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Economy: Bush Should Assemble a More Comprehensive China Policy

Interviewer: Bernard Gwertzman, Consulting Editor
Interviewee: Elizabeth C. Economy, C.V. Starr Senior Fellow and Director for Asia Studies
July 6, 2005

Elizabeth C. Economy, the Council’s director of Asia Studies and top China expert, says the stir caused over the offer by a Chinese company, CNOOC, to buy a U.S. energy company, Unocal, is due to “a growing concern over China’s rise.”

With China’s president, Hu Jintao, due to visit President Bush in September, Economy says that the Bush administration needs “to begin to develop a framework for a U.S.-China relationship that incorporates all the dynamic changes in regional and global politics that China’s rise is engendering.”

Economy was interviewed by Bernard Gwertzman, consulting editor for cfr.org, on July 6, 2005.


Why is there such controversy over the offer by Chinese company CNOOC [China National Offshore Oil Corporation] to purchase Unocal, a U.S. oil company?

I think the primary reason there has been such a stir in Washington over CNOOC [pronounced ’see-nook’] has to do with issues perhaps not directly related to the particulars of this deal, but rather to a growing concern over China’s rise. This is compounded by the fact that we have very little sense about the trajectory of this emerging global power and how it is going to behave more broadly in the international arena. At the same time, the purchase of a U.S.-based energy company by a Chinese government-supported oil company raises additional concerns—merited or not—over the future of U.S. energy security.

On the particulars, is there anything to be really concerned about?

I think the only really legitimate concern that’s been raised is that the Chinese government is subsidizing CNOOC—providing it with low or even no-interest loans to be able to accomplish this deal. Otherwise, there doesn’t seem to be anything in terms of the merits of this as a business deal that should be causing such concern in Washington.

I don’t think the White House has really commented on this, has it?

No, the White House has been remarkably quiet. I think it’s facing an enormous amount of pressure from Congress, as well as from lobbyists supporting both CNOOC and the competing purchaser, Chevron. The administration may well be waiting for the results of the CFIUS [Committee on Foreign Investments in the United States] review before committing itself one way or the other.

This is a committee that’s set up to deal with any purchase of a U.S. company by a foreign company?

No, not any company. This type of review only comes into motion when there’s the potential for national-security interests to be compromised, and in this case, the review was requested early on by some members of Congress. CNOOC, for its part, is being very forthcoming, asserting it is more than willing to respond to any issues that the CFIUS review might raise.

The Bush administration’s policy toward China is complicated. The White House wants to block military sales to China from Europe and Israel and has expressed great concern over China’s currency, which it says is undervalued. On the other hand, the United States trades heavily with China. How do you decipher this?

Well, I think that over the past four years or so, we’ve had a relative honeymoon in U.S.-China relations. The United States has had a lot of other issues on its plate—Iraq, Afghanistan, the war on terror, and North Korea, just to name a few. The White House has sought to have good relations with key countries, such as China, which it views as essential partners in resolving at least the North Korea crisis, as well as cooperating in the war on terror.

Still, if you scratch beneath the surface, it quickly becomes evident that there has been very little progress on the key issues that define the U.S.-China relationship: intellectual property rights, the trade deficit, the currency issue, human rights, Taiwan. On none of these issues can the Bush administration claim it has made any substantive progress in its relations with China. So, even though administration officials may frequently refer to the PRC [People’s Republic of China] as a very important partner in maintaining peace and stability in the Asia-Pacific region, this kind of bland statement masks a number of challenges in the relationship. The Bush administration seems relatively committed—at least parts of the Bush administration are relatively committed—to maintaining an overarching sense that the relationship is an important and sound one.

About 15 years ago, there was great concern over Japan’s buying into the United States, and of course, Japan did buy a lot, including Rockefeller Center. But its economy has taken a nose dive in recent years, and no one seems to worry about Japan anymore. Is China’s economic strength stronger than Japan’s was? Is there more to worry about?

Even though China is a much larger country with an economy predicted to take over that of the United States by 2040, in many respects, I think that there is less to worry about with China. Again, if you look just a bit beneath the surface of what appears to be this almost meteoric rise in growth in China’s economy, you find that there are many significant structural weaknesses within the economy. They have a banking system in which 40 percent of the loans at this point are considered non-performing—they simply don’t expect to see the money ever repaid. In the local banks, the percentage of these non-performing loans is as high as 60 percent. Environmental pollution and degradation is costing China the equivalent of 8 percent to 12 percent of GDP [gross domestic product] annually; more than one-third of Chinese people in rural areas don’t go to the doctor because they can’t afford it; and the Chinese government is confronting more than 50,000 protests—some of which involve as many as 100,000 people—per year.

These are mostly labor protests?

The secondary reasons for these protests are wide-ranging: labor problems, the environment, health, land grabs by local officials. But fundamentally, these protests are virtually all rooted in the endemic corruption that plagues the Chinese government, and in the failure of the Communist Party to develop an alternative to elections and the rule of law to ensure good local governance.

After she attends the G-8 meeting in Scotland, Secretary of State Condoleezza Rice will stop in China to discuss, among other things, the status of the stalled six-party nuclear talks on North Korea. Is China still backing these talks?

Well, again, I think China’s role in hosting the six-party talks has generally provided the Bush administration with some support for its contention that the United States and China are important partners. The fact that the talks weren’t going anywhere didn’t really seem to matter. But, over the past six to nine months, there clearly has been increasing frustration about China’s reluctance to use what the United States perceives as its economic leverage to try to force North Korea back to the negotiating table or to realize some substantive progress in the negotiations.

I think the point many people recognized a few years ago is finally becoming clear to everyone: The United States and China, fundamentally, have a different set of priorities when it comes to North Korea. The United States places its priority on bringing North Korea back from the nuclear brink and having North Korea dismantle its nuclear program. While China believes that’s a serious problem, China’s priority is maintaining a stable North Korea. And thus, it is not going to do anything such as withhold substantial amounts of food or energy assistance that might cause instability in the country.

China is concerned that if there’s a breakdown in stability, there will be thousands of North Koreans seeking refuge?

Millions of people will be fleeing across the border into China, absolutely.

If you were going to give advice, what should the United States do? Should the Bush administration speak more about China?

President Hu [Jintao] is coming this September to meet with President Bush. I think at this point what’s really needed is for the White House and the cabinet to sit down and assess China’s likely trajectory, and begin to develop a framework for a U.S.-China relationship that incorporates all the dynamic changes in regional and global politics that China’s rise is engendering. It’s not simply about the bilateral relationship. China has become far more active throughout Asia advancing new trade and security relationships, and setting in motion regional power dynamics with South Korea, Japan, and India that the United States needs to address. Just today there was an announcement that China, Russia, and the four central Asian states—Uzbekistan, Tajikistan, Kyrgyzstan, and Kazakhstan—have called for the removal of U.S. troops from the region. [U.S.-led military forces have been deployed at air bases in Uzbekistan and Kyrgyzstan to back up the military campaign in Afghanistan.] So, we can see that China is playing a much more important role in regional and even global politics, again, in ways that the United States is ill-equipped to handle.

Why doesn’t Uzbekistan just simply ask the United States to get out?

Well, that was the reaction from the U.S. government; that this is an issue that should be handled bilaterally. One can imagine, however, that at the present time, Uzbekistan takes great comfort in having China and Russia stand behind it. [In May, the United States criticized Uzbek President Islam Karimov over his crackdown on protests in the city of Andijan. Hundreds of civilians were reported killed.]