China, Japan, and the 21 Demands
Image Credit: Wikimedia Commons

China, Japan, and the 21 Demands

Compared with the high-profile national Memorial Day for the Nanjing Massacre last month, the date January 18 passed uneventfully. Chinese media appeared to have forgotten that one hundred years ago, on exactly that day, Japan presented Chinese President Yuan Shikai (Yuan Shih-Kai) with requests that would have turned China into a de facto Japanese protectorate.

The Japanese requests included five groups of secret demands that became known as the Twenty-One Demands. Groups One and Two were designed to confirm Japan’s dominant position in Shandong, southern Manchuria, and eastern Inner Mongolia. Group Three would acknowledge Japan’s special interests in an industrial complex in central China. Group Four forbade China from giving any further coastal or island concessions to foreign powers except for Japan. The most outrageous was Group Five. Group Five required China to install Japanese advisors who could take effective control of Chinese government, economy, and military. These demands would have had a similar impact to that of what the Japan-Korea Annexation Treaty had on Korea in 1910.

These notorious demands were issued at a time of shifting balance of power in East Asia. With the Qing dynasty’s humiliating defeat in the first Sino-Japanese War (1894-95), regional dominance for the first time had moved from China to Japan. Japan’s ambitions in China were further emboldened by its decisive victory in the Russo-Japanese War (1904-05), which affirmed the Japanese presence in south Manchuria and Korea. The 1911 Revolution brought an end to the Qing dynasty and ushered in the Republican era in China, but China remained a pushover in the face of pressure from Western powers. Furthermore, Yuan’s ruling status itself was shaky due to threats from competing local warlords. World War I granted Japan a perfect opportunity to push the envelope even more with China. As the war was underway in Europe, the Japanese hoped that other major powers would show little interest in countering Japanese expansion in China. For these reasons, Japanese Foreign Minister Kato Takaaki was convinced that the filing of an ultimatum buttressed by the war threat would cause China to accept all the demands.

Fully aware of the negative reaction the demands would cause, Japan asked China to keep them confidential and threatened to take “drastic actions” if they were leaked. Contrary to the popular Chinese image of Yuan being a traitor, archived history suggests that Yuan and his top associates worked hard to minimize the harms caused to China’s sovereignty by the Twenty-One Demands. Soon after studying the Japanese request, Yuan instructed top Chinese diplomats that by no means should China submit to the demands of Group Five. Headed by then Foreign Minister Lou Tseng-Tsiang, the Chinese negotiators sought to stall the negotiation process for as long as possible. Between February 2 and April 17, twenty-five rounds of negotiations were held. Disregarding the Japanese threat, Yuan had his political advisor leak the full contents of the Twenty-One Demands to a correspondent for the Times in Beijing, who then reported them on February 12. In seeking international support, Yuan also relied on the traditional Chinese strategy of playing one power against another (yi yi zhi yi). He hoped that a perceived threat to European and U.S. political and economic interests in China would lead them to constrain Japan’s aggressiveness. Although the United States continued with a low-risk strategy in China, Secretary of State William Jennings Bryan warned that the United States would not recognize infringements on Chinese sovereignty and the Open Door policy. As author Bertram Lenox Putnam Weale documented in the book An Indiscreet Chronicle from the Pacific, the possible intervention of Great Britain and the United States was indeed a concern for Japan in deliberating what final steps to take on May 6. In addition, Yuan also sought to affect Japanese domestic politics by mobilizing the support of Genro, who were angered by the government’s failure to consult them before drawing up the demands. As the negotiations evolved into an inevitable crisis at the end of April, the open opposition of elder statesmen like Matsukata played a decisive role in forcing the Japanese government to drop the demands of Group Five in the ultimatum delivered to China on May 7.

Not surprisingly, Yuan, who had no intention of risking war with Japan, accepted the ultimatum on May 9. The final form of the treaty was signed on May 25, 1915. With the removal of the most odious provision, however, the new treaty gave Japan no more than what it already had in China. Yuan, whose credibility and popularity as a leader was further weakened as a result of his appeasement policy, viewed accepting the treaty as a “terrible shame” (qichi daru) and made May 9 China’s National Humiliation Day. The Twenty-One Demands nurtured a considerable amount of public ill-will towards Japan, and the upsurge in nationalism is still deeply felt today in China’s handling of Sino-Japanese relations.

To be sure, times have changed. This time, the pendulum of power is swinging in China’s favor. Given the ongoing territorial disputes in East Asia, the episode that occurred exactly one century ago can still provide critical insights into how a rising regional hegemon like China should behave, and how less powerful states could play the power game to better protect their national interests.

Yanzhong Huang is Senior Fellow for Global Health at the Council on Foreign Relations. This post appears courtesy of and Forbes Asia.


The Dragon’s Eyes and Ears: Chinese Intelligence at the Crossroads

The MSS has lost several of its vice ministers to spy scandals and the ever-widening net of President Xi’s anti-corruption campaign. What happens next?

January 20, 2015

A little over a week ago, Hong Kong media reported and, on January 16,Beijing confirmed investigators had detained Chinese Ministry of State Security Vice Minister Ma Jian as part of China’s ongoing anti-corruption campaign. While Ma’s detention gives Xi Jinping and political analysts the opportunity to boast, his dismissal from the Ministry of State Security (MSS) opens a void at the top of China’s civilian intelligence service. Ma is the third vice minister to be shown the door in recent years, and each could have succeeded Geng Huichang, the current Minister of State Security, who is due to retire in the next two to three years. With an open playing field, the choices made by Xi Jinping and his colleagues will go a long way toward deciding the future of Chinese intelligence.

The MSS has lost its vice ministers to spy scandals and the ever-widening net of President Xi’s anti-corruption campaign that is sweeping up the debris of former security chief Zhou Yongkang’s network. In 2012, under President Hu Jintao, Executive Vice Minister Lu Zhongwei was disciplined and retired early because one of his close aides reportedly spied for a foreign government. Like the current minister, Lu had worked his way up the MSS ranks in the China Institutes of Contemporary International Relations—one of China’s most prestigious international affairs think tanks and staffed entirely by MSS officers. While Lu may only be the second CICIR analyst to rise to the vice-ministerial ranks, he followed a typical MSS pattern of a headquarters bureau director taking the helm of one of the provincial departments, in this case the Tianjin State Security Bureau, prior to being promoted to the front office.

The next vice minister to fall was Qiu Jin, a counterintelligence/counterespionage specialist, who was one of the first victims of Zhou’s disintegrating patronage network. Qiu probably is best known outside of China for his role in escorting would-be defector and Bo Xilai sidekick Wang Lijun from the U.S. Consulate in Chengdu back to Beijing. Earlier in his career, Qiu reportedly directed the MSS headquarters counterespionage investigations bureau and the marquee provincial unit for counterespionage, the Beijing State Security Bureau. His crimes reportedly included directing an associate, Beijing State Security Bureau Director Liang Ke, to clandestinely monitor senior Chinese leaders.

A thirty-plus year veteran of intelligence operations, Ma Jian, the latest intelligence official caught in Xi’s anti-corruption web, most recently served as executive vice minister, presumably claiming the position after Lu left the service, and once was regarded as a strong candidate to succeed Minister Geng. Ma also probably took over Qiu Jin’s counterintelligence portfolio after the latter’s ouster this time last year. Vice Minister Ma had been a key player in Chinese event security, including the Asian Games in Guangzhou in 2010 and probably the Beijing Olympics in 2008. Ma did not commit any obvious crime; however, it appears he was guilty of assisting family members in their business dealings and presumably exploited his MSS position to do so. He is also believed to be close to Ling Jihua, Hu Jintao’s former top aide, who was himself detained last month.

The current MSS chief, Geng Huichang, ascended to the position in August 2007 as a scandal forced a ministerial shakeup ahead of the 17th Party Congress and routine ministerial changes due at the 2008 session of the National People’s Congress. Geng will turn 64 this year, leaving only a short time before he is due for mandatory retirement. He was the first minister selected with a foreign affairs background; however, he still reflected the tendency to choose a politically-neutral or weak minister who could not become a political force of his own or be used as a cat’s paw in leadership struggles.

With three potential candidates ousted from the ministry, the question is who is left to replace Geng? This is a difficult question as the leadership lists remain mostly hidden from public view. Only the minister and the provincial-level department directors are officially listed. With Lu, Ma, and Qiu gone, the only publicly-identified vice ministers unaccounted for are Sun Yonghai and Dong Haizhou.

Sun is listed online as a special member of the Chinese People’s Political Consultative Conference (CPPCC) and MSS vice minister. Apart from him potentially masquerading under a pseudonym as a leader of various cultural and academic exchange organizations—suggesting a foreign intelligence focus like Geng—even less is known about Sun than Ma Jian. According to his CPPCC profile, Sun was born in 1953 and internet sources suggest he became a vice minister in 2006. Other online sources suggest Sun headed the MSS Fifth Bureau, which handles intelligence source reporting and requirements.

Like his colleagues, Dong Haizhou has a low profile with public references to his CPPCC membership and a handful of Xinhua references. The top milestones of Dong’s career include his assignment as director of the Tianjin State Security Bureau in the late 1990s and his rumored ascent to the MSS party committee in 2005 followed by his promotion to vice minister in 2006.

Sun and Dong are the only two professional choices to succeed GengHuichang, unless the leadership brings someone over from military intelligence. The losses of Lu, Ma, and Qiu leave a gaping hole of experience at the top of the ministry, as they served in the MSS front office for several years.

Below are a few of the considerations that the Chinese leadership will need to consider when choosing the next minister of state security and possibly filling in the vice minister vacancies. The choices made by Xi Jinping and China’s other leaders about MSS leadership will provide a window into the politics of Chinese intelligence and what Beijing expects from its principal intelligence service.

·      Professional or Political? In a country governed by a Leninist party-state, professional versus political seems like a foregone conclusion. The history of Chinese intelligence, however, has demonstrated a consistent tension between professionally-minded intelligence officers, such as Li Kenong, Pan Hannian, and Xiong Xianghui, and those who wielded the intelligence service as a tool for state terror, such as Kang Sheng, Luo Ruiqing, and Wang Dongxing. The Chinese news coverage of the MSS’s creation in 1983 suggests that, even if the ministry may not have a professionalized approach to intelligence, it least aims to be an apolitical organization outside leadership politicking. Although Xi Jinping seems committed to reining in excesses, he could try place his own man in charge of the ministry when the time comes. If Xi can bring the MSS under his control, then he would provide a tangible demonstration of his authority vis-à-vis his peers.

·      Political Power or Neutrality/Weakness? The minister of state security is the only MSS official on the party’s Central Committee, placing it at a bureaucratic disadvantage with its principal competitor, the Ministry of Public Security (MPS), which usually places numerous officials on the Central Committee (probably by virtue of their party careers outside law enforcement). There have even been times when no MSS official was represented on the Central Committee; Geng’s predecessor, Xu Yongyue, languished as only an alternate member for a number of years. The cost of raising the political clout of MSS leadership, however, risks making the ministry a “normal” part of Chinese politics and encouraging meddling of the kind that got Qiu Jin and Liang Ke dismissed.

·      External or Internal? MSS history and organization favor a leadership selection based on internal security or counterespionage expertise. Because of the MSS organizational structure that gives local governments’ influence over their operations through the Political-Legal Affairs Committee system, internal stability and counterespionage take priority over foreign intelligence operations that only benefit the central government. An externally-focused pick, nevertheless, may make sense for the MSS. The current minister is the first who had foreign affairs expertise, and he arrived on the scene as the People’s Liberation Army was redirecting its intelligence apparatus away from policymaker support and toward operational military requirements. Simultaneously, the Ministry of Public Security appears to be regaining its important domestic intelligence role, which was passed to the newly-formed MSS in 1983, driven in part by investment in public surveillance. An external focus across the ministry would move the MSS into an increasingly open bureaucratic space for policymaker support.

·      Human or Technical? The MSS has long focused on human intelligence (HUMINT); however, the growing role of cyber in China’s intelligence collection as well as the ministry’s role in key cybersecurity and informatization leading groups suggests the MSS needs at least one person in the senior ranks with technical expertise as well as the gravitas that comes from being in the front office.

Peter Mattis is a Fellow with The Jamestown Foundation and a visiting scholar at National Cheng-chi University’s Institute of International Relations in Taipei.

Image: Flickr/Ana Paula Hirama

The Spies Are Coming! The Spies Are Coming to Taiwan!
Image Credit: Photo of a Taiwan Air Force pilot by J. Michael Cole for The Diplomat

The Spies Are Coming! The Spies Are Coming to Taiwan!

The optics couldn’t be worse — four Taiwanese military officers, including an Air Force pilot, a lieutenant colonel and a former Army major general, indicted on charges of belonging to a spy ring led by a Chinese intelligence officer. Oh, and the owner of a karaoke club, to boot. The January 16 indictments, which follow the arrest in September last year of Zhen Xiaojiang, the Chinese handler who was also indicted, are but the latest in a string of arrests on espionage charges in recent years. 15 cases were uncovered in 2014 alone. Has the Taiwanese security apparatus been completely penetrated by Chinese spies, as some analysts have been arguing?

Maybe, but the extent to which systems and people have been compromised is anyone’s guess. The People’s Liberation Army is particularly interested in establishing a complete picture of Taiwan’s C4ISR architecture, radar and air defense systems, as well as war preparedness plans, a focus that has been confirmed through the string of arrests over the years, including the latest case. Despite warming ties between Taiwan and China since 2008, espionage efforts against the island-nation never abated; in fact, substantially increased contact between the two sides created a wealth of opportunities for intelligence collection and source recruitment by China.

The PLA’s rationale for stealing secrets from Taiwan is self-evident: Beijing does not recognize the existence of Taiwan as a sovereign state and regards it instead as a province awaiting “re-unification,” by force if necessary. Despite views to the contrary, Taiwan remains a so-called “core interest” of Beijing, and President Xi Jinping has stated that he hopes to resolve the Taiwan “issue” during his term. It goes without saying that if force were used to resolve the “issue” — that is, preventing a permanent state of division through the de jure independence of Taiwan — the Chinese military would seek to exploit the weaknesses in Taiwan’s defense establishment. To be able to do so, it must gather intelligence, recruit agents, and have sources in the many agencies that would play a role in a military contingency.

So of course Taiwan has a serious spy problem on its hands! It was, is, and will remain an intelligence priority for the Chinese.

However, damage assessments in the wake of a Chinese op should not be limited to the information that was, or may have been, stolen. Just as important are the propagandistic aspects of Chinese intelligence gathering, which are felt not when agents access classified information, but rather when they are caught and their activities are exposed.

For all the bluster, Beijing would much rather “win” Taiwan without having to fire a shot in anger. War is a messy adventure and its outcomes are unpredictable. Even if the PLA had the ability to prosecute a “quick and clean” war over Taiwan, which is by no means certain, the consequences would be dire for China, both in terms of the human cost and the blow to China’s image internationally. Better, then, to win without a fight, a strategy that certainly isn’t alien to Chinese culture.

Ironically, most defense analysts in Taiwan and abroad do not seem to be all that interested in understanding the propaganda component of China’s offensive operations against Taiwan. Through propaganda, Beijing aims to undermine Taipei’s image, further isolate Taiwan within the international community, and destroy morale in Taiwan. Consequently, whenever an espionage case is brought to light — regardless of the seriousness or nature of the incident — it tends to reinforce the notion that Taiwan is crawling with Chinese spies and therefore cannot be trusted with secrets or advanced military technology. The ramifications for intelligence sharing and arms sales to Taipei can be serious. Even careless operations in which agents are likely to be exposed can yield propaganda benefits for Beijing by damaging Taiwan’s reputation as a reliable security partner. In some cases, being caught could very well be the main goal of an intelligence operation!

Worse, Beijing’s propaganda ops broadcast the belief that Taiwanese can simply be “bought,” a view that simply doesn’t stand scrutiny. Western media have sometimes irresponsibly helped create that impression. For example, in an otherwise fine (if somewhat pessimistic) piece, Defense News writes, “The joke among many government officials in Beijing, according to media reports, is that it will be easier to buy Taiwan than invade it.” Unfortunately, the author doesn’t tell us which media reports he is referring to, or who the government officials are, not to mention whether they are qualified to discuss the matter or what their motivations might be for doing so.

The spy problem puts Taiwanese counterintelligence in a difficult position, as successful operations, especially when they are made public, exacerbate perceptions of Taiwan as drywood infested with termites. During the détente period of President Ma Ying-jeou’s reign, the military tended to downplay the seriousness of the Chinese espionage problem, or punished those who, like this author, sought to draw attention to the problem. Politics then dictated that the negative aspects of the relationship, such as continued Chinese belligerence, should be papered over in order to ensure continued dialogue, President Ma’s main consideration. Top-down intervention was rampant, and agencies were instructed to remain silent on Chinese aggression. As a result, intensifying Chinese espionage (and military buildup) against Taiwan was relatively cost-free for Beijing: The consequences of exposure were next to nil, and rapprochement continued as if nothing had happened.

However, relations soured in early 2014, by which time Beijing had lost patience with Ma over his “inability” to meet its timelines (for all his faults, President Ma has to deal with a democracy). Accordingly, Taipei reciprocated by taking a tougher line on China. Electoral considerations, growing apprehensions about China’s intentions in part due to the Sunflower Movement, and the need to appear strong on national security compelled the government to become more vocal on the China threat. Suddenly the National Security Bureau (NSB), the island’s civilian spy agency, was less reluctant to point fingers at China, and the government didn’t intimidate journalists who presented an overly pessimistic picture of the spy situation.

Ma, who is widely regarded as the architect of Taipei’s “pro-China” policies since 2008, stepped down as chairman of the Chinese Nationalist Party (KMT) following his party’s disastrous performance in the November 29 “nine-in-one” elections.” The presidential election next year will likely force the KMT to distance itself from the embattled president, and the party’s candidate (Ma cannot run for a third consecutive term) will be tempted to adopt a more Taiwan-centric position to increase his or her appeal with the majority of Taiwanese. Taipei could therefore conceivably become more openly critical of China and more willing to expose Beijing’s bad behavior.

So we should not be surprised if more spy cases come to light in the coming months. However, in order to fully understand the severity of the situation, we must look beyond the secrets that were potentially leaked and take into consideration the propaganda value of an intelligence operation — both the costs of exposure and Beijing’s motives for launching an op in the first place. In other words, while we should regard Taiwan’s spy problem as a serious issue, we must not overstate the matter: China might be attempting to make it look worse than it actually is.

The Decline of China’s Princeling Generals

The recent appointment of Lieutenant General Zhou Xiaozhou as deputy commander of the Chengdu Military Region has been widely regarded as a sign of the rise of princeling generals in Chinese politics.

The son of Lieutenant General Zhou Yibing, former commander of the Beijing Military Region (from November 1987 to April 1990), Zhou Xiaozhou, aged 58, began his military career in 1973 and worked in the 27th Army and 14th Army before his promotion to chief of staff in the Chengdu Military Region in 2012. He was awarded the rank of lieutenant general in 2013 and appointed deputy commander of the Chengdu Military Region in December 2014.

One may also note that Lieutenant General Wang Ning, aged 59, the new commander of the People’s Armed Police, has also come from a military family. His father was an officer of the deputy army commander rank in the Nanjing Military Region; his uncle, General Gu Hui, was commander of the Nanjing Military Region in the 1990s; and his father-in-law, Lieutenant General Du Ping, was No. 7 political commissar of the same military region in the 1960s, 1970s, and early 1980s.

Strictly speaking, these cases belong to different categories of princeling generals. Zhou Xiaozhou is a typical example of princeling generals by birth — sons and daughters of former high ranking officers/officials of the Chinese Communist Party (CCP). Wang Ning represents princeling generals by marriage — sons-in-law and daughters-in-law of former high ranking officers/officials of the CCP.

In the former category, one may also find other princeling generals such as General Zhang Youxia, director of the General Armaments Department; General Ma Xiaotian, commander of the PLA Air Force; Admiral Wu Shengli, commander of the PLA Navy; and General Liu Yuan, political commissar of the General Logistics Department. In the latter category, one may also find other princeling generals such as General Liu Yazhou, political commissar of the National Defense University.

Taken together as one group, however, princeling generals have been in decline in Chinese politics. Since 1994 when the first military princeling was awarded the rank of general, nine of them (including six princeling generals by birth and three by marriage) have been promoted to this rank. At the beginning of 2015, however, there were only five princelings with the rank of general left. Four of them (Zhang Youxia, Wu Shengli, Ma Xiatian, and Liu Yuan) are princeling generals by birth, and one (Liu Yazhou) is by marriage.

But Liu Yuan is likely to retire in 2016 at the age of 65; Liu Yazhou, Wu Shengli, and Ma Xiaotian are also likely to retire in 2017 due to their age. Only Zhang Youxia would stay on beyond the 19th Party Congress in 2017.

Hence, despite some recent promotions, we are actually seeing the decline of princeling generals in Chinese politics.

Professor BO Zhiyue, a leading authority on Chinese elite politics in the world, will take up an appointment in January 2015 as Director of the New Zealand Contemporary China Research Centre (NZCCRC) and Professor of Political Science at Victoria University of Wellington. The only nation-wide research center on contemporary China in the world, NZCCRC aims to be a global leader in knowledge generation and knowledge sharing on political, economic, and social life of contemporary China among tertiary institutions, business sector, and policy community for the benefit of New Zealand. Based in Victoria University of Wellington, the Centre has seven member universities: Victoria University of Wellington, the University of Auckland, Auckland University of Technology, the University of Canterbury, the University of Otago, the University of Waikato, and Lincoln University.

China Just Doubled the Size of Its Amphibious Mechanized Infantry Divisions
People’s Liberation Army (Navy) Marines
Image Credit: U.S. Marine Corps photo by Lance Corporal J.J. Harper

China Just Doubled the Size of Its Amphibious Mechanized Infantry Divisions


According to media reports China will double the number of its Amphibious Mechanized Infantry Divisions (AMID) from two to four. Initially, the People’s Liberation Army (PLA) fielded two AMIDs, one stationed in Guangzhou, the other in the Nanjing Military Region, with a total number of about 30,000 men. Now total manpower in the AMIDs will be around 52,000 – 60,000. These new amphibious forces are meant to complement the roughly 20,000 strong elite PLA Marine Corps in future conflicts over the East and South China seas as well as Taiwan, although the PLA Marine Corps and the AMIDs still lack a joint command system.

In comparison to the PLA Marine Corps, the AMIDs are mostly suitable for conventional large-scale amphibious assaults, such as would occur in a full-scale invasion of Taiwan. However, as a report by the U.S. Department of Defense on military and security developments in China notes: “Large-scale amphibious invasion is one of the most complicated and difficult military operations the PLA might pursue in a cross Strait contingency. Success would depend upon air and sea superiority, rapid buildup and sustainment of supplies on shore, and uninterrupted support. An attempt to invade Taiwan would strain China’s armed forces and invite international intervention …. China does not appear to be building the conventional amphibious lift required to support such a campaign.”

The report continues:

“The PLA is capable of accomplishing various amphibious operations short of a full-scale invasion of Taiwan. With few overt military preparations beyond routine training, China could launch an invasion of small Taiwan-held islands in the South China Sea such as Pratas or Itu Aba. A PLA invasion of a medium-sized, better defended offshore island such as Matsu or Jinmen is within China’s capabilities.”

Thus, for now Taiwan appears to have little to fear from this nascent force. China simply cannot transport the AMIDs across the Taiwan Strait. Each of the four divisions is equipped with up to 300 armored and amphibious transport vehicles – the majority of which are of the ZBD05/ZLT05 type. However, these amphibious vehicles cannot traverse large stretches of water by themselves. Consequently, China will have to rely on its fleet of amphibious warfare ships such as the new Type 071 (Yuzhao-class) transports of which it is currently building two, with three completed and six more planned.

According to open source information, the Type 071 ships can carry between 15-20 armored vehicles and 500 -800 troops (some reports also indicate that China is building an even bigger class of amphibious assault ships). China also operates older and smaller landing ships of the Type 072II-class landing ships, as well as the even older Type 072-class landing vessels. All of these ships combined would currently not be able to transport and re-supply a single AMID along with support elements across waters. (A Taiwanese military intelligence assessment quoted in the 2010 U.S. Department of Defense report to Congress appears to have been wrong.)

It should be noted that the capability to transport a large conventional force is not required for the majority of China’s naval operations. However, in the special case of a full-scale conventional invasion of Taiwan, where there will be only a small time window before China would face massive retaliation by the United States, this capability may very well be required.

China’s $1 Trillion Investment Plan: Stimulus or Not?


With China’s growth slowing down, Beijing will approve 300 infrastructure projects worth a total of 7 trillion RMB ($1.1 trillion) for 2015, Bloombergreports. The decision has not yet been publicly announced by the Chinese government or Chinese media.  The move is linked to a larger plan that will see 10 trillion RMB ($1.6 trillion) pumped into China’s economy by 2016. According to Bloomberg’s sources, the investment will center on “seven industries including oil and gas pipelines, health, clean energy, transportation and mining.”

The report hints that economic rebalancing still faces an uphill challenge in China, despite vocal support from top leadership. China has been extremely reliant on government investment as a driver of growth ever since 2008, when Beijing launched a massive stimulus program to compensate for a decline in global trade. With investment levels at nearly half China’s GDP, Beijing’s economy is “the most investment-dependent in history,”Financial Times notes. This strategy has also resulted in a massive amount of government debt, particularly at the local level.

Beijing recognizes these long-term concerns and plans to promote domestic consumption as a pillar of growth while easing off on investment. But as this new announcement indicates, domestic consumption simply isn’t robust enough to support growth at a level China’s leaders are comfortable with. China’s growth is widely expected to slow to 7 percent or even lower in 2015. While the Chinese government has repeatedly attempted to de-emphasize hard GDP growth targets in favor of promoting stable and efficient growth, concerns about employment and income still make Beijing incredibly nervous about overly slow growth. In July 2014, PremierLi Keqiang noted that China must keep its growth within a “reasonable range.”

When growth threatens to dip below that threshold, it sparks a return to the comfortable and familiar method of jump-starting growth through government investment. China will continue to be reliant on government-funded infrastructure development in the short term even as it seeks to change its long-term economic drivers.

Last year, between October 16 and November 5 alone, China greenlit 21 new investment projects worth $112 billion. At the time, Chinese state media described the decisions as a way “to hedge against falling investment in the real estate market.” Chinese experts predicted further infrastructure investment as a way of compensating for a sagging real estate market; the measures reported by Bloomberg fulfill that prophecy.

Still, experts caution this does not signal a return to the stimulus era of 2008. Nicholas Consonery of the Eurasia Group predicts that the $1 trillion-plus investment package “will not mark a significant trajectory change in terms of Beijing’s determination to use fiscal stimulus to boost growth.” Instead, it’s a “public messaging strategy,” which lumps together pre-existing projects to get to a eye-catching number that helps boost confidence in China’s economy. In general, Consonery writes, “we do not expect Beijing to use aggressive fiscal stimulus to push growth above a 6.5-7 percent level in the year ahead.”

Lian Ping, the chief economic with China’s Bank of Communications, seems to agree. Lian told Xinhua in November that the spate of new infrastructure projects “should be deemed reasonable investment and non-stimulus on a massive scale,” as the projects are “quite necessary” in addition to being important economically.

Infrastructure investments are especially crucial for China’s central and western regions, where development lags behind the wealthier coastal areas. In November, reports emerged that China would earmark $16.3 billion especially for infrastructure development in those areas, part of the groundwork for the planned Silk Road Economic Belt. China Daily reported that the fund “will be used to build and expand railways, roads and pipelines in Chinese provinces” along the planned Silk Road route.

Internationally, the Silk Road Economic Belt and Maritime Silk Road projects, which also require massive infrastructure development, represent another chance to jump-start China’s economy. At the 2014 APEC summit, President Xi Jinping announced the set-up of a $40 billion Silk Road fund to finance infrastructure projects. Much of that money will go to fund Chinese-led projects in other countries. As a recent Xinhua articlepointed out, for example, China is currently discussing high-speed railway projects with 28 separate countries.

China’s “one belt, one road” project offers opportunities for more than just Chinese infrastructure and investment firms. The completed trade route would open up new markets for Chinese goods in Southeast, South, and Central Asia, and beyond — even in the Middle East and Europe if all goes as planned. If implemented completely, China’s “Marshall Plan” will also be a major boon to Chinese companies.

That brings us back to China’s $1 trillion infrastructure investment plan. Beijing has made clear that the first step in creating the new “Silk Road” is to literally create roads – and railways, ports, pipelines, and the other necessities that make up an inter-connected region. While the international aspect of this strategy receives the lion’s share of the attention, China will also need to pump billions into its domestic infrastructure, particularly if under-developed provinces like Xinjiang are to take up their envisioned role as China’s “gateway to the West.”

In other words, the Bloomberg announcement shouldn’t be read only as China’s latest stimulus package. The economic ramifications are obvious, but it also ties in closely with China’s overall development and even foreign policy goals.

Is China’s Cyberwar Capacity More Backward Than We Think?


In a lecture on January 7 in Beijing, a senior PLA officer and professor at the PLA National Defense University called on “PLA troops to enhance their capability of winning informationalized warfare,” according to an article on the Chinese Ministry of Defense website. The article goes on to summarize the lecturer’s principle point: “Zhu Chenghu said the future war will be information-based local wars, featuring unprecedentedly high levels of intelligence. As a result, there will be no concept of front or rear. Space, air, sea, ground, cyberspace, and even electromagnetic pulse space can be the target to strike. The information security will become the most vulnerable area for China.”

This is nothing new. Many senior Chinese officers have repeatedly emphasized the need to bolster the country’s cyber capabilities, since they provide some asymmetric compensation at a comparatively low cost for the relative backwardness of the Chinese military vis-à-vis the U.S. military and its regional allies.

Despite many reported successes in cyber espionage, the PLA is a latecomer when it comes to applying information technology to broad military use. China has never issued a formal cyber warfare strategy document. At the 16th Party Congress in 2002, then General Secretary Jiang Zemin announced that the PLA’s future mission will be to persevere in “local wars under informationized conditions” by 2050. This strategic guidance set in motion a timetable of modernization with the end result of a total “informatization” of the PLA by 2050. In a speech back in November 2012, former Chinese president Hu Jianto stated that by 2020 China should have made “major progress in full military IT application.”

However, as I have pointed out elsewhere, China will need to overcome a number of challenges before it can be considered a first-rate military power in cyberspace.  For example, Chinese technical institutes and universities still cannot compete with the United States in the highly specialized areas that support cyber warfare. On a micro level, Chinese specialists can compete with their Western analogs, but postgraduate training for military personnel in cyber-related spheres is not as good as it is in the United States.

The PLA also has other competing military priorities, such as the mechanization of the army, modernizing the air force and deploying a more robust navy. More importantly, the private sector capacity in China – the true center of gravity in any cyber conflict – is inferior to the highly sophisticated U.S. private sector’s capacity to support cyber war operations (e.g., training future cyber warriors).

In addition, there are cultural issues within the PLA that will hamper progress such as the well-known strong “single-service silo” culture with little information sharing between services, which only amplifies the also well-known aversion of the Chinese military bureaucracy to change. Also, China, according to a former intelligence operator I spoke with, is still relatively weak in global intelligence collection – especially human intelligence, which is problematic for advanced military operations in cyberspace since they require intelligence collection from diverse sources in order to be successful. Insiders believe that China’s efforts on this front are neither as comprehensive nor as successful as those of the United States.

The False Hope of Chinese Economic Rebalancing

“The widely held view that the Chinese economy is headed for an explosion in consumer demand is flawed…”

January 7, 2015

There is a line of thinking among foreign economists and financial analysts that China is in the midst of a change in direction known generically as “rebalancing,” this based upon statements made by Chinese leaders about emphasizing stronger consumption after years of investment-led growth. We described the wasteful and unsustainable investment strategy embraced by Beijing in July 2014 here in these digital pages: The Beijing Bubble: Will China’s Housing Addiction Damage the Global Economy?

The alleged move by China involves “a reliance on investment and exports for growth to one where consumption and markets play a bigger role,” Bloomberg News reports. “Economists and analysts are watching seven areas for quickening policy change that could bolster economic restructuring in 2015. They include a pickup in domestic demand, cheaper oil, energy-pricing reforms, improved welfare cover and a wave of privatizations.” Were that it were so.

Venerated Western observers such as Stephen Roach, former chief economist at Morgan Stanley, state emphatically that China’s shift to consumption-led growth is part of a dramatic change that will offer “fantastic opportunity” to the developed world. Such views of China reflect the Western dualism between political and economic activities, something that China has still yet to embrace. As an old China hand observed to me years ago, there is no division between Church and State in China, there is only the state.

The widely held view that the Chinese economy is headed for an explosion in consumer demand is flawed in several respects. First, it reflects a tendency on the part of foreign analysts to believe that China’s leaders wish to push the country towards a more open, Western-style form of political economy where consumers exercise choice. Second, and more significant, it reflects a sort of wishful thinking that an increase in consumption and, particularly, Western-style consumerism in China will help to improve the overall outlook for corporate profits and world economic growth. And thirdly, it assumes that China’s rulers can make its people increase consumption in the same way that Beijing uses public-sector expenditures to boost the construction of transportation, housing and whole cities.

China is nothing if not a nation of sharp contrasts, many of which are in open conflict with the false image of the country held in the minds of most Western observers. For example, despite the many changes that have occurred in China, Beijing remains firmly in control over the country’s economy, what Orville Schell of the Asia Society in New York describes as “Leninist capitalism.” Indeed, since the rise of Mao Zedong and the Communist Party in 1949, politics and economics in China have been unified into a single state religion. The heroic role of the Chinese Communist Party (CCP) has always been tightly bound to a politically deterministic view focused on the idea that the world inexorably is moving towards communism, an argument that justifies the CCP’s monopoly on power and the acts of repression required to maintain the party’s “leading role.”

As Mao led his 600 million countrymen through disasters such as the Great Leap Famine and the Cultural Revolution, the control of the CCP over both China’s economy and its political life was total and it remains so today. Since the death of Mao, periods of “liberalization” have been followed by a reassertion of state hegemony, as in the case of the June 4, 1989 Tiananmen Square massacre. The CCP leadership understands that losing control over the political and economic life of China will ultimately spell their personal doom. Thus today, even as Western analysts predict economic opening led by consumers, China is seeing a resurgence of Marxist orthodoxy.

The fact of continued CCP control over China’s economy, especially the financial system and major industries, largely precludes precisely the type of free-market economic evolution that Western analysts are so fond of predicting. And at the same time, the fact of state control over the political economy does not necessarily translate into the ability to cause Chinese consumers to increase consumption.

Perhaps this is one reason why the long-awaited surge in consumer demand has yet to materialize and, indeed, retail activity in China has been falling for the past year.

China Beige Book (CBB), one of the few independent sources of information on the Chinese economy, reports in its Q4 2014 survey that the economy has stabilized after reaching a near-term low in the second quarter of last year. But the national survey published by CBB strongly refutes the idea that China is experiencing a consumer-led boom:

While services led this quarter and manufacturing held up, retail weakened for the fourth straight quarter. This complicates the rebalancing story, since rebalancing toward services is occurring but rebalancing toward consumption is not. Other aspects of rebalancing appear fleeting: Export orders picked up more than domestic orders in Q4, reflecting stronger demand abroad than from business and consumers back home. Property is also sending mixed signals, with a collapse in construction partially obscured by better performance in realty.

What CBB suggests is that while China is not following the script regarding increase consumption mandated by Beijing (and parroted by many foreign analysts), China is in fact experiencing the very same deflationary pressures that are causing weak retail and consumer activity around the world. CBB notes that:

Our finding of no 2014 deflation will likely be challenged in 2015. There has been continuous disinflation since the first quarter of 2013, with sales prices, wages, and input costs still increasing, but more slowly. While outright deflation has not set in, the impact of the collapse of crude oil prices has yet to be felt. Deflationary concerns are now justified.

While many foreign analysts are heralding the emergence of a consumer society in China, the deflationary bias affecting the entire global economy is causing China’s businesses and individuals alike to be very cautious about spending. Indeed, when you look through the incredible claims of annual GDP growth published by official government agencies and consider the underlying fragility of the Chinese economy, worries about deflation and credit problems in Chinese banks ought to be paramount. But instead foreign analysts proclaim a degree of confidence regarding China’s economic prospects that are even more effusive than the most optimistic government statistics.

One of the most telling indicators of the fragile stability of the Chinese economy is the tendency of many of the nation’s most powerful and wealthy citizens to immigrate. Wealthy business leaders and government officials have been sending their children overseas in droves, hardly a vote of confidence in the solidity of China’s economic future. Capital flight is one reason for this human exodus from a nation that, if you believe the official statistics, is the fastest-growing economy on earth. But most fundamentally, notes ProfessorPerry Link of the University of California at Riverside:

[L]egal émigré status is an insurance policy against an unpredictable future in China: life in the West offers a feeling of security that life in China, despite government expenditures of hundreds of billions of yuan per year on “stability maintenance,” cannot offer. If people in the Chinese elite were truly confident in their system of Leninist capitalism, they would not need a huge budget for domestic repression, would not keep a Nobel Peace laureate in prison, and would not be looking to emigrate.

Indeed, as this article was being finalized, China announced a new spending program for infrastructure projects to counter fears of an economic slowdown. Once again, Beijing is turning to useless construction projects to preserve the appearance of economic growth. But one element missing from the economic equation is political and personal freedom, something China’s communist rulers fear more than any other possibility.

Christopher Whalen is Senior Managing Director and Head of Research at Kroll Bond Rating Agency, where he is responsible for financial institutions and corporate ratings. He is the author of the December 2010 book Inflated: How Money and Debt Built the American Dream, now in a second printing from John Wiley & Sons. He is co-author with Frederick Feldkamp of the book Financial Stability: Fraud, Confidence & the Wealth of Nations which was published by John Wiley & Sons in September 2014.

Image: Flickr/leniners/CC by-nc 2.0

Top Chinese Diplomat Falls to Corruption Probe
Image Credit: pixabay/ tpsdave

Top Chinese Diplomat Falls to Corruption Probe

Chinese President Xi Jinping’s anti-corruption probe captured its latest “tiger” to ring in 2015. Senior Chinese diplomat Zhang Kunsheng has been sacked on suspicions of “violating discipline” — a common euphemism used by the Chinese Communist Party for corruption. Zhang, 56, is notably the first prominent member of China’s diplomatic corps in the Ministry of Foreign Affairs to be sacked. Details on the circumstances leading up to Zhang’s investigation are unknown as the Chinese government has been characteristically tight-lipped about the situation.

According to Chinese media reports, Zhang was the most senior of the four individuals holding the rank of assistant foreign minister within the Chinese foreign ministry. Zhang’s portfolio concerned the ministry’s protocol department which will now be taken over by the ministry’s chief spokesperson Qin Gang. According to the South China Morning Post, Liu Jianchao will take over from Qin as the ministry’s spokesperson. Zhang recently represented China at the ASEAN Regional Forum Seminar on Sea Lines of Communications Security. He has additionally previously served at the Chinese embassy in Washington D.C., and worked in the Ministry’s Department of North American and Oceanian Affairs.

Zhang’s investigation somewhat expands the scope of Xi Jinping’s anti-corruption probe in practice. Where previously senior military leaders, politicians, and even Politburo members (Zhou Yongkang) have fallen to corruption investigation, Zhang is a top-level bureaucrat from the relatively clean Ministry of Foreign Affairs. Though details concerning Zhang’s case are sparse, there is considerable speculation that the investigation surrounding Zhang could have been motivated by politics in Zhang’s native Shanxi province.

Zhang has yet to officially be charged with any crime. In previous cases concerning corruption investigations, the individual under question has usually been sacked and removed from their public role for a period of weeks or months before being formally charged with a crime.

How to Approach Political Rumors in China
Image Credit: Wikimedia Commons

How to Approach Political Rumors in China

With regard to political rumors in China, there are two basic rules to follow.

Rule No. 1: do not spread them. You could be legally liable if you retell the story about the involvement of a former premier’s 90-year-old mother in a corruption scandal, even though the original reporter later won the Pulitzer Prize for “his striking exposure of corruption at high levels of the Chinese government.” You could face severe sanctions if you can not keep to yourself the story about the relatives of a former vice president being filthy rich and having secret bank accounts overseas. You could be dismissed from the Central Committee of the Chinese Communist Party if you are a Central Committee member; expelled from the Party if you are a CCP member; or sent to jail if you are none of the above.

Rule No. 2: do not dismiss rumors completely. Subsequent to a Politburo meeting on December 29, 2014, it was rumored that Party Secretary Sun Chunlan of Tianjin would be transferred to Beijing as director of the Central United Front Department, replacing the discredited Ling Jihua. Mayor Huang Xingguo of Tianjin would replace her as party secretary of Tianjin; Deputy Secretary Wang Dongfeng of Tianjin would replace Huang as mayor of Tianjin. This was quickly dismissed as a rumor by an internet group, Xue “Xi” Xiaozu (Xi Jinping study group) — Xi Jinping’s cyber alter ego. This is because Ling Jihua had yet to be dismissed as director of the Central United Front Department, paving the way for Sun Chunlan’s possible appointment, and Wang Dongfeng had to be appointed as acting mayor by the Tianjin Municipal People’s Congress Standing Committee before his formal appointment as mayor.

But on December 30, 2014, it was announced officially that Sun Chunlan was no longer party secretary of Tianjin and Huang Xingguo took over as acting party secretary of Tianjin. On December 31, 2014, Ling Jihua was officially dismissed as director of the Central United Front Department and Sun Chunlan took over that post. It is not clear who will eventually be party secretary of Tianjin, nor is it clear who will become next mayor of Tianjin. But Huang Xingguo could be a strong candidate for the position of Tianjin party chief and Wang Dongfeng is a good candidate as his replacement — just as the rumors suggested.

In sum, please remember these two don’ts for dealing with rumors about Chinese politics: don’t spread rumors and don’t dismiss them entirely. PERIOD.

Professor BO Zhiyue, a leading authority on Chinese elite politics in the world, will take up an appointment in January 2015 as Director of the New Zealand Contemporary China Research Centre (NZCCRC) and Professor of Political Science at Victoria University of Wellington. The only nation-wide research center on contemporary China in the world, NZCCRC aims to be a global leader in knowledge generation and knowledge sharing on political, economic, and social life of contemporary China among tertiary institutions, business sector, and policy community for the benefit of New Zealand. Based in Victoria University of Wellington, the Centre has seven member universities: Victoria University of Wellington, the University of Auckland, Auckland University of Technology, the University of Canterbury, the University of Otago, the University of Waikato, and Lincoln University.