Unpublished, May 2005
Post-Cold War portrayals of China as a potentially rising hegemon in East Asia often ignore the contradicting realities underlying its polity and society. As it is, the tone of much current academic analysis reveals a propensity for scholars and statesmen alike to conflate economic power with hegemonic probability – reinforcing the ‘strategic competitor’ mentality and thus obviating attempts at meaningful engagement. Yet, how accurate is this prognosis? Is China on the way to ousting America as the preeminent regional, if not global power, or has it merely “mastered the art of diplomatic theatre” as Gerald Segal suggests?
This article attempts to reassess predictions of a hegemonic China in two parts. The first focuses on China’s economy, the clearest indicator of a ‘rising China’, but sets about discussing some of its deficiencies and the socioeconomic implications that result from these: income disparities, massive unemployment and to an extent, China’s ethnic minority problem. It then analyses China’s polity in relation to its economy and the problems this could pose to a rising China. The second section examines – broadly, given the complexity of individual issues and the limited scope of this paper – the external challenges to China’s East Asian hegemony, namely the US-led security architecture, Japan, Taiwan and even the North Korean issue. It also highlights the less pressing but equally real challenges posed by China’s immediate non-East Asian neighbours. Finally, the section concludes by looking at both China’s multilateral diplomacy and its correlation to military power.
Ever since Deng Xiaoping opted for reform in 1978, China’s economic growth has been averaging a stupendous 8-9% each year. By 2001, it was the world’s sixth largest economy, second if measured in purchasing power parity, prompting predictions that it would overtake Japan and Germany within a decade. By late 2002, it became the world’s second largest holder of foreign exchange reserves, and the recipient of foreign direct investment (FDI) amounting to $510 billion – from a mere $20 billion two decades earlier.
While these statistics are no doubt impressive – to Beijing’s credit – there are several issues. Unlike the industrialised nations, China’s comparative advantage lies in its cheap labour, not high technology. The bulk of its economy as such consists of export-oriented labour-intensive manufacturing and reprocessing sectors generating an increasing amount of the world’s low-end consumer goods, making it something of the world’s ‘sweatshop’. Conversely, high-tech industries including telecommunication, IT and aerospace tend to be largely foreign-owned and dependent on the import of critical components, thus constituting the bulk of China’s trade deficits. Much of this impetus comes from foreign direct investment (FDI), so that despite appearances, more than half of the Chinese economy is actually dominated by foreign-owned companies. In 2003, foreign firms accounted for 55 percent of export earnings, particularly in high technology. Likewise, they accounted for about 60 percent of imports. Considering the intense penetration of foreign businesses, a crisis may not come as a surprise if the FDI “bubble” were to burst. It remains to be seen if China can effectively position itself as the dominant player in its own economy in the long run rather than living off profit margins generated by non-native businesses. More importantly, unless China becomes a hub for not just quantitative imitation but qualitative innovation in high-technology and information-based industries – the real currency of power – it may not even catch up with the weakest of the industrialised nations, nevermind hegemony.
Local state-owned enterprises (SOEs) constitute another problem. Byproducts of China’s incomplete transition from command to market economy, these until only recently represented the country’s leading firms and enjoyed the bulk of the markets, access and capital. Although a dynamic private sector is now on the rise, the dismantling or privatisation of SOEs – many of them financial liabilities – risks unleashing an unemployment catastrophe in a country with already more unemployed than most countries have people. The government thus faces a dilemma between incrementalist but slow-paced and aggressive but high-risk reform. Moreover, as a consequence of deteriorating asset quality, non-performing loans linked with SOEs have badly affected the financial sector through massive internal corporate debt and undercapitalisation of banks, making national insolvency a very real prospect.
With economic liberalisation came widening income disparities, particularly between the affluent coastal cities and the neglected rural interior. While the former generated 57 percent of GDP the latter, centre and west respectively, oversaw 26 percent and 17 percent. In 2001, the average per capita income for China’s 800 million rural residents was only $290, and indeed, only 0.16 percent of the nation controlled 65 percent of its $1.5 trillion liquid assets! To make matters worse, China’s recent membership of the WTO has been to the detriment of rural peasants who now have to compete with overseas food imports. To be sure, all this is not an uncommon phenomenon in rapidly industrialising nations – China simply started late. Yet what Minxin Pei calls China’s “split personality” underwrites serious rural unrest, a situation compounded by the often arbitrary levying of taxes and fees by corrupt local governments.
Well over 8 percent in urban areas alone, unemployment is a colossal problem whether measured in relative or absolute terms. If SOE reforms among other things have led to current unemployment, the lack of non-state-affiliated social safety nets and poor credit-lending facilities in rural areas to encourage business start-ups only intensify the problem. Again, labour unrest has resulted, of late even numbering in the tens of thousands.
Socioeconomic problems do tend to intensify the further inland one travels, but the periphery of non-Han ethnic minorities occupying 60 percent of China’s landmass poses a different set of complications for stability. In the ethnically Turkic Xinjiang Uighur Autonomous Region, religion (Islam) and nationalism (the quasi-mythical but briefly existent ‘Eastern Turkestan Republic’) have become twin engines in the campaign for independence, receiving covert encouragement from neighbouring Central Asian countries. The Tarim Basin, however, carries China’s largest oil and gas reserves, resources it relies on to power the coastal economies. The response by injection of Han Chinese into the region (now 45-50 percent of the local population), the Han-dominated local government and, after 9/11, the linking of Uighur separatists with al-Qaeda has only fueled ethnic tensions in China’s largest province. A similar situation prevails in neighbouring Tibet (Xizang) whose language, culture and the global status of Tibetan Buddhism have long placed it at odds with wholesale Chinese efforts at homogenisation, especially tragic during the Cultural Revolution. From Beijing’s point of view, the concession of anything resembling independence would not only precipitate the dismemberment of China’s western periphery but create serious complications in both Taiwan and Hong Kong – where discontent is already afoot – as well. Still, the problem of secession-prone ethnic minorities is not unique to China. In fact, so long as suppression continues (as was the case in the Soviet Union), neither should it constitute a major impediment to hegemony.
More significantly, China’s transformation has led to an increasingly irreconcilable disjuncture between single-party politics and market economics. In its inexorable march toward modernisation, the CCP has abandoned class struggle in favour of the educated elite, contradicting its original role as champion of the workers and peasants. China is presently experiencing not only the best but the worst of both capitalism and communism combined: not only are individual liberties and an independent civil society still largely circumscribed, as pointed out, glaring inequalities, unemployment and a host of other ailments associated with capitalist systems have become a systemic feature. Furthermore, structure-wide decentralisation – a precondition for marketisation – has weakened Party-state surveillance, encouraging corruption at all levels. This Dickson correctly identifies as the present regime’s greatest threat, noting that corruption eventually undermines popular support for central authority.
Like the pre-1989 East European regimes, the CCP has utilised China’s economic boom as a pretext for its continuing legitimacy: as long as money flows, it sees no need to engage in genuine political reform. But ineffectual and atrophying governance can quickly dampen economic progress. An increasingly liberalised economy requires high levels of social autonomy to be efficient, and with spreading nation-wide village elections, is already raising the threshold for more intense democratisation. An underperforming economy will all the same strengthen demands for political reform. Either way, for China to continue rising, the ruling elite can either choose to continue muddling through or else rationalise its politics in line with economic liberalisation: democratisation.
In East Asia, the US-sponsored security umbrella centering on the US-Japan alliance poses the most obvious threat to a rising China. Through a hub-and-spoke system of bilateral security pacts, Washington pursues a “divide and rule” strategy, effectively discouraging the rise of counter-hegemons. Given America’s global interests and its stabilising presence, it is unlikely that a withdrawal will occur anytime soon. Still, China benefits from the economic prosperity that stability generates, in addition to its own ‘special relationship’ with Washington. Moreover, an American withdrawal creates the risk of Japanese rearmament to counter the perceived ‘Chinese threat’. Given its economic and technological clout, Japan’s augmenting of the Self-defense Force (SDF) and even nuclearisation will not be difficult, perhaps even countering China’s relatively backward military. The post-war resurgence of Japanese militarism moreover risks upsetting the region’s economic balance.
In addition, the security dilemma intensified in the wake of a possible American withdrawal risks precipitating crisis on the Korean Peninsula – another Korean war is hardly in China’s interests. Beijing-Pyongyang relations can be described as warm compared to the rest of the region, yet its North Korean ‘wildcard’ is not without risks. While Kim Jong-Il’s nuclear brinksmanship is useful as diplomatic leverage over the US and its Northeast Asian allies, a premature disintegration of the Hermit Kingdom will produce grave consequences for the region and especially for China. A unified Korea scenario will similarly portend instability, the loss of an ‘ally’, and in the long term, strategic competition from an enhanced neighbour. Under the present circumstances, China may still be confronted with the occasional influx of Northern refugees and the problem of nuclear proliferation beyond Korea proper.
In the context of US-East Asia relations, Taiwan represents China’s toughest problem. As it is, the island is already creating enough hardship for Beijing without involving a third party. Although Sino-US relations are largely premised on the three Joint Communiqués, Washington has been able to manoeuvre itself around the terms by nominally recognising the ‘One Country, Two Systems’ policy even as it continues to provide for the island’s defense through the Taiwan Relations Act. Likewise, the Bush administration favours maintaining the status quo rather than Taiwanese independence, which it has said will not back militarily in the event that it leads to confrontation with Beijing. Even if ‘peaceful resolution’ fails, it is questionable if the US can deploy quickly enough to forestall a full-fledged Chinese invasion of Taiwan. Whatever the outcome, Washington’s Taiwanese involvement constitutes a moderating constraint on China’s security, if not its integrity.
China’s immediate environment is another issue. While favourable geography enhances hegemony, China borders fifteen nations – a world record. FSU states and Russia alone account for 7,000 kilometres of border. Although post-Soviet Russia is much weaker now and Sino-Russian relations have on the whole improved since the 1990s, Russia is still the world’s second largest nuclear repository. Kyrgyzstan, Tajikistan, Afghanistan and Pakistan are all one way or another havens for Islamic fundamentalism, drug smuggling, nuclear trafficking or, in Xinjiang’s case, ethnic subversion. If the Shanghai Cooperation Organisation that includes Russia has encouraged regional stability, US-Central Asian anti-terror cooperation recreates a sense of encirclement in Beijing. To the southwest lies India, another nuclear power with a headcount that is fast approaching China’s and a source of occasional border disputes. Although not all of China’s border relations are fraught with tension, the strategic implications for Beijing are clear.
Finally, China’s increasing integration into regional and global politico-economic fora serves both to constrain it as well as to strengthen its diplomatic voice. Integration into the world market – marked by its recent entry into the WTO – and complex interdependency with external markets for trade and resources reduce the impulse to go rogue. It is unclear however, if China will restrain from force once it deems its intrinsic interests – such as Taiwan – in jeopardy. Nevertheless, participation in multilateral dialogues, together with its own cultivation of bilateral ties, reassures states wary of China’s intentions and offsets the US-led bilateral treaty system. But although Chinese diplomatic weight is on the ascendant, its military muscle may not be in sync. Despite speculations of a far larger defense budget than officially announced, China’s military continues to train with relatively obsolete equipment and combat doctrines. If Beijing has increased defense spending over the past decade, so have its neighbours, not to mention America’s ‘Revolution in Military Affairs’. Furthermore, the ongoing acquisition of advanced weapons from Russia (e.g. SU-27s and Kilo-class conventional submarines) does not automatically translate into an integrated fighting force. An underdeveloped air force and navy restricts China’s force projection capability, in turn limiting the scope for prolonged overseas campaigns. Nonetheless, China’s military dimension is only weak when considered against the US and against its own potential for hegemony: it is still, after all, the world’s third largest nuclear power.
As the foregoing analysis has argued, China’s economic dynamism – and hence hegemonic suppositions – belies structural deficiencies and socioeconomic problems that may hamper long-term growth if not dealt with adequately. China needs to ‘re-indigenise’ dominance of its own economy as well as pursue qualitative innovation in high-technology and information-based sectors in the long run. Similarly, genuine political reform requires immediate attention if economic liberalisation is to persist more or less smoothly. Within East Asia, the US-led system of bilateral alliances continues to present a collective front vis-à-vis possible Chinese expansionism. Closer to home, the potential instability of China’s immediate neighbours may also affect Chinese hegemony. Lastly, the article argues that China’s military power is not nearly commensurate with its rising diplomatic clout, although it is nuclear. Nevertheless, as history has proven, China has repeatedly confounded even the best-informed predictions of collapse (1989), instability (post-Tiananmen) and so on. Consequently, though a hegemonic China may not yet be a fait accompli, it may indeed be too early too tell.
 Gerald Segal, ‘Does China Matter?’, Foreign Affairs, Vol. 78, Iss. 5, Sept-Oct 1999.
 During the 1988-9 period of inflation, growth dipped to about 4 percent, still an economic wonder by most measures.
 Peter Nolan, China at the Crossroads, Cambridge, Polity, 2004, p. 24; It should be pointed out that not all scholars agree on such an evaluation based on purchasing power parity.
 Approximately 11.3 percent of the world’s total foreign exchange holdings; Samuel S. Kim, ‘China’s Path to Great Power Status in the Globalization Era’, in Guoli Li (ed.) Chinese Foreign Policy in Transition, New York, Aldine de Gruyter, 2004, p. 359.
 Ibid. loc. cit.; George J. Gilboy, ‘The Myth Behind China’s Miracle’, Foreign Affairs, Vol. 83, Iss. 4, Jul-Aug 2004.
 The Financial Times (3 December 2002) called it the “factory of the world”.
 As of 2003, China’s trade deficits were $31.5 billion with Taiwan, $13.1 billion with South Korea, $7.6 billion with ASEAN, $5 billion with Japan, and $1.3 billion with Australia. On the other hand, China ran trade surpluses with the US ($105 billion in 2002) and Europe. See David Hale & Lyric Hughes Hale, ‘China Takes Off’, Foreign Affairs, Vol. 82, Iss. 6, Nov-Dec 2003.
 Taiwan represents a telling indicator, especially in its high-technology operations. For example, 56 percent of Taiwan’s electrical companies, 63 percent of its medical companies and 73 percent of its small manufacturing companies are all based on the mainland.
 In comparison, the equivalent for Taiwan in the mid-1970s and South Korea between 1974 to 1978 was a mere 20 percent and 25 percent respectively; Gilboy, ‘The Myth Behind China’s Miracle’.
 Hale & Hale, ‘China Takes Off’.
 Peter Nolan, China at the Crossroads, p. 24.
 Baohui Zhang, ‘American Hegemony and China’s U.S. Policy’, Asian Perspective, Vol. 28, No. 3, 2004, p. 98-9.
 In 2000, across-the-board unemployment was as high as 150 million; Steven F. Jackson, ‘Introduction: A Typology for Stability and Instability in China’, in David Shambaugh (ed.) Is China Unstable?: Assessing the Factors, Studies on Contemporary China, New York, M.E. Sharpe, 2000, p. 4.
 Pieter Bottelier, ‘How Stable is China? An Economic Perspective’, in David Shambaugh (ed.) Is China Unstable?: Assessing the Factors, Studies on Contemporary China, New York, M.E. Sharpe, 2000, pp. 72-3.
 Indeed, income disparities are masked by China’s US$1.43 trillion GDP. Per capita GDP, on the other hand, is a not so stupendous US$1,115 (figures accurate as of 2003).
 Hale and Hale, ‘China Takes Off’.
 Peter Nolan, China at the Crossroads, p. 13.
 Ibid., p. 17.
 Hale and Hale, ‘China Takes Off’.
 Minxin Pei, ‘China’s Split Personality’, Newsweek International, Oct 28, 2002, p. 40.
 Excluding the Han majority, China has fifty-five other minorities within its borders.
 Two other historically and ethnically non-Han regions of note are Nei Mongol (Inner Mongolia) and the three Northeastern provinces (historical Manchuria).
 Minxin Pei calls this ‘dot communism’; see his ‘China’s Governance Crisis’, Foreign Affairs, Vol. 81, Iss. 5, Sept-Oct 2002.
 That is, entrepreneurs, intellectuals, technocrats – from whose ranks both President Hu Jingtao and Premier Wen Jiabao emerged – and the like.
 Bruce J. Dickson, ‘Political Instability at the Middle and Lower Levels: Signs of a Decaying CCP, Corruption, and Political Dissent’, in David Shambaugh (ed.) Is China Unstable?: Assessing the Factors, Studies on Contemporary China, New York, M.E. Sharpe, 2000, pp. 40-1.
 Though, like David M. Lampton points out, it is also true that China is freer today than it has been in the past fifty years; see his article: ‘Think Again: China’, in Guoli Li (ed.) Chinese Foreign Policy in Transition, New York, Aldine de Gruyter, 2004.
 Dickson, ‘Political Instability at the Middle and Lower Levels’, p. 48.
 The 1996 Joint Security Declaration reaffirmed that the US-Japan alliance “remains the cornerstone for achieving common security objectives and for maintaining a stable and prosperous environment for the Asia-Pacific region”; Majie Zhu, ‘China and Asia-Pacific Security Building in the New Century’, in David W. Lovell (ed.) Asia-Pacific Security: Policy Challenges, Canberra, Asia Pacific Press, 2003, p. 63.
 G. John Ikenberry, ‘American Hegemony and East Asian Order’, Australian Journal of International Affairs, Vol. 58, No. 3, Sept 2004, p. 359.
 The notable exceptions are the only two regional wars that broke out in Korea and Vietnam, both of which resulted from direct confrontation with communists.
 Indeed, the revised US-Japan Defence Guidelines of 1997 and the subsequent legislation in 1999 (Shūhen Jitaihō) set in motion the expansion of Japan’s security role, in the region at least. Since September 11, Japan’s non-direct military support of the US encompassed the Gulf region as well, corroborating somewhat evidence of its growing security role. See Christopher W. Hughes, ‘Japan’s Security Policy, the US-Japan Alliance, and the “War on Terror”: Incrementalism Confirmed or Radical Leap?’, Australian Journal of International Affairs, Vol. 58, No. 4, Dec 2004, p. 428.
 Richard K. Betts, ‘Wealth, Power, and Conflict: East Asia After the Cold War’ in Robert S. Ross (ed.) East Asia in Transition: Toward a New Regional Order, New York, M.E. Sharpe, 1995, p. 34.
 For example, China is North Korea’s largest trade partner, accounting for about 70 percent of the latter’s oil supplies.
 Robert S. Ross, ‘China and the Stability of East Asia’, in his East Asia in Transition: Toward a New Regional Order, New York, M.E. Sharpe, 1995, p. 111.
 The Shanghai Communiqué (1972) recognising the People’s Republic of China (PRC) and by implication its replacement of the Republic of China (ROC) in the UN; the Normalization Communiqué (1978) formalising the One China policy; and the communiqué of 1982 committed to reducing arms sales to Taiwan.
 Andrew Peterson, ‘Dangerous Games Across the Taiwan Strait’, Washington Quarterly, Vol. 27, No. 2, Spring 2004, pp. 36-7.
 Andrew J. Nathan & Robert S. Ross, The Great Wall and the Empty Fortress: China’s Search for Security, New York, W.W. Norton, 1997, p. 211.
 Kim, ‘China’s Path to Great Power Status in the Globalization Era’, p. 370.
 Ross Garnaut & Ligang Song (eds.), China 2002: WTO Entry and World Recession, Canberra, Asia Pacific Press, 2002, p. 8.
 Ikenberry, ‘American Hegemony and East Asian Order’, p. 363.
 Joseph S. Nye, Jr., ‘Re-emergence and the Future of the Asia-Pacific’, in Guoli Li (ed.) Chinese Foreign Policy in Transition, New York, Aldine de Gruyter, 2004, pp. 341-5.