Liang Yao argues that China’s central government feels it needs a new national identity. She shows how this identity is being shaped using the example of glorification of recent accomplishments in the space program. While the accomplishments in space technology are significant and impressive, the use of “model” citizens and repetitious propaganda to develop a sense of national pride are reminiscent of the Maoist days.

Along with major progress in space exploration, China has build a modern navy. Having a navy, then, China is beginning to utilize it, changing China’s role in the South China Sea and beyond, as explained in the second article by John Garver. Some of the new deployments have served humanitarian goals such as the launching of a new hospital ship in 2007 and the evacuation of Chinese citizens from Libya in February 2011. But Chinese warships have also been deployed to fight pirates off Somalia, providing actual experience in naval combat.

On the economic front, Latin America has been the recipient of rapidly growing Chinese investment and trade. The third article by Michael Cerna argues that albeit unintentional, China’s growing economic presence in Latin America has challenged the U.S. in yet another realm. While the U.S. continues to be the major economic partner in this region, China is advancing rapidly. Countries in the region need to find a way to balance relations with both.

The fourth article by Daniel Mojahedi analyzes the mixed messages and changing approaches between China and Taiwan during the years of Lee Teng-hui when Taiwan swung away from building closer ties across the Taiwan Strait. Mojahedi argues that the two sides had incompatible goals—the mainland wanted to move toward reunification, while Taiwan wanted to normalize relations. As China has grown in economic and military strength, resolutions palatable to the Taiwanese people have become ever more elusive as neither side has been willing to accept the other’s end game.

Vijaya Subrahmanyam, in the final article of this issue, brings the global competition back home to China in the realm of community banks. Neglected by investors until recently, city and rural commercial banks are helping nurture small and medium-sized companies and those located in rural areas. Big-city growth has contributed to inequalities in access and outcomes across China, causing the government to feel a need to respond by trying to further the development of this sector. Foreign companies see these third- and fourth-tier banks as potentially good vehicles to invest deeper into China’s economy, increasing competition in the banking sector.

Competition between Chinese and foreign firms, and between the U.S. and China for influence both politically and economically, is on the rise. Managing this competition will take insight, patience and extra effort to find mutually beneficial results as changes continue to unfold.

The post Introduction: China Enters New Terrain appeared first on China Research Center.

China’s space program was initiated early in 1956 when Qian Xuesen (Tsien Hsue-shen), one of China’s most senior scientists, urged China’s leaders to consider the possibilities of interplanetary space flight, even as China was confronting one of the worst famines in Chinese history². In the 1970s, Qian brought forward a manned spaceflight proposal called the “714” project. However because of the weakness of the national power, backwardness of research ability and experience, lack of funding, and domestic political crises, the project was put aside by Chairman Mao. The 1970s was an era when the Chinese pulled together to reconstruct their newborn country with confidence and enthusiasm. It also was an era full of political movements that distracted the PRC’s development agenda. When Mao’s heir apparent, Minister of Defense Linbiao, was killed in an air crash in Mongolia on September, 13, 1971, Mao accused Linbiao and his group of planning a coup. Because of the bad economy resulting from the war and severe famine in the ‘60s, it was too hard for the Chinese government to support a project as costly as the space program. Mao emphasized the nation must take care of terrestrial needs first; space could come later. The space program was still laid aside when Deng Xiaoping took office. It was not resumed until January 1992. Unlike in the ‘70s, the Chinese government seemed quite ambitious and determined in the ’90s. They demanded the program have a great technological breakthrough before 1998, and make every effort to launch an airship in 1999 ³. Why did China push its manned spaceflight program so hard in the ‘90 when it showed such reluctance during the ‘70?

First of all, many social crises went around in the last decade of the 20th century that threatened China’s national solidarity and prestige. Deng Xiaoping’s reform and open policy in 1978 turned China from a plan-oriented economy to a market-oriented economy, a new road to modernization. However, according to Yongnian Zheng, unlike many other countries whose modernization and centralization were almost identical, in modern China, modernization was characterized by decentralization. Decentralization promoted rapid economic growth and dramatic social changes on the one hand, but led to a nationwide crisis on the other such as the deterioration of national identity, traditional values, Marxist beliefs and Maoist faith⁴. The rise of separatists in Tibet and Xinjiang in the post-Mao period, the Tiananmen Square protests of 1989 ⁵ and the collapse of the Soviet Union caused the Chinese government to rouse national confidence and prestige, and redefine China’s national identity in the new condition home and abroad.

Secondly, a trend of technocracy emerged in contemporary China. Technological determinism became a dominant ideology with Chinese politicians. Science and technology appeared to be the panacea to all social problems. Michael Adas points out that after the Industrial Revolution, science and technology replaced religion as the dominant ideology in western societies⁶. So it was in modern China. Influenced by a “hundred years of humiliation” since the Opium War, Chinese people deeply believed their backwardness in science and technology left them vulnerable to attack. As early as late Qing Dynasty, Chinese intellectuals began to notice the important role of science and technology in the takeoff of western countries. To save the crumbling Qing Dynasty, they initiated a Self-Strengthening movement called tiyong (Chinese fundamentals and western technology). In 1919, science again was used as one of the slogans in China’s New Culture Movement aimed at awakening and saving China from the imperialist aggressions. In the PRC, by adopting and interpreting Marxist theory as one of the CCP’s theoretical guides, the Chinese people again were convinced by technological determinism. Marx’s classical saying: “The hand-mill gives you society with the feudal lord; the steam-mill, society with the industrial capitalist” ⁷ indicates the level of technology represents the degree of development of a society. Accordingly, Deng Xiaoping raised a slogan in the 1980s that “science and technology are the primary productive force,” encouraging Chinese to use science, technology and education to revive the greatness of the nation. Since then, numbers of science and engineering majors in Chinese universities are expanding greatly and quickly, compared to liberal arts majors. Scientists and engineers soon became heroes in Chinese people’s minds. More and more Chinese children dreamed of being scientists and engineers when they grew up; more and more students chose science and engineering majors; even more notably, more and more officers in Chinese government had science or engineering education backgrounds since the 1980s. In a study on the 16th Central Committee of the CCP, Li Cheng and Lynn White concluded that throughout the history of the PRC, “social scientists have usually been marginalized and occasionally despised.” ⁸ They noted that among the full members of the 15th (1997) and 16th (2002) CCs who have college degrees, 55.6% had engineering and science majors in the 15th CC, and 45.5% in the 16th CC.⁹ Cheng and White as well as other scholars assumed that post-Mao China has a trend of technocracy in which technocrats emerged as the core leadership in the CCP. Many Chinese politicians, especially those who have engineering degrees, believe science and technology are the most effective way to solve all the problems in China.

Facing crises home and abroad on the one hand, having technological determinism ideology and the trend of technocracy on the other, it is not surprising to see post-Mao China using concrete technology to rebuild its endangered national identity. In order to highlight “Chineseness” and “Greatness,” the Chinese government constructed a series of concrete images to identify the Chinese nation and its long progressive history. This intention could be seen apparently in all propaganda at home and abroad, especially at the opening celebration of 2008 Olympics in Beijing, in which China’s Four Great Inventions – paper making, printing, the compass and gunpowder – were well displayed. It provided an impression that China’s civilization is continuous and progressive, represented by a series of advanced scientific and technological achievements. In the Qin Dynasty (770 BC), China built one of the Seven Wonders in the world, The Great Wall; The Four Great Inventions represented the great achievements from the Han to Song Dynasties; Zheng He’s voyage to the Indian Ocean in the Ming Dynasty revealed that Chinese navigation technology was at the top of the world at that time. For the CCP, the culture of ancient China was the root of the Chinese nation, and these images representing Chinese civilization were always sources of pride for the Chinese. When it comes to communist China, the CCP again strived to use concrete images to continue its national image-making. Even in the 1950s and ‘60s, when the Mao administration was so welcomed, trusted, and esteemed by the mass, they still drastically extolled their satellites and atomic bomb, showing how great the nation was and how wise the leadership of the CCP.

However, with the domestic policy change since the ‘80s, tensions grew gradually. The new generation of the CCP leadership, most of whom were technocrats, felt a lack of image consistency. How to mitigate pressure at home and abroad, how to keep authority, how to continuously inspire people’s national pride, and how to keep the consistency of the national image became important issues for the CCP in the post-Mao era. The manned spaceflight program was well fit for these considerations.

As expected, soon after the success of the Shenzhou V, immense enthusiasm swept the country. This inspiring news dominated the headlines of China’s main newspapers, magazines and TV news right after the successful flight. People’s Daily ran 100,000 extra copies which were quickly snapped up, as did other papers. Schoolchildren drew pictures of spaceflights and showed them to press and television. In addition, 10.2 million stamps were printed in Yang Liwei’s honor¹⁰.

Interestingly, Chinese people throughout the country did not know the news until the rocket was safely and steadily flying in space, when success was fully guaranteed by the experts. It was revealed later that journalists from all the major mass media had already congregated at the launch site with sufficient preparations at the very beginning, but they were commanded to hold the news and report live as soon as the mission was guaranteed successful. Interestingly too, Jiang Zeming, China’s president at that time, had not been to the site. Instead, Hu Jingtao represented the government at the exciting moment. Obviously, it was intentionally planned by the government since manned spaceflight was not simply a technological issue for China, it also was an image project, which could not be stained by any deficiencies.

As soon as experts announced the success of the Shenzhou V, Hu Jingtao represented Jiang Zeming by giving a speech immediately from the launch site, extolling the virtues of China’s manned spaceflight for the first time. He highly praised hardworking, enterprising, serious-minded, innovative, factualistic and cooperative workers and researchers in the manned spaceflight program. These characteristics were dubbed the “spaceflight virtues.” In the speech, he compared the “spaceflight virtues” to the virtues shown in the making of a bomb, missile and satellite in the Mao period, and proclaimed they were the essence for the revival of the Great ¹¹.

After the successful launch of the Shenzhou V, the Chinese government held ceremonies for each launch and the main leaders gave celebratory speeches every time. On November 26, 2005, President Hu Jingtao gave another inspiring address for Shenzhou VI, in which he stressed the important role of science and technology in promoting economy and education. Once again he highly extolled the spaceflight virtues, which took up half of his speech. He said, “The manned spaceflight virtues are a development of the virtues of Liang Dan Yi Xing (bomb, missile and satellite) in the new era. They vividly represent patriotism, nationalism and reformism. In the road of constructing socialistic modernization, we should greatly publicize the spaceflight virtues over the whole society in order to increase the national pride and confidence, and intensify the national solidarity….”¹² Compared to Hu’s endeavor in expatiating on the manned spaceflight virtues, the economic and scientific benefits of this program in his address seemed very broad and unclear. In the speech, he stressed the key function of science and technology in promoting economic, social and cultural development. He particularly emphasized the importance of China’s independent scientific innovation, and highly lauded the Chinese manned spaceflight as a representation of “Made in China project” in order to encourage more independent innovations. Two themes were apparent in Hu’s speech, the manned spaceflight virtues and “Chineseness.” As a result, a neutral technology was tinted by certain identity that was not neutral any more. The manned spaceflight first of all was marked by a nationality-Chinese. Then it became the embodiment of certain virtues-hardworking, innovative, cooperation, united, enterprising, serious-minded and factualistic etc. Combining the two, Chinese leaders endowed the concrete space technology with a new meaning, an embodiment of the national identity which is flawless, inspiring and honorable.

The Chinese government intentionally created a perfect hero image – the first Chinese astronaut, Yang Liwei – so impeccable and consummate, and encompassing all the best virtues of the Chinese nation. Without exception, all Chinese media described Yang Liwei as a good child, good student and excellent pilot inborn. According to official biographies, Yang had a “happy and tranquil childhood” and was “very intelligent and a good team leader of his playmates.” Excelling in mathematics and math competitions, Yang scored high on entrance exams and went to the best middle school in his county. Joining the People’s Liberation Army at the age of 18, Yang was recruited by one of the Chinese Air Force’s top aviation colleges, where he earned the highest grade in every class he took. Upon graduation, he became a fighter pilot and was rated as an “elite” member of his Air Force division.¹³ Yang’s predisposition to be a pilot stemmed from both an excellent physical condition and a perfect psychological quality. He was a quick learner and fast reactor, neither smoking nor drinking and had solid flying knowledge and experience.¹⁴ All in all, Yang was exactly “the right man” to take the mission.

Yang was not only technically a highly qualified pilot, he also was hardworking, friendly and humble, which were noble virtues in Chinese value. One of his colleagues commented Yang was so modest that he never talked about himself. He never mentioned his hobbies such as travel and music, and even did not express his own individual mood. By contrast, he always regarded himself as one plain pilot in China’s manned spaceflight team. In his mind, there was no individual “I,” but only a collective “we.” ¹⁵

In Confucian China, one’s evaluation is tightly related to one’s private life. Being considerate to family is estimated as one of the most important and indispensable virtues for a gentleman. Yang also fits this model. Yang’s wife, Zhang Yumei told journalists that “Yang is a considerate husband. He loved me and our family, he tried every effort to take care of the family in despite of his busy work. When I gave birth to little Ningkang (their son), Yang cooked for me every day. Although Liwei was very busy after he joined the manned spaceflight program and seldom came home, he often called home, and made every effort to accompany Ningkang and me as soon as he had some time.” ¹⁶ When Yang was in space, Chinese media broadcasted nationwide that Yang called his wife and son, telling them he was fine and asking them not to worry about him.

As soon as he successfully completed China’s first manned spaceflight mission, Yang Liwei was honored as one of the “top ten outstanding Youths in China,” “China’s spaceflight hero” (Nov. 7, 2003)¹⁷ and awarded as “major general.”¹⁸ His news appeared on the front page of every main Chinese newspaper and dominated most of China’s mass media for several days. He became a public figure overnight. After returning, he was much busier than before. Besides regular training, Yang was invited to give speeches to university students, government officers and factory workers, and was interviewed by hundreds of journalists, in which he was highly lauded.

Right after the success, members of the manned spaceflight team formed a reporting team that traveled all over the country to advocate the manned spaceflight virtues. This team was made up of Yang Liwei, manned spaceflight scientists, researchers, engineers and workers. In the year after the successful launch, this reporting team visited most of the major cities in China including Beijing, Shanghai, Tianjin, Chongqing, Shengyang, Hongkong and Macao etc., covering nearly every corner of Chinese territory. It was reported that people in all these cities welcomed the team with tremendous enthusiasm and admiration. In Tianjin, five-thousand people gathered at the exit of Jing-Jin highway, beating drums and gongs, singing and dancing to welcome the coming of the manned spaceflight team. In Chongqing, the city turned into a sea of people and flowers when the visiting team passed by. In Yang Liwei’s hometown Shenyang, jubilation permeated the whole city. Four-thousand people stood along the 16-mile road to welcome their hero back.¹⁹ It was reported that during a 100-minute report in Chongqing, the audience interrupted 67 times with thunderous applause. One undergraduate student said even the most famous speechmaker would hardly receive such a welcome.²⁰ One third grade student in Tianjin No.7 middle school named Guo Fangjie told journalists, “Yang Liwei is a ‘star’ in my heart. He is also a ‘star’ in people’s hearts in all of our country.”²¹

The fervor of success was immersed in every social activity. In Haikou, the first international sand sculpture exhibition included a series of sculptures with the theme “the heaven and the earth.” One was a sand statue of Yang Liwei standing on the top of the returning capsule of Shenzhou V. The 8.5-meter-high sculpture included a large Earth model at the base, and was called the highest work in the exhibition. Universities such as Tsinghua and Nankai also invited Yang Liwei to give reports to enthusiastic students. In addition, universities and high schools also held a series of activities such as scientific and technological competitions called “manned spaceflight virtues” to commit to memory the country’s exciting moment and encourage the youth to learn the manned spaceflight virtues.

In short, Shenzhou V serves as one part of a series of continuous and systematic efforts by the CCP in the new era to make Chinese national images and identity at home and abroad. The CCP assigned distinctive cutting-edge technologies to each stage of Chinese history in order to show the greatness of the Chinese nation. It was far beyond party politics. Through highlighting two themes: “Science and Technology” and “Chineseness,” Shenzhou V combined the great nation’s ancient dream of flying into the heavens with the contemporary requirement for consolidating unity and revival, to become a new symbol in Chinese history.

References:

Books and Papers:

Adas, Michael, Machines as the Measure of Men: Science, Technology and Ideologies of Western Dominance, Ithaca : Cornell University Press, 1989.

Brown, Peter J, “China’s space pioneer under the microscope,” Copyright 2009 Asia Times Online (Holdings) Ltd, http://www.atimes.com/atimes/China/KH27Ad01.html, accessed by 2010-3-8

Dick, Steven J and Roger D. Launius ed., Social Impact of Spaceflight, NASA, 2007. P106

Harvey, Brian, China’s Space Program-From Conception to Manned Spaceflight, Springer Praxis, UK, 2004. P13.

Li Cheng and Lynn White, “The Sixteenth Central Committee of The Chinese Communist Party,” Asian Survey, July 2003, P553-97.

Marx, Karl The Poverty of Philosophy, Progress Publishers, 1955. Chapter 2, part I.

Zheng, Yongnian, Discovering Chinese Nationalism in China, Modernization, Identity, and International Relations, Cambridge University Press, 1999. P.21.

On-line Sources:

China Manned Space Engineering, Nov. 26, 2005, http://www.cmse.gov.cn/project/show.php?itemid=138. accessed by 2009-12-10.

China Youth, Oct.25, 2003, http://news.sina.com.cn/c/2003-10-25/04181993879.shtml. accessed by 2009-12-11

Jie Fang Jun Newspaper (PLA Newspaper), Oct.16, 2003, http://www.mod.gov.cn/leader/2003-10/16/content_3074004.htm, accessed by 2010-1-23.

Lifeweek, Dec. 9, 2003, http://www.lifeweek.com.cn/2004-01-02/000017593.shtml. access by 2009-12-11

People, Nov. 23, 2003, http://www.people.com.cn/GB/keji/1059/2205486.html, accessed by 2010-2-7

Southern Daily, Aug. 9, 2004, http://www.southcn.com/news/gdnews/sz/whz/jj/200408090147.htm. accessed by 2009-12-11

Xin Hua News, June 22, 2008, http://news.xinhuanet.com/mil/2008-07/22/content_8745772.htm, accessed by 2010-2-6

Xin Hua News, Nov. 7, 2003, http://news.xinhuanet.com/newscenter/2003-11/07/content_1167141.htm, accessed by 2010-2-6

Xinhua News, Nov. 11, 2003, http://news.xinhuanet.com/newscenter/2003-11/11/content_1172495.htm. accessed by 2009-12-11

Xinhua News, Sep. 24, 2008. “China’s manned spaceflight program”, http://www.cnsa.gov.cn/n615708/n2243881/n2243887/166780.html, accessed by 2010-1-10.

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This was only the most recent demonstration of the naval aspect of China’s current rise. China is increasingly operating in seas far from home and using naval power in support of a range of objectives. In November 2010, 100 ships and 1,800 PLA Marines participated in live fire exercises in the South China Sea. Viewed by 200 military observers from foreign countries, the exercises came after U.S. Secretary of State Hillary Clinton had suggested a U.S. role in resolving the South China Sea territorial dispute and as Southeast Asian countries were moving to strengthen their claim to islands and seabed resources in that region. According to one PLA analyst quoted by Beijing’s Global Times newspaper: “It’s time to oppose these interventions with power politics.”²

A month earlier PLA warships made their first-ever public visit to Myanmar ports. The visit by a two warships was part of a multi-country tour. Chinese warships have been visiting ports in the Indian Ocean since 1985, and Chinese warships reportedly have occasionally called at Myanmar’s ports before. But the 2010 visit was the first publicly announced visit. Indeed, the occasion was celebrated by the Chinese ambassador as well as representatives of Chinese companies, teachers, and students based in Myanmar. ³

In 2007 China launched its first ship built specially to serve as a hospital ship.⁴ Such ships play a central role in humanitarian assistance and disaster relief (“HA/DR” in naval jargon) that has become a mainstay of U.S. naval diplomacy during the post-Cold War period. According to Xinhua, China’s new hospital ship made it one of only a few countries in the world to possess long-range medical capabilities. The PLA-N hospital ship undertook its first exercise in March 2009, visiting Chinese military outposts in the South China Sea. Chinese analysts made clear that the main mission of the new hospital ship was to support amphibious attack operations. The year before the hospital ship was commissioned, China launched its largest indigenously designed amphibious assault ship to date. ⁵ With a 20,000 ton displacement the vessel delivers assault forces by hovercraft and helicopters.

The most substantively important PLA-N deployment came in 2008 when Chinese warships were deployed to the Gulf of Aden to protect against pirate attacks. This was the first time the PLA-N had undertaken sustained and complex operations at great distances from China. Such an accomplishment is crucial to true naval capability — as opposed to simply having an impressive list of naval hardware. One friend at the China Maritime Studies Center of the U.S. Naval War College made a comparison to the British and French fleets during the epic battle at Trafalgar in 1804; while the British seamen literally lived at sea for months on end and were excellent at related skills, French seamen were bottled up in their harbors and seldom were able to put to sea for more than a few days at a time. Only sustained sea operations at great distance and under varied conditions generate true naval capability. Chinese seamen are now acquiring this off Somalia.

The PLA-N is fielding new and potent naval warfare systems. Chinese shipyards recently began producing several new classes of submarines and frigates qualitatively more capable than earlier PLA-N warships.⁶ Early in 2010 the U.S. Office of Naval Intelligence reported advanced Chinese work on anti-ship ballistic missiles, probably based on indigenized Russian technology and designed to target U.S. aircraft carriers.⁷ While developing the capability to deny U.S. carriers access to the seas around Taiwan, China is starting to build its own carriers. Late in 2010 the final paragraph of a report by the State Oceanic Administration revealed that the previous year China’s government had decided to build an aircraft carrier.⁸

Commentary in PLA publications indicates that a more expansive definition of China’s national interests parallels the growth of Chinese naval capabilities. Or at least some in the PLA believe this should be the case. An article in Jiefangjun Bao in March 2011 cited the recent and successful PLA-protected evacuation of Chinese nationals from Egypt and Libya to argue that China’s traditional concept of limiting use of military power to defend China’s own territory was inadequate to the era of globalization.

In today’s age, national interests have already surpassed the traditional territorial land, sea, and air, and expanded toward the oceans, space, and even intangible information space. Interests in these domains have become important components of national interests and security of these domains has become an important content of national security. The scope touched upon by national security is not only limited to traditional ‘territorial land borders’ …. Maintaining normal overseas economic relations and links, protecting the security of energy, resources, and transport channels, and protecting the interests of citizens and legal entities overseas and the just rights and interests of overseas Chinese are important issues related to the overall … national development and the basic interests of the people.⁹

One of the fundamental precepts of the Realist approach to politics is that interests expand as capabilities do, and this may be what is happening now. As China develops globe-spanning naval capabilities, it may be discovering that it has globe-spanning interests to be protected by those expanding capabilities. There is nothing unusual about this; China is following the path of most other states that became naval powers.

China’s embrace of navalism will make Sino-U.S. relations more complex. Until recently China had been essentially a continental, land power while the United States has been essentially a maritime power. The PRC’s primary security concerns have had to do with deterring aggression against its land mass (from the U.S. in Korea or Southeast Asia, or from the USSR), while the United States has typically drawn its defense perimeter through the Western Pacific chain of islands lying off the East Asian coasts. There were exceptions to this — South Korea for the U.S., Taiwan for the PRC — but the big picture held. A sort of geographic division thus underlay the spheres of influence of the two powers, and this fact was cited by writers, especially Robert Ross of Boston College, to argue that the PRC and the U.S. were likely to work out a mutual accommodation. Now Chinese and U.S. spheres overlap more.

One gloomy case study contemplated by scholars is Anglo-German rivalry in the early 20th century. Historical analogies are never conclusive, but they can sometimes be suggestive. Britain’s global position was based essentially on maritime power, while Prussia-Germany commanded the preeminent army on the continent of Europe. The cautious Chancellor Otto von Bismarck understood this and deliberately eschewed construction of a big navy that would challenge Britain and drive it into alignment with Germany’s nemesis, France. Emperor Wilhelm II fired Bismarck and developed a High Seas Fleet that could challenge Britain’s navy. Germany’s navalism was a major factor pushing Britain toward alignment with France against Germany and, by extension, unleashing World War I.

China, and indeed the whole world, was blessed by a giant statesman like Deng Xiaoping. Deng’s Bismarck-like prudence and realism has thus far underlain the PRC-U.S. comity underpinning China’s peaceful rise. Let us hope there are not unintended consequences to China’s embrace of naval power.

The post China’s Increasingly Assertive Navalism appeared first on China Research Center.

A major talking point in the U.S. media today is the alleged weakening of American influence in the world. The common perception is that power is shifting to East Asia, and particularly to China, with ramifications globally and especially close to home in Latin America. China’s economic emergence over the last decade has sent shockwaves through the region, causing economic policy shifts and realignment of markets toward the reawakened dragon. While the U.S. has a strong history of moving to block outside political influence in Latin America, its attention of late has been focused on Iraq and Afghanistan, and the region has gradually fallen lower and lower on America’s list of priorities. China has been all too willing to fill any void. However, the numbers show that, despite the rapid growth of the Chinese economy, the U.S. remains the central figure in economic relations with Latin America by an enormous margin. Yet, there are trends that should at least concern the United States. Exactly how worried should the U.S. be about China’s growing influence in Latin America? Is China on its way to overtaking the U.S. as the region’s primary trade partner? Are China’s motivations strictly economic or is there an underlying political driver behind China’s actions that should warrant concern from the U.S.? Perhaps most important, is trade with Latin America a zero-sum game, or is it possible for both China and the United States to benefit from Latin America’s growth? These are the questions that this article will attempt to answer.

Historical Roots

In March 2011, U.S. President Barack Obama met with leaders and officials in Brazil, Chile and El Salvador. Mr. Obama made this visit amid growing Chinese power in the region. The trip marked the first time President Obama had visited Latin America since becoming President. By comparison, at this point in Hu Jintao’s presidency, the Chinese president already had visited four countries, including Brazil, where he signed 39 bilateral agreements and announced $100 billion in investments. While Mr. Obama was well-received during his trip, the most common response in those countries was that the trip was symbolic but not very substantive. Obama’s visit did not reflect any shift in policy. Many of the major statements these countries hoped for (such as a call for Brazil’s permanent place on the U.N. Security Council), in fact, were not made. Mr. Obama admitted on his trip: “There have been times when the United States took this region for granted,” according to the Latin American Herald Tribune. Those times are not yet in the distant past and there are fears this administration is making mistakes similar to ones in the past. After promising during his 2000 election campaign to correct Washington’s indifference to Latin America, George W. Bush was accused of turning his back on the region in favor of more pressing issues in the wake of the September 11 attacks. The President showed no concern for a growing Chinese influence in the hemisphere, and China put both feet inside before anyone in Washington seemed to realize the door was open. This was a move China had planned during the administration of George H.W. Bush.

In 1990, only a year after China gunned down protesters in the Tiananmen Square demonstrations, President Yang Shangkun visited five countries in Latin America. His trip was the first of an increasing number of high-level missions that laid the foundation for what he described as “a new international political and economic order” (McCarthy, 2008). However, the depth to which China would be involved with the region did not expose itself for almost a decade. In 2001, then-Chinese President Jiang Zemin completed a 12-day mission to cement economic ties with Latin America. Key countries on his itinerary included Brazil Argentina, and Venezuela. Li Peng, Chairman of the Standing Committee of the People’s National Congress, followed up with more visits in November 2001. Then in November 2004, in what may one day be considered the turning point of Latin America’s shift away from U.S. relations, President Hu Jintao flew to Argentina, Brazil, Chile and Cuba, where he announced the aforementioned $100 billion in investments over the next 10 years (Painter, 2008). His goal was that by 2010 the amount of two-way trade between with the region would equal $100 billion. Yet not even China could have expected such incredible results.

By 2007 two-way trade between China and Latin America had already eclipsed $100 billion, almost 50% more than the previous year and three years ahead of schedule. In 2008, two-way trade and investment reached $140 billion, with approximately $120 billion devoted to bilateral trade (Miller, 2009). China appears to be slowly closing the gap on the U.S. In 2009, Latin American exports to China jumped nine times, reaching $41.3 billion, almost 7% of all Latin American exports, according to Kevin Gallagher of The Guardian. U.S. exports and imports with the entire region are still vastly greater than China’s, but year by year, China is catching up and in some countries, surpassing the U.S.

Even though China has become a major player over the past decade, trade between the China and Latin America still pales in comparison to Latin American-U.S. trade. Regional trade with the U.S. totals $560 billion compared to just over $140 billion in trade with China. But the trend is significant when looking at where China was in 2000 ($13 billion) (Painter, 2008). When we look at Latin American trade over the past decade with both the U.S. and China, one would find that the percentage of trade is slightly shifting. At the beginning of the 2000s the U.S. had more than half of the trade with the region; China had less than 10% for China. Now the U.S. has roughly the same amount of total trade, but China is now nearing 12%. Going back a little further, total U.S. trade in Latin America increased from 7.2% in 1996 to 8.3% in 2009 (Hornbeck, 2011). However, Mexico is the largest trading partner of the U.S., which brings that number up significantly. If trade with Mexico through NAFTA is taken away, U.S. trade growth with Latin America is even less impressive. Meanwhile, Sino-Latin American trade increased tenfold over the last decade and investment has also increased.

China’s search for commodities

China’s thirst for natural resources has sent the country in search of sustainable supplies of oil, soy and iron ore. In South America, China has found some of the most well-endowed partners in the world. China is devouring Latin American commodities and eyeing a market of 500 million people. “Countries in South America have arable land and need our technology and investment, and they welcome our companies. It’s a win-win solution,” said Wang Yunkun, deputy director of the Agriculture and Rural Affairs Committee of the National People’s Congress, as reported by MercoPress. In 2006, more than 36% of Chile’s total exports were directed toward Asia, with China taking 12% of the total. Chile was the first Latin American country to complete a major bilateral trade agreement with China (Santiso, 2007). Since then China has looked beyond Chile, also targeting Brazil, Venezuela, Ecuador, Argentina and Peru.

In 2009, China became Brazil’s largest single export market, eclipsing the U.S. for the first time in history. Later, Brazil’s then-president, Luiz Inacio Lula da Silva, and his Chinese counterpart, Hu Jintao, signed an agreement that allowed the China Development Bank and Sinopec to loan Brazil’s state-controlled oil company, Petrobras, $10 billion in return for as many as 200,000 barrels a day of crude oil for ten years (Economist, 2009). This is but one example of how China is seizing lending opportunities in Latin America when traditional lenders such as the Inter-American Development Bank are being pushed to their limits. “Just one of China’s loans, the $10 billion for Brazil’s national oil company, is almost as much as the $11.2 billion in all approved financing by the Inter-American Bank in 2008,” according to The New York Times.

It was not only in Brazil that China went after oil. In order to meet rising industrial needs and consumer demand, China has pursued investments and agreements with a variety of Latin American oil producers. In 2007 Venezuela agreed to a $6 billion joint investment fund for infrastructure projects at home and for oil refineries in China able to process Venezuelan heavy crude oil (Santiso, 2007). Venezuela planned to increase oil exports to China by 300,000 barrels per day. Then in 2009, Venezuela announced a $16 billion investment deal with the Chinese National Petroleum Corporation (CNPC) for oil exploration in the Orinoco River to develop heavy crude oil resources (Economist, 2009). Meanwhile, the CNPC has invested $300 million in technology to use Venezuela’s Orimulsion fuel in Chinese power plants. This exemplifies Venezuela’s desire to break away from the U.S. During a visit to China in 2004, President Chavez said shifting exports to China would help end dependency on sales to the United States (Johnson, 2005).

In 2003, China bid on rights to Ecuador’s major oil fields. Also in 2003, the China’s CNPC acquired a stake in the Argentine oil and gas firm Pluspetrol, which operates in northern Argentina and Peru. In August of 2009, the CNPC bid at least $17 million for 84% stake in YPF, Argentina’s largest oil company (Economist, 2009).

China is interested in more than just oil. Deutsche Bank researcher Tamara Trinh states that as China’s agricultural demands have risen sharply in the last decade, soy has been a major export to China from Argentina and Brazil. China accounts for almost 40% of the world’s soybean imports and Latin America’s vast agricultural sector is a perfect match for China’s needs.

There is no denying that there are some positive effects for both sides that pave the way for increasing relations. Trinh reports that profits based on soy have grown from around $10 billion in the early 1990s to more than $35 billion today for Latin America. Brazil and Argentina have benefitted most from China’s growing hunger for soy, with exports growing from around 25 million tons in 2000 to almost 40 million tons in 2005 – which accounts for more than half of China’s total soybean imports.

China is also the world’s leading importer of metal ores, a large percentage of which comes from South America. Brazil is China’s third largest supplier of iron ore and largest exporter of iron ore in the world, accounting for billions of dollars in profit for Brazil. As China’s need increases, so will Brazil’s exports to China. Chile and Peru, the largest producers of copper in the world, account for more than 50% of China’s copper imports, according to Trinh.

China’s investments have been in the area of transportation, with an eye toward making resource deliveries more efficient. China is partnering with Brazil to improve Brazil’s railways and establish a rail link to the Pacific to cut transportation costs of iron ore and soybeans. Other countries also are benefitting from Chinese investment. China is proposing to build a rail link in Colombia to rival the Panama Canal. The 220- kilometer line would connect Cartagena, on the northern Atlantic coast of Colombia, with its Pacific coast, making it easier for China to pass goods through Latin America and import raw materials. China is currently Colombia’s second-largest trade partner after the U.S., with bilateral trade rising from $10 million in 1980 to more than $5 billion in 2010, according to The Guardian’s Tania Branigan. At the same time, a consortium of three companies from China, (as well as companies from Japan and South Korea) are bidding on a high speed rail project in Brazil to connect Rio, Sao Paulo and Campinas, which shows that China’s focus goes beyond the coastal countries.

In addition, China signed a $10 billion agreement with Argentina in July 2010 to refurbish two major rail lines, according to Global Intelligence Report. China signed an agreement to take a 40% stake in a Venezuelan rail project worth $7.5 billion in 2009. This project to connect oil-producing regions in Venezuela to the capital will assist China in maintaining a steady energy supply from Venezuela. There are also opportunities not paid for by China, but beneficial to the Asian country nonetheless. In January 2011, Peru completed work on a road that connects the mountainous country to Brazil. This has the potential to boost Peruvian and Brazilian trade with Asia. Peru itself has had a free trade agreement with China since 2008.

The Latin America Perspective

The expanding relationship with China is transforming Latin America. The Chinese are pursuing neighborhood relations with vigor. Thus far the idea is that China’s expansive growth is both an opportunity and a threat to Latin markets. While the Chinese boom brings a positive windfall, boosting exports of Latin American countries whose endowments are commodity related, the sheer size of the growing demand presents a real challenge to Latin America. Brazil’s view of China is a proper litmus test for the region as a whole. Since Brazil represents a full 50% of South American trade, it will set the standard that the region as a whole abides by when looking to China as a viable alternative to U.S. influence.

During Luiz Inacio Lula da Silva’s presidency, Brazil vigorously pursued a deeper relationship with China. After the financial crisis of 2002, in which Brazil became dependent on the IMF to recover from an economic downturn, Sino-Brazilian relations became a priority for the South American nation. As this relationship blossomed, so did Chinese relations with the rest of Latin America. Now, as China becomes more deeply tied to Brazil and Latin America as a whole (Chinese FDI being greater in Latin America than any other region outside of Asia), some Brazilian officials worry that Brazil’s relationship with China is presenting a large trade imbalance that could negatively affect Brazil’s industries outside of agriculture and mining.

“We seek to expand the share of manufactures in exports to China,” said Maria Edileuza Fontenele Reis, ambassador and Deputy Permanent Secretary for Asia at the Foreign Ministry, according to the People’s Daily Online. “We seek a better position to expand our investments in China, and our interest is that China diversifies its investments in Brazil, so as to avoid excessive polarization in mining and agriculture.” The ambassador made this statement before President Dilma Rousseff’s first trip to China in April 2011, which focused on improving the China-Brazil bilateral relationship at the third BRICS summit.

Many in Brazil are concerned that the country’s trade surplus with China masks greater problems. The concentration on commodities in Brazil’s exports raises the risk of the country’s agricultural growth pushing the real exchange rate and redirecting capital and labor toward the agriculture/natural resources sector at the expense of manufacturing. This is part of the reason that Brazil’s currency looks so overvalued while its manufacturers are struggling to compete. This has pushed Brazil to pressure China to stop undervaluing the Yuan. China’s excessive protectionism and undervalued currency has made it difficult for Brazilian companies to compete. In fact, this was one of the priorities on President Rousseff’s agenda during her inaugural visit.

While these issues were not solved on the first meeting, there were steps taken to diversify China’s investment in Brazil as well as Brazilian investments in China. Twenty bilateral agreements were signed between the two countries, with the largest deals coming in the areas of telecommunication, aircraft and energy, according to Latin Trade. Brazil promised to give China its long sought-after market-economy status recognition. Both sides pledged to expand and diversify investments through company partnerships. Overall, President Rousseff was pleased with the trip.

“We reached our main goals, which were to open the doors for our more sophisticated products to enter China and for working together in important fields such as science and technology,” President Rousseff said upon her return to Brazil as reported by the People’s Daily Online. She continued: “There’s a delicate balance between ‘cooperation’ and ‘competition’ between the two sides.” These concerns also are shared by the rest of the region, in order to prevent China from overwhelming local industries.

While China’s commodity-based trade structure is currently lucrative, it does not encourage diversification of Latin America’s exports into more value-added goods, manufactured products, and modern services. Economic relations are dependent on often unstable commodity market demands. U.S. investment in the region is far more diversified and spans a range of value-added activities, including manufacturing, finance, telecom, retail and other services. Going back to a comparison with the United States, while China accounts for 6.7% of the region’s total exports, the United States continues to be the largest buyer, with a 40% share. Latin America’s exports to the U.S. are more diversified and remain fairly balanced so it is better suited to survive a possible commodity cut-off in Latin America. Roughly 24% of the region’s exports are raw materials, another 12% consists of resource-based goods and 60% is manufactured products. Karen Poniachik of Latin Trade also sees enormous risks for the region: “The steep overvaluation of the region’s currencies—due in part to the flood of investment flows and export proceeds—is eroding the competitiveness of its higher-value added goods and services. This could in turn fuel its already high level of overdependence on commodities.”

Future Implications

With both the U.S. and China making gains in the region in different sectors, there is seemingly room for each side to grow; which implies that, in fact, trade with Latin America is not a zero-sum game. China presents an alternative to the United States, but that is not necessarily a bad thing. The U.S. is much more diversified than China at the moment and therefore does not need to enter into direct competition. However, as China responds to calls from Brazil and diversifies its investments, there is increasing worry that China is going to outmatch U.S. trade in the region. These fears may be economically based, but there are potentially harmful political consequences – primarily, providing Latin America with a quasi-world power as an alternative to the U.S. Since the Monroe Doctrine, Latin America has been considered a secure sphere of influence for the U.S. The fact that China presents a less democratic alternative to U.S. influence presents a major problem.

The third BRICS summit in April provided more insight into the potential consequences of China’s growing place in Latin America via its relations with Brazil. One proposal to emerge from the summit of the five nations (Brazil, India, China, Russia and South Africa) was a broad-based international reserve currency system providing stability and certainty. The idea was to set up a new exchange rate mechanism that would bypass the U.S. dollar as the reserve currency of the world. In addition, banks of the five BRICS nations agreed to establish mutual credit lines in their local currencies, not in U.S. currency. While the chances of such a proposal gaining support are debatable, it sets a clear example of a possible shift in power away from the U.S. and toward a more global organization, one that is arguably anchored by China. If China becomes a preferred partner in Latin America, it will show that U.S. dominance around the globe also is at risk.

Conclusion

So what does China’s growing place in the region mean for the future? Depending on whom this question is posed to, there are two probable answers. The first is that China’s intensifying relations with Latin America offer a clear sign of the end of U.S. dominance in the region, and in a greater sense, the entire world. There is enough evidence to show that the tides have changed in favor of China. The other answer is that it means nothing. The U.S. is obviously still the more dominant power in the region, and Chinese presence will eventually subside, again leaving the United States as the region’s premier partner. The real answer probably falls somewhere in the middle.

Is China the preferred partner for Latin America? At this point, the definitive answer is no. However, the United States should not take its place in the region for granted. There is clear evidence of an increasingly symbiotic relationship with China throughout Latin America. While the U.S. is the most dominant trade partner to the region as a whole, it is losing ground in key countries, namely Brazil, which is blossoming on the world stage and is emerging as the clear leader in the region. Increasing trade and investment can be beneficial for all, but the power that China can derive from its growing economic influence could bring increased political and ideological influence that the U.S. might find unnerving. China already has replaced the U.S. as the largest trading partner for Brazil and Chile, and is on pace to do the same in Peru and Venezuela. At the very least, this should cause the U.S. to pay more attention to its southern neighbors and take steps to make sure that China only benefits economically and not politically at the expense of the U.S. The world will be watching.

As it stands, the Chinese are not broadening their relations with the region in a way that directly competes with the United States. China is strictly concerned with commodities, including oil. U.S. President Barack Obama recently signed an agreement with Brazil’s Petrobras that will allow the oil company to drill in the Gulf of Mexico. This symbolic move could cause tensions to increase as the world’s two largest oil consumers battle over rights to Brazilian oil. In that regard, the competition may go beyond a race to Latin commodities and move into the realm of fighting for political influence. It is odd to think that the United States would need to compete for hemispheric dominance with a country on the other side of the globe, but China’s actions and increasing integration into the region tell us that such a scenario may one day arise. Given the proximity and importance of Latin America to the United States, this region could be the symbolic battle that best measures the continued hegemony of the U.S. versus China.

With both the U.S. and China jockeying for influence in a world where political power relations are changing, Latin America has the most to gain. The primary concern for the region is that it does not become a battle ground for a neo-Cold War between China and the U.S. Brazil already has clearly stated its concerns regarding Chinese influence. Yet, despite this tension, Brazil is now too reliant on China to turn away from the path on which Lula set the country. Agricultural exports to China are crucial to Brazil’s economy. Lula’s Brazil supported China politically and made clear moves away from the United States. Now Rouseff’s administration has welcomed Barack Obama with open arms. With all three major actors going through stages that could influence the global economic and political landscape – China implementing its 12th five-year plan, Brazil cementing itself as a prominent world player and the U.S. still recovering from a terrible financial crisis – this dynamic relationship is one that deserves close attention from all those concerned with the future of China-U.S. relations. Where Brazil and the rest of Latin America were once looking for an alternative to U.S. influence and found China, the region may now be looking to the U.S. to strike a balance with growing Chinese influence. With the global ambitions of Latin America, namely Brazil, it is essential to maintain close ties with both the United States and China. The world will be watching.

References

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The late 1980s and early ’90s saw unprecedented rapprochement between Taiwan and China. The two sides went from being at a technical state of war to having citizens from both sides visiting one another. Trade blossomed, and limited, unofficial contact between the two governments was encouraged. While Taipei and Beijing had very real and substantial differences to overcome before any official relations could be built, the confidence-building measures and growing civilian contacts did seem promising. Yet all this changed quickly. Starting in 1995, the two sides quickly backslid into a state of tension not seen for 30 years largely because of Taipei’s shift away from supporting reunification with China into what Beijing perceived as clear steps toward independence.

Adding to the complexity of this shift was that the Chinese Nationalist Party, called the KMT, remained in power and was much more sympathetic to China than the opposition Democratic Progressive Party, or DPP. Any analysis as to why relations deteriorated must revolve around Taiwan’s president at the time, Lee Teng-hui. As Lee and Wang note, Taiwan’s cross-Strait policy during Lee’s presidency was largely “a one-man show” (2003, p196), making him the central focus of any study of this time period. Thus the focus of this article is to analyze why Lee Teng-hui, head of the pro-China KMT and hand-picked successor to dictator Chiang Ching-kuo, would decide to shift away from closer ties with the mainland and seek to develop a more independent identity for Taiwan.

Cross-Strait Relations Prior to and After 1995

Before going into any detail about why Lee shifted away from the cross-Strait rapprochement of the early ’90s, it is important to understand the historical context before and after 1995. Previous to 1987 any thought of rapprochement was considered treacherous. The government held fast to its “Three Noes Policy” of no contact, no negotiation, and no compromise with the CCP regime, and debate on the matter was strictly forbidden under martial law.

Yet the situation began to shift. In 1986 the DPP, which later spearheaded Taiwan’s independence movement, was founded as the island’s first opposition party. One year later martial law was lifted. This served as a step toward allowing the freedom of discussion needed to bring up rapprochement. It also took Taiwan off war footing toward China. In early 1988 Chiang Ching-kuo died, replaced by the island’s first native Taiwanese president Lee Teng-hui. Lee continued promoting democratic principles, lifting the Period of National Mobilization for the Suppression of the Communist Rebellion in April 1991. As Roy notes, Taiwan no longer considered itself at war with China (2003, p185).

Although the war had not officially ended in Taiwan’s eyes until then, the government had already begun preparing to proceed with cross-Strait relations. In January 1991 the government created the Mainland Affairs Council (MAC), a cabinet-level agency in charge of developing cross-Strait policy, along with the Straits Exchange Foundation (SEF), a quasi-private organization put in place to deal with the Chinese government as any official contact with China was still officially forbidden. The Chinese government responded in kind, creating the Association for Relations Across the Taiwan Strait (ARATS) in December of the same year. Everything was in place for contact to resume between the two sides after a 40-year hiatus.

While talks did in fact begin, and did result in technical agreements on issues such as the transfer of registered mail and the repatriation of Chinese illegal immigrants in Taiwan, practically no progress was made toward the betterment of relations between the two sides. This stagnation was due to a critical disparity in the objectives each side maintained for holding talks. The Chinese government saw the talks as paving the way for the reunification of Taiwan with China. The Taiwanese saw them as a way to normalize relations between two states (Cabestan 1998, p217) and actively avoided getting pinned down in unification talks with their Chinese counterparts.

This stagnation would turn into outright hostilities during and after 1995 as Lee Teng-hui began showing more concern for Taiwan’s political reform, sovereignty, and international status at the expense of relations with the mainland. From 1995 to the end of his presidency in 2000, Lee engaged in a series of activities that served to anger and frustrate Beijing. These included a high-profile visit to the U.S. in 1995 during which Lee actively sought to promote Taiwan’s interests, encouraging the island’s shift from a Chinese to Taiwanese national identity through his New Taiwanese campaign, and finally his description of relations between Taiwan and the mainland as state-to-state relations. These activities brought cross-Strait tensions to a new all-time high where they would remain until Ma Ying-jeou became president in 2008.

The Political Center

Lee’s shift was at least in part determined by the will of the public. As democratic reforms took hold in the early ’90s the KMT began paying more and more attention to the needs and wants of the political center. According to public opinion polls conducted by the Election Study Centre of NCCU, the public had been shifting its preferences from unification to either maintaining the status quo or even independence, with just a fifth of the population supporting unification by 1995 (Election Study Centre, 2011). This put public opinion at diametric odds with the stated goals of China’s bid for rapprochement. Although the KMT had long maintained its desire to reunify Taiwan with China, the political center’s moderated stance could not be ignored. Lee, looking to maintain the KMT’s power in a more democratic environment, embraced a broader Taiwanese identity and gradually slowed the island’s rapprochement with the mainland in order to accommodate this political center.

To make matters more complicated, the KMT no longer monopolized the promotion of unification with the mainland in Taiwan’s political arena. In late 1993 the New Party (NP) was founded from the New KMT faction, later pushing more aggressively for eventual unification with China. This created two factors that allowed the KMT to shift toward a more moderated stance. First of all, the exodus of many of the hardliners from the KMT to the NP removed much inner-party opposition and helped Lee consolidate his power within the KMT and pursue more liberal cross-Strait policies (Roy 2003, p188). Secondly, as the NP staked a more extreme position on the political spectrum, taking possession of this part of the electorate, the KMT was forced toward a more moderated stance (Fell 2005, p117). This proved advantageous to the KMT. Cabestan notes that, as new parties formed and staked out their cross-Strait policy, Taiwan’s political theater went from having one cross-Strait policy to three (1998, p229). Finding itself on the political spectrum in between the DPP on one side and NP on the other, the KMT was now seen as a moderating force, protecting the country from two extremes and more responsive to the political center (Fell 2005, p102). Thus, because the KMT aligned itself more with the political center through its shift to one of cautious links with the mainland, Lee was both able to defend Taiwan’s sovereignty against pressures from China, consolidate his power within the KMT and, as will be discussed in the next section, help the party fare better in national elections.

National Election Politics

The KMT would never be more keenly aware of the political center’s position on cross-Strait issues than during national elections. For one thing, as Su points out (2004, 58-59), it is advantageous for Taiwanese candidates to be seen as the underdog. As elections draw near on the island, voters often see campaign flags and posters with the characters ??, meaning “to make an emergency rescue.” Candidates want to be seen as fighting an uphill battle in order to garner as much support as possible right before the election. Lee Teng-hui was able to take advantage of this political tactic by portraying himself as an underdog standing up against a belligerent communist China during the missile crises of 1995 and 1996. The crises, during which the PLA fired missiles into the waters near Taiwan’s two major ports, was a reaction by the Chinese government to a private visit by Lee to the U.S. and an attempt to warn people not to vote for him in the upcoming presidential elections. The crises caused China to be seen as the aggressor and created a defiant Taiwanese public, helping Lee soundly defeat his opponents (Su 2004, p46). As one elite interviewee pointed out to Fell, “If the CCP attacks and you do not attack back, then you’ll lose. People will think that you have no guts. You are a coward (2005, p128).” Lee thus stood up to China, attacking back.

Another advantage Lee was able to reap by promoting Taiwan’s sovereignty during this period was to bring cross-Strait relations to the forefront of domestic politics when the KMT was struggling to maintain public trust in other areas of domestic concern. This fact was particularly true for how the island’s youth saw Lee. The younger generations within Taiwan’s population do not harbor the same amount of animosity that is seen in the older generations. In fact, they tend to worry about cross-Strait relations much less than more immediate concerns such as education and employment (Rigger 2006, pp31-32), areas in which the KMT was not accomplishing as much as the public wished. In fact, many voters saw Lee’s 1995 trip to the U.S. as a way to isolate himself from the KMT’s failure to fight corruption (Roy 2003, p198). With his trip to the U.S., and by maintaining a brave face against China’s threats, Lee was able to highlight his successes in defending Taiwan’s sovereignty while also taking attention off of the KMT’s failures (Fell 2005, p19), giving the electorate cause to be wary of China, and portraying himself as the brave underdog. ¹ Lee was thus able to both promote Taiwan’s sovereignty and consolidate his power through the island’s first direct presidential elections. While, as Su points out, in the long run cross-Strait tensions would push the political center away from independence (2004, p63), for the elections Lee’s moderated stance was given the advantage.

Economic Factors

One important threat to Lee’s power and Taiwan’s sovereignty during the mid- to late 90s was the growing economic ties between the two sides of the strait. Although Taiwan did not officially open up to cross-Strait trade until 1987, it had been going on at least since China opened its doors in 1979 (Luo 1998, pp18-23). By 1995 this trade had grown to US$11.46 billion and by 1997 equaled 10.33% of Taiwan’s total foreign trade and 7.52% of China’s (Luo 1998, p17). In fact, if it had not been for Taiwan’s US$16.61 billion surplus with China, the island would have suffered an overall international trade deficit of US$8.97 billion, compared to the US$7.74 billion surplus it enjoyed in reality (Luo 1998, p17). By any reckoning Taiwan and China were becoming economically integrated.

This would threaten Lee’s power and Taiwan’s sovereignty in two ways. First of all, it was believed that increased economic relationships between the two sides would lead to less Taiwanese animosity toward China (Rigger 2006, p7). Secondly, this closer economic integration was a threat to Lee’s power by creating a unified challenge to his cross-Strait policy. While there was much disagreement about the advantages and disadvantages of cross-Strait economic ties, business leaders across the political spectrum were very much for those ties, creating a unified opposition to Lee’s policies (Lee and Wang 2003, pp191-193).

Lee would work to stave off this perceived economic threat, while at the same time countering China’s political and military threats, by tying economic relations to the cross-Strait political environment and trying to induce Taiwanese companies not to invest in or trade too heavily with China. As Tso notes, Lee tried to play the economic card in an attempt to force China to yield to Taiwan’s economic demands (1996, pp132-133). In lieu of such political concessions, Lee sought to prevent any kind of rapprochement on China’s terms that would lead to further economic integration. For example Myers and Zhang theorize that another reason Lee made his 1999 “State-to-State” comment was to derail upcoming talks and prevent the kind of mainland fever that was seen after the talks held in the early ’90s (2006, pp42-43). While the KMT was indeed keen to be seen as working toward the island’s economic interest, Lee was loathe to do so at the expense of his personal power and Taiwan’s national interests.

Conclusion

Throughout the mid- to late 90s Lee showed clearly that he preferred to maintain Taiwan’s sovereignty and his own personal power base over improving ties with China. Yet, despite the fact that Lee had his own clear ideas on how cross-Strait policy should be dictated, these ideas were not created in a vacuum. Firstly they were developed in response to the political center’s wishes, which decreasingly saw the island as a province of China. Secondly they were developed as a way to politicize cross-Strait relations during national elections, namely the 1996 presidential election. Finally they were developed as a response to what Lee saw as an overheated economic integration of the two sides that would give the business community too much political sway while mollifying public opinion toward China. Many scholars question the success of Lee’s cross-Strait policies, as economic ties continued to flourish and Taiwan’s international space remained limited. Nevertheless, it cannot be denied that they were borne out of very real concerns regarding the island’s status in the global arena that were shared by much of the public.

These factors gain much more relevance today as KMT President Ma Ying-jeou looks to re-engage China after more than a decade of chilled relations. Indeed there are some differences between what happened with Lee and what Ma faces now. However, the similarities between the two cannot be ignored. Regarding the differences, Ma has embraced the cross-Strait economic ties Lee feared and has given up the zero-sum game over diplomatic relations Lee so eagerly fought with China. On the economic front Taiwan’s trade surplus with the mainland, shrinking be it may, has helped the island’s sagging export-based economy, and Chinese tourists visiting the island have created a limited but real boost for local businesses. On the diplomatic front, China has responded to Ma’s rapprochement by making limited concessions, such as not objecting to Taiwan’s WHA membership as an observer. However, China’s intentions to reunite Taiwan with the mainland remain unchanged and, despite Ma’s pleading, Beijing has not renounced its willingness to take back Taiwan militarily, continuing to add to its missile arsenal aimed at the island.

The greatest similarity between the two environments is that China still expects unification between the two sides, and the majority of people on Taiwan are against any such endeavor. Ma must also function in an election system and political environment similar to what Lee faced. While much of the New Party has been re-absorbed into the KMT, Ma was put into office by an electorate whose political center has continued moving further away from a Chinese national identity and support of unification, keeping pressure on him not to make too many concessions to Beijing. In short, while tensions have been reduced during Ma’s tenure, it has only eased some of the symptoms of the problem, not provided a cure. If the two sides of the Strait are going to develop any lasting rapprochement, they will have to do so in a way that will acquiesce to China’s own needs to maintain its sovereignty and territorial integrity while not abandoning the island’s own political and economic desires. If they do not, history could very well repeat itself, and Ma could be left facing many of the same difficult choices Lee was faced with almost two decades earlier.

Bibliography:

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The post Lee Teng-hui and Cross-Strait Relations: 1995-1999 appeared first on China Research Center.

Introduction

China’s vast rural areas and lesser known cities have become a focus of attention both for China’s banking industry and foreign banks. A major signal of this trend came in 2010, when AgBank of China, one of the country’s major banks, made an IPO that became known as the manna from heaven for the nation’s western, rural regions. The bank is now aiming at narrowing the gap with the affluent coastal areas.¹, ² Foreign banks, such as Canada’s Bank of Nova Scotia and Spain’s two largest banks, BBVA and Banco Santander, are increasingly investing in smaller Chinese banks in the hope of profiting from rapid growth in the financial sector³. Banco Santander, in fact, agreed to take a 19.9 percent stake in a joint venture with China Construction Bank Corp. to provide banking services outside China’s major cities, according to The Wall Street Journal. Much of the interest by Chinese and foreign banks is focused on China’s City Commercial Banks (CCBs) and Rural Commercial Banks (RCBs), which largely serve small and medium-sized businesses sprouting up across China.

There are other indications that CCBs and RCBs could become the focus of a new wave of expansion in the Chinese financial sector. In December 2010, Chongqing Rural Commercial Bank, one of China’s largest lenders to farmers and small businesses, raised US$1.48 billion in an IPO in Hong Kong in what is expected to be the first in a wave of listings by smaller rural-focused Chinese banks⁴. In addition, four Chinese RCBs in east China’s Jiangsu Province have won approval from the country’s banking regulator for their IPO plans. China’s Banking Regulatory Commission (CBRC) said it encouraged and supported qualified rural financial institutions to pursue listings. ⁵

A focus on rural areas and smaller cities could help ease the yawning and growing gap between China’s largest cities and the countryside. Despite China’s rapid urbanization, particularly in coastal provinces, the majority of China’s total population still lives in rural areas ⁶. China’s rural-urban wealth gap has been an issue of concern, with the average annual income for a rural worker around RMB 5,150 ($750) while those in the cities earned RMB 17,180 ($2,510) on average in 2009 ⁷. A recent study showed that the current banking system meets only about 60 percent of rural household financial needs, and about half of rural agricultural needs.⁸

This research focuses on assessing CCBs and RCBs as vehicles for easing gaps in China’s economic development and as a sector of interest by foreign investors. The essay will include an explanation of the services they provide to growing and yet underserved small and medium-sized firms found in smaller cities and rural regions and an analysis of how and why foreign banks are looking to invest in these lesser known Chinese banks.⁹ The first task is a brief history of CCBs and RCBs.

Background

In 1995 the first of the CCBs came into existence with the key aim of boosting local economic development and small and medium enterprises (SMEs). China’s CCBs are joint-stock commercial banks established by local governments, enterprises and residents. These banks sprouted from shareholding reform and former urban credit cooperatives. They are allowed to open branches only within their home cities. Few of the CCBs have any private investment capital and have largely been used to finance local government projects. They are thus influenced by local governments, which are perhaps more bureaucratic and less developed than the central government. CBRC reports indicate that these banks are largely present to grant loans to SMEs that operate within city boundaries.

Several RCBs have been created since 2001 in order to improve financial services in the countryside. The four RCBs of Zhangjiagang, Wujiang, Changshu and Jiangyin have received approval for an IPO and, along with Chongqing RCB’s IPO in Hong Kong, they have placed RCBs in the forefront of China’s banking industry. Since the CBRC revised regulations covering rural banking in 2006, allowing foreign banks to operate alone or with partners, HSBC, Standard Chartered and City have all established their presence in China’s interior.¹⁰
In a move to further close urban-rural income gap, the Banking Commission and the Chinese government are planning to increase the number of RCBs more than tenfold to 1,027 by the end of 2011. This development will be particularly focused on central and western China, where most people are farmers with little access to financial and loan services.¹¹

The CBRC actively encourages foreign banks to engage in business with small and medium-scale enterprises, but most foreign banks believe these endeavors are relatively risky, and their financial information is not transparent. In addition, foreign banks lack the networks required to reach them. Thus an alternate route has been to invest in or create alliances with CCBs. Under similar encouragement from the CBRC, foreign banks are also increasingly involved with rural banking via RCBs. This helps them establish links across the nation in a more tangible fashion and meet the needs for banking services in the rural areas.

Research increasingly notes that it is beneficial for foreign lenders to team up with a CCB or RCB.¹² CCBs and RCBs benefit both directly from capital investments as well as from knowledge transfer gained from experienced management and financial innovations in products and services obtained from foreign partners. CCBs and RCBs also benefit indirectly by being able to offer superior products and services that make them more competitive in the domestic market. In turn, these alliances with Chinese banks could potentially result in further endeavors for foreign banks. They not only are an easier route for foreign banks, but they also help the banks grow organically with local incorporation. Recently, Australia and New Zealand Banking Group Ltd. (ANZ), one of Australia’s top lenders, announced plans to invest in China via expansion of its branch network and seeking local incorporation.3 At present the bank owns a 19.9 percent stake in Shanghai RCB and a 20 percent stake in Bank of Tianjin, a CCB. Other banks in Australia also similarly hold stakes in CCBs. This is expected to lead to a rush of second-tier regional banks from the West investing in China with the intent of expanding into less urbanized areas.

City Commercial Banks

Recent research has been mixed on the performance of CCBs. A 2007 KPMG study noted that China’s banking sector assets grew at a compound annual growth rate of about 13 percent since FY 2000 reaching a massive $3.8 trillion; CCBs account for five percent of that total.¹³, ¹⁴ The study also shows that their performance has been less than stellar with poor capital adequacy, high non-performing loans (NPLs) and limited market penetration. Consequently, these banks have had regulatory mandates to reduce their NPLs to 15 percent by 2005 and maintain an eight percent capital adequacy ratio (CBRC, 2006 Annual report). In their defense, more recently, Giovanni Ferri (2009) finds that while CCBs have low market share, they boast of high growth and better performance than the State Owned Commercial banks (SOCBs). In addition, he points out that while their performance was a mixed bag, they had a 13.2 percent growth in assets in 2005, and their ROEs and ROAs were still higher than those seen in SOCBs. Ferri’s paper, although recent, was based only on a small sample of CCBs for which data was available in Bankscope.¹⁵

By 2005, there were 113 CCBs. That number rose to 140 by FY 2009. By the end of 2005, the average capital adequacy ratio of China’s CCBs was 5.14 percent, and the number of CCBs with the capital adequacy ratio up to eight percent rose to 36 from 18 in early 2005. CCB NPLs totaled RMB 84.2 billion in 2005, decreasing by RMB 21.7 billion in 2004, and loan quality improved; only 7.7 percent were non-performing in 2005, four percentage points less than the previous year and down from 30 percent five years previously. (CBRC Reports, 2006). ¹⁶

From 2006 to 2009, according to official Chinese statistics, CCB assets almost doubled.¹⁷ During this time both the average growth in assets as well as the share of CCB assets in proportion to all banking institutions rose each year (see Table 1). This perhaps reflects the growth of Chinese SMEs creating an increased need for CCBs.

Table 1: City Commercial Banks’ Quarter-end Balance, RMB 100 million, %

Fourteen of these 140 banks had assets that exceeded RMB 100 billion, more than 50 percent (70 banks) had assets of RMB 10 billion-100 billion and more than 50 banks held less than RMB 10 billion (CBRC report, 2009-10). The NPLs in China’s banks had been in decline by 2005 and continued a downward trend from 2006 to 2009. The average outstanding balance on loans of RMB 75.8 billion had gone down to almost half of that, or RMB 46.2 billion, by FY 2009. Also, in contrast to the aforementioned KPMG (2007) study, the proportion of NPLs as a share of total loans declined in all commercial banks, and in CCBs, NPLs went from 6.29 percent of total loans in 2006 to only 1.76 percent in 2009, steadily declining each year (see Table 2).

Table 2: Commercial Banks’ Non-Performing Loans (NPL) as of end-year, 2006-09

Source: China Banking Regulatory Commission Report.

What has caused CCBs’ improved performance in the latter years, and is that performance sustainable? CCBs’ major advantage lies in that they are local, with capital and ownership derived from the communities they serve. They are expected to become prominent players in the future of China’s banking landscape since private enterprises in China—mostly SMEs—produce some 52 percent of GDP but account for only 27 percent of outstanding loans.¹⁸ Ferri (2009) finds that the performance of CCBs is significantly and positively related to the level of economic prosperity in the provinces where they are located. They have recently thus attracted foreign banks that are seeking strategic investment opportunities in China. The improved performance (decline in NPLs) may be a result of increased competition perhaps resulting in more efficient performance.

In a recent Pricewaterhouse Coopers (PWC) survey, foreign banks note that despite an increasing threat from domestic banks, China’s market appears extremely strategic with the expectation of aggressive development. As they expand into China’s large market base of lenders and focus on the SMEs, will they be able to sustain their growth?

Rural Commercial Banks

RCBs regard SMEs as their key clients to provide them with business operations aimed at serving the agriculture sector and other rural industries. Historically, bank lending to rural areas has not performed on par with lending to urban areas. In order to encourage banking to rural areas, the CBRC and central government have considered new incentives such as tax cuts, lowered capital requirement for rural banks, and subsidy programs that include infrastructure development, some of which have already been initiated. ¹⁹, ²⁰ This effort has not gone to waste. Table 2 shows a dramatic jump in average outstanding loans for RCBs in 2009 and a definite reduction in NPLs over time showing movement in the right direction. The recent Agbank IPO and Zhangjiagang RCB IPO approval of December 2007 may improve the outlook for RCBs. ²¹

In December 2010 Chongqing RCB, the largest bank in the municipality, was the first Chinese mainland-based rural bank to list on the Hong Kong Stock Exchange.²² Upon its debut it did not perform to par, and its shares later fizzled in trading, reflecting skepticism among Chinese investors. However, it marked an important point in Chinese banking since it is expected to be the beginning of an era of similar listings by RCBs and CCBs in Shanghai and Hong Kong as these banks look to the markets to bolster their balance sheets and raise capital for expansion.²³ It is also a test to gauge foreign-investor interest in the growth of China’s hinterlands. RCBs may be seen as a means to provide capital to rural areas, and foreign banks may find RCBs an easier way to penetrate rural markets, which still require extensive networks. Evidence of such is noted with banks such as ANZ Bank, which not only opened a rural branch near Chongqing last year but also has a 20 percent stake in the Shanghai RCB as well as in Banco Santander SA’s joint venture with China Construction Bank Corp. in rural banking. The future may lie there if a viable operating model can be developed to control risk and manage non-performing loans by perhaps requiring adequate capital.

Unfinished Agendas

In China, alongside a huge untapped market for financial services, many challenges still face both the CCBs and the RCBs. Banks operating in the inner provinces and in the rural banking market are faced with a lack of experience, lack of talent and the high costs of building infrastructure and networks. With the newer economic policies, foreign banks are increasingly attracted to CCBs and RCBs as a strategic option to penetrate the Chinese banking market thus diversifying their portfolios while simultaneously limiting their investment and hence risk.²⁴ So far, foreign banks in China have displayed lower NPLs as a share of total loans than local commercial banks. Non-performing loans have gone from 0.87 percent of total loans in 2006 to 0.74 percent in 2009. Thus CCBs and RCBs are increasingly looking to foreign banks as a boon rather than a bane since this may be their opportunity to expand by obtaining more access to capital while simultaneously learning about new products and adapting new strategies without having to reinvent the wheel. In December 2007, HSBC became the first foreign bank to set up a rural bank in China and now has seven rural branches; the largest network among the overseas banks. Richard Yorke, HSBC’s former China CEO, recently commented: “The rural banking sector is under banked, so we are seeing strong demand for the right product and for the right services. There is strong untapped demand in that market.”;²⁵ Katherine Tsang, China CEO of rival Standard Chartered, has also said that her bank’s first rural branch in Inner Mongolia has been running better than expected. “Rural banking is a long-term commitment and we are not in a rush to make quick money. We will set up more rural banks, if the first one proves to be a role model.”²⁶

Alongside typical transactional issues, Chinese banking is rampant with issues such as lack of transparency, government interference, non-productive assets, NPLs and lack of technical know-how among others. As one ponders the future of Chinese banking, many of these issues need to be addressed both for the CCBs and RCBs that intend to expand, and foreign banks that plan to expand into China via mergers with these institutions. Strong support from the Chinese government and more incentive policies to support RCBs and CCBs are needed and may help with their long term sustainability and the future of Chinese banking.

References

Ferri, Giovanni, “Are New Tigers supplanting Old Mammoths in China’s banking system? Evidence from a sample of city commercial banks,” Journal of Banking and Finance, 33, 2009, 131-140.

Gale, Fred, “Financial Reforms Push Capital to the Countryside,” The Chinese Economy, 42 (5), Sep-Oct 2009, 58-78.

Brough, Paul, “China’s City commercial banks: Opportunity Knocks?,” KPMG, 2007.

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