[Congressional Record Volume 141, Number 78 (Thursday, May 11, 1995)]
[Senate]
[Pages S6554-S6559]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                     POLITICAL TRANSITION IN CHINA

 Mr. BAUCUS. Mr. President, on March 23, the Congressional 
Economic Leadership Institute, in conjunction with the Congressional 
Competitiveness Caucus, held a discussion of China as that nation 
begins a political transition.
  The meeting was led by three China experts: former United States 
Ambassador to China, Jim Lilley; Nigel Holloway, Washington 
correspondent of the Far Eastern Economic Review; and Drew Liu, 
executive director of the China Institute.
  Called ``China After Deng,'' this vigorous discussion highlighted 
some of the outstanding issues in Chinese internal affairs and the 
United States-China relationship. I commend it to my colleagues who 
wish to gain a deeper understanding of these issues.
  The panelists agreed, in the words of Drew Liu, that ``China is 
perhaps entering the most crucial period of transition.''
  Mr. Holloway expressed another theme by urging ``constructive 
engagement,'' since the United States and the West generally ``need to 
keep drawing China out, into the wider world, and help to prevent its 
becoming a merchantilist military state.''
  Ambassador Lilley put these points in context by noting that basic 
long-term economic and political trends 
[[Page S6555]] within China are positive and leading toward a more 
economically and militarily powerful nation, and that the range of 
United States interests in the relationship with China is very broad.
  I want to compliment the institute for organizing this useful 
discussion, and I ask that the transcript be printed in the Record.
  The transcript follows:

                            China After Deng


                               panelists

       Ambassador James R. Lilley, Director of Asian Studies, 
     American Enterprise Institute.
       Nigel Holloway, Washington Correspondent, Far Eastern 
     Economic Review.
       Drew Liu, Executive Director, China Institute.


                               moderators

       U.S. Senator Max Baucus.
       Congressman Jim Kolbe.

       Rep. Jim Kolbe. We're here to look at a very timely topic 
     and one in which there is a great deal of interest in the 
     United States--the subject of China in the era after Deng 
     Xiaoping.
       It's my pleasure this morning to introduce my Senate 
     colleague and good friend, Max Baucus. Senator Baucus has 
     been involved with the Competitiveness Forum for a long 
     time--in fact, since it was begun in 1987. He is a member of 
     the Trade Subcommittee of the Senate Finance Committee; he's 
     also ranking member of the Senate Environment Committee. As I 
     think many of you know, he has taken a very strong and 
     personal interest in the subject of China over the years. 
     Please join me in welcoming, to introduce our panel this 
     morning, the senior Senator from Montana, Max Baucus. Max:
       Sen. Max Baucus. Thank you, Jim. Thank you all for coming 
     out this morning. We have three very distinguished guests 
     this morning to help us discuss the future of China as that 
     nation enters an era of political transition. In politics and 
     security, China is critical to every major Asian security 
     issue--from the conflict between India and Pakistan, to the 
     Spratly Islands, to the Korean peninsula and on up north to 
     the Russian Far East. It holds a permanent seat with a veto 
     in the United Nations Security Council and, of course, China 
     is a nation of 1.2 billion people with one of the world's 
     largest armies.
       In commerce, China is already one of the world's largest 
     economies and international traders. Its trading power will 
     increase even more after 1997. While China is our fastest 
     growing export market, its issues--copyrights and patents; 
     market-access for Montana wheat-producers; World Trade 
     Organization membership; and trade deficits--show that China 
     is also one of our most difficult trade policy challenges.
       In environmental policy, China will very soon become the 
     largest contributor to global warming. Its rapid coastal 
     development, growing fishing fleet, and reliance on coal for 
     power generation, all pose immensely difficult questions. 
     And, of course, since Tiananmen Square in 1989, almost no 
     foreign-policy issue has been as controversial or as divisive 
     here in the United States as has human rights in China.
       Internally, China faces high inflation, widespread 
     corruption, and a declining standard-of-living in rural and 
     inland regions relative to urban and coastal areas. At the 
     National People's Congress last week, people as diverse as 
     Prime Minister Li Peng and dissident petitioners identified 
     these as problems threatening the stability of the country.
       And what should we, the United States, expect in the next 
     few years? What policies are likely to get results? 
     Conversely, what actions will create a backlash? Difficult 
     questions--and we have had heated debates over them since 
     1989. But I think everyone will agree the U.S. would benefit 
     from a deeper understanding of trends and possible future 
     developments in China. The CELI has brought together a panel 
     of three long-time observers who can help us arrive at that 
     understanding. They are:
       The Honorable Jim Lilley. Jim is one of our country's most 
     accomplished diplomats and Chinese scholars. He, of course, 
     was the Ambassador of China during the Bush Administration 
     and previously served as Ambassador to Korea. An 
     internationally respected commentator on Chinese Affairs and 
     U.S. China policy, he is now a Scholar-in-residence at the 
     American Enterprise Institute.
       Nigel Holloway, a long time observer of Chinese and Asian 
     affairs. Mr. Holloway is the Washington correspondent for the 
     Far Eastern Economic Review, which for decades has been the 
     most respected Journal of East Asian business and politics.
       And Drew Liu, Executive Director of the China Institute. 
     The China Institute, established here in Washington by Wong 
     Jung Tao on his release from prison last year, links China's 
     most respectable intellectual dissidents on research on 
     political and economic trends in China.
       Each panelist will speak for a few minutes on what he sees 
     as a major trend in China's economic and political 
     development as we enter this transition era. Then we'll take 
     questions. Thank you all for coming. Let's give a big warm 
     welcome to our guest. [Applause.] Jim, I think you're first.
       Ambassador Jim Lilley. Well, that's quite a challenge. Let 
     me just anecdote the first. I asked three people about the 
     future of China--not romantics or visionaries, but people 
     that basically do business there. One was a Korean fat cat 
     who has invested probably three-quarters of a billion dollars 
     in China and is investing more. And I said Chairman, how do 
     you see China? He looked at me and he went like this 
     [gesturing]--he said headaches, terrible headaches. But also, 
     he said, long-term good.
       Secondly, I talked to a Hong Kong businessman, just last 
     night. And I said, where do you see it? He said, ``I have 
     just bought one-quarter of a billion dollars of property in 
     Hong Kong and I see a long-term rise because I am in the 
     business of making money. The one thing I avoid is having 
     anything to do with princely, high-cadre kids, economically. 
     Socially they're fine--but don't touch them any other way.'' 
     But he said, ``I'm putting my money where my mouth is--
     investing in the future of Hong Kong.''
       The third person was a Department of Commerce 
     representative who speaks beautiful Chinese. He said Commerce 
     is quadrupling its staff in Shanghai, hiring 22 new locals; 
     it's going to become the base of operations, almost 
     paralleling our operation in Beijing. In other words, the 
     United States Government is putting its people where it's 
     mouth is, and they are going to build a center in Shanghai. 
     This on a bet on the future of China's economy. I'm not 
     saying the U.S. Government is always right. But I'm saying 
     this is where they are going to make their action.
       Let's move into the situation of China. Just briefly, I'll 
     touch on three zones which are the obvious ones--political, 
     military, economic.
       First, militarily: Senator Baucus has touched on the places 
     in Asia where China is an indispensable player. On the Korean 
     peninsula, the stakes are very high; we are in a game of 
     chicken and brinkmanship this very weekend. Strategically, 
     the Chinese are basically with us. But they play a different 
     game, one with Chinese characteristics. They don't want to 
     see Kim Joy Il with nuclear weapons and long-range missiles. 
     Nor do they want to see instability on the peninsula. 
     Probably better than anybody, the Chinese know what a really 
     weird, strange regime Kim Joy Il runs. They're done good work 
     in the past; they've also been ambiguous in certain areas. 
     But, to get a solution, the Chinese have to be a player, and 
     we have to play with them. Because when we work with China, 
     North Korea tends to give; when we split with China, they 
     take advantage of it.
       Second, the South China Sea. Perhaps you saw the piece in 
     the Outlook section of the Washington Post this weekend? 
     China is playing a long-term game of taking over the South 
     China Sea--no question about that. It's going to happen, not 
     in this century perhaps, but in the next century. It is not 
     going to be necessarily large or violent, but more of a 
     creeping takeover. This is spelled out in their internal 
     documents. They are modernizing their military with this 
     objective in mind. Jiang Zemin mentioned this in effect at 
     the National People's Congress. So you shouldn't be confused.
       What you have a genuine argument over is: Can they do it? 
     Are they able to do it? With economic growth, will China 
     spend its money on unproductive military activity that puts 
     them in confrontation with the rest of Asia and possibly with 
     the world's most powerful instrument, the United States 
     Seventh Fleet? They've got to calculate very carefully and 
     intelligently--which is precisely what they are doing. But 
     they have ambitions, there's little question.
       The third area, of course, is the Taiwan Straits. There's a 
     great deal of gong-banging, stage-acting and posturing: Both 
     sides trying to use the Americans against the other side--a 
     very old game. Please don't get sucked in. The Chinese and 
     Taiwanese are working very, very closely to straighten things 
     out--when they really put their mind to it. But it's much 
     more fun for each one to use the Americans to bash the other 
     side. So be careful here. We hope it isn't next year's issue. 
     This year, the issue is intellectual-property rights; last 
     year, it was MFN and human rights. Next year, is it going to 
     be Taiwan? Let's not make it Taiwan. Let's work ourselves out 
     of this one--and we can if we don't let the Chinese use us.
       Finally, the economic situation--obviously a mixed bag. 
     China has an excellent growth record. Reserves are up a 
     hundred percent. The trade balance has gone from 12 billion 
     negative last year to five billion plus this year. But China 
     also has 150 million surplus laborers, along with real 
     problems in getting some sort of a financial code--a taxation 
     code that functions. You see progress, but it's shaky. So 
     apply the same business judgment you would in any such 
     country: Know your partner, know the local market situation, 
     get a good contract, deal with the people in power to get 
     things done. This all applies to China. There is no quick 
     fix.
       The good news I see coming out of the National People's 
     Congress that just finished is--don't get me wrong on this 
     one, don't caricature my position, but--a slow movement 
     towards the rule of law. There are differences in the Chinese 
     system about how this should be done, and how fast. But the 
     arguments they are having are arguments we, as Americans, can 
     comprehend: Subsidies to state-owned enterprises. Subsidies 
     to agriculture. How you manage the distribution of money 
     internally--how much you put into the state sector and how 
     much you keep out in the free-market sector. Arguments about 
     the rules governing property, bankruptcy, 
     [[Page S6556]] and central banking. And I see progress on 
     most of these fronts.
       But the most encouraging sign is a degree of autonomy 
     coming out of the Chinese themselves. You find one-third of 
     the people voting against a candidate for Vice-Premier. You 
     certainly have people showing their displeasure at Li Peng's 
     work report--very few, but they show it. You, see across-the-
     board, the Chinese representative bodies, usually 
     overstaffed, beginning to move in the direction of some kind 
     of an independent posture--where they can exercise a function 
     over the party people. What I think it boils down to, over 
     the long haul, is the rule of law versus the rule of man. A 
     very deep issue in Chinese history, it is not easily solved--
     but the issue emerged in this National People's Congress. And 
     I think that probably is the most promising sign in China 
     today. Thank you. [Applause.]
       Nigel Holloway. Thank you very much. I'd like to thank the 
     Institute very much for inviting me to this pulpit. First of 
     all, I want to say that this is the first time that I've 
     actually spoken about China's future in this way. I'm a 
     journalist, probably as many of you are--so, we have 
     something in common. But I maybe can see things in a slightly 
     different way from the specialist. I have obviously traveled 
     in China several times. I lived in Hong Kong for three-and-a-
     half years. And I've written about Asia as a whole since 
     1982.
       I want to start by emphasizing the magnitude of what's 
     happening in China today. Living standards have been doubling 
     every five years or so--something that has never happened in 
     a country larger than 100 million people. What an 
     extraordinary change taking place with one-fifth of the 
     world's population. (Of course, India is starting to go 
     through the same transition--but it's different in India.)
       Second point: In China, we have a Marxist superstructure, 
     superimposed on a capitalist substructure. This is a recipe 
     for tension, dislocation and conflict in the long term. You 
     tend to compare it with Russia, where political opening 
     preceded economic reform--and we can see where Russia is 
     today. The Chinese transition, running the opposite way, is 
     almost as difficult. China's leadership is ``riding the 
     capitalist tiger'' like the capitalist governments in eastern 
     Europe after the second world war were riding the communist 
     tiger--and they were swallowed up. (The only country that 
     succeeded in pulling it off was Singapore, in the late 1950s, 
     where Lee Kuan Yew managed to stifle the communist tiger.)
       In China's case today the tiger, of course, is the 
     capitalist system. Deng and his cohorts know they have to 
     delivery the goods. But the goods contain the seeds of their 
     own destruction, namely the destruction of the communist 
     system. The stock market, its shareholders, these are people 
     with stakes in an economic system antagonistic to the 
     political superstructure. This could be resolved gradually 
     without major conflicts. It could also, of course, lead to 
     another revolution.
       The third factor is the leadership transition itself. We 
     are going through another unprecedented situation for China, 
     with nobody of a similar stature or credentials to replace 
     Deng--so we are heading into an open country with no real 
     road map. The first stages of the transition has already 
     taken place: Deng has fully retired. I don't think he has 
     been a factor for about a year now since the military 
     appointments, made about a year ago. He is not playing a role 
     like Lee Kuan Yew, still a major factor in Singapore 
     politics.
       What precedents do we have for the situation in China under 
     a collective leadership? We have the inauspicious one, of 
     course, of Yugoslavia after Tito--obviously there are major 
     differences between the situation of Yugoslavia and that in 
     China. Perhaps a better precedent is Vietnam: Since the death 
     of Ho Chi Minh, there has been a fairly stable collective 
     leadership. But Vietnam, of course, faces the same structural 
     problems that China does long-term.
       Nobody knows of course, what will happen in China, just as 
     nobody knows who's going to win next year's presidential 
     election here. But it's even harder to predict where China 
     will be next year because it's so opaque. Talking to 
     specialists, which is basically what I do, I get most of this 
     second-hand. But the consensus is that China will move to a 
     sort of authoritarian-capitalist model. That I think is what 
     it's aiming for--rather like Singapore, a prospect the United 
     States and the west can perhaps deal with. Singapore is a 
     free-trading nation firmly in the Western camp but also with 
     significant political differences. But Singapore is a very 
     small island nation and China is a completely different 
     kettle of fish. Could we live with a Singapore-style China?
       Another question: Will China break up after the demise of 
     Deng Xiaoping. Again, the consensus among specialists is that 
     this is very unlikely. But one of the points they make is how 
     the interest groups--the interest-group politics really 
     running China now--is like the woven weft of a textile. Pull 
     out one strand, and the textile will not fragment--because 
     there are so many overlapping interests. For example, the 
     military regions China is divided into do not exactly match 
     the economic territory--they overlap. Another example is how 
     the regional military command is rotated on a regular basis 
     so they can't build local systems. At any rate, the consensus 
     is China is unlikely to break up in the next 10 years.
       What should American policy be towards China? Constructive 
     engagement is certainly the right objective. The United 
     States and the west need to keep drawing China out, into the 
     wider world, and help to prevent its becoming a mercantilist 
     military state. This is absolutely the right objective. Also, 
     because the United States has such a wide array of interests 
     in dealing with China, it should lay those out, and take a 
     very hard look at where its priorities lie, rather than 
     veering in one direction or another.
       So I think the changes that are obviously taking place in 
     U.S.-China policy over the last year have been in the right 
     direction. This is absolutely the right way to go. The U.S. 
     cannot bottle up China, nor should it. If it can help 
     integrate China fully into world affairs, this will be one of 
     the greatest achievements of the 21st Century. This requires 
     an extremely deft handling to avoid the confusion we had a 
     month ago when, in short order, we had conflict over 
     intellectual-property rights, a dramatic reduction in MFN 
     tariffs to China, and questions over the U.S. stance on 
     China's application to the WTO. In the midst of all of this, 
     we also had Hazel O'Leary in Beijing touting the contracts. 
     It was confusing for China--and confusing for Americans too. 
     I mean, what is American policy towards China? So it requires 
     a very careful explanation: ``We have this array of differing 
     interests--but these are the ones that are important.''
       The shift in the U.S. stance towards China's WTO membership 
     application is right--the U.S. is right to call for the 
     toughest possible terms on China's application. China will 
     probably become a member of the WTO by the end of the year, 
     and that's the very best development. But I think it will be 
     largely on the west terms rather than on China's.
       If you look at all different aspects of China's 
     relationships with the world and what Jim Lilley was saying 
     about the rule of law, I sense a subtheme: China has to play 
     by western rules if it wants to be a global player--whether 
     it's arm sales, trade, and so on. And I think that the U.S. 
     is right to stress that in all international forums.
       I'd also like to make a plea that the U.S. should at every 
     appropriate opportunity stress its strongest possible 
     commitment to Hong Kong's long-term autonomy. As we've seen 
     over the last few years, there's been a significant erosion 
     in both the Chinese and, I must confess, the British attitude 
     towards what was agreed on paper in the joint declaration. 
     This is a source of serious concern. And the United States 
     should stress during said meetings with Lu Ping, the senior 
     representative of Beijing on Hong Kong affairs, that the U.S. 
     has a strong interest in Hong Kong's economic and political 
     autonomy.
       I'd also like to agree with Jim Lilley that the U.S. must 
     avoid pushing the Taiwan card too far. This has obviously 
     been the major danger, I think, since the Republican 
     victories in the election last year, and needs to be watched 
     very carefully. That's my final point. Thank you.
       Drew Liu. Thank you, Senator Baucus. Thank you, Congressman 
     Kolbe. And I would like to thank also the Institute for this 
     opportunity.
       China is perhaps entering the most crucial period of 
     transition, and many of the changes have taken place over 
     last dozen years or so. Those changes are fundamental and 
     from bottom-up. And so China has entered the threshold of 
     fundamental change. What is the background, the nature of the 
     forces, behind this change?
       First, I would like to emphasize the crisis China is 
     facing. In the political area, as everybody is aware, China 
     is facing a crisis of transition, with a crack on the top 
     echelon. And it's reflected especially in this People's 
     Congress Session: Complaints and grievances from the lower 
     echelon, and from local officials, are aimed against the 
     center. And, in both political and economic areas--a linking 
     point--you have this corruption issue. It is economical as 
     well as political. The Chinese system is unable to contain 
     corruption, which is very much hated by the Chinese populace.
       In economics, the problem of the system is more fundamental 
     than at first glance. The whole structure of communist state 
     ownership has been very much undermined. But the new system 
     has not been established during this transition. The 
     transition is from the one kind of a planning system to the 
     market system--and you have this plundering of the public 
     funds, and public property, by officials. There is no law--
     it's a jungle. You [in America] talk about Ivan Boesky; in 
     China today, everybody is Ivan Boesky. The Chinese people 
     perceive this as very unfair, [a profound] injustice. 
     Certainly in the social arena, you have hundreds of millions 
     of people migrating from the rural area, from the inner 
     provinces, to the southeast provinces. And these are the sign 
     posts, in the Chinese history of big trouble, confirming a 
     dynasty's end. The Ching dynasty was very much ended in that 
     way--migration was part of the reason.
       So there are three major scenarios. First is the 
     continuation of dictatorship, the single-party model, maybe. 
     Second is the opening of a political system and gradual 
     transformation into democracy. The third one we could see is 
     social unrest. The [inaudible word] of the Chinese society 
     and maybe the breaking-up of China.
       I would think the first scenario is growing less likely 
     because of the lack of a strong man to hold China together--a 
     Deng Xiaoping, a figure like that. With the power base in 
     both military and party, and the state's bureaucratic system 
     and in the Chinese political culture, the demand is for 
     [[Page S6557]] some kind of strong man to hold it together. 
     It's like a reverse pyramid: One man at the bottom, 
     everything is on top. The bottom goes away, and then you have 
     the collapse. The current leadership of Jiang Zemin is less 
     capable of playing the same kind of integrating role as Deng 
     Xiaoping. And [Chinese society lacks] the tradition of 
     politics. Once in transition, divisions multiply. So 
     continuation of the dictatorship is also unlikely. In all 
     systems, the social forces formed during the reform process 
     have been unable to be controlled.
       The second scenario is the deep social unrest. But we think 
     the biggest opportunity [occurring with this scenario would 
     be] the gradual transition to a constitutional democracy. And 
     let me say how I envision this could happen. At the China 
     Institute, we do studies, mainly in the integrated area of 
     theory in the practice. And we try to combine the vision 
     blueprinting with actual process of change. What we find is 
     that China's change in progress, towards political openness 
     and the signs towards democratization, is always the result 
     of a muddling through. It's not designed. it's not planned. 
     It's not in anybody's mind.
       As a result, many consequences are unintended. The 
     different interest groups need to reposition themselves--but 
     they don't have commonly accepted rules of the game. The 
     process of democracy could be introduced into this 
     situation--even though people may not be aware of the 
     consequences. For instance, the mechanism of free elections, 
     the mechanism of checks and balances, and the mechanism of 
     [an impartial] monitoring device--all could be gradually 
     introduced into the process.
       Now secondly, it's not a moral process, like [in America]. 
     Here, it's the ideal--you know the Founding Fathers, you know 
     about universal rights. In China, it's not like that; it's 
     really a process of people. ``See, this is we have to do. 
     This [set of democratic mechanisms] is a way we can 
     compromise without going total chaos [and risking] civil 
     war.''
       So, in this [potential] process, what is the position and 
     role of the western world? How is this important process 
     linked to the western world in general and the U.S. in 
     particular? Shift the angle a little bit to say the 
     importance of the U.S./China relation in the immediate 
     future. It's very paradoxical and, I mean--there's no China 
     policy. Perhaps it shouldn't be a ``China policy''--because 
     of the two fundamental paradoxes in dealing with China. One 
     is to deal with China on an international level--where you 
     treat China as a society, as a state, as a collective. The 
     other is the China of individuals.
       Let me offer an example: On intellectual-property rights, 
     we have monitored events, the process, very closely. Then we 
     receive responses from different sectors among the Chinese--
     and I was surprised. Because, from our point of view, it is 
     fair for China to abide by international standards. But I 
     draw your attention to the internal Chinese response to this 
     whole issue--to demonstrate why U.S. policy has to deal not 
     only with China as a state and a collective, but also reach 
     beyond that level, to the more individual level.
       The Chinese look at intellectual-property rights, as the 
     government crack down, and many Chinese businessmen think 
     it's unfair--even though, from outside, we look at it as 
     fair. Why is it unfair? Because in China there are more 
     pressing issues--like fake medicine. Hundreds of people die 
     as a result of fake medicine. One report in the Chinese media
      about hundreds dying--from fake wine made from industrial 
     alcohol. People drink it and go blind. Things like that 
     are more pressing issues than intellectual property. 
     [America wants the Chinese] government to, you know, 
     select intellectual-property rights and push them very 
     hard. What the Chinese populace see is the government 
     caving in to the interest of the foreigners--without 
     taking care of the serious domestic issues.
       One more thing about pressing China. When we look at an 
     event, the nationalism is always in the back of mind. Some of 
     the same complaints of national because of this disparity 
     between the two systems. So what do you perceive the fair--
     ``justice'' in the global and international perspective, we 
     perceive as injustice and defeat into some other forces that 
     may not be productive. I'm trying to add perspective; I'm not 
     saying specifically do this or do that. I offer an angle on 
     China's present position in the system--incompatible with the 
     democratic and market system on one hand; and, on the other 
     hand, wanting to enter into the world community.
       So the political transformation, the liberalization, 
     democratization are really the key to the future of the U.S./
     China relations in the long-term may not, you know like a 
     very pressing issue, tomorrow in the media. But it's like the 
     under current that we will carry the problems or your 
     [inaudible word] into a specific problem into U.S./China 
     relations. If China is not going democratic, and that is very 
     unlikely I would say. THe Chinese will observe the law of 
     the, observe the general international accepted standards 
     only by the doing system to be compatible, and then you can 
     have a more better and more productive relationship. Thank 
     you very much.
       Sen. Baucus. I'll take the liberty of asking the first 
     questions. A lot of discussion so far has been about the 
     United States relationship to China. I would just like to 
     turn the tables and ask our panelists: How the Chinese see 
     us? I mean, do they see us as being fair or unfair? You 
     mentioned that we're pushing intellectual property 
     protection, for example, to the local people. Say, gee that's 
     not according to our priorities in China. But do the 
     businessmen in China or the Chinese leadership recognize or 
     don't know the United States has a legitimate beef after all. 
     And perhaps they should follow the United States in trying to 
     protect intellectual property. Or, on the other hand, are 
     they just using local conditions as a cover to not do what 
     they know they should do? My basic point is: What's the 
     Chinese leadership perception of the United States? For 
     example, is this nation seen as relevant around the world 
     these days? And, if we're relevant, where are we relevant to 
     how they see their future? Jim, I'll give you that one.
       Jim Lilley. I think the main fear in China with regard to 
     U.S. attitude is that the U.S. looking for a boogie man or 
     looking for an enemy, after Russia, to settle on China and 
     will adopt the sort of containment policy which ever way you 
     would like to put it that was adopted towards the Soviet 
     Union. And so that's, I think, one of the major reason why 
     the constructive-engagement policy is the right one to draw 
     China out to avoid the impression that United States is 
     trying to encircle China and contain it.
       Jim Kolbe. Well I listened last night at a dinner to the 
     Minister for, Director of, Administrator for Hong Kong 
     affairs in China described the commitment that China has to 
     maintaining the rules of law as he puts it and the agreement 
     that was reached with Britain over the transition of Hong 
     Kong to China. And I'm wondering if any of our speakers, this 
     morning's panelist would comment on the issue of how 
     important is the transition to Chinese rule in Hong Kong. 
     What will the rest of the world be watching in this 
     transition and what do you think we can expect as this 
     transition takes place?
       Drew Liu. Hong Kong issue is a very touchy issue in the 
     sentiment of the Chinese mentality because it would cause the 
     Chinese a humiliating defeat. But Hong Kong is also a very 
     hot--like what we say in Chinese, a hot potato: You hold it, 
     you want to eat it, but it's hot. And there is paradox, of 
     course: Hong Kong is resources for the foreign currency and, 
     on the other hand, Hong Kong is the stronghold of liberal 
     ideas, and may help to spread political instability. In 
     reacting to that, how will the Chinese government deal with 
     Hong Kong?
       I see several possibilities. I think the most likely 
     response is to contain Hong Kong. Right now, there's easier 
     traffic form Hong Kong to China and then, if Chinese 
     government step in, it most probably would maintain Hong 
     Kong's current system: Let Hong Kong still play the role it 
     has been playing. On the other hand, in order to prevent Hong 
     Kong's penetration, especially in the media, China would make 
     it more difficult for people to travel from Hong Kong to 
     China and from China to Hong Kong. And I think that seeing 
     this as one possible solution shows the mentality of the 
     Chinese leadership.
       So what we are suggesting is, Hong Kong is really 
     constructing, of course, opening wider China's market, 
     marketization and giving China the stimulus to go further in 
     marketing reform, abolishing the kind of state-controlled 
     ownership structure. And on the other hand, it can gradually 
     bring, you know alternatives, some models, examples of how to 
     live and operate in a more democratic, more efficient 
     society.
       So we propose that the following institutions, especially 
     cultural institutions, may go into Hong Kong right now and 
     then enlarge their activities--especially with regard to the 
     linkages inside China. For instance, educational projects. 
     You know, many cultural things may not be political--
     nonpolitical, I would say. You know, purely educational, but 
     by doing this, by joint venture, joint project, then Hong 
     Kong and China can be linked. If they try to cut off Hong 
     Kong from China after 1997 in administrative ways, then 
     China's internal education would also suffer loss and damage. 
     This is a very crucial time in Hong Kong, definitely, it is 
     very, very important for the future of China. Thank you.
       Jim Lilley [inaudible words] is basically allow free market 
     forces to go and strangle the political process in the 
     cradle. And they have a lot of sympathy from Chinese in Hong 
     Kong who think this western bourgeois democracy is really not 
     applicable. So I think you've got somewhat of an economy 
     there in terms. Bob, you know the formula very well: Let the 
     free-market process work in Hong Kong. Keep it the goose 
     laying the golden eggs. Have commercial rule of law in Hong 
     Kong. Persist it for 50 years--but do not allow the political 
     process to work and to contaminate China. That is the formula 
     they have--yes, their formula. I'm talking about how the 
     Chinese view Hong Kong.
       The question came up last night, as the Congressman knows. 
     Somebody asked our distinguished visitor why he didn't deal 
     with the democratic party in Hong Kong, the dissenters. And 
     what he said in his very cogent and very frank way is this: 
     The basic law of Hong Kong calls for freedom of press, 
     freedom of assembly, freedom of da-da, da-da, da-da--he 
     sounded like Jefferson. Of course, everybody knows that isn't 
     what happens. And if, the basic law says very clearly, we're 
     going to have a fully elected, [inaudible word] in Hong Kong. 
     So what are you worried about?
       The fact is, course, that most people say the Hong Kong 
     process works just fine, but scattered angry people keep 
     pushing a ``bourgeois democracy'' that doesn't really make 
     much sense. ``They are all trained in England. They talk 
     English better than we do. They don't really represent the 
     grassroots.'' 
     [[Page S6558]] Fact is, these people keep getting most of the 
     votes. There is a feeling out in Hong Kong that they really 
     do deserve democracy. And there are people voting for Martin 
     Lee and Company. [Inaudible words.] They're voting for them. 
     It's a rather positive sign.
       Moderator: Okay.
       Sen. Bingaman. I wanted to ask about our trade, growing 
     trade imbalance with China. As I see it, the first year of 
     the Bush administration, we had about a $3 million trade 
     deficit with China. This year, this last year, we had about a 
     $28 billion trade deficit with China. And China has only 
     began to export: As a share of their gross national product, 
     China is not near, doesn't devote near as much of their 
     economy to export manufacture as do other industrial 
     countries. So the potential for increased manufacture for 
     export is great. I see this growing geometrically over the 
     next five to 10 years and, in the next century, a greater 
     U.S. trade deficit with China than we have with Japan today--
     with no way to turn that around. This will hamper our ability 
     to produce or maintain manufacturing jobs in this country. I 
     would be interested as to whether I am right or wrong in that 
     prediction, and if there is some solution other than 
     continued hand-wringing and teeth-gnashing.
       Jim Lilley. I'll take a crack at it. That is what Mickey 
     Kantor's trips were all about. I don't think Mickey is 
     sitting in a corner gnashing his teeth--he's going to the 
     Chinese and saying: Open your market. I think this is all 
     about China getting into GATT and WTO. This is why they want 
     to come in as a developing nation. Fifteen percent, 22 
     percent tariffs, developed nation, fifteen percent. Three 
     thousand items are put on the block. They've got to protect 
     inefficient dinosaurs in the state-owned enterprise sector. 
     They are frightened of what GATT and WTO will do to them. So 
     we can face up to this problem the way we faced it in other 
     areas where it has worked--Taiwan and Korea. It hasn't worked 
     in Japan, unfortunately, because of their closed system. But 
     we have been able to close some of these trade gaps by 
     persistently demanding they pay royalties on intellectual 
     properties--our strong suit, where we can export a great 
     deal.
       As Jack Valenti said, our exports in the entertainment 
     industry are one of our largest exports. In some sectors of 
     China we are comparatively effective. So you go after those. 
     I'm talking about power. I'm talking about aircraft. I'm 
     talking about automobiles. I'm talking about electronics. The 
     Americans have to get in there and compete as strong as any 
     nation in the world. We aren't going to win the China market 
     by getting quotas or trying to force them into some sort of 
     managed-trade arrangement. You get the Chinese to come across 
     and change their trade surplus with us by opening their 
     market. I think this is what Kantor is trying to do, and we 
     should support it 100 percent. We are beginning to make some 
     progress on this. But it's going to be a long hard road.
       Male Voice. The question that has come to my mind is the 
     degree to which the other countries--let's say Europe, Japan 
     and others--are using our MFN position really [inaudible 
     words], and are saying to China: No WTO membership until you 
     open up and so forth. I agree that Japan
      and the others are taking advantage of us by working with 
     the Chinese leadership.
       Jim Lilley. I think, Senator, you make a very good point. 
     The Europeans and Japanese love to hold our coats while we go 
     in and slug it out with the Chinese. We finally get the 
     agreement, then they all follow to take advantage of it. Let 
     me make a contrast. On human rights, it was totally 
     bilateral. Nobody else had anything to do with our position. 
     And this is what undercut us, or it's one big reason. The 
     business community did not support us. No nation in the world 
     supported us. They said, ``What a bunch of goofballs. We're 
     going to pick up the pieces of the American effort.'' But, on 
     GATT and WTO, we got a lot of support; on IPR, we got a lot 
     of support. They aren't as aggressive as we are, the don't 
     have their Mickey Kantors--but they did come in. And they are 
     going to support us to a degree on this. Of course, most of 
     them are intellectual-property right violators too! So, 
     there's all sort of hypocrisy mixed into this arrangement.
       But it seems to me that in WTO and IPR, we are on solid 
     ground with our friends, but as usual, Senator, the Americans 
     have to take the lead.
       Male Voice. [Inaudible words.]
       Male Voice. Pardon.
       Male Voice. [Inaudible word.]
       Jim Lilley. Well, I supposed what we try to do, at least we 
     tried to do this when I was in GATT, is arrange tougher 
     conditions on the Chinese. We would working with EC. And one 
     of the, rather, I suppose I'm talking too much again. Through 
     the EC and directly, we used to say to the Chinese: ``You 
     know, Taiwan's an applicant too. And they are meeting all of 
     the standards of GATT, WTO. If you drag your feet, it could 
     be possible that Taiwan would get it first.'' This was a very 
     sobering influence, I think. It works about once or twice--
     that's all. And then you've got to get better tactics to work 
     on it.
       But the more usual argument, and you get European support 
     on this, is if you don't shape up, you aren't going to get 
     the technology you want. An the do lust for technology, they 
     want the best--that's all you hear from the Chinese. So this 
     is where you put the brakes on. We don't have COCOM anymore, 
     but some sort of an arrangement with our allies. The Chinese 
     are very dependent upon Europe and Japan to get some sort of 
     common policy for when they violate too much by ``going their 
     own way,'' as people say, you can bring to bear collective 
     pressure.
       This approach worked very well in 1990 when I was in China. 
     We worked very closely with Japan, the Europeans, Canadians, 
     Australians, New Zealanders--to exert leverage. Because in 
     the international bank, let me just make one point, China is 
     very dependent on higher [inaudible word] loans. They are the 
     biggest recipients in the world. It's two to three billion 
     dollars a year. It may not sound like much. But it is crucial 
     when matched with a third yen loan package from Japan, and 
     most every nation from the United States. Don't use it as a 
     club publicly, but quietly and effectively, through 
     diplomatic channels.
       Nigel Holloway. I just want to say that the trade imbalance 
     within the U.S. and China is really quite extraordinary. U.S. 
     exports to China are less than $10 billion and China's 
     exports here approach $40 billion. A lot of it has to do with 
     the restructuring that is going on. The question then is, is 
     Chin going to become another Japan, the capitalist but closed 
     market. My hunch is it will not--because the corporate 
     structure in China is evolving very different from that in 
     Japan. Japan has these [inaudible word] networks of companies 
     that basically collude through long-term equity arrangements. 
     But the Chinese don't do business that way. I think that's 
     something to bear in mind.
       What we really have, as Jim says, is a market-access 
     question. China is starting to open its market. If you look 
     at the market within China, there are enormous barriers for 
     one province trying to trade with another. They basically 
     compete with each other, and stumble over each other, and try 
     and prevent goods from one province going into another. And 
     this is the area where the World Bank is especially keen to 
     see major changes. And I think it's also one the U.S. should 
     focus increasingly on: If it can pry open China's market, 
     this will be the biggest factor in increasing democratization 
     in China.
       Sen. Baucus. Stand up please. Thank you.
       Question. [Inaudible.]
       Jim Lilley. I'm glad you asked for clarification, because 
     there may be some misunderstanding. I'm not saying the United 
     States will stay out of this thing. We are involved up to 
     here. We have something called the Taiwan Relations Act, 
     which is the law of the land. We also have an increasingly 
     strong relationship with China. What I resent very much is 
     lobbying groups and foreign ministry tantrums towards the 
     United States to try to get us to become their point man on 
     beating up on the other side. That's what I don't like. We've 
     got a lot of leverage in this deal and I think we should use 
     it--because both of them really need us in this one.
       But don't get trapped into a Chinese ``tong war'' on it. 
     Keep you powder dry. Keep managing it carefully. Don't make a 
     great big announcement of a Taiwan policy review and beat the 
     gong saying this
      some sort of a big deal, when it turns out to be a big fat 
     zero and everybody knows it--the Chinese become furious at 
     the policy review and the Taiwanese are disappointed. Much 
     better to keep your mouth shut and work a little bit 
     quietly on this thing as it is run by all of the other 
     administrations.
       By the same token, you have to be careful in terms of 
     Chinese sensitivities on this. You also have to be careful in 
     the Taiwan process, but as I was saying to Bob Kupp earlier, 
     we have been pushing democracy in China for about 35 years. I 
     used to beat upon the Taiwan government regularly about 
     getting the dissidents out and letting the Taiwanese back in, 
     letting the political process work. We succeeded. And now 
     you've got a flourishing democracy, a chaotic democracy, and 
     even fist-fighting in the legislative halls.
       Jim Lilley. On the other hand, for the United States to 
     begin stumbling around in the thicket of Taiwan domestic 
     policies, watch your step. The responsible businessmen and 
     politicians in Taiwan know the limits of what they can do. 
     And they know that breaking with China is not in their 
     interest. But this doesn't stop demagogues and others from 
     raising hell on the basis of political strategy. On the other 
     side, on China's side, if I hear ``sacred sovereignty'' one 
     more time, I think I'll vomit. I've gotten into a lot of 
     trouble by noting how it sounds like Gunboat Diplomacy from 
     the 19th century. ``It's what you Chinese hate the worst. 
     Don't talk about [engaging in] it yourself; don't start 
     practicing it. Don't start flexing your muscles and saying if 
     we don't get what we want, we're going to use force. This 
     doesn't make any sense.''
       The irony is that China and Taiwan are getting along 
     extremely well--solving problem after problem. Taiwan just 
     hosted the highest-ranking Chinese delegation in history and 
     many, many leading figures in the political, economic and 
     cultural realms deal with their Chinese friends. You have 
     Taiwan businessmen going over there to spend four hours with 
     Jiang Zemin giving him advice on how to make a new central 
     bank. You've got people from Taiwan going over there and 
     reorganizing all of their deep ports--a major priority in 
     China. You got them keeping the whole economy bustling. Of 
     course, there's speculation, a few nasty little elements of 
     it, but it increases the growth rate.
       [[Page S6559]] So all I can say to America is: Be careful 
     you don't, somehow or another in the next year or so, get 
     trapped into this ugly little war or this ugly little fracas 
     they are trying to create. It's not in our interest to do so.
       Sen. Baucus. Any questions?
       Voice. [Inaudible words.]
       Nigel Holloway. Yeah. Let me just give you three principles 
     of what's happening in China right now. You have three 
     things. You have what we call persistent feudalism, which is 
     Confucianism--no, chaos collectively. This feudalism is part 
     of the Chinese structure. This mixes in with decaying 
     socialism. And this is socialism's ingrown privilege, a party 
     privilege. Third, you have rapid capitalism. You have 
     corruption, nepotism and growth. They all jam together in 
     today's China.
       If you have this growth and if you have feudalism, and if 
     you have this decaying socialism, what results is great 
     disparties of wealth between provinces, et cetera. And the 
     millions of people begin to move towards the productive 
     areas. It's very hard to control because these people live in 
     camps. They have three and four children. They pay no 
     attention to birth control or the national policy. It drives 
     the Chinese wild--who, of course, have some rather draconian 
     methods to keep things down. Basically, I think they have 
     been very successful in keeping control of the population--
     but it's not very pretty to look at. They think it's crucial 
     to the control of the situation.
       What they are trying to do now in a very, very concerted 
     effort is beginning to move investment capitalism into the 
     hinterlands, but they've got to make it competitively 
     attractive, and that's hard to do. They recognize the 
     problem; they recognize it's very serious. It's right at the 
     heart of how you reform state-owned enterprises. Because the 
     conservatives are saying, keep the money flowing. Others say 
     let them go bankrupt and take care of this thing through 
     other means. And it ends up as gridlock in many cases. But, 
     at least, I think they are acutely aware of the problem and 
     are trying to deal with it.
       Sen. Baucus. You have time for one more question.
       Question. [Inaudible words.]
       Drew Liu. We touch on the topic of the trade imbalance as 
     China opens up its market. And I would like to say something 
     more about the fundamental problem, the system problem, the 
     structural problem. One of the things is transparency of the 
     legal system. And if you don't have transparency--when the 
     local government, you know, the sector cannot break their own 
     laws--this instantly creates barriers. For instance, on the 
     WTO: The center wants to enter the WTO. The local, some of 
     the local wants to enter the center also, but not without 
     some incentive. But there's some problem in it. That is how 
     to guarantee the Chinese abide by these laws and the 
     standards. And, there are loopholes, you know, that are 
     unpredictable. Our future in China comes without a well 
     established legal system, without transparency and due 
     process.
       And the second thing is the political system. For instance, 
     entering the WTO, whether China can do it or not politically, 
     is a question. If, in entering the WTO, the center enforces 
     the regulations--you know, opening its market--then maybe 
     thirty percent of the state-owned workers will be unemployed. 
     A great political problem and a great risk to the Chinese 
     leadership. But are you going to take the risk or not take 
     the risk? And what if the risk becomes threatening and then 
     it [the new policy] reverses in some way. Much uncertainty 
     links to the internal process of the Chinese system.
       Jim Lilley. Okay. I just want to make one comment on 
     agriculture. A terrible problem for China is that 
     agricultural land is shrinking; the harvest is not good. They 
     are going to import more and more grain. It's going to be a 
     big problem and so I would say your agriculture-export 
     possibilities are considerable. Some estimates have China 
     importing as much as 100 million tons of grain by the next 
     century; they have made some bad converting mistakes in terms 
     of agricultural land, industrial land. The solution, people 
     say, is what they call village- and township-enterprises: 
     Basically capitalistic, they are put into the countryside, 
     are use surplus agriculture labor to create small consumer 
     items. But they've gone about increasing agriculture 
     production by importing chemical fertilizers, by developing 
     their own plants. It's really very, very difficult for them. 
     And I see a big market for agricultural products.
       Sen. Baucus. Okay. We have no more time! Let's give a great 
     round of applause to our panelists: Drew Liu, Nigel Holloway 
     and Jim Lilley. Bob mentioned a packet of information which I 
     think will be very interesting for everyone. I encourage you 
     to go pick up a copy as you leave. I want to thank CELI very 
     much for hosting this event--I want another soon. Thank 
     you.
     

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