Memorandum submitted by Foreign and Commonwealth
Office (China)
III BACKGROUND
China's Internal Situation
10. China remains effectively an authoritarian
one-party state ruled by the Chinese Communist Party. However,
since the beginning of Deng Xiaoping's "Reform and Opening
up" policy in 1978, the Chinese government has undertaken
a wide-ranging programme of economic reform aimed at modernising
the economy and developing China's external relations (especially
with developed countries). The imperative of modernisation, fuelled
by the desire to catch up economically with the west, shapes China's
policies and perception of the world.
11. The present Chinese government remains
committed to economic reform. President Jiang Zemin has continued
Deng's "open door" policies and has sought to improve
China's international standing. Premier Zhu Rongji is responsible
for overseeing the implementation of China's domestic economic
reform programme and has focused on restructuring State-Owned
Enterprises and the construction of a "socialist market economy".
Premier Zhu has also emphasised the importance of the rule of
law, the rationalisation of government structures and functions,
and the eradication of corruption.
12. However, China's economic reforms have
been tempered by the overriding concern to maintain social stability.
Thus these economic reforms have not been matched by corresponding
political reforms. Organised political opposition to the communist
regime is still not tolerated. Those attempting to organise democratic
parties or alternative labour organisations are often sentenced
to lengthy terms of imprisonment. A measure of democracy is being
introduced at village level but the current leadership shows no
signs of implementing systemic political reform. Fear of social
instability runs deep in Chinese society and the Party is conscious
that its legitimacy relies on creating economic prosperity and
ensuring social order. The watchwords of the leadership are stability,
reform, and development.
13. Nevertheless, Chinese society has changed
enormously as a result of the economic reform programme, and the
lives of most Chinese in the more developed areas are far better
than they were twenty years ago. Standards of living are higher
and the grip of the Party over society has loosened in many social
spheres. Access to new media is wider than ever before. 90 per
cent of households now have access to a television and more than
2000 newspaper titles are printed each week. There is tremendous
growth in Internet usage. An estimated 10 million people are now
connected—four times the figure of 1998—and estimates
suggest that within five years China will have the world's largest
internet population, behind only the United States. China's media
are developing rapidly in the sophistication with which they present
the news. But recent changes have not significantly increased
the diversity of political views on offer to the general public.
State ownership and supervision of the news media remain central
to government policy, and the Party continues to regard broadcasters
and the press as vital tools for guiding national opinion.
China's Foreign Policy
14. China's economic development has led
to its taking amore active role in the international community.
The end of the Cold War and the collapse of the Soviet Union have
altered the international environment and inevitably resulted
in changes in China's foreign policy. But China's interpretation
of its interests is still highly coloured by historical experience,
notably a strong tendency to recall the history of China's humiliation
and exploitation by western powers. Nationalism is a strong force;
it is not just one created for its own purposes by the ruling
party, but a real phenomenon to which the Party has to respond.
China remains fundamentally suspicious of the West, and of the
United States in particular. However, the leadership are aware
that opening up to the outside world and dealing with the West
are essential elements in China's development strategy.
15. China is committed to the principles
of national sovereignty and of non-intervention as set out in
the UN Charter and views with suspicion the development of the
principle of humanitarian intervention. China opposed NATO's intervention
in Kosovo and has registered strong reservations about UN sanctions
against Iraq. The Chinese government has in the past tended to
avoid entanglement in international affairs, but recognises the
need for a stable international environment to foster domestic
economic reform, and that it must participate in international
or multilateral fora to achieve its aims.
16. The Sino-US relationship continues to
dominate the perceptions of the Chinese leadership. It is a relationship
marked by China's need for access to US markets, technology and
investment, but also by a suspicion in Beijing of Washington's
strategic aims. The accidental bombing of the Chinese Embassy
in Belgrade by NATO was initially viewed in Beijing as a deliberate
act, and, officially at least, that remains the position. The
Sino-US relationship is as much dictated by domestic pressures
in each country as by principal continuing source of tension,
with the general US security role in the area a contributory factor.
In particular, China has expressed concern about US plans on missile
defence.
17. China seeks to combat what it sees as
US dominance through the concept of "multi-polarity".
In practice this means developing closer ties with other influential
countries or country groupings to counter-balance the influence
of the United States. China has worked to develop ties with Russia
and the European Union in particular. Japan has emerged as a major
investor in China and destination for Chinese exports. But the
Sino-Japanese political relationship continues to be dogged by
the legacy of World War II and Japan's security relationship with
the United States.
18. Russia is no longer the active threat
to China that the Soviet Union had been until the mid 1980s, and
relations with Russia are friendly if somewhat distant. China
has purchased significant amounts of military equipment from Russia,
including submarines, destroyers, missiles and advanced fighter
aircraft, which it cannot buy elsewhere for political reasons,
and is reported to have signed a contract to build Russian fighter
jets in China. The poor state of the Russian economy has meant
that commercial relations outside the defence field have been
relatively restricted. However China's support of the Russian
position on Chechnya is an example of how the two countries continue
to share common perceptions of some international problems and
can work together in the international arena in ways which are
sometimes inimical to Western interests.
19. China has been making real efforts to
improve relations with the other states of the former Soviet Union
on its borders, not least because of shared common concerns about
the rise of Islamic fundamentalism and about terrorism. As a result
of this China has engaged in detailed negotiations to resolve
outstanding border disputes and most of these have now been settled.
The first summit of the "Shanghai Five" (China, Russia,
Kazakhstan, Kyrgyzstan and Tajikistan) took place in 1999.
20. China is concerned to preserve stability
on the Korean peninsula, and has participated in the Four Party
Talks on the Korean Peninsula. While its relations with South
Korea are now generally satisfactory, China is also perceived
as having the greatest potential influence on the North Korean
leadership, although in reality what it can do is limited.
21. China has also participated in the ASEAN
Regional Forum and, in 1999, despatched civilian police officers
to East Timor as part of the international peacekeeping effort.
22. The most sensitive security issue for
China is Taiwan. Reunification remains a fundamental objective
for the Chinese leadership and they have invested a great deal
of political capital in their commitment to restoring China's
territorial integrity. Deng Xiaoping's "One Country Two Systems"
framework was originally intended to resolve the Taiwan question
and forms the basis of the Chinese government's strategy for peaceful
reunification. While China favours a peaceful resolution of the
Taiwan question, it has refused to renounce the use of force should
Taiwan declare independence, and has recently added a further
condition under which it might resort to force, namely if negotiations
on resolving the issue were indefinitely postponed.
23. China conducted military exercises in
the Taiwan Straits, in 1995 and again in 1996 (including, in the
latter year, missile-firing exercises) which, together with a
fierce barrage of propaganda and threats, were aimed at influencing
opinion against independence in the legislative and presidential
elections. During the 1996 crisis the United States moved a number
of ships including aircraft carriers to the Taiwan straits. This
decision was widely interpreted as a warning to the Chinese not
to increase any further its military pressure on Taiwan.
24. Tensions rose again over Lee Teng-hui's
characterisation of Taiwan-China relations as "state-to-state"
last year, and again most recently in the wake of the recent election
of opposition leader Chen Shui-bian, a previous advocate of Taiwanese
independence. China's policy is aimed at preventing further Taiwanese
moves in the direction of independence. The Chinese have been
discomfited by the growth of democracy in Taiwan which they fear
may lead to greater pressures for independence. Since Chen's election,
the Chinese have adopted a "wait and see" policy. But
they have made clear that Chen must accept the principle of "One
China" as an essential pre-condition for cross-straits dialogue.
25. China has continued to build up its
military capabilities and to demonstrate a heightened state of
military preparedness, but there is currently no indication of
preparations for major military action against Taiwan. At the
same time China has been trying to influence other countries to
limit the scope of their relations with Taiwan. There may well
be differences of view within the Chinese leadership on how far
and how fast to pursue Taiwanese reunification. (More detail on
the cross-straits relationship is set out in the separate Memorandum
on Taiwan.)
The Economy
26. China has experienced rapid economic
growth in the last 10 years, and, although still a developing
country, now has the seventh largest economy in the world. However,
the geographic distribution of economic wealth is uneven. Almost
half of China's GDP is generated in the narrow strip along the
east coast; another third comes from the central provinces; but
the vast northern and western regions of China account for only
around 15 per cent of total GDP.
27. Since 1989, China claims that its GDP
has grown on average by almost 10 per cent a year. Although China's
statistics are widely regarded as unreliable, there is no doubt
that the rate of growth has been impressive. Rapid growth and
high inflation caused some overheating in the mid 1990s, but the
government took measures to reduce inflation, and growth slowed
to a more sustainable rate and inflation dropped to under 1 per
cent. Economic growth has continued to slow, partly as a result
of the Asian financial crisis and partly due to the effects of
economic reform.
28. The Chinese government achieved a number
of economic successes in 1999: it claimed a 7 per cent GDP growth
rate, helped by the issuing of bonds for investment in infrastructure,
and saw an increase in exports of 6 per cent, attributed partly
to recovery of regional economies and partly to increases in VAT
rebates for exporters. Recorded imports also experienced rapid
growth, driven in part by a severe crack-down on smuggling. Nevertheless,
China continued to run a trade surplus and is expected to continue
to do so this year. This should help to maintain currency stability.
The Chinese government's plans for 2000 are to follow broadly
the same policy lines with the hope of achieving similar results.
29. A significantly slower growth rate would
cause unemployment to rise unacceptably. The official figure for
registered unemployed in 1999 was 3.1 per cent, unchanged from
1998. Another 3 to 4 per cent of the workforce have been laid
off from their jobs but still receive a small monthly payment
from their work unit. However, unemployment statistics in China
are particularly unreliable and the real unemployment rate may
be as high as 20 per cent. Whatever the absolute figures may be
the structural problems in the labour market will not be easy
for the Chinese government to resolve. The unemployment situation
and the resulting potential for social unrest will continue to
be a major concern to the leadership.
30. The Chinese Government recognises that
economic growth and new job creation must come from the non-state
sector, and constitutional changes in March 1999 legitimised the
status of the private sector. Official data on the private sector
is being published for the first time this year. Generally, official
statistics underestimate the size of the private economy as many
privately held businesses are registered as collectives or other
forms of ownership for tax or credit purposes. Although many sectors
of the economy are still closed to private investment and many
private businesses continue to have difficulty gaining access
to credit, it is estimated that private businesses generated 33
per cent of China's GDP in 1998, compared with 37 per cent from
the state sector. The number of urban employees in State-Owned
Enterprises has fallen from 112 million in 1994 to 91 million
in 1998, while the number of private and self-employed workers
has more than doubled from 15 million to 32 million in the same
time period.
31. The Chinese Government is also concerned
at the growing economic disparities between regions. It has therefore
put forward a number of plans to reduce these disparities by attracting
foreign and domestic investment into the western provinces.
32. One of China's priorities remains reform
of the State Owned Enterprises, but the government has made it
clear that this does not mean wide-scale western style privatisation.
The government intends to retain state domination in sectors which
are critical to the national economy, while enterprises in other
sectors are being encouraged to issue shares and make use of private
sources of capital. The government is also intent upon implementing
legislative improvements to clarify ownership rights, improve
and modernise management practices and separate government from
business. Some improvements in profitability were reported in
1999, aided by reclassification of SOEs, reductions in interest
rates, some closures and bankruptcies, and writing off of debts.
Closures and bankruptcies will continue to be guided by the need
to avoid unacceptable levels of unemployment and the cost to the
financial system of writing off debts.
33. China continues to press ahead with
reform of the financial sector in preparation for competition
from foreign financial institutions after joining WTO. Following
the successful listing of the Pudong Development Bank in 1999,
more financial institutions are expected to look for listings
on domestic stock exchanges. In addition to the government has
begun to take action to deal with the non-performing loans of
the four State-owned commercial banks, through the creation of
asset management companies.
WTO Accession
34. China applied for GATT membership in
1986, converting this to an application for WTO membership in
1992. Progress has been fitful, but picked up last year when bilateral
market access deals were finally reached with the US and others.
However, at the time of writing, a deal with the EU remains to
be agreed. The US deal is also contingent upon a favourable vote
in Congress on Permanent Normal Trading Relations (PNTR). This
is likely to take place in the week beginning 22 May.
35. We and our EU partners are keen to see
China accede to the WTO and to play a full part in the international
economic trading system. We want to ensure that China joins on
terms which would enhance, not undermine, the principles of the
WTO, including greater market access. The EU wants China to address
specific EU priorities not covered in the agreement with the US.
However, China has so far been reluctant to make concessions in
EU/UK priority areas such as life insurance, telecommunications
and easing of state trading monopolies.
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