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The Presidential Inbox: China's Leadership Transition

Speakers: Elizabeth C. Economy, C.V. Starr Senior Fellow and Director for Asia Studies, Council on Foreign Relations, Cheng Li, Director of Research and Senior Fellow, John L. Thornton China Center, Brookings Institution, and Edward N. Luttwak, Senior Associate, Center for Strategic and International Studies
Presider: Thomas R. Keene, Editor-At-Large, Bloomberg News
February 22, 2013, New York
Council on Foreign Relations

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THOMAS KEENE: Good afternoon everyone. Let's get right to it. There's nothing to talk about. We could go for five hours. The Presidential Inbox: China's Leadership Transition. Usual apologies for your cell phone; in fact, I've got to turn mine off now that I think about it. I'll leave the cell phone effort here.

This is a special event. There is so much going on. You have their bios: Elizabeth Economy, Cheng Li from Brookings, Edward N. Luttwak. Elizabeth, do you have his book?

ELIZABETH ECONOMY: I do. Yes. There it is. It's for sale outside.

KEENE: Just out, Harvard Press?

ECONOMY: Yes. It's for sale outside.

KEENE: It is an extended essay, right?

EDWARD LUTTWAK: Yes.

KEENE: We like those nowadays. Those are very good. And Edward Luttwak as well. We'd like to welcome you to today's Council on Foreign Relations meeting. This meeting is part of their series on the U.S. Presidential Inbox that examines the major issues confronting the administration in the foreign policy arena.

We would like to welcome all CFR members around the nation, in the world, participating in this meeting through live stream and teleconference. And we've already heard from them. They've already lined up their questions and answers so we hope that you have as well. Please send those in.

The next meeting in the series, very importantly, is Tuesday, February 26th, on the global economy. I saw Professor Blinder yesterday. He is enthused about the punch bowl the size of the Atlantic. Alan Blinder and Peter Fisher, February 26th.

So the schedule here, because of the quality of this audience is I'm going to go shorter on my part. We're going to do one round of discussion of China and then speak about the administration and the new regime under Secretary Kerry, and then we will go to your considered questions as well, because between North Korea and islands I can't pronounce there's lots to talk about.

Mr. Luttwak, let me start with you, if I may. You talk about the logic of strategy. What is the logic of strategy in China right now with the transition as we see a new U.S. administration?

LUTTWAK: Well, the logic is not manifest in China but by China's neighbors -- Japan, India, Vietnam, even Philippines now -- which are beginning to coalesce against China in response to the sharp change in Chinese words and deeds, which has been very manifest since 2010, or 2009 or '10.

Suddenly, long dormant -- never abandoned, but dormant territorial claims have been revived in regard to the Philippines, in regard to offshore Indonesia, even, of course, the Senkakus very prominently.

First, the revival of the claim for formal statement, then the beginning of patrolling, aggressive patrolling by the fisheries protection fleet, whose leader keeps making speeches how he needs more ships, the CMS surveillance fleet, the same, more actions, overflies by jets, and so on.

Anyways, they are dealing with words. They are dealing with claims. They are dealing with actions. And they're responding by the logical strategy; that is, action brings reaction and they are coalescing, coalescing. And that's -- not to jump ahead -- that's why I believe that we, the United States, should let them get on with it, that is to do this coalescing, which extends now -- from maybe only Korea is reacting the other way, which is kind of sliding into some acceptance of a Chinese suzerainty. Everybody else is rejecting it very firmly.

And the more the Chinese act, the more they react in a very effective way. I mean, right now, the Indians, for example, just offering to train Vietnamese submarine crews, because they're buying the same submarines from Russia as they are. And the Japanese are funding the Filipino patrol boat acquisitions.

So there is that response. That's their reading of China. And none of them attribute any importance to leadership change, unless leaders -- the new leadership were to stop, change the behavior of the fisheries protection fleet, the maritime surveillance team --

KEENE: Do you predict that that will happen?

LUTTWAK: Sorry?

KEENE: Do you predict that will happen?

LUTTWAK: Regrettably, I'm just -- I'm incurably an historian; that is, I don't project. But they are not -- but what they're projecting is continuity. What they're projecting very firmly is continuity. And you can see them acting. And I believe the attribution of any policy difference on the part of the new prime minister of Japan is entirely false because there's, again, perfect continuity. I've seen -- every time I go to the Japanese Defense College -- (inaudible) -- I see more and more Indian officers. And the graph would look like a steady straight up from 2008, with no difference from governments. And I believe it is much the same everywhere.

It is an infernal machine. You're not dealing with bad people or clever people, you're dealing with an infernal machine, you know.

KEENE: What do you mean by that? Define that, please.

LUTTWAK: Well, bottom up pressure from the Chinese public, which entering into prosperity or relative prosperity, all the ancient resentments are bubbling up. And, of course, the enormous dynamic change in China in every possible direction -- royal spirits, and they manifest in hostility to the foreigner, OK?

But top down, the leadership, of course, with more communists in Berkeley than in China, have been beating the nationalist drum. To put it in a very vulgar way, they're beating the nationalist drum. They're not containing the nationalist drum. It's only in extreme cases when they start attacking the Japanese-named Chinese owned sport shops so they intervene and say, cool it, OK?

And then, sideways pressure from the fisheries guys who claim we don't have enough ships or our ships are too small, even though right now -- (audio break) -- the CMS people, they say we want more ships and, of course, the PLA, naturally, the Air Force, the Army, the Navy and so on.

KEENE: This Asian response to China, will it be organized or will it --

LUTTWAK: It is -- it is coalescing organically. There's no NATO. I hope nobody proposes any such madness. But the Indians smoothly work with the Vietnamese and the Russians to train the crews. The Russians are happy to deliver the submarines. The Japanese very smoothly move in and say, oh, the Philippines don't have enough patrol boats. Our shipyards are underemployed. Here's the money. We're going to build them for the (market ?).

And -- but the coalescing is passing some thresholds. Threshold number one: the Japanese no longer believe that they cannot increase the defense spending, even though their tragic budgetary situation. Nevertheless, since they spend less than 1 percent, they could double defense expenditure.

So -- oh, yeah. And the other very important issue in the infernal machine is that -- correct me if I'm wrong; I'm willing to be corrected by anybody. My perception of public opinion in terms of Weibo and -- since public opinion is -- (inaudible) -- that the public broadly has no idea of the military balance. They think that because they have seen so many photographs of the --

KEENE: One aircraft carrier landing -- one airplane --

LUTTWAK: That Russian carrier, yeah, they believe that the Chinese are on the threshold of having a fleet like the Americans. So this make it worse.

KEENE: OK. Cheng Li, I thought your comments before we came in on the new leadership of China were just remarkable. Set us up with your view of the China now that you see as we begin the second Obama term.

CHENG LI: Well, we earlier talked about a strategy. Strategy is made by people, mainly by leadership, so, therefore, we do need to pay attention to Chinese leadership. I especially applaud the Council on Foreign Relations for focusing on Chinese political succession.

Now, I was -- testified just two weeks ago in the Capitol Hill by a commission. And I used four words to refer to Chinese leadership succession, and they all started with "un." Let me share these four words. The first word is uncompleted, the second is unbalanced; third is unpopular; and the fourth is unsafe. Now, these are kind of negative, but let me start with the negative. Actually, I will conclude with a very positive note.

Now, uncompleted -- this is supposed to be a generational transition from so-called fourth generation to fifth generation. Five years ago, Xi Jinping and Li Keqiang were the youngest members of the Politburo Standing Committee. Five years later, they are still the youngest members of the Politburo Standing Committee. Five new arrivals, they are only three or four years younger than Hu Jintao and Wen Jiabao. So this is a generation from fourth, to four and a half. I use the term iPhone 4S to refer to that generation -- (laughter) -- because it's uncompleted.

The second is unbalanced. As we know, the Chinese leadership is not a monolithic group with the same kind of people with same background, same values, same policies. They're quite different, usually divided in a very simplistic way by Jiang Zemin's camp and Hu Jintao's camp. That is the way Chinese perceive. This is the way most foreign observers, like myself, look at China.

Now, previously, since -- especially still since the end of the strongman politics of Deng Xiaoping in the middle 1990s, this is a leadership that usually is more balanced into more important seats. Last party congress is a nine member standing committee is five versus four. So -- but this time, surprised many people including myself it's ended up with six versus one. Jiang Zemin's people got six, only Li Keqiang premier designated and represents Hu Jintao's camp. Of course, there's some reasons for that. I just wrote an article for Cairo Review of Global Affairs.

KEENE: It was too long an article. I had to read it. It was just -- it was great. It was very long.

LI: OK. Yeah. Because you to need to explain the reasons behind that, what happened in -- (inaudible) -- and what the politics was of the incident. So, particularly, two rising stars from Hu Jintao's camp, Mao Yang (ph) and Li Yuen (ph), are out so there's unbalance.

Unpopular, because among the six people of Jiang camp, four of them are princelings, the children of high ranking officials at a time when the Chinese public is mostly resentful with these rather nobilities, these big families control economic wealth and the political top power, you end with a leadership unprecedentedly dominated by princelings. So that certainly does not look good.

Now, all these "uns" lead to unsafe. If there is some social uprising, if the defeated faction decides to go out for public support, this is really the danger of the spirit of the Chinese Communist Party and the leadership. So this is the negative side.

But, actually, having said that, I also see a very positive side, because of the current leadership, this six versus one, this kind of a group, it's not so much pro-political reform. So how to get the political capital to gain public support? Economic reform. This is the things they are good at that. And all these six people -- actually, all seven people are very capable leaders, especially many of them run major cities like Shanghai and (Taichung ?), and Beijing, and Tianjin, and et cetera. They are very reform-minded in terms of the interesting economic reform and also financial liberalization. So they would push. This will become the top agenda. To make the middle class happy will be their top policy agenda.

KEENE: Is that the old agenda?

LI: Well, I think this is the agenda. And forget about this kind of urbanization that they talk about, these social welfare things. The real target is the middle class. You will see a lot of policies starting in weeks.

KEENE: I loved your phrase when we talked about honeymoon. Are they in a honeymoon? I can't imagine that leadership is in a honeymoon.

LI: Yes. It is. It is a honeymoon period because at the moment people in China -- I just got back from China. I found -- despite the cynicism or princelings, people actually like Xi Jinping, both liberal intellectuals and conservative intellectuals think Xi Jinping is good.

For liberal intellectuals, they think he will be China's, you know, Deng Xiaoping. And for conservatives, they say he will be China's Mao Zedong. Of course, Xi Jinping is neither Mao or Deng. Now, some people in the foreign interest consider he will be China's Gorbachev, but that's a curse for him. Now, I think the real possibility -- he may become China's Chiang Ching-kuo. This is the son of Chiang Kai-shek, a princeling.

KEENE: Democratized.

LI: A princeling, a conservative all of a sudden opened up Taiwanese political system in a dramatic way, also in the wake of assassination scandal. So we need to see whether Xi Jinping is capable enough to do that.

But now the concentration of power in his hand should play very well. Previously, you see all the deadlock in the infightings, but now he has six versus one and he is a good economic reformer. He will push the change. But at the end of the day, in today's China, the real economic reform needs fundamental political reform.

Now, Xi Jinping may, because of their control over the state-owned enterprises, may just crack down, just like Nixon goes to China, right? They can -- they have more resources to control the state-owned enterprises, to open up the Chinese economy. But this may also cause the split even within Jiang Zemin's faction. So this is the moment we see -- (inaudible).

KEENE: OK. Very good.

I need a quote from the Economist. Elizabeth C. Economy. Many of you, of course, here are CFR are familiar. I just -- Liz, I think just this quote is important: "These days, China books are a dime a dozen and so too are China analysts." (Laughter.) That was great. It's right there. I don't know. Just absolutely perfect. It's become a cottage industry. Some would say you led a generation of people in analyzing China. Well, I want to mention the pollution here in a bit, but please, your thoughts on where we are right now and what this administration will observe in China.

ECONOMY: I took a lot of flak inside - among my colleagues for that, many whom enjoy pontificating on China even though they're not China experts. So let me just -- I'd like just to say one thing about what Dr. Luttwak said.

KEENE: Please.

ECONOMY: I think -- I agree with everything you said in terms of the sort of establishment of sort of new relationships among countries like India and Vietnam and Australia and sort of -- these sort of just emerging, you know, friendships and relationships.

But at the same time I think it's important to remember that many of these same countries are still looking, right, to undertake military exercises with the Chinese and many of them certainly are not interested in, you know, forming any kind of even not NATO alliance, but even any sort of formal alliance that might threaten or upset the Chinese, because they still look at China as the engine of economic growth in.

LUTTWAK: (Inaudible.)

ECONOMY: So I think it's just important to bear in mind that this is not all these countries sort of aligning themselves over here looking at China. They do see China as an assertive -- rising assertiveness out of China.

But at the same time they want to maintain, you know, very strong economic relationships and, in fact, are pushing ahead as fast as they can on, you know, the FTAs and the regional comprehensive economic partnership, et cetera. So I just wanted to make that one little caveat to your point.

You know, in terms of where -- I guess we'll wait and talk about the U.S. side. Can we just say -- one word about where I think China is? Is that OK?

KEENE: Please. Or say more than one word.

ECONOMY: I think -- I like the fact that you ended on an optimistic note, but I don't see it. I have to say it. From everything that I've just observed, if you look back in Xi Jinping's history, for example, right, there's nothing about him that suggests he's going to be a reformer. Maybe there will be a crisis that will provoke a sudden shift in his -- in his approach, but by and large he's been very cautious. And pretty much everything that has emanated from him to date I think suggests -- he's looking for a strengthening of the party, right? And you know this certainly as well as I do.

And his response -- you know, in his speech in the southern tour that just came to light a few weeks ago, the way that he understands the Soviet experience is a negative one, right, that the Soviet Union crumbled because the party lost its faith in its values and in its ideals. And the anti-corruption campaign is one way of sort of making the Chinese Communist Party into a -- you know, lean, mean, clean fighting machine I think. I think that's his ultimate goal.

That's not to say that there aren't going to be some sort of small-bore political reforms I think, you know, inter-party democracy, again with the design to strengthen the party - consultative, maybe deliberative democracy, right, engaging people at the local level a little bit more than they have in the past, drawing them in -- you know, getting their opinions to make them feel as though they're participating without actually giving them, you know, any say in the decision-making part of the political process. But by and large I don't see him as someone who is at all interested in loosening sort of the grip of the party on fundamental management of the political system.

And I think, too -- and we've had this discussion in different forums, I'm not as sold on the idea that you've got six in one. I think that there's much more of a mix of talents and approaches among the seven new leaders that don't necessarily easily sort of coalesce into the Jiang Zemin versus the Hu Jintao kind of faction. You know, I think Yu Jeng Shan (ph) and Jang Gali (ph) are probably pretty different, right? And Jang Dejang (ph) -- I mean, if you look across -- when you talked about how they're -- you know, very successful managers of large cities or provinces, in fact most of them are not really very successful economic managers of large cities and provinces. So I think there's a lot of -- certainly, as you say, a lot of uncertainty in where they are now and where they're going to go.

KEENE: I see two people squirming. Cheng Li, jump in real quick.

LI: I'd like to respond. You look at the Republican Party, Democratic Party. I mean, within the party, they have variations. This is the same thing. That does not avoid the fact that they come together when they have the final election. No. So in China, there's no election, but you do also need a tendency to go to coalitions. So I think that's very important.

Now, what's assigned for Xi Jinping's reform? I mean, it's not entirely clear, but I can -- you know, talk about two things. One is he decides to -- under his watch, just within a few weeks decide to abolish the laojiao --

ECONOMY: Maybe.

LI: -- Laogai system. It's already announced.

ECONOMY: Not abolish, but maybe reform. Abolished and then took it back and said, maybe --

LI: Well, this is -- (inaudible).

LUTTWAK: Yunan province, Yunan province administrative abolition, not central government.

LI: Well, this is one area. The second area that he started to talk about the legal reform, he used a very, very strong word in the 30th anniversary of the constitutional amendment. So, of course, that -- we need to see the proof, real change. I think that, as I said early on, he's similar to Chiang Ching-kuo is not really famous for being liberal, but -- (inaudible) -- goes in that direction. I want to end up with Francis Bacon. He said, and I quote.

KEENE: Well, very quickly because we want -- (inaudible).

LI: Very quickly. Just a quote. And Francis Bacon once said, hope is good breakfast for a poor supper. But now it's breakfast time in China. It's a honeymoon period. We should be hopeful. Now, it's already disappointed. So what's the point? I think that it's hopeful. Of course, I have a lot of reservations with Xi Jinping, but it's certainly wrong for us to just ignore --

KEENE: Because of time -- this is --

ECONOMY: Can I say one -- can I just say one quick thing. You know, I wrote a piece for Foreign Affairs. I will admit this in front of everybody. Probably nobody read it anyway in 2002.

KEENE: I do. I did. I'm the only one. I'm sorry.

ECONOMY: I know. You're the only one. In which I thought that Hu Jintao was going to be the great hope of China having come out of the party's school, et cetera, et cetera.

KEENE: Is this a therapy session or --

ECONOMY: I'm trying to say I've lost my hope. I look the proof in the pudding at this point.

LUTTWAK: Excuse me. You can hold yourself excused. When Hu Jintao showed up, nobody had talked to him. So you could attribute to him whichever hopes or fears you might have.

Xi Jinping -- I'm sure there are people in this room have had conversations with Xi Jinping. Xi Jinping has been available, has met with lots of people in Beijing and the central -- (inaudible) -- school. All you have to do is called Francesco Sishi (ph) and he would set you up with tea, you know, in the same day. So Xi Jinping is no mystery, should not be attributed to any mystery.

The idea that revolutionary has been, you know, advancing, they're waiting to change everything in China, that is something that, you know, I don't think he would have been able to conceal from the colleagues who have been watching him, OK?

These people are running a very successful business, OK? Their wives and daughters and sisters and brothers-in-law are no longer in the millions but in the hundreds of millions. They're not going to let somebody who's going to disrupt the business. I'll admit one thing though.

After the corruption speech, they closed the supermarket in Chun Dahai (ph), the one that was selling the high-class Maotai for less money than the cheapest Maotai in the shop outside. So it may do things like that, but to believe the people running -- you know, the big mafia family that turns in lots and lots of money are going to allow the changer in, is a mistake.

KEENE: Because of time, let's start with this. What should be within the presidential inbox in the United States? How should we project ourselves to this new China? This has been a wonderful discussion, but now, let's turn to Washington.

LUTTWAK: Well, I think first of all, we should totally avoid being up front in this natural coalescing that is taking place. There more we're up front, the less likely the Russians are going to quietly support it, very quietly support it, very quietly. The best relations with China, of course, they'll continue to. They'll supply their best available jet engines to China, but at the same time they're doing nothing to impede the Vietnamese and the Indians and everybody else going.

So we should be -- we have already been too much up front from my point of view. I understand the enthusiasm for the pivot, which means getting away from the lands of hopelessness --

KEENE: How do you define pivot? Help us -

LUTTWAK: Pivot meant we're no longer trying to convert Afghanistan into Sweden, and instead we will go in the Pacific where there is real action, people working and doing and so on.

But this China we're dealing with is a China in which -- for example, a new edition of the Iliad has just been published, attracted much interested, even though it's only three years from the previous translation of the Iliad. So there are huge changes going on every damn day.

The one thing we mustn't do is to be up front and start treating it as a Cold War phenomenon, a containment phenomenon and so on, while being 100 percent ready to support our allies, OK? The one disagreement I have with your one disagreement is this: already Abe has made a statement saying economic measures will be next. And before his statement, your Indians stopped buying Huawei. There is -- Huawei cannot sell to anything in India that the government has anything to do with, even though they've taken out Jaishankar, their ambassador, 50 times to dinner in Beijing, still.

So there is the beginning of an economic reaction. Of course, they want to do business and everything else you want. Maximum business -- there are 500 businessmen who come to Delhi in a visit with Hu Jintao. Some of them actually did business. They're not going to walk away from business, but the coalescing is a classical coalescing. And the only thing that would ruin it would be a attempt to us to take the leadership.

KEENE: To be too aggressive.

LUTTWAK: No. We should not be the leaders of it. We should be loyally supporting our treaty allies as we believe we have done. The moment the Chinese play around Senkakus, you make a statement saying the Senkakus are included within the scope of the security treaty, things of that sort. Backing up, when the Filipinos feel uncertain, by all means, send the aircraft carriers in visitations. As you know, they've backtracked on SOFA and everything else.

You know, the Vietnamese -- you know, five years ago, they wouldn't let U.S. Navy use the anchorage beyond the horizon, OK. Now they are repairing U.S. Navy ships. And every member of the Central Committee has been aboard the U.S. Ronald Reagan because they pick them up by helicopter and take them for the tour.

So this is an organic process. It should be allowed to continue organically. If the Chinese change behavior, the organic focus will go in reverse, right away in reverse, because nothing is in brick. Everything is in rubber and we should allow it to be done. So I would say no pivot, no pivot.

KEENE: The projection from Washington -- you're there with Brookings?

LI: Well, I was raised and -- I was born and raised in communist China, or later went to Berkley so I probably -- (laughter) -- when you talk about Berkeley --

MR. LTTWAK: Real communism. You were chasing real communism. Yeah.

LI: What you said is very, very important because there's no fundamental ideological difference I think in my observation. This is -- (inaudible) -- between today's China and the United States. They did not want to challenge in ideological terms. But most importantly, different from the Cold War that the -- we really live in a globalized economy. China is a very important part of that. So if we should end anything i''s the Cold War mentality to think about the geopolitical situation. We should avoid the Cold War. Certainly we should avoid hot war.

So I think our administration should really reach out to the Chinese public and to certainly cultivate the relationship with Chinese leaders to find a delicate balance. On the one hand, work with Chinese leaders, including military leadership, but at the same time to express our good will, our longstanding good will for China. It's not in our interest to see China become chaotic. But, at the same time, we should stay with democracy, rule of law, human rights and et cetera. This is the only thing for long-term stability.

KEENE: Do you see a cohesiveness from Secretary Clinton over to Secretary Kerry or would you guess that there will be changes?

LI: Well, during Hillary Clinton's four years, we all see -- also see a lot of changes. Early on, the Chinese loved her, but later become more critical for the reasons maybe justified, maybe not justified, but certainly they are excited about John Kerry, because John Kerry himself cultivated very good relationships with both Xi Jinping and Li Keqiang, based on my knowledge. So it's a good beginning. I hope that in a very critical moment that the United States will establish a very solid relationship with Chinese leaders, but also more articulate to the Chinese public, the Chinese public intellectuals about our position, about our policies towards China and a regional stability in the Asia Pacific.

KEENE: Liz, what should Washington do here with the shift in Washington, the shifts in China?

ECONOMY: OK. So first, I have to say in terms of Huawei being kicked out of India, you should just know that Alexander Downer, the former foreign minister of Australia, sits on Huawei's board in Australia. So just in terms of -- you know --

LUTTWAK: I know, but -- they put the people on the board, but the Australia government would prohibit Huawei supplying any -- (inaudible) -- in Australia.

ECONOMY: They have very effective advocates.

LUTTWAK: Yeah. Yeah.

ECONOMY: My point only being. OK.

LUTTWAK: They have advocates, but they failed to -- you know, the reaction is a spontaneous reaction. In the nuclear era, you don't go to 1948. Where you go is to economic responses, however costly and difficult it might be.

Let me tell you, Huawei is highly competitive. The Indians are not the richest people in the world, but -- (inaudible). And the Australian thing, by getting the sympathetic Australian is not as if they get into the market. There is a natural response. You know, it is the same thing with cyber war. The cyber war episodes -- you've seen reports in the paper -- they would not have received this prominence and importance were it not for this general feeling -- not the policy, not the strategy -- the general feeling that here is this Chinese who are behaving aggressively. And it evokes a natural response from the parts of everybody.

KEENE: Liz, tell us about Washington.

ECONOMY: OK. So here's what I think. I think -- I'm going to steal from my good friend Orville Schell, who says that the first thing that we need is to have a point person in Washington and somebody in China that you can kind of -- so we'll organize to some extent the relationship with somebody that they can each talk one to the other, you know, very directly and frankly. But there's not really been anybody within either administration that has served that role, and that could be helpful.

I think also that it's probably time to look at the one area where our two countries may have some potential for really positive growth, and that's in the sort of economic and trade, even though we obviously have a lot of challenges.

I think it's time to President Xi Jinping - soon to be President Xi Jinping and President Obama probably to speak to both publics, right, in both countries, and lay out the rationale for a strong and growing and vibrant and positive U.S.-China economic relationship, because I don't think either one has really developed a narrative that is very compelling in this regard. And I think it could be quite helpful.

And along with that, then you might develop a kind of overarching economic framework for the development of the relations, pushing ahead on the, you know, Bilateral Investment Treaty, potentially even setting out in the future, you know, something like a free trade agreement, something that both countries could work toward, even though it would be incredibly difficult. But it would be a way, as well, perhaps of telling the Chinese that the TPP is not, you know, designed to exclude them, but in fact, you know, bringing them along over time to -- you know, as they can reach sort of the tougher standards of something like a TPP.

So I would like to see us -- you know, even as we are, you know, balancing, pivoting, whatever we're doing with regard to China that I happen to think is quite necessary, that we find at least one area where we can establish a very strong dialogue and move forward.

KEENE: I'm going to go to questions here, but just because of the events that I've seen, the incredible pollution, Elizabeth, you've got to take a couple of minutes here with your classic the river runs black. I am stunned by the pollution in Beijing. I've been there many times. It just seems to be a whole new level. How out of control is air pollution in the China urban space?

ECONOMY: Well, it's obviously pretty out of control since they're saying that it's the equivalent of living in a smoking lounge to be in Beijing, you know, through most of -- most of January. But I think in point of fact, it wasn't simply Beijing, it was something like 40 percent of the country was actually affected by this pollution.

I think what's interesting and is almost unfair, because, you know, really, this Chinese leadership hasn't -- is not the president and the vice president at this point, right, but Li Keqiang came out and said, you have to be patient. I don't think that's a particularly effective response to the challenge at hand. And so I'm really waiting to see what the leadership is able to come up with in terms of concrete guidelines to change the way they're doing business. So far, it's been very piecemeal --

KEENE: Do you see a catalyst here --

ECONOMY: -- no barbecues, et cetera.

KEENE: -- to a federal response --

LUTTWAK: What happened this year -- what happened this year is that it was especially cold in the northeast quadrant, OK? Kazakhstan was colder than, you know, Krasnaya, 1,000 kilometers north.

KEENE: I'm getting a weather report?

LUTTWAK: It was minus 41 centigrade. Therefore, they went and burned a lot of coal. The coal available is from -- Shandong coal is very high sulfur, and the other coal -- the only low-sulfur coal they have, which is not available for them --

LUTTWAK: Do you agree, Liz, that this is a one-off?

KEENE: And they burned -- yes, a one-off. And they filled it with --

LUTTWAK: But she doesn't agree.

ECONOMY: No, because about 20 (percent) to 30 percent of it comes from auto emissions as well. So that's, you know, another -- and autos, the number of cars is growing.

LUTTWAK: That's true. Now, the leadership did intervene to force Sinopak (ph) to adopt the other standards for diesel and so on. That is one action they did take. You know, they were supposed to have done it five years ago and they didn't do it.

KEENE: OK. Well, let's get to questions. At this time, we'd like to invite members to join our conversation. We are on the record; need to make clear of that. You've got a microphone. Stand and state your affiliation. And I'm going to start with a question that we've got from our members around the world.

This one from Berlin, Germany. To Cheng, to Cheng Li, please. Let me read it verbatim: you've made a spirited case against the assumption of continued stability in China in the adaptive authoritarianism school. Two years ago, you said you thought the Chinese Communist Party monopoly rule would be finished within a decade. Has your view on the balance been modified? This from Elizabeth Pond with the World Policy Journal in Berlin.

LI: I haven't changed my comment. It's about a decade. This is not only my assessment, but by really a large number of public intellectuals in China. They say that publicly in the -- in the -- sometimes from even semi-official media talk about the sense of urgency. Now, this is echoed by top leaders like Hu Jintao and Wen Jiabao, certainly by Xi Jinping and Wong Kisan (ph) talk about the imminent challenge for the communist party.

LUTTWAK: But no time.

LI: They do not have a timetable, but the Chinese -- we need to talk about timetable. And, again, this is -- certain events could drastically change the course of the -- of history if there's a war between China and Japan so it could change -- derail the whole thing.

But let's see if things just continue to be normal, because societal force will demand more changes because the social media plays such an important role. And also, the -- we talk about the Bo Xilai case. It was the largest crisis since 1989 Tiananmen. But the interesting thing is the Chinese society and the economy have not been disrupted as conditions --

KEENE: So the distinction of the presidential inbox now versus even four years ago, you're suggesting social media, the Internet, that communication model makes for a new dialogue within China?

LI: Well, it's already playing a role, but you can see the leadership is extremely nervous. They still want the censor, but the thing is they are fighting an uphill battle they cannot control. And also, the need to drive for change from the export-led economy to an innovation-driven economy requires the political openness and the rule of law, and the social forces where the middle class, entrepreneurial class, commercialized media, legal professions, interest groups, such as -- (inaudible) -- they all play a very positive role.

LUTTWAK: But I think they're eager to give up power like St. Augustine, eager to be chased but not yet. And they consider your 10 years -- they say after, after 10 years.

LI: This is what we have been saying for many other countries, Indonesia, in the former Soviet Union, in Egypt, in Iraq, in many other countries, sometimes they all come with a sudden -- there's some larger -- because there's some social -- state-society relations start to change. Then, to a certain extent, the political change is inevitable in that regard.

KEENE: OK. Well, let's get some --

LI: So I go stay with my timeframe, but, of course, that's also subjected to different unexpected events could change the ----

KEENE: Concise questions, right here, please. No lectures, concise questions. We've got many people that want to jump in.

QUESTIONER: Jamie Metzl from Cranemere. I'm one of the pontificators Liz was referring to.

ECONOMY: Hello, Jamie. I count you as a China expert.

QUESTIONER: Thank you. Thank you. Just a quick question. You mentioned the China hacking scandal or the -- getting a little more evidence of what everybody already thought was the case. Can you give your thoughts on how the U.S. administration might respond to that, all of you?

KEENE: Please.

LUTTWAK: Well, independently of this scandal, in the last three years the Washington government has accepted the concept that cyber is a new dimension of war for like Navy, air, ground and so on. The resources have not yet flown in that direction because, you know, the aircraft carrier -- (inaudible) -- but they are coming. And -- but the organizational change that is required is that you cannot fight this kind of war by having sort of uniformed people be through the whole system, went to academies, got married, have children and so on. What you need are youngsters who are willing to do it, you know, the way it's been done.

And so now, there is a new phenomenon, which is that sort of Silicon Valley big people who ought to be looking after their own businesses and some are beginning to come to Washington with schemes such as getting people out of high schools and get the -- (inaudible).

You know, you can't do it with the Marine Corps so there is an organizational response. Now, all of these people, none of these people in the system, which is NSA people, military people, are at all scandalized. They're not scandalized by this. And, as you know, the response to the revelations was there are only two kinds of American institutions -- three kinds: the unimportant that nobody cares about, including the Chinese; the ones that are known to be hacked; and the ones who don't know they're being hacked. And, of course, the only possible response is to go in the same neck -- in the same woods and be active in the same woods.

So the Washington response to this is you've got to be present, OK? Now, we had the discussion earlier -- the big differences between this and all other espionage is that in espionage you break into the study in the guise of a beautiful woman, of course, and you steal the letter, and then you go home with the letter. Here, it's different because you leave your thing in there, capable of starting a fire in that building. So it's not espionage by no means.

KEENE: Do you agree with that, Cheng? That cyber war or whatever phrase is -- I'm struggling with every day -- that it's really espionage?

LI: Well, certainly that we see a major challenge. You can -- this involves different things. On the one hand, it's fear that's also well grounded -- you know, the criticism, the general criticism concern. I think regardless all the superficial things, I think the truth is we face something unprecedentedly challenging. I think we should form something like a Nuclear Non-Proliferation -- (inaudible) -- the new initiative, work with the Chinese side and make China -- bring China into the international framework, otherwise really quite messy.

LUTTWAK: But this is truly -- arms control worked beautifully, as you know, in aggravating every possible international tension, but in this case it can't even begin to work. You cannot pretend that you can write a treaty because you cannot possibly differentiate between the public and the private actor and whatever. There are private actors are doing exactly what the public actors are doing for their own reasons.

LI: But this is the same thing with terrorism, non-nation state actors, but still, the international community and the major powers should be involved. It's a joint interest, again. So --

LUTTWAK: You know, the terrorist -- when he shoots and blows up something, he's signing himself. He's doing it -- the concept of arms control to deal with this really breaks down the moment you try to even visualize it.

ECONOMY: So I think I can see part of what Cheng Li is saying perhaps that what we really need is to have other countries, right, that also are experiencing Chinese hacking and other hacking as well come together, right? And I think one thing that's clear is that when the United States says something that the Chinese don't like about whatever is it that China is doing, they tend to sort of block their ears. But when you get a wider swath of countries speaking out about something, especially if you can engage some of the developing countries, you have a much better chance of bringing China really to the table. And so I think that's one part.

I think the other thing we can do is actually find areas where we both face challenges, for example, domestic cybercrime, right, and sort of what is it about, you know, people from -- you know, that say they're from Ghana or wherever it is or, you know, other people, but domestic sort of issues that we both confront and work together on those issues. It doesn't really address what we're talking about here, but at least perhaps it begins to build up some kind of foundation for cooperation in this space.

KEENE: Another question please. Sir, right here. Or in the back. Let's go in -- in the back right there. Yeah. I'm just looking where the mike goes. We'll get to you next, sir.

QUESTIONER: Maggie Lewis, Seton Hall Law School. Cheng Li raised the Taiwan experience, but when Jong Jin Gwa (ph) started to relax power, you at least had the nascent DPP, a fairly well organized alternative to the KMT. But in China today, if not the communist party, even in 10 years, what do you see as that alternative structure?

LI: The best scenario is still the gradual -- the spread or legitimized faction infighting within the Chinese Communist Party. But this model may or may not work. You know, it depends on how -- (inaudible) -- and how the social unrest and what -- how that happened, and et cetera. But certainly Chinese Communist Party at the moment claims with certainly strong reasons that there's no opposition. But, on the other hand, they don't want -- they don't allow the opposition.

So, therefore, they are extremely sensitive with a religious group, some rural organized, you know, group, and some urban protests. I think, on the one hand, some would argue that opposition could emerge based on some legal professions, and et cetera, at least some legal communities or civil society gradually develop that, because Taiwan also experienced similar path and that the legal professions play a very cool, very important role. Right, some of the opposition leaders later, DPP, were human rights lawyers. You already see this similar group also become very, very active in China.

LUTTWAK: But, anyway, DPP was illegal -- when Jong Jin Gwa started, DPP was illegal and was actively persecuted.

LI: But she's an expert on Taiwan politics out of -- (inaudible) -- the opposition.

LUTTWAK: Yeah.

LI: Precisely. But it may take some time. But a speedy change -- speed and pace of change in China could be quite faster than many other countries because of the tension -- the enormity of challenges for the government.

So I think my answer is two level: one is the best scenario is the legitimate of the party, faction of parties to provide the real mechanism which that can balance very much like Japan's LDP. But this may fail. Then you can look at some other options.

KEENE: Sir.

QUESTIONER: Winston Lord, International Rescue Committee. By the way, Cheng Li's article was not too long. I commend it.

KEENE: I was kidding.

QUESTIONER: Liz suggested that we try to find an issue. And, in your case, you suggested economics, where we try to show cooperation to our -- presumably to our respective domestic audiences and try to solidify the relationship.

I ask anybody on the panel, can you come up with other issues of a political security nature that this might happen -- for example, Iran or Korea or the Middle East or militaries on piracy or natural disasters? I think we all agree we've got find something that demonstrates some global or regional cooperation, but the Chinese aren't very helpful in many of these issues. Which ones look the most promising?

KEENE: Liz?

ECONOMY: I think we already have, as you know -- you know, joint anti-piracy and we've been talking for I think several years about how can we build upon this. I'm not sure what the stumbling block is to building more and more upon this. But it's clear that as -- you know, China's sort of resource quest expands, right, and more and more Chinese are best abroad sometimes in conflict areas, there's a lot of pressure via the Chinese public to ensure that the people who are based abroad are protected and the Chinese government itself of course is quite interested to ensure that the resource routes are protected. So I think that that is one area, as you suggest.

Of course, what would be great would be to have some kind of cooperation on North Korea right now. We've had a little discussion. I'll give you a chance. Just two seconds.

We had a little discussion of this before in talking about the possibility that there's really a lot of divisiveness right now within the Chinese sort of elite policy community over what to do about North Korea because there are mixed messages coming out in the wake of the most immediate test, you know, first sort of saying we need to reduce our aid and then saying actually it's all the fault of U.S., Japan and South Korea.

So where is it all going to be situated? But maybe -- you know, certainly there's much more debate, open debate within China on this particular issue. This may be an area where we could find some more cooperation.

LUTTWAK: Well, in reality, if you look at the totality of U.S.-Chinese relations across the board, there is tremendous amount of interaction, cooperation, give and take, all kinds of stuff.

In regard to the military-to-military, you may recall that after the Hainan incident, April 1st, 2001, the Pacific Command -- there was Admiral Blair at the time -- started an effort to have military-to-military dialogue in some, which has been pursued. The Americans have systematically been the proposers. The Chinese sometimes say yes, sometimes say no. But there have been a lot of exchange, a lot of visitations. My wife and I at our own home, we had the notorious Lo Li Wong (ph) came for dinner in my home. Yeah. And there have been a lot of efforts of dialogue in sum.

I think in regard to things like Iran, you will not get anything from the Chinese because the Chinese are -- they're taking a position just with the Russians. You know, if the Russians are willing to do it, they're willing to do it.

In regard to North Korea, I believe that they've sold us that particular suit many times. Many, many times they sell us North Korea, we buy, they don't deliver. And the latest -- I'll go with the latest Xinhua statement. It is arguable the Xinhua is no longer what it used to be, saying that, no, it wasn't Pyongyang. It was us that did it actually.

But in regard to so many other subjects, there is actual cooperation that can be increased, and it is increased. And it obviously -- what you cannot expect is the phenomenon like the piracy thing should suddenly expand into some sort of join naval commonwealth. That will not happen. But I don't think this is relevant.

The infernal machine is not affected by this thing. So, you know, in the 1920s, you know, the French and German war veterans used to kiss each other in sincerity, sincerely. It makes no difference.

When the infernal machine is underway in this manner, you start seeing television programs about China's maritime future in which the television program opens -- CCTV, beautiful production, everything in blue. And there are all these songs about how China is really a maritime country. We didn't notice, but it was a great maritime country, and they belong over the -- (inaudible) -- and there's the fabulous thing of the aircraft carrier sailing into the sunset. You know, this is what Air Force critics never understand, that the appeal of aircraft carriers is aesthetic. You know, they make such beautiful films.

When phenomena like this are across society, when you start seeing poets coming out spontaneously -- nobody told them to do it -- with the nationalist (pins ?) and proclamations and songs, that is not something that, you know, the Xi Jinpings of this world can change, you know, any more as Germany, July 1914, would acquire a new chancellor wedded to peace. It wouldn't have made a difference, you know.

KEENE: Cheng Li, do we have an understanding of Chinese military?

LI: Well, it's a very important question. The fact is no one understands. And even Chinese leaders they need to deal with that issue very, very carefully because, on the one hand, you do see that military at the moment is not that powerful. Military is not a king maker. Military does not have a heavyweight figure who serves on the steering committee. But if there's a domestic uprising, like another Tiananmen, military almost for sure will come back to politics. If there's a military conflict with -- in South China Sea or East China Sea, the military definitely will become more important. So that's the -- that's a challenge.

Now, to answer the ambassador's question, I think -- you know, you are the expert in this area. There are so many areas we can cooperate with China like food safety, natural conservation, energy security and et cetera.

But I want to go back to what Liz mentioned about North Korea. You know, I was surprised by how strong Chinese leaders reacted this time, you know, really very strong words about North Korea. And it also opened the Chinese domestic discourse. Some leading intellectuals argue that North Korea is not our friend. It's our, you know, major problem, our party hijacked by that. They ask for review.

Now, this all interpreted in a way that Xi Jinping wants to show some positive sign to the United States. I think our administration should seize the moment to really work with Chinese.

LUTTWAK: And ignore the Xinhua statement saying that we drove the North Koreans to it? The Xinhua. You know, it's the Xinhua. It is not, you know, the Agence France-Presse. Very categorical, you know.

LI: The problem is if the United States administration --

KEENE: At least you didn't say Bloomberg News. (Laughter.)

LUTTWAK: I wouldn't dare.

ECONOMY: Aren't you guys still banned in China?

LI: But, to a certain extent, Xi Jinping, when he took this -- takes this position, he's also under pressure by China's domestic -- you know, including military. Someone said, why you give -- why are -- (inaudible) -- with Japan really backed by the United States? Now, North Korea should remain as a buffering, you know, player for us so why you sacrifice China's interest? So that's a very important moment. I hope that President Obama will seize that moment to really work with China on not only North Korea but also Iran and the nuclear non-proliferation issues.

KEENE: The gentleman in the back please.

QUESTIONER: Huai Yang Jung (sp) from the Council on Foreign Relations. One item that is top on the leadership agenda of the Chinese is corruption. Sometime ago, the Wall Street Journal published an article I think by a scholar who basically said, well, in terms of the corruption level in China is no different from the level in the United States decades ago.

But still others believe that the Chinese corruption level is such a structural problem, it is like an apple rotten to the core. And, you know, so it's almost incorrigible and unless there is fundamental change in the political system. I wonder what's your take on that.

KEENE: Please.

LUTTWAK: The corruption in Kansans City in the 1920 was done very well to maintain equilibrium and tranquility. So they need technical help in China, because what happens now is Xi Jinping's sister, she has $386 million plus that house in Hong Kong. It was you guys who revealed -- you know, the corruption is different in China than let's say Egypt. In Egypt, they say, oh, Mubarak, he had $2 billion. In China, they have the exact number of shares in the exact company that today's quotation on that company in the value, OK? Now, Xi Jinping has nothing. His sister has 300 million. And so it goes right, as you well know, all for the leadership. Bloomberg has done its work, New York Times.

The problem is this. They haven't -- they need help from Kansas City old timers, you know, very old timers to distribute it evenly through the party echelon. Since it's not distributed, it's creating terrible tension because the wife of the guy says -- you know, how come I have to go around with this lousy Porsche when she has a Maserati, you know, and even though we are the same hierarchical level? In other words, the difference between American municipal corruption and Chinese national corruption is that municipal corruption was evened out. Everybody got his share. The ward healer -- you know, and everybody else, and that's why it worked as a stability mechanism.

KEENE: Liz, do you agree with that? And how should we respond to it? (Laughter.)

LUTTWAK: And this is instability.

KEENE: Do you -- do you --

ECONOMY: No. No. I'm kind of flummoxed but I guess I see it a little bit differently. (Laughter.) I think corruption is pretty much spread throughout the entire Chinese system in virtually every place that you look, from a hospital, where, you know, a doctor is overcharging for medicine because he himself isn't paid very much, to local officials who have 18 houses and 16 gold watches.

I think what's interesting now is I think two things. Number one, the degree to which the sort of public has become engaged in this process of outing people, right, because it was always my contention that the top down method of trying to pluck out the individual corrupt official was never going to work because the corruption is endemic. So the fact that you now have the people rising up and posting pictures of that official with those watches and sort of trying to act as a -- as a watchdog on this system I think is interesting. But it's clearly not enough. But it's clearly not enough, right?

And going to your earlier point about the rule of law and the development of rule of law, the question is what does Xi Jinping mean by that? Because part of the challenge now is as you get these corrupt officials outed, and, of course, there are -- you know, tens of thousands if not millions more of them throughout the entire system, what kind of -- you know, fair shake will they necessarily get? And can you be assured that -- you know, the recent real estate tycoon who's come under question, for example, isn't being targeted because he's a leader in the anti-pollution fight? What do we really know about this system?

So is Xi Jinping, for example, willing to take the party out of the judicial system, right, to ensure a degree of independence. Of course, he's not, right? So my question is, through the system, how are you going to develop the systemic reform necessary to get rid of this?

KEENE: Cheng Li, your answer.

LI: I used the term somewhere that China's corruption at the moment is unprecedented in China history and unparalleled in today's world. We talk about huge amounts of corrupt money not only by national leaders, but also by county level leaders, even below.

So it's just -- this is also the reason why I argue that kind of system will not be sustainable. And this -- you cannot continue to go. I mean, and also the demographic dividends are coming to an end, so all the pressure will be on the Chinese leadership.

There are only two ways to deal with corruption. One is Mao's way or Bo Xilai's way that want to use campaign. Now, Mao era was very repressive politically, but it's not corrupted in the economic sense. But this is the way China should go? No. This also would be a disaster.

But the other only way is through the legal process. It may be slow and -- but eventually the communist party needs to surrender power in order to stay in power. So that's their own dilemma. But by doing so, you fundamentally change the nature of the Chinese Communist Party and change the totalitarian aspect of the Chinese Communist Party. So this is what we're going to see.

It will take some time. The behaviors already start to change in China. You go to the casino in Macau, VIP room, you know what I mean. I've never been there.

ECONOMY: I don't think -- (inaudible) -- knows what you mean. I think you do, but --

LI: I saw so many reporters --

(Cross talk.)

LUTTWAK: The provincial officials no longer come. So, you know, it's complaining --

KEENE: Last comment, please.

LUTTWAK: Yeah. The military, the military -- what happens, my wife and I were at dinner with a bunch of major generals, one of them shaking with anger at the end of the long dinner railed about corruption, Huang Xi (ph). I asked him -- (inaudible) -- and I say, why did you lose your -- (inaudible) -- and the result is that in the military, the officers who have a hand in logistics, who could be even very low officers buying produce, you know, local produce for the local base, their children drive Maseratis, OK, and Bugattis even. I mean, I've seen a Bugatti parked in Beijing many times. I've never seen one in Washington.

So they get -- and the officer -- the -- if you get promoted -- you're a major general and you get a division, a whole army division, you're a big guy, you haven't got a penny and you've got a lousy salary. If on the end, you're a humble major in the logistics department, you roll in money. This is the kind of disequilibrium.

In other words, is corruption a disruptive force in the system, which I see with the military very clearly and very sharply, and with the political ones I think is -- they don't have a system of spreading it around. They should get technical advice, get people from the Italia Democracia Cristiana -- (laughter) -- you know, they will come and tell them how to do it, you know.

KEENE: Very well. There's an optionality here. We have to quit at 2:00 p.m. sharp or go to 5:00 p.m. So thank you all so much. (Applause.)

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