of market andpolitical reforms will be fiercely resisted by many of the expanded centralgovernment, local government, military, princeling, and state enterprise interestgroupsthathavebecomesoempoweredinrecentyears.Just as Chinas superior openness and commitment to globalization mean thatit will avoid the worst of the Japanese-decay scenario, the vast empowerment ofconservative interests that has occurred since 2003 means that the fullaspirations of thosewhoseekworldleadershipthroughglobalizationof talentwill notbefullyachieved. Butthoseconstraintsleaveavastrangeof possibleoutcomes, rangingfromgradual loss of momentumtogradual replacement ofU.S. worldleadership, depending onthe leaders whoascendin20122013.WhileJapanese-styledecayistheworstcase,thebestwouldcatapultChinaintogloballeadership.WilliamH.OverholtTHEWASHINGTONQUARTERLY jSPRING2012 134Chinas succession struggle is not just about whowill rule, but about thefuturecharacter of theChinesenation.At the beginning of the HuWenadministration, I likened China to a manbeing chased by a tiger.18If one focuses acameraontheman,oneisawedbyhowfastheruns;surelyhecanoutdistanceanyoneelse.If,however,thecamerafocusesonthe tiger (problems of environment, urbanization, inequality, politicaldemands, etc.), one concludes that anything infront of that tiger will geteaten.UnderJiangZeminandZhuRongji,themanfaroutdistancedthetiger,butthentiredandneededanap.Sincethen,whilegivingHuJintaoandWenJiabao full credit for historic achievements in developing the interior,overcoming the global financial crisis, developing world class publicadministrationsystems, andinitiatingenvironmental improvement programs,thenapofeconomicandpoliticalreformhaspersistedsolongthatthetigeriscatchingup.WeareabouttodiscoverwhetherthetigersapproachwillrevealprolongedChineselethargyorstimulateanewroundof reformsthatcatapultChinatoworldleadership.Notes1. WilliamH. Overholt, The Rise of China: HowEconomic Reformis Creating a NewSuperpower (NewYork: W.W. Norton, 1993). Forarecentstatement of theparallelsbetweenChinaandtheother miracleeconomies, seeWilliamH. Overholt, TheChinaModel, FudanJournaloftheHumanities&SocialSciences5,no.2 (June,2011).2. Along with scientic development, the concept of harmonious society has been thekey slogan of the Hu Jintao era. It encompasses harmony between man andenvironment, between social classes, and between China and foreign countries.Implicit in the concept of harmonious society is a repudiation of the Mao-eraemphasisonclassstruggleasthekeydynamicofpolitics.Implicitalsoisamoveawayfrom the degree of social stress and inequality entailed by the frenetic market reforms oftheZhuRongji era. For anofciallyendorseddenition, seeHarmonious Society,Peoples Daily report on the 17th National Congress of the Communist Party of China,September29,2007,http://english.people.com.cn/90002/92169/92211/6274603.html.3. Pew Global Attitudes Project, Chinas Optimism, table on Satisfaction withNational Conditions, November 16, 2005, http://www.pewglobal.org/2005/11/16/chinas-optimism/.4. Forinstance,seeKeytargetsofChinas12thve-yearplan, Xinhua,March5,2011,http://news.xinhuanet.com/english2010/china/2011-03/05/c_13762230.htm.5. ThemostcommonlycitedstudyofactualwagesisaKPMGstudythatisnotpubliclyavailable, but theKPMGwebsitecontains anoverviewbyanoutsideauthor: JamesAnderlini, Has China Reached Its Peak? originally published in High Growth Markets,April 2011, http://www.kpmg.com/US/en/WhatWeDo/Industries/Japanese-Practice/Pages/2011-issue2-article1.aspx. In October 2011, Chinas Ministry of Human Re-Whatthenewleaders will do remainsagreatenigma.ReassessingChinaTHEWASHINGTONQUARTERLYjSPRING2012 135sourcesandSocialSecuritystatedthattheminimumwagein21of31provinceshadrisenbyanaverageof 21.7percent intherst ninemonths of 2011alone. See, forinstance, Li Mao, 21Regions Across ChinaRaiseMinimumWage, Peoples DailyOnline,October26,2011,http://english.peopledaily.com.cn/90882/7626697.html.6. SeeCIAWorldFactbook, https://www.cia.gov/library/publications/the-world-factbook/elds/2186.html.7. One of the most careful studies of local debt is provided by two papers by Ting Lu andT.J. Bond, LGFV and Local Government Debt: This time is notthat different, Bankof AmericaMerrillLynch,April 8,2010,andLGFV:The sub-primetrap for China?BankofAmericaMerrillLynch,March22,2010.8. The saying became omnipresent. For instance, the Brookings Institution held a seminar,Chinas New Breed of State Capitalism, with the theme Known popularly in Chinaas guojinmintui or thestateadvances andtheprivatesector retreats, this apparentenhancement of state monopolies has in recent months been ercely debated inBeijing. Seehttp://www.brookings.edu/events/2011/0301_china_capitalism.aspx.9. See, for instance, Chinaannounces support for SMEs ingovernment purchasing,Xinhua, December 31, 2011, http://news.xinhuanet.com/english/china/2011-12/31/c_131337773.htm.10. ThenumbersoninterestratescommonlypaidbySMEsarefromconversationswithChinese business executives. A high proportion of those loans are technically illegal, sotheyarenot openlyquoted. Onthedifculties of theSMEs, seeSMEs headedforcollapse, business lobby warns, China Economic Review, July 22, 2011, http://www.chinaeconomicreview.com/content/smes-headed-collapse-business-lobby-warns; andChinas SMEsfaceadverseconditions in2011, Xinhua, September 1, 2011, http://news.xinhuanet.com/english2010/china/2011-09/01/c_131092442.htm.11. See,forinstance,ChinareiteratesitsindisputablesovereigntyoverDiaoyuIslands,Xinhua, January 3, 2012, http://news.xinhuanet.com/english/china/2012-01/03/c_131340503.htm; and China Says Its South Sea Claims Are Indisputable,Bloomberg News, July 30, 2010, http://www.bloomberg.com/news/2010-07-30/chi-na-has-indisputable-sovereignty-in-south-china-sea-defense-aide-says.html.12. The pivot to Asia has become the principal buzz phrase for U.S. national security policyin Asia.See, for instance,HillaryClinton, Americas Pacic Century, Foreign Policy,November 2011, http://www.foreignpolicy.com/articles/2011/10/11/americas_pacic_century; Barack Obama, Remarks By President Obama to the Australian Parliament,The White House, November 17, 2011, http://www.whitehouse.gov/the-press-ofce/2011/11/17/remarks-president-obama-australian-parliament; and Barack Obama,Remarks by the President onthe Defense Strategic Review, The White House,January5, 2012, http://www.whitehouse.gov/the-press-ofce/2012/01/05/remarks-presi-president-defense-strategic-review.13. Authorinterview,May2011.Iwasnotgivenpermissiontonametheindividual.14. Author interview with Tung Chee-hwa, vice-chairman of the 11th NationalCommittee of the Chinese Peoples Political Consultative Conference (CPPCC),July1,2011.15. For calculations that indicate South Koreas likely surpassing of Japanese average wages,seeFlyingGeeseNoMore, TheOriental Economist78,no.11(November2010).16. Mostof WangHuiyaosworkisavailableonlyinChinese(several books)andinhisnumerous oral/PowerPoint presentations. Some of his English-language work isavailableontheBrookings Institutionwebsite. See, for instance, Chinas NationalTalentPlan:KeyMeasuresandObjectives, http://www.brookings.edu/ /media/Files/rc/papers/2010/1123_china_talent_wang/1123_china_talent_wang.pdf.WilliamH.OverholtTHEWASHINGTONQUARTERLY jSPRING2012 13617. These gures and the subsequent gure about Chinese students remaining in the UnitedStates aretakenfromoral/PowerPoint presentations byWangHuiyaoat Harvardin2010 and at Yale in 2011. He is the author of several books in Chinese on related topics.18. WilliamH. Overholt, Chinas Economy, ResilienceandChallenge, HarvardChinaReview, Spring 2004, http://www.rand.org/content/dam/rand/pubs/reprints/2005/RP1116.pdf.ReassessingChinaTHEWASHINGTONQUARTERLYjSPRING2012 137