The second possible future for China is perhaps equally daunting for international business executives. In fact, those who see China as a militarily aggressive country seeking geopolitical leadership and hegemony in Asia paint a picture of China's future that is even more alarming than the Humpty-Dumpty scenario simply because it has a much greater probability. Putting aside the above problems and pressures, which are not atypical of rapidly developing countries, there are many factors that make the disintegration of China along the lines of the Soviet Union extremely unlikely. Most importantly, China, unlike the Soviet Union, has a highly homogeneous population. Over 93% of the population is Han Chinese, versus less than half of the Soviet population being Russian. In addition, there is a rich and long history of Chinese nationalism, which traditionally viewed the Middle Kingdom as the center of the world. Soviet nationalism, on the other hand, was significantly weaker. Moreover, the Soviet breakdown occurred in an economic environment of stagnation and collapse, whereas China is one of the world's fastest growing economies.

It is this fast growth, however, that is causing some analysts great concern because it is generating huge foreign exchange reserves that can be used for military and political purposes. A more aggressive China can be seen in many recent incidents, from expansionist territorial claims in the South China sea to sabre-rattling and missile testing in the Taiwan straits. Chinese military capabilities are rapidly expanding as well, given a military budget growing at 10-12% per year in real terms and given recent purchases of sophisticated Russian military equipment in what Prime Minister Li Peng called a ``strategic partnership'' to ``offset the influence of the United States.'' In fact, a recent article by Bernstein and Munro in the prestigious and influential magazine, Foreign Affairs, argued that China may lead an anti-Western coalition of states, which will include radical Islamic countries, who have goals and philosophies inimical to those of the United States, and many of which share China's sense of grievance at the long global dominance of the West.'' As China aggressively pursues the redress of historical misdeeds, a clash between the United States and China over Taiwan looms as a likely possibility. As Chinese military capabilities increase, so does the probability of Chinese aggression toward Taiwan, but apart from such capabilities, any declaration of independence by Taiwan would certainly prompt a Chinese invasion of Taiwan. The resulting tensions, trade embargoes and possible fighting between the military forces of China and the United States would have a devastating impact on international business. Trade and investments flows throughout East Asia would be negatively impacted. Nearly all foreign investment projects in China would suffer. Firms that stress China as an export base would face trade barriers or sanctions led by the United States, and companies more oriented toward sales within China would confront a stagnating economy cut off from major sources of growth, exports and foreign investment. American firms in particular would suffer as they would be targeted for expropriation or blackballing from lucrative government contracts. One might think of this as the Angry-Hungry Panda Bear scenario.

This scenario is grounded in certain questionable assumptions about the intentions and motives of the Chinese leadership, which is generally recognized to include about 25-35 key individuals in the government and military. When China buys world-class naval vessels from Russia and rapidly increases its military budget, those who expose the Angry-Hungry Panda Bear scenario see aggressive intentions. Others, however, see these actions as understandable attempts by China to help redress their perceived and overwhelming military inferiority relative to the United States. When China conducts missile tests in the Taiwan straits, some see this as a prelude to a future invasion, while others point to this incident as evidence that the Chinese leadership and people are almost unanimous in their opposition to Taiwanese independence and will to go to war to prevent this development. In particular, the proponents of the Angry-Hungry Panda Bear scenario have great difficulty in explaining Henry Kissinger's assessment that ``Deng frequently insisted that he considered cordial relations with the United States the central element of Chinese foreign policy.'' The reason for Deng's view was

quintessentially Chineseşthat is without a trace of sentimentality; it reflected his assessment of the requirements of Chinese security' and the conviction that China could progress economically only in a relaxed international atmosphere for which good relations with the United States were the essential precondition.

Thus instead of China wanting the removal or significant reduction of U.S. military forces in East Asia, which would seem to be the logical conclusion of those who expose the Angry-Hungry Panda Bear scenario, the Chinese have instead welcomed and supported the continued presence of the United States at current force levels in East Asia. These facts seriously challenge those who assume aggressive intentions on the part of the Chinese leadership.

The third scenario, recently articulated by William Overholt in Foreign Affairs, instead envisions China progressing along the lines of other Asian Tigers, like Taiwan and Korea. China's recent developments certainly seem similar to a pattern seen in these two East Asian countries. Rapid economic growth is achieved by state-directed investments in export-oriented industries. Such rapid growth, however, does produce socioeconomic and political problems, like the Tiananmen Square incident, which in the short to medium term is constrained or managed by authoritarian politics. As the economy continues to grow and as the middle class expands in relative size, political liberalization gradually takes place. There are already signs of such a development as the head of the National People's Congress, Qiao Shi, recently gave a speech stressing the importance of making the legislature the country's key law-making authority and for creating a ``system of law'' that even party members must obey. As in Korea and Taiwan, this scenario sees China evolving into more participatory political structures and procedures, when even the power of the Chinese Communist Party could be legitimately contested. One can call this best case for international business the Asian-Tiger Panda Bear scenario.

This very optimistic view of China's future also has a number of flaws or questionable oversights. First of all, it is quite unlikely that China will be able to maintain the extent of its recent export-led growth, which is highly dependent on preferential access into the U.S. market. Keep in mind that China enjoys approximately a $40 billion trade surplus with the United States against a total trade surplus of around $10 billion. The size of this bilateral deficit is politically unacceptable to the United States in light of two facts: there is clear evidence that China's markets are far from open and, unlike the cases of Taiwan or Korea, the U.S. has no geopolitical incentive to allow such trade imbalances to continue.

In a related point, political liberalization in China will not proceed in a Western-democratic sense for several reasons. Because the international relationship between China and the U.S. is far different from American relations with the Asian Tigers, China will not be as responsive to external pressure to adopt certain political institutions and procedures. Simply put, China is less dependent on the United States for political and military support, and therefore less subject to such pressure. Any U.S. threats to attack China on economic grounds are understood as true ``paper tigers'' given strong American economic interests in China. But perhaps more importantly, the revolutionary roots and legitimacy of the CCP are strong in the eyes of all key holders of power in China. This view is particularly and most importantly held by top military leaders. At the same time, the CCP faces no widespread, populist challenges to its power and that will probably continue short of major setbacks in the economy. Thus the dominance of the CCP in political decisions will not change in China for the foreseeable future.

Key Predictions and Trends

Domestic Politics

A major political change in China over the next ten years may be the increased participation of more Chinese in the political process. Such developments would take place under the guidance of the CCP. Within a few local areas today, particularly wealthy rural villages, political activity consistent with Lenin's ideal model of ``democratic centralism'' is already taking place in the form of real competitive elections between party members. They are real in the sense that CCP members running for the same office debate and take different positions on issues important to the village. Over time, such procedures could percolate up to the level of the national legislature, which would be consistent with the views expressed recently by Qiao Shi. Political developments in this direction would certainly be good news for international business for it should make the government more responsive, legitimate and less corrupt.

Economic Developments

Increasingly, this relatively high rate of growth will be stimulated by private consumption and investment. As economic liberalization proceeds, average family incomes will continue to rise (in urban areas they have risen 15 times over the last 20 years and the increase is even more dramatic in wealthy rural villages). Thus the current retail spending boom ( retail spending has increased 40% over the last year) will remain robust for some time. On the investment side, China will continue to be a major recipient of foreign direct investment, and domestically, the relative importance of private capital and township village enterprises will grow. In 1992, for example, the World Bank estimated that the output of enterprises that were privately owned comprised 2% of GDP in 1985 but that percentage had skyrocketed to 29% by 1995. This data in part is a reflection of large numbers of government bureaucrats and of officials going into private business on the side. Village township enterprises also grew rapidly in importance. TVEs are companies created by wealthy farmers when rural incomes rose substantially in the aftermath of land reform (peasants were allowed to cultivate their own plots and sell produce on the open market at prices determined by supply and demand). Many TVEs were joint ventures between the village and overseas Chinese investors from Singapore, Taiwan or Hong Kong. During the 1980s and early 1990s, the output of TVEs grew 30% per year and exports increased 65% per year. The World Bank predicted that the contribution of TVEs to China's economy would rise from 37 to 48% of GDP during the 1990s.

By definition, this means the relative importance of state-owned enterprises will diminish. SOEs currently employ 100 million workers and contribute 34% of total output, down from 81% in 1978. SOEs as a whole are losing money and are heavily subsidized by the government. With a fiscal deficit of only 1% of GDP, China could afford even higher subsidy expenditures, and over time, many SOEs have and will modernize and merge into more competitive companies. In the near term, however, maintaining employment at many SOEs will be a key feature of China's welfare system.

International Relations

There are, however, some issues of nationalism that supersede the relationship with the United States. This is primarily the case when territorial sovereignty is at stake. In certain areas, China will never compromise on Hong Kong and Taiwan. Although China will certainly not change Hong Kong's economic system, China will insist on governing Hong Kong based on the political conditions that prevailed when the 1984 treaty was signed. China, moreover, will never accept a declaration of independence from Taiwan. Doing otherwise would be comparable to President Lincoln agreeing to British arbitration between the North and the South or to allowing Southern succession.

On the whole, U.S. foreign policy has been sensitive to these Chinese concerns. At the same time, it is important for the United States to insist that China abide by its obligations under international agreements and law. For example, sending two aircraft carrier groups near the Taiwan strait during Chinese missile tests was appropriate. Each side succeeded in sending the right signal, namely, China will not tolerate a movement toward independence in Taiwan and the U.S. will not allow China to successfully invade Taiwan. By working within these policy parameters and with the continued integration of the Taiwanese and Chinese economies through trade and investment flows, some form of political integration between them may become possible over the next 10 years, particularly if the political process described earlier unfolds within the CCP. Such a development is extremely important because clearly Taiwan is the wildcard that could upset the realization of a scenario that would be extremely beneficial not only for international business but for the entire world political and economic system.

Selected Bibliography

Christensen, Thomas, "Chinese Realpolitik," Foreign Affairs, September/October 1996.

Kissinger, Henry, The Philosopher and the Pragmatist," Newsweek, March 3, 1997.

Lieberthal, Kenneth, "A New China Strategy," Foreign Affairs, November/December 1995.

Nathan, Andrew and Ross, Robert, The Great Wall and the Empty Fortress, W.W. Norton, 1997.

Overholt, William, "China after Deng," Foreign Affairs, May/June 1996.

Siegal, Gerald, "Tying China into the International System," Survival, Summer 1995.

The Economist, "A Survey of China," March 8, 1997.