By Franz Schurmann

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Prediction #24 for Tuesday, August 3,1999

China Is Turning Inward

• Prediction:
  Introductory remarks: (Non-) Prediction #19 is closely related to the current Prediction #24. It offers two equally possible scenarios: "China Deflation Leads to Global Recession or China in WTO Means Breather for Global Economy." The evaluation date for Prediction #19 is December 7, 1999.

  The current signs suggest to me that there is a good chance that China's deflation could significantly diminish Beijing's eagerness to join the WTO. The Clinton-Jiang meeting at the New Zealand heads-of-state summit in mid-September can produce one of three possible statements regarding the WTO:

  (1) Agreement by both parties on China joining (2) No statement (3) A statement short of joining the WTO but reaffirming US-China trade relations

  My own sense is that the third option is now the most likely.

  PREDICTION #24: In mid-September at the New Zealand heads-of-state meeting the US and China will agree on a statement short of joining the WTO but reaffirming US-China trade relations.

• Outcome:
  

  The outcomes of Prediction #24 (August 3, 1999) and Prediction 25 (August 10, 1999) are related. On August 10 I wrote:

  "Last week I predicted that China will decide not to join the WTO. The evaluation date is September 28, 1999. This week I predict that America is going to tilt more towards China and away from Taiwan. The evaluation date is identical, September 28, 1999."

  EVALUATION: Whether China does or does not meet the effective deadline for World Trade Organization (WTO) entry before November 30, I rate both predictions taken together as ----- pretty much on target.

  ANALYSIS OF OUTCOMES:

  Today September 28 Reuters reported: "China trade negotiator Long Yongtu said Tuesday China and the United States were 'very close' to a deal on Beijing entering the World Trade Organization (WTO) but cited a long list of topics which needed clarification."

  But on September 22 Ruan Cishan, special correspondent for the Singapore-based Lianhe Zaobao wrote: "The chances for China joining the WTO this year are getting lower and lower." He based his evaluation on a remark made by President Jiang Zemin to President Clinton during their recent meeting at the APEC conference in New Zealand: "You are in a hurry; I'm not."

  On February 23 I predicted in Prediction #2: "By the time of the WTO's next meeting on November 30 in Seattle China will be a full member."

  Confusing? No, I don't think so.

  Less confusing is the outcome of Prediction #25 of August 10. It is very clear that the Clinton Administration has definitely tilted away from Taiwan towards the PRC, This was made quite clear at the APEC meeting. The star performers were Jiang and Clinton. Clinton, when asked about a deal on China's entry into WTO said: "I am neither pessimistic nor optimistic." Taken together with Jiang's remark "You are in a hurry; I'm not," it's clear Clinton was more eager for the deal that Jiang.

  But even clearer is the fact that the White House rapidly and completely shot down Taiwan president Lee Teng-hui's "two states" gambit. Lee was making one of his several tricky but interesting moves by advancing his "theory." In the Cross-Straits discussions the positions of both sides had frozen into endless repetition. Beijing said politics must precede economics in the discussions. Taipei said the reverse: first economics then politics.

  But the two states theory is a political, not an economic, matter. What Lee did was accept Beijing's position but suddenly hit his opponent with a sharp jab to the jaw. Everybody saw the jab but did not see the positional shift. Lee broke the deadlock. Unfortunately for him the result was the opposite of what he intended.

  Earlier this year Lee was getting a lot of support from the US Congress. He got open support from Republican members as well as the usual effusive support from the protectionist AFL-CIO. He also felt that he had put Clinton on the defensive. The American presidential campaign had begun and China was not an issue the Democrats wanted to see aired. Nor did some Republicans, like candidate Texas governor George W. Bush. His father has a long history of tilting toward Beijing despite selling arms to Taiwan during his (failed) reelection campaign of 1992.

  In early August Clinton was quiet on China while the Congressional China-bashers were still roaring against their favorite foreign target, Now at the end of September it is the reverse. The White House is moving fast to resume its once close ties to China while Congress is astonishingly mute on China.

  I don't think there's much mystery why. President Clinton just announced a whopping federal surplus of $115 billion! Where does all the money come from? Of course it comes from a full employment American economy. But where do all the salaries, wages and windfalls come from? Only one answer: a booming global economy.

  The core of that economy is the Asia-Pacific region. On its eastern side is the political, military, technological, financial and cultural powerhouse America. On its western side is financial, economic and technological powerhouse Japan ----- and ----- vast China which is fast becoming the industrial heartland of the world ----- and --- several smaller giants like South Korea, Taiwan, Hong Kong, Thailand, Singapore, Malaysia. And looming up fast is another powerhouse that is going to surprise the world shortly into the next millennium: India.

  America does not need Europe to survive. It needs Asia to survive. Even America's most hard-bitten China-haters know that the world's ever-running bull market depends primarily on peace and prosperity in the Asia-Pacific.

  But watch and listen to what China is doing. For millennia China has always marched to its own drummer. It is doing so again, Yesterday the People's Daily, the official organ of the ruling Chinese Communist Party, published its long-awaited guidelines on reforming the state-owned industries.

  It is a thin newspaper which is hard to find on Beijing newsstands. When you ask people why, they say it's too boring; nobody reads it ----- that is, with their morning tea, But people also know that it's oracle-like tone has to be taken seriously

  State-owned industries in communist societies are much more than output-producing factories. They are ways of life, literally and metaphorically, for millions of people. Right at the beginning those guidelines reaffirmed socialism's most fundamental principle: the state is the first and foremost source of people's life and livelihood in society.

  This is bad news for the privatization ideologues in the IMF, World Bank and Harvard. It's even worse news when the West looks at the shambles created by that ideology in Russia. China's leaders are not sure which direction to go in. A new figure, Hu Jintao, is emerging as a possible "successor." He is from Shanghai as are other older leaders. And Shanghai is rapidly developing into a key center of the global economy. That suggests China is quite ready to go into the WTO. But as Jiang Zemin said: "we are not in a hurry."

  Why should they be in a hurry. Russian-speaking Jiang Zemin knows Russia well and many times has expressed his affection for that people and country. For people in coastal China America has long been their main model. But most people in China are still bound to the land. And the country which many of their intellectuals see as most closely resembling their own history is Russia. Russia now has become the world's premier negative model. And that is why the Chinese leaders are again doing what they have done for centuries and millennia: finding and listening to their own drummer.

Every year around this time the Chinese Communist leaders meet in the beach resort of Beidaihe near Tianjin to set policy lines for the coming year. This time it will be for the symbolic year 2000, as symbolic for China as Y2K is for America.

For two decades the policy line has been: "reform and opening up." Reform meant privatizing and marketizing the major part of the economy. Opening up has meant joining the global economy. Now there are signs that the leaders are looking in different directions.

The Chinese government just published its 1999 "White Paper on Foreign Trade." Its tone is gloomy. It predicts that this year the global economy and world trade will slow down though there won't be a recession. A lot of obstacles in world trade are appearing. Supply is greater than demand. Prices are not going up. Competition is getting fiercer and protectionism is spreading.

For China this means: its exports won't increase; international confidence in the RMB's monetary stability is going down; less foreign investment will be available to Chinese businesses; and foreign expectations about China are turning negative.

In 1979 Deng Xiaoping started the reform policies in the agricultural sector. The results were spectacular: production and farmer income soared. In 1984 he launched the opening up policy. That meant opening up to the world economy and world culture.

His advisers used two foreign models to transform a poor China into a rich nation. The first model was America whose consumer capitalism --- making profits through mass production and consumption --- made America and Americans rich. The second model was post-World War II Japan. Japan was the first non-Western nation to successfully adopt the American model. It achieved this through two interlinked paths: a world-wide external export economy and a nation-wide internal consumer economy. Japan became even richer than America.

Reform and opening up worked brilliantly during the 1980's and 1990's --- till recently. The chain-reaction of Asian financial crises that began with Thailand in July 1997 did not substantially affect China. The RMB remained strong. Trading relations with the US, Japan and Taiwan continued to flourish all during 1998. It seemed that China would enter the World Trade Organization (WTO) before the end-of-the-century November 1999 meeting in Seattle.

When what had been the General Agreement on Trade and Tariffs (GATT) was made into the WTO some years ago it signified the shift from a technical to a visionary organization. The vision was made up of three successful models of consumer capitalism: post-1970 America, Japan and Western Europe. Each was vitally linked to the global economy through ever growing international trade. But each also had developed strong internal economies based on mass production and consumption.

In early January 1999 China still seemed to be a shoo-in candidate for membership. However within a few months the prospects became cloudy. A huge wave of anti-China and anti-Chinese sentiment welled up in the US media and Congress. Loud voices were heard demanding that China not be "rewarded" by WTO membership. One source of this sentiment was not unexpected: right-wing and conservative nationalists who saw China as a mortal threat to the USA. The other source was unexpected: left-wing and liberal intellectuals, media and politicians linked up with the former to create a neo-McCarthyism that hit hard at Chinese-Americans, especially scientists in sensitive positions.



American-style Business and Entertainment
in the Minshan Hotel, Chengdu, Sichuan, China



The net effect on China's leaders and people was to bring about a total loss of trust in America. The friendly relations established first by the Clinton-Jiang meeting in the US of November 1997 and then by the Jiang-Clinton meeting in China of June 1998 were washed away. The loss of trust also extended to the American model of consumer capitalism.

Chinese are beginning to see more and more bad things in their own consumer capitalism as well as its American sources. The spectacular spread of Fa-lun-gong is a reflection of this deep disenchantment.

Another sign is about family life. Family life has been deeply affected by the one-child policy. Not only is China beginning to experience a demographic inverted pyramid --- more oldsters at the top, fewer youngsters at the bottom --- but young men are not marrying. For thousands of years Chinese have assumed that just about everybody gets married. Older people tried hard not to die before grandchildren were born. Now more and more men over 30 are not getting married.

In Japan a statistician recently predicted that in the year 2500 Japan's population will consist of one person only. Statistically it can be predicted that not much farther along China's current 1.3 billion people will also become one single person.

That's bad enough but even worse is the return of one of feudalism's worst practices: costly weddings. In Tianjin City alone average wedding costs have risen 48 times over the last 20 years: from around US$136 to US$6,224 (World Journal, August 2, 1999).

Chinese are increasingly swimming in an ocean of money. And its source is American-style consumer capitalism. Last April when Prime Minister Zhu Rongji kept telling Americans his biggest problem at home was fighting deflation he meant that more and more people were opting out of the American-style shopping mall mentality: keep buying and buying even if you don't have the money. Instead they are stuffing their money into savings accounts.

There are no signs that the leaders are coming up with some new economic policy. Many Chinese currently criticize their leaders for not having visions or even ideas about the future. Most, like Zhu Rongji, are trouble-shooters and problem-solvers. In its attacks on the Fa-lun-gong the Chinese media responded to guru Li Hongzhi's rejection of government with the argument that governmental trouble-shooting and problem-solving are how humanity progresses.

Practicality was Deng Xiaoping's forte. But, as Fa-lun-gong shows, practicality is not what many Chinese now want. Instead they are looking for realistic visions and inspirational ideas.

When Zhu Rongji was in Washington last April it seemed China was eager to join the WTO but the US media and Congressional China-bashers forced Clinton to delay agreement. Now the situation is reversed. America and Japan are anxious for China to join but it is the Chinese who now are going slow. More and more doubts are being expressed in the Chinese media that a WTO agreement can be reached by the time presidents Clinton and Jiang Zemin meet each other in mid-September at the New Zealand summit of Asian heads-of-state. Evidently the final decision will be made at the forthcoming Beidaihe Conference of China's top leaders (China Press, August 3, 1999).