Time to Consider the China That Really Is

Tensions between China and Taiwan and by extension the United States now threaten serious problems for world financial markets, for the development of Asia and even for the U.S. presidential election.

Trouble can be avoided if China and Taiwan stop goading each other and if the United States stops demonizing China as a threat and sees it for what it is, a country poorer than most experts and U.S. government rhetoric make it out to be.

Indeed, rhetoric, fear and ignorance play a surprisingly large role in U.S.-China relations, partly because of China’s aged and fearful leaders and partly because of U.S. politics.

That’s a correctable flaw, but first we must understand the anger now crackling across the Taiwan Strait, the waterway 125 miles wide that separates Taiwan from China’s east coast.

With an election coming up in March, Taiwan President Lee Teng-hui has been advocating full independence for the island, historically part of China, that Beijing regards as a province. China has moved troops to its coastal region and is telling U.S. business and political leaders that, if provoked, it will shoot missiles at ships calling at Taipei, hoping to cripple Taiwan’s trade-centered economy.

The United States is involved because it is Taiwan’s protector and because Lee, who made a controversial U.S. visit last year, might be invited back to address Congress. If that happened, missiles would fly and all Asia would panic.

No wonder funds from Taiwan have been surging into Southern California in recent months and the Taiwan stock exchange has fallen 50% in the last year.

But warlike action would cripple more than Taiwan. It would hurt the rapidly growing economies of Indonesia, Thailand, Malaysia and other countries that have sizable investments from Taiwan.

It would backfire on China, which would lose World Bank credit--it has received more than $20 billion since 1987--and foreign investment, lately running at $40 billion a year.

And it would place the United States in a dilemma--called on for protection by fearful Asian nations but unable to set up a Pacific version of NATO without either including China or making it an implacable enemy.

The odd part is that estimates of China’s growing strength are often overblown.

Half of what is counted as industrial production by state-owned firms represents informal loans from one enterprise to another, explains Weijian Shan, a vice president of J.P. Morgan & Co. in Beijing. The loans, which may never be collected, are a way for state enterprises--which employ 175 million of China’s 600 million workers--to keep people in jobs.

Pressures in China affect farms in Iowa. To keep food cheap for urban workers, Beijing has held down prices paid to farmers. But this has hurt crop yields because farmers failed to buy fertilizer. So China, formerly a major exporter, has become a grain importer, purchasing 4 million tons of corn last year, explains Robert Paarlberg, an agriculture expert at Harvard.

Those purchases helped to raise grain prices on world markets. And China’s tensions with Taiwan may be raising the price of gold, says James Grant of Grant’s Interest Rate Observer newsletter.

China’s economy is not so much weak as in an early stage of development. In the villages and in the bustling coastal provinces of Fujian and Guangdong, there are roughly 20 million small firms employing 100 million people.

Consumer markets are bubbling, and China is attracting investment from Taiwan, Hong Kong and the rest of Asia as well as from the United States and Europe. William E. Simon & Sons, an American firm, has invested with Indonesian and Singaporean partners in a successful sunglass business.

But as in any developing economy, there are hitches. China’s ambitious program to build 40 electric power plants a year has barely begun because Chinese officials are wary of allowing outsiders to profit. Makeshift facilities are being built to meet China’s expanding electrical needs.

Developing economies are irregular. One way the poor country supports a 3-million-strong military force is by letting the army take a hand in illicit business, such as the pirated compact discs that have become an issue with the United States.

The U.S. response of calling for $1 billion in trade sanctions is intelligent, say experts on China. The specific figure tells China how much it has to cut back the compact disc activity.

Otherwise, notes Nicholas Lardy, a China scholar at the Brookings Institution, China has been more open to foreign goods and investment than Japan ever was--a contract to Hughes for satellite systems is the latest example.

But China also sees itself as a new nation, and “nationalism is the most important force,” says Frankie Leung, a Los Angeles lawyer and China expert.

That means if the issue is Taiwan or Hong Kong or any matter of sovereignty, China won’t be moved by economic sanctions. “They care about public acceptance, but only up to a point,” says international banker Jackson Tai of J.P. Morgan. So putting restrictions on U.S. companies to “punish” some Chinese action won’t affect China but will be costly for America.

How, then, to ease tensions on political matters? Keep a cool head and have patience. U.S. policy used to be to keep the Taiwan issue quiet on the understanding that in a decade or two, as mainland China, with GDP per person of $550 a year, approaches the wealth of Taiwan--$10,500 per person--the two sides will work out a peaceful reunification.

The Taiwan situation, after all, is no more artificial than others in Asia, where, despite its huge economy, Japan is still the military ward of the United States.

But China also has to realize that things have changed, that Asia’s economies are much more interdependent, says Richard Drobnick, head of USC’s Institute for International Business. “If China goes back to the craziness it showed, even in the early 1980s, of sending cadres to undermine governments in Indonesia, Malaysia and Thailand, Asian economic development will go into a deep freeze.”

Times of great change and opportunity are often times of trouble too. This time in Asia is no exception.