Brookings: Centers - John L. Thornton China Center

The U.S., China and Africa: Pursuing Trilateral Dialogue and Action

Mon, 13 May 2013 14:30:00 -0400

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May 13, 2013
2:30 PM - 4:30 PM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

With six of the ten fastest growing economies in world, sub-Saharan Africa is attracting both American and Chinese investors. The growing importance of sub-Saharan Africa to the global economy has made the region a focal point for the differing policies of the United States and China. China recently pledged significant financing to Africa over the three year period from 2012-2014, while the U.S. looks to extend the Africa Growth and Opportunity Act ahead of schedule. Despite the opportunities and growth in the region, the U.S., China and Africa all face shared and separate challenges in the areas of security, trade, investment, foreign policy, and natural resource extraction and management.

On May 13, the Africa Growth Initiative and the John L. Thornton China Center at Brookings, with the Institute for Statistical, Social, and Economic Research at the University of Ghana and the Chinese Academy of Social Sciences in Beijing, hosted a discussion to examine the relationships among the U.S., China and African states. This forum was the first in a series, which brings a balanced perspective to the examination of the challenges and opportunities for trilateral dialogue and action.

Chinese National Security Decision-making: Processes and Challenges

Yun Sun — Mon, 06 May 2013 16:03:00 -0400

In studies of contemporary China, information about the national security decision-making process is largely absent, despite the abundance of information and analysis on leadership politics and domestic policy-making. A proliferation of foreign policy actors in China has attracted much attention from researchers, leading to a booming number of investigations into the governmental and non-governmental players involved. The processes themselves―in which these players operate and interact to produce the eventual policy decisions―have eluded academic scrutiny, mostly due to the scarcity of available information. The topic, however, is critically important in achieving an accurate understanding of China’s national security policies which often seem unclear and plagued by conflicting messages.

In the Chinese context, the definition of “national security” is significantly different from that in the United States. For the American policy community, the term “national security” usually refers to the country’s external national security interests and threats. The responsibility for coordinating national security affairs lies primarily with the National Security Council. In China’s case, the term “national security” encompasses both domestic/internal and foreign/external security and, therefore, has a much broader connotation. This paper is primarily focused on the external dimensions of China’s national security. There are many overlapping aspects between China’s national security policy and its foreign policy, as the latter also serves to protect China’s national security interests. However, because national security also covers military security, national defense, economic security and other non-traditional security challenges, the framework and coverage is broader than with foreign policy.

This paper examines three processes of China’s national security decision-making: the decision-making at the top level, the policy-coordination process conducted through the National Security Leading Small Group (NSLSG), and the informational process for national security decision-making. Generally speaking, the supreme decision-making authority in China is monopolized and exercised through the collective leadership of the Politburo Standing Committee; this is especially true with regard to “strategically important” issues, such as Sino-U.S. relations. However, the paramount leader at the time of this writing, President Hu Jintao (the Politburo’s designated person for national security affairs) commanded large authority and privilege in determining regular national security policies. His primary advisor on national security (at the time of this writing State Councilor Dai Bingguo) played a central role in informing and advising him on key policy decisions. As the Director of the Foreign Affairs Leading Small Group (the same organization as NSLSG),[1] Dai also carried responsibility for inter-agency policy consultation and coordination through the NSLSG/FALSG. Information for national security decision-making is produced primarily by participating agencies and think tanks, but there is a standard process of screening, organizing, and disseminating that allows information to flow to the top.

A fundamental challenge for China’s national security decision-making system lies in the conflict between the need for centralization and the diffusion of power (collective leadership) at the top level. Decisions on strategically important issues must be based on consensus, which is created through time-consuming debates; consensus-building proves especially problematic when a timely response is required. As an informal and ad-hoc committee, the NSLSG does not operate as the core national security team designated to follow, analyze, and coordinate daily national security affairs, nor does it have the adequate human resources and professional capacity to play that role. In reality, its role is more or less confined to the organizer of research and coordinator of policies. Its authority on national security affairs is further undermined by unbalanced civil-military relations and the lack of civilian oversight over daily military operational activities. In the informational processes, the players in the Chinese system are extremely risk-averse. Confined by agency perspectives and career advancement interests, they are reluctant to report new findings that are not in line with established conventional wisdom.

Understanding that most of the challenges in the Chinese national security system have deep historical, political and structural roots, any attempt to address them must be bold and might seem politically unrealistic. Nevertheless, the recommendations offered in this paper are aimed at addressing the fundamental deficiencies of the current system. Their feasibility depends on the future of political reform, which although widely agreed as inevitable, has thus far been successfully avoided.

[1] The general understanding of the relationship between FALSG and NSLSG in China is that it is literally the same organization with two different titles (一个机构两块牌子). However, several government analysts pointed out that within the same organization there is a distribution of labor on national security and foreign policy between two different bureaus.

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Yun Sun

Image Source: © Jason Lee / Reuters

An American Perspective on Malaysia's Elections: Preserving Najib Razak's Gains

Jeffrey A. Bader and Douglas H. Paal — Wed, 01 May 2013 00:00:00 -0400

Malaysian Prime Minister Najib Razak has called national elections for May 5. This date is perilously close to the statutory deadline to hold the elections, suggesting he is concerned that the results may lead to his departure from office. Malaysia, the United States, and much of the world have a stake in the outcome.

The traditionally dominant party, the United Malays National Organization (UMNO), and its partners in the long-ruling Barisan Nasional coalition have experienced internal divisions. Ethnic preferences for Malays in government and the economy have alienated many Chinese, who are a minority (roughly 40 percent of Malaysia’s population) but economically dominant. Najib’s efforts at internal reform have threatened traditionalists associated with former prime minister Mahathir Mohamad. Younger, urban voters seem itching for change.

There is a strong challenge from an opposition coalition headed by former deputy prime minister Anwar Ibrahim. His Pakatan Rakyat coalition includes Chinese and Islamic parties and is close enough in some polls to win outright.

But many longtime observers believe the real election is within UMNO, between old warhorses associated with Mahathir and the reformists surrounding Najib. The argument is that if Najib cannot bring in a result that preserves UMNO’s two-thirds majority and capacity to rewrite the constitution, old-line leaders, possibly current Deputy Prime Minister Muhyiddin Yassin, would displace Najib and stem reforms.

This is where the stakes need to be clearly stated. Under Mahathir, opposition to perceived residual Western colonialism was a rallying cry and a frequent and increasingly anachronistic theme. His successor, Abdullah Badawi, was less shrill but did not move significantly away from Mahathir’s policies. Najib has fundamentally repositioned Malaysia internationally. He has moved away from the old UMNO policy seeking to divide Asia from the United States and has seen the United States as an important partner for Malaysia and ASEAN.

Najib and his top officials have been forthright in speaking about democratic values in international forums such as the ASEAN Regional Forum. They have been critical of states such as North Korea and even Myanmar before reforms commenced there, something that would not have been countenanced in an earlier period when criticism was aimed solely at the West.

Najib has done all this as part of a strategy to retain domestic (Chinese) investment and attract foreign investment in order to accelerate Malaysia’s development. As a demonstration of his commitment to a more open Malaysian economy, he has joined the discussions on the Trans-Pacific Partnership trade agreement with ten other nations.

After economic contraction in 2009, Malaysia’s GDP growth has rebounded to a robust 5 percent, led by double-digit export growth in 2010 and large FDI inflows in 2010 and 2011. Gross investment for 2012 was up 9 percent over the last year, with the fastest growth in private and domestic investment (up 22 percent and 55 percent, respectively). The current account surplus is expected to narrow in the near term, and employment growth is expected mostly in domestic-oriented sectors such as services, in line with Najib’s New Economic Model that aims to create more sustainable, equitable, high-income growth. The Asian Development Bank forecasts that Malaysia’s GDP will grow by 5.3 percent in 2013, accelerating a little to 5.5 percent next year. Malaysia’s strong performance under Najib stands in marked contrast to the ethnic preferences and frequent allegations of corruption and cronyism under Mahathir.

Domestically, Malaysia remains an impressive Muslim-majority nation with a democratic system, pluralism, and generally good standards for human rights protection. Najib has given a number of speeches in international settings denouncing terrorism in the Islamic world and indeed has preached formation of a league of moderate nations to fight terrorism.

Under Najib, Malaysia also has moved to significantly tighten its previously porous export-control system, which had made the country a transit point for shipment and financing of dual-use products going to Iran. Defense cooperation with the United States and others has been normalized, and it has not remained a forum for grandstanding against the West.

Najib has moved to dismantle one of the instruments of repression, the Internal Security Act inherited from the British when Malaysia became independent. Under his guidance the legislature has replaced the law, which provided the basis for lengthy detention without trial.

These are not just achievements for Najib’s leadership, but they are gains for Malaysia, the region, and the world.

As the election campaign unfolds, it will be interesting to see what issues UMNO and its Barisan National coalition and Anwar with his Pakatan Rakyat coalition use against each other (see the table below).

Barisan National (ruling coalition) Coalition head: Najib Razak	Pakatan Rakyat (opposition) Coalition head: Anwar Ibrahim
The Economy
Gradually increase the government’s 1Malaysia People’s Aid (BR1M) handouts to RM1,200 for qualified households and RM600 for qualified singles Enact a more broad-based tax system and gradually reduce personal and corporate tax rates	Maintain BR1M cash assistance if elected Broaden income tax band, raise the income floor for the 26 percent tax rate to RM400,000 from RM250,000
Bumiputera (Ethnic Malays and Indigenous Groups)
Promote and improve Bumiputera policies that favor ethnic Malay businesses Provide RM500 million in seed funding to the Indian community	Equally distribute economic assistance regardless of race Undertake an inclusive development platform that includes all ethnic groups
Transparent Government
Establish additional corruption courts Elevate officers of Malaysian Anti-Corruption Commission to higher level	Introduce corruption elimination policy (DEBARAN) to free anticorruption institutions from political control and improve anticorruption prosecution Undertake electoral reform
Living Standards
Expand transport subsidies, education aid, food and housing assistance, public transportation, and rural infrastructure	Undertake similar populist policies, and raise minimum monthly income to RM4,000 by end of first term
Innovation
Enact the 2020 plan for high-income development based on innovation Attract RM1.3 trillion worth of investments and create 2 million new high-income jobs Channel investment to small and medium enterprises	Raise research and development expenditures to 5 percent of GDP Create a RM500 million national innovation fund Reshuffle tax incentives to give more assistance to small and medium industries
The Environment
Introduce financial incentives for renewable energy investment Voluntarily reduce emissions intensity of GDP by up to 40 percent by 2020 Pass stricter illegal logging laws	Halt work at the Lynas rare earth plant Review the implementation phases of the RAPID petrochemical project in Pengerang Reform logging regulation

Anwar has a mixed record. He earlier stood out as one of Malaysia’s leading progressive political figures and someone who creatively reconciled Islam and Western values. Since his imprisonment by Mahathir in 1998 on allegations of sodomy and a subsequent revival of similar charges in 2008 that was overturned in Malaysia’s courts, he has moved toward a closer alignment with Islamic politics. He has, for example, irritated women voters by suggesting that sharia law could be adopted by tradition-minded Malaysian states. Anwar nonetheless continues to be a strong public advocate of democracy and human rights and criticizes Najib as essentially continuing the more repressive policies of the Mahathir years.

Whether the winner is Najib or Anwar or the conservative forces within UMNO, Malaysians should consider seriously how to preserve the gains of the Najib era.

Authors

Jeffrey A. Bader
Douglas H. Paal

Image Source: © Bazuki Muhammad / Reuters

How the China Development Bank is Rewriting the Rules of Finance: Debt, Oil and Influence

Thu, 18 Apr 2013 14:30:00 -0400

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April 18, 2013
2:30 PM - 4:00 PM EDT

Saul/Zilkha Rooms
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

The China Development Bank may be the most powerful financial institution in the world, argue Beijing-based Bloomberg News reporters Henry Sanderson and Michael Forsythe in their new book, China’s Superbank: Debt, Oil and Influence – How China Development Bank is Rewriting the Rules of Finance (Bloomberg Press, 2013). The China Development Bank has been the enabler of the government's policies both at home and abroad. It invented the system of local finance that helped China weather the global financial crisis and has financed the China-Africa Development Fund, bankrolled the global expansion of Chinese companies and extended tens of billions of dollars in energy-backed loans to borrowers around the globe, including Brazil, Russia and Venezuela.

On April 18, the John L. Thornton China Center at Brookings hosted a discussion on China’s Superbank with Forsythe and Sanderson. Brookings Fellow Erica Downs provided introductory remarks and moderated the discussion.

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The Road Ahead for China’s Economy

Tue, 16 Apr 2013 09:00:00 -0400

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April 16, 2013
9:00 AM - 4:30 PM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

In recent years, China has increasingly confronted new challenges in economic policy, including rising labor costs, low household consumption, rapid urbanization and inefficient domestic investment. While it is now widely acknowledged in Beijing that major structural adjustments are needed to address these issues, implementing serious reforms pose major challenges for the newly installed leadership.

On April 16, the John L. Thornton China Center at Brookings and China’s Caixin Media Group hosted a conference to examine the daunting challenges confronting China’s new leaders. The morning panels featured a discussion of the financial sector as well as the relationship between the domestic agenda for financial reform and China’s evolving strategy for outbound investment. The afternoon panels took a close look at the political obstacles to implementing major economic reform in areas such as tax policy, the household registration system and land transfers, as well as explore the impact of environmental and natural resource constraints on China’s economic growth.

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North Korea and Policy Priorities for the United States

Mon, 15 Apr 2013 10:00:00 -0400

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April 15, 2013
10:00 AM - 11:30 AM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

This event was broadcast live on C-SPAN and cspan.org. Click here to watch online.

In the past months, North Korea has issued a series of threats and provocative actions, from testing a nuclear device and conducting a missile launch—in contravention of multiple United Nations resolutions—to cancelling the armistice ending the Korean War and threatening a new war against the United States and South Korea. Harsh rhetoric from North Korea is nothing new, but some observers feel that the recent threats represent real danger. Others claim that they reflect internal dynamics in North Korea and that the crisis will pass.

On April 15, Foreign Policy at Brookings hosted a discussion on the policy priorities for the United States in dealing with North Korea during and after the current crisis. Brookings experts debated the threat to the United States and its allies and analyzed steps that the United States can take to mitigate the danger, including sanctions, engaging allies and neighbors in the region, nonproliferation efforts and, if necessary, responding to aggressive actions by North Korea.

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North Korea and Policy Priorities for the United States

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China’s Global Currency: Lever for Financial Reform

Arthur R. Kroeber — Thu, 11 Apr 2013 12:09:00 -0400

Following the global financial crisis of 2008, China’s authorities took a number of steps to internationalize the use of the Chinese currency, the renminbi. These included the establishment of currency swap lines with foreign central banks, encouragement of Chinese importers and exporters to settle their trade transactions in renminbi, and rapid expansion in the ability of corporations to hold renminbi deposits and issue renminbi bonds in the offshore renminbi market in Hong Kong.

These moves, combined with public statements of concern by Chinese officials about the long-term value of the central bank’s large holdings of US Treasury securities, and the role of the US dollar’s global dominance in contributing to the financial crisis, gave rise to widespread speculation that China hoped to position the renminbi as an alternative to the dollar, initially as a trading currency and eventually as a reserve currency.

This paper contends that, on the contrary, the purposes of the renminbi internationalization program are mainly tied to domestic development objectives, namely the gradual opening of the capital account and liberalization of the domestic financial system. Secondary considerations include reducing costs and exchange-rate risks for Chinese exporters, and facilitating outward direct and portfolio investment flows. The potential for the currency to be used as a vehicle for international finance, or as a reserve asset, is severely constrained by Chinese government’s reluctance to accept the fundamental changes in its economic growth model that such uses would entail, notably the loss of control over domestic capital allocation, the exchange rate, capital flows and its own
borrowing costs.

This paper attempts to understand the renminbi internationalization program by addressing the following issues:

Definition of currency internationalization;
Specific steps taken since 2008 to internationalize the renminbi;
General rationale for renminbi internationalization;
Comparison with prior instances of currency internationalization, notably the US dollar after 1913, the development of the Eurodollar market in the 1960s and 70s; and the deutsche mark and yen in 1970-90;
Understanding the linkage between currency internationalization and domestic financial liberalization;
Prospects for and constraints on the renminbi as an international trading currency and reserve currency.

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Arthur R. Kroeber

Image Source: © Bobby Yip / Reuters

China’s Increasing Interest in Africa: Benign but Hardly Altruistic

Yun Sun — Fri, 05 Apr 2013 14:42:00 -0400

China’s new leader President Xi Jinping has completed his foreign debut tour as the head of state after visiting Russia and three African countries: Tanzania, South Africa and the Republic of Congo. As the Chinese media hailed his “tremendous victory” and the “successful practice of great power diplomacy with Chinese characteristics”, the issue of China’s role and activities in Africa were once again put under the spotlight. Right before Xi embarked on his trip, Nigerian Central Bank Governor Lamido Sanusi criticized China’s engagement in Africa publicly in the Financial Times. His most quoted charge says “China takes from us primary goods and sells us manufactured ones. This was also the essence of colonialism.”

Sanusi’s comment cast a negative shadow to Xi’s first foreign visit and was met with ferocious rebuttals from an infuriated Beijing. China’s Ministry of Commerce pointed to the western countries’ “exploitation of African resources, trade of African people, occupation of African land and destruction of African culture” as the “essence of colonialism” and argued that it is China, not the West, that has provided support for Africa’s economic and social development. China’s Ministry of Foreign Affairs dispatched the head of its Africa Department, Lu Shaye, to deliver a formal demarche to a Hong Kong media outlet. He defended China’s role in Africa and argued that China has improved Africa’s international status by offering it a powerful alternative market and collaborator, delivering to Africa concrete benefits and treating it as an equal partner. In comparison, he argued, the West only “takes resources from Africa” and treats Africa with a condescending attitude.

The drastically diverging perceptions of China’s role in Africa are an interesting phenomenon. The polarization stems from the focus on different aspects of China’s activities on the continent. For example, dragon-slayers emphasize China’s selfish quest for African natural resources and how it sabotages international efforts to keep unpalatable African regimes in check. On the other hand, panda-huggers applaud China’s contribution to Africa’s economic development through infrastructure projects and revenue creation.

Unfortunately, neither reflects the nuanced, mixed nature of what China means to Africa. China enjoys unique financial and political advantages in promoting Africa’s growth through vast financing with little or no strings attached. However, these short-term benefits should not form a cover-up for the potential long-term negative consequences associated with neglecting issues of governance, fairness and sustainability.

On the positive side, China’s economic engagement in Africa has created significant benefits for African countries. Most importantly, Beijing has considerable capacity and willingness to provide financing to fuel Africa’s growth. During his recent trip, Xi reconfirmed China’s commitment to provide another $20 billion in financing to Africa. China usually attaches a significant amount of such funding to infrastructure projects, which forms the foundation for Africa’s industrialization and economic development. Many of these projects require large investment and long pay-back terms that traditional donors are reluctant to provide.

It is true that China does not emphasize the governance side of the story. This is a reflection of China’s own philosophy on the prioritization between economic development and political progress. Many Chinese officials, analysts and businessmen find the West’s overwhelming emphasis on democracy, governance, transparency in Africa amusing. To the West, they would ask an innocent but critical question: “for people who do not have food on the table, what’s the point of having democracy?” Using its own experience of subjugating political liberalization to the “higher cause” of economic development, China finds its approach to Africa as one that prioritizes the provision of basic elements of development, completely legitimate and fully justified.

In this way, China’s intention in Africa is benign. Beijing has no intention to colonize the continent, dictate the politics or economy of the local countries or deprive them of development opportunities. On the contrary, China truly sees itself as Africa’s “brother” and hopes to help African countries develop through infrastructure projects. Beijing seeks an approach different from that of the West, one that avoids the “meddling” with the internal affairs of African countries through conditional aid. In the last several years, China has contributed significantly to the economic growth of some of Africa’s poorest nations. China wants to see a prosperous Africa, which is beneficial to China’s interests as well.

However, this does not mean China is being altruistic. Helping Africa is important, but China would not do so if it had nothing to gain. Indeed, China emphasizes that any bilateral relationship has to be mutually beneficial. And China’s investment in Africa does pay itself back in multiple ways economically: development and exploitation of Africa’s natural resources, access to local market, employment opportunities for Chinese labors and service contracts for Chinese companies on infrastructure projects that China funds. When Chinese officials emphasize that China also invests substantially in countries that are not rich in natural resources to defuse international criticisms, they often forget to mention that China also has its eyes on other things that these countries can deliver, such as their support of Beijing’s “one China” policy, of China’s agenda at multilateral forums and of China as a “responsible stakeholder”. While there is nothing wrong with not being altruistic in one’s motives, it should be noted that China is not helping Africa in exchange for nothing.

In analyzing the nature of China’s activities in Africa, another important voice to examine is that of Africa itself. Many African countries and officials welcome China’s approach and fiercely defend China internationally. This seems like fairly powerful pushback to western criticisms of China’s role in Africa since African countries should know what they need more than anyone else. Africa’s approval of China poses an intriguing question for those in the West who disapprove of China’s activities in Africa: should the West reexamine its approach to Africa in order to better address what African countries truly need?

Authors

Yun Sun

Image Source: © Siphiwe Sibeko / Reuters

Money Talks: China-Russia Energy Relations after Xi Jinping’s Visit to Moscow

Erica S. Downs — Mon, 01 Apr 2013 10:42:00 -0400

The series of energy deals signed during Chinese President Xi Jinping’s visit to Moscow in March 2013 underscore the important role that Chinese capital -- primarily in the form of loans from China Development Bank (CDB) --plays in spurring Eurasian economic integration. The nonbinding agreements inked by Chinese and Russian firms have laid the groundwork for the creation of new energy corridors stretching from Russia to China. Indeed, Xi spoke of oil and natural gas pipelines functioning as an artery connecting China and Russia in the 21st century like the tea road over which traders exchanged Chinese tea for Russian furs did in centuries past. The key to substantially expanding energy trade between Russia (one of the world’s largest exporters of oil, natural gas and coal) and China (one of the world’s largest importers of oil and coal and a growing importer of natural gas) is likely to be CDB. The bank not only has the motivation and means to finance the infrastructure needed for the cost-effective delivery of substantially larger volumes of Russian energy to China. It also has an established track record as a driver of regional economic integration.

The latest China-Russia summit set the stage for dramatically increasing the flows of oil, coal and natural gas from Russia to China. First, Rosneft pledged to triple its oil deliveries to China from 300,000 barrels per day (b/d) to as much as one million b/d, which is double the amount of oil Russia exported to China in 2012 and equal to the amount of oil Saudi Arabia, China’s top crude oil supplier, delivered to China last year. Second, China’s Shenhua Group and Russia’s EN+ Group agreed to develop coal resources and related infrastructure in East Siberia and the Russian Far East with an eye to expanding Russian coal exports to China. Third, Gazprom and China National Petroleum Corporation (CNPC) signed a memorandum of understanding for the delivery of 38 bcm of natural gas to China over for 30 years starting in 2018 with the option of expanding deliveries to 60 bcm. A supply contract of this size would help fill the projected gap of 150 bcm between China’s natural gas demand and China’s domestic natural gas supply in 2020 projected by CNPC last year.

CDB features in the oil and coal agreements. The increased volumes of oil that Rosneft pledged to deliver to China reportedly are being used to support a $2 billion loan from CDB. The bank also agreed to extend a $2 billion line of credit to Shenhua Group and EN+ Group for the development of coal resources and infrastructure to transport them to markets.

CDB may also become part of Chinese and Russian efforts to transform their long-discussed dream of a cross-border natural gas pipeline into a reality. This project has a strong logic for both parties; Russia is looking to diversify its markets away from Europe, while China is looking for supplies to meet its growing demand. The principle obstacle to moving this pipeline off the drawing board has been a disagreement over price. Gazprom has long insisted on selling natural gas to China at prices that would provide the same level of profits it earns from sales to Europe, while CNPC has repeatedly refused to pay international prices for Russian gas due to domestic price controls. (The company lost almost $7 billion on natural gas imports in 2012 because it could not pass the full cost of its imports to Chinese customers.) However, a multibillion dollar loan from CDB to Gazprom may resolve the stalemate. Indeed, Gazprom Deputy CEO recently indicated that his company would reconsider its position that its standard terms of deliveries for European customers should apply to China if China were to provide a loan that could be repaid with natural gas exports.

CDB is no stranger to breaking impasses in the China-Russia energy relationship. In 2009, the $25 billion in oil-backed loans that the bank extended to Rosneft and Transneft (the Russian pipeline monopoly) persuaded Moscow to give the green light to the construction of a spur from the East Siberia Pacific Ocean oil pipeline to the Chinese border. The Russians were thrilled with the large volume, low cost and long duration of their loans, and the Chinese were delighted to see Russian oil exports to China jump after the ESPO spur began operation in 2011.

CDB also helped open up energy corridors between Central Asia -- one of the least economically integrated regions of the world -- and China by bankrolling the construction of the Kazakhstan-China oil pipeline and the Trans-Asia Gas Pipeline. Before these pipelines were built, most of the oil and natural gas produced in Central Asia were shipped to points west. Today, increasing volumes of energy are going to China.

It’s hardly surprising that CDB has emerged as a premier financier of energy development and related infrastructure projects in Eurasia. The bank has a mission to advance the interests of the Chinese leadership as the leadership understands those interests at any given time. In the past, those interests included financing the domestic infrastructure necessary for China’s economic boom. Today, those interests include increasing the flows of energy from Russia and Central Asia to China. CDB also has the means to support those interests. It is China’s largest overseas lender, and its outstanding foreign currency loans – a rough proxy for its international lending – have ballooned from nearly $17 billion in 2005 to $210 billon in 2011.

If history is any guide, CDB’s involvement in the energy deals signed during Xi’s visit to Moscow improves the likelihood that these nonbinding agreements will be finalized. The past decade of negotiations over cross-border pipeline projects indicate that geographic proximity and economic complementariness are necessary –but not sufficient – for the development of a robust bilateral energy relationship. An increase in the flow of Chinese capital across the border for infrastructure construction should expand the flow of energy in the other direction.

Authors

Erica S. Downs

Image Source: © Sergei Karpukhin / Reuters

China Needs Political Capacity, Courage to Force Change

Kenneth G. Lieberthal — Sat, 30 Mar 2013 00:00:00 -0400

Editor's note: In an interview with Business Standard, Kenneth Lieberthal explains what talks about the changes China is likely to see under the new leadership, the prospect of China-India relations and China’s relations with its neighbors. Read an excerpt below.

Business Standard: What does the change of guard in China mean for the nation internally? What does it mean for the outside world?

Kenneth Lieberthal: There's been a 70 per cent turnover of the leadership of the Communist Party of China (CPC), government and military in November last year and March this year. They have a good idea about the challenges China faces. But whether the new leadership has the political capacity to meet these challenges is the question.

The leadership understands that the development model on which China has been operating its economy for the last few decades is no longer viable: it was a natural resources-intensive model that has led to deepening inequalities, environmental destruction and corruption.

The assumptions on which the model was based are no longer valid. The assumptions were that China can develop based on continuing to expand exports rapidly, leveraging a large, cheap, young and flexible pool of labour, and counting on social tolerance of various problems such as inequality, corruption, and pollution as the inevitable costs of transitioning from plan to market.

The new model is significantly different. It sees a bigger contribution to the Chinese economy from services - versus manufacturing - and visualises a bigger contribution by the Chinese private sector. It envisions a much bigger social safety net, accelerated urbanisation and an increase in domestic consumption as a driver in the domestic economy. It wants to see the Chinese economy become innovative and high quality.

Today, while everyone knows what the objectives are, if the political capacity is missing, these objectives cannot be achieved. Will the changes in the political leadership produce the necessary changes in the economy?

Authors

Kenneth G. Lieberthal

Publication: Business Standard

Image Source: © Jacky Chen / Reuters

China and the Changing Myanmar

Yun Sun — Fri, 29 Mar 2013 13:50:00 -0400

INTRODUCTION

Myanmar’s rapidly political reform dazzled and puzzled many watchers, Chinese included. Multiple internal and external factors contributed to the decision to adopt the reform. Internally, the political change is the result of a process designed and implemented by the military government, which was necessitated by the military’s lack of professional governance skills and made possible by its consent. Externally, Myanmar’s desire to mitigate its overdependence on China, to improve relations with U.S. and to repair its reputation at ASEAN motivated its reform at home.

The democratic reform in Myanmar unveiled a series of unpleasant uncertainties for China. Economically, the suspension of the Myitsone dam project has encouraged further scrutiny and criticism of Chinese investments, threatening the viability of strategic projects such as the oil and gas pipelines. The pressure on Chinese existing economic interests on the ground is strengthened by the increasing competition from the west. Politically, the preliminary success of Myanmar’s democratic reform has raised questions inside China about China’s political system and the long postponed political reform. Strategically, Myanmar’s changing foreign policy undercuts China’s original blueprint regarding the strategic utilities of Myanmar at ASEAN, in the Indian Ocean and more broadly in the region.

As a result, China has adjusted its posture and policy toward its southwest neighbour. Since the suspension of the Myitsone dam, China has dramatically reduced its economic investment in Myanmar, intentionally cooled down the bilateral political ties while established historical relations with the democratic oppositions. At the same time, China also launched massive public relations campaigns inside Myanmar that aimed at improving its image and relations with the local communities. The security of China’s energy investment, such as the oil and gas pipelines and the Myitsone dam, remain China’s priority. And the issues are substantially complicated by the conflict in the ethnic border areas.

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Authors

Yun Sun

Publication: Journal of Current Southeast Asian Affairs

Examining North Korea’s Recent Heated Rhetoric

Strobe Talbott, Richard C. Bush III, Michael E. O'Hanlon and Jonathan D. Pollack — Fri, 29 Mar 2013 15:04:00 -0400

As the United States and South Korea undertake joint military exercises, North Korea has responded with harsh rhetoric, saying that its people are “burning with hatred” for the United States. Brookings President Strobe Talbott leads a discussion with Richard Bush, Michael O’Hanlon, and Jonathan Pollack focusing on the latest saber rattling by North Korea and exploring the intentions of Kim-Jong Un, North Korea’s young leader.

Strobe Talbott: Do you think that the current bluster (and more) from Pyongyang represents more of what we’ve seen before from North Korea or is there a real danger of conflict? If the latter, what should the U.S. be doing to prevent that terrible prospect and what would happen if it comes to blows?

Michael O’Hanlon: I recently wrote on the subject in Politico following the third nuclear test in an effort encourage the U.S. against overreaction given Kim Jong-Un's youth and inexperience—and his potential for moderation/change as he ages (I hope!). My proposal was to make any additional sanctions temporary, partly as a way to induce Chinese support and partly as an incentive to North Korea not to test again (since the new sanctions would only sunset in the event of no further tests or big provocations).

But, of course, that's not quite the same as an answer to your question. In light of the above thinking, my own druthers would be to make any upgrades in our capability quietly—even secretly—so as not to provoke the action-reaction cycle we are now in (e.g., sending F-22 aircraft to bases in South Korea to improve the effectiveness of any initial air strikes, but not telling anybody except Seoul).

Richard Bush: The consensus opinion among specialists is that North Korea’s recent actions are the same old-same old, the typical way North Korea responds to U.S.-ROK exercises every year. Specifically, because the regime portrays the exercises as a segue for a U.S.-ROK attack, even nuclear attack, then it must make at least verbal threats about what it will do when that war happens. The intensity this time may have been dialed up a bit because Kim 3.0 is feistier than his father was, but it's a question of degree.

What may happen (or may not) is a limited conventional strike at the DMZ, against a ROK naval ship, or against one of the West Sea Islands (like the one that preceded our November 2010 visit to Seoul). The ROKs have pledged retaliation, which does create the problem of escalation, but how it might play out is speculative at this point.

Talbott: Thanks, Richard. Most convincing and, to a point, reassuring.

O’Hanlon: Yes, to a point, indeed. "Consensus among specialists" is not always a concept I find reassuring, though! I am glad, Richard, that you seem willing to deviate somewhat from that consensus yourself (at least to some extent). This is probably the same old-same old….until it's not, that is. I actually do worry that the U.S. default approach of tit-for-tat with North Korea (and the imposition of additional, permanent sanctions after the third test), while of course morally defensible, may exacerbate the situation in this particular case—which feels somewhat different to me than past periods of bluster.

Talbott: Interesting point, Mike. I’d be interested in your assessment of Kim-Jong Un, or Kim 3.0 as Richard calls him. His recent rhetoric and actions show that he is willing to test the boundaries of what is internationally acceptable. But, I had the impression that he was subject to a lot of supervision from the North Korean military, meaning he doesn't have much autonomy, especially, one hopes, when it comes to declaring the Korean War back on and taking other actions that would significantly escalate the situation.

O’Hanlon: Right and Kim-Jong Un wants to be friends with Dennis Rodman and he grew up largely in Europe—and he doesn't strike me as the suicidal type, so I'm hoping that someday he'll want to be the next leader of a "reform from within" movement as in Vietnam years ago, Burma of late, etc. Obviously a long-shot concept at the moment though....

Jonathan Pollack: The reality is that we don't really know very much about what animates Kim 3.0, so we must infer from what we can observe about his behavior. He seems very much like Kim Il Sung and may even be modeling himself on his grandfather. (He has his physicality and extroversion; even his body language seems reminiscent of the grandfather.) Very few foreigners have met 3.0. The Chinese blessed his succession at an early date (November 2010, as I recall), when a then serving member of the Politburo Standing Committee was on the podium with young Mr. Kim. So far as I can determine no senior Chinese official has met with him since then, and he has not been invited to visit China. In contrast to the distinct warming in China-SK relations (including several messages between Xi Jinping and Pres Park), there is a decided coldness/distancing in China-NK relations. I think Beijing early on calculated that there was a potential opening with 3.0 (as did we—witness the abortive February 29 agreement), but this seems largely a dead letter at this point.

The most troubling possibility is that he is very full of himself, listens to few others, and is now consorting regularly with the North Korean military leadership. Despite some early hopes for reform in the North, he has now wrapped himself in the "military first" rhetoric every bit as much as his father did. Worse yet, he has a successful satellite launch and another nuclear test under his belt, with clear expectations that more could be in the offing.

As I wrote in the Foreign Policy program’s Big Bets-Black Swans project, there needs to be a much more determined effort by the United States and ROK to deal fully with China in the event that things go from bad to worse in Korea. Now is definitely the time, lest we find ourselves in an acute crisis. That said, North Korean propaganda always spikes whenever the U.S. and the ROK are in the middle of major exercises, so perhaps the latest campaign will subside as the exercises wind down next month. But the tone and threats are particularly worrisome at present - even they are intended largely for domestic effect.

O’Hanlon: That's an excellent point, Jonathan, if I may say so (the focus on consultation with China).

I can't disagree with any of the analysis, and of course, you know the dynamics in the region very well. However, I still would venture to say that our February 2012 hopes (just two months into 3.0's rule, when he still hadn't even turned 30 years old as I recall) were unrealistically optimistic that early in his tenure within a Stalinist system, and we should remember how unlikely glasnost and perestroika would have seemed (or Chinese and Vietnamese economic reform) a few years before they occurred. But that's a footnote, not a central argument, of course.

Pollack: I and a few others met with the State Department’s Glyn Davies immediately after the signing the 2/29/12 agreement. He remained very sober about the possibilities—and that it seemed too good to be true. Davies was careful not to oversell the agreement, which, in the end, blew up two weeks later.

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Image Source: © KCNA KCNA / Reuters

China’s Rise: Assessing Views from East Asia and the United States

Fri, 29 Mar 2013 09:00:00 -0400

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March 29, 2013
9:00 AM - 1:00 PM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

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The opportunities and challenges presented to East Asia by China’s rapidly increasing international stature, economic influence and military heft have been thrown into sharp relief over the last few years. Escalating tensions over a series of maritime territorial disputes have contrasted with a marked improvement in cross-strait relations and with efforts by China to pursue free trade agreements with ASEAN countries as well as Japan and South Korea. Until recently, however, scholars who follow this issue have not had access to survey data that might allow them to draw more specific conclusions about the attitudes of other East Asians towards the rise of China.

On March 29, the John L. Thornton China Center and Center for Northeast Asian Policy Studies at Brookings, the Program for East Asia Democratic Studies of the Academia Sinica and National Taiwan University, and the Institute of Arts and Humanities of Shanghai Jiaotong University will host a half-day conference to address this question. At the conference, panelists will present data from the Asian Barometer Survey and compare these findings with prevailing survey data in the United States. Leading experts from both sides of the Pacific will weigh the potential implications of these studies for future relations between China and other East Asian countries and for U.S.-China relations.

After each set of presentations, speakers will take audience questions.

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The 2013 People’s Congress: A New Government, A New Direction?

Kenneth G. Lieberthal — Thu, 28 Mar 2013 17:00:00 -0400

In China, where the 12th National People’s Congress officially selected its new leadership, many economic, domestic and foreign policy challenges persist. My colleagues Cheng Li, Jonathan Pollack, Feng Wang, Ran Tao and I discussed China’s most pressing issues and possible outcomes.

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Kenneth G. Lieberthal

BRICS and China’s Aspiration for the New “International Order”

Yun Sun — Mon, 25 Mar 2013 16:24:00 -0400

The destinations of new Chinese leader’s first foreign tour are always carefully chosen and reflect two things: 1) They are important countries and represent certain foreign policy priorities for China, and 2) they are China-friendly, therefore the new leader will be met with open arms and a warm welcome rather than difficult questions or a long list of demands. Russia, China’s close neighbor and former ally, fits the profile and has been the first destination for both former President Hu Jintao in 2003 and for Xi Jinping this year. However, a decade ago, Hu focused on China’s periphery—Russia, Kazakhstan and Mongolia—while today Xi is taking China’s agenda further away. With the exception of Russia, Xi’s foreign tour focuses on Africa: specifically Tanzania, South Africa and the Republic of the Congo. The highlight is the fifth BRICS (Brazil, Russia, India, China and South Africa) summit in Durban, South Africa from March 26-27.

The unprecedented level of emphasis the new Chinese leader is attaching to the BRICS nations reflects the profound changes in China’s perceptions of itself and of the outside world. In the past decade, China has grown into the second largest economy in the world. However, this economic muscle is yet to be translated into comprehensive national power and the United States, despite its relative decline, remains the sole superpower in China’s foreign policy lexicon. As the U.S. rebalances to Asia, China feels a heightened pressure in its immediate periphery from Washington’s enhanced military deployment, alliances and “interference” in China’s territorial disputes. As the new Chinese leaders contemplate how to break away from this new “containment and encirclement of China,” the reliance on and cooperation with non-Western, rising economic powers are of high importance for China.

China sees natural common ground with emerging economies, especially in the pursuit of a new international economic order and the democratization of international relations. In Beijing’s view, the 2008 financial crisis dramatically changed the mapping of the world economy, deeply damaging the strength of the traditional developed countries. The economic recovery of the U.S. and Japan has been sluggish, while the eurozone crisis has lingered on for years. The relatively impressive momentum for growth comes from emerging economies, especially the BRICS nations.

For China, since the BRICS countries’ share and importance in the world economy has been growing but has not yet surpassed the developed countries’, the next step, naturally, would be for them to act as one group to increase their collective voice and bargaining power against traditional developed countries. In China’s view, this momentum would democratize international relations by offering developing counties more voice and rights. As Xi pointed out in his interview with journalists from BRICS nations right before his trip on March 19, the international economic governance system must reflect the profound changes of the global economic reality, and emerging markets/developing countries deserve more representation and bigger voices. The reform of voting rights at the IMF and World Bank signifies the direction to which China aspires—in Beijing’s dictionary, more responsibility is only justified when it is accompanied with more rights.

China also wishes to strengthen its identity as an emerging economy and a developing country by enhancing its contribution to the BRICS nations and their international status. Xi pledged to deepen the cooperative partnership and improve the cooperation mechanism among the BRICS nations. One possible major move would be the potential plan for the BRICS countries to establish their own development bank to provide funding assistance to Africa’s infrastructure development. If this plan transpires, it would demonstrate a major advancement by China in the field of international development assistance. By forming a de facto alliance among themselves, BRICS nations will gain more legitimacy and increase competitiveness for their development assistance, which is often criticized and even marginalized by traditional donors.

Xi’s first overseas trip reveals the international quagmire China is in. The past 10 years witnessed unprecedented growth of Chinese economy, but it was also accompanied by unparalleled foreign policy challenges. As many Chinese analysts observed, China’s external environment did not improve as a result of China’s rise, instead, it has worsened. China has become richer, but less respected. It has more transactions with the world than ever, but less friends.

Therefore, Xi’s trip to Russia, Africa and the BRICS summit genuinely reflects China’s strategic moves to break away from this predicament. It seeks to reconsolidate friendship with a Russia also antagonized by the West, with Africa to reinforce its developing-country identity and solidarity with the developing world, and with other emerging economies to align their collective power against the traditional developed countries. China learned its lesson that it is yet to be strong enough to challenge the existing international order (and the supremacy of the U.S.) alone. Alignment with other rising powers, like the BRICS countries, and reinforcement of its friendship base among developing countries will be a new emphasis for China’s foreign policy in the foreseeable future.

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Yun Sun

Lifting the Veil: Book Review of China’s Superbank

Erica S. Downs — Wed, 20 Mar 2013 16:27:00 -0400

What do the Three Gorges Dam, local-government investment companies (LICs), the China-Africa Development Fund, Huawei’s transformation into a global player, China’s world-beating solar technology companies, and the issuance of tens of billions of dollars in energy-backed loans all have in common? They were financed by China Development Bank (CDB), one of China’s most powerful institutions and an increasingly important player on the world stage.

Despite CDB’s central role in developing China’s economy and bankrolling the international expansion of Chinese companies, China’s biggest policy lender rarely makes an appearance in most English-language chronicles of the country’s economic rise. All the more reason then to praise a superbly researched new book, written by two Beijing-based reporters for Bloomberg, in which CDB finally makes a star turn. In China’s Superbank: Debt, Oil and Influence—How China Development Bank is Rewriting the Rules of Finance, Henry Sanderson and Michael Forsythe chart CDB’s transformation from an ATM for officials financing pet investment projects into “the world’s most powerful bank.” Lifting the veil on one of global finance’s least understood institutions, the book is essential reading for anyone seeking insight into the workings of Chinese state capitalism.

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Erica S. Downs

Publication: China Economic Quarterly

Examining U.S. Concerns on Trade, Security as China Welcomes New President

Kenneth G. Lieberthal — Thu, 14 Mar 2013 00:00:00 -0400

Editor's note: China officially installed Xi Jinping, already the Communist Party leader, as president for the next 10 years. In an interview with PBS's Judy Woodruff, Kenneth Lieberthal discusses contentious issues of trade, defense, and cybersecurity for China and the U.S. Read an excerpt below.

Judy Woodruff: And let me start with you, Ken Lieberthal. What do we need to know about Xi Jinping? Tell us something about him.

Kenneth Lieberthal: The most important thing we need to know is that he's going to govern China for the next decade.

And the next decade is going to be enormously important for U.S. interests, for China, for Asia and globally. He's worked his way up through every level of the Chinese political system, so he's a very experienced politician and administrator.

He's come in on a program of saying he's going to clean up corruption, he's going to revitalize the Communist Party and keep it in power and use his capabilities to reform the Chinese economic system while maintaining and building military strength.

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Kenneth G. Lieberthal

Publication: PBS Newshour

Environmental Outlook: Air Pollution In China

Kenneth G. Lieberthal — Tue, 05 Mar 2013 00:00:00 -0500

Editor's note: In an interview with NPR's Diane Rehm, Kenneth Lieberthal to talk about the catastrophic air pollution crisis in China. Read an excerpt below.

Diane Rehm: Ken Lieberthal, to what extent are Chinese leaders, number one, taking this into account, number two, acknowledging it publicly and number three trying to do something about it?

Kenneth Lieberthal: Public acknowledgement has increased a lot just over the past year. Interestingly, that was largely forced by the U.S. Embassy's measuring air pollution at the embassy compound in Beijing and putting out a Twitter feed live all the time that tells you what that rating is.

And what it turned out was that the official statistics put out by the Chinese Ministry of Environmental Protection were systematically, dramatically lower than those of the embassy so that caused an uproar. The Chinese then improved their game.

They began measuring those very dangerous pollution, the small particulate pollution and they began giving more accurate figures with more measurement. That is now a Cause célèbre in China.

In terms of what they're doing about it, though, frankly it is fundamentally a combination of their approach to economic development, which is to drive GDP growth every day all the time. With most of that GDP growth being in manufacturing and in construction and with officials everywhere benefiting the most when they can build big projects and drive GDP growth by big capital, intensive projects, those tend to be the most polluting things out there.

And they're supported by things like cement and aluminum and so forth, all of which are highly polluting. So at the end of the day, this is a model of development just built into the genetic code of the current political system. And they need to change that model of development dramatically as part of the solution to this catastrophic air pollution. So this is not going to happen quickly or easily.

Authors

Kenneth G. Lieberthal

Publication: NPR's The Diane Rehm Show

High Expectations for China’s National People’s Congress

Cheng Li — Fri, 01 Mar 2013 00:00:00 -0500

Editor's Note: In an interview with The Wall Street Journal’s Tom Orlik, Cheng Li provides his analysis on what to expect at the upcoming National People’s Congress, where China’s new leaders will be officially installed. Read an excerpt below.

Tom Orlik: Some people’s expectations for the NPC seem to be quite low, why is that?

Cheng Li: Many observers are cynical about any substantial policy changes. That’s due to resistance from powerful interest groups, lack of consensus in the leadership, and because Xi Jinping and Li Keqiang need time to consolidate their power and place their people in the right places.

In addition, some of China’s leaders may not want to generate high expectations prior to the NPC meetings. That helps reduce political pressure and could pleasantly surprise the public and business communities if there are major policy initiatives.

There’s also a historical precedent for having big policy decisions come at the third plenary meeting of the Central Committee of the Chinese Communist Party in October following the NPC meeting rather than at the NPC meeting itself.

Orlik: You have higher expectations?

Li: I believe that we will see the announcement of some important policy initiatives at the NPC, for several reasons:

First, there is a sense of urgency on the part of Mr. Xi to lift public confidence by initiating major policy changes, especially to please the middle class and to do so now rather than waiting another seven months.

Second, Mr. Xi is now in his “honeymoon period,” and he should cash in his political capital to carry out new policies promptly.

Third, in contrast to the previous 10 years when there was often policy deadlock resulting from the factional infighting of the top leadership, Mr. Xi now has a six-to-one concentration of power in the Politburo Standing Committee — a great advantage that should allow him to do substantive things .

And fourth, Li Keqiang is under tremendous pressure to demonstrate his leadership ability. Evidence seems to suggest Messrs. Xi and Li understand very well their need to support each other. Their different policy preferences can also complement each other, resonating well in different sectors and with different classes throughout the country.

Still, some eagerly awaited policy changes – like land and hukou reform – are not in the interest of the middle class, and so we may only see lip service paid to some of these policy areas. But from the perspective of the Chinese leadership, the interests of vast numbers of farmers, migrant workers and urban poor should also be addressed.

Read the rest of the interview at The Wall Street Journal »

Authors

Cheng Li

Publication: Wall Street Journal's China Real Time Report