International Socialist Review

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International Socialist Review Issue 42, September–October 2005

Enter the Dragon

China, Inc.—The rise of a new power

by ASHLEY SMITH

Ashley Smith is on the editorial board of the ISR. He is author of “The Occupation of Japan,” ISR 29, May–June 2003, available at www.isreview.org.

OVER THE past twenty-five years, China has had the fastest growing economy in the world, averaging10 percent growth in the 1980s and 9 percent in the 1990s. Its growth rate of 9.5 percent in 2004 is the highest of all the major economies in the world. In doubling its size in the 1980s, and then again in the 1990s, China has catapulted itself up the world economic hierarchy. China’s GDP exploded from $106 billion in 1970 to $1.4 trillion in 2004, making it the seventh largest economy in the world.¹ When China’s GDP is calculated according to the Purchasing Price Parity method, which adjusts figures based on the relative cost of doing business in a country, it ranked in 2003 as the second largest economy in the world, with a GDP of $6.6 trillion—ahead of Japan with a GDP $4.3 trillion and below the United States with its GDP of $10.1 trillion.²

China’s spectacular emergence as an economic powerhouse is causing a tectonic shift in the world system and is generating a sharpening rivalry with the United States, and regionally between China and Japan.

A flurry of discussion and debate has filled American mainstream news about how to respond to the “China threat.” CNN’s Lou Dobbs warned America “about a red storm hitting our shores.”^{³ Public Citizen’s president Joan Claybrook worried, “Imagine the potential chaos if a foreign power—especially an unpredictable, potentially hostile state like China—had the controls to our electricity grid or worse yet, the keys to the deadly nuclear material located at our commercial reactors.”⁴

Most recently, the Chinese National Offshore Oil Corporation (CNOOC) shocked the American political establishment with its $18.5 billion dollar bid to buy the American energy company Unocal. Protectionist Democrats and Cold War Republicans rallied the U.S. House of Representatives on June 30 to overwhelmingly vote for a non-binding resolution asking Bush to block CNOOC’s bid as a threat to national security. Frustrated by these maneuvers, CNOOC withdrew its bid. In an official response to the House resolution, China’s foreign ministry declared, “We demand that the U.S. Congress correct its mistaken ways of politicizing economic and trade issues.”⁵

The U.S. ruling class has responded to China’s rise in conflicting ways, treating it alternately as a threat to U.S. global dominance that must be contained,⁶ a source of profitable investments and potential consumers of American products, and an unstable economy whose collapse (under the weight of its own economic contradictions) could trigger a world recession.⁷

Whatever their different approaches to China, the U.S. ruling class is united in its determination to defend its status as the sole superpower against all challengers.⁸ In China, it confronts precisely the kind of rival that threatens to undo its efforts to maintain a unipolar world order under its hegemony. It cannot prevent China’s challenge either through integrating it into its economic arrangements or through its own international political infrastructure. China is outside America’s control. As a result, the U.S. has increasingly shifted from a policy of engagement to one of containment.

China, in turn, hopes to cooperate with the U.S., while simultaneously developing its economic, military, and political forces in order to take its place as a major world power. China’s transformation into such a power portends a protracted period of political, economic, and possibly military competition with the United States for dominance in Asia and throughout the world.

The turn toward neoliberal development

In the 1970s, few would have predicted China’s meteoric rise. China did experience overall growth in the three decades following the 1949 revolution that brought Mao Zedong’s Communist Party to power—though some of Mao’s programs, such as the Great Leap Forward, had di-sastrous results that temporarily set the country back.9 Through the application of various economic policies, following the Russian model of state ownership and bureaucratic planning, industrial production rose from only one-third of the gross national produced in 1952 to 71.5 percent in 1975.10 But, because it began from such a primitive economic basis and was so isolated in the world system, instead of catching up with the advanced capitalist countries, China kept falling further and further behind.

After Mao’s death in 1976 and the completion of a power struggle at the top, the Chinese bureaucracy adopted a neoliberal economic strategy. Deng Xiaoping’s “Four Modernizations” proposed the development of a mixed economy with a state sector, a private market in agriculture and industry, open markets to multinational investment, and modernization of China’s military. Deng called this turn toward the market “socialism with Chinese characteristics.”

The reforms began with decollectivizing agriculture and the creation of small-scale rural economic enterprises. The market reforms improved peasants’ living conditions overall, but it also made China more subject to the booms and busts of the world economy and created immense regional imbalances and growing social inequality. The reforms also produced a pool of 200 million landless peasants, a reserve army of cheap labor to work in the newly developing industries in the cities. In addition, the bureaucracy began slowly dismantling China’s aging and non-competitive state sector, shuttering the bulk of these factories, and laying off their workers through the 1990s.

Alongside this process the Chinese ruling party set up special economic zones, vast export processing zones like the Maquiladora plants on the U.S./Mexico border, designed to lure international capital. Guangdong Province, which borders Hong Kong on the Southeast Coast of China, became the model zone. Hong Kong investors flooded into the province, transporting all their light industry like textiles to cities like Shenzhen. Shenzhen exploded from a sleepy fishing village of 70,000 in 1980 to a city of seven million today. Now, six million mostly female workers labor in 30,000 factories in and around Shenzhen.¹¹ The entire region has averaged 3 percent higher growth than the rest of the country over the last twenty-five years. The bureaucracy also established a special economic zone in Fujian, the province opposite Taiwan. Taiwanese capital rushed in and spurred another industrial expansion and transformation of the region.

The boom of the 1980s began to develop the country at a rapid rate, but it also generated massive inequalities as well as imbalances. The main symptom of the problems was inflation, which skyrocketed to 18.5 percent in 1988.¹² This led to a drop in living standards and brought on a social crisis in the cities, panic buying, and runs on the country’s banks. In the cities, workers’ grievances piled up like kindling. By contrast, the peasants in the countryside had in part benefited from the rising prices and so were not in a mood to revolt. All that was needed in the cities was a spark that would enflame a rebellion. Students in Beijing provided that spark in 1989. Their protests for democracy in Tiananmen Square inspired workers to protest and begin organizing, prompting fears that workers in China might repeat the Polish workers’ Solidarnosc (Solidarity) rebellion in 1980.¹³ Terrified, the bureaucracy crushed the movement, killing thousands and arresting tens of thousands in a wave of repression.

Contrary to predictions in the West of the imminent collapse of Deng’s reform project, the reforms accelerated. Deng rallied his free-market supporters declaring, “We must speed up the reforms starting now.”¹⁴ He offered to open new special economic zones throughout the coastal area and into the interior.¹⁵ Central to this was the expansion of export processing zones, especially the one in Shanghai and the neighboring area of Pudong. It has replaced Guangdong and Fujian as the mother of all special economic zones. International capital rushed into the opening; by 1997, forty-four multinationals had started 2,600 joint projects with Chinese capitalists and state companies.¹⁶ Shanghai and Pudong have taken off at every level from sweatshop textiles to heavy industry and high-tech manufacturing.

Shanghai has also become a center of a speculative construction boom. Between 1992, when the zone was opened, and 1995, Shanghai construction companies built 15.4 million feet of office space.¹⁷ It now boasts the tallest building in the world, the largest shipyard, and the tallest Ferris wheel.¹⁸ Shanghai’s bureaucrats recently announced plans to invest $120 million in building a space city devoted entirely to China’s booming space program.¹⁹

A rush of investments from Taiwan, Hong Kong, and Chinese investors from other parts the world allowed China to continue to boom in spite of the economic and military sanctions the U.S. and the European Union (EU) imposed on China in the wake of Tiananmen. Similarly, Japan and South Korea increased their investments. China was sucking up capital from all over Asia and beginning to effectively integrate the regional economy.

Sensing they were losing out, the U.S. and EU dumped their human rights qualms. Clinton declared China a strategic partner in 1994, restoring China’s “most favored nation” trading status. Finally, he gave them Permanent Normalized Trade Relations at the end of his second term and cleared the way for China’s accession to the World Trade Organization in 2001. By 1999, 212,436 foreign invested enterprises accounted for 15 percent of China’s gross industrial output and 45 percent of its exports to the world.²⁰

China boomed throughout the 1990s, escaping the Asian financial crisis by fixing the value of its currency to the U.S. dollar. The bureaucracy under Deng, Jiang Zemin, and now Hu Jintao took advantage of the end of the Cold War, the neoliberal opening of the world market, and the global restructuring of industry in search of cheap labor. It has risen to the top of global capitalism by winning the race to the bottom.

China: The new workshop of the world

China is fast becoming the hub of the world economy. In 2003, it became the number one recipient of foreign direct investment, with $53 billion, surpassing the U.S., which received $40 billion.21 China’s trade with the rest of the world has been increasing at an annual rate of 16 percent, which is double the average for the rest of world. The U.S. runs a massive trade deficit with China, worth $162 billion in 2004.22 China has $700 billion in foreign exchange, the bulk of it in dollars. It has used this reserve to buy $230 billion worth of U.S. treasury bonds—a significant investment in the U.S. debt. It has become Japan’s main trading partner, and Japan has shifted a growing percentage of its industrial base to China to take advantage of the country’s extremely low wages. The EU and China are each other’s largest trading partner and will soon exchange $200 billion in goods annually.23

The success of China is in large part due to its almost limitless supply of cheap labor, drawn from its rural population of 800 million people. China’s workers earn 60 cents an hour on average; 5 percent of American wages and 10 percent of the average Asian wage.²⁴ These low wages are attracting labor-intensive light industry from both the advanced capitalist world and the developing world. The U.S. moved 400,000 jobs abroad in 2004, a quarter of them going to China.²⁵ Many multinationals operating in Mexico’s Maquiladora zone have also moved to China.²⁶ With the expiration of the multi-fiber agreement, which allowed protective tariffs on the world textile industry, the Dominican Republic is expected to lose one-third of its textile jobs to China.²⁷ Chinese companies and multinationals based in China now dominate light industry; the country now makes 70 percent of the world’s toys, 60 percent of bicycles, 50 percent of shoes, and 33 percent of luggage.²⁸

But China is also advancing in its heavy industry sector. It has spurred the development of a new consumer appliance industry that has become competitive not only in the Chinese market, but around the world. For example, the Chinese company Haier recently bid $2.25 billion to buy Maytag, only to later withdraw the offer. The auto industry has taken off as well. The world auto industry has invested $12 billion in the country. Now there are over120 carmakers in China, which account for a third of global growth in car sales. Most of the industry has been targeting Chinese buyers, and if they continue to buy at the current pace the country will be the largest car market within fifteen years. Now, the Chinese and multinational makers are beginning to export Chinese-made cars to the rest of the world, including the United States.²⁹

The high-tech industry is also booming. Dell makes almost all its computers in China. As a result of the technology transfer from Chinese partnerships, various domestic manufacturers are beginning to develop a global reach and compete with the major computer companies on all fronts. For example, Shanghai’s Lenovo is buying IBM’s personal computer business for $1.8 billion, making it the third largest PC maker in the world. Intel’s chairman Andrew Grove stated, “China is the most vigorous market for the U.S. and its most vigorous competitor.”³⁰

China has mostly gotten its high technology through agreements with multinationals, in many cases pirating copyrighted materials. It has become the international headquarters for the manufacture and sale of fakes. One study estimated that the sales of pirated products from computer programs to Rolex watches range from $19 to $24 billion annually.³¹ China has, however, increasingly invested in its own domestic research and development. As a result, China’s universities are producing 325,000 engineers a year, a number four times greater than the United States.³²

China’s massive expansion has heightened competition in the world system and thereby accentuated its tendency toward a crisis of overproduction. With its low wages and growing dominance of many industries, it is able to produce and sell products at extremely low prices—the so-called China price. For example, Wal-Mart now stocks its shelves with inexpensive Chinese products, undercutting its competitors. The company that used to boast that it sold goods “made in America” is now China’s eighth largest trading partner with an annual business of $18 billion.³³ With its cheap wages producing super-cheap products, China is one of the principal sources of deflation and is thereby slashing profit margins throughout the world economic system.

On the other hand, China’s expansion has also caused inflation. Its demand for key commodities has driven up prices. China now is the second largest consumer of oil behind the U.S. It is the number one consumer of steel in the world, gobbles up 25 percent of the world’s aluminum, 33 percent of its iron ore and coal, and 40 percent of its cement.³⁴ It is driving up prices in all these areas, causing inflation that further hammers profit margins for world capital.

China’s grand strategy confronts U.S. containment

China has developed a four-pronged grand strategy to pursue its rising aspirations to become a regional and world power. First and foremost, China tries to maintain friendly relations with other powers and developing nations so that it can continue to attract capital and thereby keep itself on the path of rapid economic expansion. President Hu Jintao repeats over and over that China wants a peaceful rise. Second, given their military backwardness, China restrains its use of force while at the same time accelerating its military modernization to prepare for conflicts down the line. Third, it aims to join international economic and political institutions in order to establish its position in the world and gain advantage from joint ventures with more developed nations. Finally, China wants to prevent the U.S. from containing or in anyway impeding its rise to power. So it has to balance standing up to the U.S. and currying friendly relations with its main export market, investor, and source of high technology. China is nevertheless buying time and space to be more unilaterally assertive in the future.

To project and protect its new economic power, China has been intent to modernize its archaic military over the last twenty-five years. It has only begun to do this, and while it may have achieved the status of a regional military power, it is not currently a threat to the United States.

China has revised its military doctrine under the banner, “Limited wars under high-tech conditions.” It has downsized its army to 2.5 million troops (from four million) and has invested instead in developing its air force, navy, and increasing its number of ballistic missile batteries. It now has one of the largest official military budgets in the world, at $30 billion, and is increasing it by 12.6 percent a year. The CIA estimates that China’s actual spending is closer to $60 billion. But that is still a fraction of Washington’s $400 billion annual military budget and about level with Japan’s $47 billion annual budget.³⁵ Moreover, it has yet to produce high-tech weapons of its own, depending instead on procurements of such arms from Russia. In the hopes of getting more up-to-date weapons, China has pressured Europe in all its negotiations over trade and investment to drop its weapons ban.

China aims to overcome its weaknesses by using its rising high-tech industry to carry through its own revolution in military affairs. This drive to develop its high-tech weaponry underlies its new push for a space program. It has also launched an aggressive plan to develop its navy and is opening deep-water ports in Pakistan and Myanmar so that it can project its power into strategic shipping lanes in Asia. However, China is almost hopelessly far behind the United States. In his book Modernizing China’s Military, David Shambaugh estimates that China’s best high-tech equipment is still twenty years out of date.³⁶

The U.S. is caught on the horns of a contradiction in its strategic response to China’s rise. It relishes China as a source of investments, but it also recognizes that China is becoming its main regional challenger, and may in the future become a global challenger. Moreover, the U.S. has no multilateral mechanisms for the control and containment of China as it has with the European Union. It never created an Asian NATO, but instead developed a hub-and-spokes relationship between itself and individual nations in the region. As a result, the U.S. confronts China as an independent power.

The U.S. has consequently flip-flopped between engagement and containment of China. During the Clinton administration, the U.S. tried to lock in its dominance of the world system through what some have called aggressive multilateralism. The U.S. used various institutions like the UN, NATO, and the WTO to enforce its position as the lone superpower. Of course, Clinton was also always ready to deploy troops to shore up American economic power from Eastern Europe to the Middle East.

Applied to China this meant strategic engagement. The U.S. ended its economic sanctions against China and pursued friendly diplomatic relations, while at the same time it maintained a military force designed to deter and contain China. Clinton repeatedly displayed U.S. military might to send signals to China, the most obvious instance being when he deployed the 7th Fleet in the Taiwan Straits during Taiwan’s 1996 election. Whether intentional or not, Clinton’s bombing of the Chinese embassy in Belgrade during his war on Serbia sent a powerful message to China. It provoked official condemnation from Beijing and relatively large nationalist demonstrations in China that denounced American “hegemonism.”

Bush explicitly shifted U.S. policy toward containment of China. He framed it within the overall concern to maintain U.S. hegemony into to the foreseeable future. Zalmay Khalilzad, now U.S. ambassador to Iraq, laid out in 2001 the key objective of U.S. foreign policy as}

the need to preclude the rise of a regional or continental hegemon. This is important for two main reasons: to prevent the U.S. from being denied economic, political and military access to an important part of the globe; and to prevent a concentration of resources that could support a global challenge to the United States on the order of that posed by the former Soviet Union.³⁷

fAccordingly, Bush and his team of Cold Warriors pronounced that China was not a strategic partner, but a strategic competitor.38 In the journal Foreign Affairs, Condoleezza Rice wrote that China was a revisionist power that sought to challenge U.S. supremacy in Asia.39

Bush’s containment policy brought the U.S. into increasing conflict with China in the first year of his administration. He promised to pursue nuclear missile defense including theater missile defense in Asia with the clear aim of neutralizing China’s advantage over other Asian nations in ballistic missiles. In 2001, when an American spy plane collided with a Chinese fighter plane in Chinese airspace and a diplomatic row ensued, the Bush administration seemed to have brought things to the brink of a new Cold War. The U.S. and China eventually patched things up because at that time they each had more to lose from an ongoing confrontation.

Despite rhetorical flourishes of cooperation with China in the “war on terror,” Bush has sharpened this containment policy over the last few years. On the political front, the U.S. aims to use its networks of Cold War alliances and divisions to impede China from establishing itself as a geopolitical counterweight to the United States.

Significantly, the U.S. has opted to turn Japan into its key ally in the region. As the American Enterprise Institute comments, “there is no mistaking the fact that Japan has decided to join the United States in its grand strategy of checking China’s great power ambitions.”⁴⁰ The U.S. has encouraged Japan to increase its military budget, violate its pacifist constitution by deploying troops in Iraq, agree to deploying a ballistic missile defense system, and make Taiwan’s security part of its strategic interests.⁴¹ It wants to turn Japan into the Britain of Asia, a strategic junior partner.⁴²

The Bush administration is also trying to use the two major ongoing political conflicts in Asia—North Korea and Taiwan—to prevent China from expanding its diplomatic and political reach. It is in this context that the U.S. desires to keep the issue of North Korean nukes “hot” without actually solving the crisis, since it helps justify what might otherwise appear as completely outdated military and political arrangements. The North Korea threat offers both Japan and the U.S. an opportunity to strengthen their military prowess in the region without admitting directly that their main concern is China. The Bush administration has made it abundantly clear that it will arm and defend Taiwan against China. The U.S. wants to disrupt China’s strategy of politically reintegrating Taiwan into the mainland. The U.S. aims to maintain the current standoff so that China cannot take over Taiwan and thereby squeeze out the U.S. and assert control over vital shipping lanes through the South China Sea.

The U.S. is also using the war on terror to compel Asian obedience to U.S. dictates. Bush demanded countries attending last year’s Asia Pacific Economic summit pledge allegiance to the U.S. war on terror. Bush also sent Condoleezza Rice and Donald Rumsfeld all over Asia at the start of his new term to reinforce this obedience. Throughout the tour, in the height of hypocrisy, both denounced China’s large military budget. Rumsfeld questioned China’s military build-up saying “since no nation threatens China, one must wonder: why this growing investment?”⁴³ But the U.S. is indeed threatening China, using the war on terror to reposition its military bases throughout Asia and develop alliances to encircle China. It has built new bases in Afghanistan and throughout Central Asia, and reopened its old bases in the Philippines. It has added these to its troop presence in South Korea, Japan, and several other nations, so that along with its mighty 7th Fleet, which rules the seas of Asia, the U.S. has effectively surrounded China.

On the economic front, the U.S. wants to use China’s accession to the WTO to undermine China’s pirating of computer technology by enforcing WTO intellectual property rights rules. It wants to open up China’s protected grain markets and flood it with U.S. farm produce. It demands that China follow through and develop a more open export market in China for U.S. products. The Bush administration has also turned up the heat on China to revalue its currency, the yuan, to protect U.S. industries against China’s exports. U.S. corporations have brought a host of dumping charges against Chinese producers. Bush has forced China to agree to voluntary tariffs on its textile industry. Finally, the U.S. wants to shore up its own economic zone in Latin America where China has made significant inroads. For example, U.S. initiatives like the Central American Free Trade Agreement (CAFTA) and the Free Trade Area of the Americas (FTAA) must be seen not only as an attempt by the U.S. to dominate the region but also to keep out the EU, Japan, and increasingly, China, whose investments in Latin America, particularly in the field of energy and raw materials, have increased dramatically.⁴⁴

On the military front, the U.S. has developed deterrent and containment strategies against China. The Pentagon is pursuing its revolution in military affairs to establish full spectrum dominance in every weapon system by using the newest high-tech gadgets to make its military lead insurmountable. By doing so, it will force China either to give up its military expansion plans or to enter into the kind of costly and unwinnable arms race that helped wreck Russia during the Cold War. The U.S. also aims to deploy theater missile defense systems in Japan, South Korea, and potentially Taiwan.

China’s pursuit of power through multipolarity

These policies are not lost on China’s ruling class. President Hu Jintao observed that the United States

has strengthened its military deployments in the Asia-Pacific region, strengthened the U.S.-Japan military alliance, strengthened strategic cooperation with India, improved relations with Vietnam, inveigled Pakistan, established a pro-American government in Afghanistan, increased arms sales to Taiwan, and so on. They have extended outposts and placed pressure points on us from the east, south, and west.⁴⁵

China has attempted to head off U.S. containment by a combination of tactical cooperation and pursuit of alliances to counter the American strategy of maintaining a unipolar world order.

China collaborates with the U.S. economically and militarily to its advantage. It accepted a raft of concessions as part of its admission to the WTO. It agreed to voluntary tariffs on its textile exports after the expiration of the multi-fiber agreement. China endorsed the United States war on Afghanistan, in part to ally itself with the U.S., but also to gain cover for their national oppression of Tibet and its Muslim province of Xinjiang. Similarly, China has deployed 1,000 riot police to the UN peacekeeping mission in Haiti to aid the U.S. and project its military power into a key region for the first time.

At the same time, China has explicitly denounced America’s attempt to maintain its status as the world’s only superpower, attacking this policy as hegemonism. “The United States is trying to preserve its status as the world’s sole superpower,” said China’s premiere Wen Jiabao, “and will not allow any country the chance to pose a challenge to it.… The core of American policy toward China is still to ‘engage and contain.’”⁴⁶

Communist Party chairman Li Ruihuan noted that when America

looks at our latent developmental strength, if the Chinese economy keeps developing for a few more decades it will be big enough to be able to balance with them. So they want to contain us, they want to implement a carrot and stick policy. It’s useless for us to use a lot of words to refute their “China threat theory.” The Americans won’t listen to you.⁴⁷

Beijing has opposed Bush’s war on Iraq as an American attempt to close off their independent access to oil and encircle it with military bases to contain China’s rise. Instead, it advocates a multipolar world order where it has room to expand. It aims to curry favor with various states to develop counter-balancing alliances against U.S. dominance. Beijing’s successful fight to host the Summer Olympics in 2008 is clearly part of this effort; it will use the games to project China as a leading nation in the world and help it make alliances independent of the United States.

The most important attempt by China to build a counter-balancing alliance has been its strategic partnership with Russia. The two signed the Shanghai Five Pact in 1996, pledging mutual cooperation with three key Central Asian states—Kazakhstan, Tajikistan, and Kyrgyzstan. They laid out plans to crush Islamic fundamentalists, block U.S. incursion into Central Asia, and develop oil and natural gas deals around the Caspian Sea. In 2001, they transformed this pact into the Shanghai Cooperation Organization, adding Uzbekistan to the list of member countries. China and Russia are using this as a counter to NATO’s eastward thrust and the U.S. bases in Central Asia. China and Russia have also recently agreed to joint military exercises. Zbigniew Brzezinski registered the significance of this pact writing, “China’s steady expansion of regional involvement within the Shanghai Five, and subsequently the Shanghai Cooperation Organization, is a geopolitical watershed.”⁴⁸

While the U.S. has been bogged down in Iraq, the Washington Post writes that China “is forming alliances that would reduce and possibly eventually challenge America’s influence in Asia.”⁴⁹ Kenneth G. Lieberthal, a Clinton administration official now at the University of Michigan told the Post, “China has moved in and assumed a dramatic regional role. Everyone in the region believes the movement has shifted toward China in a way no one anticipated three and a half years ago.”⁵⁰

China has initiated unprecedented summits with India designed to settle their historic border disputes and establish strategic economic and political ties. As one Chinese official remarked before the recent meeting between Premier Wen Jiabao and India’s Prime Minister Manmohan Singh,

The Chinese have been observing the U.S.’s intentions of closely engaging India by transferring nuclear technology for energy, arms supplies, talks on missile defense as well as stepping up economic relations. The response of China will be equally powerful. Instead of taking on the U.S. single-handedly, China will seek to work out a grand alliance of nations including India and Russia that will be able to take on the economic and military might of the U.S. People right now talk of a unipolar world, by the quarter of this century the world will be bipolar, with China as the power to be reckoned with, and by the half of the century tripolar with India in the picture.⁵¹

These sentiments are prompted by China’s fears of “an anti-China ‘Asian NATO’ front with Japan, Australia and India joining the U.S. to ‘contain’ China.”52 These fears have no doubt been heightened by the mid-July announcement of a strategic partnership between the U.S. and India to increase cooperation on civilian nuclear energy programs.

China has organized summit meetings with the Association of South East Asian Nations (ASEAN). They held the ASEAN Plus One meeting. They followed up with ASEAN Plus Three, including itself, South Korea, and Japan. At that meeting, China announced the creation of a free-trade zone by 2010 under the slogan “rising together.”⁵³ They have planned an East Asia summit scheduled for November and have not even invited the United States.

China has taken this struggle to build a network of alliances right into the heart of the World Trade Organization. Along with Brazil, they led the so-called G20, an alliance of developing nations, in protests at the Cancun Summit. They demanded that Europe and the U.S. drop their agricultural subsidies as unfair barriers to Third World exports to the United Sates. China has thus tried to turn the Washington Consensus against the U.S. and rally the developing world under its banner. Of course, China in no way has the best interests of the ruling classes of the developing world in mind, since it is the main country that is economically undercutting them.

The strategic confrontation between the U.S. and China is provoking conflicts in Asia, in particular between China, Japan, and Taiwan. In each country, despite their profound economic integration, the ruling class is whipping up nationalism to support their geopolitical power projection. China has strenuously opposed Japan becoming a permanent member of the UN Security Council. A flurry of angry, sometimes violent protests last April in China, which involved tens of thousands of people in several cities, were part of a government-sanctioned campaign against Japan’s efforts to gain a seat on the UN Security Council. These demonstrations were also stoked by Japan’s approval of a history textbook, which whitewashes the atrocities committed by Japanese troops in China in the 1930s and 40s.

Japan has openly declared alongside the U.S. that Taiwan is a mutual security concern. China has in turn threatened unilateral actions against any attempt by Taiwan to declare independence from China, and has denounced U.S. and Japanese support of Taiwan. The Chinese Communist Party bureaucracy has made this a central part of its regional strategic orientation. The bureaucracy has already reintegrated the former British colony of Hong Kong and the former Portuguese colony of Macao, and are insistent that Taiwan be reintegrated into China.

This standoff could easily spiral out of control. Last summer, the U.S. conducted one of the largest naval exercises in its history called Operation Summer Pulse, which gathered twelve carrier groups in one place for the first time in U.S. history. China has responded with a new anti-secession law and increasingly hostile rhetoric toward Taiwan. The U.S. has used this standoff to get the EU to postpone dropping its ban on weapons sales to China. Bush said, “There is deep concern in our country that a transfer of weapons would be a transfer of technology to China, which would change the balance of relations between China and Taiwan.”⁵⁴ Former New York Times bureau chief Patrick Tyler grasped China’s determination to secure its national integrity, “I think it’s very dangerous to underestimate the willingness of the Chinese leadership to march over a cliff over this issue of sovereignty.”⁵⁵

Resource wars?

Central to China’s multilateralist strategy is its determination to escape U.S. attempts to control its access to key resources, especially oil and natural gas. The U.S. has made this aspect of its containment strategy abundantly clear. As Bush supporter Patrick Seal argues, “to contain China, the U.S. needs to take sole control of the strategic Gulf area, which contains more than 25 percent of the world’s oil reserves, a resource China desperately needs as it seeks to consolidate and expand its already formidable economic power.”56

Chinese companies have dramatically increased their foreign direct investment. They spent $3 billion in 2004 buying foreign companies, and they are expected to shell out $25 billion in 2005.⁵⁷ Instead of spending all their profits and currency reserves on U.S. treasury bills, which return a pittance of interest, China has increasingly opted for more profitable investments that secure resources and market share that is in their national security interests.

The most important of these new investments is in the oil and natural gas industry. Since 1993, China has become dependent on 1.7 million barrels of imported oil per day to make up for the shortfall in its domestic production. The Department of Energy expects that China will have to import 9.4 million barrels a day by 2025, an increase of five times over the 2001 figure.⁵⁸ Copying the U.S., China has made plans to construct a thirty-three billion barrel strategic oil reserve so that it can endure shortages and cutoffs to its oil supply. China has also become increasingly preoccupied with securing independent access to oil, free of U.S. interference, through deals with various so-called rogue states, as well as developing stronger relations with oil and gas producing nations within the U.S. umbrella. This is one of the pivotal causes of increasing U.S./China tensions.

The key to China securing oil and gas is the Middle East, where it expects 81 percent of China’s imported energy to come from by 2010.⁵⁹ China has thus struck up friendly relations not only with U.S. allies like Saudi Arabia, which is its largest supplier, but also with Iraq and Iran. Before the U.S. invasion of Iraq, China had signed large oil deals with Saddam’s government. Currently, China has made large oil deals with Iran and has invested in Iran’s oil industry to help upgrade it.

But China is also concerned to diversify its energy imports. China has invested in the extraction of sand oil in Alberta, Canada,⁶⁰ and has investments and trade deals worth $50 billion involving oil and other raw materials with Venezuela, Brazil, Ecuador, Argentina, and Chile.⁶¹ Venezuelan President Hugo Chávez has pledged to send 100,000 barrels of oil a day to China valued at about $6 billion.⁶²

Chinese bilateral trade with Sudan, Angola, Zimbabwe, and other African states has tripled from $10 billion in 2000 to $30 billion in 2004, and investments have grown to $1 billion.⁶³ China has also struck major oil and natural gas deals in Central Asia through the Shanghai Cooperation Organization. They are planning major pipelines to run from the Caspian Sea to Western China. In the Caribbean, China has offered to work with Cuba on joint oil exploration off its coast.

And, in Asia, China is competing with several countries for oil and natural gas exploration. In the East China Sea, China and Japan are involved in competitive oil exploration that nearly produced an incident between China and Japan. Last November, a Chinese nuclear sub probably involved in oil exploration entered Japanese waters and Japan responded with its own ships, which chased the submarine. China is also competing with Vietnam, Malaysia, Taiwan, and the Philippines over the Spratly Islands and their possible oil reserves. This has produced twelve armed conflicts over the last twenty years. The U.S. and Japan have become involved by registering complaints against China on behalf of the Philippines.

Finally, China’s state-owned companies have begun to buy various multinational corporations that control key resources for its economy. Thus, CNOOC’s attempted takeover of Unocal and Minmetals’ bid for the Canadian mining company Noranda. They add these to the growing list of purchases of foreign companies like IBM’s PC division and South Korea’s car company Ssangyong Motor Co. As China looks to increase its weight in the world system, securing resources, buying out competitors, and purchasing lucrative brands, it will come more and more into conflict with U.S. interests.

Contradictions of Chinese capitalism

“Europe was the past, the U.S. is the present and a China-dominated Asia the future of the global economy. That future seems bound to come. The big questions are how soon and how smoothly it does so.”64 So writes Martin Wolf of the Financial Times. The trend is undeniable, but China faces many contradictions that may have a strong impact on how these trends play out. As The Far Eastern Economic Review writes,

China’s industrial powerhouse is also a fragile, developing economy that needs to provide jobs for tens off millions of workers thrown out of state sector jobs. Bank loans threaten the stability of the financial system, and the government…also needs to ensure that pensions are paid and social tensions are kept from the boiling point.⁶⁵

China confronts key political and economic problems in managing the expansion of its economy. The Communist Party hangs on to what legitimacy it has left through virulent nationalism and by delivering some improvements in living standards to large sections of the population as a result of continued economic growth. Its nationalism has resonated especially with middle-class students and to some extent in the working class and peasantry. But the rise of such nationalism not only in China but also in Japan and the rest of Asia could trip wars and undermine the bureaucracy’s current design for the peaceful rise of China.

The Communist Party is now so concerned that widening inequalities will spur rebellion that they have launched a campaign inside the party focused on alleviating some of the worst abuses against peasants and workers. The contradiction, one that has faced every rising capitalist economy, is this: Its competitiveness is based on low wages; but China’s development demands a more educated and, over time, a better-paid workforce. Such developments will again put pressure on the bureaucracy to open up as Russia did during its glasnost phase. But the bureaucracy also fears another Tiananmen. It is therefore reluctant to risk a fifth modernization, democracy, out of fear of instability. So it will likely continue to vacillate between reform and repression.

The Chinese state owns a smaller percentage of its economy than does the United States.⁶⁶ This loss of centralized economic control has made it difficult for Beijing to manage regional bureaucrats, the country’s new private capitalists, and the massive multinational presence. One consequence has been the regionalization of the Chinese economy. The different regions operate independently, compete with one another to cut deals with multinationals, and have therefore often developed an antagonistic relationship with each other. Another consequence has been the emergence of massive corruption throughout the economy. Bureaucrats have enriched themselves through all sorts of schemes, from purchasing cheap state-sector commodities and then reselling them in the private market at higher prices, to simple bribery. The bureaucracy’s abuses have become one of the major popular complaints against the Communist Party.

For the last decade and a half, Beijing has been able to manage the situation despite its political weaknesses. But it faces giant problems at the core of its economy. China’s agricultural system has proved unable to meet the society’s food needs and it consequently became a net importer of food for the first time ever in 2004.⁶⁷ Moreover, reckless industrialization has led to a growing environmental crisis; cities have gobbled up farmland, development has led to toxic levels of pollution, and the country is experiencing increasing desertification. With its accession to the WTO, China will be increasingly swamped with cheaper grain from the world market that will undercut peasant production, causing more and more peasants to leave the land. If these peasants are unable to find work, their desperation could easily trigger peasant rebellions in the countryside.

The biggest problem Beijing must manage is overcapacity. Multinationals and Chinese investors in search of profit have built too many factories, producing too many goods and returning too little profit on their investment. This overcapacity has driven down prices not only in China but around the world. Chinese and multinational capitalists have tried to get out of this situation by driving their competitors out of businesses and buying them up. The vast majority of new start-ups thus go out of business.

Chinese capitalists will try and export their surplus in an attempt to overcome their saturation of the domestic market, but that will only exacerbate the worldwide problem of overcapacity. ⁶⁸ For example, China has the capacity to produce 2.8 million cars a year, but can only sell 1.8 million. What Oded Shenkar says of China’s auto industry applies to its whole economy: “the whole world has overcapacity right now. The Chinese, like everyone else, will be looking to export to sell all those extra cars.”⁶⁹

In another attempt to restore their profit margins, corporations have turned to more and more speculative investment, especially in real estate. Their speculation in housing has driven prices up by 34.9 percent while 26 percent of the units built stand empty.⁷⁰ Just last year, this speculative bubble combined with the massive increases in commodity prices, especially oil, led to inflation and fears of an overheating economy. Beijing managed to survive the situation by raising interest rates and cooling the economy down, but the overcapacity and tendency toward speculation will plague its development plans and continue to destabilize the society.

Beijing has avoided taking on one of the features of this overcapacity—its big unprofitable and uncompetitive state sector. Over the last decade, it has eliminated many of the smaller state-owned companies, but retained the thousands of largest ones.⁷¹ Two-thirds of the remaining companies operate at a loss.⁷² The bureaucracy must restructure its state sector and cut its losses so that it can divert capital to more profitable investments. It has already cut employment in the state sector by fifty-three million since 1996, but it must lay off tens of millions more.⁷³ The bureaucracy wants to end the “iron rice bowl” of cradle to grave social welfare programs paid to the state-sector employed and laid-off workers. But it fears triggering workers’ rebellions and it has therefore avoided restructuring the remaining state sector.

The continuing crisis in the state sector has also caused a mess in China’s four state-owned banks. They have propped up the state sector with massive loans to unprofitable firms. Today they hold $490 billion in bad debt⁷⁴— nearly 40 percent of the loans they hold—and they will never recover that money.⁷⁵ Moreover, the debt continues to mount. As a result, a banking crisis threatens China and the rest of the world economy. Several things could set it off, for example a run on the banks by peasants and workers worried about loss of their life savings to changes in the Chinese currency. A Chinese banking crisis would spread instability throughout the world since these banks hold huge foreign currency reserves, especially American dollars. A banking crisis would thus destabilize the U.S. economy and, given that it is the export destination of the world system, could lead to a global recession. For these reasons, U.S. banks have become increasingly involved in the managing of China’s banks, but in so doing they have tied their fate more and more to China’s.

China’s accession to the WTO is accelerating all of these problems. But the bureaucracy hopes that it will also open markets, increase investment, and spur continued high growth. An expanding economy will provide dislocated peasants and state workers with jobs and therefore soften the blow of the crises in agriculture and the state sector. China needs to create fifteen million jobs a year to absorb the surplus labor. But it confronts dynamics in the world system that it cannot control. If the world economy slows, it will boomerang on China. Investment could dry up, its export markets could collapse, and growth could drop, thereby bringing all its political, social, and economic problems to a boiling point.

Thus, China is both the strongest and weakest link of the world system. An economic crisis there threatens to send the world into a major slump. A world recession triggered by a crisis in China will heighten both economic and political tensions, regionally and globally. That China, like other capitalist countries, will face cyclical crises and structural crises, cannot be in doubt. But either way, low or high growth rates, China will increasingly challenge the U.S. for mastery in Asia and the world.

Struggle from below

While the Chinese bureaucracy prepares for such interimperial conflict, it also confronts rising class struggle inside its borders. The scale of social inequality in China is astounding, and the grievances of peasants and workers are mounting and generating a wave of protests and strikes. China now has two million millionaires, while most people barely eke out a living. The top 3 percent owns wealth equal to the bottom 800 million in the society. Although the bureaucracy boasts about lifting 150 million out of poverty—and can claim real progress in this regard—China’s Gini coefficient, which measures the gap between the rich and poor, is the highest of any major developing economy. Forty-seven percent of the population lives on about $2 a day,76 while a quarter of the population (350 million people) suffers from desperate poverty.77

These inequalities are stoking the fires of social rebellion. Unlike 1989, the students are not the leading edge of this potential upheaval, having largely bought into the neoliberal project with the hopes of getting careers as technocrats, computer programmers, engineers, and scientists. But if the economy slows and their dreams are dashed, they could easily erupt again.

Peasants, on the other hand, have lost ground in the 1990s, earning a decreasing amount compared to urban workers. They have developed deep hostilities toward local bureaucrats for unfair taxation, non-payment for their produce, loss of access to education and health care, and rural industrial pollution.

China has been hit with a wave of peasant demonstrations and revolts. Recently, 20,000 peasants marched in Huaxi against the Zhuxi Industrial Park that threatened to take their land away. Last October in Sichuan, 50,000 marched to stop the government from evicting them to build a dam. Thousands protested for three straight days beginning in July in Xingchang, a village 180 miles south of Shanghai, demanding the closing of a local pharmaceutical plant that had been polluting their water supply. According to a New York Times report,

As many as 15,000 people massed here Sunday night and waged a pitched battle with the authorities, overturning police cars and throwing stones for hours, undeterred by thick clouds of tear gas….

“This is the only way to solve problems like ours,” said a 22-year-old villager whose house sits less than 100 yards from the smashed gates of the factory, where the police were massed. “If you go to see the mayor or some city official, they just take your money and do nothing.”

The riots in Xinchang are a part of a rising tide of discontent in China, with the number of mass protests like these skyrocketing to 74,000 incidents last year from about 10,000 a decade earlier, according to government figures. The details have varied from incident to incident, but the recent protests all share a common foundation of accumulated anger over the failure of China’s political system to respond to legitimate grievances and defiance of the local authorities, who are often seen as corrupt.78

Workers in both the state industry and the new private sector are also beginning to resist. As a result, strikes in the old state industry as well in the special economic zones have risen dramatically, from 8,700 strikes in 1993 to 58,000 in 2003, involving three million workers. These protests are fragmented, and, as far as we know, purely local in organization, character and aims. But the government is terrified of them, as it is of any unofficial organization, even the Falun Gong religious group that it has repressed since its 20,000-strong protest in Tiananmen in 1999. What the bureaucracy fears most is that a workers’ movement similar to the one that developed in Korea in the 1980s develops in China, or that the increasing numbers of local struggles are able to combine into a more formidable national movement that brings together collective grievances.

Internationalist opposition to imperial rivalry

The globalization theorists were wrong in arguing that the free market, by further integrating the world economy, would ease national tensions. The integration of the world system has not ended the economic, strategic, and diplomatic competition between capitalist states, but is in fact exacerbating it.79 The growing interimperial rivalry between the U.S. as the world’s sole superpower, and China as a rising power, proves that, just as Vladimir Lenin and Nicolai Bukharin predicted, capitalism’s tendency toward internationalization still operates through nation states and therefore produces interimperial rivalry as great powers compete for dominance over the global system. 80

The U.S. is today the world’s largest economic and military power with no peer rival. Yet to think that this situation will persist into the indefinite future is mistaken. While war between China and the United States is clearly not on the immediate horizon, they are locked in a growing rivalry in a highly unstable section of the world. Any number of disputes, such as over Taiwan or battles in Central Asia over oil and natural gas, could set off an unintended and catastrophic military conflict in the future. In any case, the U.S. is faced with a situation, as have other great powers in the past, where tectonic changes are forcing to the surface tensions that will, over time, propel battles over the realignment of power-relations on a world scale.

In this volatile competition, a section of the U.S. capitalist class, especially in its right-wing Republican incarnation, are clamoring for a new Cold War and protectionist policies to defend American industry. For example, Peter Morici of the R. H. Smith School of Business at the University of Maryland rages, “A well armed, authoritarian China, bent on subverting global institutions that support democracy and free market values” could easily become “a fascist menace with global reach.”⁸¹ Former CIA chief, James Woolsey stated in his congressional testimony about CNOOC’s bid for Unocal, “We are dealing here not, in any reasonable sense, with a takeover attempt by one corporation of another. We are dealing with a takeover attempt by the most powerful Communist dictatorship in the world.”⁸²

A section of the union bureaucracy and its Democratic Party allies, like New York Senator Charles Schumer or nominal independents like Vermont Congressman Bernie Sanders, are similarly calling for such protectionist policies purportedly to defend American workers. But three decades of such approaches to international capitalism’s race to the bottom have failed. Protectionism has not saved jobs in any industry from auto to steel or textiles. Instead of the dead end of protectionism and nationalism that plays into capital’s attempt to pit workers from different nations against one another, we have to build solidarity across borders that unites workers against both their American and Chinese bosses.

A real danger is that nationalism may not only divide workers internationally, but also scapegoat Chinese and other Asian workers inside the U.S., thereby weakening the domestic labor movement. Given the right-wing campaign against immigrants already taking place, China-bashing from the Right and pseudo-Left could easily fuel the kind of racism that anti-Japanese protectionism stirred up in the 1980s. Only a united struggle of workers, immigrant and native, inside the U.S. and across national borders can defend jobs and raise living standards anywhere in the world today.

A renewal of anti-imperialist politics is necessary to guide such an international workers’ struggle. The U.S. aims to preempt the rise of any challenger or network of challengers, but that attempt will provoke conflict with not only so-called rogue states but also rival powers like China over everything from oil to markets and geopolitical advantage. Only through international solidarity and anti-imperialism can we chart a path out of the tangle of crisis and war toward which the world is headed.