House of COMMONS






East Asia



Wednesday 8 March 2006




Evidence heard in Public Questions 65 - 137





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Oral Evidence

Taken before the Foreign Affairs Committee on Wednesday 8 March 2006

Members present

Mike Gapes, in the Chair

Mr Fabian Hamilton

Mr David Heathcoat-Amory

Mr John Horam

Mr Eric Illsley

Andrew Mackinlay

Mr John Maples

Sandra Osborne

Mr Greg Pope

Sir John Stanley

Richard Younger-Ross


Memoranda submitted by Dr Linda Yueh, Professor Jude Howell and Professor Yong‑nian Zheng


Examination of Witnesses


Witnesses: Dr Linda Yueh, Pembroke College, University of Oxford, and Department of Economics, London School of Economics and Political Science, Professor Jude Howell, Director, Centre for Civil Society, London School of Economics and Political Science, and Professor Yong-nian Zheng, Head of Research, China Policy Institute, University of Nottingham, gave evidence.

Q65 Chairman: May I welcome our first of many witnesses this afternoon? I apologise to the three of you for keeping you waiting for a few minutes, but we have had a lot of business to deal with. May I begin by asking an introductory question? When you respond could you say a little about yourself and the work that you are doing, so that we have a sense of what is appropriate for the questions? I know that you are specialists in different aspects of China and obviously we do not require all three of you to answer on every subject. It would help us if we were able to move through a number of subjects but, nevertheless, if you feel that you want to come in on a question please do so. Can I begin by asking you about the situation in terms of this phenomenal economic growth in China? Is that going to continue at such a high rate of nine per cent per annum? Is the Chinese Government actually in control of the economic growth? We note that they have just recalculated their statistics with regard to a major upward adjustment of their gross domestic product figures, and I would be interested to know how you see this developing in the future. Dr Yueh?

Dr Yueh: I will start with the introduction first, I think. I am Linda Yueh. I am an economist and I study the economy of China. I am affiliated to the London School of Economics and the University of Oxford. My view on China's growth is that there are very good signs that growth is sustainable for the coming years, but there are also a number of structural issues in the Chinese economy which have to be resolved through progressively harder sets of reforms to sustain that growth. Specifically, I am referring to the challenges raised by dismantling the state-owned system which came from the period of central planning, and I am also referring to the issues associated with a developing country - so things like imperfect credit markets, information, or lacking information. These are issues of development that many developing countries face, and China has essentially to face both sets: the sets of transition issues and development issues. That being said, it has managed to grow remarkably well in the past 27 years since economic reform started. National GDP approximately doubled every eight years or so, at a growth rate of nine per cent. It is a phenomenal rate of growth. Given that per capita GDP is still less that US$ 2,000, China still has quite a way to go before it is a medium‑level developed country and has exhausted the early spurt from growth. Is the Chinese Government in charge of the process? The entire reform path has been characterised by a lack of decentralisation. Much of China's economic reform, therefore, started with allowing regions to experiment; creating Special Economic Zones; allowing different provinces to take a lead on experimenting with market economy forces. That process is indeed still continuing, but the challenge for the government now is whether they are able to maintain this type of decentralised growth approach as the policy issues of governance become increasingly more difficult, as the economy becomes more marketised.

Professor Zheng: I would like to make a point. I am a political scientist. With regard to your question whether the government needs to control the economy, I think that now the government tends to control the economy less and less. The main sources of China's economic growth are from both the external side and the internal side. On the internal side there are still very many domestic events, many from the education sector. China is now producing lots of engineers. Also, in the next few decades in China the age structure will still be very favourable for high economic growth. As to China's economic growth from the new system, the new institutions and the private sector, the private sector is now becoming larger than the state sector. As Linda mentioned, because of rapid decentralisation all provinces are competing with each other. I think that no one can stop this kind of local competition, which of course promotes economic growth. The problem now for the Chinese Government is how to manage the economic growth. Actually, in recent years the role of the government has been how to control high growth, not to promote high growth, because there are a lot of constraints - an energy crisis, and all kinds of things. Latterly, the new government has been trying to exercise so-called macro economic control, to slow down economic growth to a reasonable rate. I feel that in the next decade high growth will be maintained, because there are lots of social or economic issues which have to be solved by growth, by development.

Q66 Sir John Stanley: I would like to ask you for your assessment of the political impact of this very rapid rate of industrialisation. We have all been reading accounts of social unrest taking place in China which, in part, seems to be related to the Chinese authorities carrying out enforced acquisition of land and paying inadequate compensation, as seen by the farmers - in most cases very poor farmers - owning the land. There were widespread reports about the riots that took place in Huaxi in Zhejiang province last April, when the government were trying to take over a substantial amount of land in order to construct 13 chemical plants. I noted that in Clifford Coonan's article in the Independent yesterday, which was written from Zhejiang province in China, he says, "Last year, 87,000 serious disturbances to public order were recorded, a rise of almost seven per cent". He also reported that the central government had come down hard on the Zhejiang provincial government, and that they "took the rare step of punishing eight officials from Dongyang and Huaxi in December for failing to 'preserve social harmony'". Could you give us your view? Given the huge pace of industrialisation and the enforced acquisition of land, what is likely to be the continuing political impact of this with regard to the huge numbers of people in China who are dependent on continuing to be able to farm?

Professor Howell: Maybe I will start off. My name is Jude Howell. I am from the London School of Economics and the Director of the Centre for Civil Society. I am a political scientist like my colleague here, and have worked on China for over 20 years. I also lived in China in the 1980s and, like probably everybody here, I am a frequent visitor to China. I think that the economic reforms, the pace of change and the rapid growth are putting enormous pressures on society and governance. One of the issues that the new leadership and previous leaders have been concerned about is the growing inequality: across generations, between rural and urban areas, and across different sectors of society. This is an issue of deep concern to parts of the central leadership. This is why we are seeing a shift in central government policy, away from a unique focus on rapid growth to what is called a "balanced" approach to development, a people‑centred development, which is trying to take account of some of these contradictions in processes of rapid economic growth and social change. The issue of land requisition is a very important one. I do not have the exact statistics with me, but I would say that in China people are becoming less dependent on farming as their main source of income. There is a surplus of labour in rural areas, hence a huge migration of many young and middle-aged migrant rural people to urban areas in search of employment. Therefore, land is an issue and land requisition is one of the issues around which people are protesting. Other issues around which protests have been taking place relate to the back-payment of wages for migrant workers in many of the factories, particularly in the construction industry - which, again, the central government have taken heed of and have been trying to address. Another issue is in relation to the situation of laid-off workers in China and pensioners who, for various reasons, have not been receiving their dues according to the regulations. All of these different tensions have been the source of various protests, many of which, of course, are not recorded formally. So the figure of 87,000 is probably a good underestimate of the level of protest.

Professor Zheng: I think that the land issue-led protests are somehow inevitable in China, because China is now undergoing rapid industrialisation and urbanisation. To make progress, I think that no one can stop this process of urbanisation and industrialisation, which of course trigger off land issues. The problem is the way the government deal with the issue. In China, the system is highly decentralised; so China has laws and regulations, but enforcement is always a problem - a big problem. Local government - you have mentioned Zhejiang, and in other places - does not follow the regulations and the laws made at the centre. Nevertheless, as Professor Jude mentioned, the top leadership has realised the seriousness of the issue and is now trying to make a policy shift, to give policy priority to farmers, migrants and rural workers. There will be huge difficulties ahead for the leadership but, nevertheless, some sort of progress is underway.

Q67 Mr Horam: Can I come back to what Dr Yueh said? It was very clear, because you distinguish between, on the one hand, the problems inherent in running down communist state-owned systems, state-owned companies and, on the other hand, the sorts of issues which any developing country will face - transitional problems and problems of that kind. Coming back to the state-owned bit, that has been run down quite a lot and the consequences are clear for unemployment, and also for the collapse of the social systems which they very often funded. Has that a lot further to go and will it go much further in the next four or five years?

Dr Yueh: There is still quite a way to go before China has effectively reformed its state‑owned system. It has made quite a lot of progress in, effectively, privatising small state‑owned enterprises; but the medium and the large ones, for the very reasons that you state, are difficult to reform. So parts of them have become corporatised, meaning that there are shares which are issued in those firms and which are floated on the two stock exchanges in China.

Q68 Mr Horam: Is one of the reasons for those large organisations not being privatised the power issue? The government want to keep control, fundamentally.

Dr Yueh: Yes, I think that one recurring question in China on this topic is to what extent is China intent on maintaining control of key industries - this "national champion" policy, which has gone global since the mid-1990s.

Q69 Mr Horam: What is your view about that?

Dr Yueh: My view is that I do not think there is yet a clear line. We do not quite know where China is headed in this, but it is quite clear that they are very keen to promote industries which are competitive at home and competitive abroad, so that China can manage the process of globalisation. At the same time, they recognise the inherent inefficiencies in having state ownership in generating a profit constraint, which does not tend to be binding because firms do not have to perform well: they are owned and supported by the state. It means that these SOEs have the potential to be inefficient, and large numbers of them are. That is what we see in terms of the lack of competitiveness of the large and medium state-owned enterprises, their inability to look after their workers, and then the difficulty of reforming these enterprises because of the associated social welfare and full employment objectives that these SOEs hold. That is the current situation. Since the mid-1990s there has been a great effort towards reforming SOEs and, in the last couple of years alone, there has been a push towards full privatisation of the listed companies.

Q70 Mr Horam: Do you think that will happen?

Dr Yueh: I think that they have attempted to undertake privatisation through what is known as "share issue privatisation". Currently, the stock exchange is not fully tradable, meaning that the state controls about two-thirds of the shares on both stock exchanges. Therefore, they are not private companies, where all their shares can be traded and you can have the market dictate what the valuation of their shares is. The government have attempted to release all of the non-tradable shares onto the market. It was not successful on the very first attempt last year, primarily because there was not a feeling that there was enough corporate governance, transparency, accountancy standards, to give the markets confidence that this type of privatisation will bring value to the shares. They have now stepped back, and they are going to do this in stages. They will ultimately make these companies private - or "private" as in the shares are listed publicly and owned - but the big question is that their parent companies, a lot of the major companies, are not listed. Whether those will be privatised, or what form they will take going forward - meaning will they be primarily government-owned - I do not think is quite clear yet.

Q71 Mr Pope: I want to ask about the political effects of fairly rapid economic progress. It seems to me that, if you have a rapidly growing middle class, rapidly growing access to the internet - I think that China has the second largest number of registered internet users after the USA - this is bound to force some political change or, at the very least, it is bound to create conflict. As people become wealthier, as they have greater access to information, they will be very dissatisfied with the status quo and it will lead to tension with the ruling elite. I wonder if you would like to give us your views on how that will pan out over the next five to ten years.

Professor Zheng: It is a good question. As you mention, the rapid socio-economic development has generated enormous pressure for China in political changes; for example, the internet. Of course, the government still exercise very tight control over the internet. Nevertheless, because of the huge amount of internet users, it is increasingly difficult for the government to exercise that tight control. The internet-based or internet-facilitated social protest is now becoming more and more frequent, especially over lots of domestic issues. As I understand it, many social protests are now facilitated by the internet. So some sort of change must take place, but the problem is how the government are dealing with the change. Of course, the government dislike bottom-up social changes. That is why the government will do everything to control social protest and social movement; but I think that somehow the government are taking the initiative in trying to introduce some sort of reform from the top. For example, in some areas the government have opened more social participation, allowing NGOs to grow, to take over government functions. Also, as you mentioned, China now has a sizeable middle class. Basically, most of them are new private entrepreneurs. That is why two years ago, the Communist Party, the ruling party, legitimated capitalism and allowed capitalists to join the party - which previously was unimaginable, because the whole purpose of communism was to destroy capitalism or capitalists. So for the government, or the party, it has been quite problematic. On the one hand, exercising social control, very tight control, to prevent bottom-up social change and, on the other hand, taking the initiative to accommodate socio-economic changes.

Q72 Mr Pope: Can I look at this from another angle? I think that is quite interesting in terms of how the growing middle class relate to the political process. Could I look at how the poorest in society are facing up to this challenge? It seemed to me that unemployment in the cities could be quite high in some areas. That in itself is an unusual phenomenon, for an economy which has not really had urban unemployment because of the way the state controlled the economy. Now, as it embraces a capitalist mode of production, it inevitably forces some people out of work, at the same time as people are migrating into the cities. That in itself must also have some fairly dire political consequences. If there is a growing and emboldened middle class and, at the same time, a growing number of urban dispossessed, that seems to me to be a recipe for political difficulty.

Professor Zheng: That is exactly the dilemma that the Chinese Government are now facing. As Professor Jude was saying, NGOs and business associations are now very powerful. They have got themselves organised and they can influence government policy. On the other hand, farmers, migrant workers and rural workers are not allowed to be organised. The union used to be a part of the state and the union does not speak for the workers. The farmers do not have their own organisations. That is why there is a lot of social protest, because their interests are not articulated; their interests cannot be represented in the government's policymaking process. The previous government, under Jiang Zemin and Zhu Rongji, gave the highest priority to newly arising social crises. Now, with the annual session of China's National People's Congress, or China's parliament, going on, there are many new policy initiatives and they are paying a lot of attention to farmers and the workers. I am still not sure whether these new policy initiatives will work out, because the less privileged social groups are not self‑organised - but they are paid attention to now.

Q73 Mr Pope: This rapid expansion in the number of NGOs and locally based organisations - is this effectively a kind of safety valve for the government, so that people can express themselves through a locally based NGO in a way that they could not five or ten years ago?

Professor Zheng: I think that it depends on different areas. In some areas, like social services and poverty reduction, the government allow NGOs to play a substantial role; but in other areas, like human rights, religion and politics, NGOs are still not allowed. So it depends on different policy areas.

Q74 Sandra Osborne: Could I take you back to the economy, in relation to energy? China has a huge energy consumption and the government have an aim of trying to encourage energy efficiency, with a doubling of consumption by 2020, but at the same time wanting to quadruple growth in the economy. How can that happen? How could they manage to do that: manage to achieve energy efficiency at the same time as this huge growth?

Dr Yueh: China is not particularly energy-efficient. It is less energy-efficient than even most of developing Asia. So from that perspective - improving efficiency - there are technologies which could allow it to use the energy that it has better. This also extends to building infrastructure which could improve the efficiency of delivery. The quadrupling of the growth rate is based on a trend growth of about nine per cent. You could imagine that GDP growth will plough ahead, due to the other factors that I have mentioned, and energy becomes a possible constraint, but it is not a constraint that might come into effect very soon. China is concerned about energy efficiency; it is concerned about having sufficient energy sources, as we have seen in its overseas investments; but China itself has a large reserve of coal. So part of it is efficiency; part of it is making sure that it does not become a constraint; but part of it is that, because it has a lot of coal, there is a lot of pollution which is associated with current energy use. That is why they are pushing to improve energy use, but it may be some time yet. China is likely to grow and achieve a per capita income of US$ 3,000 by 2020. That would be an achievable level, given the current energy and infrastructure within the country at the moment.

Q75 Chairman: Dr Yueh, you said in the paper that you have sent to us, which was very helpful, that there were problems with the legal, regulatory systems. What needs to be done in that area to deal with the problem of the banking sector in particular, and the bad loans and the potential threat that poses? Is there a danger that, although you are optimistic about sustained long‑term growth, there could be some serious problem arise because of bad loans, the banking system, and the regulatory framework not being strong enough? Is there a potential for some disaster?

Dr Yueh: I should clarify that I am always cautiously optimistic on China! I can see the potential but I can also see the numerous issues and obstacles which could impede growth if reform is not undertaken. The reforms are getting harder, and the banking sector one is a good one to show why reforms today have to be both more complex but also broader. It is not feasible to reform the banking sector, for instance, unless you look at both the economic and the legal sides of reform. On the economic side, for the banking sector official statistics say that the amount of non-performing loans are falling, but the underlying problem of non‑performing loans is structural to the economy. State-owned banks have non-performing loans through policy-directed lending to state-owned enterprises. They support the state‑owned enterprises for the reasons that we mentioned. Unless they are able to undertake a reform that creates jobs, creates a social safety net, improves the competitiveness of SOEs, and cuts off the flow of non-performing loans from the close relationship of the state-owned banks to the state-owned enterprises and the state, then even if the stock is falling the flow is likely to continue. That is the economic side. Of course, many transition economies undergo banking crises. It is a very difficult point of transition. On the legal side, China has always encouraged a dual-track reform process. It allows a market sector to develop alongside a non‑market. So one of the ways in which China would like to improve the banking and the financial sector is to allow essentially private banks - non-state institutions - to increase their share in the entire lending system. This makes the state-owned banks' not-very-attractive portfolio shrink in relative size; but the difficulty of this approach - which worked with food prices and various other reforms early in the process - is that you need to have legal, regulatory, information, credit, assessment, risk, and all of these types of structures in place before you could have a well-functioning private financial banking sector, driven by interest rates and driven by risk and profitability. They have to do both before the sector could make me more optimistic rather than less.

Q76 Mr Hamilton: Doctor, you said earlier that you envisage the per capita income growing to US$ 3,000 by 2020. I am not sure who will be best able to answer this question, but do you feel that the present dominance of the Communist Party, the total control by the Chinese Communist Party, will be challenged further by civil unrest as the country grows richer? Will there be a demand for genuine democracy, or are people satisfied that their economic improvement and the circumstance of their personal wealth increasing as China's economy grows is sufficient recompense for the lack of any kind of true democratic choice?

Professor Howell: I might come back to the point about the middle classes, because I think that there is a tension there between having an interest in politics and political change and an interest in consumption. I think that we can see in many developed countries a far greater interest in consumption than in formal politics. There are considerable tensions that arise through the increasing wealth of certain sectors of society in China, including the middle classes. Whether that translates automatically into greater demands for democracy is very difficult to predict. I do not think it is inevitable that in 20 years' time China will become a multi-party democracy. Certainly we have seen that there have been initiatives to demand greater democracy in China, as we saw in 1989 and also the foundation of the Democracy Party in China in 1998, which was of course quickly prohibited. I think that what we will see is increasing contestation of the boundaries of authoritarianism in China. Therefore, we see middle-class activists, working-class activists, farmer activists, pushing at these boundaries more and more, and also changes in approach towards these protests from the top and at the local level. I think that this will be a very contradictory process: of, on the one hand, a process of repression and continuing coercion and, on the other hand, of small-scale initiatives to allow people greater room to articulate their demands. A fundamental problem is the lack of any institutional mechanisms for the articulation of demands. The old system of liaising between the government and society were the old mass organisations like the trade unions, the Women's Federation and the Communist Youth League. We are seeing that, in the process of transition, they also have to struggle with transition. In the case of the All‑China Federation of Trade Unions, this is particularly challenging. For many years they have ignored the interests of migrant workers and have suddenly, slowly, begun to wake up to this in the last few years. In the case of migrant workers, for example, it is very difficult for people to organise themselves and, when they do, very often such organisation is quickly repressed. In terms of political change in the future, I think that we will see increasing contestation of the boundaries of what is possible, with cycles of repression, coercion, coupled with increasing pushing of those boundaries from different groups in society. If I were to share my own personal experience, China is considerably more open now than 20 years ago in terms of the ability of people to speak their minds, and so on; but there are still many remaining concerns about the ability to organise, the right to associate, human rights, and so on.

Q77 Mr Hamilton: Is anybody else going to come back on that?

Professor Zheng: You mentioned the middle class. I think that the role that the middle class plays in Chinese politics is quite complicated. On the one hand, of course, the middle class demands political participation. So we have now been seeing the capitalists' and private entrepreneurs' property rights protected by the constitution. They can join the party and they have party membership. On the other hand, this middle class also needs protection from the communist state and its power, because the majority of Chinese people are still farmers and workers. The new rich actually need the authoritarian state to protect their interests. This is the current situation. There is now a lot of debate going on in China about whether the regime, the political system, should be more wide open to proper political participation. I do not think that, as in the case of Singapore, middle class means democracy. There is still a huge gap between middle class and democracy. My second point is that China is likely to take political reform, so-called democratisation, ideally from the top. I have learnt that the government have established a so-called "constitutional reform committee" to talk about how the NPC, the National People's Congress, can have more elements for political participation, interested representation, and so on. China has practised rural democracy at the village level for many years, and now at the township level. That is the basic level of the administration. Township elections are also taking place on an experimental basis in many places. Another thing the party is doing is to introduce so-called intra-party democracy, and the major party cadres are elected by party members. In China, the Communist Party now has more than 68 million party members. That is quite a lot. If the party can have some sort of intra-party democracy, that is also making progress. The problem for China's democratisation is not whether China will be democratic or not; the problem is whether you can have a so-called liberal democracy, a Western type of liberal democracy, under a one-party system. That is the most difficult part. I think that, for the party to survive within this new socio-economic development, some sort of democracy must be introduced, just as the leadership is doing now.

Professor Howell: Perhaps I may add that the Communist Party is quite adept at transforming itself and it has been very good at absorbing different groups in society. So we see the opening of the party to entrepreneurs. It has been very interesting that, with the village elections in China, a good number of candidates who have stood for village committee positions in the village elections have not been party members. However, this has also been a very good strategy to rejuvenate and resuscitate the Communist Party at the most basic level because, where a non-Communist Party candidate has become the village chair, they are quickly approached - often successfully, sometimes not - to become a party member. In this way, at the most basic level, the Communist Party is able to re-legitimise itself. This is particularly important where, for example, the previous incumbents were considered by local people to be corrupt or dishonest. The village elections have proved a very effective way of getting turnover and then absorbing such people into the party. I think that we should be aware of that also in relation to the middle class.

Q78 Mr Hamilton: Can I check on one fact that Professor Zheng gave? Did you say 68 million party members?

Professor Zheng: That is right.

Q79 Mr Hamilton: I think the British Labour Party would be delighted if they had that many!

Professor Zheng: Also, I have to mention that the majority of party members are now professional technocrats, middle class. Previously, under Mao, the majority were workers and farmers. Now China is learning, like the Singapore model, to transform the party into an elite party. China has a huge population, but 68 million is still quite a lot.

Professor Howell: I should add that 16 per cent of those are women.

Q80 Mr Illsley: In terms of the increase in the Chinese economy and the problems that causes with social inequality, perhaps you could tell us whether that is exacerbated, rural against urban, and in geographical areas? I recall that the last time the Committee visited China in 1999 we visited Shanghai. The mayor of Shanghai told us an old proverb, along the lines of, "Beijing is far away and there are many hills between here and where the Emperor lives"; in other words, "We will do as we want in Shanghai...." Are there major geographical differences within the country and are any steps being taken to address that? Or is it simply a policy of, if one area pushes forward, it pushes forward on its own?

Dr Yueh: The measures of income and equality for China show that it has risen very rapidly throughout the reform period. Since 1979 the Geni coefficient, which is a measure of inequality, is roughly around 0.45 for China, making it a fairly unequal society. The evidence suggests that, although hundreds of millions of people have been lifted out of poverty, the growth in rural incomes lags behind urban incomes. They were starting from a lower level and now there is an increasing gap between the two. That gives one of the measures, which is the urban-rural divide. One of the other measures of inequality is coastal versus interior, because three-quarters of China's GDP can be accounted for by the three major river deltas on the coast. This essentially means that you have various divisions, which can be traced to the way China has developed and which is why the current growth strategy is intended no longer to be growth at any cost but growth which tries to take into account the consequence of the way that China has developed. However, the level of inequality between urban and rural areas in recent years has plateaued, and that is because of increasing urbanisation. So intra‑province inequality has been falling but inter-province inequality is still expanding. Some provinces are very rich - Guangdong - and other provinces, like Zhejiang, will be very poor.

Q81 Sir John Stanley: Can I turn to Hong Kong? As we know, the Chief Executive's proposals, through the constitutional task force, for some modifications of the electoral system in Hong Kong were rejected by LegCo. The objective amongst the democrats in Hong Kong is of course to achieve a genuine universal suffrage system, with the ultimate abolition of the functional constituencies and to go to a one-person-one-vote system. Though, in fairness to the Chinese, it is right to point out that that was never achieved during the British period of colonial government of Hong Kong. Can you tell us whether you think that the government in Hong Kong, the Chief Executive in particular, will seek to modify the proposals that were originally put to LegCo, to try to get a majority vote in favour of them through LegCo, or whether the position of the Hong Kong government will be, "That's as far as we are prepared to go, certainly at the moment", and it is a matter of "take it or leave it"?

Professor Zheng: I think that, for the moment, it is quite unlikely that the Hong Kong government will have a dramatic change over the proposal for political reform, because China as a whole is still an authoritarian system. I do not see any possibility for this authoritarian system agreeing to Hong Kong democracy, that is, radical democratisation in Hong Kong. The problem is that a few years ago the government felt that it should pass Article 23, which deals with national security. I think that, unless this article was to be passed before radical democratisation, on the Beijing side there would be no possibility of passing this article after democratisation. So lots of negotiations are going on, both on the Hong Kong side and on the Beijing side. I think that Beijing still prefers an incremental way for Hong Kong's democratisation, not a radical way. Beijing says that, once radical democratisation takes place, the situation will become more complicated. For the moment, Beijing has used different economic means to stabilise Hong Kong. The situation since last year has been quite good, and the Hong Kong people's confidence is coming back; the economy is again in good shape. So there is no urgent need for the Beijing government to allow Hong Kong to go to a radical democratisation process.

Q82 Sir John Stanley: Do either of the other two witnesses want to add anything to that?

Professor Howell: No.

Dr Yueh: No.

Q83 Sandra Osborne: At the moment, China is attracting a great deal of foreign direct investment because of the cheap production costs. As wealth increases, will that come under pressure? Could you foresee a situation where foreign companies take their investment elsewhere as costs increase in China? How would it affect the economy if that happened?

Dr Yueh: Since China's open-door policy took off in 1992, exports have become increasingly important as part of its economy, but the way that China has increased exports is via attracting foreign direct investment, taking those multinationals which are investing in China and putting them into joint ventures with Chinese firms. This has happened, primarily starting in the southern provinces but is now happening in many of the Special Economic Zones. There are two implications from that. One is, if a Chinese firm is in partnership with a foreign firm with more advanced technology, it facilitates the technological upgrading of that Chinese firm, which would allow China to grow even if the export side were to slow. The other element is, by attracting foreign direct investment in this way, China has plugged itself into what we call "production chains" across Asia. So there is a high degree of vertical specialisation: where a firm will locate partially in China for part of the process and then partly in other Asian countries. That would suggest that, so long as Asia remains attractive as a place for multinationals to locate, China is part of that chain. In my submission I gave some evidence about the rapid growth of this type of trade. That implies that if labour costs were to rise in China, even though China is still very much below the level of wages in the newly industrialising countries, which are the old East Asian Tigers, it still has a place in that production chain. Finally, if China's membership of the World Trade Organization, which it has joined since 2001, means that it has now opened its domestic market and will do so increasingly, then the openness itself will bring with it pro-competitive effects; meaning that, if you find more efficient companies locating on their own in China, they would stimulate productivity and competitiveness with firms around them. So the benefits of globalisation for China are quite varied and only part of it would be driven by its original source of what we call comparative advantage, which is low-cost, abundant labour.

Q84 Sandra Osborne: Is the skills base in China expanding sufficiently to go into a more high-technology export market?

Dr Yueh: China in this respect has potential, but we have not yet seen it in terms of the technological advancement indicators. China graduates around two million scientists and engineers per year, but the overall enrolment in tertiary education is much below that in secondary and primary education. It is the feature of a developing country but, because of China's 1.3 billion people, it means that it can still generate quite a high number of what we would consider to be potential innovators. China's overall skills level is fairly good, because of the high levels of educational enrolment and attainment at the primary and secondary level. The challenge for China now is to translate the skills of its scientists, those who are educated to degree level, into productive capacity. So they could innovate, but do they translate that into breakthrough, general-purpose technologies which stimulate economic growth? That is a hard question for any economy and it is also quite a difficult one for China. The evidence is that China has not shown very much technological advancement in its growth so far, but there are its efforts towards investing more in R&D - China now invests much more in R&D as a percentage of GDP than it did in the past and is expected to outpace that of the OECD average in the next few years - and it has created high technology development zones. It has entirely transformed the Special Economic Zone system so that it can have these hi-tech centres, to create science and industrial parks, to help its researchers push through to technological advancements which will generate long-term growth.

Q85 Andrew Mackinlay: This is perhaps a matter for Professor Howell. The impression I have in broad-brush terms is that democracy at a very local level, outside the main cities, is fairly pluralistic. People do not have to be candidates of the Communist Party; lots of independents are elected, even to senior posts in the municipal government. I wonder if we are comparing like with like. Presumably some of these local government units are of quite a substantial size in terms of population. I think that you used the term "village" - I forget the term you used - but what I want to establish is if, in some of these local government units where people are voted in against the Communist Party-anointed candidate or candidates, where there are lots of independents, we are purely talking about the village, or are we talking about municipalities or county council equivalents of some thousands, hundreds of thousands. It seems to me that is very important. We tend to think in terms of the broad, federal structure: central government, Beijing, and the big regional governments; but I would like to get some feel as to the level below, how democratic that is, and what sorts of numbers we are talking about.

Professor Howell: We are mainly talking about village committees. The lowest level of government ---

Q86 Andrew Mackinlay: Parish council, basically?

Professor Howell: ...is the township. However, village committees - the next level below - carry out certain government functions. For example, in the past they would raise grain and agricultural taxes, be responsible for family planning policy, and other kinds of directives which come down from the centre - which creates a contradiction for any village committee head because, on the one hand, they have to look upwards and, on the other hand, they have to look downwards. Most of these elections have started at the village level and are an initiative of alliances between what you could say were reform-minded party members, ministers at the top, and the lower levels, the villages. The township government has often been quite resistant to the idea of having the village committees elected, because it is not so easy for them then to assert their control over the villages. When people stand for the village committee elections they cannot stand as an alternative party, except for the parties that are recognised in China. They stand as individuals. So they are always standing as individuals, rather than standing as a representative of a party. The elections have been greeted with enthusiasm in many quarters and have inspired other initiatives. For example, in some villages you will find that the selection of party branch leaders at village level, where the party branch is big enough to exist at village level, has also given way to elections - so a more competitive type of election than before. There have also been experiments at township level with elections. There are experiments at urban neighbourhood committee level, with elections. The issue really is that, although there have been experiments at township level with elections, the party is not yet ready to allow this to be generalised across China. The risks are seen as too big, whereas the risk of having village committee elections is less.

Q87 Andrew Mackinlay: So the policing and enforcement, if that is the correct word, of, say, the one-child-per-family policy is very much a matter at the village level. There might be some villages which are slack on that and some which would be robust on that. Would that be correct?

Professor Howell: Yes, but the pressure will come from the township, which will have targets for the family planning policy, and which will then go down to the villages to try to implement those targets.

Q88 Mr Horam: What is going to happen to the one-child policy? Will that be affected by the economic development, or will it remain the same?

Professor Howell: That is an interesting question. I am not an expert on the one-child-family policy. That is a whole area in itself. It was interesting that recently there were some press reports which said that wealthier people were getting by the one-child-family policy in the city by paying the fines, and there was some concern about this at central level. In the countryside, as I am sure you are aware, rural residents are permitted to have more than one child. However, I would say that there is a rather unfortunate element to this, namely that if you are so unfortunate as to have a girl as your first child, then you can have another shot and see if you can get a boy! That does not apply in the urban areas.

Professor Zheng: This policy of one child per family has already changed in the rural areas. As Professor Jude mentioned, if your first child is a daughter then you can have a second. However, because everything now in China is commercialised, if you have money you can pay. There is a fine. If you have more children, the government will fine you; but if you have money you just pay that. The population statistics in China are always problematic. Even local government do not know how many people and, under this regulation, that is the case. For the urban area, the policy has been under debate; but I think that the government have begun to consider making changes, because of the ageing population and for the future. So changes will happen to this policy.

Chairman: I am afraid that we have to conclude this session now. Dr Yueh, Professor Howell and Professor Zheng, thank you very much for coming and giving us such useful information.

Memorandum submitted by Human Rights Watch

Examination of Witnesses


Witnesses: Mr Brad Adams, Director for Asia, Human Rights Watch and Ms Corinna‑Barbara Francis, East Asia Team, Amnesty International, gave evidence.

Q89 Chairman: Mr Adams and Ms Francis, thank you for coming this afternoon. I do not know if you heard the previous session, but we are trying to look at a whole range of issues. In this session we wanted to focus on human and political rights in China, but inevitably there is an overlap with other areas. Can I begin by asking a question about China's compliance with international human rights law and the treaties it has ratified? Does it actually comply with the treaties it has ratified? I understand that there are a number of areas where China has a reservation, including with regard to the rights of organised labour. It has also signed the International Covenant on Civil and Political Rights but not ratified it. Could you explain, from your great expertise on these questions, how China is in compliance or not in compliance with its international obligations?

Ms Francis: I would say that, overall, China has failed to comply with the treaties that it has signed up for. There are also certain treaties that it has signed up for but has not yet ratified: for instance, the ICCPR. Taking the ICCPR as an example, I think there are a number of areas that are of concern in terms of its behaviour. These have to do with systems of justice, personal liberty, fair trials. China has very problematic areas in its judicial system, having to do with the independence of the judiciary. It has a system of political and legal committees that severely compromise the independence of the judicial system, which fundamentally undermines the independence or the ability for it to have fair trials. A major concern is the ability to get a fair trial in China. In terms of labour issues, China has signed on to quite a few of the International Labour Organization treaties but it has systematically not signed up to those that refer to freedom of association. It has taken reservations on all of the key areas that refer to free associations. China maintains quite a strict system of official labour unions, and there is still no move towards allowing genuine autonomous labour unions. In other areas, such as torture, China has signed on to the Convention against Torture; yet, as the recent Special Rapporteur on torture has found in his recent mission to China, his conclusion was that torture remains widespread. It took ten years for this mission to take place. There was an effort over a ten-year period to get the mission accepted on the terms of the UN and, even so, the Special Rapporteur still concluded that there were not the kinds of conditions that would have been ideal for him to carry out his mission. There was a great deal of fear. He concluded that there was tremendous fear among the people that he met. The UN Committee on the Child last year came out with conclusions regarding rights of the child. In very important areas such as education, despite the fact that the Chinese Government guarantees public education to all children for, I believe, nine years, there are increasing percentages of children in rural China that do not effectively have access to public education, because of the increasing rates of fees, informal fees, that are applied to rural schools. So that again is an area of concern, where China has signed up to these treaties and yet has failed. The question of education was raised in the report of the Committee on the Child, especially regarding rural children. There are other areas that I can follow through, and perhaps later we can go into more specific areas. That gives a little bit of an overview.

Q90 Chairman: Do you want to add anything, Mr Adams?

Mr Adams: Yes. It is important to note that there is a lot of interest in getting China to ratify the ICCPR. It is the chief diplomatic aim of many countries that have human rights dialogues with China. I sometimes think that this is a bit of an over-hyped goal, because the signing and ratifying of these documents has not noticeably changed Chinese behaviour in many cases. So it would be good to have China ratify - it is one of our goals institutionally, of course - but it does not mean that, tomorrow, much changes. It is true of many states. China is not a huge exception in this regard. It would give us more tools, it would give Chinese people more tools, to hold the state accountable; but I do not think one can expect that the act of ratifying will lead to major changes on the ground. The other point I would like to make is that China often holds up the International Covenant on Economic, Social and Cultural Rights as its touchstone. It says that it is primarily interested in the social and economic rights of its people and that therefore political and civil rights have to wait. I think that you are all familiar with the argument. In the transformation that you discussed in the previous session - the big economic transformation in the country - many of the economic and social rights that were in place in China have actually been degraded; education being one, and healthcare being another big example. Many things that used to be free and provided by the state are no longer available. The divide that you were talking about and the tensions you were discussing previously are in many cases fuelled by the problems with access to education and healthcare, for example. There is a huge problem with forced evictions. Land being a motivation for that; greed being a motivation for that in some cases. Forcing people out of their homes; not giving them proper compensation. If you look at Tibet and Xinjiang, for example, those issues are very live. So the compliance of China with its obligations is weak; the area in which they used to say that they were doing the best is now under great strain, under great question; and state obligations for basic economic and social rights are weaker than they have been in the last 30 years.

Q91 Mr Horam: I am very interested in what you have to say. I understand precisely where you are coming from, and there is obviously concern. None the less, as we heard from the previous evidence, there is a rising level of protest among people and they are not afraid to have riots, to take what we would call trade union action, to protest in all sorts of ways. This is clearly some sign of assertiveness and a lack of willingness to kowtow to the regime in certain circumstances. What is the significance of this? Do you think that this is important? Is something happening at the ground level?

Mr Adams: There is a long history of public complaining in China.

Q92 Mr Horam: It is not new.

Mr Adams: The petition system is thousands of years old. It was quashed by the Communist Party when they came to power. It has revived itself over the last couple of decades. There is a very big debate in China about whether it is being allowed as a steam valve or whether it is representing something deeper. Most people who look at this think that it is essentially a pressure release valve for a one-party state. People have to have somewhere to go with their grievances. Interestingly, the Chinese Government actually produces statistics. The last statistic was 87,000 public protests last year in the country, following 74,000 the previous year. It is not clear to me what interest is served in reporting these figures, but I think ---

Q93 Mr Horam: Do you think they are reliable, these figures?

Mr Adams: They are certainly a minimum level. They are certainly not going to overstate these, but I think that they have a reason for reporting them, which is to tell the public that there is some space for political discussion. I would not say that people are not afraid. In some parts of the country they are not afraid. They lose their fear and they have even had riots but, throughout the country, I think that fear is still a very salient characteristic of people who are opposing local officials. We published a report on petitioning very recently. We found that people are basically so desperate that they are willing to take any risk that it takes, and they work their way up through the system. Often they end up in Beijing but, in Beijing, there is a system of what are called "retrievers". It is an official system of having people go and find people who have made their way to Beijing to protest against local officials and to send them back, physically. In many cases they are tortured and abused on their way back. There are two reasons. One is that, in Beijing, they do not want these people hanging around the streets. It is rather embarrassing for the capital of an incipient superpower. Secondly, local officials send people to get them, because they do not want to be told on; they do not want to get in trouble, in case they have actually done something that is wrong. Where corruption is involved, that is a bit of a vulnerability for local officials. They can be held accountable for corruption. For other kinds of things they have less of an exposure.

Q94 Sir John Stanley: I read the section on China in the Human Rights Watch World Report for 2006. For my money, I would have it as compulsory reading for all British ministers visiting China.

Mr Adams: I am glad someone reads it!

Q95 Sir John Stanley: The opening sentence reads, "While many governments have praised recent developments in China, the country remains a one-party state that does not hold national elections; has no independent judiciary; leads the world in executions; aggressively censors the internet; bans independent trade unions; and represses minorities such as Tibetans, Uyghurs and Mongolians". Against that backcloth, I would like you both, if you would, to give us your view as to where we are going in the broad sweep, in terms of human and political rights for real in China. Are they marking time? Are they advancing, or are they actually going backwards?

Ms Francis: I would say that, with the administration of Hu Jintao and Wen Jiabao, we have seen a deterioration overall since they came into office in 2003, compared to the reform period. There had been an expectation when they came into power. People were quite hopeful that after Jiang Zemin, the last leader, there would be a further liberalisation. There was the hope of both Chinese society and the West that there would be a gradual, inexorable trend towards liberalisation. I think that both Chinese society and the West were quite taken aback by the steps backwards, in terms of human rights, in terms of civil society. Within that several-year period we have even seen, in the last several months, an intensification of the human rights situation. My feeling regarding the Chinese Communist Party is that the contradictions between its desire for continued rule and the pressures of economic reform and economic opening to the world periodically come to a head and then die down. I think that contradiction, that sort of tension, has reared its head again. We would all like China to be able gradually to reform and gradually to become a more democratic, liberal, humanitarian society, as we see in other countries in Asia - in South Korea and Taiwan. There are examples of authoritarian regimes, even one-party or military authoritarian regimes, able to make that gradual transition. We all hope that that will be possible; but for that to be possible the Chinese Government will have to take much more serious steps towards political reform. Unfortunately, they have not taken those steps towards political reform. We think of China as having just started its reforms and we give it a lot of slack. We give it slack because it is large, and so on, but in two years' time it will be 30 years since China started its reforms. It is far overdue. Deeper changes to the legal system, deeper changes to freedom of the press - deeper changes are very much in order. Otherwise, there could be a crisis. In fact, with the recent National People's Congress having opened a few days ago, the government recognises an impending crisis and they are, quite belatedly I think, trying to respond to that. Their focus is primarily on the rural areas. They see the crisis and intensification of protest in the rural areas as the most threatening to their regime. They are throwing a certain amount of money at that problem, without undertaking the underlying institutional changes that they really will have to undertake for this to proceed smoothly. So my feeling is that this administration has gone backwards. They are not committed to expanding the freedom of the press, freedom of expression, freedom of association, to resolve those underlying issues to the extent that they need to in order to make this a smooth process.

Mr Adams: You can look at the last couple of years since President Hu has come into power, where they have intensified a crackdown on internet activity and they have passed new media laws. You now have to be licensed to be a journalist. You have to make a pledge to commit to the party ideals. They have closed lots of newspapers. They are cracking down on blogs. So there are different trends here. If you ask a Chinese person, "Are things better now than 20 years ago?" - "Yes". "Are things better now than ten years ago?" - "Yes." They would laugh at you if you thought otherwise. "Are they better than five years ago?" - "Yes." "Are they better than two years ago?" Ah, now we have a different question, and in some places we will have different answers. What has happened is that these different forces which have been contradicting each other have become quite apparent over the last couple of years. China is deathly afraid of independent political activity. They are afraid of "colour revolutions". They are very conscious of it. It is a term that they are bandying about. They do not want that to happen. They are worried about the influence of George Soros, for example, and other people who may fund local NGO activity. Soros has a record in other countries. They are lopping all this together, so that any independent activity is now getting more scrutiny than it was before. University students used to be able to use the internet freely. They used to be able to use pseudonyms, just like a lot of us use pseudonyms or we do not use our full name. They now have to register it completely. They have to say who they are and have to identify themselves, to be able to have an account as a student at university. So in many ways big, in many ways small, the space is actually closing in the last couple of years. I think it is because they intend to buy off their problems, where possible, but they intend absolutely to hold on to political power - and there is no debate about that.

Mr Hamilton: Following on from what Sir John said about social freedoms, I want to ask you a question about religion. I understand that there have been new regulations on religious affairs, which became effective on 1 March 2005. I know that Human Rights Watch have called it "little more than a continuation of long-established policies that limit religious freedom". There is some practice of religion in China. Three to four per cent are Christian, one to two per cent are Muslim, and I think that there are even some Jews near Shanghai. My question really relates to what I think have been termed as independent groups, which are of course subject to monitoring, harassment, arrest and severe ill-treatment. The state definitely distinguishes between a religion and what they call a cult. You can guess what I am moving towards. Can you tell me what the situation is at the moment regarding Falun Gong? Whether it has a large membership, whether it is regarded as a cult - which is clearly is - what is its status as far as being registered as a religion is concerned, and are Falun Gong adherents still persecuted in the way they have been up till now?

Andrew Mackinlay: And why they feel threatened by it.

Q96 Mr Hamilton: Yes. Why do they feel so threatened?

Ms Francis: Falun Gong was outlawed in 1999 by the Communist Party. It was deemed a heretical, illegal organisation. The reason it was branded as such was that in that year it organised, silently, quietly, very effectively, a large demonstration in Beijing, right at the steps of the office of the Communist Party. This is the main reason: its ability to organise. Its size and its ability to organise are what scared the Communist Party. They were protesting the prior treatment that they had been subjected to. Since that time, it has been an illegal organisation and the crackdown began in 1999. It is still an illegal organisation. In fact, anyone who has anything to do with Falun Gong is at risk of detention. It is very hard to know the numbers, because people cannot register. So we really cannot know the numbers, although the numbers and the depth of organisation externally are quite remarkable. Judging from that, we do not know if that correlates to membership continuing within China. The situation is that it remains illegal; it remains extremely dangerous for anyone to have anything to do with Falun Gong. We know from interviews we have done that Falun Gong members tend to be subjected to some of the worst treatment in the prison system and also within the re‑education through labour system.

Q97 Mr Hamilton: Does the Communist Party feel so threatened because of the ability of Falun Gong to organise or is there something deeper than that?

Ms Francis: I think it is a combination of those. China has no official religion and I think this is in some sense a problem. Unlike the Soviet Union that in a sense could foster the Orthodox Church and have that as part of the system, China does not have its own indigenous religion. Because the Communist Party in a sense wants to be the religion, it wants to be the church and the state combined, it therefore feels threatened by any ideological or religious belief system that might put its rule into question. I think that is why any form of religion, not just Falun Gong but Christian and Muslim groups, is a threat to their legitimacy. It is a problem for China because I think there is a real need within Chinese society for some sort of spiritual outlet. The sheer number of Christians is growing; we are quite certain about that. That growth in the number suggests that there is a need within society which the Chinese Communist Party is not fostering or for which it is not allowing outlets. I think a long-term problem for the Chinese Communist Party is how to resolve this need for some sort of spiritual outlet, yet there is fear of the consequences. This new rule, the crackdown, effectively was a way to bring all religious organisations under its wing, so that now all religious groups have to register with the local authorities. If anything, it is a mechanism for more control.

Q98 Mr Illsley: Basically you are saying what these people are preaching or doing is not an issue. I have read stuff in the past that has been put before us stating that Falun Gong is a suicide code but you are saying it does not really matter. The point then is that if, all of a sudden, the Chinese discover Christianity and there are a few thousand Christians organised in the same way, the same thing would apply?

Ms Francis: The same thing is happening. The same thing is happening with the underground Christian churches. People are constantly being arrested. The police are constantly raiding their services. The Falun Gong had been more open and I think they have organised more externally to China, and that makes it more of a threat perhaps. They are much more vocal and more organised externally, which is partly why the intensity of crackdown is high, but it is there for all of the groups.

Mr Hamilton: Would not the same apply to Buddhists as well?

Q99 Mr Pope: There is some irony that we move on to somebody called Pope, is there not? I wanted to ask about the human rights dialogue between China and the UK and also between China and the EU. It seems to me that a despotic regime like Iran would welcome a human rights dialogue with polite countries like the UK, meeting up twice a year for civilised chats behind closed doors with nice, polite ministers. That would provide a perfect cloak for me to continue repressing my people. I have been a long-term critic, as you may guess from those comments, of this policy of engaging in a human rights dialogue. I wondered if you could give me your assessment as to whether or not it has been a success and whether it is worth continuing with it. My own view is that we should abandon it. I would be interested to hear your views.

Mr Adams: Your Foreign Office staff should be commended. May I say for the record that within the confines of the dialogue they are pushing pretty well. I have just attended a meeting in Brussels of all the dialogue partners with China, and there was nothing but pessimism in the room. Nobody claimed the dialogues were a success. Some governments, at least at the civil servant level, would certainly stop them. There is a feeling, however, that they do not know what to do in their absence. I do not think that is a good enough answer, but that is where dialogue governments are coming from. My feeling is that the Chinese basically are running circles around dialogue partners. The one thing that a dialogue does is to marginalise human rights. It does not mainstream them. From talking to people who were at the embassies, we know that they do not think they have to deal with human rights because they are waiting for the dialogue. The Chinese actually say the same thing back to governments: "We do not need to talk to you when people in your embassies do bring human rights up. If we need to talk to you, let us wait for a dialogue." Sometimes the dialogues are postponed or held hostage to other events. Secondly, when the dialogues do take place, it will be no surprise to you that the Chinese do not really want to engage with the subjects that are being brought to their attention. They stonewall; they delay; they have the wrong person there. You have missions of foreign service officers going over a subject as important, let us say, labour rights, and allowing one hour per year to talk with the Chinese about that. That hour can be frittered away very easily. That is the dialogue process on that subject. We hear this from lots of governments; your government, the EU people, the Americans, you name it, they have all had similar experiences. Interestingly, some governments write reports that say that things are going great and progress has been made. They list the subjects that were discussed but there is no qualitative analysis to it. When you talk to them, there is a very different story from what you read in terms of their public reporting on it. I think that it is absolutely crucial that the UK in particular finds its public voice on human rights with China, that it be raised at the highest levels, and not be marginalised to a dialogue. It does not have to be either/or. In fact, when Tony Blair was asked at a press conference when President Hu was here what subjects he was going to discuss, and I do not know whether you saw the proceedings on TV, when he came to say the words "human rights" he swallowed them. He could not bring himself to say them. He said, "We will discuss security, political reform, economics and security". He actually repeated himself.

Q100 Andrew Mackinlay: This was Mr Blair?

Mr Adams: Yes. It was on a press conference on TV. A Chinese journalist asked the question. This is endemic; it is not the British Government only. The French Government has been much worse; the German Government has been even worse than the French; and the US has vacillated. They are all in thrall to the Chinese market. They all feel as though they are going to put at risk other issues, such as foreign policy issues. They are now going to the Chinese as supplicants on international affairs, and so they do not want to jeopardise North Korea; they do not want to jeopardise Darfur; they do not want to jeopardise other things. We have this self-censorship going on throughout most governments. In their defence they say that they have the dialogues. I think that is the critical problem for dialogues.

Q101 Andrew Mackinlay: I deplore this censorship and control of the internet. It seems to me they are much like King Canute, are they not? They are just going to be overwhelmed. The need for them to expand skills, science, knowledge and so on is going to mean that they will not be able to sustain this level of control and access to what people will look at, read and draw from the internet. I do not know much about the internet. I can just about switch it on. It seems to me that is the logic, is it not? It is all in vain. It is ridiculous. This is not going to be discussed.

Ms Francis: The internet started in China in 1993. Since then, everyone has been saying that and hoping that for 13 years. During that time, certainly it has been the hope of the global community and Chinese civil society that the internet cannot be contained. The Chinese Government has amazed us in its ability precisely to do that, to contain it. A very small minority of extremely technically sophisticated urbanites can get around firewalls; they can find ways. The very dedicated, technologically skilled can get around it, but for the majority of people, and what matters in a sense is how the Chinese Government comes off to the majority of the people, it has succeeded in containing it through a combination of technology and increasingly sophisticated filters. In the beginning, these were quite crude filters where they would just blank out a whole website; it just would not come up. Now they do it with word packages, so that certain phrases of certain words are filtered and that will then blank out that particular thing. It has become much more sophisticated with the aid of Western technology. There is also the element of self-censorship. Average people are afraid to lose their jobs; they are afraid to be kicked out of school; they are afraid they will not be promoted; and they are afraid they will not get their bonuses. So there is a very sophisticated multi-level system by which writers, journalists, regular internet users, students and blog managers throughout society operate self-censorship, which is very successful. Blog managers decide to censor certain issues because they know that if they do not censor them themselves, then the government will shut down the entire site. A self-censorship operates. In some sense, that is what really makes it successful, not just the technology. The technology is quite formidable in terms of blocking out certain sites, but there is a pervasiveness. Now even at internet cafés you have to show your ID and the manager of the internet café has to take your ID, all your identification and monitor all the sites that have been visited. It is pervasive through the system. In Guangzhou, the main city in the south of China, they have now instituted the internet police. Two cute little figures called Jing and Cha, the names for police, come up on the screen to remind the user that the searches he is going to undertake will be monitored. Literally two little figures in cute police uniforms pop up on the screen to remind the user on a constant daily basis on all of the searches. We know technologically that in the West as well governments can go in and subpoena information on exactly the time, and all of that is recorded and can be retrieved. The internet is not this free‑for‑all, anonymous institution that we would all like it to be and think of it as; it is not, indeed, not at all.

Mr Adams: In terms of the critique I have just given of governments being in thrall to the Chinese Government and not speaking out and sending the wrong signals, you have the Chinese Government essentially being able tame Microsoft, Yahoo and Google in recent months. If you do a search in China with their search engines, Microsoft has made human rights and democracy lead to a blank screen. Google has actually agreed to be the censor, not to be censored, and accept that as a cost of doing business actually to be the censor. These are huge businesses with market caps that exceed General Motors and major industrial concerns. These are the biggest businesses in the world.

Mr Illsley: We saw press articles last week on this.

Chairman: We have just received what I would call a self-serving letter from Google explaining their position. It would be interesting to see their reaction to what you have said today.

Q102 Mr Pope: I have a follow-up to the question about the human rights dialogue. I welcome what you have said and it was interesting. Would there be great downsides if we abandoned the dialogue? Would there be downsides in terms of human rights issues in China? Would they take that as the fact that we had just lost interest? You referred to the perfectly reasonable foreign policy objectives that the West has with regard to Iraq and North Korea and wherever. Do you think they would be damaged if we broke off the dialogue and took a more robust public view?

Mr Adams: Banning the dialogue without corresponding changes in the way the governments address human rights with the Chinese Government would not serve any interest because we would just have fewer exchanges on human rights. I do not see a political will for governments to take on human rights. In our submission we said that human rights should be at the heart of the agenda again as it used to be. It used to be that every summit was about human rights and then other things. Now human rights struggles to find its way on to the agenda at the highest level meetings. I am offering perfect world-ism, that we should put human rights back at the heart and we should have robust dialogues and come together and reinforce each other. I do think there is a risk if you just abandon them, which is why we all but said abandon them because we do not see that, and we do not see that across the board. If the UK Government did it, Jacques Chirac would go in and try to sell French products tomorrow and undercut the UK and that would put the UK in the position of feeling that they cannot go this alone. We are talking to all the dialogue countries. No-one disagrees with our critique, but there is no commitment. That is what is missing. I do not think that an abandonment of the dialogue would be seen as a signal of lack of interest. I am not worried about that. The Chinese would see it and if it were abandoned, it would be abandoned presumably with a statement from the foreign ministry (our Foreign Office and other foreign ministries) saying there was a failure and we are abandoning them because they were not producing anything. I do not think they would harm relations on North Korea and other things because those interests exist. We are saying that, important as those interests are, you can still find space to talk about human rights. The Chinese are not going to walk away from you on Darfur and North Korea over raising human rights issues. They are much more mature than that. They have many more interests than that. They also have economic interests. It is almost always seen as the West losing out if we raise these things with China on economics.

Q103 Chairman: Can we take you back to what was said earlier on about specific human rights abuses? Ms Francis, I think you referred to torture. Is torture a systematic policy encouraged from the top or is it something that is carried out at lower levels, which the central government is trying to reduce or minimise?

Ms Francis: It is certainly not something that the central government encourages. I think the central government would like to see a reduction in torture. They have undertaken a number of reforms; for instance, they have experimented with having interrogations tape‑recorded. They have had a campaign to crack down on police extracting confessions through torture. They have attempted to deal with this but, as in many of the other areas of effort, it is not thorough enough, it is not fundamental enough, the institutional mechanisms are not powerful enough to undercut the phenomenon. For instance, the fact that courts still accept evidence based on torture, and confession is still a very significant piece of evidence in a criminal procedure, encourages the police to use torture in order to extract confessions. You would have to have a judicial system strong enough to reject that kind of evidence to start to change the proceedings. No, I do not think the central government wants torture; they would like to reduce it. They just have not taken significantly fundamental reforms to eradicate it.

Q104 Chairman: Does the same apply to the death penalty?

Ms Francis: No. I think the death penalty is very different. I think the average Chinese person believes the death penalty is legitimate and fair. We have just had a young journalist from Beijing University visiting Amnesty recently and we had a fiery, passionate discussion about the death penalty, with people trying to get their views on the death penalty. Even the most educated liberal parts of society are still for the death penalty. There is not much of a social, cultural movement away from the death penalty. That is a much more difficult, probably long-term issue, but it is still one that we hope to influence.

Q105 Chairman: Is there any reliable evidence about whether the death penalty is increasing or being reduced?

Ms Francis: We produce statistics from year to year. We know we can document only a small proportion of the totality. We do not have significant evidence that it is significantly reduced. They have brought in some reforms reinstating review by a Supreme People's Court, which may reduce that, but it will be a long process. The danger is that they are really entrenching the system even more. I think it is still used very widely. In fact, recently - and I apologise that my written submission is late - Guangdong province has just changed the law so that violent bag-snatching is now subject to the death penalty. There used to be a maximum of three years for that crime, and now they have made it subject to the death penalty. This is definitely against the trend of moving away and trying to reduce the scope of crimes that are subject to the death penalty. This is definitely against the trend.

Q106 Chairman: While we are dealing with these matters, China uses forced labour and re‑education through labour, as it is called. Is that going out of fashion or is it still an essential part of the way that the penal system works?

Mr Adams: Re-education through labour is an area where there had been some hope and signs of progress. In the dialogues, the Chinese had said that they are going to move towards phasing this system out. That reform has stopped in its tracks recently because it appears that there are different views in the Chinese Government of the value of that. They are introducing some partial elements of judicial review, which probably will not amount to very much for individuals caught up in the system. In this system people can be detained essentially arbitrarily for two to three years or four years. This is a great illustration, and I am glad you have brought it up, of the way that the reform impulse has been stopped. This would be an easy one to deal with because law enforcement would still have a lot of tools. The criminal law is quite expensive in China. They would have no problem dealing with a lot of people through other means. From what we hear of the Public Security Bureau, they do not like the idea that someone else may decide that their arrest was wrong and that they will not be able to hold people if they think it is appropriate to hold them. This is not going forward.

Q107 Sir John Stanley: We have covered the issue of the internet and the success that they are having in making it very difficult for people to gain access to the internet. Could we turn to TV and radio? I am talking about foreign-owned stations. Am I right in assuming that the impact of foreign television is effectively negligible in human rights terms because it is successfully blanked out or, in the case of the Murdoch show, the degree of self-censorship is a sort of done deal with the Chinese Government? What about radio? Is there any significant success in terms of the people in China being able to pick up the foreign-funded overseas radio stations, the American stations, BBC World Service, and indeed other foreign services, which are broadcasting in Chinese? Are those a useful instrument or not in terms of trying to get greater understanding of human rights aspirations and what goes on elsewhere in the world?

Ms Francis: Television is very effectively controlled. From the Government's perspective, it is a very powerful medium, so they are very intent and they have consistently controlled foreign ownership. With radio, they have purchased and acquired I think even better jamming capabilities. They are very good at jamming radio programmes. It is a cat and mouse game. The VOA attempts to switch its frequencies and tries to get in through different ways and the Chinese are constantly attempting to block. I know, for instance, that Radio Free Asia, which attempts to broadcast into various different languages, is able to get in occasionally; it is just not consistent. Again, it is a bit like the internet; the government is constantly trying to keep up in terms of blockage. It takes a lot of effort on the part of the individual. You cannot just click on your radio. It is a constant cat and mouse game. Everything that makes it more difficult is a success for the government in the sense that only the most dedicated people can find ways round it. You cannot count on being able to turn your radio on and hear the programme.

Mr Adams: I would like to make a plug for the British Government (the Prime Minister or the Foreign Secretary) to take up the subject of the BBC website a little more and it being blocked with the Chinese Government. That could be a major discussion point when they meet with the government because there is no excuse on that.

Q108 Chairman: Last year at Shanghai airport, I tried to log on to it and could not get through, but I did manage to get on to the Guardian. Can I ask you whether the Chinese are exporting to repressive regimes this ability to block either the internet or other technologies to deal with television and radio? Potentially, will there be a growth industry in this?

Ms Francis: It has not happened yet but it could happen very soon. Just setting the precedent that the internet can effectively be controlled, censored and monitored by a powerful government sends the message to all sorts of other regimes that they can do the same. What was supposed to be the internet in terms of a global, borderless phenomenon simply will not be the case.

Q109 Andrew Mackinlay: Are computers being used by what are described in China as patriotic hackers?

Ms Francis: Not that we know of yet but we do attempt to have a fairly good security system.

Mr Adams: There is one very clear example of this where China is exporting its firewall. There is something called the World Society for Information Summit, which was held in Tunisia a few months ago. China paid for all the internet technology and the computers that were being used. The Tunisian Government set up an official site for people to use computers and email. We had staff there who discovered that the Chinese had stocked the computers with lock boxes with keypad technology. I was actually sending to one of our legal officers a report on China for review, not thinking that Tunisia was an unsafe place for her to review it. She discovered, and the Tunisian authorities admitted this, that the Chinese had provided the computers and the technology, which had never existed in Tunisia before, and they were copying keystrokes. She wrote me back an email and said, "I am horrified because I cannot retrieve what is in the hard drive and the Chinese can. I am sending you an email saying I have to stop working on this and so I will have to put out the report later than I expected".

Q110 Chairman: Are any Western companies involved in this technology that the Chinese are using?

Ms Francis: Besides the major companies that have signed on to censorship, Nortel and Cisko are two of the companies that have provided the hardware for the Chinese censorship system.

Mr Adams: They are going to break down the hardware and then try to make it themselves. As with a lot of electronic goods, the quality is not quite there yet. There is no reason to expect that it will not be there over time.

Ms Francis: The initial technology has been provided by these Western companies. We know of at least these two companies that have provided technology.

Q111 Mr Hamilton: One of the other ways of fighting repression and organising surreptitiously is the mobile phone. How developed is China's mobile cellular network? Is it used at all for illegal communication? Is it censored?

Ms Francis: It is and that is why when SARS first started to spread, the government was clamping down on the internet, so people were not able to communicate about SARS through the internet. The government did not know about mobile phone communication. People were not communicating for any subversive reasons; they were simply afraid and wanted information, and so they started using their mobile phones. Because of that, the Chinese Government subsequently has now tightened control over mobile phone use and text messaging. My apologies as I am not very technically sophisticated, but I know that they have now come up with ways in which to monitor mobile phone use. In fact, quite sadly, one activist in Shanghai was located while in hiding from the government when he made a call from his mobile phone. It was precisely SARS that really triggered the government's awareness of the potential of mobile phones.

Q112 Mr Hamilton: I suppose it will vary according to economic regions, but do you know the percentage of saturation of cellular use?

Ms Francis: I cannot tell you the percentage but I know it very large.

Mr Adams: In urban areas it is very large and it is also even in rural areas.

Ms Francis: That is because of the weakness of the landlines. They are not well developed; in fact they have gone to mobile phones at higher rates than the West.

Q113 Chairman: In the time left to us, it is important that we ask some questions about Tibet. Has the investment, the economic development in Tibet which has been taking place, in any way helped the Tibetans in terms of alleviation and elimination of poverty or has it just become a negative in terms of their culture and their society?

Mr Adams: May I read something sent to me by a Tibetan who I think is a very moderate personality, someone I know very well? He said: Please tell them that as civilisation is being erased from the map through the combination of hegemonic modernisation, Tibetans have virtually no ownership in the development process and political repression and because the Tibetans are so marginalised, they have no counterweight any more. There are a couple of adjectives in there that are quite emotive. I think that is a pretty fair assessment. Most Tibetans feel that this is not just about politics any more but about their culture and it is really under threat, that the Chinese-isation, Hanisation, Sinisation, whatever you want to call it, of Tibet has really taken over. For the jobs that pay good money, mostly Chinese language is a barrier. Tibetans learn Tibetan in school in their early years and then switch over to Chinese, so that they are inevitably behind Chinese migrants who are there. Anecdotally, people point to taxi drivers more and more being Chinese as that is a job that pays cash. There is an attempt to move people off the land and into apartment buildings and new neighbourhoods that are built mostly in urban areas, sometimes in more rural areas, changing their way of life. Most Tibetans do not feel that they have a major stake in whatever economic benefits have come. We have talked to Tibetans about the new railway. They are absolutely freaked out about it; they are convinced, rightly or wrongly, that this is the end of their culture and the end of their civilization over time, that it has just opened a door that can never be closed.

Q114 Chairman: Is there then a sense of time running out? In that situation, as the Dalai Lama, who is still a very dominant figure to Tibetans, gets older, is there a prospect of an imminent political breakthrough? I understand talks have been going on for some time. As the Dalai Lama grows older and the dispute continues about his successor, the Panchen Lama, is there in a sense any window of opportunity for a settlement or is it in China's interests just to say that they will play this long and create facts on the ground?

Mr Adams: I think the latter. I would hope that there would be a breakthrough, although it is hard to see what breakthrough there could be on equal terms. China has very little incentive to make a deal that in any way cuts against what they consider to be their interests. They hold all the cards in Tibet right now. No governments are willing to challenge Chinese sovereignty over Tibet. Human rights groups do not take positions on sovereignty and only a rump of Tibetans do so. The Dalai Lama has been extremely conciliatory. He has offered concession after concession and they have not been met. They do have one problem, which is that the Panchen Lama probably would not be accepted and that could lead to major unrest. It depends how this plays out. There could be unhappiness but no unrest; there could be major unrest if they try to force the Panchen Lama and do not replace the Dalai Lama and keep the rhetoric about the Panchen Lama being the pre-eminent figure in Tibetan Buddhism. My guess is that they will play that situationally.

Q115 Chairman: In the last question, may I take you to Zhejiang and the Uighur population that is a Muslim community? Can you give us a sense of the human rights situation there and whether that has become worse recently because of the global context and the war on terrorism and so on?

Ms Francis: I think you are absolutely right and that it has become worse. Zhejiang has many of the problems of Tibet. It is in a similar situation but it is in an even more dire situation because it has very little international recognition. It does not so far have a leader who could highlight the causes of that people and because of the war on terror and the use that the Chinese Government can make of the fact that this is a Muslin issue, or they make it into a Muslim issue. I think the situation in Zhejiang has become increasingly worse and worse over the years. Again, it is also a cultural issue. It is a people who are afraid of losing their identity. The Chinese have really attacked language, which is essential to culture. It used to be that one could be educated in Uighur all the way through to university level. They have gradually introduced the Hanese language as a compulsory language to younger and younger ages and now it is compulsory at the primary school level. Essentially individual Uighurs cannot be educated in Uighur. In terms of any sign that a writer would write anything that might vaguely have to do with some form of nationalism, Uighur nationalism is cracked down on. There is the case of a Uighur writer who wrote a short story about a wild pigeon. It vaguely refers, or they thought it referred, to the Uighur people and was a symbol. Just for that he was imprisoned for 10 years. Any sign that you are expressing anything having to do with your cultural identity as a Uighur is not allowed. There is a massive similar situation of the Chinese Government saying that they are developing the Zhejiang autonomous region but the Uighurs have been extremely marginalised in that process and have no part in that process. In some ways, it is also a policy of Han migration. The Uighurs used to be a large majority in the region but they are becoming a gradually shrinking minority there as Han people migrate. Often the land is taken and given to Han people, the Chinese people. I think you have a similar situation but more dire because there is even less global awareness or global attention and a voice for the Uighurs.

Chairman: Thank you both for coming and giving us such a wide-ranging perspective on human rights issues. We are grateful to you.

Memoranda submitted by Dr Gerard Lyons and Lord Powell of Bayswater KCMG

Examination of Witnesses


Witnesses: Dr Gerard Lyons, Chief Economist, Standard Chartered Bank and Committee Member, Hong Kong Association, and Lord Powell of Bayswater KCMG, a Member of the House of Lords, President, China Britain Business Council, gave evidence.

Q116 Chairman: Welcome to Lord Powell and Dr Lyons. I do not know how much you heard of our previous session. You are the third set of witnesses this afternoon giving us a different perspective particularly on British business in China and Hong Kong. We are grateful to you for coming. To open, could I ask you how well organised and co-ordinated is what our Government is doing to support British business in China?

Lord Powell of Bayswater: Chairman, thank you very much for inviting us both to come. We are delighted to be here. This is an extremely important study and I am pleased that you are going to undertaken it. I would say that co-ordination has improved greatly in recent years for a number of reasons. One has been the establishment of the China Task Force set up about three years ago. For the first time, all elements of British policy towards China involving not just business but education, health care and cultural matters are drawn together. We are approaching the point where you could say we have a national strategy towards China, which is co-ordinated through a clearing house called the China Task Force. This is a great step forward, and I think the Government deserves a lot of credit for it. The Chinese have copied it. They have set up their own British Task Force. We do not know a whole lot about its activities but we assume it is more or less a mirror image of ours. Then I think it is fair to say there has been improved co-operation between UK TI, which of course is the Government's trade promotion body generally, and the China Britain Business Council. We have a service level agreement with them, which describes exactly what the Government expects of the China Britain Business Council, as well as of course what business expects of it. That enables us to work very closely with UK TI without duplicating what they are doing. That co-ordination also extends into China where we have a clear understanding with the Embassy and the consulates-general what they do, particularly what I would call the higher level work, the policy work, ministerial visits work, and what the China Britain Business Council does, which is to deliver the basic commercial trade promotion services. On the whole, I think it is going pretty well. It is of course unique. I do not think there is any other market where there is the equivalent of the China Britain Business Council, which does a lot of the work, which in other markets is done by government but which is headed by business. The Business Council derives two-thirds of its funding from business and only one-third from Government. I sometimes think that maybe it would be quite a good model for some other markets, too.

Dr Lyons: My name is Gerard Lyons and I am the Chief Economist at Standard Chartered, but I am also here this afternoon to represent the Hong Kong Association, of which I am a committee member. Before I start, may I send the apologies of Baroness Dunn, the Chairman of the Hong Kong Association who would like to have been here but had a longstanding commitment. I am here to represent both the Hong Kong Association and Standard Chartered. I would like to reinforce the comments made. I do not need to repeat them. I think there has been an improvement in UK's relations with China. This is partly because of the successful work being done by organisations such as the China British Business Council and also the Hong Kong Association. Having said that, however, I think it is important to stress that when one looks, say, from the Hong Kong angle, UK relations with Hong Kong have not matched up with those of other countries, despite the longstanding historical relationship between the UK and Hong Kong. That is a concern of the Hong Kong Association. A very important factor encompassing all of this is that for far too long the focus here in the UK was very much on Europe and maybe on the States and it is only in recent years that the UK has started to think more globally. At the moment, it has been very much focused on China, but recently, with the Asian Task Force being set up, I hope that the focus will become more than just China and east Asia in general. Basically, there has been improvement but I think more can be done in a proactive way.

Q117 Mr Maples: In the past in countries where we have seen economic development take off quite fast it becomes very difficult to sustain a totalitarian political regime. This is obviously a problem the Chinese Communist Party is grappling with at the moment. I suppose the most obvious example is South Korea where it took perhaps slightly longer than one would have thought to get democracy in place. The pressures for it become enormous as people travel more, read more and are therefore more exposed to the outside world and are better educated. How is this problem going to manifest itself in China? Do you think that the government understands that it will have to deal with this and is going to be able to do it or do you think, at the end of the day, the political supremacy of the Chinese Communist Party is so important to them that they will be prepared to suppress the rate of economic development to maintain that?

Lord Powell of Bayswater: I would look at that at two levels. At one level there are a lot of grievances in China at the moment. There are grievances about the inequality of wealth between regions of China, between the new rich, if you like, and the great mass of peasantry in the countryside, and other grievances of that sort. The Chinese Government is trying to address those. Some of you may have noticed that they have just had their National People's Congress discussion and the government has proposed new policies for putting more money into rural infrastructure, into trying to deal with some of these grievances so that they do not burst out into some sort of open demonstration and revolt. Then I think there is what I would call the other level, which is the higher level of people's sovereignty almost: can you ever have a properly functioning really successful economy without much greater freedom than exists in China today? My answer is: no, you cannot. How long it takes to get there, I do not know but if you look at the examples which you yourself quoted of other Asian countries, one has to have hope that that is the way that things will develop. For instance, trying to put firewalls on the internet is just hopeless. People will always find a way round it, and so they should.

Dr Lyons: Following on from that, I would start from the position of saying that good economics is good politics. The focus in China has, up until recently, been very much a focus on economic growth almost at all costs. One should remember that the Chinese economy had a boom-bust in the early Nineties. I think it is inevitable that as the market mechanism takes hold and as the economy opens up further, the economy will not just continue to rise, as many people suggest; it is likely to experience increased future volatility. Against this background, it clearly poses not only economic considerations but possible political considerations in Beijing. There has been a shift. In March 2004, at the National People's Congress, there was a focus on the five balances, roughly speaking: urban/rural; regions; the environment; economic and social; and international. That has been reinforced recently and the catch phrases in China are: scientific development, harmonious society, and prosperous society. That means basically not just focusing on growth at all costs, but on sustainable growth. As has just been mentioned, the agricultural or the rural area is key in all of this. One thing that I think is very important is not only that the leadership in Beijing is likely to start spending more money in the rural areas but that the scale of the problem is just phenomenal. If I may, I would like to quote a couple of figures. From our analysis as Standard Chartered, we attach much of the poverty in China to a collapse of the public health and the education infrastructure. The central government, back in 1978, provided 31 per cent of health spending; in 2002, that had fallen to 15 per cent. The years are quite different just because the date is hard to work with. Put it this way: back in 1980, 18 per cent of health spending came out of people's own pockets; by 2001, that was up to 61 per cent. Similarly, in terms of education spending, more and more of that is having to be paid by individuals. China's spending on education in terms of GDP is 3.3 per cent, which is lower than India at 4.8 per cent. The public share of that is only 62 per cent. In terms of public health and education, those areas have really been neglected in recent years. What is always cited as one of the main causes of the 87,000 demonstrations is the fact that in local areas there are big problems between farmers and their ability to retain their land. Land ownership, education and public health are all issues. Against this backdrop, the leadership in Beijing has started to change its focus from growth at all costs to sustainable growth, but the reality is that the scale of the problem in China plus the likelihood of further future economic volatility means that there is going to be further economic and possible political social tensions ahead.

Lord Powell of Bayswater: Might I add one point? I think one should give credit where it is due. I think there has been some progress towards developing a rule of law in China. It is very, very far from complete but a real effort is now being made to make the courts more efficient and more just, to make redress through legal channels possible, and there are a lot more lawyers, in so far as that is a good thing. This area is getting priority, and I think that is important for the future nature of Chinese society.

Q118 Mr Maples: I want to ask you about something different, which is China's foreign policy. We are seeing obviously that as it rises in prosperity it wants to carry more clout in the world; it is a P5 member of the Security Council. It has big Taiwan Straits issues, and it is building up its military power. I suppose a key objective of Western foreign policy must be to try to incorporate China into the management of the world and the more prosperous they become, hopefully the bigger stake they will have in it. Do you think that their objectives in building up their armed forces goes further than the Taiwan issue and being able to deal with that? Do you think they have any wider ambitions, or is it just to have a blue water navy to protect their own merchant shipping? Do you think they have wider ambitions of becoming the regional superpower and having a specific influence?

Lord Powell of Bayswater: I think their primary ambition is to become a regional superpower. I think they are concerned about American power in the region. They want at least to be able to balance that. Equally, I do not ever see China really as an aggressive power. It has no history of territorial expansion beyond Tibet and a brief period in Vietnam, and we can put the blame on either side for that one, I think. I do not see them as wanting to be a global military power like the United States or the Soviet Union was in its time. I think you are right that the right policy towards China is to engage it as far as possible in as many multilateral institutions as possible. Just look at the result of getting it into the WTO? There has been the most colossal change in Chinese economic organisation and the Chinese way of life, and so on. They have undertaken obligations which five or six years ago would have been inconceivable. If they can be dragged more into the G8 group and so on, the pressures will be there, too. I think that engaging them is right and will pre-empt any tendencies to want to become a global power with a global military reach.

Dr Lyons: May I make three brief points just to reinforce that? I think the Chinese leadership has reacted with remarkable maturity in some of its international dealings in recent years in terms of relations with North Korea, the apparent conciliatory approach towards Taiwan, and with respect to the demonstrations and economic problems in Hong Kong a few years ago where, in response, effectively they opened up the border to allow more flows of people and money into Hong Kong. In those terms, they have reacted with maturity. Second, a number of speakers have been, dare I say it, sent overseas by the Chinese authorities over the last year, particularly Zheng Bijian who came to London a few months ago to talk about China's peaceful rise. The interesting aspect of that was that he cited quite significantly that there is a need to unify domestic and foreign policies to allow the whole country to proceed. International factors are important in this. The third point is very much to reinforce the need for the global policy forum to change and to incorporate not just China but India, both on economic and perhaps on political issues as well.

Chairman: We will return to the economic process that is going on.

Q119 Sir John Stanley: I would like to ask you about the degree of satisfaction amongst the business community, both in mainland China and also in the Hong Kong SAR with the degree of service and support it is getting from the FCO, both through our posts in mainland China and through the consulate-general in Hong Kong. Do you feel it is at a satisfactory level? Do you feel that improvements could be made and, if there are improvements, can you indicate what sort of improvements you are looking for?

Lord Powell of Bayswater: Might I start with China? I have never known in any market the British business community to be satisfied with the support it gets from Government. This is a sheer fact of life. They always want more; they always want something that they are not being offered, and are never particularly appreciative of what they are being offered. I am afraid this is just the way it happens. There are many different ways to provide this support. Taking just China, Germany works through chambers of commerce, particularly the ones from the lander, from the German provinces. The Dutch have a rather interesting system of just dotting individuals around China in markets and using them as sort of intelligence points to pick up commercial information, report back and get their companies involved. I think what Britain provides is pretty good, whether it is through the FCO and its posts or in fact through the China Britain Business Council. I suppose, yes, I could always think of ways to spend more money, but would it really produce a return? I am not sure. At the end of the day, it is the big companies that do the big business with China. They do not need a lot of help. If you are Shell, BP or Standard Chartered Bank, you do not really need the Government to help you in China, except very occasionally you need a Prime Minister to lobby for you for some huge contract or licence or something. Then there is the myriad of smaller companies. I would not say they provide a social service but it is a bit more like that; you are trying to help these companies get into the market and do business there. In proportion to the market and in proportion to total British business in that market, they are never going to be a huge factor and so one approaches that in a different way. It is getting out into the countryside in Britain around the main regions of Britain and preaching the China market to them. In the China Britain Business Council, we run a programme called Take the China Challenge, which goes out to different regions, spends a day, invites in smaller and medium sized companies, usually getting about 80 to 100 of them, and tells them about the China market, how to get into it, what government support is available. We take along with us representatives of smaller and medium sized companies that have gone into China and done it, and so they can talk and describe it. I think that sort of thing is very helpful and governments of all persuasions have seen a need to help smaller and medium sized business, but I do not think there is a great gap I see that needs to be filled and it would be so much better if it was.

Dr Lyons: Again I reinforce much of what has been said. Certainly from Standard Chartered's perspective, our relationship with both the Foreign Office and the UK embassies is very positive. There are frequent visitors from both the Foreign Office and the UK embassies to the Hong Kong Association. Again, the attitude is very positive. Yet, when you actually look at the data, and let us take Hong Kong as an example and trade and goods, the UK share in 1997 was 2.8 per cent and it is down to 2.1 per cent now. When one looks at UK exports to China, the UK I think is fourteenth; France is twelfth; Germany is fourth. These figures may change. The question is whether we are lagging. We can always talk about the past but the question is how we proceed from here. It is important that now we are starting to have a more global perspective. When the Chancellor gave his pre-budget report at the end of 2004, India and China figured prominently. Over the last year, there has been a far more pro‑active stance. Indeed, the Prime Minister visited China last September in terms not just of the EU China Forum but the UK China Forum. There is a number of ways forward. In terms of the UK and Hong Kong, certainly it is the feeling of the Hong Kong Association that we can do more to leverage off the economic, business and cultural ties in the past. The fact that the Deputy Prime Minister recently visited Hong Kong I think is a positive sign. In terms of looking at Asia more generally, one of the concerns is that the multilateral trading system seems to be going slow, and so there is a tendency now for more countries to have bilateral deals, particularly with the States. It is important for us here in the UK to realise that that potentially leaves UK companies at a disadvantage, or certainly with a less advantageous system, and so the role will very much be to push the multilateral angle and perhaps push it very aggressively through the EU. Finally, perhaps we could be more proactive in trying to identify sector analysis or solutions where the UK has a comparative advantage, whether it is finance, high tech or energy and perhaps even bring some solutions not just to China but across the rest of Asia as well.

Q120 Mr Pope: Could I ask a question about the ethical obligations that are on Western companies operating in China, in terms, for example, of health and safety, labour practices and so on but also in the context of something that you mentioned earlier about Western internet providers providing equipment which will censor the internet. You described that as foolish and unworkable in the long run. I would hesitantly add that it is also immoral.

Lord Powell of Bayswater: My comment would be, first, that we tried to address this problem a bit in our paper which we put to you that our policy is to encourage British companies doing business in China to observe best practice; i.e. the best practice they use in this country or wherever else they do business. By and large, my impression, from 15 years of visiting China pretty regularly, is that they do that. You are not going to find British companies parading with placards saying "Free Tibet" or something, but in the workplace they do what they should be doing. I think they set an example and, over time, that helps to improve standards all over China. I have to say that I think the same is true of most Western companies. When it comes to the comments you made about the internet, I am all in favour of Western companies in there spreading the network, getting the internet up and going. I think it has done huge benefit to people in China. Do I think they should be sneaking on Chinese people and helping the Chinese authorities identify those who are breaking Chinese law? No, I do not. I do not believe that all, but that is my view.

Dr Lyons: If I could stress two things, one from a Hong Kong angle and one from a Standard Chartered perspective as well? The Chinese gradualism, in my view, tends to dictate most of what they do; they tend not to like to make big changes. If Hong Kong, which we should remember is part of China, is seen as being more successful then that might help migrate best practice from Hong Kong, and in particular Hong Kong does have best practice in terms of an independent judiciary and rule of law, and also very sound corporate governance, both factors which I think most international companies would like to see adopted eventually in Mainland China. Second, from a corporate perspective I think it is the case of most major international companies to try to adhere to best practice, but certainly from Standard Chartered's perspective we clearly do. In terms of the financial sector, when you open up the international banking sector foreign banks - I tend to call it the ABC - (a) accelerate the pace of change; (b) bring best practice; and (c) add to competition. But the bringing of best practice is very important, and with big multinational companies going into China hopefully that will be the case, although you have cited one or two examples where that may not be.

Q121 Sandra Osborne: Could I ask you about the position of business to make the most of the opportunities of investing in China in relation to language? The UK has a poor record in studying the languages and cultures of East Asia. How much priority do you think should be given to improving that situation and how do we fare in relation to other European countries in that regard?

Lord Powell of Bayswater: I think you are absolutely right to identify the problem there. There is a very big problem in that the number of Chinese speakers and the amount of Chinese studies in this country are quite clearly inadequate, particularly looking forwards when China is going to play such a big role. The Secretary of State for Education said recently that Mandarin was the fastest growing language taught in British schools. That must be from an extremely low base, which is probably why it is growing so fast, but nonetheless it is perhaps an encouraging sign. At the moment the Higher Educational Funding Council is studying a number of bids from universities to increase Chinese language studies and studies of China. On the other hand, you have very recently had the decision by Durham University to close down its East Asian studies centre, which I think is a very negative factor indeed. So the answer is that we do need to do a lot more. It is an issue which the China Task Force has taken up and is trying to encourage in a variety of ways, including additional scholarships and getting more Chinese teachers over here to provide Chinese language instruction, but there is a very long way to go.

Q122 Sandra Osborne: And our European partners?

Lord Powell of Bayswater: My impression is that we are better than them; they are even worse than us.

Dr Lyons: I do not know about that question specifically, but just to look at it from a different perspective I think it is an important point that China is now opening up and so China's global influence is likely to grow, not just in terms of being a competitive threat, as some companies talk about, but in terms of the opportunities. Chinese tourists are the fastest growing tourist group in most parts of Asia; for instance, they are over half of the tourists now to Hong Kong. Also education, with more Chinese students studying not just here in the UK but in other countries, but the UK is seen as having the competitive advantage in this. Of course, as Chinese universities develop themselves maybe more students will stay in China. I certainly think that there will be more money, more flows. Indeed, at Standard Chartered we talk about it in terms of trade corridors; we are starting to see emerging trade corridors between China and the rest of Asia, between China and Africa, between China and the Middle East and also China and Latin America, and that is also now being reinforced by other Asian countries as well following in those footsteps. So against that backdrop the more we are aware of the opportunities in China then clearly the language is one aspect that we need to become more aware of, and how we can benefit or leverage off this.

Q123 Sandra Osborne: How widely is English actually spoken in China?

Lord Powell of Bayswater: I fear remarkably so. A lot of it is learnt through radio - the BBC had a great role in this in earlier years. I have come across Chinese leaders at the very highest level who learnt English without ever having been anywhere near England or America, simply from listening to the radio.

Q124 Chairman: Can we get back to something that Dr Lyons said? You referred to our share of the Chinese market going down.

Dr Lyons: The Hong Kong markets.

Q125 Chairman: It is also the case for the China market as well, I think. We have had some written evidence pointing out the trade deficit that we have with China compared with Germany, for example, and also that over the last five years the UK has under performed in both goods and services, according to evidence we have had. Why is that?

Lord Powell of Bayswater: I think there are a number of reasons for it. Particularly when it comes to trading goods, I would identify first of all the fact that we are no longer a great manufacturing economy. The German share of manufacturing in Germany's economy is far greater than it is in ours and German exports of manufactured products to China exceed ours by a factor of three or even four, and that despite the fact that in this last year, 2005, we had record exports to China - we crossed the three billion threshold for the first time. So it is not a wholly bad news story. But you are right; our market share is 1.3 per cent, which is obviously inadequate - China is Britain's sixteenth export market. Here is the world's fastest growing economy on course to be the third largest before very long and it is our sixteenth market. So, lack of a major manufacturing sector. I think that for a while the exchange rate was a problem, the Pound was quite strong, but that is usually the excuse that business gives and it is not a particularly convincing one. It is very difficult to discuss this subject without sounding as though you are making excuses rather than giving reasons, to be perfectly honest.

Q126 Chairman: I do not mind whether they are excuses or reasons.

Lord Powell of Bayswater: Some of the problems are that it is a difficult market, it is a distant market, it requires more effort than plucking the lower hanging fruit in Europe or some Commonwealth countries perhaps, and so on. There is a host of reasons. Our efforts are devoted to try to improve that performance. Just on the service side - and then I will leave it to Dr Lyons - one would hope that in the future this is going to be the major growth area for Britain because we do pride ourselves on our services, and that is not just the financial services but professional services, accountancy and legal services; it is things like retail and transport and so on. The latest figures we have seen were for 2004, which is about a billion of exports for services; but, again, that is still less as a share of our exports than it would be to many other countries - it is well below the average - and I think it puts us as only seventeenth in China as our services market. But with the restrictions now really beginning to come down in China on financial services I think that this is the area in which we can look to expand most rapidly and I would hope three years from now we would be able to tell a very different story about that.

Dr Lyons: If I could reinforce that very briefly? First, I think there has started to be a sea change. To reinforce the point I made earlier, we are thinking more globally as opposed to being focused almost exclusively on North America and Europe. Second, as the Treasury stated, if I could quote from its document at the end of 2004, it cited the reason for the UK under performing was the need for the UK to become flexible, innovative and entrepreneurial. I am not sure that we are practising what we are preaching on that in terms of making ourselves more entrepreneurial. Third, very much to say that we need to really look at where we do have a big competitive advantage, which is financial services; we can seek to open up markets in Asia - high-tech areas, energy and the environment. But also when we look at Asia it is important to stress that it is not just China, there are some phenomenal economies across the whole of East Asia, and in 25 years' time two-thirds of the globe's population will be in Asia and three of the world's biggest four economies will be in Asia. So I think it is important to stress that whilst we should be looking at China we should be looking at East Asia generally as part of our global perspective, and certainly the advantages are not necessarily in manufacturing but are in a whole host of other service areas. I think once we start to realise that then we will see that there are greater opportunities in selling into many of these markets.

Lord Powell of Bayswater: May I mention one other factor? That is that Britain does have a bigger stock of investment in China than any other European country and of course to a degree that is a substitute for trade; if companies decide to go into China and manufacture there then they are not going to be exporting to China - in fact they are more likely to be exporting from China.

Q127 Chairman: To the UK?

Lord Powell of Bayswater: To the UK, yes; so that helps the deficit that way. But it is a factor that we are still the leading European investor in China although the Germans, I have to say, are beginning to catch up with us; but we are still ahead. You saw the other day BP announcing a very major investment there.

Q128 Andrew Mackinlay: The banking and financial sector is going to be liberalised this year, and yet listening to you it renewed a deep frustration I had. In Central Europe, our own backyard, when the wall came down there our banking and financial sector was appallingly tardy in going in compared with our competitors. And particularly, but not unimportantly, in retail banking we virtually lost the opportunity. To complete this before the Chairman stops me, anecdotally I remember that after this Labour Government came in, in Warsaw there was a British Trade Exhibition promoted by our Embassy and the only retail bank they could get to represent Britishness was the Allied Irish Bank. It seems to me that we are again faced with this opportunity which is going to slip through our fingers, and in the whole area of banking and finance it seems to me demonstrably that sooner or later there is going to be an immediate growth, mushrooming of retail banking. Are we geared up to take advantage of this? If not, why not? And is there not a problem of perception amongst some of our people who deem themselves as very good businessmen and women but who actually have an abysmal ignorance as to what is going on in some key parts of the world, and in this case China?

Dr Lyons: I spoke at the EU China Summit last September on some of these issues, and what I think is very encouraging is that the Chinese authorities are very receptive to advice, not just from the UK but from other countries as well, and they do seek UK advice in many areas, particularly in the financial sector. Again, I think it is important to stress that gradualism is a key factor in China; it is a case of gradually opening up their financial sector. In terms of WTO, you are right that there will be further opening up, although when it comes to the WTO it seems that the Chinese very much adhere to it when there are numerical targets but when there is no numerical target it is less clear cut. Certainly from my own bank's perspective, Standard Chartered is the oldest foreign bank in China; our organic operation last year grew by 40 per cent in personnel terms. It is also important to stress that all foreign banks are restricted in terms of what they can do in China, in terms of acquisitions. The Chinese are allowing foreign banks to buy up to a 20 per cent stake in domestic banks and it is important to stress that, as we saw in the early to mid-90s when the Chinese economy had a boom-bust, non-performing loans were a key problem. Therefore, it is very important to pick your partner very carefully, as we have done with Bohai Bank. Also, the other thing which we found, very importantly - and I think this is a key thing, not just from UK banks going into China but to think of us here in the UK - is there is more and more money and more and more Chinese companies coming out of China. Hong Kong, for instance, is now being seen as a big regional centre in terms of RMB (Renminbi) banking services, and also as a capital market on which Chinese companies can actually come out and raise money. I think it is very important to stress that the UK here in London can position itself as potentially the financial centre on which Chinese companies will come out and list. So coming back to your question, I think there are clearly opportunities in China and I think those opportunities are being realised by some banks, like Standard Chartered and by other banks. The pace is going to be clearly influenced by the legislation; but also there is another angle to this, which is to take advantage of the money that is coming out of China, whether it is Hong Kong now or as Chinese companies become more global in the future.

Lord Powell of Bayswater: Just so that this does not become an advertising session for Standard Chartered, I think it is only fair to say that Hong Kong Shanghai Bank has five billion invested in China. This is a very substantial sum and I think the rewards of that will be seen in the future, just as they will for Standard Chartered.

Q129 Andrew Mackinlay: I appreciate all that you have said and I value it. The point I was trying to make was, what confidence do we have that people in London will go at the same rate of enthusiasm as those in Frankfurt, because the evidence is that we have actually been very slow, very conservative, very hesitant here?

Lord Powell of Bayswater: I think you are absolutely right for Eastern Europe but I think it is the other way round with China. I think that probably the most energetic of all the groups of British business in this country is the financial services group in the City of London, and they are constantly out there. The present Lord Mayor is the Treasurer of the China Britain Business Council and he is out there twice this year with big financial services delegations. The next Lord Mayor is a Council Member of the China Britain Business Council and he is doing the same. The push is real, but the advantages and the profits are going to take time to come through because it is still a very tough market.

Q130 Mr Hamilton: Can I follow that up with a little more about Hong Kong and its role as a gateway for British business and certainly British financial services? You have both touched on it and Dr Lyons obviously has talked quite a bit about it. The Heritage Foundation - not an organisation I have a great affinity with, I have to say - has ranked the economy of Hong Kong the freest in the world every year for the last ten years. I wondered whether you felt that the British Government was making enough of our unique and historic connection with Hong Kong and the freedom of the economy there and all the other benefits that it brings, certainly to Great Britain, to use that as a gateway into China to ensure that we can then correct this imbalance and really take up our rightful place as one of the major investors and one of the major traders with China. Are we making the best of Hong Kong?

Dr Lyons: Certainly the UK is clearly benefiting from its special relationship with Hong Kong but there is a general feeling, certainly from people more expert than I am on Hong Kong, members of the Hong Kong Association, that maybe we have not leveraged off it sufficiently since 1997. Clearly there has been success; business ties are still very deep, economic ties therefore are very good, and also there are strong cultural ties as well, and the Hong Kong Association is just one example of an organisation that promotes ties. Hong Kong Trade Development Council set up the Hong Kong-UK Business Partnership Programme with UK Trade and Investment in October 2004, so there are further signs of change. The feeling is that we need to see from the UK side more promotion of the long-term relationship by promoting trade and investment and arranging more high level visits so that when British parliamentarians visit China they also visit Hong Kong as well as Mainland China; and also arrangement of commercial and business visits both between Hong Kong and the UK. When Donald Tsang, the Chief Executive, visited last September he expressed concern on the last three major Hong Kong/UK events in the UK; no member of the British Government had attended and I believe he stated on the record that he raised that with the Prime Minister. I think maybe sometimes people take things for granted and it is not an active decision to play down the relationship. The Deputy Prime Minister on his recent visit I think realised some of these points and was keen to play up the relationship. Coming back to some of the issues raised earlier, some of the concerns about mainland China are linked in to the rule of the law, to the judiciary, the sound corporate governance - things that are in existence in Hong Kong and hopefully will remain very solid and very good - and maybe it is a case of not only playing on the long-term relationship that the UK has had with Hong Kong but also citing the positive aspects of Hong Kong and maybe trying to see some of these transferred initially into the Pearl River Delta which borders Hong Kong and also maybe into the Pan-Pearl River Delta, reflecting the fact that the Chinese often like to experiment in certain areas and with certain policies. So basically, trying to transfer better practice in those areas from Hong Kong into the mainland.

Lord Powell of Bayswater: May I add one point to that because I think it is very important? There was a time when virtually every British company that did business with China based it in Hong Kong - life was just different then. Nowadays that is not the case and most British companies want to be in China themselves or they need to be in China. Of course, they do still use a lot of services out of Hong Kong, financial services particularly and professional services too. My second point would be that I think there is a lot of scope for cooperation between organisations like the China Britain Business Council and indeed the government services and their counterparts in Hong Kong. For our part we work very closely in Southern China with the Hong Kong British Chamber of Commerce; they have a great reach from Hong Kong into Guangdong Province so they know much more about it than we do, and therefore we work very closely with them there. We do not expect them to do the same in the north of China. So you can leverage the British influence and role in Hong Kong and in parts of China very successfully still.

Dr Lyons: Just to make clear, it is not a case of Hong Kong or Mainland China; I think the UK can leverage off Hong Kong as well as making inroads into Mainland China.

Q131 Mr Hamilton: Can I ask very briefly as a follow-up, how does the rest of China see Hong Kong? Do they still regard it as a former British colony with an alien system, or do they feel it is a model for the rest of China? As briefly as you can.

Dr Lyons: I am not sure, is the answer to that question.

Lord Powell of Bayswater: I think they see it in a number of different ways. I think they are very envious of its standards of living and that sort of thing. I think they are rather jealous in the sense that they want to assert the primacy of some parts of China - Shanghai wants to prove that it is bigger and more important than Hong Kong and therefore is the leading commercial centre in Greater China. It is a mixture of emotions. But at least there is much more access now and the Chinese get to visit Hong Kong much more and play a great part in Hong Kong's economy, and that must be good.

Q132 Chairman: Dr Lyons, can I take you back to something you said in passing, as an aside almost, an earlier remark, which I am not sure I agree with, where you refer to a conciliatory approach to Taiwan? You will recall that a year ago the anti-secession law was adopted and I would not have thought that that would have been regarded as necessarily conciliatory. I am interested in the context of Taiwanese/Hong Kong/China economic relations, and also the politics. Does the issue of Taiwan and whether companies have relations with Taiwan and how they relate to Taiwan complicate trading and economic relations with China?

Dr Lyons: It may complicate it but it does not prevent it. The Taiwanese leadership a few years ago talked about a "go south" policy, trying to encourage Taiwanese companies to go south, and in fact most of them went north. There are a number of different ways to look at this and it fits in with the last question as well in some respects. When one looks at Mainland China I tend to think of five economic regions. We often talk of China almost as if there is one economy but the reality is that just as in the UK there are huge economic disparities there are huge disparities in China. There are five regions: there is the Pearl River Delta bordering Hong Kong, which is booming and both leverage off one another; there is the Yangtze River Delta bordering Shanghai, which is booming, and that benefits immensely from Taiwanese inward investment; there is the Bohai ring round Beijing, which again is booming and that benefits from investment from all sorts, including Taiwan, including Korea. The two laggards, if I can call them that, are northeast China, the old industrial rust belt, and western/central China where 285 million people are planned to be moved off the land into urban centres over the next 20 years. That gives you a scale of the issues. Against this backdrop economic factors really do dominate. You are right about the anti-secession law and we should not downplay that, but at the same time the mainland has invited opposition politicians into China and that is what I was really talking about in terms of the conciliatory approach. Coming back to your question specifically: has it prevented economic ties? No. We do see, for instance, many Taiwanese companies still going via Hong Kong and setting up businesses there. So there is a strong business link between Taiwan and Mainland China despite the ongoing political issues.

Lord Powell of Bayswater: That surely is the main point. There are three million or more Taiwanese actually living and working in China, but every big Taiwanese company has a business in China. Long-term that must surely be the way that the problem is going to be eased, simply because the trade will lead the flag by a long, long way.

Chairman: We hope so.

Q133 Mr Maples: That was really the question I was going to ask, so perhaps we can explore it a little further? What restrictions are there on investment either way between Taiwan and Mainland China, and between travel and working and that sort of thing? Presumably it is a bit of a one-way traffic, is it not, from Taiwan into China rather than the other way around?

Lord Powell of Bayswater: Restrictions on investment were actually imposed by the Taiwanese rather than the Chinese. The Taiwanese have recently relaxed a lot of those restrictions because, frankly, of pressure from their own companies who said, "You cannot let us not be in China, we need to be in China, we need to have access to Chinese labour and the cheaper labour as well." Travel is still more difficult, although it is beginning to ease up; it is mostly still through Hong Kong, but I think it is only a matter of time before direct travel will increase. It operates at two levels: there is the political principle sovereignty level where it is a hugely dangerous and difficult subject, and there is a ground level where things happen which are all the time eroding the barriers and differences between Taiwan and China.

Dr Lyons: Indeed, the Asian supply chain is becoming more interlinked, which is another future competitive threat for UK manufacturing but positive at the end for UK consumers. You are starting to see greater economic linkages among many of these countries, driven as much by the corporate level as different levels of the operation take place in different countries across Asia.

Q134 Mr Maples: On a practical day-to-day level, if you are living or doing business in Taiwan or you are a Taiwanese living and doing business in China it just operates in a very practical and relatively unrestricted way. Do you think that this is part of China's overall policy towards Taiwan or is it just part of a business policy? Do they see this in the long-term as achieving the objective you describe there, or is this simply, "This is part of our economic development, this is a source of capital, part of the supply chain"?

Lord Powell of Bayswater: If you take the view that there is one China then obviously anyone from any part of China who wants to work in a different part of it is furthering that policy, so I think you can say it is part of the Chinese Government's policy, yes.

Q135 Chairman: Just to throw in a slightly different question, but it relates in a way to some of the discussions we had earlier with the people from Human Rights Watch and Amnesty, how concerned are you about the potential for explosion of frustrated rural populations or people in urban areas who do not have the ability to organise, to associate, to have free trade unions, and therefore you end up with Luddite type or anarchistic type of social unrest rather than having a partner to negotiate with, which you would find in, say, India or many other fast growing developing countries like Korea? Is there a danger for foreign investors that they basically become complicit in the lack of human rights and trade union rights in China?

Lord Powell of Bayswater: The first point I would make is that it does not matter much whether I worry about it, but certainly the Chinese Government worries about it. You can see that the whole thrust of the recent National People's Congress was towards addressing these problems and tackling them, so clearly it is a major concern for them let alone for foreign investors. I will come back to my second point.

Dr Lyons: It is interesting. India clearly is a democracy and there are many things about India that should be applauded, and we are also the biggest foreign bank in India. I think it is interesting that the Indian election a couple of years ago shocked everyone. "India is shining" was the policy of the previous administration and if you visited the urban centres in India, as I do, you clearly got the impression that the previous government would be easily re-elected. It came to the election and they were basically beaten, and what it showed was that the agricultural area in India was really feeling aggrieved. It therefore should be no surprise, in my mind, that we have similar issues in China. It is a real problem of transition. Globalisation, opening up and change, has winners and it has losers, and a big difficulty is managing the transition. I think the Chinese leadership is now trying to address that problem. I touched on some of the figures early on, and when you actually look at the appalling fall in spending on health and education it is no surprise, and add in the problems with the land. So I think rural tensions will become acute. I have no further insights as to how the leadership in China is handling them, other than to say that clearly we should be worried. My concern might be nationalism. We have not mentioned Japan here this afternoon but one thing I always pick up on when I visit China is the nationalism with regard to Japan. So those axes where the tensions can be seen can sometimes surprise. It might not be in terms of mainland versus Taiwan, it could be in other areas, but I certainly think it is something that we should watch. Given the likelihood is that the economy can become more volatile or probably will become more volatile in the future, and given the disparity between east and west, urban/rural and also between some other parts of the country, educated versus uneducated, there are clearly social issues there. I think the bottom line is that the Chinese authorities need to introduce a social safety net and we from the UK side can probably give some good advice on that.

Lord Powell of Bayswater: May I just make my other point? I think that one of the crucial factors here will be whether there is a major economic downturn. If there was a recession in the United States' economy, a steep falloff in Chinese exports or, let us say, the United States took some measures to obstruct Chinese exports, then that could have really quite severe consequences quite quickly in China in terms of more and more people being thrown out of work, and then you would have foreign investors being very worried about the situation.

Q136 Chairman: Do you think that British companies should actually try to be at the forefront of impressing on the Chinese authorities the need for international labour standards and social standards, or do you think that there will be a danger that British companies would lose their market share if they did adopt such an approach and would end up having the French, German or American companies coming in and cleaning up?

Lord Powell of Bayswater: I am not in favour of telling British companies how to conduct themselves - they are responsible companies, they will conduct themselves as they think appropriate - but we do encourage them in a general sense to observe best practice, as I said in answer to an earlier question. I do not think there is a great difference between what British companies do or French or German, and I do not think it would have much impact on our market share. I really do not think it is a major factor. If British companies were to say, "We will not do business in China unless we are allowed to negotiate with a trade union in a particular factory" then you can forget that particular business.

Dr Lyons: I think it is very important that UK companies do not drop their standards. Standard Chartered has been in countries across Asia, Africa and the Middle East for the last 150 years. You cannot drop your standards just because you think you may lose in the short-term. It is like your long-term brands, you have to adhere to best corporate governance all the time; and if you are a big company you can set the standards for others to follow, and you have to do that.

Q137 Chairman: Thank you very much. We have come to the end of a very long session this afternoon. As you have seen, we have been here for several hours and we are grateful to both of you for coming along and giving us a very wide number of answers and we hope to continue to look closely at economic developments in China and British investment in China over the coming months.

Lord Powell of Bayswater: Thank you very much for inviting us; we admire your stamina.