China’s Changing Shape

Gerald Segal. Foreign Affairs. Volume 73, Issue 3. May/June 1994.

At the very moment when China seems poised to regain its former power, doubts are growing about precisely what China is. China’s economy appears set to become the world’s largest, by some measures as early as 2002. Beijing has spurred this economic growth by abandoning Marxism and allowing China’s various regions remarkable independence. The risks of such a strategy raise enormous questions about China’s future. As the last of the communist old guard acquiesces in the move from Mao and Marx to market economics, China may be changing not only face but also shape. This basic question over China’s future revolves around the degree to which Beijing’s authority will give way to the centrifugal pull of China’s increasingly dynamic periphery. The death of old ideologies has left Chinese nationalism as the obvious, if uncertain, organizing principle for Beijing’s domestic and foreign policies. Will China’s fate be dominated by its unsatisfied nationalism, or will it be moderated—even wrecked—by the fissiparous tendencies of Beijing’s continental empire?

The international context surrounding this internal challenge is critical. Never in China’s history has such a push for decentralization been accompanied by the pull of so many outside forces. In an age when empires disintegrate, sovereign powers form greater unions and the world economy grows more interdependent, can China be immune to revolutionary change? East Asia is rapidly evolving, and an era of increasing interdependence will tend to weave China’s competing regions into various patterns of global affairs. China’s neighbors may seek to exacerbate the regionalism begun by Beijing in order to restrain its impulse for domination. China’s regionalism at home thus connects with its increasing interdependence abroad.

The result is an identity crisis for China, at least a crisis in the Chinese sense of a simultaneous threat and opportunity. To better understand China’s future, Sinologists must abandon traditional methods and look beyond the politics of Beijing. China’s regions count for more, as do developments in neighboring East Asia and the world beyond. Factors well beyond Beijing’s control—burgeoning flows of commerce, decisions by regional and local players, and the power that accrues to new economic centers—will change the way China is perceived, how it is governed and how the outside world interacts with this rising power in the 21st century.

Deng’s Gamble

Deng Xiaoping has embarked on a risky strategy that ties the legitimacy of his regime to its ability to produce prosperity. So far it has worked. China has sustained nearly ten percent annual growth for the past 13 years, and the World Bank, not the most radical of institutions, now issues a range of evidence for why China looks set to become the world’s largest economy by 2010 Or, if one includes “Greater China,” by 2002. According to International Monetary Fund data, China is already the world’s second-largest economy, and the World Bank has dubbed the Chinese economic area a “growth pole” for the region. As China looks set to become the number one economic power, it may also come to have the world’s largest trade surpluses with some countries, not to mention the world’s largest military spending. China will be different than Japan or the United States in that it will still have a far smaller per capita GDP, which may ensure China’s continuing need for foreign investment and technology transfer, leaving the outside world with important leverage.

Deng has managed an enormous confidence trick, using the fruits of prosperity to buy off those opposed to abandoning Marxism. But a more professionally run economy will eventually undermine China’s authoritarian politics. Thus, wittingly or not, Deng has in effect abandoned not only Marxism but also Leninism, and he may ultimately bequeath his successors a political system more akin to that of Taiwan, or even South Korea or Japan. It is a risky strategy in part because the post-Deng leadership will have less authority than the preceding revolutionary generation, a fact that could well open new divisions in the state.

As if the risks of transition from communism were not enough, Deng has compounded the uncertainty by grounding China’s new economic growth in a strategy of regional development. When confronted with conservative opponents in Beijing, Deng found support in the regions for his market reforms, thereby demonstrating that his strategy would offer sufficient prosperity to provide stability and even a degree of legitimacy for the regime. But as Beijing gives more leeway to the regions, it grows harder to retain central control over the economy. Many levers of central power, rusty from disuse, have proven to be stuck when Beijing has sought to reassert its control. For example, Beijing’s failure to implement an economic austerity package in the summer of 1993 was almost entirely due to resistance by the rich coastal provinces.

The emphasis on regionalism has also increased the differences and disparities between parts of China. This problem was initially mitigated because some of the rapidly growing coastal areas were merely catching up to interior regions that were blessed with central support in earlier decades. But as coastal China grows so much more swiftly than the interior, a form of east-west split is evident. For example, coastal Guangdong’s per capita GNP is twice that of interior Ningxia, and Shanghai’s is five times that of Sichuan.

Regionalism poses major challenges for China, especially as interprovincial tensions and trade protectionism rise. World Bank research shows many provinces trading more with the outside world while trade with domestic counterparts falls, both in real terms and as a percentage of a province’s total trade. At the same time, higher wages in coastal regions allow provinces such as Guangdong to buy material and labor from the hinterland, increasingly without central control. There have been numerous clashes, such as the “rice war,” when Guangdong used military units to ensure access to cheap rice in Hunan. A number of provinces have set up inspection stations along rail lines to restrict domestic imports. Others, such as Hubei, Hunan and Jiangxi, have used their own de facto currencies.

While leaders in Beijing decry this internal “chaos” caused by “regional protectionism,” their ability to control or counter it has been reduced. Beijing demands tax revenues, but its leverage is diminished as the regions grow richer on the proceeds of their growth. When Beijing tries to enforce discipline by restricting access to centrally controlled energy resources, Guangdong can, as it did in a 1992 dispute, buy its own oil on the international spot market and charter its own tankers. What’s more, the implications of Chinese regionalism extend beyond domestic politics into the international arena. Regionalism, especially in its foreign and security policy context, soon raises the sensitive question of the integrity of the modern Chinese state.

As the domestic fabric of China loosens, it is pulled by outsiders. Yet the outside world is well aware of the risks of regionalism, most notably if economic fragmentation leads to mass migration and the loss of an important trading partner. China’s decentralization and social decay have already led to a massive increase in uncontrolled migration (including to the United States), drug addiction and drug running. The mephitic implications of a China ripped apart are balanced by the risks that many of China’s neighbors see if it grows strong and unchecked. China’s unsatisfied nationalism is a source of serious concern in East Asia.

The strongest basis for confidence about the ability to manage the return of Chinese power is the fact that China’s new prosperity is based on interdependence with the outside world. In the past, China has been far more self-sufficient and focused inward. Today, China’s growth is simply not sustainable without access to foreign markets and injections of foreign capital. Yet it is far from certain that the benefits of interdependence will be cut off if China misbehaves. Given the size of the Chinese market and the difficulty of pushing around a country so large, those who benefit from trade with China are very reluctant to sever ties.

The extent and complications of interdependence are best understood in their more specific context. The closest ties are those between parts of Greater China. Some 80 percent of total investment in China comes from overseas Chinese in Hong Kong, Taiwan, Singapore and beyond. Exports from the economic areas of Greater China were as large as Japan’s in 1992. These thickening webs of international interdependence—among Chinese in Greater China, with Chinese minorities living throughout Southeast Asia and even with neighboring non-Chinese countries—are creating unique “natural economic territories.” These territories consistently defy formal state boundaries and challenge the cohesion of China proper as well as Beijing’s central control. Burgeoning economic forces are thus helping to fragment China even as they integrate regions of the mainland with Chinese communities abroad.

Nowhere is complex interdependence more intense than in the context of China-Hong Kong relations. With the colony slated for return in 1997, convergence is already underway. Hong Kong employs some three million workers in China, and Chinese investment in Hong Kong now exceeds Hong Kong’s annual investment in China. Hong Kong has long been China’s main trading partner, as reexport trade has fueled prosperity on both sides of the frontier. Even gangsters operating on both sides have increasingly close ties.

Yet Hong Kong’s convergence with Guangdong is often misunderstood as being convergence with all of China. Given Hong Kong’s ethnic ties to southern China, most of its investment and interaction is concentrated there. Thus the fate of Hong Kong is not just about the fate of six million people in the British colony. It is also caught up in the struggle between southern China and Beijing. As Hong Kong rapidly becomes the service center at the heart of a larger southern Chinese economy, the prospects for managing local economic relations are not necessarily the same as managing political relations with Beijing. The “rice war,” the tanker dispute and Guangdong’s blockage of a Sino-American deal on trucking are all evidence of how Hong Kong and the wider world can become caught up in a struggle between the center and provinces in China.

Taiwan’s economic prosperity is also increasingly tied up with that of southern China. Although Taiwan has a particular interest in Fujian province, Taiwanese investment is concentrated throughout southern China—a region that drew $5.5 billion from Taiwan in 1992 on top of a cumulative $3.4 billion in investment in the previous decade. By April 1993 there were reportedly some 12,000 Taiwan-funded enterprises in China. Two-way trade in 1992 totaled some $7 billion.

The China-Taiwan economic convergence is so extensive that it has forced political changes, with the two sides holding their first high-level talks in Singapore in April 1983. The selection of Singapore is significant for those concerned about the forces of Chinese nationalism in Greater China. Singapore’s senior minister, Lee Kuan Yew, has led the campaign for a nonadversarial relationship with China and praised the benefits of economic transformation leading to gradual political reform under authoritarian control. But in this new dialogue with Taiwan, Beijing may actually be making the majority of political concessions. It is anxious to obtain a large portion of Taiwan’s massive foreign exchange holdings. Moreover, unlike Hong Kong, Taiwan is not necessarily on an inexorable road to unity with China.

Ironically, greater integration with the mainland makes de facto independence for Taiwan more plausible. If even China is prepared to be pragmatic in its dealings with Taiwan, it becomes harder for third parties to refuse decent relations with Taiwan. The more Taiwan is able to operate as a normal international actor, the less it will feel the need for eventual unity. And Taiwan’s political independence in turn encourages greater regionalism on the mainland. In this context, “Greater china” takes on the economic meaning of closer relations with the mainland, but the political meaning of greater fragmentation of China, defined in its widest sense. Meanwhile, wider and deeper natural economic territories are created in East Asia. While certainly a player in this process, Beijing is far from being in control.

As one moves outward from China to Southeast Asia, this complex sense of Greater China becomes more obvious. Despite Lee Kuan Yew’s rhetoric and ever-closer economic ties, no one suggests that Singapore wishes to surrender its political independence to China. In 1992 alone Singapore’s investment in China was $997 million—$100 million more than in the dozen years from 1979 to 1991. Initially concentrated in southern China, investment has since begun to diversify. With plans to attract some $20 billion in investment to develop a township in Suzhou near Shanghai, Singapore is signaling its intention to gain economically while using regionalism to hedge its political bets. Southeast Asian investors are freer to invest where the terms are best and are therefore better placed to take advantage of competition between China’s various regions.

Overseas Chinese, especially those outside Singapore, are acutely sensitive to the political dimension of their economic choices. Over the centuries they have struggled to maintain ethnically based economic links, all the while living as an ethnic minority in a divided and uneasy society. As even Taiwanese have invested in China, Chinese minorities from the Association of Southeast Asian Nations have followed suit. In 1992 a number of major deals were announced and some 10-15 percent of foreign capital entering China came from ASEAN countries. ASEAN’S Chinese minorities are especially wary of any charge of playing politics when making money. Thus their approach to China is very different than that in other parts of Greater China, if only because they are not in charge of state policies. Their choices are based on economic rationality, and they want the least possible intervention from governments. Their stake is in enhanced economic regionalism with no change in the current political pragmatism.

A Lilliputian Strategy

For many of its non-Chinese neighbors, China’s regionalism and interdependence provide avenues for both economic and security strategy. They find distinct advantages in a China whose component parts are integrated in separate, even competing, economic spheres. They may even seek to aggravate differences in regional interests, prospering economically from enhanced trade and investment even as they help create a politically less unified, and perhaps less threatening, great power.

Japan, for example, has been the prime advocate that China’s good behavior can be guaranteed by tying it into webs of interdependence. It is a major investor in China, although Japanese firms have acted more conservatively than overseas Chinese. Now that Japan is becoming a more important investor in China, it is hedging its bets on regionalism. Investment used to be concentrated on channels through Hong Kong. But recent evidence suggests far more concentration on neighboring Shanghai and other regions farther up the coast. In Dalian, 20 Japanese firms joined together in September 1992 to develop a special industrial park, and half the foreign direct investment in Liaoning comes from Japan.

Of all countries, Japan recognizes the need to be careful about discussions of Chinese regionalism. Japan exploited warlordism earlier this century to divide and rule much of China. And yet Japan can see obvious advantages in dealing with a China that has distinctive regions competing for foreign investment and trade, and not having to face a unified and more powerful China. If East Asians are to work together to cope with the risks of a stronger China, then Japan will have to play a crucial role as the most powerful non-Chinese state in Asia. Japanese have only recently begun to think through their options, but the advantages of dealing with a looser China are enormous.

Korean calculations are equally complex. Seoul’s investment in neighboring parts of China has an obvious economic rationale, as well as a political calculation of buying influence via Beijing on Pyongyang. As South Koreans look forward to eventual reunification with the North, they also know that they will continue to need a friendly China to help balance Japan. But a large and nationalist China can be a problem as well, and Korea also sees benefits from a looser China.

China’s largest neighbor, Russia, is perhaps in one of the weakest positions. Well before the Soviet Union collapsed, Sino-Soviet economic relations were leading a developing detente. Trade between the two states totaled nearly $8 billion in 1993, $3 billion of which was cross-border trade. An important part of the logic of detente was the benefits of regional interdependence, especially for those interior parts of China that felt left out of the general opening to the global market economy. If trade relations stalled, it had far more to do with Russia’s deepening chaos and collapsing economy. While these problems still afflict the prospects for economic interdependence, Russia nonetheless desires stronger contacts with China.

Russia has good reason to be wary of China as a unified great power. Russia grabbed much of the territory along this frontier when China was weak in earlier centuries. Now Russia must fear for its own ability to hold on to these imperial spoils as China’s economy grows and its defense spending approaches Russian levels. A fast-growing China will require precisely those minerals and energy resources that are so close by in the Russian Far East. The small Russian population sitting atop these valuable natural resources could be highly vulnerable, especially if Russia itself should fragment.

But the fact that so much of the territory on either side of the frontier sits uneasily in either empire provides some comfort for Russians. Manchuria is not firmly within core China, and its tendencies toward regionalism are far greater than Chinese officials would admit. Russians sometime speak of making the most of this uncertainty and tying the region into closer connections. They hope that China will be less of a threat when these Chinese, in competition with other regions farther down the coast, have a stake across the Russian border. But for Russians, whose economy is in such sad shape, this strategy entails great risks.

Although other East Asians are not in such a weak position, they share the desire to make the most of Chinese regionalism in order to avoid having to face a unified Chinese power. So long as China was weak and foreign powers were present to keep it under control, most East Asians were relatively unconcerned about its power. But nearly all the great powers are gone (or going), and China is growing strong. It is not surprising that some look to regionalism in China as a way of controlling China’s challenge.

Centralized Nationalism

Interdependence between China’s regions and the outside world is possible only because Beijing has sanctioned economic decentralization. But Beijing is acutely sensitive to any extrapolating of the economic trend to security issues, and it copes with this problem by taking a particularly strong nationalist line on military matters. In military affairs the premium is on unity.

China is virtually unique among great powers in having a territorial dispute with nearly every one of its neighbors. From China’s point of view, using its new power to “right the wrongs of history” is only natural. But it is equally obvious why such a strategy makes for nervous neighbors.

No one is more nervous than Hong Kong, for it already knows its fate. Precisely because Hong Kong (and Britain) was never able to stand up to China, the lesson for others is that China will regain what it believes to be its own, regardless of the risks to its economic prosperity. This message is clearly heeded by Taiwan, for it too is claimed by the mainland. Although China and Taiwan at times share security interests, it is increasingly clear that Taiwan will continue to defend its independent position by developing a democratic political system and active military deterrence. So long as its economy continues to prosper, Taiwan will remain more a pole of attraction and power than a pawn to be captured by China in due course. The result will be continuing worry in Beijing about economic regionalism developing into something more serious.

China’s nationalist approach is evident in the way that it has handled territorial disputes in the South China Sea. Leaving aside the validity of China’s claims, Beijing’s regular resort to force in seizing islands appears designed to signal that China will be ruthless in taking what it claims to be rightfully its own. Only the limits of China’s military capability and its calculation of political opportunity appear to temper this strategy. While scaring its neighbors and the broader international community seems to make no economic sense, Beijing may be calculating that the potential gains of energy supplies and other resources in these newly won territories are more vital to the growing Chinese economy.

Part of China’s nationalist agenda is to demonstrate its dominance in the region. The problem is that China often defines “normal” relations with certain neighbors—Vietnam, for example—as ones where China is dominant. This outlook is not necessarily true for all Southeast Asian nations. But for the likes of Malaysia, Indonesia and the Philippines, a China left to set its own agenda for economic interdependence, and one free to use force as it sees fit, will likely see the natural state of affairs as subservience to China. Japanese economic investment is an inadequate counterweight to fully developed Chinese economic or military power. Without a balance of power, Southeast Asians are vulnerable. The question that Southeast Asians must ask, then, is how much should they pacify China before seeking strategies of deterrence.

Beijing is apparently set on a policy of force in the South China Sea. Unlike the case of Hong Kong, no serious sign has yet emerged that China’s regions oppose a hard, nationalist policy. Yet one could conceive of conditions in which regional leaders would fear that the ruthless pursuit of an irredentist agenda would damage their own economic prospects and impinge on local interests. Would it necessarily be foolish for China’s neighbors in Southeast Asia to exert influence on sympathetic regions in China in order to widen certain differences with the center? The question is as yet hypothetical, but it points to some of the potential choices open to China’s neighbors who worry about its nationalist agenda.

In northeast Asia, the territorial disputes with China are, for the most part, far less acute. But Japan, too, is growing more suspicious of the military dimensions of Sino-Japanese relations. Why does China want to enter into long-term defense production arrangements with Russia when there are no major threats to Chinese security? Confronted by a hegemonic China, Tokyo may be forced to rethink its economic and technological assistance to China. It might also seek closer cooperation with the Group of Seven leading industrial nations regarding China, perhaps putting itself at odds with those East Asians who continue to trust in economic interdependence to control China’s potential threat. Japan might find it easier to remain an active trader with China, but it may also seek to make China more manageable by encouraging regional economic rivalries and, through the regions, by pressing for moderation in Beijing.

In the Russian case, similar calculations apply, only more so because of Russia’s apparent weakness. Russia also has to decide if it wants to continue arming China and helping it obtain next-generation defense technology. China and Russia have yet to resolve their territorial disputes. Border talks are stalled, and not only because the Commonwealth of Independent States cannot get its act together. Under the guise of fostering economic cooperation, China is seeking a range of quick and long-term fixes for its obvious military weakness. If China does emerge as the main power in East Asia, Russia and Japan will have far more in common in foreign policy than they are used to admitting. Neither can count on China’s short-term economic needs ensuring a peaceful partner in the 21st century.

Hence the question arises of the limits of the interdependence strategy to restrain China. With unfettered trade, supposedly in the civilian sector, China could pick up critical military technologies. For all the decentralization of the Chinese economy, what is traded to China at the provincial level might well end up as part of a central effort to develop new military technology. As China becomes an increasingly important actor in the international arms trade, Beijing’s advancing military capabilities are a matter of concern not only to China’s neighbors but to the world at large. Economic decentralization will no doubt lead the Chinese to argue to foreigners that they no longer have control over their defense industries. But the reality looks far more complex. The central government continues to control matters such as defense procurement and arms sales, even as other economic decisions devolve to provincial or local levels.

China stands on the brink of redefinition. Most Chinese would like to believe that China is set to return to its natural position as the predominant power in Asia. Most everyone else fears such a return of history. But China is an empire with fragile fringes subject to outside pressures. What is most significant about its current circumstances is that previous Chinese regionalism has never taken place at a time when it was encouraged by forces both at home and beyond China’s own frontiers.

The fault lines of the Chinese empire are myriad, and history is replete with Chinas of different configurations. Today one can distinguish between China’s inner and outer empires. The outer empire includes Tibet, Xinjiang, Mongolia and other fringe territories, most of which have strong cases for ethnically based independence but have reaped relatively little benefit from economic decentralization. Even the inner empire, which consists of areas such as southern China, Shanghai and its hinterland, and Shandong, is divided by dialect and important cultural fault lines. The southern Chinese, now economically booming, have one of the strongest cases for greater independence based on cultural distinctiveness.

By and large when China has disintegrated it was at least initially for internal reasons, with foreigners taking advantage of subsequent weakness. A strong China has usually been able to resist outside pressure. Thus when European and then Japanese imperialism pressed a severely divided China, it crumbled into pieces. Now that those pieces have been put back together, the great historical question is how well cemented is the edifice. Foreign forces no longer operate like imperial powers, but powerful pressures from the international system could yet reshape a China in the midst of momentous internal transition.

Far from being in control of a wider, hierarchically organized Greater China, China is a Middle Kingdom in a muddle. Beijing’s grasp of its outer empire has always been tenuous. Although these regions are not about to spin out of orbit, they will continue to be a source of insecurity for the central leadership. But the fate of the outer empire is relatively inconsequential compared to the challenges regionalism poses in the inner empire. Here, southern China is most at risk. But as the other coastal regions also grow economically more powerful, they too will naturally seek more control over their own futures. It is more than a curiosity, for example, that provincial leaders in Guangdong have been appearing on television in recent months speaking in Cantonese.

A possible, albeit unlikely, outcome is a breakup of China, whether peaceful or otherwise. The uncertainty surrounding the succession to Deng Xiaoping and the fact that economic modernization and reform have already moved 130 million Chinese off the countryside and into towns and cities—with another 200 million set to migrate soon—creates a situation of fundamental political and social change, leaving much revolutionary tinder scattered around the country. The most senior military officials in China talk of the risks of civil war because the armed forces are weakened by these economic and social forces. If China does collapse, no one should say they did not know why.

What seems most likely is a continuing devolution of power. To an important extent, Beijing will pretend to rule the provinces, and the provinces will pretend to be ruled by Beijing. But central power is unlikely to be lost entirely, at least in the medium term. The center will retain some ability to play one province off another. Some economic decisions will be taken at a provincial level. Others will be taken lower down at the local level. Still others may even be made outside in Greater China, where key interactions with the global market economy take place. Thus, the most effective level of government may vary from local to national to international, depending on the issue.

The result is likely to be a looser United States of China or a Chinese Economic Community. Part of the difficulty in judging what this looser China might look like is that China has no tradition of federalism and no legal tradition on which to build federalism. Might Beijing become more like Brussels or Washington? Will economic decisions be made in the regions and most security decisions in Beijing? Is such a divided system sustainable, or will power tend to gravitate to the periphery? These issues are impossible to resolve. But experience suggests that form often follows function.

While this argument seems to suggest that military regionalism will follow economic regionalism, a far messier pattern is more likely. Beijing will likely hold many of the traditional functions of diplomacy—conducting negotiations on security and arms control issues, or deciding how to vote in the U.N. Security Council—even as the regions or more specific localities take increasing control of trade and investment questions. In some areas of foreign relations, however, such as migration or gun and drug trading, Beijing has already lost control, and often to gangsters rather than another level of government. The aspects of foreign relations where real power resides in the regions are growing. Beijing may welcome membership in the General Agreement on Tariffs and Trade, in part because it will strengthen its hand in trying to control increasingly uppity provinces. But foreigners who want to trade with China are best advised to think in terms of provinces or localities. It is they who can guarantee the transparency of global trading regulations or resolve disputes over intellectual property.

A range of political and security issues will require a more sophisticated treatment of China. No issue will be more contentious than how to ensure China’s cooperation on matters of regional and international security. The divergent interests of coastal China and Beijing may continue to force changes in Chinese foreign policy, as it already has. Regional leaders may be best positioned to restrain China’s use of force in territorial disputes or even to curb its arms sales policies. If the Hong Kong and southern China economies have to be damaged in order to modify Chinese policies on arms sales or human rights, then so be it. If industries in Shanghai or some other region have to be targeted in order to induce regional leaders to press Beijing on foreign policy disputes, then so be it. Foreigners will have an increasing stake in the conclusion that, if Beijing is to remain in the middle of its kingdom, it will have to be a looser kingdom.