Office of the Press Secretary

For Immediate Release June 22, 1998


The Briefing Room

12:10 P.M. EDT

COLONEL CROWLEY: Good afternoon. Last fall, right before President Jiang Zemin came here to Washington in October, we had what proved from your standpoint to be an enormously beneficial briefing with Dr. Harry Harding and Dr. Ken Lieberthal to help put the renewal of high-level contacts between the two countries in context.

So back by popular demand, and with a slightly new twist, we thought in preparation for the President's departure on Wednesday and, many of you, your departure tomorrow, that we once again invite a couple of our scholars back to the present situation in context one more time.

So we have for you once again, a man who said, jeez, I should have quit while I was ahead last fall, Dr. Harry Harding is here. He's the Dean of the Elliott School of International Affairs, and Professor of Political Science and International Affairs at George Washington University. And joining him is Dr. Nicholas Lardy, senior fellow in foreign policy studies at the Brookings Institution, and a leading authority on the Chinese economy.

We'll have Dr. Harding start off with a little political contextual issues, and then Nick will follow with some elements of the economic aspect of the relationship, and then we'll take your questions.

DR. HARDING: Thank you very much and good afternoon, everyone. It's a great honor for me to be asked again to provide some background, this time on the President's visit to China -- his first trip to the Chinese mainland and the first presidential visit since President Bush's trip in early 1989.

To me, the most important aspects of China for all of us to understand are its diversity and its dynamism. And the President should see both of these in ample measure on his trip. As the nation with the biggest population on earth and one of the largest territories, China has always been a land of huge contrasts -- between the dry north and the wetter south, between the coast and the interior, between its cities and its countryside, between rich and poor.

And these longstanding contrasts are being exacerbated by more recent changes. Today's China is undergoing at least three historic transitions simultaneously: an agricultural society is being modernized into an industrial one; an ossified Marxist-Leninist political and economic system is being reformed into something more open; and a country that has been relatively isolated is being integrated with the rest of the world.

Now, of course none of these transformations is complete, and all of them carry significant dilemmas and risks. Economic growth is straining China's physical infrastructure. Industrialization is bringing enormous environmental pollution. The dismantling of old institutions and the discrediting of old ideologies has produced at various times inflation, unemployment, corruption, uncertainty, and ruthlessness.

The new political and financial institutions being formed to replace the old are variously inadequate or untested. The integration of China with the rest of the world is challenging China's longstanding belief in unfettered national sovereignty.

Now, this combination of dynamism, diversity, and dilemmas makes China extraordinarily difficult for us scholars to understand and for you journalists to report. It confounds those who wish to describe the country in overly simple terms. It complicates our ability to forecast China's future. At any given time, past or present, China usually confronts us with both the noble and the base, the inspiring and the depressing, the hopeful and the pessimistic.

I hope that the President's visit to China will introduce him to the complexity of that country, and the cities that he will visit promise to do so. Xian is of course the site of one of China's most impressive historic sights -- the underground armies of terra cotta warriors. This extraordinary archaeological excavation is truly one of the wonders of the ancient world, although also a reminder of the cruelty of some of China's ancient dynasties.

But Xian is more than this. It's also in the middle of one of the poorest parts of the country. Nature has not been particularly kind to northwest China, and the poverty in the countryside around Xian illustrates the vast and difficult task of developing rural China.

Increasingly, China's leaders have understood the need for local political reform as part of that effort. They understand that, unless village government is seen as legitimate by its people, it cannot mobilize the human and financial resources needed to promote modernization. They also appear to understand that that legitimacy must come through some form of local elections.

Local elections in China are like almost everything else in the country -- extremely diverse, ranging from the tightly controlled to the genuinely competitive. But they represent an element of political reform that holds considerable promise for the future of China.

The President's next stop, Beijing, has been China's capital since the latter part of the Ming Dynasty, except for a 20-year period earlier in this century. And the heart of the capital, Tiananmen Square, has been the site of major political events throughout this century: the calls for modernization and democracy during the May 4th movement of the late 1910s and early '20s, the celebrations marking the establishment of the People's Republic in 1949, the mobilization of vast armies of workers to build the Great Hall of the People during the Great Leap Forward of 1957-58, the Red Guard rallies of the Cultural Revolution, the spontaneous popular movement to mourn the death of Chou En-Lai and criticize the Gang of Four in 1976, the jubilant celebrations after the fall of the Gang of Four later that year, and of course the first inspiring, and then the tragic, events of the spring of 1989.

Perhaps no other place in China better symbolizes the turbulent course of modern Chinese history, both for better and for worse, than does this one spot.

In Beijing the President will be meeting with Chinese leaders both high and presumably somewhat lower. The succession to Deng Xiaoping, who died just about a year ago, has gone remarkably smoothly. Jiang Zemin is clearly not the transitional figure that some observers once believed him to be. He is rising in stature and has recently been reconfirmed in his positions as President of the People's Republic as well as General Secretary of the Chinese Communist Party.

The new Prime Minister, Zhu Rongji, appointed earlier this year, has an impressive commitment to restructure the banking system and the state-owned enterprises -- the two key remaining tasks in China's economic reforms, and I'm sure Nick will touch on in a minute.

But in Beijing as elsewhere, the President will also meet with new generations of leaders. Those beginning to rise to responsible levels in both Beijing and the provinces are in their forties and fifties. Compared to their predecessors, they have much higher levels of formal education, sometimes in the West, often in the United States. They're also more flexible and pragmatic in their outlook. And they will need all of those qualities if they are to successfully confront the enormous problems facing their country.

At Peking University the President will meet with an even younger and still different generation of Chinese, in their late teens and early twenties. This is the generation that more than any other, enjoys American popular culture, dotes on the Chicago Bulls, and is eager for access to the Internet. And yet, like its elders, it remains understandably proud to be Chinese, can be highly nationalistic, and is often suspicious of American intentions towards China.

From Beijing the President moves on to Shanghai, China's commercial capital since it was forcibly opened to trade by the West in the mid-nineteenth century. Here he'll have the opportunity to see evidence of socio-economic change in urban China, the emergence of new classes of entrepreneurs and managers, some of whom own their own businesses and of middle class consumers, some of whom now own their own homes.

Here, as in Beijing, the President will see that Chinese society is far freer than at any other time since 1949. And yet the ability of Chinese citizens to practice religion freely or to pursue their interest towards independent political organization remains highly restricted. In China one constantly sees the contrast between the liberalization of social and economic life on the one hand, and the remaining restrictions on pluralism in political affairs on the other.

The President's fourth stop will be Guilin, the site of some of the world's most spectacular scenery, which has served as inspiration to countless Chinese landscape artists and photographers from all around the world over the centuries. You will see, in fact, that the landscapes that you thought were fantasies in Chinese landscape art are in fact reality, when you see the environment of the Li River in Guilin.

But I understand the President will also be introduced at this stop to China's enormous environmental problems: the political of air, water, and land. These problems, particularly air political, have potentially dire consequences for both China and the rest of the world. Polluted air is already becoming one of the most significant causes of death in China. It is producing acid rain and gray haze in other parts of northeast Asia. And if unchecked, it will contribute to global warming. Managing the contradiction between economic development and environmental protection will be one of the most important dilemmas for Chinese leaders in the decades ahead.

And finally the President will visit Hong Kong, the former British colony that, as a result, is the most cosmopolitan city in China, and that for the last 20 years has been the key economic link between China and the rest of the world. Thus far, Hong Kong's return to Chinese sovereignty has gone far more smoothly than many people expected. Its free economic institutions and its legal order remain intact, and it has just conducted its first democratic election under Chinese sovereignty.

The issue, of course, is whether these political and economic institutions will continue to flourish, or whether they will gradually wither, and perhaps even more important, whether these same institutions will be restricted to Hong Kong, or whether they will become a model for the rest of China.

The President's visit does not, and cannot, touch on all the issues in today's China. But it will introduce him, and through his eyes the rest of us, to the problems of rural development, economic reform, generational change, political transition, and environmental protection in that country.

The President will see a China that is vastly different than the country which President Nixon saw in 1972, different from the country that President Reagan visited in 1984, and different even from the China that President Bush saw in 1989. If through this visit we all can acquire a better understanding of China's dynamism and complexity, that alone I think will be a significant contribution to U.S.-China relations.

DR. LARDY: I'm delighted to have a chance to be here and talk with you about some of the economic issues that loom large as the President prepares to leave and will continue, I think, to be with us for some time. I'll start with China and the WTO. We had some news from Ambassador Barshefsky over the weekend about progress, or more specifically, lack of progress, on that issue. Then I want to turn and talk briefly about China's role in the Asian financial contagion and the implications of that. And then finally I'll close with a brief set of remarks on problems in bilateral economic relations between China and the United States.

Let me start, though, with the WTO issue. The WTO, of course, is the one major international organization -- economic organization that the Chinese do not participate in. They have been negotiating for accession since 1986. And I think during this period we have made a substantial amount of progress. The Chinese have reduced their tariffs fairly dramatically. These were as high as 43 percent as recently as 1994; they're now down to about 17 percent. They have also largely eliminated a whole series of non-tariff barriers that protected their markets, particularly licensing requirements for imports and also quotas on imports. So there has been a great deal of opening up of that market over time.

On the other hand, they have been very reluctant to open up their services sector, especially in distribution and in financial services, banking in particular. And they still have a number of other obstacles to imports, particularly statutory inspection requirements and certain other features of their trade system.

So I think the assessment that was being made this weekend was that we're probably not going to see dramatic progress on the accession process during the President's trip, although we'll have to wait for the details to see exactly what happens.

Let me say what I think are the fundamental programs here, the underlying problems, and the context for looking at this. The first is -- the first problem that our negotiators have, quite frankly, is that the United States has almost no carrots to offer in this accession negotiation. The Chinese already have permanent MFN from every other country in the world except the United States. These negotiations will not necessarily give China permanent MFN in this market, at least not immediately. So China is already gaining most of the benefits from participating in the international system, and it is -- we have few carrots to offer in that regard in terms of getting them to further open up their markets.

I think the second problem is more recent, and that is, in the wake of the Asian financial crisis, China has become even more cautious on opening up its financial markets to full international competition. In particular, they're very reluctant to offer so-called national treatment for foreign banks operating in China, and they are very reluctant to give us a concrete timetable towards moving towards capital account convertibility.

I think, quite frankly, they have read the lessons of the Asian financial crisis correctly; they would be unwise to open up at this point. But the world community, the international community, including the United States, has very high expectations in terms of an accelerated -- an almost immediate -- opening up of their markets in the area of financial services. I don't think they are going to do it.

So I think probably for those two reasons, China's accession is a ways off despite the progress that they have made over time.

What is the risk to us if they don't come into the World Trade Organization? Well, I think, quite frankly, the risk is not enormous, but at this present time -- that is, over the last two or three years, as China has emerged as one of the top ten trading countries in the world -- this is the only period, only years, in the post-World War II period when one of the top ten trading countries has remained outside of the major international trade organization, the General Agreement on Tariffs and Trade, and its successor organization, the World Trade Organization.

So they are not a participant. That means two things: they are not fully bound by the rules, there is no timetable for getting them to be bound by the rules; and, secondly, they don't have the opportunity to participate in the formulation of the rules. And I think particularly as we move into 1999 with new multilateral trade negotiations on the horizon, that it is very important that we have all the large players in the international system participating in the system, not observing it from the outside. So there are some risks to the world trading system if such a large player remains outside of the system.

What is the solution? I think the solution, quite frankly, is to offer phase-ins that are consistent with China's announced plans -- Harry has mentioned these -- for commercializing its banking system, reforming its money-losing state-owned enterprises. Zhu Rongji has announced a very aggressive program to do this in roughly three years. I think in critical areas they should be given long enough time phase-ins so that they will feel comfortable signing on to all of the provisions of the international trading system.

In other words, the issue is not really whether or not they are going to be complying with all the WTO principles. They clearly must comply with them. But the issue is the length of time over which they should come into compliance once they have actually acceded. I don't think the phrase that is so commonly used about commercially viable terms for their participation is really very meaningful. Of course they have to participate ultimately on commercially viable terms. It's unlikely, however, that they are going to come into the organization if they have to participate on all of those terms on day one.

Let me turn secondly to China and the Asian financial contagion. I think, to begin with, it is fairly obvious that China has side-stepped some of the most obvious -- or the worst aspects of the contagion that we have seen over almost the last year now. They have pledged to maintain the value of their currency; however, I would quickly add that this is largely in their own interest and, quite frankly, the price that they have paid for doing this, at least to date, is fairly modest. They have not borne a high price for maintaining the value of their currency.

I think looking at last week's events, a number of people speculated that one of the reasons the Treasury began to intervene in currency markets was the pressure China was placing -- that China was putting the international community on notice that they were about to devalue if there wasn't some correction in the value of the yen. That is not the way I read it. I think our intervention in those markets, at least as I see it, was really a bilateral matter between Japan and the United States.

China, however, was and is very interested in Japan's economic future. I think as the depths of the crisis have become clear and the prospects are that it will take not just a year or two to recover but maybe three to five years, I think the Chinese are looking out and recognizing that the cost to them of maintaining a stable currency over time will be much higher if Japanese recovery is delayed. So they were signalling their basically similar view of the United States that Japanese performance is very important for recovery from the crisis for the region as a whole. They were not signalling, I believe, an intention to devalue any time in the near term. They are under no pressure at all. They still have a very large trade surplus. Although there are some difficulties on the capital account side, they are not yet to the point where they are being forced to seriously consider devaluation.

So the Chinese comments were looking out six months ahead, nine months ahead, two or three quarters, thinking, gee, if Japan continues to soften, this could really get ugly for us and make it much more difficult for us to sustain the kind of economic growth we need for continuing our own domestic reform program and maintaining the value of our currency.

Although they have, shall we say, dodged the biggest bullet so far, I do think there are some significant vulnerabilities. As Harry has already indicated, they are on the eve of -- and they really already have begun to implement one of the more far-reaching reform programs that they have undertaken over the last 20 years. As Harry said, none of these transformations that he outlined are really complete, and they are really trying to move very aggressively and complete a very large part of the agenda on the economic side over the next three years. But, of course, they have discovered now that they are doing this in a much less favorable international and regional environment than they would have had even a year ago.

Let me just point out a couple of vulnerabilities that they have that I think have not been significantly or adequately appreciated. The first is that they already have significantly diminished access to international capital. The currency is stable, yes. Their economy is still growing, yes. And in these respects, of course, they differ from several other countries in the region, indeed almost all the other countries in the region. But their access to capital is diminishing significantly. Foreign direct investment in China has already started to fall. We don't know how far it will fall, but it has started to fall significantly and undoubtedly will continue to fall throughout the second half of this year.

Other dimensions of accessing international capital are also much less favorable. Last year, for example, they sold about $7.5 billion in equities on international markets in New York, Hong Kong, and in their own small dollar denominated B share market in Shanghai and Shenyang. In the first half of 1998, they have only sold a few hundred million dollars. In other words, their ability to sell in international markets has been very, very substantially harmed. Their stock prices have fallen almost as badly as some of the other most affected countries in the region. And so the terms under which they can go to the market in 1998 are very much less favorable than they were only a year ago. So their ability to attract international capital through equity markets is very substantially impaired compared to a year ago.

The interest rate premium that they pay to sell their debt on international -- debt as opposed to the equity -- has also gone up. Indeed, it has almost doubled and the Chinese government has postponed -- a couple of months ago postponed a sovereign bond offering that would have been on the market back in the March/April timeframe. So the ability to sell debt has slipped, or at least the price they would have to pay has gone up very significantly.

A second set of variables I would point to in terms of their vulnerabilities going forward, these are similarities that they have with Korea, Thailand, and Indonesia. They have a bank-dominated financial system, the same kind of financial system that failed in several other countries in the region. They have a weak central bank, which is critical also in places like Korea and Thailand. Their banking regulation and supervision is inadequate; that is, the regulation and supervision of their commercial banking system by the central bank is inadequate.

They have had a tremendous buildup of excess lending. The growth of lending in China is, in many ways, similar to that which has occurred elsewhere in the region, and you can see it in the buildup of asset bubbles when you go to Shanghai. Particularly if you go to Pu Dong you will see probably the world's biggest property bubble in the making, with 70 percent of the space already vacant and the completion of new buildings over the next year or two, based on what's already half completed, will put on the market roughly three times more space per year than they have absorbed on average in the last two or three years. So the vacancy rates are 70 percent and going higher.

You see it also in a lot of manufacturing firms and industries where there is a tremendous amount of excess capacity because firms have over-invested. They have built to get market share without adequate consideration for the rate of return on the investments that they have been undertaking. Again, that sounds very similar to Korea and Indonesia as well.

The consequence of this, again, as seen in China as it was in the other countries in the region, a huge buildup of nonperforming loans in the financial system, significant institutions are failing, including today the People's Bank announced the very first bank that has failed in China. A number of trust and investment companies have failed; some small credit unions have failed. But today they announced the first significant -- the first bank failure, the failure of the Hainan Development Bank, which was the site of rampant property development and other lending irregularities that has gotten them into deep trouble. So depositors' funds are generally at risk in the Chinese financial system, as they are in other countries in the region.

So they face enormous challenges in continuing to maintain the stability of their exchange rate, to contribute to the recovery from the Asian financial crisis. Certainly China's long-term economic growth is very important in that respect.

Let me turn finally to the bilateral trade balance between China and the United States. This has been in the news, again, recently. I'll just make a couple of brief points. First of all, the deficit is significantly overstated by the Commerce Department. It is something on the order of $36 billion, not $50 billion. The reason is American firms sell about $6 billion in goods to Hong Kong that then are immediately re-exported to China, and the Commerce Department doesn't want to count those as exports to China. They count them as exports to Hong Kong. The figures also overstate our imports. So we actually sell a great deal more to China than the official numbers suggest.

But more importantly than the size of any particular deficit number -- I would say the deficit numbers really are meaningless in a world with very highly mobile international capital. And one of the things that characterizes China and makes it different from other countries in the region is its tremendous openness to international investment. China has attracted just in the last five or six years, when the numbers have gotten huge, much, much more -- China has attracted more investment per year over the last three or four years than Japan has attracted in the whole post-war period, cumulatively.

Japan has just remained fundamentally closed to foreign investment. China has been very, very open. So what we have seen is the migration of labor-intensive manufacturing to China and, as a result, we are buying large quantities of goods from China that we used to buy from Hong Kong and Taiwan.

But the job losses are not in the US. The job losses are elsewhere in Asia, for the most part Hong Kong and Taiwan, to some extent Korea. Consumers are gaining in the US from the availability of much lower-priced products. US workers are gaining as well since our exports to China are generally in high-wage industries and our exports to China have actually tripled since 1990, making China the fastest growing of our top ten export markets. I have a little chart on this if you are interested in seeing it afterwards. But it is really rather impressive how far we have come in terms of making China a very large market and, as I said, the fastest growing of our export markets since 1990, with growth of exports of almost 20 percent per year.

So there are some problems in terms of reaching a final agreement on China's accession to the World Trade Organization, but I don't think it's fair to characterize that market as being closed. US firms have been doing very well there, particularly in the 1990s.

I'll stop there. Thank you.

Q Do you think that President Clinton should be meeting with the dissidents when he's in China? Apparently, he has no specific plan to do so. Is that a mistake?

DR. HARDING: I'm not sure it's appropriate for me to, in this place, give my recommendations on US-China policy.

Q I'm not asking you to recommend. I'm asking your opinion.

DR. HARDING: Well, they're awfully close to the same thing. Let me make a few comments that perhaps put the issue in perspective. Number one, there are a lot of agents for change in China, in addition to dissidents both at home and abroad, and it's important for us to understand the variety of people and, for that matter, institutions, both inside and outside the Chinese government and the Chinese Communist Party, both at home and abroad, that are forces for change in China.

Number two, I think one has to make a very careful analysis of how dissidents are viewed inside China, as compared to how they may be viewed here in the United States or abroad. We have to understand that some Chinese, including people outside the government and the party, may not have the same admiration for some of the dissidents that we do here.

And, thirdly, one has to ask the question --

Q That's not a surprise. This happens everywhere.

DR. HARDING: Well, the third point that I would make is one that Sandy Berger made also, and that is a more strategic question: Do you think that meetings with dissidents or attempted meetings with dissidents will actually have a positive effect on the general situation in China? We recall that the last time this happened, when President Bush invited Fang Lizhi to his return banquet in Beijing, the result was that Mr. Fang was prevented from attending the banquet. It certainly did no good for him, did not promote positive change in China, did not promote US-China relations. So there are some tactical issues involved.

Q It made Americans look good.

DR. HARDING: That is an issue which we would have to study more carefully inside China. So it's a very complicated issue. I certainly think, simply as a general statement, there are many ways

in which we can make it absolutely clear that we are (a) in favor of progressive political change in China and (b) worried about the status of political dissidents in China than meeting with them or their families. And one has to make some very careful calculations about how best to promote that objective.

DR. LARDY: I would just add, anybody who has got a pat answer on this is probably being quite superficial. I think it's a very complicated question, as Harry has indicated, and I think the thing one has to weigh very carefully is the risks to the individuals, the Chinese individuals themselves. I certainly wouldn't recommend quickly that any American leader rush to meet with Chinese dissidents.

Q Well, that shows a very tyrannical situation, if they would meet with an American president and then they -- that they would be oppressed.

DR. HARDING: China is a complicated place and no one has said it is not an authoritarian system.

Should we handle these questions ourselves?


Q On the Asian financial crisis, the Chinese have made it increasingly clear, particularly last week, that they were looking for direct US intervention which, ultimately, the US provided in the currency markets. Are you expecting during this that we are going to hear any pressure on the United States to take a more proactive role in the financial crisis that goes beyond operating through the IMF, but a more direct role, either in the currency markets or in direct support for other countries that are hurt or any larger diplomatic role?

DR. LARDY: I'm not expecting the Chinese to mount of series of demands in that area; in fact, the Chinese have been very supportive of the programs that the International Monetary Fund has put in effect for three of the countries in the region. They have contributed their own money to the Thai bailout crisis. And there is certainly closer consultation on these issues.

But I don't think -- again, I would not share your premise that the Chinese were looking necessarily for intervention in the currency markets last week. I think they were basically forecasting that the challenge they faced was going to escalate dramatically if the Japanese economy continued to shrink over the next few quarters. I don't think that they were necessarily signaling for intervention in the markets. And I think their view going forward is that these countries have to work out the huge problems they have in terms of both foreign indebtedness and domestic indebtedness.

Q Mr. Lardy, both the President and the Treasury Secretary have spoken appreciatively of China's maintaining the value of its currency. In simplistic terms, why is that so important to the United States and why, when the Treasury Secretary won't speak at all about the value of the dollar, he is willing to speak publicly about another country's currency?

DR. LARDY: Well, I do think it's very important. I think stability in the region, in terms of currency values, now is quite important. And if China were to devalue significantly, it certainly could set off another downward leg of the crisis. It could knock the props out from under the Hong Kong dollar. I'm not saying it would, but it could.

And, in turn, one would expect to see, even if the Hong Kong dollar peg was maintained, one would expect other currencies in the region to come under enormous new pressure. They, in turn, might devalue. And you would set off another -- you could set off another cycle of the crisis.

So I think that they are looking for stability and I think that's perfectly appropriate.

Q But what if that stability is at unrealistic values? What if it doesn't reflect what the market would value those currencies at?

DR. LARDY: Well, China is in a little bit different situation, as I indicated. They don't have capital account convertibility so speculators who think maybe it's not quite at the right point can't really do very much about it, at least in the short run -- and I emphasize the short run. China has had, I would say, a fairly successful policy of adjusting its exchange rate. They depreciated the value of the renminbi about 75 percent in real terms between 1978 and 1994, a very controlled -- they started out with a highly overvalued currency; by 1994 they had brought it down to a level that was probably very close to equilibrium in terms of trade transactions.

One can argue today about whether or not it's overvalued, undervalued, but we're not talking about a currency that's wildly misvalued.

Q A technical question and a substantive question. You called it Peking University.

DR. HARDING: The last time that I looked at their letterhead, the official English name of the university is Peking University. Its address is Peking University, Beijing, China. (Laughter.)

Q So I can explain that and my editor will understand it. (Laughter.)

Zhu Rongji seems to be the economic reformer. You say Jiang Zemin seems to have taken over the reins of government. What is the Jiang Zemin doctrine? What does Jiang bring to the table aside from the fact that he's in charge? What's going to be his signature policy besides having Zhu do the reforms?

DR. HARDING: I think that's a very good question, because I don't think there is an answer to it quite yet. I think that at this point, Jiang Zemin has been willing (a) to make it very clear that he wants to see these final stages of economic reform continued and completed, and that he's willing to put one of the toughest guys in China in charge of that process. You could say that that promptly passes the mantle to someone else, but I think that Jiang Zemin has to get credit for that as well.

Beyond that, I think that he would say, or the people around him would say, that trying to stabilize U.S.-China relations and trying to build towards the so-called constructive strategic partnership is something else that Jiang Zemin would like to be part of his legacy. And that's another second part of his platform or program.

But that still leaves the question that many Chinese would ask about what about political structure, what about political reform? It's clear that Jiang is presiding over some steps towards greater emphasis on the rule of law. The continued progress towards village elections, the indication that they may be moved now up one level to the township in China hints that they may be moved into the basic area -- basic level in the cities.

But he really still does need to put his mark on that most sensitive issue, which is what does he see as the evolution of China's political system. He will be cautious in this, given the fact that two of his predecessors, namely Zhao Ziyang and Hu Yaobang, fell from power when they attempted to answer that question. But I think that at some point he will have to try to make his mark on the political side as well.

Q I'd be interested in your assessment of China's political order, and particularly you said President Jiang is gaining in power right now --

DR. HARDING: In stature.

Q Gaining in stature. Okay, I beg your pardon. If he's gaining, at whose expense is he gaining? What is his power base? What is his fundamental power base? Where does Prime Minister Zhu fit into the political structure, and what is his power base? DR. HARDING: I think increasingly one's so-called power base in China comes from the fact that they are elected by political institutions -- admittedly, communist party institutions -- that are becoming more stable and predictable. So we don't write off the fact that Jiang Zemin was reselected by the Chinese Communist Party both to head its organization and to head the state apparatus.

I think that beyond this his power base is reflected in the fact that he is a sort of moderate figure. He is not seen as someone who is in favor of dramatic political change, but he clearly is also in favor of quite dramatic economic reform and perhaps more gradual and incremental political change. That means that he occupies the middle of the Chinese political spectrum, which is in many societies the best place to be.

When I said he was gaining in stature, I meant mainly relative to the vacuum created by the death -- the weakening and then the death of Deng Xiaoping, who was clearly China's paramount leader. And secondly, I was referring to the fact that some observers did see Jiang as a rather ineffectual compromise figure when he first was promoted after the Tiananmen crisis of 1989. I think that he has shown himself to be a skilled politician, and that's why he was reselected. I don't see that this comes at anybody else's expense. It's more filling a vacuum that was created by Deng's death.

As far as Zhu Rongji is concerned, he is a popular figure in some quarters in China because of his determination to undertake economic reform, and a very feared figure in others for exactly the same reason. He is not popular in the Chinese bureaucracy because he has said he is going to cut out 50 percent of civil service positions. He's not popular among Chinese state industry because he is going to force them to compete and to downsize. He's not popular among the workers who are going to be laid off in this process. So that his continued political survival depends on his ability to make these reforms work and to make the case that the benefits of these painful reforms outweigh the cost.

DR. LARDY: Let me just make a comment on the Zhu Rongji thing. It is true, we've always thought that Zhu was opposed, say, by those people from regions that have heavy concentrations of state industry that were going to be badly impacted by the reform, and certain other constituencies. He stepped on a lot of toes, shall we say, when he was running the Central Bank from the middle of 1994 on.

On the other hand, when you get to the People's Congress this spring when they had to vote for him, 98 percent voted in favor. They could have abstained. They could have voted no. The National People's Congress is not quite the rubber-stamp institution that it was a decade ago. There have been lots of no votes on appointments. Which suggests that even though he doesn't have the easily identifiable power bases that some other leaders have, that maybe there is more of a consensus for pushing ahead on his tough reform agenda than one might have guessed earlier.

Q Are there any challenges on the horizon to Jiang or to Zhu, or is there a consensus at this point that those two men should --

DR. HARDING: I think that the challenges increasingly are not within the leadership but between, in effect, the leadership and the entire society and the economic system. And so the challenges are the enormous dilemma that I identified earlier: How do you restructure state-owned enterprises without creating enormous social and political unrest when you throw millions of people out of work? How can you afford to put into place a social safety net that can moderate the threat of unemployment? How can you cope with the insolvent banking system that Nick Lardy has just described? How do you deal with the environmental problems that China faces -- and on and on and on.

I think that it is that increasingly that is the problem in China, that I increasingly see the main contradictions not as between moderates and conservatives or liberals and conservatives within the leadership compound in Zhongnanhai. That may have been a useful way of looking at things in the Maoist era and even well into the Deng Xiaoping era. Increasingly, though, I see a reasonably unified central leadership that is struggling with enormously daunting problems. I would not wish their assignment on any close friend. It is a huge task.

Q There has been a lot of criticism here on President Clinton being welcomed in Tiananmen Square. How do you see that?

DR. HARDING: Well, as I said in my opening remarks, Tiananmen Square has a lot of symbolism, both to Chinese and Americans. It is not a place where only one event occurred; it is a place where many events occurred, some extremely positive and some extremely tragic. So that this is a site that has lots of historic resonances, lots of meanings, and not just one.

I would have to say that a Chinese who was quoted by, I believe, Steve Musson in the piece that he did on this issue in The Washington Post rang true to me. It basically said that if President Clinton is going to come to China, he should really expect and accept the kind of welcoming ceremony that we traditionally give to visiting heads of state, at least in the last decade and more. Once he has accepted that framework, then he can say anything he wants and we hope -- many Chinese hope he will speak out on human rights. So that that comment resonated pretty well with me. That's how I understand Chinese to think about it, too.

Q For those of us who were last in China when President Bush was there, what are the biggest differences we are going to see?

DR. HARDING: I think that some of the biggest changes are the following. First of all, it is an even more dynamic society economically. The growth of Beijing as a city, the growth of Shanghai has been truly impressive, although as Nick points out, much of it, especially in Shanghai and especially in the so-called eastern part of Shanghai may be taking on the worrisome signs of a bubble.

Secondly, what I notice is the emergence of this new youngest generation of Chinese. Again, Steve Musson -- I hate to be giving an advert for The Washington Post here, but he has been --many people writing from China have written some very fine stories in recent weeks. Steve had this very interesting series on the cultural revolution generation. My only concern about that series was (a) that it could have been written two, three, four years ago and (b) that there is yet another generation that is emerging, people who are now in their 20s, perhaps their early 30s, who are quite different in their outlooks: the so-called Generation X-ers of China, perhaps a little bit less motivated by high issues of public policy, more concerned about making money, getting ahead, being successful, but much more exposed to the West, either directly or indirectly, than even the people in their 40s and early 50s.

In terms of political change, I sense a very different strategy, which may disappoint some people. I'll describe it as objectively as I can. The pre-1989 strategy of political reformers in China, the Zhao Ziyangs and the Hu Yaobangs, was to make big changes in a sense from the top down, to redefine the role of the Chinese Communist Party, to redefine its relationship with the government in very grand, sweeping terms.

Since 1989, political reform, to the extent that it's going on, is working from the bottom up, much more quietly in the areas that I mentioned -- rule of law, village elections, a more technocratic bureaucracy.

And even bigger than that is the trend that some Chinese call the trend of moving towards a small state and a big society. As economic reform continues, the government in China and the Chinese Communist Party simply have fewer and fewer responsibilities. They do less; society and individuals do more and more. And that is a very different strategy and style of political change.

So in all these areas -- new generations, new wealth, new economic reforms and a different approach to political reform --I think it is a very different place than it was nine years ago.

Q Can I ask a question for Mr. Lardy? On the subject of the economic reform that is taking place and the pending layoffs in the state industries, certainly one of their last -- that was just, you know, a dream, a glimmer, for some reformers. Is there really an expectation that there are going to be such wholesale layoffs that society is going to be turned upside down?

DR. LARDY: Well, I would begin by saying there already have been wholesale layoffs in many places. Whether or not society is ultimately going to be turned upside down, we'll have to wait and see. But I think one should not underestimate the progress that has already been made in recent months -- really, some of it began more than a year ago. But the acceleration of layoffs is very dramatic, particularly in places like the northeast. Unfortunately, you won't be going there, but that is where it's more visible. I mean, combined with striking changes in the skyline and tremendous increase in traffic jams in most cities, which you'll see right away.

You will also see people begging and obviously homeless -- or what appear to be homeless people, maybe migrant workers who have run out of money or whatever -- are quite visible, even in Beijing if you look around. And you wouldn't have seen that, or you certainly would have seen very, very little of it, ten years ago. This is a much more marketized economy where, you know, lifetime employment is going out the window in many places and there is a lot of signs of labor mobility -- unemployment and so forth. So those are some very dramatic changes.

But I do think the changes in terms of cutting back on some of the less well performing state enterprises are well underway. There is a long way to go. You know, maybe 20 million more people are going to have change jobs. You've got to think of it as changing jobs. They are leaving the state-owned enterprises. Hopefully, they will find new jobs in service sectors and other industries, particularly if the banking system is able to redirect their lending towards new kinds of economic activity. I think that is the big challenge.

And this economy still has going for it a very high savings rate, lots of resources. If they can improve the allocation of these resources, there is no reason they can't grow at least as fast as they have in the past, although getting to the new regime, getting to the new era, will obviously entail a significant amount of transitional unemployment.

Q How many would you say have been thrown out of work so far due to the reforms?

DR. LARDY: Well, this is one of the areas where, quite frankly, even the Chinese don't have good data and different agencies that try to collect these data have different criteria for classifying people as unemployed. And the fact of the matter is most of the people are in this intermediate status of being furloughed where they get, you know, a few dollars a week and get to maintain their housing. If their enterprise is very finally profitable, they may retain access to their medical care and medical insurance and so forth. If it's not, they won't.

So these numbers -- you know, one hears numbers but the basis under which they are compiled is not clear. It is well over 10 million now. We are talking about an urban -- basically an urban work force, in the state sector, of about 110 million people. There are obviously some non-state people employed in urban areas as well, but if you are talking about 10 million to 20 million already unemployed, you are talking about upwards -- you know, something approaching 20 percent of the most important universe, that is, people that are working for state-owned companies.

Q On the question of Taiwan, what is the level of Chinese angst on that right now? How much do you expect they are going to want to dwell on it in the conversations with President Clinton? And are the repercussions of the '96 crisis pretty much past now?

DR. HARDING: The repercussions are not past because I think this was the most important single factor that caused both governments to become aware of the potential dangers of confrontation and to work towards a more stable and cooperative relationship. So in that way the lesson continues and, in fact, I hope it will continue.

In terms of how much angst they have and how much they will dwell on it, I think that their level of angst is somewhat down than it was before, as American officials have tried to reassure them that our agenda is not to try to promote independence, not to try to prevent unification, but rather to promote a peaceful future for Taiwan. And as we have very subtly tried to encourage Taiwan to be a little more flexible about the terms under which it returns to a cross-straits dialogue with its counterparts in the mainland. So their level of angst is, I think, down, well below where it was in the period of 1995-96 and maybe early -- well, early '97 anyway, although it can actually -- it can be easily reactivated at any time. It's neuralgic for the Chinese.

As far as what they will press for, I don't know. It's silly for me to speculate in too much detail about what is going to happen in a very few days. I can tell you what Chinese policy analysts that I have talked to have been pressing for at various times in the past several months -- everything from a moratorium on US arms sales to a pledge that we won't provide theater missile defense technology to a statement that we positively favor reunification to reassurances that Taiwan is not within the scope of the US-Japan Mutual Security Treaty and so on and so forth. I think that it is unlikely, extremely unlikely, that they will get very far on that wish list, if at all, and therefore they may not even press.

The big issue for them is always the question of general intentions: Does the United States promote unification -- sorry, promote independence? Would it support reunification? As long as they are reassured about long-term American intentions, that we're not defining our interest as fundamentally opposed to theirs, I think the smaller issues are easier to handle.

Q How about the question of Tibet -- early last week in Washington and now they are pressing for more --

DR. LARDY: The President already mentioned the Tibet issue in his speech to the National Geographic Society last week. Again, I'm not here -- and though it's tempting in this setting -- to be a spokesman for the US government. I'll simply give you my understanding of some of the outlines, that the United States has not challenged the exercise of Chinese sovereignty over Tibet, but all of us have very deep concerns about the status of human rights in Tibet, realizing that while in some ways the issues are the same as in all other parts of China, there are particular problems that arise in places like Tibet or, for that matter, Shenyang or, for that matter, Inner Mongolia, where there are ethnic minorities and you have a question of majority/minority ethnic relations on top of state/society relations.

So I think that the President said that, as many others believe, that it would be wise to see a restoration of dialogue between the Dalai Lama and the Chinese. This is a person in my personal judgment with whom the Chinese would be well advised to open a dialogue.

Q How important is it that this summit be more substantive than symbolic in considering the differences on such key issues as human rights? Can we expect this to be anything but symbolic?

DR. HARDING: I would hope it would be both, and I think symbols are very important. They certainly are to the Chinese. And I think that overall rhetoric, overall symbols, that give a sense of, again, the long-term principles that guide a relationship are of fundamental importance to the Chinese. We, I think, tend to be focusing on immediate deliverables -- what progress will be made on issues X, Y, and Z.

One way of putting this, as a Chinese friend, a colleague in China, has put it is that both sides realize that the challenge is to build trust and to promote a more cooperative relationship. That's what we want to try to do. No guarantees that we'll succeed, but both governments seem to be wanting to do this. The thing is that we go about this from our different cultural perspectives in different ways. Americans tend to think that you build trust by accumulating progress on concrete issues, and out of that comes trust. The Chinese think that you build trust by establishing and agreeing on basic principles to guide your relationship, and out of that comes the progress on concrete issues. That's a dilemma -- easily answered, however: you have to make progress on both fronts simultaneously.

So the symbolism of the summit is important if it reassures the Chinese that we want a cooperative relationship. The events surrounding the meetings across the negotiating table or in the Great Hall of the People are important if they give the President and you and the American people a better understanding of China. Substantive progress on major issues is also important if the policy of comprehensive engagement is to maintain political support in the United States.

So I'm hoping that a couple of weeks from now we'll look back at this summit and be able to see things that were achieved on all of these dimensions, because they're all significant.

Q If I could return to the welcoming ceremony for a moment. The China adviser to a previous administration was quoted recently as saying that until about a decade ago, the traditional welcoming ceremony for foreign visitors was not held at the Great Hall of the People --

DR. HARDING: Correct.

Q -- that it was held at the airport usually, and that the Chinese changed the site after the Tiananmen Square events. They changed it to the Great Hall of the People to force foreign leaders to confront that --

DR. HARDING: I don't believe that that is true. I confess, if I'd had more time -- I did anticipate the question, that's the good news. The bad news, I didn't have time to check on the facts.

My recollection is that they changed the site before the Tiananmen crisis, as was evidenced by the fact that the issue of where Gorbachev would be received came up. They could not have it at Tiananmen Square, as they had planned, but rather at the airport.

My sense is -- it's something that Nick has already referred to -- it is, I believe, as prosaic as simply how much leaders' time could be spent fighting the traffic to go to and from Beijing Airport, to Capital Airport, to meet leaders. And they decided to make a decision -- and I believe it was in the mid-1980s, I can't tell you when -- that they would simply move the welcoming ceremonies downtown to spare the leaders these time-consuming trips to and from the airport.

Now, it is true that they have had welcoming ceremonies elsewhere in the past. It is also clear that by insisting on having the welcoming ceremony in Tiananmen Square, that they make it less likely that we will be able, as a nation, to put Tiananmen behind us. Look at how much time and energy we are spending debating this issue. Many Chinese have said they wanted this summit to put Tiananmen Square behind us in U.S.-China relations. And yet the very site of their own welcoming ceremony works counter to that objective, if that is indeed what they wanted to do.

Q There were some discussions earlier with regard to -- in the overall U.S.-China relationship, to try and get the Chinese to adhere to the MTCR in exchange to increase space cooperation similar to what we've done with Russia. Now, obviously because of the alleged Loral incident, the alleged transfer of technology to China, and the rather inflamed atmosphere on Capitol Hill as a result of that, the space cooperation has really gone on the back burner. I was wondering if there is still an attempt to try and come back to these issues, which seem to be ultimately of significance in a U.S.-China relationship in the long term on this trip.

DR. HARDING: Well, if you're asking me about what's going to happen on this trip and whether attempts will be made to do this or that, you're asking the wrong person. I don't know. I think that obviously the issue is not dead. It is a very high priority for us to get Chinese compliance with -- full compliance with the Missile Technology Control Regime.

Let me simply make a broader point about the difficulties that we face. We should not be too romantic or sentimental, although that's often the American tendency in dealing with China, about this concept of a constructive, strategic partnership. It's a concept that I happen to endorse, but we have to have a very hard-headed view that what the Chinese mean by this is a relationship that involves lots of hard bargaining if cooperation is to be achieved.

What the political climate in Washington risks doing is making it more difficult for the President to engage in this kind of bargaining, or at least makes it more difficult when he goes to the bargaining table, to carry positive incentives as well as negative ones.

I'm not commenting on the details of this specific deal, but rather simply to say that we can see the problem here, that if the President -- any President -- finds it more difficult to put forward a quid pro quo solution to a problem because of enormous political opposition at home, we may find it more difficult to build towards this relationship that we're trying to build with China.

Q The fact that the President of the United States will spend nine days in one country, that is a very good opportunity to educate the American audience. But at the same time it sends some signals to surrounding countries, like Japan and Russia. What will be the strategic implication of this visit?

DR. HARDING: Doesn't somebody want to ask about economics? (Laughter.)

I understand the concerns in Japan about the issue that you have raised. All I would say is that a President cannot go everywhere on every trip. I think that Presidents and Secretaries of State, Ministers of Foreign Affairs, are going to have to do a lot of traveling in today's world, meeting with different counterparts,

sometimes in groups, sometimes one on one, sometimes larger groups, sometimes smaller groups.

So I personally would not overstate the importance of this particular visit to U.S.-Japan relations. As I understand, there are already going to be other ways for the President to meet with his counterpart, Prime Minister Hashimoto, in the near future. So I would not see this as anything --

Q Like what?

DR. HARDING: I believe that he's coming here. Late July.

So I think that at this particular time, I think it is appropriate for the President to spend a long time in China. It is his first visit to the mainland of China. It's the first presidential trip since 1989. I think a longer visit, and a visit solely to China, is appropriate this time.

On other occasions, once we get the relationship more stabilized, I'm sure the President -- future Presidents will be making other stops on their way to and from China. I would not read too much into this particular decision.

DR. LARDY: I guess I wouldn't accept the premise of the question. I don't think it's a zero sum game. If U.S.-China relationships are improved, I think that redounds to the region as a

whole, and Japan in particular. So the premise of your question seemed to indicate it was a zero sum game situation. I don't think that's the case.

Q Question for Nick Lardy. You said it's not in China's interest to devalue its currency right now, but their exports are down, their growth is slowing. Why shouldn't they devalue it?

DR. LARDY: Well, a couple of reasons. First of all --some technical and some more major. Let me start with one technical one. About three-quarters, two-thirds to three-quarters of what they export is with imported components. If they devalue, the gain they get in terms of export competitiveness is very, very modest because the value-added share is only about 20 percent. In other words, if you devalued, you'd pay more for the things that you're assembling in China and about two-thirds to three-quarters of all their exports are made from imported components and assemblies. So the actual gains to devaluation to them are fairly small.

Secondly, those gains would probably be erased by declines in other currencies in the region. They cannot with any confidence undertake a devaluation and think that that is going to be the last move.

And, thirdly, there are some major implications for their own domestic system. The Chinese leadership is increasingly convinced that a devaluation would be seen domestically as weakness that might precipitate a run on Chinese banks that could create problems for stability in their own domestic banking system. The fact that they're thinking this, quite frankly, is quite interesting because it reflects really how open the economy is, the large amount of foreign goods available for purchase by domestic residents and the extent to which Chinese people are beginning to think in terms of purchasing power over goods, not just domestically but internationally.

DR. HARDING: And there would be a political cost in terms of China's relations with the rest of the region since they have pledged to hold the line.

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