China-Centric Globalisation
The last thirty years have witnessed the era of globalisation which can be defined as the creation of an integrated global economy. However, what began as a project for globalisation has gradually been transformed into a project of "China-centric globalisation". This paper argues that China-centric globalisation has grave economic and geo-political implications for the US. It also carries major implications for other countries, although those implications obviously vary according to country-specific economic and political details.
China-centric globalisation is characterised by three features: 1) the emergence of China as the global centre of manufacturing–the so-called "factory for the world"; 2) the creation of a new dollar zone shared by the US and China, and supported by China's adoption of a pegged dollar exchange rate; and 3) the emergence of a massive US trade deficit with China, combined with the transfer of a significant chunk of US manufacturing capacity to China.
China-centric globalisation is an extension and evolution of corporate globalisation, which in turn evolved out of the post-World War II free trade era. This evolution is visible in US trade statistics shown in Table 1. Stage 1 of this evolutionary process ran from 1945 to 1980 and constituted the "free trade" era. It was characterised by rising trade openness, measured by goods exports and imports as a share of GDP, with roughly balanced trade. Stage 2 ran from 1980 to 2000 and constituted the era of corporate globalisation which was marked by a continuing rise of trade openness, but now with rising goods trade deficits as a share of GDP. Stage 3 has run from 2000 to present and constitutes the era of China-centric globalisation. It has generated a continuing rise in the goods trade deficit as a share of GDP plus an increase in the share of US imports from China.
| [X+M]/GDP | [X-M]/GDP | China X/X | China M/M | China[X-M]/[X-M] | |
|---|---|---|---|---|---|
| 1960 | 6.7% | 0.1% | |||
| 1980 | 17.0% | -0.1% | 1.8% | 0.1% | N.A. |
| 2000 | 20.2% | -4.5% | 2.0% | 8.1% | 18.8% |
| 2010 | 22.0% | -4.4% | 7.1% | 18.8% | 42.2% |
Globalisation was always problematic for both national security and national shared economic prosperity. China-centric globalisation makes it more so. Why? First, it aggravates the impacts of globalisation on both national security and shared prosperity. Second, it constrains US economic policy space. Thus, it has hindered US attempts to escape the Great Recession by limiting capacity to address the trade deficit via exchange rate adjustment; it also promises to block any future attempts to recalibrate globalisation so as to make it more equitable and environmentally sustainable.
Manufacturing and economic security
The conventional focus of concern has been China's effect on manufacturing and economic security. This concern is now widely acknowledged and discussed. The basic story is China-centric globalisation has caused large transfers of technology and manufacturing capacity to China; shrunken the US manufacturing base; promoted enormous financial investments in China; and caused the emergence of a huge trade deficit that has cumulated into making China the largest foreign holder of US government debt. These developments pose both economic and national security dangers. A shrivelled manufacturing base promises lower future productivity growth and exposes the US to potential balance-of-payments constraints. It also undermines national security because reliance on imported manufacturing goods could undermine the ability to equip a modern military and fight a lengthy war. A related concern is off-shoring of industrial research and development (R&D) facilities to China as the location of R&D seems to follow the factory. That will reduce the flow of future innovations. Since power is relative, the above developments strengthen China by strengthening its manufacturing base, its export prowess, its R&D capacity and its capacity to sustain a modern military.
Financial security
Another issue that has received some attention is that of financial security. Here, the argument is that persistent large trade deficits have meant China has accumulated massive financial claims against the US, making it the largest official creditor of the US. The fear is that this debt gives China power and leverage over US financial markets. In the event of tensions, China could disrupt US financial markets using strategic selling that spikes interest rates and damages the US economy. A classic example of vulnerability to financial pressure is provided by the 1956 Suez crisis when the US threatened to financially undercut Britain and France if they did not end their occupation of the Suez Canal.
However, these financial security fears are easily overstated. US debts are dollar-denominated so the Federal Reserve can always step in and buy them, as it has done with its quantitative easing program (this was not the case for Britain in 1956 which had borrowed dollars). The US Treasury also has the power to freeze holdings. Lastly, massive selling of assets would impose financial losses on China and that is a deterrent to doing so.
Geopolitical security
Whereas significant attention has been directed to the issues of manufacturing and financial security, much less attention has been directed to the issue of geopolitical security. Here, China-centric globalisation has major ramifications that implicate every region of the globe (East Asia, Africa, Australia, Latin America and Europe), and these implications appear to be little appreciated.
The key feature is that the post-Cold War world is marked by a new form of geopolitical competition. In the Cold war era, the currency of competition revolved around military force and ideology. In the new era, the currency of competition is economic power that fashions durable commercial alliances. China-centric globalisation gives China economic and financial power to build these alliances, while it also undermines US economic and financial power. That combination dramatically weakens US geopolitical power and security.
China's geopolitical financial challenge
In addition to the financial security threat, China-centric globalisation also creates a geopolitical financial challenge. First, China's financial wealth gives it increased power in multilateral institutions like the International Monetary Fund (IMF) and World Bank. It also gives China financial power to woo domestic elites, a power that was recently on display in Canada with China's purchase of the energy firm, Nexen. Regardless of the economic merits of that transaction, it showed China's capacity to deploy financial resources and affect domestic politics by exploiting differences of interest within Canada. Second, it gives China increased geopolitical influence and power thanks to its ability to grant credit and foreign aid. This increased power is not just vis-à-vis developing countries. It also affects developed economies, as evidenced in China's courtship of countries affected by the euro crisis, particularly Greece.
East Asia and the global supply chain
China-centric globalisation has also dramatically impacted US geopolitical standing in East Asia. Here, the critical change has been the restructuring of the global supply chain.
Globalisation has always raised supply chain security concerns because sourcing from outside one's borders is intrinsically more dangerous. The traditional threat metrics consist of the vulnerability of the foreign supply chain (distance); the extent of foreign supplier diversification (the number of supplier countries); and the extent of quantitative reliance on foreign suppliers (imports as a share of manufacturing output). Greater distance, fewer supplier countries and greater quantitative reliance all increase the potential national security threat.
China-centric globalisation has increased this threat by making the US global supply chain more vulnerable to interruption and more dependent on China. This is illustrated in Figures 1 and 2. Figure 1 contains a stylised illustration of the global supply chain that, in the 1980s, had the US supplied by many East Asian countries (eg. Japan and South Korea). This exposed the US to dangers of distance, but the supply chain was relatively well diversified and the level of quantitative dependence was also low. Figure 2 shows the new supply chain that places China at the centre in a role as product assembler. China receives inputs from East Asian suppliers, assembles them, and then ships the finished goods to the US. This middleman position gives China increased leverage.
It also makes East Asian countries more dependent on China which increases China's regional power. Moreover, it projects China as the engine of regional economic growth, for which China gets significant diplomatic credit, when in fact the US is the ultimate engine since demand for East Asian inputs is derived from US demand for Chinese assembled products.
China's resource diplomacy in Africa, Latin America and Australia
China-centric globalisation has also considerably increased China's geopolitical power with regions exporting natural resource. The basic logic is that by making China the factory of the world, it has created the basis for new commercial alliances. The economic logic of these alliances is China exports manufactures to these countries and in return receives imports of natural resources.
In the Cold War, the Soviet Union could never accomplish that because it was a resource exporter and was in competition with these countries. Consequently, the Soviet Union had little to offer economically; instead, it offered guns and ideology. The US used to be the supplier of goods and buyer of resources but, as its manufacturing base has shrunk, it has been increasingly displaced by China. That places the US in a weaker position versus China than it was versus the Soviet Union.
Resource exporters have benefitted from China's rise thanks to the increasing prices of raw material and access to cheaper manufactured goods, as well as from Chinese foreign direct investment (FDI). But they also suffer. First, China is undemocratic and its commercial practises promote the "natural resource curse" as it tolerates corruption and violations of human rights and labour standards, which harm development. Second, China's mercantilist commercial policy and undervalued exchange rate undermine manufacturing development in these economies. Third, higher resource prices are not a "free lunch" as they promote exchange rate appreciation that drives deindustrialisation–the so-called Dutch disease. The bottom line is the new relationship between China and resource exporters has inexorable commercial logic but it is not necessarily good for development.
The trans-Atlantic relationship between the US and Europe
Lastly, China-centric globalisation also has implications for the trans-Atlantic relationship with Europe which has been the bedrock of the international system after World War II. The structure of global production under China-centric globalisation exerts a tendency to pull the US and Europe apart by creating rivalries between them.
As mentioned above, China has already used its financial strength to woo Europe during the current euro crisis. Second, with regards to trade, there has been some decline in the significance of trade with Europe for the US as measured by the size of total trade with Europe relative to GDP. Third, and most importantly, the new economic structure tends to create a "prisoner's dilemma" situation between the US and Europe. The two would do best by cooperating in their dealings with China, but the structure of China-centric globalisation has them engaging in mutually injurious competition that benefits China.
This is particularly evident in the aircraft industry in the competition between Boeing and Airbus. China has been able to use its state control over purchasing by Chinese airlines to manipulate Boeing and Airbus into patterns of disadvantageous competition. These patterns include forced technology transfer and shifts of manufacturing and assembly to China. That has cost jobs and investment; it threatens the long-term prosperity of both of these key companies by potentially creating a commercial rival.
Trouble ahead
China-centric globalisation is very problematic for the US from both economic and geopolitical standpoints. The problems are not going away and promise to get worse. The trade deficit, investment diversion and exchange rate policy have already hindered US economic recovery from the Great Recession of 2007-09. China's mercantilist export-led growth model poses a threat to global development because other countries are now unable to get on the ladder of manufacturing. Lastly, the US push for a flexible renminbi with open capital markets to resolve the exchange rate question is particularly misguided. If implemented, a flexible renminbi risks exposing the US to renminbi depreciation as it is quite likely there will be future capital flight from China. That is because Chinese wealth holders are undiversified internationally and they are also subject to domestic political risk. Furthermore, there is the possibility of a Chinese economic bust.
Conclusion
China-centric globalisation raises clear concerns. Despite that, it has been very hard to get discussion on the policy table. There are several reasons for this. First, and foremost, is the fact that many large corporations have benefitted from China-centric globalisation and they control international economic policy discourse in Washington. As significant beneficiaries from China-centric globalisation, they block any challenge. That speaks to a grave weakness in the US political system. Corporations have become the most powerful political actors but their goal of global profit maximisation is different from the goal of advancing the national interest.
Second, there is little understanding of the distinction between globalisation and China-centric globalisation. That fosters the misunderstanding that rolling back China-centric globalisation is synonymous with rolling back globalisation. Third, globalisation (which includes China-centric globalisation) creates "lock-in" whereby economic arrangements are difficult to reverse except at considerable cost. That cost discourages change.
Finally, there is a conceit that there are no security dangers because economic links with China will turn China into a democracy and democracies do not go to war with each other. That conceit is very dangerous as evidenced by the history of the late 19th century when there was a seismic shift in relations between Great Britain and Germany that ultimately led to World War I. Britain and Germany had monarchs who shared a common lineage, yet they still went to war. The US and China are not close allies, have many areas of competition and have different political systems. That speaks to the dangers of China-centric globalisation which has been allowed to develop with great rapidity and little public discussion of its implications and consequences.
Chinese Acquisitions of Canadian Companies and Chinese Greenfield Investments in Canada: When are there Genuine National Security Threats?
This paper addresses two interrelated issues of central interest to Canada as Chinese outward foreign direct investment (FDI) grows to be a major force in the international economy. First, what is the impact of Chinese FDI on the structure of natural-resource industries around the globe? Does Chinese FDI "lock up" production of minerals, oil and gas in an exclusive manner that deprives non-Chinese users from the world supply base? Second, when does Chinese FDI via acquisition of an existing Canadian firm, or any external acquisition of an existing firm anywhere, constitute a legitimate national security threat to the home country where the proposed acquisition is headquartered? Is the national security calculus different in cases of inward Chinese greenfield investment?
Chinese lock-up of the world natural resource base?
Beginning with the first issue, are the growing number of Chinese natural resource investments taking over the global resource base with zero-sum implications for others? When Chinese companies take an equity stake in central Asian oil fields, extend loans to mining and petroleum investors in Africa, write long-term procurement contracts for minerals in Australia, or propose to acquire natural resource companies headquartered in Canada, do these activities cut off other buyers from access to world supply? Or, might Chinese investments, loans, and long-term contracts constitute a positive influence for non-Chinese buyers, helping to multiply suppliers and expand access to the world resource base?
The Chinese deployment of capital to procure natural resources takes four forms:
- In the first procurement arrangement, Chinese investors take an equity stake in a very large already-established producer so as to secure an equity-share of production on terms comparable to other co-owners.
- In the second procurement arrangement, Chinese investors take an equity stake in an up-and-coming producer so as to secure an equity-share of production on terms comparable to other co-owners.
- In the third procurement arrangement, Chinese buyers and/or the Chinese government make a loan to a very large already-established producer in return for a purchase agreement to service the loan.
- In the fourth procurement arrangement, Chinese buyers and/or the Chinese government make a loan to finance an up-and-coming producer in return for a purchase agreement to service the loan.
These four structures provide the basis for examining the potential to "tie up" supplies. If the procurement arrangement simply solidifies legal claim to a portion of the output of established large producers (first and third structures), this gaining "preferential access" to supplies does have exclusionary implications for other consumers. In contrast, however, if the procurement arrangement expands and diversifies sources of output more rapidly than growth in world demand (second and fourth structures), the zero-sum exclusionary implication does not hold because other consumers have easier access to a larger and more competitive global resource base.
An assessment of the sixteen largest Chinese natural resource procurement arrangements around the world reveals the predominant pattern (thirteen of sixteen projects) is to take equity stakes and/or write long-term procurement contracts with the competitive fringe. A brief review of four smaller Chinese procurement arrangements–undertaken to check for selection bias–shows only one that has zero-sum implications for other buyers. A comprehensive examination of the universe of thirty-five Chinese natural resource investments and procurement arrangements in Latin America indicates that twenty-three help diversify and make more competitive the portion of the world natural-resource base located in Latin America. Thus widespread apprehensions about Chinese potential to "lock up" of world resources are not supported by this hypothesis. (As discussed later, Chinese manipulation of rare earths resources constitutes a notable exception.)
Upon reflection, such behaviour on the part of China should not be surprising; in comparative perspective, the Japanese government, for example, considered a strategy of pushing the country's own major "national champion" resource companies to establish relationships with major OPEC members and other extractive-intensive countries to exercise control over a portion of world supplies. From the late 1970s through the 1980s, however, Japanese policies shifted towards procurement arrangements that would make the structure of global extractive industries more competitive and diversify the geography of production, a strategy that is maintained by Japanese investors today.
The impact of Chinese procurement arrangements on the structure of natural-resource industries around the world is by no means the only object of concern; indeed this competitive outcome is only one dimension of the geopolitical challenges surrounding Chinese investment behaviour. It must be noted that Chinese natural-resource investment flows to problematic states and regions, including Iran, Sudan and pre-reform Myanmar. In addition, Chinese investors often expose host countries in the developing "resource curse" practises of illicit payments, graft and corruption, as well as poor worker treatment and lax environmental standards.
In addition, it is important to note that not all Chinese strategic manoeuvres towards natural resource procurement reflect the predominant trend towards making the supplier base more competitive. Chinese policies to exercise control over "rare earth" mining runs precisely in the opposite direction, a fact that will feature prominently in any proposed Chinese acquisition of rare earth firms in Canada or in already concentrated resource industries in general (such as potash).
Identifying national security threats from foreign investment: separating plausible from implausible outcomes
Turning to the second issue of interest for this paper–establishing a framework for distinguishing genuine national security threats from implausible assertions of such threats–a comparative review for a Canadian audience of US foreign acquisition cases reveals three kinds of threat. The first category of threat ("Threat I") is that the proposed acquisition would make the home country dependent upon a foreign-controlled supplier of goods or services crucial to the functioning of the home economy that might delay, deny or place conditions upon provision of those goods or services. The second category of threat ("Threat II") is that the proposed acquisition would allow transfer of technology or other expertise to a foreign-controlled entity that might be deployed by the entity or its government in a manner harmful to home country national interests. The third category of threat ("Threat III") is that the proposed acquisition would allow insertion of some potential capability for infiltration, surveillance, or sabotage, using a human agent or some non-human mechanism, into the provision of goods or services crucial to the functioning of the home economy.
Potential national security threats from inward, greenfield investments will be considered later.
For any of these three threats to be credible, the industry in which the proposed acquisition would take place must be tightly concentrated, the number of close substitutes limited and the switching costs high. Might Lenovo's proposal to acquire IBM's PC business, for example, pose a credible national security threat to the home country of the target company? Looking at Threat I (denial) and Threat II (leakage of sensitive technology), competition amongst personal computer producers, for example, is sufficiently intense that basic production technology is considered "commoditised". It is exaggerated to think that Lenovo's acquisition of IBM's PC business could have represented a "leakage" of sensitive technology or provided China with military-application or dual-use capabilities that are not readily available elsewhere. Nor could Lenovo manipulate access to PC supplies in any way that would matter. As for Threat III (infiltration, espionage, and disruption), any purchasers that feared bugs or surveillance devices within Lenovo PCs could eschew Lenovo and simply purchase any one of numerous alternatives.
Applying the three-threats framework to foreign acquisitions of Canadian companies
This three-threat framework appears to fit Canadian needs quite appropriately, beginning with potential foreign acquisitions of Canadian companies in the extractive sector. While a complete analysis of the evolving structure of the international fertiliser industry is not attempted here, the evidence suggests that supplies of both potash and phosphates are becoming more concentrated (with the former centred in Canada and the latter centered in Morocco) as US sources diminish. Within this context, BHP Billiton's hostile bid for Potash Corporation of Saskatchewan would fall into the category of placing external control of a major world source of supply into foreign hands rather than in the category of helping to expand, diversify and make more competitive the world supplier base. How BHP Billiton exercised control over output levels, prices and destination of sales could become problematic for Canada, even though provincial and national authorities could take steps to try to influence BHP Billiton's actions post-acquisition.
There was public discussion at the time of the BHP Billiton bid for Potash Corporation that a Chinese or even a Russian firm might be an alternative to BHP. From a national security point of view, neither of these alternative acquirers would be preferable to BHP, since each of these too would represent transferring external control of a major world source of supply in an increasingly concentrated industry to an external actor. Thus it is important to note how the national security framework introduced here differs fundamentally from the consideration of economic "net benefit", as contained in the Investment Canada Act. In the Potash case, a Chinese or Russian acquirer might offer a higher price to shareholders than BHP Billiton or make more generous no-layoffs commitments. However, this would not alter the calculation in the national security calculus: concern about transferring external control of a major world source of supply in an increasingly concentrated industry to an external actor would remain. (A quick review of the concentrated structure of the international nickel industry suggests that the proposed acquisition of Noranda by China Minmetals in 2004, never consummated, should also have qualified for national security assessment rather than a simple "net benefit" calculation.)
Potential acquisitions of Canadian rare earth elements (REE) companies might be subjected to the same calculus as Potash. A hypothetical Chinese acquisition of Avalon Rare Metals or Great Western Minerals Group would further consolidate Chinese control over the global REE industry. Indeed, Canadian authorities might want to be concerned about such consolidation even if a proposed Chinese acquisition did not involve a production site on Canadian soil. Again as a purely hypothetical example, a proposed Chinese acquisition of Great Western Minerals Group's operations at Steenkampskraal in South Africa would qualify to be blocked by Canada on national security grounds. Indeed, even a greenfield investment by a Chinese company over undeveloped REE sites in Canada would serve to extend tight Chinese control over the industry.
The above example highlights the important observation that review within the national security framework presented here requires considerations beyond what might ordinarily be contained in a typical anti-trust review of a potential acquisition. Canadian authorities would want to be cognizant of Chinese government manipulation of rare earth exports to Japan as part of geo-strategic rivalries in North Asia–and make a judgement about the advisability of permitting a hypothetical Steenkampskraal acquisition in light of Canadian foreign policy considerations–rather than looking solely at anti-competitive outcomes in a purely economic sense. In this sense, national security reviews could draw on widely accepted industry concentration measurements but would have to add more explicit considerations of Canadian national interest.
In contrast to the Potash case, the decision of PetroChina to exercise its option to acquire the entire undeveloped MacKay River project from Athabasca and Sinopec's acquisition of new drilling lands owned by Calgary-based Day Energy would appear, to the outside observer, to be helping to expand and diversify Canada's energy base. So would the China National Offshore Oil Company's (CNOOC) acquisition of Nexen; so would Petronas's acquisition of Progress Energy; so would hypothetical greenfield investments in Canadian energy projects on the part of external investors.
The national security framework presented here can be used to evaluate foreign acquisitions outside of the natural resource sector, such as the proposed purchase of the space technology division of Vancouver-based MacDonald, Dettwiler and Associates (MDA) to Alliant Techsystems Inc. (ATK) of the United States in 2008. From a national security point of view, the proposed sale would transfer control of Radarsat-2, a high-resolution satellite with a particular kind of polar orbit, to ATK. Alliant promised to honour all of MDA's outstanding contracts with the government of Canada, including access protocols to Radarsat-2 for surveillance of the Arctic. However, Alliant could not ensure that the US government would refrain from imposing controls on Canadian access to information if there were a dispute between the United States and Canada about sovereignty in the Arctic. The United States does not recognise Canada's designation the Northwest Passage shipping channel, for example, and might refuse to permit Canada to use Radarsat-2 surveillance to enforce its claim. Given the unique nature of Radarsat-2's technology and polar orbit, what has been labelled "Threat I" earlier would come into play since Canada would have no other alternative if the US were to behave so.
This paper does not presume to assess the merits of a possible US-Canada dispute over Arctic sovereignty, but within the framework proposed here an argument for rejecting the proposed acquisition for Canadian national security reasons ("Threat I") does not appear inappropriate.
This brief review of how the national security threat assessment apparatus introduced in this paper might be applicable to sensitive cases in Canada should be coupled with a clear statement about the principal value of using such a rigorous framework–namely, to show that the vast majority of proposed foreign acquisitions will not pose any plausible threat whatsoever. Application of this framework in Canada should, as elsewhere, help dampen down politicisation of individual cases and lead to swift and confident approval of those acquisitions where genuine national security threats are totally absent.
Industrial Upgrading in China: Moving in the Right Direction?
China's manufacturing sector has played an important role in the economy's growth in the last three decades, expanding at a rate nearly at par with the rest of the economy. Currently, manufacturing contributes upwards of 35 percent of gross domestic product (GDP) and is the source of nearly 90 percent of its exports. Despite the massive lay-offs from the state manufacturing sector beginning in the mid-1990s, manufacturing has continued to absorb new workers, and in 2010 manufacturing activity accounted for over 110-120 million jobs.38
Concerned about manufacturing's future prospects, recent policy initiatives of the central government including the 12th Five-Year Plan for Science and Industry, and the Five-Year Plan for National Strategic Emerging Industries are calling for new national industrial upgrading efforts. These efforts are predicated on a view of only limited upgrading and development of innovative capacity, especially in "Chinese" firms, and the reported dominant role of the extensive margin, ie. increases in labour and capital–and not productivity growth–as the key source of growth in the Chinese economy.39 These views, as well as nationalist and strategic concerns, are playing into China's current big push for "indigenous" innovation and the development of ambitious plans in priority areas extending from energy resources to biotechnology to IT–initiatives that often envisage restricted roles for multinationals. As part of these efforts, the Chinese government is also promoting a big outward push by domestic firms.
The perception of limited upgrading in China's manufacturing may be off the mark, however. So may be the government's assessment of the critical constraints on upgrading and innovation by Chinese firms, as well as the kinds of policies and investments it is promoting most likely to foster new innovation40. Both have potentially important implications looking forward. Recent research41 points to impressive growth in productivity in Chinese manufacturing in the last decade and a half that is comparable or higher than rates observed in Japan, Taiwan or Korea over similar extended periods in their development. This growth is relatively broad based and cuts across sectors, regions and ownership groups. There has been a striking narrowing of the productivity gap between state-owned and foreign-invested firms between 1998 and 2007. Product upgrading in the form of cost and quality innovation that allows firms to capture rising market share in demanding international markets is also clearly evident in China's export behaviour. Exports, however, only make up a sixth of China's manufacturing output, which points to the important role of upgrading in the context of China's domestic market.
Equally telling, productivity growth is occurring less through the upgrading efforts and improvements in "continuing" or "surviving" firms, and much more because of "creative destruction" and the dynamic process of entry and exit. Between 1995 and 2010, for example, several hundred thousands of new manufacturing firms have been established, a majority of which are private. Exit has also been common. When new (old) firms enter (exit) the productivity distribution at levels higher (lower) than incumbents firms, total productivity rises; new firms also contribute positively to productivity growth subsequent to entry. Recent estimates42 suggest that this margin may be the source of as much as sixty percent of productivity growth in manufacturing since the mid-1990s.
This perspective focusses our attention on the role of market liberalisation and the dynamics of competition in China. This process began in the early 1980s with the rise of the township and village enterprise (TVE) sector and the introduction of the dual-track system, and accelerated in the 1990s as a host of internal and external barriers came down. China did not enter WTO until 2001, but tariffs and non-tariff barriers actually experienced a much larger reduction before entry than after. Between 1992 and 2000, for example, average tariffs fell from 43 to 18 percent, and then further to 7 percent by 2010. With tariff reductions passed through almost one-for-one into lower domestic prices, the productivity threshold that entering firms must achieve in order to be profitable has been rising.
By virtue of its size and rapid per capita GDP growth, China has become the largest market in the world in a growing list of consumer and producer goods. In mobile handsets, for example, demand grew from 35 million in 2000 to 225 million in 2010, or twenty percent of global demand; in automobiles, more than 11 million passenger cars were sold in 2010 compared to slightly more than a million in 2000; and in the case of excavators, domestic sales increased from 9,000 to 215,000 over the same period. Twenty years ago, these markets were often highly segmented between the products of domestic firms and multinationals–domestic firms serving the low end and multinationals serving the higher end through either imports or production in China. But increasingly we observe intense competition emerging between these two43.
To be successful, investments in upgrading of local capabilities by both types of firms are required. For domestic firms, upgrading to improve product quality and variety, and thereby avoid the intense competition at the lower end of the market, has become essential; for foreign firms, it is investments in local sourcing, as well as development of local research and development (R&D) capabilities to help them modify their products in ways that make them more appealing to local customers. One major foreign automobile original equipment manufacturer (OEM), for example, developed a five-year plan in the mid-2000s to lower their production costs in China by 45 percent through exactly such measures.
In the Chinese context, especially important are the interactions and spill-overs between these two types of firms, which expand the pool of upgrading opportunities for OEMs and suppliers. Increasingly, Chinese firms are able to leverage the benefits from participating in multiple value-chains, for example, supplying local Chinese firms, more-demanding local foreign firms producing in China and then for the export market. Associated with each of these channels are different kinds of know-how and capabilities. Moreover, through mobility in the labour market, knowledge and experience acquired in foreign firms is being more broadly disseminated in the economy. This is pervasive.
Despite its depth, this process is highly uneven across sectors, with a host of restrictions and constraints continuing to impede the upgrading process and the reallocation of resources (skilled labour, capital, energy and raw materials) to the most productive of firms. Some estimate that total factor productivity (TFP) in industry could be raised by as much as twenty five percent if misallocation withinsectors could be lowered to levels observed in the United States. There may be even larger gains to inter-sector reallocation, which are excluded in these calculations. In a country like the US, this reallocation represents an important source of productivity growth, but in China its role has been minimal.
These distortions are likely tied to continued imperfections in capital markets, regulatory restrictions on entry that preserve existing market power, difficulty of firm exit, policy preferences in key sectors for state-owned or state-linked firms, as well as continued subsidies to exporting. The state has retreated from many sectors, but in those in which it has remained, it often dominates. At a higher ("two-digit" industrial classification) level, for example, the sectors in which state firms have the highest revenue from output represent nearly two-thirds of total state output in industry. Moreover, the average state share in these sectors is 60.1 percent, compared to an average of 24.4. These sectors include power generation, transportation equipment, iron and steel, petroleum and coal mining.
Much more work needs to be done to identify these factors, but a number of things point to the likelihood that these impediments are largely policy-related and tied up in China's political economy, especially their non-economic objectives, at both the local and central level. In some circles in China, there are growing concerns of a return to highly dirigiste economic policies44. In all likelihood, the costs for the economy are very high.
There are also dynamic implications, as perceived constraints on firm growth may be impeding investment incentives of the most dynamic of firms in R&D, worker training, capital equipment, etc. because of lower expected returns. For example, concerned that SOEs are favoured in the market, non-state actors will not be willing to make as big investments because of lower future returns.
Automobiles, the heavy construction equipment sector and telecommunications provide a valuable contrast in the ability of domestic firms to emerge in the context of highly competitive domestic markets45. In heavy construction, a mix of private and state-linked firms such as Sany, Zoomlion, Longgong, Liugong and Xiagong have emerged over the course of the last two decades and are successfully competing with multinationals such as Volvo, Caterpillar and Komatsu in a growing array of products and product-market segments in both China and now in other emerging markets.46 Amongst Chinese firms, we also see a growing market consolidation that is bottom-up as opposed to top-down. Telecommunication equipment, on the other hand, has parallels with heavy construction equipment, with local equipment manufacturers such as Huawei and ZTE early on successfully leveraging market opportunities in lower-tier cities in their upgrading efforts.47
Contrast this experience with the automobile sector, where Chinese firms continue to experience difficulty in competing domestically, let alone globally, and once again high on the agenda of policy-makers in Beijing is a top-down, administrative-led consolidation of market players that is simultaneously encouraging overseas acquisitions. In mobile handsets, government policy through the early 2000s handicapped the development of local firms through restrictions on licensing, and only innovations of MTK (Taiwan) and Google–through Android–significantly opened the door. Underlying these differences between sectors are several decades of state policies relating to freedom of entry, foreign direct investment, forms of technology transfer, tariffs, bankruptcy, as well as mergers and acquisitions that influence the incentives and channels of upgrading, and the ability of highly competitive indigenous firms to emerge.
Some of the same factors at work in industry help to explain even weaker performance in services which now constitute upwards of 45 percent of GDP. Earlier estimates suggest that productivity growth in services may be only fifteen to twenty percent of that in manufacturing. Services contribute directly to GDP, but are also an important input into manufacturing. The most recent national input-output table for China shows that the contribution of services (direct and indirect through their contribution to other intermediate goods) to manufacturing is 40 percent. In general, the reform and restructuring of services (for example, transportation, telecommunications, retail and wholesale trade, and financial services) lag reforms in manufacturing by a wide margin. Largely non-tradable, high prices in these sectors can be linked directly to low productivity. Industry and manufacturing are important, but China's ability to remain competitive and sustain robust growth will depend as much, if not more, on productivity performance in services, and here the record has not been promising.
The Implications of China's Resource Quest
China's demand for minerals, oil, gas and agricultural products drives commodity production throughout the world and brings much needed capital to resource-rich countries. At the same time, the scale and scope of Chinese investment are shaping global commodities markets, governance practises and international security in new ways. In some cases, China's impact is nascent; in others, it is already profound. Most importantly, China's resource quest is an evolving process that is influenced not only by internal Chinese dynamics but also by the interaction of China with the rest of the international community.
China's resource demand and the market
Over the past decade, China has become the world's largest or second largest consumer of a wide range of primary commodities. The size of its population, its economic growth rate and its position as the second largest economy in the world all contribute to make it a significant force in global commodities markets. Its consumption of key commodities in 2011 gives some indication of its importance:
- China consumed 48% of global zinc supplies, 50% of lead, 50% of copper and 45% of aluminum. (In comparison, the United States consumed 8% of global zinc supplies, 15% of lead, 8% of copper and 6% of aluminum.) Mineral imports alone made up 30% of China's foreign trade;
- In agricultural products, China consumed half of all pork, almost one-third of global rice supplies, as well as one-quarter of the world's soybeans;
- China is the world's second largest consumer and importer of oil after the United States. In 2011, growth in China's oil consumption accounted for half of the growth in global oil consumption.
During 2006-2011, as China became the dominant importer of many base metals and agricultural commodities, its impact on global commodity prices increased steadily.48 Some commodities are more sensitive to Chinese demand, such as soybeans, copper, oil and platinum49, and as a result of growing Chinese demand, prices of iron ore rose almost tenfold between 2001 and 2011.50 Other resources, such as natural gas, are not as susceptible to Chinese demand.51
China's preference is to import resources from Chinese-owned assets or joint ventures. A series of government white papers published during the period from 2000 to 2009 on grain, mineral and energy security makes clear that even as Beijing's confidence in the global market has increased, the Chinese leadership continues to believe that resource security depends on control over assets. According to one Chinese official, by 2015, China has called for 50% of its iron ore to come from Chinese-owned mines outside China.52
Will Chinese demand continue to grow? The picture is mixed. Major domestic drivers of increased Chinese demand include urbanisation, rising income levels and shifting diets, none of which shows any sign of abating. Notably, China's commodity intensity is quite high: at the same level of economic development, China consumes about 35% more energy than Korea and twice as much as Brazil; and the difference in commodity intensity is even greater for base metals.53 If China makes substantial improvements in its industrial efficiency, however, commodity demand could ease. Similarly, shifting the Chinese economy away from a capital intensive, export-driven economy to a services and consumption-based economy would contribute to a slowing of demand growth or even a levelling off.
Resources and governance
China's overseas investment in extractive industries is also shaping the economic and political landscape of many countries. China is now the largest provider of loans to the developing world, and the economic benefits of Chinese investment are easily visible in thriving mining industries, new highways, and active ports around the globe.
Chinese investment is also marked by a willingness to set aside political considerations. As Sahr Johnny, a former Sierra Leone ambassador to Beijing, noted in 2005, "We like Chinese investment because we have one meeting, we discuss what they want to do, and then they just do it... There are no benchmarks or preconditions..." Unlike the International Monetary Fund or some other countries, China does not qualify its loans with requirements for budget transparency or transparency in the distribution of resource revenues.
While the benefits of Chinese overseas investment are evident, the challenges have also become apparent. Corporate governance, environment, labour and safety violations, as well as a lack of socially inclusive growth have become hallmarks of Chinese investment.
Latin American officials and analysts, for example, have expressed apprehension over the large number of state-owned enterprises (SOEs) involved in China's overseas foreign direct investment. (During 2000-2011, 87% of China's overseas foreign direct investment in Latin America was from state-owned enterprises, and 99% of that was in companies involving access to raw materials and energy.54) They are particularly concerned over intellectual property rights and cultural preservation, as well as the potential for a political conflict with Beijing to bleed into the resource investment and vice versa.
Some countries, such as Canada, are taking steps to limit the influence of investment by foreign state-owned enterprises. In the wake of the buy-out of the Canadian energy firm Nexen by the Chinese National Overseas Oil Corporation (CNOOC), for example, Canadian officials announced new strictures on investment by SOEs, such as requiring them to demonstrate that they are free of political influence. Similarly, Chinese companies' efforts to purchase large tracts of agricultural land in Brazil led the Brazilian government to rewrite its land laws to limit the size and number of such purchases by any one firm.
Chinese resource investment has also been accompanied by complaints over damaging environmental practises. Chinese mining companies such as Peru's Shougang Hierro mine and the China Metallurgical Group's Ramu Nickel mine in Papua New Guinea have engendered widespread, ongoing environmental protests. In Argentina, Chinese agricultural firms have created concerns over land management and environmental practises. Nobel Prize laureate and president of the Foundation for the Defence of the Environment Raul Montenegro has spoken out explicitly about the challenge posed by China. "On a global level, China is the country most affected by the extension, intensity and economic impact of land degradation. So it is difficult to believe that they won't make the same mistakes with their land in Rio Negro as they have in their own country."55
The most politically sensitive issue with regard to Chinese investment revolves around labour and the widespread, government-supported practise of exporting Chinese labour to the target country. Chinese investment in a particular resource is often structured as a loan-for-oil, loan-for-gas or loan-for-minerals deal, in which the loan is either paid back or guaranteed in the supply of the commodity to China. In many cases, these loans also include a broad package of infrastructure projects, a number of which are required to be undertaken by Chinese contractors. In the case of a 2011 China Development Bank loan to Ghana, for example, the loan required that Chinese contractors implement projects worth 60% of the loan amount.56 In Angola, where only 30% of the work financed by Chinese money must go to domestic firms, there are as many as 300,000 Chinese workers. Chinese managers often argue that Chinese workers are willing to work longer hours for lower wages. Even if the wages are not a consideration, the language barrier often is. Unsurprisingly, this has bred resentment and large-scale protests in many countries, including Zambia, Papua New Guinea, Vietnam and Zimbabwe, amongst others.
Some countries have responded by adopting new labour regulations that attempt to limit the potential influx of Chinese workers. In Mongolia, for example, immigrants from any one country are capped at less than 10,000 people, and foreign workers are limited as well. As a former vice finance minister stated, "We cannot afford to have one particular nation control our business."57 In 2012, Vietnam passed a new law requiring that all foreign business give priority to Vietnamese workers; local government committees will be allowed to solicit Vietnamese workers before any foreign labour can be imported. At one construction site, for example, there were 100 Vietnamese workers and 760 Chinese.58
Beijing is increasingly sensitive to international claims that its enterprises are not operating up to international standards. In 2011, the Ministry of Commerce's Department of Outward Investment and Economic Cooperation noted that in Peru, companies specifically needed to "respect Peruvian law; consider environmental protection and keep good relations with workers to keep disagreements from spiralling out of control." Several large SOEs are also now participants in the UN Global Compact (an initiative that supports corporate best practises in human rights, environment, labour and anti-corruption), including China Minmetals, Chinalco and Sinosteel. There is also evidence of learning. While the Shougang Hierro mine has been widely reviled in Peru for its poor labour and environmental practises, Chinalco has earned points for its handling of the relocation of a local town, hiring of a Canadian firm to develop an Environmental Information Management system, and the fact that it did not bring in Chinese labourers.
Security implications
China's reliance on overseas resources is also contributing to a transformation of Beijing's broader security interests, particularly with regard to maritime security. Forty percent of China's oil, for example, relies on maritime transport.59 Chinese analysts have identified three threats in this regard: pirates and non-state actors;60 the potential of other countries, in particular the United States, to enforce a blockade of the Strait of Malacca; and sovereignty disputes with their neighbours in the East and South China seas.
Beijing has taken a number of steps to try to ensure the security of international transport routes and to protect its citizens working abroad. Some are defensive in nature, for example, developing overland supply routes, such as a pipeline through Burma to transport oil and gas from the Middle East and Africa to avoid the Malacca Strait. Over the past several years, the People Liberation Army's (PLA) Navy also has undertaken anti-piracy activities in the Gulf of Aden; it has participated in joint anti-piracy activities with a number of countries. Others, however, contribute to a greater offensive capability, such as arming fishing boats in the East and South China seas, formally adopting a doctrine that moves from a "near seas" to a "far coastal" defence and a ratcheting up of both PRC military rhetoric as well as naval capabilities. Still, other measures remain speculative, such as the potential establishment of military bases, where China has been developing or modernising ports in areas such as Pakistan, Bangladesh and Sri Lanka. China has already established a naval "supply and recuperation" facility in the Seychelles, although it insists that it will not station troops abroad. (Some analysts, such as Fudan University's Shen Dingli, have nonetheless suggested that China should not take military bases off the table. As Shen argued in 2010, "It is our right. Bases established by other countries appear to be used to protect their overseas rights and interests."61)
Conclusion
China's growing demand and outwards quest for resources to fuel its continued economic growth have raised the spectre of rising commodity prices and shortages, deteriorating governance conditions in resource-rich countries, and a growing, potentially assertive Chinese military presence globally. While such concerns are not unfounded, they also are not preordained. China's development trajectory and political choices at home will influence significantly the structure of its future resource demand. Resistance to Chinese state-owned investment on environmental, labour and corporate governance grounds is already producing a shift in the practises of some Chinese companies. A broad-based push by the international community to engage China more deeply on joint anti-piracy exercises as well as on naval coordination could help ensure greater stability rather than uncertainty in maritime security. While China's resource security needs and strategy are overwhelmingly domestically driven, the international community nonetheless can play an important role in determining how China's policies and influence evolve.
China's Acquisition of Natural Resources Abroad: Australia's Experience
Ever since the development of iron ore and coal exports to Japan in the 1960s, followed by the development of similar relationships with South Korea and Taiwan, trade and investment in resources have played a crucial role in Australia's security in the broadest sense, including economically and socially. Through growing levels of prosperity, it has also strengthened the country's abilities and credentials as a security partner in a narrower, strategic sense. However, its increasing trade and investment links with China have far outstripped any of these earlier relationships in both speed and scale, and Canberra is still feeling its way as to the longer-term impact of this.
China is now Australia's top trading partner, accounting for over 22% of total trade. Two-way trade today stands at around A$100 billion while it broke the A$10-billion mark in 2002. The current figure is over 80 times that of 1982. Further, since 2001 the balance has been clearly in Australia's favour.
In 2010 resource exports made up 57% of Australia's total export receipts. Almost 70% of iron ore and 18% of coal exports went to China. In the same year, 37% of Australia's total resource exports went to China.
Looking at the terms of trade, they are currently 65% higher than the average for the 20th century, and 90% higher than the average for the 1990s. China is in large part responsible for this–as it is for the fact that of all OECD countries, Australia was one of the few that did not go into recession during the global financial crisis of 2007-09.
In 2008-2009, China was the second largest investor, with investments totalling A$26.6 billion. In 2009-2010, it ranked third largest with A$16.3 billion. Around 80% of this investment is in mineral exploration and resources processing. It should be pointed out, however, that despite the dramatic growth of Chinese investment in Australia, in terms of total foreign direct investment (FDI) into Australia Beijing lags far behind the UK, the US and Japan, for many years the largest overseas investors down under.
Precisely because of the speed and scale of these unprecedented developments, Australia is now on a very sharp learning curve, and this applies equally to popular opinion, media, business, academia and a range of government processes, analysts and decision-makers.
This was highlighted dramatically by the almost perfect storm in Australia-China relations between 2008 and 2009. It began with the events in Lhasa in 2008 and the way this played into the progression of the Olympic Torch around the world. In Australia, there were no seriously untoward incidents, but on the day of the torch's run through Canberra we saw the nation's capital turned into a sea of red flags waved by patriotic Chinese students from across the country, assisted by the Chinese embassy and consulates. The impact on the citizens of Canberra, and across the country, was significant. Then came a series of controversies: the mining company Chinalco's attempted bid for a larger stake in an Australian competitor, Rio Tinto; the crude and badly handled Chinese interference in the 2009 Melbourne Film Festival over a film about Uyghur exile leader Rebiya Kadeer, and her subsequent visit to Australia; the arrest of Rio Tinto's representative in Shanghai, Stern Hu, seen by some as retaliation for the rejection of Chinalco's bid (by British shareholders, not the Australian government, as some in China believed to be the case); and the ambiguous messages regarding China in Australia's 2009 Defence White Paper, which went down badly in Beijing, prompting defensive responses in Australia. The Chinese were also disappointed in Kevin Rudd's failure to be a "friend of China", as they would have preferred it, rather than in his chosen capacity as a "zhengyou" (one who demonstrates his friendship through frank criticism when it is called for).
This was the strained bilateral environment in which vigorous if not always well-informed debate about Chinese investment, most particularly investment in natural resources (later expanded to include the equally if not even more visceral issue of agricultural land) unfolded. To the typical concerns about foreigners investing in these areas was added the fact that, in China's case, many of the real or potential investors were from state-owned enterprises (SOEs). Through this period the image of China, which had been generally quite positive in Australia, was also beginning to change for the worse. It was not only SOEs per se that presented a problem, but also the nature of the state that owned them. More generalised concerns about a rising China as a Party-state beginning to challenge the US-dominated Asian-Pacific order also influenced reactions to Chinese investment and the question of the longer-term implications of Australian dependence on the resource trade with China.
In a 2011 poll conducted by the Lowy Institute for International Policy, some 75% of Australians agreed that China's growth had been good for Australia, up 8 percentage points since the question was first asked in 2008. However, the Lowy also runs a chart tracking the feelings Australians have towards a number of major countries which trend negatively for China. In 2006, China and the United States were on the same level. Six years later, a gap of 19 percentage points had developed, with a simultaneous rise in US popularity and fall in that of China–to the same level as Indonesia, traditionally regarded with suspicion, at least at the popular level. According to the Lowy, in 2011 57% of Australians polled said the Australian government was allowing too much investment from China, the same figure as for 2010, up 7% from 2009. Also, 35% said the amount was right, and only 3% said more was needed.
Most significantly, despite the extraordinary rise of China's economic importance to Australia, fully acknowledged by those polled, around 44% felt that China would become a military threat to Australia in the next twenty years.
For the Australian government, in terms of managing investments, as well as handling public perceptions and domestic politics, a crucial element concerned the operation of the Foreign Investment Review Board (FIRB). The FIRB was originally established in 1976 in response to public concerns over growing investment from Japan (and from the United States). It was tasked with reviewing larger foreign investment proposals using the test of "national interest" in order to maintain community confidence and de-politicise the approvals process. Since its establishment, the government has officially rejected only two proposals, although several have been withdrawn as a result of what the initiators considered unacceptable amendments being required prior to approval.
The application of the national-interest test, however, has not been without its critics, not least for its opacity. While the original intention in creating the FIRB was to reduce the political pressure on decision-making regarding FDI proposals, heightened levels of concern over Chinese investment in the context of the bilateral troubles of 2008-2009 were directly reflected in additional, and arguably unnecessary, considerations and amendments being included in the review process following FIRB reviews in 2008. Significantly, this period also saw a breakdown in the bi-partisan approach to foreign investment issues, with the opposition taking a more populist stance. This stood in contrast to that enunciated by former coalition Prime Minister John Howard, who said: "You've got to remember that when a company invests, whether it's state-owned, partly state-controlled or not, it still has to comply with the laws of Australia and it's quite possible for the treasurer of the day to impose conditions on investment". This statement touches on two crucial issues: the question of state ownership, and the overall regulatory framework and the ability of the government to ensure its proper functioning.
The prevalence of SOEs in Chinese investments in Australia has raised concerns that the Chinese authorities may use these investments as a vehicle for pursuing geopolitical strategies. It is feared that, because every SOE includes a Party committee in its midst which is ultimately responsible to the Party centre, Beijing could exert pressure if it decided to punish Australia or use its economic clout to pursue its goals. It is not unreasonable to make this assumption in considering the security implications of Chinese SOE investments and a good deal of work has been done to test this assumption. However, most scholars and officials who have worked in this area are struck by the degree to which SOEs abroad tend to behave more like commercial entities, including in quite competitive fashion, than as obedient followers of Chinese government strategies. Domestically, too, corporate governance of Chinese SOEs is evolving towards a system increasingly driven by market disciplines, and reform is likely to intensify as their international interests are subjected to more scrutiny by Chinese authorities as well as host-country regulatory processes. It seems the most we can say about the worst-case scenario is that, while it is theoretically possible, the evidence is not yet available. This does not mean we should not be continually alert to any signs of such behaviour, but neither should we allow such concerns to lead us to act in ways which damage our own economic security interests.
There is a separate issue concerning the quality of SOE businesses. Many have been characterised by less than optimal efficiency, with "fat and lazy" managerial and work practises encouraged by their links to government, subsidies, etc. Over time, too great a presence could lead to an overall pollution of the business environment in the host country. Some are simply inexperienced and do not understand the local business environment. However, here too, as with the previous consideration, local regulation and oversight form the first line of defence.
An additional consideration is the danger of China using its SOEs to behave in a mercantilist fashion for strictly political purposes, as we saw in the case of rare earths and Japan. That is for two reasons. First, China's action was extremely short-sighted and in the longer term more damaging for China's interests than those of Japan. Second, where the resource relationship with Australia is concerned, the scale and nature of our trade and investment links do not readily lend themselves to such actions. China has just as much reason to worry about dependency as we do, and indeed it does. Over the past decade China's foreign dependence for key minerals has risen sharply. In 2010, its dependency ratios were 43.8% for copper, 62.1% for iron ore and 78.0% for aluminum. This is of course the main reason why China's investment policies have explicitly identified natural resource acquisition as a central strategic objective of internationalisation.
The other side of this coin is the concern that Australia could become overly dependent on the resource trade and investment relationship with China, and hence become vulnerable to changes in demand. While the country enjoys a favourable geography, impressive natural wealth and political stability, it is not the only game in town. Some authoritative analysts worry that lack of clarity around the FIRB's processes, perceptions in China of increased investment risk, as well as costly and embarrassing public failures could accelerate the relocation of Chinese investment to other countries. China can go to Africa, just as Japan went to Brazil to fill the Australian gap thirty years ago.
The case the Chinese most often raise when complaining about Australian policies is the attitude to Huawei's proposed involvement in national infrastructure. The irony here is that the issue has nothing to do with the FIRB on investment policies, but reflects a judgement made on security grounds by the relevant authorities. While this relates to assumed links between Huawei and certain Chinese agencies, Huawei is not an SOE but a private company. Whatever the details of the case, this should demonstrate quite clearly that, when there are perceived security risks, there are both capable agencies and the necessary legislative framework to handle such issues as they come.
The final point is that ultimately all these concerns relate to the big issue of the rise of China and what that portends for Australia's national security in the very broadest sense. However, given that the country's economic well-being depends to a significant degree on continued Chinese growth, Canberra is unlikely to decrease deliberately economic exchanges in case a wealthier and more powerful China may eventually act in ways contrary to its interests. Of course it may–and it may do so regardless of the state of our economic ties. Then again it may not, or those ties may themselves help ameliorate future Chinese attitudes. There is a need to place legitimate and rational security concerns in the context of our crucial economic interests.
China and the Arctic
The Arctic's potential in the 21st century
Rising temperature in the Arctic is causing a retreat of sea ice and a lengthening of the summer season. These unprecedented changes have prompted a reassessment of the region's economic potential and given rise to new political issues. Projections of the date when the Arctic Ocean will first be free of sea ice during the summer season have moved forward in recent years, from the end of the 21stcentury in a 2007 report by the International Panel on Climate Change (IPCC) to within the next 25 to 40 years in more recent studies. The warming of the Arctic is making possible circumpolar navigation that makes possible the redrawing of transportation routes, the emergence of new port cities and reduced transport time between Europe, Asia, and North America — in some cases by more than two weeks. The warming of the Arctic could also extend exploration and drilling seasons for offshore oil and gas, and mining for minerals. The Arctic is appraised to hold vast natural resource potential. The US Geological Survey estimated that the Arctic contains 30% of the world's natural gas and 13% of the world's oil reserves. It is also rich in minerals such as coal, nickel, copper, tungsten, lead, zinc, gold, silver, diamonds, manganese, chromium and titanium.
Drivers behind China's interest in the Arctic
According to Russell Hsiao of the Project 2049 Institute, as a fast growing economy, China is supplementing its domestic supplies of energy with imported fuel resources. Furthermore, while China has abundant domestic coal, it is slowly weaning itself off of coal as the main source of power generation and importing oil and gas.
If they became accessible, gas and oil supplies from the Arctic, using an Arctic route, would be more secure than supplies from the Middle East and Africa, where both piracy and unstable governments are of great concern. Chinese scholars have noted that an Arctic route would circumvent the coast of developed nations, where stability is common and piracy is not. A viable Arctic route could also alleviate China's "Malacca Dilemma". It is estimated that about 60% of international vessels passing through the Strait of Malacca are either Chinese-flagged ships or container ships transporting cargo for China. China is feeling insecure about its heavy reliance on this strategic waterway, which it does not control.
Given the commercial and security implications, China wants to be regarded as a legitimate player in the Arctic. Knowing full well that it is not geographically located in the Arctic, China has started to refer to itself as a "near Arctic state" and an "Arctic stakeholder". Becoming a permanent observer to the Arctic Council is another avenue to gain legitimacy as an Arctic player. Furthermore, as a permanent observer, it will gain fuller access to related debates, such as the accessibility and governance of the various Arctic transportation routes.
There is also a degree of political bravado involved. As a permanent member of the Security Council, China likely believes it should be involved in all global affairs.
Chinese activities in the Arctic
Expeditions and navigation
In the summer of 2012, China's sole icebreaker, Xuelong, or Snow Dragon, completed its fifth Arctic expedition. More impressive,Xuelong sailed to the Arctic using the Northern Sea Route, but returned from the Arctic using the Polar Route, bypassing both the Northern Sea Route and the Northwest Passage. This is particularly significant since the Polar Route lies in international waters and is the shortest route.
China is also increasing its investment in Arctic seafaring hardware. Chinese policy-makers recently decided that Xuelong needed "brothers and sisters". Moreover, instead of purchasing icebreakers from another country, China has decided to build the second icebreaker in its own shipyard, although using Finnish and British technical know-how.
Presence in the scientific community
University research departments and government-affiliated research institutes have been created in cities such as Beijing, Dalian and Shanghai for dedicated academic and scientific thinking on the Arctic. In 2004, China gained a physical scientific presence there by establishing the Huanghe, or Yellow River, research station in Norway. However, despite the infrastructure being set up specifically for research, it is worth noting that China does not have a dedicated budget line for Arctic research.
Diplomacy efforts
Even though Nordic countries were the first western nations to recognise the People's Republic of China after its establishment in 1949 (Sweden, Denmark, Norway and Finland in 1950; Canada in 1970; Iceland in 1971), no senior-level visits from China to the Nordic countries occurred until recently. This marked increase in diplomatic activity at the highest levels of China's government is evidence of China's growing interest in the Arctic.
From 2005 to 2010, Norway had the most active relationship with China of the Nordic countries. Norway saw a flurry of visits by vice-premiers (2005, 2006), vice foreign ministers (2006, 2007, 2010), the minister and vice minister of commerce (2006, 2010), as well as senior officers from the People's Liberation Army (PLA), such as Chief of General Staff General Chen Bingde (2008) and Chief of PLA Navy Admiral Wu Shengli (2009). Norway and China also established a bilateral dialogue on Arctic affairs.
Senior officials have made inaugural visits to almost all of the Nordic countries in recent years, despite the freeze in relations with Norway in 2010. Chinese president Hu Jintao visited Sweden in June 2007 and Denmark in June 2012. In March 2010, Vice President Xi Jinping visited Sweden and Finland. In April 2012, Premier Wen Jiaobao visited Sweden and Iceland.
Economic engagement
With high-level political contact came economic engagement. Indeed when Premier Wen Jiabao visited Sweden in April 2012, five bilateral trade deals were signed with the government, and six agreements were signed with companies. During his June visit to Iceland in the same year, Wen Jiabao also signed a number of economic agreements, covering areas like free trade and continued geothermal energy cooperation. Denmark received a trade delegation ahead of any visit from a Chinese head of state; in May 2010, Chinese Minister of Commerce Chen Deming led a trade and investment promotion mission that included more than 100 Chinese entrepreneurs. This was the largest Chinese trade delegation to visit Denmark.
Greenland's minister for industry and mineral resources was greeted by Vice Premier Li Keqiang in China in November 2012. A few months later, China's minister of land and resources, Xu Shaoshi, travelled to Greenland to sign cooperation agreements.
Greenland has substantial deposits of minerals, including rare earths, uranium, iron ore, lead, zinc, petroleum and gemstones. However, Greenland has presently only one working mine. More than 100 new sites are being mapped out by prospecting companies of various nationalities. For China, large Chinese companies are financing the development of mines identified by these smaller prospecting companies. For instance, London Mining, a British company, is in talks with a state-owned Chinese steel-maker to finance and build a US$2.3 billion iron mining operation 175 kilometres north of the capital, Nuuk. China plans to import 2300 Chinese workers (against Greenland's population of 57,000). A vast majority of the iron extracted in the mines would be shipped back to China.
According to The New York Times, China also proposed building runways for jumbo jets on the ice in Greenland's far north to fly out minerals until the ice has melted enough for shipping. Chinese mining proposals often include infrastructure building. In Canada, Chinese firms have acquired interests in two oil companies that could give them access to Arctic drilling. In addition, the Canadian government is currently considering a multi-billion dollar mining proposal in the Izok Corridor in western Nanuvut. The project would consist of two mine sites, an all-season access road and a port facility. The mines are expected to produce 180,000 tonnes of zinc and 50,000 tonnes of copper a year. To transport and ship these mineral concentrates, the all-season access road would extend north to connect the two mines (Izok and the High Lake) and end further north at a proposed port at Grays Bay on the Coronation Gulf. The planned port would accommodate ships of up to 50,000 tonnes and which could make 16 round trips a year–both east and west–through the Northwest Passage.
Chinese debate on the Arctic
According to Linda Jacobson of the Lowy Institute for International Policy, in the Chinese system, the formulation of an official policy position is usually preceded by a period of open debate. We are witnessing that right now. Although the initial focus of China's Arctic research was on climate change and its environmental consequences, there has been a steady flow of assessments on the commercial, political and security implications for China of a seasonally ice-free Arctic.
Li Zhenfu of Dalian Maritime University has stated that, "whoever has control over the Arctic route will control the new passage of world economics and international strategies". Another prominent scholar of the region, Guo Peiqing, of the Ocean University of China, opined that it is not in China's interest to remain neutral in Arctic politics and added that "any country that lacks comprehensive research on Polar politics will be excluded from being a decisive power in the management of the Arctic and therefore be forced into a passive position".
Perhaps the most alarming assessment came from the military. In a rare open-source article by a military officer titled "The Closely Watched Dispute Over Arctic Sovereignty," PLA Senior Colonel Han Xudong noted that due to complex sovereignty disputes in the Arctic, the possibility of using force cannot be ruled out.
China might not yet have a fully-formed, clearly articulated Arctic strategy, but it certainly is clear about its objective: to influence Arctic affairs and have a role in its governance structure. It is doing so by impressing upon its audience that Arctic affairs are international, not regional issues. In an official speech given by Hu Zhengyue, the assistant minister of foreign affairs, in 2009, Hu urged the Arctic states to recognise the interests of non-Arctic sates, and also to consider "the international submarine area" as belonging to "the common human heritage" and that they should "ensure a balance of coastal countries' interests and the common interest of the international community."
Yet recently, China's public narrative on the Arctic is becoming more subdued. It is recognizing that overly proactive statements on resource and sovereignty issues are alarming Arctic states and consequently, undermining the position it has gained. It has dropped the words "evaluation of polar resource potential" in the Five-Year Plan's polar project. Also, an increasing number of researchers are recommending that climate change be prioritised in China's Arctic agenda. However, it is important to note that these adjustments are made to circumvent the sensitivity of discussing Arctic resource and sovereignty issues; they do not mean the expulsion of these issues from Chinese thought.
Arctic states' reaction to China
Arctic states are justifiably interested in Chinese activities in the Arctic. The Arctic has for a very long time been their exclusive backyard and now a number of countries with no direct territorial claims in the region are also expressing interest in this arena. China is unique amongst the newcomers in terms of its political and economic heft as a "rising power".
The Nordic reaction to China is mixed. While Iceland initially welcomed China's investments, there has been some trepidation, as evidenced by the government's rejection of Huang Nubo's US$200 million proposal to purchase or lease 300 square kilometres of land for eco-tourism. However, the country's recent proposal for the creation of an Arctic Circle, which will be open to China and other non-Arctic state, presents an opening of which Beijing is certain to take advantage.Norway was also one of the first to welcome China into the Arctic, but its view of China has dimmed since relations were unceremoniously put on deep freeze after the Nobel Peace Prize award to Liu Xiaobo. Greenland, on the other hand, has insisted that it will not treat China any differently than the EU, despite the latter's request for a preferential investment climate. Scholars have surmised that Greenland's position has the tacit support of Denmark, an EU member.
Canada shares many of the Nordic countries' concerns but also understands the economic opportunity that Chinese capital could offer. A key question is how to balance economic opportunity with potential security risks. Some also wonder about the possibility of China becoming a political ally: given its position in maritime sovereignty disputes elsewhere in the world (notably in the South China Sea), perhaps it would be sympathetic to Canada's sovereign claims in the Arctic, including the Northwest Passage.
The US understand China's interests in Greenland's natural resources, its decision to build, instead of purchasing, a new icebreaker, as well as its focus on the strategic impact of new transportation routes for commercial and military purposes. Nonetheless, Washington takes a holistic view of the Arctic and its mission to maintain freedom of the seas. Both NORTHCOM and the US Navy have noted that a sound US polar strategy includes enhanced communications, domain awareness, infrastructure and presence.
Russia has a fairly matter-of-fact response to China. An official at Russia's Ministry of Foreign Affairs summarises the Russian position: "Understandably, China is concerned about the Arctic due to its rich resources, but the country does not have the right to make any decision regarding the region". At the same time, "it is correct for the Arctic nations, including Russia, to cooperate with non-Arctic nations". Russia also readily acknowledges that since China will increase its interest in navigable routes and resources in the Arctic, the region could be a fruitful area for cooperation–and presents high potential area for discord–between the two countries.
Potential partnerships between the Arctic states and China
Chinese officials understand that their country needs to partner with foreign companies to extract energy and minerals in the region; most Arctic oil and gas is found on the near-shore continental shelves of the Arctic states. In general, the Russian Arctic is considered to contain more gas and the offshore Norwegian and North American areas (ie. Alaska, Canada and Greenland) more oil. In addition, China lags behind western deep-sea oil and gas exploration and exploitation techniques and technologies. Taken all together, Arctic watchers wonder about the prospect of a partnership in which Russia supplies the drilling rights to natural gas, a Nordic nation supplies the deep drilling capability, and China supplies the capital to finance it all.
Political calculations, not political speculation
There are three main attractions fuelling China's interests in the Arctic: natural resources, trade routes and political prestige. All three require China to "play nice" with Arctic Council states, because China needs their support in order to operate–and operate with legitimacy–in the region. Most of the natural resources lie in exclusive economic zones (EEZs), and although China has the capital, it is the Arctic states that possess the knowledge and technology for deep-sea drilling.
China has made its own calculations about the value of becoming more attached to the Arctic Council. Being an observer in the Arctic Council is a means, not an end. China is seeking greater participation in the Arctic Council not because it wants to be part of an international regime and cooperation mechanism, but because enhanced membership would allow it greater access to Arctic politics, which would have a direct bearing on Chinese Arctic interests. If permanent observer status in and of itself was important to China, it would not have treated Norway so coldly after the 2010 Nobel Peace Prize was awarded to Liu Xiaobo ("for his long and non-violent struggle for fundamental human rights in China"). Norway is not just any Arctic state; it is one of two Arctic states to have held a formal bilateral dialogue on Arctic affairs with China (the other being Canada), and it is on Norwegian territory that China has its sole Arctic scientific research station.
The Security Implications of China's Use of Cyberspace and Related Trends
Any discussion of China's cyberspace strategy typically begins with its domestic controls, and specifically the so-called Great Firewall of China (GFW). Secrecy surrounds the GFW but it is China's Internet backbone around cyberspace controls, the country's deepest layer of communications infrastructure through which all Internet traffic must eventually pass. Requests for content that contain banned keywords, domains or IP addresses are routinely blocked. Unlike other countries that impose national Internet censorship regimes and who present back to the user a "blocked" or "forbidden" page, the Chinese system sends a "reset" packet that disables the connection and sends back a standard error message giving the impression that the content requested doesn't exist ("file not found") or that something is wrong with the Internet. What other functionalities are contained in these gateway routers (eg, deep packet inspection) is unknown at this time; however, most analysts suspect that the gateways are designed not just to block content but to monitor network traffic and communications.
The GFW is part of an elaborate regime of domestic cyberspace controls, one element in China's overall information and communications strategy. It is reinforced by laws, policies, regulations in an effort to control the country's communications ecosystem. Contrary to principles of network neutrality, Internet service providers (ISPs), hosting companies, websites, chat clients and blogs operating in China are all required to police content flowing through their networks. Internet cafés are routinely surveilled. All individuals and organisations are held accountable by law for what they do and post online. According to a 2010 white paper published by the Chinese government:
No organisation or individual may produce, duplicate, announce or disseminate information having the following contents: being against the cardinal principles set forth in the Constitution; endangering state security, divulging state secrets, subverting state power and jeopardising national unification; damaging state honour and interests; instigating ethnic hatred or discrimination and jeopardising ethnic unity; jeopardising state religious policy, propagating heretical or superstitious ideas; spreading rumours, disrupting social order and stability; disseminating obscenity, pornography, gambling, violence, brutality and terror or abetting crime; humiliating or slandering others, trespassing on the lawful rights and interests of others; and other contents forbidden by laws and administrative regulations. These regulations are the legal basis for the protection of Internet information security within the territory of the People's Republic of China. All Chinese citizens, foreign citizens, legal persons and other organisations within the territory of China must obey these provisions.
China routinely downloads responsibilities to police the Internet to the private sector, which must follow regulations in order to operate there. In 2008, the Citizen Lab, a multi-disciplinary laboratory of the University of Toronto, discovered that the Chinese version of Skype (TOM-Skype) was coded in such a way that it secretly intercepted private (and encrypted) chats whenever people used any number of banned keywords. Despite the outrage after the release of that report and Skype being condemned for colluding with China, four years later the same system is still in place. In fact, it is now more elaborately designed and frequently updated, sometimes on a daily basis, in response for example to current events like the ongoing dispute with Japan over islands in the South China Sea or the controversy around disgraced Communist Party official Bo Xilai. All Internet companies operating in China–Baidu, Sina, Tencent, Youku, QQ, etc.–are required to pledge self-management to stop the "spread of harmful information" over their networks. The policing is typically undertaken through filtering and surveillance of the type Skype engages in, enforcing the use of real names in registration processes (to eliminate anonymous postings), and even direct intervention by paid officials in forums warning users not to engage in unwelcome, perhaps illegal discourse.
While downloading controls to manufacturers of equipment and services is routine in China, occasionally there is resistance. For example, a proposal to have all new personal computers (PCs) manufactured in China come pre-equipped with the "Green Dam" censorship system was met with widespread condemnation from users and subsequently withdrawn. However, while the Green Dam represented a serious request, even for the Chinese government, more often than not companies simply comply in order to do business.
The system is hardly foolproof. Researchers at the University of Cambridge, for instance, once demonstrated how easy it would be to disable the GFW, and that even without outside meddling the gateway routers can be overwhelmed by peak usage. Technical means to circumvent the GFW are plentiful. Using tools like Tor, Psiphon and commercial virtual private networks (VPNs), many users play cat-and-mouse with authorities, with millions breaking through on a daily basis. Chinese citizens have also proven themselves adept at outflanking and mocking the censors. Code words, alternative metaphors, neologisms and ingenious images circulated as Internet memes are used in place of conventional terms to circumvent Skype and other company's filtering and surveillance regimes. In spite of these controls, there is a very dynamic Internet culture in China–and the Internet is often the source of considerable criticism of organised crime, corruption and government policies. But such criticism takes place in an environment that is tightly monitored and regulated, with an atmosphere of self-censorship reinforced by occasional high profile arrests of those who breach the system.
China's rapport with the information space
It is worth noting that China's cyberspace strategy is not aimed at completely isolating the country's population from outside influence. Rather, it is deliberately designed to take advantage of information and communications technologies, which the Chinese see as critical to their long-term future, while maintaining political stability around one-party rule. Continued economic prosperity is essential to the legitimacy of the Chinese Communist Party, and information and communications technologies are a central ingredient to a burgeoning knowledge economy.
Often ignored is the connection between China's domestic controls and the international dimensions of its cyberspace strategy. One of China's international objective appears to be the exploitation of cyberspace for intellectual property, political espionage and targeted threats against human rights, as well as ethnic and religious groups the government describes as "separatists", "terrorists" or supported by "foreign hostile forces." It has pioneered ways to vacuum up information of strategic value to the government and national industries from the Internet directly, and done so seemingly without shame. The probe of Ghostnet62, a global cyber-espionage ring,may have been one of the first to expose what this looks like from inside out, but it was neither singular nor unique, as evidenced by a report released in February 2013 by the US firm Mandiant63. Evidence of Ghostnet-like compromises now surface almost weekly and reveal a level of audacity and rapaciousness that is remarkable: dozens of government departments, from intelligence services to politicians' offices in numerous countries have been penetrated, with the perpetrators having operated out of China-based Internet networks.
The Nortel case is particularly noteworthy. In 2012, ex-Nortel employee Brian Shields, who had led the forensic investigation of the compromise, came forward to disclose his experiences. According to Shields, the breach was so thorough that the attackers, which Shields traced back to IP addresses in China, had control of seven passwords from the top company executives, including the CEO, giving them direct access to the company's internal secrets and intellectual property. (Attackers downloaded technical papers, research reports, business plans, employee emails and other documents from computers under their control.) Shields discovered the breach in 2004 but found his warnings constantly ignored by top executives. He estimates that the compromise had been going on since at least 2000 and lasted nine years. Nortel went bankrupt in 2009. Could there be a link between the Nortel breaches and the rising fortunes of Nortel's main China-based competitors, Huawei and ZTE?
In 2012, the China state-owned company, Sinopec, made a controversial bid to acquire Talisman Energy, one of Canada's top oil and gas exploration companies, for over $1.5 billion. While news reports focused on the question of foreign ownership of national assets, few noticed that Talisman Energy had become the victim of a major China-based, cyber-espionage operation called "Byzantine Hades" in 2011. The attackers gained access to Talisman's Asian-based networks, and had control of them for over six months. (Notably, a Bloomberg News report on this issue disclosed that the same Chinese attackers, known as the "Comment Group," had infiltrated the computer of a Canadian Immigration and Refugee Board adjudicator who was involved in the case of Lai Changxing, a Chinese tycoon ultimately extradited by Canada to China, where he is now serving a life-sentence in prison.) There is no evidence connecting the hack to the Talisman take-over bid, but it certainly raises some intriguing questions as to whether and to what extent information gleaned by the attackers made its way to state-owned Sinopec.
Also often overlooked are the civil society and non-governmental targets of cyber-espionage, whose victims are seen by China's leadership as being captured, or at least substantially supported, by "foreign hostile forces" rather than as expressions of legitimate domestic discontent. There appears to be little effort to address the root causes of this discontent; China's strategy is to infiltrate, disrupt and quash. Remarkably, the attacks against these groups are fairly indistinguishable from those targeted at foreign governments and private firms. Indeed, the same perpetrators often attack both. Both the Luckycat and Comment Group campaigns, for example, targeting energy, aerospace and other high-tech industries and government computers in several jurisdictions around the world, have impacts on civil society. Very rarely, though, do these groups' breaches attract the type of attention that other espionage cases receive. It is not profitable for cyber-security companies to focus their efforts on such groups. Those almost always lack the resources or capacity to handle the security problem themselves, relying often on small staff and poorly equipped infrastructure.
While cyber-theft and espionage are indeed threats, the potential military implications of China's cyber activities are more serious. It is unlikely that China would see any benefit in an armed conflict with the United States, but Chinese military literature emphasises the People Liberation Army's (PLA) capacity to destroy US satellites, as well as its other surveillance systems, should war break out. Like many other countries, China's military planners have fully integrated cyber-warfare into their military doctrine and operational plans. As the US has a military alliance with Taiwan and Japan, in the event of a regional war the People's Liberation Army would be hard pressednot to deploy its cyber-warfare assets to confuse, deter and even disable American military and civilian assets. When considered in light of the spill-over effect that might arise from their routine targeting of civil society, the potential for unintended escalation should be taken seriously.
Part of China's international strategy revolves around the setting of technical standards, like those relating to wifi protocols. In the early 2000s, China lobbied unsuccessfully to have its WAPI standard adopted internationally, losing out to the ISO approved 802.11 version. So the Chinese government turned to promoting WAPI as the domestic standard instead, making many handsets less than fully functional. For example, the official Chinese iPhone offered by China Unicom did not include wifi (which helps explains the burgeoning iPhone grey market in the country). However, in 2010 Apple introduced a new generation of its iPhone with the China-preferred WAPI wireless standard on its handsets, as did Motorola and Dell. It is noteworthy that Huawei is now the world's largest telecom-equipment manufacturer, bypassing Sweden's Ericsson in 2011, and China's Lenovo is now the second-largest PC maker in the world, behind only Hewlett-Packard. Technical standards are the sine qua non of cyberspace control: they shape the realm of the possible, structure the limits of what is permissible and define a path of dependency for future trajectories of technical development that is difficult to escape. Chinese investments in information and communication technology infrastructure around the world, as in Africa, should be viewed in light of the power and influence the standard will generate. Being built "from the ground up", Africa could be set on a path of "surveillance by design".
Future prospects
While technical standards-setting may work in indirect ways to further China's influence abroad, its policy engagement at regional and international forums is also important to note. China's participation at international forums where global cyberspace rules are debated has grown significantly, and its agenda is more clearly articulated and promoted. China's presence is increasingly felt, as it sends large, well prepared delegations to the Internet Corporation for Assigned Names and Numbers (ICANN), the Internet Engineering Task Force (IETF), the International Telecommunications Union (ITU), the UN Group of Governmental Experts on Cyber Security and the Internet Governance Forum.
Beijing is also active at a regional level, as evidenced by its leadership, along with Russia, in a regional security alliance called the Shanghai Cooperation Organisation (SCO). The SCO also includes Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. Afghanistan, India, Iran, Mongolia and Pakistan enjoy observer status, and Belarus, Sri Lanka and Turkey are "dialogue partners". The SCO is used to coordinate security concerns, primarily through the "Regional Anti-Terror Structure", known by its acronym, RATS. At RATS and SCO meetings, member states' security services coordinate anti-terror exercises and share information on "threats"–which many human rights groups suspect includes domestic opposition groups in an effort to restrict revolts.
It was once fashionable to think that China, like other authoritarian regimes, would wither in the face of the Internet and other new technologies. As powerful are these technologies can be, the Chinese government has shown that they can be made to serve anti-democratic ends, too. Given the increasingly strident messages sent by US officials to China regarding cyber-espionage, we may be entering a new, less predictable phase. The risks that unintended actions may lead to serious instability are indeed growing.
As we consider means to mitigate these risks and the bleeding of our industrial base from unabashed cyber espionage, we would do well to remind ourselves of a fact that may be easily overlooked. First, China's domestic problems in the human rights arena are a major factor driving its cyber insecurity abroad. China's aggressive targeting of foreign hostile forces in cyberspace includes groups simply exercising their basic human rights. We may well soften China's malfeasance around corporate and diplomatic espionage, but without dealing with the civil society dimension of the problem, at times neglected, we will not eradicate it entirely.
Confucius Institutes: Distinguishing the Political from the Cultural
The purpose of this article is to address the division of opinion amongst academics over the desirability of hosting Confucius Institutes (CI) on university campuses that has been growing since the first CI was established in Seoul in 2004. This will be done by first explaining the political mission of the CIs and their links with the Chinese Party-state. It will then be possible to draw on the evidence of various reports to assess the risks posed to the educational mission of universities. The article will finish with a plea to manage the problem of the CIs by clarifying the ethical principles universities claim to uphold, considering the implementation of governance mechanisms to ensure these are widely known and applied in a transparent fashion.
The political nature of the CIs
Most of the world's states support projects to promote their languages and cultures in one form or another. Comparisons of the CIs with organisations like the British Council, however, are misleading. In the first place, this is because the CIs have a primarily political agenda. Although this is not stated on the website of Hanban (Chinese National Office for Teaching Chinese as a Foreign Language) or in the contracts it signs with host institutions, Chinese leaders describe it as an organisation for spreading propaganda and building soft power. This is invariably repeated in the writings of Chinese academics in Chinese language journals on the topic. While the British Council does engage in political projects, such as the institutional development of justice, the rule of law and civil society, this is publicly stated on its website. Moreover, this cannot present a problem for foreign universities, because it does not establish offices on campuses.
Unlike the British Council, whose charter ensures that it is free from political interference, the CIs are closely linked to the Chinese Party-state. This can be seen in the first place in the way that the Hanban is affiliated with the Ministry of Education, an organisation that works according to a higher education law that is designed to uphold the ideological orthodoxy of "Marxism-Leninism, Mao Zedong Thought and Deng Xiaoping Theory". Moreover, the executive board and board of trustees of the British Council are composed of figures drawn either from the Council itself or from the worlds of the arts, business and commerce; the deputy director of the Hanban, however, is its CCP secretary and three of the sixteen members of its governing Council are members of the CCP Central Committee. The director, Liu Yandong, is a member of the Politburo and was head of the United Front Department from 2002 to 2003. Another member, Hu Zhanfan, has been president of China Central Television (CCTV) since 2011 and Chinese netizens have criticised him for telling journalists that they should understand that they are "propaganda workers". Given the importance of presenting the claim to sovereignty over Taiwan in China's foreign policy, it is also worth noting the presence of Zhou Mingwei on the Council, who has served as a deputy director of China's Taiwan Affairs Office and was dispatched to Washington in 2001 to lobby against arms sales to Taipei and any departure from the "one China principle".
Risks to universities
The first risk for host universities posed by CIs is that their political mission and links with the Chinese Party-state are not compatible with the principle of independence from political interference that is important for independent academic activity to flourish. This can be seen in the way in which the contract with the Hanban stipulates that the activities of CIs "shall not contravene...the laws and regulations of China". Moreover, signing the contract subjects all parties to the by-laws of the Confucius Institutes, which gives the Hanban the power to assess and adjudicate the performance of CIs. The Hanban is even empowered to invoke punitive consequences on any person or party who engages in "Any activity conducted under the name of the Confucius Institutes without permission or authorisation from the Confucius Institute Headquarters".64
This legal arrangement is more than an issue of abstract debate. The prejudicial nature of the Hanban's terms of employment, for example, has already become the focus of controversy and legal action. There is no secret about those terms, given that the Hanban's web site states that, to be considered for a teaching post, an individual must be "aged between 22 to 60, physical and mental healthy (sic), no record of participation in Falun Gong and other illegal organisations and no criminal record".65 This situation has already led on employee of a CI in Canada, at McMaster University, to seek political asylum on grounds of religious persecution. By February 2013 the university had decided to resolve the issue by not renewing its contract with the Hanban. As well as posing a threat to the rights of individual employees, accusations that a university is supporting activities that are "unethical and illegal in the free world" can also pose a risk to the reputation of a university.
This reputational risk is compounded by the perception that CIs do not allow critical discussion of topics that the Chinese government deems sensitive, such as the status of Tibet and Taiwan or the 1989 Tiananmen massacre. This can be compounded when academics from China who have a record of promoting their government's policy are prompted to talk about such issues. Such was the case when pro-Tibet groups dismissed the CI at Sydney University as "a very good outlet for Chinese propaganda" in August 2012, for example, for organising a lecture by an academic from the Chinese Center for Tibetan Studies who has publicly stated that his mission is to explain to foreigners that Tibet has always been governed by China and has been rescued by the CCP from a scheme by the Dalai Lama to restore "a dictatorship of monks and aristocrats", and who links the self-immolations in Tibet to "overseas plots".
Again, such cases show that ethical standards are important to universities not just as a matter of abstract debate. They are important to protect and cultivate the secure environment that is necessary to promote the freedom of thought and expression upon which academic work depends. To grasp this point it is only necessary to put oneself in the position of an individual student or academic who is involved in or working on an issue the Chinese government deems sensitive. It is particularly disturbing when Chinese students express their fears and disappointment when they arrive at a university only to discover that their own government has established an organisation on campus that makes it feel as though they are still under the kind of surveillance with which they had to live in China. As one such student expressed it in a private email to the author, "The Confucius Institute, to me, functions like the closed circulation (sic) television and has the potential to scare away my critical thinking by constantly reminding me: we are watching you and behave yourself".
Such feelings of insecurity are made worse by concerns that the Chinese government is engaged in collecting intelligence about the activities of individuals and the networks that many academics develop to further their research. It is not necessary to provide evidence that the CIs have been directly engaged in such activities when there is widespread evidence to indicate that the state for which they operate sponsors cyber-espionage on a grand scale against commercial and media organisations around the world. Although there is no direct evidence to prove a link between the Chinese state and hacking attacks on universities, it is significant that staff and research students doing work on China tend to be the targets of hacking. In spring 2010, for example, the London School of Economics and Political Science detected attempts to use tailored trojans to penetrate the email accounts of most of the staff and several research students working on issues related to Chinese politics and foreign policy. Multiple attempts had been made against seven targets. The top two scorers, who were working on issues deemed especially sensitive by the Chinese government, had been targeted no less than 59 and 28 times respectively.
As well as such immediate risks to universities, concerns have also been growing in the academic community that the CIs may distort the long-term development of Chinese studies. Particularly sensitive is the Hanban's insistence that CIs can only use the standardised form of Putonghua Chinese and the new, simplified form of Chinese characters. This has political implications because it denies students the opportunity to learn dialects such as Cantonese and the full-form, traditional characters favoured in the Chinese-speaking world beyond the control of the CCP, such as in Taiwan, Hong Kong and amongst the Chinese overseas. As Michael Churchman of the Australian National University explains, the directive that prevents foreigners from writing certain kinds of Chinese characters is based on the same underlying principle of encouraging them to extend their knowledge of China in ways acceptable to the Chinese state as the directive "You must not discuss the Dalai Lama". The result could be a generation of China scholars who will only feel comfortable working with a simplified version of China and will have difficulty dealing with historical texts or using media outlets that are critical of the CCP.
In a similar vein, towering figures in the field of sinology, such as Yu Yingshi, emeritus professor of East Asian studies and history at Princeton University, and Goran Malmqvist, professor of sinology at Stockholm University, have expressed their fears that reliance on CIs will encourage universities and governments to scale down funding for existing centres of expertise and specialist libraries and deny job opportunities to scholars trained outside China. Such a trend can also lead to the marginalisation of academics who refuse to work with CIs in their own institutions as they are denied access to contacts and the making of decisions that shape the relationship of their institution with China, not to mention the additional funds that universities have to contribute. Such a situation can lead to the growth of self-censorship and can even result in the departure of established academics, who would rather resign than see their own projects and organisations starved of funds and suffer the humiliation of decisions affecting their work being made over their heads. New members of the profession are in an even more vulnerable situation, especially if they have to commit themselves to working with a CI that is highlighted in job advertisements as a flagship project of the university.
When assessing the above risks, it should be borne in mind that the first CI concept was only established nine years ago and that the current plan is to expand the total number to 1,000 by 2020. A degree of mission creep can already be seen, going back to the establishment of the CI at Waseda University, in Japan in April 2007, in a partnership with Peking University that includes a program to assist the research activities of graduate students studying in China. CIs have also been broadening their work into projects such as holding discussions on topics such as China's financial system, its knowledge economy, its economic situation and the "China model".
When the Hanban held its annual conference in December 2012, it was felt that this "integration" (rongru) into the mainstream activities of universities abroad was too slow. A "new sinology plan" was thus announced, which aims to promote the involvement of CIs with the projects of doctoral students, youth leadership, study trips for scholars to "understand China", international conferences and assistance for publishing research. This is to be accompanied by greater efforts to penetrate the broader academic system of the host country by holding Chinese classes in junior and middle schools and by designing the local curriculum and by training a "brigade" (duiwu) of expert teachers.
Yet again, there are serious political implications of the CIs taking over the role of teacher training and curriculum design that are normally steered by academics trained in native universities. Controversy has already arisen over the political nature of the teaching materials provided to schools by the Hanban; This includes a lesson on the Hanban web site that described the Korean War as "The War to Resist US Aggression and Aid Korea". While older students may be better equipped to see through such attempts at indoctrination, Chinese academics are already drawing some satisfaction from evidence that American children who have studied under the direction of CIs have developed a more positive view of China and its political system.
Managing the risks
Many of those who defend the presence of the CIs on campus argue that they have not been exposed to political pressures. However, the political mission of the CIs, the unusual legal position they have staked out, the way in which they are perceived by vulnerable students and staff, the scale and speed of their development and the determination of the Hanban to expand their work into core academic activities and school education poses risks that need to be properly assessed and managed.
So far there has been only minimal discussion of whether the CIs can be managed within limits that are compatible with the mission of the university. It is interesting to note, however, a number of cases where the decision to host a CI has been actively resisted by academic staff on ethical grounds when put under proper scrutiny, most notably at the universities of Manitoba, British Columbia, Melbourne, Stockholm, Chicago and Pennsylvania.
The economic argument also needs to be set out more clearly, taking into account the matching funds, accommodation and administrative support provided by host institutions to CIs. When these are factored in, it may well be the case that it is more effective to train language teachers in-house, who will develop long-term careers, be familiar with local teaching methods and be free from political constraints. This would also open up opportunities for Chinese nationals who might be excluded under the Hanban system on political, religious or health grounds.
It is somewhat ironic that while many of the people who are most concerned about the risks posed by the CIs have spent their working lives devoted to Chinese studies, they are characterised by spokespersons for the Chinese government as purveyors of "Cold War thinking". Nobody can deny that there will and should be more academic engagement with China. All sides will benefit, however, if this is done in ways that are compatible with the mission of the university to uphold core values such as the pursuit of academic and intellectual freedom and respect for religious and political diversity. An alternative is to remove such values from the mission of the university. If the university is understood as an institution that not only reflects but also shapes the values of the society in which it is embedded, such a departure cannot be allowed to occur by default.
Age-old Temptations and the Protection of Trade Secrets
Chinese use of perception management
Although a diverse and complex country, China's overall grand strategy appears to have three inter-related goals: controlling its periphery, preserving domestic order and stability, as well as attaining and maintaining great-power status.
Perception management is an effective tool used by the country against perceived adversaries. Sun Tzu specifically called for such measures in his oft-quoted adage: "Deception is the way of military affairs". The Chinese government practices deception and perception management today in order to protect its strategic interests while deterring conflict. "It is better to subdue the enemy without engaging it in battle", also wrote the military stratgist.
As a result, Beijing relies at times on manipulating an adversary's cognitive processes and producing perceptions that directly benefit China. Beijing has long placed significant emphasis on propaganda, or the manipulation of information made available to the public. The Tiananmen incident of 1989 is a telling example, as barely anyone in China remembers it today or what sparked the conflict. Manipulation of history from the Great Leap Forward to the Cultural Revolution also provides examples of how deft the Communist Party is in managing the nation's, as well as the outside world's, view of what is and is not history. China's Ministry of Foreign Affairs (MFA) consistently denies the country's involvement in cyber attacks, noting it is against Chinese law. What is not said, however, is that it is only against Chinese law to hack into another's computer inside China.
The methods employed by Chinese "collectors" to steal intellectual property are as diverse as the collectors themselves. They include collection using (i) direct requests, solicitation and marketing services; (ii) acquisition of technologies and companies; (iii) targeting conferences or other open venues, scientific exchanges, exchange students; (iv) exploiting joint research and official visits; (v) gaining employment in high-tech and research firms; and (vi) targeting of travellers overseas. Chinese collectors increasingly make use of technologically sophisticated methodologies such as cyber-attacks, the insertion of Trojan horse software, and the use of an "insider" within a company that often obfuscates China's hand and its goals.
Cases of theft of intellectual property in the United States
Lest there be anyone who questions whether foreign governments continue to involve themselves in stealing US technology, the following provides several examples.
(i) First there is the case of Greg Chung Dongfan66, an engineer for Boeing and Rockwell, who passed restricted information on the space shuttle, the Delta IV rocket and the C-17 military cargo jet to China from 1979-2006 after becoming a naturalised US citizen. Chung's motive was to "contribute to the motherland". Initially, he travelled to China pretending to give lectures while secretly meeting with Chinese government officials and agents. He was also encouraged by his Chinese handlers to use Chi Mak (see below) to transfer information back to China. Chung was arrested in February 2008 and convicted in February 2010 of economic espionage and sentenced to over fifteen years in prison.
(ii) Chi Mak (Mai Dazhi) was a classic sleeper agent.67 In March 2008, Chi Mak, a China-born, naturalised (1985) US citizen, was sentenced to over twenty-four years in prison. Chi Mak admitted he was sent to the United States in 1978 in order to obtain employment in the defense industry with the goal of stealing defense secrets, which he did for over twenty years.
He had been lead project engineer on a research project involving Quiet Electric Drive (QED) propulsion for use on US Navy submarines. The technology developed in the QED program is considered by the Navy to be Significant Military Equipment and therefore banned from export to countries specifically denied by the State Department, including China.
Beginning in 1983, Chi Mak passed this and other information to the PRC. In the early years, he and his wife transported the material to China, but after his brother Tai Mak arrived from China, he became the courier. Tai Mak encrypted the information and made arrangements to travel with the encrypted CDs to the PRC. Chi Mak admitted that the information he gave his brother was passed to a research fellow with the Chinese Center for Asia Pacific Studies (CAPS) at Zhongshan University in Guangzhou. CAPS is partially funded by, and conducts operational research for, the PLA.
(iii) In yet another case of espionage, a federal judge in Chicago on 29 August 2012, sentenced Jin Hanjuan, a Chinese-born, naturalised American, to four years for stealing millions of dollars in trade secrets from Motorola, describing the soft-spoken, unassuming woman as having carried out a "very purposeful raid" on the company in the dead of night.68 Jin worked for Motorola from 1998 to 2007. Federal authorities stopped her during a random search at O'Hare International Airport in February 2007. She had a one-way ticket to Beijing. Customs agents discovered over US$30,000 in her luggage, as well as more than 1,000 confidential technical documents, that included paper copies, thumb drives, and information on several hard drives. A later search of her home found evidence that Jin had consulted on projects for Kai Sun News Technology Company, also known as Sun Kaisens, which is affiliated with China's military, since 2004 and emails indicated she intended to return to China to work for the company.
The judge in this case said "it was important to send a message that would deter others with access to trade secrets from siphoning off vital information. In today's world, the most valuable thing that anyone has is technology, hence the need to protect trade secrets."
(iv) Finally, on 29 May 2012, Zhang Bo, a Chinese citizen who worked for a contractor at the Federal Reserve Bank of New York, pleaded guilty to stealing US Treasury Department software used to track federal collections and payments. Zhang pleaded guilty to one count of theft of government property and one count of immigration fraud in a hearing in Manhattan federal court. On 4 December 2012,69 Zhang was sentenced to six months of home confinement as part of a sentence of three years of supervised release. The judge in ruling on the case said there was no evidence that Zhang shared the computer code with anyone else or compromised the security of the software, but the judge was troubled by Zhang's continuing acts of illegal conduct. Zhang also admitted to submitting false documents to immigration authorities on more than one occasion to help foreign nationals obtain visas to enter and work in the US.
Zhang, a computer programmer formerly with Goldman Sachs, has been assigned to work on source code development at the New York Federal Reserve that related to the tracking of billions of dollars that are electronically transferred every day in the US general ledger. Zhang took advantage of the access that came with his trusted position to steal highly sensitive proprietary software. Stealing it and copying it threatened the security of vitally important source code. His case highlights what security experts call the "insider threat"–an employee working inside a company who steals intellectual property.
Footnotes
- Footnote 1
- Kuhn A., Philip (1992), Soulstealers, (Cambridge: Harvard University Press), p. 223.
- Footnote 2
- The New York Times, 23 January 2013.
- Footnote 3
- The New York Times, 15 February 2013.
- Footnote 4
- Lingdao canyue, Reference Reading for Leaders, No. 25, 2010.
- Footnote 5
- Reference Reading, No, 1, 2011
- Footnote 6
- The globalisation of Chinese interests has also resulted in an increased number of Party-state bureaucratic entities that are stakeholders in Chinese foreign affairs and national security policy.
- Footnote 7
- The PRC rarely discusses LSGs in the public domain; neither the names nor numbers of these groups or their membership is published. Analysts believe the PLA has membership on the Foreign Affairs Leading Small Group (two seats: Defense Minister and Deputy Chief of the General Staff for Foreign Affairs and Intelligence); the National Security Affairs Leading Small Group (two seats: same as foreign affairs–these two organs are thought to be identical); the Taiwan Affairs Leading Small Group (two seats: the CMC Vice Chairman responsible for operation's and the DCoGS or Foreign Affairs and Intelligence); and possibly a small group whose name is roughly the Politics and Law Committee (one seat for the Deputy Director of the PLA General Political Department, and one for the Commander of the People's Armed Police). The name and existence of this latter group is very tentative.
- Footnote 8
- The constrained role of the PLA in domestic affairs is believed by some analysts to be the result of conscious decisions made by Deng Xiaoping in his final years in power. The last uniformed PLA officer to sit on the Politburo Standing Committee was Deng's life-long associate in the PLA Admiral Liu Huaqing, who stepped down 1997.
- Footnote 9
- It still remains unknown whether these PLA officers are acting on their own, whether they are fronting for a group of like-minded PLA officers or others, or whether their public activities are sanctioned.
- Footnote 10
- In the mid- and late-1990s there were attempts to create such a coordinating mechanism modelled somewhat on the US National Security Staff. For reasons that are still not clear this never took place, although some analysts believe that trying to work out relationships between Party and state entities proved too difficult and too many bureaucratic "rice bowls" were threatened by a new arrangement.
- Footnote 11
- The four general departments are the: General Staff Department, General Political Department, General Logistics Department and General Armaments Department.
- Footnote 12
- J. Michael Cole, "China Increases Its Surveillance Fleet Capabilities," Taipei Times, May 14, 2012,http://www.taipeitimes.com/News/taiwan/archives/2012/05/14/2003532784.
- Footnote 13
- "China Exclusive: China to Conduct Daily Fishery Patrols in South China Sea in 2014," Xinhua News, February 7, 2013,http://news.xinhuanet.com/english/china/2013-02/07/c_132158317.htm.
- Footnote 14
- "Vietnam Adds Sea Patrols amid Tensions with China," Voice of America,December 4, 2012,http://www.voanews.com/content/vietnam-adds-sea-patrols-amid-tensions-with-china/1557993.html.
- Footnote 15
- Daniel Ten Kate and Norman P. Aquino, "Philippines Nears $4443 Million Deal for South Korea Fighter Jets", Bloomberg News, January 30, 2013, http://www.businessweek.com/news/2013-01-30/philippines-nears-443-million-deal-for-south-korea-fighter-jets.
- Footnote 16
- "Military Spending in South-East Asia — Shopping Spree," The Economist, March 24 2012,http://www.economist.com/node/21551056.
- Footnote17
- "Stirring up the South China Sea (I)," International Crisis Group, April 23, 2012,http://www.crisisgroup.org/~/media/Files/asia/north-east-asia/223-stirring-up-the-south-china-sea-i.pdf.
- Footnote 18
- Ibid.
- Footnote 19
- Notable measures in the past have included the plan to establish a military garrison on Woody Island in July 2012.
- Footnote 20
- Austin Ramsy, "China's Newest City Raises Threat of Conflict in South China Sea," Time, July 24, 2012,http://world.time.com/2012/07/24/chinas-newest-city-raises-threat-of-conflict-in-the-south-china-sea/.
- Footnote 21
- "我国即将启动第二次全国海岛资源综合调查" [China intends to begin 2nd comprehensive survey of marine and island resources],Xinhua News, January 10, 2013, http://news.xinhuanet.com/politics/2013-01/10/c_114325435.htm.
- Footnote 22
- Fat Reyes, "4-Way Maritime Talks in Manila Next Week Postponed," The Inquirer, December 7, 2012,http://globalnation.inquirer.net/59063/4-way-maritime-talks-in-manila-next-week-postponed.
- Footnote 23
- Huang Yiming and Wang Qian, "China's Youngest Sansha City Busy Preparing Tourism", People's Daily Online, January 28, 2013, http://english.peopledaily.com.cn/205040/8109821.html.
- Footnote 24
- Ibid.
- Footnote 25
- Jane Perlez, "Dispute Flares Over Energy in the South China Sea," New York Times, December 4, 2012,http://www.nytimes.com/2012/12/05/world/asia/china-vietnam-and-india-fight-over-energy-exploration-in-south-china-sea.html.
- Footnote 26
- "Stirring up the South China Sea (I)", International Crisis Group, April 23, 2012,http://www.crisisgroup.org/~/media/Files/asia/north-east-asia/223-stirring-up-the-south-china-sea-i.pdf.
- Footnote 27
- Kathrin Hille, "Hu Calls for China to be 'maritime power'", Financial Times, November 8, 2012,http://www.ft.com/cms/s/0/ebd9b4ae-296f-11e2-a604-00144feabdc0.html; "Xi Vows Peaceful Development while not Waiving Legitimate Rights", Xinhua News, January 29 2013, http://news.xinhuanet.com/english/china/2013-01/29/c_132136202.htm.
- Footnote 28
- Jane Perlez, "China Stalls Move to Quell Asia Disputes over Territory," The New York Times, November 19, 2012,http://www.nytimes.com/2012/11/20/world/asia/china-and-cambodia-stall-move-to-quell-disputes-in-southeast-asia.html.
- Footnote 29
- Mark Valencia, "High-Stakes Drama: The South China Sea Disputes," Global Asia, September 2012,http://www.globalasia.org/V7N3_Fall_2012/Mark_J_Valencia.html.
- Footnote 30
- Provisional measures apply to both parties and the entire area of the dispute; therefore, Manila may be reluctant to seek such provisional measures which could prevent energy exploration activities that would be damaging to its interests. See Jay L. Batongbacal, "The impossible dream and the West Philippine Sea," Rappler, January 28, 2013,http://www.rappler.com/thought-leaders/20550-the-impossible-dream-and-the-west-philippine-sea.
- Footnote 31
- Tarra Quismundo, "Japan Affirms Pledge to Back PH Development," Philippine Daily Inquirer, January 10, 2013,http://globalnation.inquirer.net/61251/japan-reaffirms-pledge-to-back-ph-development.
- Footnote 32
- Shinzo Abe, "Asia's Democratic Security Diamond," Project Syndicate, December 27, 2012,http://www.project-syndicate.org/print/a-strategic-alliance-for-japan-and-india-by-shinzo-abe.
- Footnote 33
- "India to ASEAN: We Will Not Intervene in China Dispute," The Inquirer,December 22, 2012,http://globalnation.inquirer.net/60101/india-to-asean-we-will-not-intervene-in-china-dispute.
- Footnote 34
- While the original agreement was that both Philippine and Chinese vessels would leave the shoal, China later reneged, and stationed three ships outside the lagoon, blocking the entrance with a rope. Jane Perlez and Steven Lee Myers, "In Beijing, Clinton Will Push for Talks Over Disputed Islands," The New York Times, September 3, 2012,http://www.nytimes.com/2012/09/04/world/asia/in-beijing-clinton-to-discuss-island-disputes.html.
- Footnote 35
- "CNOOC invites foreign firms to explore for oil in deep-sea blocks," South China Morning Post, August 29, 2012,http://www.scmp.com/news/china/article/1024849/cnooc-invites-foreign-firms-explore-oil-deep-sea-blocks.
- Footnote 36
- TJ Burgonio, "Aquino Open to Joint Oil Development of Recto Bank, but..,." The Inquirer, January 14, 2013,http://globalnation.inquirer.net/61547/aquino-open-to-joint-oil-devt-of-recto-bank-but; "Philippines Aims to Drill in South China Sea," The Chosun Ilbo, February 9, 2013,http://english.chosun.com/site/data/html_dir/2013/01/25/2013012500315.html.
- Footnote 37
- Chris Buckley, "China leader affirms policy on islands," January 29, 2013, New York Times,
- Footnote 38
- These estimates are based on the sum of urban manufacturing employment, manufacturing employment in the township and village enterprises (TVE) sector and individuals self-employed in manufacturing. On manufacturing employment in China, see Bannister, J. (2011), "China's Employment and Compensation Costs in Manufacturing Through 2008", in Monthly Labor Review. Accessed at: http://www.bls.gov/opub/mlr/2011/03/art4full.pdf.
- Footnote 39
- Frequently cited in support of such a perspective are the country's deficit in international technology transfer payments, the "limited" transfer by foreign firms of cutting-edge technology to the local economy, the small number of national champions with international brand-name recognition, as well as a low (albeit rising) share of GDP directed towards research and development.
- Footnote 40
- Breznitz, D. and M. Murphree (2012), Run of the Red Queen: Government, Innovation, Globalization, and Economic Growth in China, (Yale University Press: New Haven and London).
- Footnote 41
- Brandt, Loren (2012, "Creative Accounting or Creative Destruction: Firm Level Productivity Growth in Chinese Manufacturing", in Journal of Development Economics 97 (2).
- Footnote 42
- Brandt, Loren (2012, "Creative Accounting or Creative Destruction: Firm Level Productivity Growth in Chinese Manufacturing", in Journal of Development Economics 97 (2).
- Footnote 43
- Brandt, Loren and Eric Thun (2010), "The Fight for the Middle: Upgrading, Competition, and Industrial Development in China",World Development 38 (11 ).
- Footnote 44
- World Bank report accessed at: http://www.worldbank.org/content/dam/Worldbank/document/China-2030-complete.pdf.
- Footnote 45
- Brandt, Loren and Eric Thun (2010), idem.
- Footnote 46
- Major products of the heavy construction equipment sector include wheel-loaders, excavators and motor-graders.
- Footnote 47
- In this context, it is interesting to note that Huawei, cut off by government procurement policy from the domestic 2G equipment market, went outside to countries in Africa and Latin America to find opportunities for moving up the ladder.
- Footnote 48
- Shaun K. Roache, "China's Impact on World Commodity Markets", IMF Working Paper WP/12/115 (May 2012), p. 21.
- Footnote 49
- Ali Zafar, "The Growing Relationship Between China and Sub-Saharan Africa: Macroeconomic, Trade, Investment and Aid Links", The World Bank Research Observer, vol. 22, no. 1 (Spring 2007, p. 109.
- Footnote 50
- Australian Strategic Policy Institute, "Fuelling the Dragon", Special Report (August, 2012), p.12.
- Footnote 51
- Liam Pleven, "Flexing Muscle: China's Influence on Global Commodities Markets",www.online.wsj.com/article/SB10001434052748704117304575137921753267684.html (March 24, 2010).
- Footnote 52
- Australian Strategic Policy Institute, idem, p.10.
- Footnote 53
- Shaun K. Roache, "China's Impact on World Commodity Markets," IMF Working Paper WP/12/115 (May 2012), p.3.
- Footnote 54
- Enrique Dussel Peters, "Chinese FDI in Latin America: Does Ownership Matter?" Working Group on Development and Environment in the Americas, discussion paper No. 33 (November 2012), p.1.
- Footnote 55
- Mia de Graaf, « Limiting Foreign Land Ownership: A Law in the Making », The Argentina Independent, 28 september 2010.www.Argentinaindependent.com/currentaffairs/newsfromargentina/limiting-foreign-land-ownership-a law-in-the-making/
- Footnote 56
- Mia de Graaf, "Limiting Foerign Land Ownership: A Law in the Making", The Argentina Independent (28 September 2010).www.Argentinaindependent.com/currentaffairs/newsfromargentina/limiting-foreign-land-ownership-a law-in-the-making/
- Footnote 57
- Charles Hutzler, "Mongolia finds China can be too close for comfort", www.businessweek.com/ap/2012-12-05/for-mongolia-chinas-too-close-for-comfort (5 December 2012).
- Footnote 58
- Hunter Marston, "Bauxite Mining in Vietnam's Central Highlands", Contemporary Southeast Asia, Vol. 34 No. 2 (2012) pp. 173-96.
- Footnote 59
- Andrew Erickson, "Selfish Superpower" No Longer? Harvard Asia Quarterly (Spring/Summer 2012), p. 95.
- Footnote 60
- Andrew Erickson and Gabe Collins, "China's Real Blue Water Navy," The Diplomat (30 August 2012)www.thediplomat.com/2012/08/30/chinas-not-so-scary-navy
- Footnote 61
- Dingli Shen, "Don't shun the idea of setting up overseas military bases", www.china.org.cn, (28 January 2010).
- Footnote 62
- Footnote 63
- Accessed at: http://intelreport.mandiant.com/.
- Footnote 64
- "Constitution and By-Laws of the Confucius Institutes". Chapter 1:6; Chapter 6: 32; Chap 7:36a; accessed from:http://english.hanban.org/node_7880.htm
- Footnote 65
- "Overseas Volunteer Chinese Teacher Program", Article 3d.; accessed from:http://www.chinese.cn/hanban_en/node_9806.htm(accessed 13 February 2012).
- Footnote 66
- Footnote 67
- See Washington Post article: http://www.washingtonpost.com/wp-dyn/content/article/2008/04/02/AR2008040203952.html.
- Footnote 68
- Footnote 69
- See Wall Street Journal article: http://blogs.wsj.com/economics/2012/12/04/chinese-national-sentenced-in-theft-of-ny-fed-code/; and the Huffington Post: http://www.huffingtonpost.com/2012/01/18/bo-zhang-ny-fed-software-theft_n_1214481.html.
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