SOURCE: AP/ Jon Chol Jin

North Korean soldiers stand near the portraits of former North Korean leaders Kim Il Sung and Kim Jong Il while attending a rally in celebration of the country's recent nuclear test at Kim Il Sung Square on February 14, 2013, in Pyongyang, North Korea.

The U.S. Director of National Intelligence reported that North Korea performed a several-kiloton nuclear-explosive test earlier this week—Pyongyang’s third nuclear test since 2006. Several news agencies reported a six- to seven-kiloton blast yielded by the test, which would make this North Korea’s most powerful and sophisticated nuclear device yet. The negative reaction in Beijing, Tokyo, Seoul, Washington, and at the United Nations in New York reveal the incredible isolation of the North Korean regime and the international unity against its nuclear weapons program.

The nuclear test is not completely unexpected. But it once again poses a serious threat to U.S. allies in the Asia-Pacific region and calls into question Pyongyang’s true motivation.

Some analysts have speculated that the timing of the test was meant to either coincide with the Chinese Lunar New Year or upstage President Barack Obama before Tuesday’s State of the Union address. More likely, the test appears to be a response to several leadership changes in the region and a warning sign from one new leader on the Korean Peninsula—North Korean dictator Kim Jong-Un—to another—South Korean President-elect Park Geun-hye.

The nuclear test poses challenges for North Korea’s neighbors. In Beijing, it is another pivotal moment for Chinese diplomats, who asked the North Koreans not to conduct the provocative test. Unfortunately, China’s newly appointed political leaders have limited leverage over Pyongyang and few attractive options to influence North Korea’s behavior. China provides considerable food and energy aid each year to North Korea, making Beijing a vital lifeline for the regime in Pyongyang. China could, as it has at least once in the past, cut off these supplies for a period of time. But for now, the Chinese leadership has been very reluctant to do this for fear of risking a major destabilization on the Korean Peninsula, potentially leading millions of refugees to stream across the border to China. There appear to be some divisions within the Chinese leadership over this issue, with more analysts openly questioning whether China’s support for the regime is worth the price of a more militarized Japan, for example. Nevertheless, continued begrudging support for North Korea has remained the prevailing view in Beijing. Whether the new leadership alters this course has yet to be seen.

North Korean leaders understand the tensions inside China and use them effectively to their advantage. They also understand that Chinese and U.S. interests differ—the United States cares most about North Korean denuclearization, while China balances its opposition to the nuclear program with keeping the current regime stable enough to avoid insecurity on its border. North Korean analysts are good at reading the tea leaves in Beijing and using the difference in priorities to drive a wedge between U.S. and Chinese leaders to prevent them from presenting a unified front on the nuclear program.

In Tokyo, recently elected Prime Minister Shinzo Abe is considering his own options to better defend Japan from an existential threat in North Korea. The National Diet of Japan, its parliament, is currently debating expanding Japanese military capabilities beyond self-defense—a significant change from its pacifist post-World War II foreign policy. Prime Minister Abe announced a $2.1 billion purchase of PAC-3 surface-to-air antiballistic missile systems and the modernization of four F-15 jets last month, which comes just a month after Japan purchased $421 million in upgrades to the U.S.-built Aegis missile defense system. None of these developments are welcome in Beijing, to say the least, but in the face of North Korean recklessness, Japan’s moves are understandable.

In Seoul, the nuclear test is a signal that there will be no honeymoon for South Korean President-elect Park Geun-hye, who formally takes office on February 25. Some analysts saw the potential for greater reconciliation on the Korean Peninsula between Kim Jong-Un and President-elect Park, who might have been able to move past the decade-long animosity between the two countries. That possibility, however, now appears unlikely, if it ever existed at all. President-elect Park issued a statement following the attack saying that, “North Korea’s nuclear test is a grave threat to the Korean Peninsula and international peace, hampers inter-Korean trust-building, and undermines efforts for peace.”

In Washington, the actions in North Korea are just the latest chapter in an all-too-familiar story. North Korea continues to provoke the West on the nuclear question, raising the danger of whether the regime will export nuclear-weapon technology out of the country. Secretary of State John Kerry responded to the nuclear test by stating:

This is not only about the [Democratic People’s Republic of Korea] and its continued flaunting of its obligations under three separate Security Council resolutions. This about proliferation, and it’s also about Iran because they’re linked. … What our response is with respect to this will have an impact on all other nonproliferation efforts.

The other concern is that Pyongyang will develop the capacity to miniaturize a warhead and deliver it to the United States via an intercontinental ballistic missile. At some point, the North Korean crisis could become a very serious direct threat to the United States, and that will change the U.S. response—once again in ways that China will not welcome.

At the same time, North Korea represents an immense humanitarian problem, which calls for international attention. The regime in North Korea relegates its people into a subservient environment through an 800-calorie-per-day diet, leading to malnourishment, starvation, and, most importantly for Pyongyang, a population unable to protest the government’s neglect.

At the United Nations, representatives of almost every major nation—including the United Kingdom and Russia—quickly condemned the nuclear test, demonstrating the international opposition to North Korea’s nuclear program. U.S. Ambassador to the United Nations Susan Rice discussed the augmentation of the current sanctions regime, which will require the consent of China and Russia. But as Ambassador Rice stated, conducting the test “despite strong warnings from [the United States] and the international community is nothing more than an act of isolating itself.” North Korea remains alone on this issue, and their efforts to drive a wedge between China and the West may not successfully prevent a ratcheting up of international sanctions.

North Korea’s dangerous and reckless actions continue to show just how isolated this regime is—isolated in its region, isolated from the interests and suffering of its people, increasingly isolated from its neighbor China, and out of step with its global responsibilities.

Rudy deLeon is the Senior Vice President of National Security and International Policy at the Center for American Progress. Ken Sofer is a Research Assistant with the National Security and International Policy team at the Center.

SOURCE: AP/Charles Dharapak

President Barack Obama meets with Chinese President Hu Jintao on the sidelines of the G-20 summit in Seoul, South Korea, Thursday, November 11, 2010.

See also: US-China Study Group on G-20 Reform: Final Report by the China Institutes of Contemporary International Relations, the Center for American Progress, and the Stanley Foundation

Last year the Center for American Progress, the China Institutes of Contemporary International Relations, and the Stanley Foundation convened a study group of 23 leading U.S. and Chinese experts to discuss and debate the role of the bilateral relationship in strengthening the Group of 20 developed and developing nations, or G-20. The discussions also centered on the role this still-young institution for global governance plays in the U.S.-China bilateral relationship.

The Group of 20 is the world’s premier institution for multilateral cooperation to tackle key global economic challenges. Together, G-20 member countries produce 86 percent of total world economic output, comprise two-thirds of the world’s population, and account for 84 percent of all fossil fuel emissions.

While the G-20 originally met at the finance ministers’ level, President George W. Bush made it a forum for leaders when confronted with the global financial crisis in 2008. Now more than ever, the economic trials facing national leaders have roots in increasing global economic interconnectedness and mutual interdependence. From restarting economic growth and addressing mounting inequality; to ensuring stability in the international financial system; to devising solutions to environmental and regional security concerns, the solutions to the world’s challenges increasingly demand multilateral cooperation and coordination.

The benefits from such cooperation are substantial. Since 2008 the leaders of the G-20—which represents the 19 largest economies in the world plus the European Union—have met six times. Some important achievements include:

• The coordinated stimulus across member countries that prevented a global economic collapse
• Governance reforms at the International Monetary Fund, or IMF, to give stronger voice to developing country economies
• Establishing a peer review and mutual assessment process to promote international economic rebalancing
• Progress on international financial regulatory cooperation

IMF economists estimate that a G-20 coordinated response to international economic rebalancing—policies to shrink trade surpluses and current account surpluses and deficits among members—could result in 58 million more jobs and 3.5 times the economic growth worldwide by 2017.

The United States and China, as the world’s two largest economies—with trade between the two countries amounting to more than 20 percent of the world’s total—share a special stake in working to strengthen the G-20 as a multilateral institution for global economic governance.[1] As they together account for 38 percent of the G-20’s international economic imbalances, both countries also share a special responsibility for ensuring and improving the G-20’s efficacy at sustaining economic policy coordination.[2]

The discussions of the American and Chinese experts—including former U.S. government officials and experts from some of China’s leading institutions and universities—culminated in the group agreeing to 20 recommendations and proposals to strengthen the G-20, while also strengthening the bilateral relations between the United States and China. In related work, the Stanley Foundation and Centre for International Governance Innovation also published David Shorr and Barry Carin’s analysis on the forum’s operations and prospects in “The G-20 as a Lever for Progress.”

The final report makes some specific suggestions for the reform of the G-20, including a requirement to put in writing any new topics for the agenda and their connection to the G-20’s main mission, as well as a recommendation that the G-20 nations boost the G-20’s administrative capacity by pooling talent from the former host, the current host, and the future host.

The U.S.-China study group makes clear in this final report that the G-20 can be a useful forum through which the United States and China can cooperate. Working together through the G-20 provides an opportunity to build patterns of cooperation among national leaders and their representatives at the working levels of government. Moreover, China is ensured a voice in shaping the rules and norms of the international system on which it relies for growth. Having such a voice will encourage China to invest in building an effective G-20 community.

Nina Hachigian is a Senior Fellow at the Center for American Progress. Adam S. Hersh is an Economist at the Center.

Endnotes

[1] Authors’ calculation of World Trade Organization data, available at http://stat.wto.org/Home/WSDBHome.aspx?Language=E.

[2] Authors’ calculation of Bureau of Economic Analysis International Transactions and IMF World Economic Outlook database data.

SOURCE: AP/Dale Sparks

The Mountaineer Wind Energy Center on Backbone Mountain near Thomas, West Virginia.

Endnotes and citations are available in the PDF version of this issue brief.

In President Barack Obama’s first term, economic issues were often a source of friction between the United States and China, particularly regarding clean energy. But things started off relatively well a few years ago: President Obama made his first trip to China as president of the United States in November 2009, and energy cooperation was high on the agenda. President Obama and Chinese President Hu Jintao signed multiple agreements pledging to cooperate on a range of important energy initiatives such as the U.S.-China Clean Energy Research Center and a U.S.-China renewable-energy partnership.

These initiatives are important. The United States and China are the world’s biggest energy consumers and biggest greenhouse gas emitters. Our two nations have similar energy and climate problems but different comparative advantages for addressing those problems. The United States leads in cutting-edge clean energy innovation, and China leads in the rapid commercialization and deployment of those technologies.

Working together on clean energy just makes sense. If U.S. and Chinese clean energy enterprises can have open access to both markets, that access will improve their abilities to achieve good economies of scale and drive down costs. If both markets are competitive, that will give enterprises in both countries strong incentives to innovate, and innovation will lead to new technologies and new business models that should speed our transition to a clean energy economy. That would be good for U.S. and Chinese consumers, good for our economies, and good for the planet as a whole.

Despite those macro-level incentives to cooperate, however, things can get a bit more complicated when we actually delve into the details. Although we want to cooperate at a macro level, the United States and China are also big competitors at a market level. Both countries want to see their own companies dominate in critical industries such as solar and wind. Neither Washington nor Beijing is happy about being too reliant on energy products or services provided by foreign enterprises. Balancing cooperation with competition and our respective national ambitions is always difficult, and clean energy is no exception.

Although the United States and China expanded bilateral cooperation with critical projects such as the Clean Energy Research Center, throughout President Obama’s first term we increasingly butted heads in the trade realm. U.S. steel workers filed a World Trade Organization petition against China’s wind-power equipment subsidies in 2010; U.S. solar panel and wind turbine manufacturers filed U.S. Department of Commerce countervailing duty petitions and antidumping petitions against Chinese manufacturers producing those same products in 2011; and the American Superconductor Corporation is still engaged in an ongoing legal battle with China’s Sinovel Wind Group over alleged intellectual property theft.

These U.S.-China clean energy trade frictions are serious, and unfortunately they are unlikely to disappear anytime soon. China’s regime to protect intellectual property rights is still developing. Some local officials in China are still more interested in protecting local companies than in adhering to international trade laws, and China’s relative lack of administrative transparency can make the resultant trade complaints very hard to resolve.

One area in which the Obama administration has proven especially adept, however, is approaching the U.S.-China relationship issue by issue without letting frustrations on one issue spill over and impede cooperation elsewhere. As my colleague Nina Hachigian recently wrote, President Obama has taken a “clear-eyed, nuanced and effective approach” toward China. Where cooperation makes sense, the president has been ready to deal. Where he feels American interests are being harmed, he has not hesitated to get tough.

This is exactly what we will need more of in U.S.-China relations in the clean energy sector. We need to continue to keep an eye on clean energy trade to ensure that American companies have a level playing field, but trade frictions should not hold us back from pursuing promising opportunities with China in other areas.

One of our most promising opportunities for U.S.-China clean energy cooperation is inward Chinese direct investment. Many Chinese companies want to come to the United States, directly invest in this country, and create jobs here. That is exactly what our economy needs, particularly in sectors such as renewable energy generation that generally do not pose national security concerns and will require large amounts of investment capital to develop. The problem is, however, that we do not have a good policy framework in place to encourage these investments.

In President Obama’s first term, the White House signaled general support for increasing Chinese direct investment. During Vice President Joe Biden’s August 2011 China trip, for example, the vice president stated:

President Obama and I, we welcome, encourage and see nothing but positive benefits flowing from direct investment in the United States from Chinese businesses and Chinese entities. It means jobs. It means American jobs.

From the perspective of most potential Chinese investors, however, those general statements of welcome are not enough to make the U.S. market look like a good bet. These investors need to be able to predict how the U.S. government will respond to particular foreign-invested business models—and that requires actual policies. The only policies we have at present are the national security review policies of the Committee on Foreign Investment in the United States, which are designed to block foreign direct investments that could pose national security concerns. National security protections are very important, but we should pair those protections with additional policies designed to encourage foreign investment in the sectors where security is not an issue. In this era of economic difficulty, we should not let those opportunities go by the wayside.

This issue brief will outline the opportunities and current problems in attracting Chinese direct investment and offer policy recommendations for how the United States can make the most of Chinese capital and knowledge in the clean energy sector.

Why encouraging inward Chinese direct investment in clean energy makes sense for the United States

President Obama’s administration made great strides in his first term toward building a sustainable U.S. clean energy economy that will provide jobs for middle-class Americans and reduce our nation’s dependence on foreign oil and fossil fuels. But more work is needed. Moving toward a clean energy economy in the United States will require more than $1 trillion of investment in the electricity grid, new fuels, mass transit, power generation, and manufacturing. An investment of this size will require the United States to mobilize every possible source of capital, including foreign direct investment.

While the United States has a sizeable investment need, Chinese investors are eager for new opportunities in foreign markets—and the U.S. market in particular. Their goals are not always perfectly aligned with ours, nor do U.S. market opportunities always perfectly meet their needs. That said, however, there are times when Chinese direct investment in the U.S. clean energy economy would be mutually beneficial.

Chinese enterprises would like to invest in the United States for many reasons, including:

• Some potential investors are seeking infrastructure investments with stable returns.
• Others are seeking access to innovative technology and processes or high-yield opportunities in manufacturing.
• Directly investing in the United States can give Chinese enterprises a local presence and a closer relationship with U.S. consumers—two critical prerequisites for building and promoting Chinese name-brand goods and services.

All of these possible reasons for Chinese investment in the United States are supported by the fact that the Chinese government has amassed more than $3 trillion in foreign-exchange reserves. They cannot convert those reserve holdings into Chinese renminbi—the official currency of China—and invest them domestically without triggering inflation, so Chinese banks and enterprises are constantly looking for good investment opportunities abroad. Over the past 5 to 10 years, Chinese enterprises have grown more adept at operating in foreign markets, and that has triggered a shift from lower-yield portfolio investments—where Chinese entities buy minority shares in foreign assets—to higher-yield direct investments—where Chinese entities actually play an operational role by building and operating manufacturing plants abroad.

China’s total cumulative outward foreign direct investment now amounts to around $230 billion worldwide. Annual Chinese direct investments in overseas markets grew from less than $2 billion in 2004 to more than $40 billion in 2009, and some analysts predict that China’s total global stock in outward foreign direct investment could reach $2 trillion by 2020. If handled correctly, these investments could play a large role in revitalizing economies worldwide, including the U.S. economy.

Overall Chinese direct investments increasing, but clean energy lags behind 

Chinese direct investment in the United States is already rising steadily. Annual investment has surged in recent years—from $375 million in 2004 to more than $6.5 billion in 2012, which is the largest annual total so far. As of the end of 2012, Chinese enterprises have directly invested a cumulative total of more than $22 billion in the U.S. economy. And more than 27,000 American workers are currently employed by firms in which a majority of investments come from the Chinese.

Among China’s current U.S. direct investments, energy is a primary focus. Energy projects accounted for about 45 percent of total inward Chinese investments in 2012. Most of these energy investments, however, are minority-share fossil-fuel acquisitions by China’s state-owned energy companies. The China National Offshore Oil Corporation, for example, has invested more than $3 billion in U.S. shale gas fields since 2010, and the China Petroleum and Chemical Corporation, or Sinopec, has invested another $2.5 billion over the same time period. Comparatively, however, Chinese investment in clean energy is very low. (see Figure 1)

More work is needed to open up comparable investment opportunities in renewable energy sources, utilities, and energy efficiency. The interest is there: Chinese investments in U.S. clean energy sectors have increased significantly in recent years, from $4 million in 2006 to $264 million in 2011.

When you compare those investment numbers to the investment numbers for fossil fuels, however, clean energy is still just a drop in the bucket.

Federal policy is a problem for foreign direct investment in U.S. clean energy sectors

One reason Chinese direct investment in U.S. clean energy sectors still lags behind Chinese investment in U.S. fossil-fuel sectors is because our investment incentives for clean energy still do not measure up to the tax breaks and other policies supporting oil and natural gas. Leveling the playing field for clean energy technologies is still a work in progress in this nation, and that impacts foreign direct investment just as it impacts domestic investment. Additionally, the clean energy incentives that we do have are hard for most foreign companies to utilize.

The three main national-level U.S. clean energy incentives are the Department of Energy loan guarantee program, the production tax credit, and the investment tax credit. The U.S. Department of Energy loan guarantee program—section 1703 of the loan program—supports pre-commercial clean energy technologies by guaranteeing bank loans issued to companies pursuing those technology development projects. Department of Energy loan guarantees lower the otherwise-high investment risks associated with these companies, making them more attractive to private lenders.

Legally, Chinese and other foreign enterprises are eligible to receive clean energy loan guarantees from the Department of Energy as long as the project itself is located in the United States. In reality, though, in the current political climate it would be a serious liability for the Department of Energy to provide loan guarantees to a foreign company, particularly a Chinese company. U.S. politicians routinely attack clean energy deals that appear to allow Chinese companies to benefit from U.S. government funding. In 2010, for example, some U.S. senators protested a clean energy program that provided stimulus funding to U.S. wind farms that were importing their wind turbines from China. Similar protests arose last year when China’s Wanxiang Group moved to acquire A123, a U.S. battery company that had received federal clean energy funding before going bankrupt. Even when Chinese companies are not involved, the Department of Energy already has its hands full defending clean energy loan guarantees from fossil-fuel lobbying efforts. Adding Chinese companies into the mix would make that difficult job even harder.

In addition to the loan guarantee program, the United States also has two renewable energy tax credits: a production tax credit and an investment tax credit. The production tax credit provides a per-kilowatt-hour tax refund for companies that generate electricity using wind, biomass, hydropower, and other renewable sources. That tax credit can substantially reduce the costs of some renewable generation projects—particularly for wind, closed-loop biomass, and geothermal projects, which can receive a tax credit of 2.2 cents per 1 kilowatt hour.

The investment tax credit provides a 30 percent tax credit for residential solar systems, commercial solar systems, fuel cells and small wind systems, and a 10-percent tax credit for geothermal energy, small wind turbines (those with below 2 megawatts of power), and combined heat and power systems.

These two tax credits are great programs for electric utilities and other companies considering investing in renewable energy. The problem is, however, that tax rebates primarily benefit big companies that are already established in the United States, that already have big tax bills, and that can pay all project costs up front and wait until the end of the year to get a rebate. That is not the case for most foreign investors. Those companies generally do not have large existing operations in the United States looking for tax breaks, and they often have limited operating capital. What those companies are looking for is incentive programs that can reduce project costs from day one.

China’s ENN Group, for example, recently negotiated with the Clark County Commission in Nevada to purchase 9,000 acres of public land along the Nevada/California border to build a large solar project. The land was appraised at around $3,000 to $4,000 per acre, but Clark County sold the land to ENN at $500 per acre, thus substantially lowering ENN’s cost to construct the solar facility. In exchange, in addition to constructing the new facility, ENN promised to hire local labor, buy building materials locally, and create at least 1,000 jobs for the state of Nevada. That project appears to be a win-win: The land discount enabled ENN to save money at the outset, and Nevada got a new job-creating project.

Similar local-level investment incentives exist across the United States. They vary by locality depending on what the individual state and local governments have to offer and what types of investments they want to attract. But it can be difficult for state and local governments to connect with Chinese investors interested in building the types of projects that make sense for their regions. Even when local governments can make those connections, the Chinese companies are often scared off by what they perceive to be a relatively high risk that their projects will be blocked for national security reasons.

National security reviews add another layer of uncertainty

Chinese enterprises report that one of their biggest concerns with direct investments in the United States is the national security review. The Committee on Foreign Investment in the United States includes the secretaries of treasury, homeland security, commerce, defense, state, and energy; the U.S. attorney general; the secretary of labor; and the director of national intelligence. (The latter two are nonvoting members.) The committee is tasked with reviewing foreign business acquisitions in the United States to determine if those acquisitions create any national security risks. If the committee does find a security risk, they pass those findings on to the U.S. president, who can then block or reverse the business deal.

This review process has created a problem for some foreign investors in the United States, as it is difficult to predict what the committee will consider to be a national security threat. The governing regulations give the committee wide leeway to make that determination, and that makes it hard for foreign enterprises to foresee which deals will trigger security concerns. Recent regulatory reforms have expanded the committee’s focus to specifically target U.S. energy sectors, particularly the electric grid and other critical infrastructure. The committee generally considers foreign government ownership to be a red flag, so a Chinese state-owned enterprise investment in U.S. utility infrastructure, for example, would likely trigger committee review.

Recent high-profile national security review cases involving Chinese enterprises include the CNOOC deal in 2005, the Huawei deals in 2007 and 2011, and the Ralls Wind Corporation deal in 2012. In 2005 CNOOC issued an unsolicited $18.5 billion bid for Unocal, a California oil company; this high bid created a political firestorm in Washington. Many U.S. policymakers questioned whether the acquisition would threaten U.S. energy security by transferring critical oil assets to the Chinese government, and the U.S. House of Representatives passed a bill calling on then-President George W. Bush to review the transaction. It became clear to CNOOC that the deal would require an extensive committee review and that the likelihood of passing that review was almost zero, so the organization dropped the offer.

Chinese telecommunications equipment provider Huawei ran into similar difficulties in 2007 when it tried to acquire—with help from private equity firm Bain Capital—a minority interest in electronics manufacturer 3Com for $2.2 billion. 3Com provided Internet security software to the U.S. military, and the committee blocked the transaction due to concerns that Huawei could give the Chinese military access to U.S. defense software. Huawei ran afoul of the committee again when the company acquired cloud computing technology and 15 employees from U.S. server firm 3Leaf LLC in 2010. The U.S. Department of Defense raised concerns that Huawei might transfer 3Leaf technology secrets to the Chinese military for cyberattacks against the United States. That triggered a review of the deal, and the committee eventually forced 3Leaf and Huawei to unwind the transaction.

More recently, in September 2012 President Obama issued an order forcing China’s Ralls Wind Corporation to divest a wind farm that the company had purchased in Oregon. According to the U.S. Treasury Department, which chairs the committee, the purchase of the wind farm was deemed a national security risk because the site overlooked a U.S. Navy weapons-training facility.

The Committee on Foreign Investment in the United States system is designed to target and block potentially problematic foreign investment projects while letting the vast majority go forward. And in general, that is how the process works. Many foreign companies directly invest in the U.S. economy without triggering any national security concerns whatsoever, including many Chinese companies. The ENN Energy case mentioned above is one example of a Chinese direct investment project that went forward without any committee blocks. And the projects that do trigger the review process can still win approval. Wanxiang Group, a Chinese auto parts company, recently underwent a review for its planned acquisition of A123 Systems, a U.S. company that specializes in lithium-ion battery technology. Wanxiang came out of the review process with official U.S. government approval for the acquisition.

Although there are plenty of success cases, however, when most potential Chinese investors see big state-owned enterprises such as CNOOC and state champions such as Huawei get tangled up in the committee’s red tape, they assume that if those giants cannot get through to the U.S. market, then smaller Chinese companies definitely would not have a chance. But the reality is that the opposite is true. Smaller, privately owned companies that do not have strong connections to the Chinese government are much less likely to trigger security concerns than their state-owned counterparts. Foreign government control is one of the key issues the committee process tries to detect. The more independent the investor, the less likely foreign government control will be a problem.

Of course, nonstate investors run into problems too, just as China’s Ralls Corporation did with the Oregon wind farm project. That is where foreign firms start to get a bit confused. From the Chinese perspective, it can be hard to anticipate which projects will trigger security concerns. The end result is that many potential Chinese direct investors view the U.S. market as extremely high risk, and that deters them from launching projects that would be a win-win for both nations.

The United States needs to level the playing field for inward foreign direct investment in clean energy

The U.S. government needs to provide a more stable and predictable policy framework for foreign direct investment so that we can leverage opportunities to expand our clean energy economy.

First and foremost, the United States needs to clarify where foreign direct investment is welcome and where it is not. At present, we simply do not have a coherent national policy on inward foreign direct investment. The U.S. federal government appears to divide inward foreign direct investment into two buckets: deals that threaten national security and deals that do not. That line, however, is not always clear.

One thing that has become increasingly clear since 2008: Any transaction involving the U.S. electric grid will most likely face a security review. Safeguarding our critical infrastructure is certainly important, particularly in the cyber era. U.S. intelligence officials are already finding malware in our domestic utility networks. Intelligence officials believe foreign governments are inserting the malware in hopes that they can use it to shut down critical U.S. utility networks in future conflicts with the United States. Given these national security concerns, it is justifiable to keep some parts of our critical infrastructure under U.S. ownership to guard against potential foreign government control. Clean energy development is also important, however, and electric grids are critical elements in the U.S. clean energy economy.

We need to achieve two goals at once: keeping our critical infrastructure secure and bringing in much-needed private-sector capital, including foreign direct investment, to stimulate our clean energy markets. To achieve both goals at once, the United States will have to send very clear signals to Chinese and other foreign firms clarifying which clean energy sectors they are welcome to engage in and which clean energy sectors are going to be generally off limits.

Specific steps the United States can take

In his first official meeting with new Chinese General Secretary Xi Jinping, President Obama should clearly state that the United States strongly welcomes Chinese companies to come to the United States, directly invest in our economy, and create jobs. President Obama has said quite a bit thus far about clean energy trade enforcement but nothing concrete about Chinese direct investments in the U.S. economy. Trade enforcement is important, and the United States should not slack off on this important task. When the president is only emphasizing Chinese trade infringements, however, Chinese firms start to assume that U.S. markets are hostile to them. The reality is that as long as Chinese firms are willing to play by the rules—just as U.S. firms do—many of them will be warmly welcomed.

It is high time for the United States to clarify that message, starting at the top. Chinese officials and enterprises pay a great deal of attention to leadership statements—and particularly to those from the United States. We should take advantage of that attention and use a presidential statement to spread the word that U.S. clean energy markets are open for business—and Chinese companies in particular are welcome to participate.

The United States should also rank clean energy sectors by degree of national security concern and publicize that general ranking to help foreign firms more accurately gauge the risks involved in specific investment projects. It is impossible to construct a perfect ranking system because the details of a particular deal can have a dramatic impact on the perceived security risks. Renewable energy generation, for example, is generally open to foreign investment, but the Ralls wind farm acquisition was blocked because the site happened to overlook a U.S. naval base. Most cases do actually follow a predictable pattern, however. After all, the Committee on Foreign Investment in the United States process is based on legislation that provides a general outline of what the United States considers to be a red flag. Helping potential Chinese investors translate that general outline into a sector-specific risk analysis would go a long way toward reducing current perceptions of U.S. market uncertainty.

Additionally, the United States should do more to connect Chinese firms with the U.S. state and local governments that are willing and eager to provide good investment incentives for clean energy projects. In 2011 the Obama administration launched the Commerce Department SelectUSA initiative that is working to promote the United States as a destination for foreign direct investment. This initiative provides foreign investors with general statistics on the U.S. market and general information about federal- and state-level investment incentives. It is basically a federal-government public relations initiative aiming to convince foreign investors that the United States is a good place to do business.

That is a wonderful and much-needed effort, but industry-specific efforts are also needed. The United States should roll out supplementary programs for specific sectors such as clean energy. Sector-specific initiatives could provide much more information on specific investment incentives, particularly the local-level incentives that vary by location and project. Only some U.S. state and local governments are directly participating in the SelectUSA program, so it is not yet a one-stop shop. It would be extremely beneficial for all involved if the United States did have a one-stop shop to connect our state and local governments interested in attracting clean energy projects with the potential foreign direct investors looking for good project locations.

What China needs to do

To be sure, China also has some work to do. As Chinese direct investors expand their presence in the United States, that expansion could generate concerns that some Chinese firms—particularly state-owned firms—are benefiting from state subsidies and other preferential policies in China and using that support to gain an unfair edge in the U.S. market. Unlike the United States, China has national industrial policies that direct massive state support toward developing new and emerging industries. Across the board, the policy support that Chinese companies receive almost always exceeds what companies receive in the United States. That can trigger accusations that there is an uneven playing field—that when Chinese companies drive their U.S. counterparts out of business, it is due to government subsidization, not natural market forces.

Part of this dynamic is a U.S. problem. The United States does not have a comprehensive industrial policy for developing clean energy, and that sometimes puts U.S. companies at a disadvantage in the global market. Part of this dynamic is also a Chinese problem, however. China’s industrial policies are often not transparent, and that can make it very difficult for foreign observers to determine how much and what types of support Chinese companies receive.

Chinese companies and Chinese policymakers often argue that the Western world needs to give the Chinese administrative system more time to develop. They argue that since China is still at an early development stage, it is natural to have some problems with transparency today, but those issues will improve as China moves up the economic ladder. The fact is, however, that China has already reached a relatively high point on that ladder. Top Chinese companies are already going abroad, investing directly in the United States, and gaining significant market share in sectors such as wind and solar power. These new successes bring new responsibilities that demonstrate that those Chinese companies are making those achievements on a level playing field. The more Chinese firms can themselves strive to abide by international standards on issues such as corporate-governance transparency, the more they will be welcomed to compete in foreign markets, including the U.S. market.

Melanie Hart is a Policy Analyst for Chinese Energy and Climate Policy at the Center for American Progress. She would like to extend many thanks to Richard Caperton for his comments on and contributions to this issue brief.

SOURCE: AP/Carolyn Kaster

President Barack Obama looks to Vice President Joe Biden, left, as he announces his nomination of Sen. John Kerry (D-MA), right, as next secretary of state in the Roosevelt Room of the White House, Friday, December 21, 2012, in Washington.

Confirmation hearings began today for President Barack Obama’s choice for America’s next secretary of state, Sen. John Kerry (D-MA). While the Senate Committee on Foreign Relations should ask Sen. Kerry about China, he is sure to continue the broad contours of the Obama administration’s clear-eyed, nuanced, and effective approach to the relationship.

While working to expand areas of cooperation with Beijing, the administration has invested in America’s ability to compete and has not hesitated to push back when Chinese conduct harms the interests of the United States or its allies. The Obama administration has walked a careful line between welcoming a prosperous China that adheres to international norms and standing firm when China’s actions do not contribute to peace and stability. In the president’s first term, the United States deepened alliances in Asia and broadened U.S. economic and political engagement in the region, while also communicating with China—both formally and informally—to an unprecedented degree. This is a “cooperate and compete” strategy and follows a risk-management approach.

Some issues in the U.S.-China relationship need immediate attention. Foremost among them is the dispute between Japan and China over the Senkaku/Diaoyu Islands, which is becoming increasingly tense and dangerous. Sen. Kerry and his team would be wise to devote considerable energy to determining how the United States can help diffuse the situation.

Beyond the immediate issues, a broader aspect of U.S. policy toward China needs attention: The United States and China have no shared vision for what their future bilateral relationship could or should look like. They have not articulated a clear understanding of how they could continue to co-exist in peace a decade or two down the road, and they need to develop a shared, tangible idea for the future of the relationship.

Without a credible alternative, the default prediction for the interaction between a rising power such as China and an established power such as the United States is based on what has come before: inevitable violent conflict. As China grows, the uncertainty about what will come next in the relationship will only increase. With no positive vision, some Americans will picture a much stronger, more aggressive China that the United States will need to confront, and many Chinese will imagine that America will inevitably seek to preserve what they see as its waning hegemony by lashing out even more than it already does. These dark visions could become self-fulfilling prophecies. Because the United States and China do not know where they are headed, they cannot know what policy steps to take now.

Agreeing upon a plausible vision of a positive future today could assist the United States and China in getting beyond their self-fulfilling cycle of distrust. It could empower those in both China and the United States who want to continue a mature working relationship.

Fortunately, both governments recognize the need to better define where the relationship is going. Xi Jinping, the newly anointed head of the Chinese Communist Party and soon-to-be president of China, called for a “new type of great power relationship” when he visited Washington, D.C., this past spring. Soon-to-be departing Secretary of State Hillary Clinton has said that “Together the United States and China are trying to do something that is historically unprecedented, to write a new answer to the age-old question of what happens when an established power and a rising power meet.”

Many analysts in China are working to give content to Xi’s call for a new type of great-power relationship. Some preliminary ideas center on calling on the United States to halt actions—such as selling arms to Taiwan—that infringe on China’s “core” national security interests. While visions based on dramatic changes to longstanding U.S. policy are not likely to fly in Washington, the Obama administration would do well to offer its own ideas of what could work as a future vision of U.S.-China relations.

The Obama administration’s suggestion could begin with this: A peaceful future is one in which the United States and China, along with the other major powers, are embedded in a web of laws, norms, and institutions. Such an international architecture can draw boundaries around the two nations’ natural rivalry. When each side is sure that the rules are fair and followed, competition need not be hostile. Forums for dispute resolution—such as the one in the World Trade Organization—can channel frictions. And collaboration will be easier when both countries know that they are shouldering a fair share of the burden along with other nations.

The basis for this future vision lies very clearly in the ground that the Obama administration has already laid. Secretary Clinton has articulated many times the importance of a rules-based system and how important China’s support for it is. In her Forrestal lecture at the U.S. Naval Academy, for example, she said:

Our aim is to build mature and effective institutions that can mobilize common action and settle disputes peacefully, to work toward rules and norms that help manage relations between peoples, markets, and nations, and establish security arrangements that provide stability and build trust.

She also explained that the international order does not create itself and warned of the dangers of major powers acting as “selective stakeholders,” who pick and choose which rules to follow. She has been clear that a successful China is good for the United States—and vice versa—and that we need a different kind of relationship than established and rising powers have had in the past.

The important additional step that Sen. Kerry could take is to draw more closely the connections between the international system of rules, China’s attitude toward it, and the future of the U.S.-China relationship. He needs to make clear that the bilateral relationship depends on China’s willingness to live by international rules.

Of course, foreign policy realists will not concede that rules and norms could ever shape China’s behavior, but the record—and China’s current internal debate—suggest otherwise. As Sen. Kerry said in a speech at the Center of American Progress in 2010:

Over the last 20 years, China has integrated itself—however imperfectly, it has integrated itself into the international rules and institutions that govern key issues like trade and nonproliferation. But progress, stated frankly, has not been as comprehensive as some people predicted.

Some of the most contentious issues in the current bilateral relationship are those that lack common rules and institutions. In maritime conduct and the areas of cyber espionage and outer space, a single incident has the potential to set off a spiral of confrontation. There are no established procedures and no independent bodies to manage such disputes. There is no shared and broad understanding of what conduct is permissible and what conduct is not. That these areas involve the U.S. and Chinese militaries—where suspicion runs the deepest—makes them especially challenging to navigate. By contrast, while intellectual-property protection and trade restrictions are perennially neuralgic bilateral issues, the World Trade Organization process and international intellectual-property rules at least help to establish the parameters of disagreement.

Chinese leaders should welcome a future where the United States is bound by rules and the international community has a role in keeping both big powers honest. On the other hand, it’s a commonly held view in China that the West uses international rules to keep China from being successful. For this reason, China needs to have a seat at the table when the international community negotiates these rules. This inclusion need not come at the expense of an effective regime. U.S. officials have suggested, for example, that because China was a charter member of the new Financial Stability Board, China refrained from making its usual argument about needing, as a developing country, a separate set of rules under the board’s effort to tighten and harmonize financial regulations. And for all the difficulty of climate negotiations, China has taken a number of positive steps.

When they meet with their Chinese interlocutors, Sen. Kerry and his team should present this concept to China. Whether China eventually accepts it, however, there are some specific steps Sen. Kerry and his team should take to move toward a more rules-based future. These steps include:

• Making a no-holds-barred campaign for Senate ratification of the Law of the Sea to increase U.S. leverage and credibility as a champion of rules
• Continuing the push for international rules that govern the global commons by engaging China, while at the same time seeking to achieve the most effective, fairest, and most transparent framework possible, which should include:
  • Continuing to advocate for countries involved in disputes in the South China Sea to adopt a Code of Conduct
  • Pushing for international norms and rules of acceptable behavior in cyberspace and greater agreement on the applicability of the laws of armed conflict in cyberspace
  • Continuing to support the negotiation and adoption of an International Code of Conduct for Outer Space Activities
  • Working with friends and allies to continue encouraging China to adhere to existing rules

Finally, Sen. Kerry and his team should make the rhetorical case for a positive future vision of the bilateral relationship based on rules. On his first trip to China, therefore, as part of a larger speech that would also include more specific points, Secretary Kerry could make the case along these lines:

Many American leaders, including my able predecessor Hillary Clinton, have described why it is important for China to play by the rules, contribute to peace and stability, and accept the responsibilities that go along with becoming a major power in the modern age. The international system cannot sustain itself. Nations need to make the investments of time, ideas, and funds to help solve global problems.

Some in China are frustrated that the world looks to it for such significant contributions. After all, rising powers of the past didn’t have to concern themselves with climate change, economic crises, or illegal nuclear weapons programs. But our era is different. Global problems demand that we work together on global solutions.

Today I want to talk about another reason why China’s quality of engagement with the international system is so important. It’s not just about being a responsible world citizen that contributes to the collective goods we all share. China’s relationship to the international system will also affect the U.S.-China relationship. When China is a dedicated steward of the international system, the future of the U.S.-China relationship is clear and bright. I can imagine a future, one in which China, as well as the United States, is even stronger and more prosperous than it is today. In this future, the United States and China co-exist in peace because both of us, as well as other major powers, are deeply dedicated to strengthening and abiding by the international architecture of rules, norms, and institutions that help solve global problems.

This architecture draws boundaries around our natural rivalry. It helps us manage areas of competition because we will know that we are playing by the same rules. It eases frictions by providing forums for dispute resolution in areas such as trade and maritime conduct. It helps us collaborate because we will know that we are both shouldering a fair share of the burden with other nations. In short, it will help us to avoid the past fate of rising and established powers—an endeavor we both share.

There are reasons to be optimistic that we can reach this future. The long arc of China’s engagement with the international system is very positive. And while the United States does not claim to have a perfect record in upholding international obligations, it has done more than any nation to construct the current system that today benefits all.

But we have a great deal of work to do to reach this optimistic future. Today China picks and chooses which rules it will follow and which it will not. It contributes very constructively in some areas, but it shirks international standards in others. Sometimes it is willing to join the international community to condemn a country that is flagrantly violating its international obligations. Other times, it is not. It has not always welcomed new sets of rules to help resolve conflicts peacefully. Today China has only one foot on the path toward the future I describe.

Of course, this future that I imagine won’t be free of conflict. We will surely disagree on what some of the rules ought to be and on who broke them at a given time. But these disagreements are par for the course in a relationship between two big, complex powers, and we can handle them.

We do not know what the future will bring. But with hard work, respect for each other, and dedication to common obligations, we can live together in peace for decades to come. As I said when I was a senator: “The story of U.S.-China relations can be the story of defining the 21st century. It can be a story of genuine cooperation, a fierce competition and of spectacular, ground-breaking human accomplishment. We’re going to disagree sometimes, perhaps even strongly. But I am convinced that we can work together, that we shouldn’t simply manage this relationship over the short term, but we should cultivate it and nurture it and believe in it. We have to resist the temptations of those in China and the United States—both places—who seem to relish a relationship that is defined in terms of conflict rather than cooperation. Despite our differences, the two most powerful nations on Earth have to find a common ground. And in the doing so, we can write the history of centuries to come. Thank you.”

This kind of speech will set the right tone for the relationship at the beginning of President Obama’s second term. It will focus both the United States and China on the future, where they need to concentrate. Getting the future vision right could make the challenges of the present easier.

Nina Hachigian is a Senior Fellow at the Center for American Progress. She is editing a book on U.S.-China relations.

SOURCE: AP/Steffi Loos

When it comes to global climate change negotiations, such as the U.N. Framework Convention on Climate Change conference currently wrapping up in Doha, Qatar, many nations are looking for China to step up and play a role more in line with its global economic and emissions status.

Endnotes and citations are available in the PDF version of this issue brief.

From many perspectives, China is a global powerhouse. China is the world’s second-largest economy in terms of gross domestic product, the world’s largest energy consumer, and a global leader in renewable energy investment. China is also the world’s biggest greenhouse gas emitter.

It is no surprise, then, that when it comes to global climate change negotiations, such as the U.N. Framework Convention on Climate Change conference currently wrapping up in Doha, Qatar, many nations are looking for China to step up and play a role more in line with its global economic and emissions status.

From a U.S. perspective, that means demanding that China play by the same rules in the climate treaty that will be developed between now and 2015, rather than being treated as a developing country on par with Chad or the Congo. Some parties want that new treaty to require internationally legally binding emission reductions for all—though not the same amount for all parties. Thus far, China has refused to endorse this kind of legal framework and instead is sticking to the interpretation of “common but differentiated responsibilities,” which creates a firewall between the obligations of developed and developing countries. This puts the United States and other developed nations in one bucket, puts China in a separate bucket along with the poorest countries in the world, and allows the latter to make only voluntary commitments to reduce their emissions—as opposed to the mandatory commitments requested of the developed countries.

The United States has no problem allowing still-developing economies to make less-ambitious emission-reduction commitments. What the United States and other developed nations take issue with is allowing those countries to make commitments that are less binding at the international level than what is expected of developed countries. China—an upper-middle-income country, according to the World Bank—has a standing voluntary climate commitment under the 2009 Copenhagen Accord to reduce carbon intensity by 40 percent to 45 percent (based on 2005 levels) by 2020. The first phase of that commitment has been incorporated into China’s five-year economic plan and ratified by China’s National People’s Congress, so that commitment is legally binding in a domestic sense.

Unfortunately, those types of commitments from China are not enough to get the rest of the world to sign on to a new global climate treaty. Developed countries in particular want China to upgrade this commitment in two ways:

• Switch from an emission-intensity reduction target—reducing the amount of carbon dioxide emitted per unit of GDP—to an absolute reduction target.
• Commit to that target via the same form of international mechanism that will be expected to bind all countries equally, regardless of development status.

U.S. negotiators have stated that the United States is unlikely to sign on to a new climate treaty until China commits to that treaty in the same way that everyone else does. But there is plenty keeping China from making a legally binding international commitment if that is what it takes to fulfill this expectation.

Whereas the global community generally views China as an economic powerhouse with plenty of room to maneuver on climate issues, the view from Beijing is vastly different. From China’s perspective, the past 30 years of rapid economic growth in no way guarantees that they will be able to make it up into the ranks of higher-income economies and easily traverse the middle-income trap. Chinese leaders have a deep fear that instead of transitioning smoothly from lower-income to upper-income status, their economy could follow the path of Malaysia, Thailand, and the Philippines and fall into a period of economic stagnation. China’s sluggish growth throughout 2012 clearly illustrates that the country is not immune to an economic slowdown, and it is important to remember that any major slump brings with it a very high risk that the Chinese Communist Party will lose public support and be forced to forfeit its authoritarian political power.

Within that context, Chinese leaders are not yet willing to take on international climate commitments that could reduce their flexibility to keep the economy growing. That does not mean there is no room for negotiation. It does mean, however, that in the near term China will continue approaching international climate negotiations with more caution than leadership. The negotiators now meeting in Doha will need to keep this in mind as they spend the next three years hashing out the terms of a new treaty with the ambition that it be equally “applicable to all,” in the terms of the Durban Platform.

This issue brief will identify some of the key factors that are still holding Beijing back from taking these steps. These factors include:

• Rising energy demands and consumption due to an emerging middle class
• Market distortions providing few incentives to transition to renewable energy
• Local governments avoiding Beijing’s centrally mandated energy and climate agenda

Rising energy demand and consumption in China

Here in the United States, energy consumption is relatively flat due to our sluggish economy and recent roll-outs of policies encouraging companies and consumers to use energy more efficiently—such as the Obama administration’s fuel efficiency standards. The U.S. energy mix is also changing for the better. Coal consumption is declining rapidly due to decreasing natural gas prices and recent Obama administration moves to regulate coal emissions under the Clean Air Act. Due to these developments, the U.S. Energy Information Administration reports that coal will account for just 37 percent of U.S. electricity generation in 2012, down from nearly 50 percent in 2008. Overall, energy efficiency is up in the United States, and coal is on its way out, which means it is getting increasingly easier for U.S. policymakers to reduce greenhouse gas emissions and meet global climate targets.

Even without comprehensive climate legislation, U.S. emissions have declined over the past two years and the United States is actually on track to meet its Copenhagen goal of reducing emissions by 17 percent (based on 2005 levels) by 2020, especially if the Environmental Protection Agency goes forward with regulations on existing stationary power sources.

Nearly the opposite trend is occurring in China, however. Whereas U.S. emissions are already on the decline, China’s emissions are projected to keep growing until 2030. That is because the Chinese economy as a whole is growing, and its growth is not climate efficient. China’s electricity demand is expected to double over the next decade and overall energy consumption is projected to grow a whopping 60 percent between now and 2035. Most importantly from a climate perspective is China’s heavy dependency on coal—something not likely to change in the near future. Coal currently accounts for 70 percent of China’s energy mix and coal consumption grew 9.7 percent in 2011—the biggest jump since 2005.

China’s steadily rising coal—and overall energy—use translates into steadily rising greenhouse gas emissions, and a large chunk of those emissions will come from Chinese consumers. The first three decades of China’s economic growth focused primarily on industrial production and fixed-asset investments such as high-speed rail and other large infrastructure projects. That has led to a major economic imbalance: Big industry and capital investors have gotten rich, but Chinese consumers have been left behind. Household consumption accounts for around 30 percent of Chinese GDP—less than half the U.S. level (71 percent in 2010) and one of the lowest consumption rates in the world.

This means Chinese citizens’ purchasing power is lagging behind the country’s overall economic growth. Chinese citizens have watched industrial and political elites get rich at the public’s expense, and they are demanding change. Going forward, Beijing absolutely must rebalance the economy and provide more benefits for their growing middle class, including an increase in consumer buying power. That will be great for the global economy because increased Chinese consumption will provide a new market for products from around the world.

From a climate perspective, however, those changes hurt because what most Chinese citizens aspire to is the type of lifestyle we have here in the United States: bigger homes with continuous climate control, more household appliances, and family cars. That type of consumption growth is already underway in China, and it is triggering a surge in household energy consumption and emissions. There is plenty of room for growth: China consumes more energy than the United States at the national level, but China has more than four times as many people, so per capita energy use is just 24 percent of U.S. levels.

To be sure, the United States has its own energy and climate problems, and the U.S. model is not the model we would like to see China emulate. Ideally China will follow the example of more carbon- and energy-efficient developed countries such as Japan or Germany. That is what Beijing aspires to, but it still entails a major consumption increase because Japanese and German citizens still consume more than two times the energy per capita as the Chinese do. Regardless of the model China follows, from the Chinese citizens’ perspective there still is a lot of room for consumption growth, and as they climb up the energy-consumption scale, the emission impact of that growth could be huge.

Even if Chinese leaders manage to reduce industrial emissions, they therefore still face a continuing emissions boom on the consumer side. That is why China’s emissions are projected to keep increasing until 2030 and why China’s climate negotiators are so resistant to make commitments involving overall emission output as opposed to emission intensity.

Market interference makes the shift from fossil fuels to renewables harder to achieve

Ideally Beijing could keep China’s economy growing and satisfy middle-class consumption desires by expanding renewable energy to account for the new growth. That would enable the Chinese economy to keep growing while also moving the country more rapidly toward a peak and eventual decline in annual emissions.

China’s clean energy economy is undoubtedly booming. China has the largest amount of renewable energy capacity in the world with 133 gigawatts of installed renewable capacity as of 2011—more than twice the size of Germany’s capacity (61 gigawatts) and 35 percent larger than the U.S. market (93 gigawatts). The problem is that although China’s renewable energy capacity is expanding, its current capacity is still just a drop in the bucket compared to the country’s overall energy use, and fossil fuel consumption—particularly coal—is still expanding to make up that shortfall. In 2011 fossil fuels accounted for more than 90 percent of China’s primary energy consumption. Renewables, including nuclear and hydropower, added up to around 8 percent of the total. Beijing is aiming to expand renewable consumption to 11.4 percent of the country’s energy mix by 2015 and 15 percent by 2020, which will certainly be a substantial improvement. Given China’s rapid growth rates, however, that rate of renewable expansion will not be enough to keep overall emissions from climbing in the near term.

One big problem limiting renewable roll-outs in China is the fact that the country’s power sector is stuck at a halfway point between the old, Soviet-style system and a more market-based system like that of the United States. Under the planned economy, government bureaus managed every step in China’s power-production process—generation, transmission, and distribution—following top-down production plans. In parallel with China’s overall economic reforms, Beijing has gradually reformed its power sectors by corporatizing generation and grid operations—turning government bureaus into state-owned enterprises—breaking up state-owned monopolies into multiple smaller companies, and introducing a degree of market competition among them.

Marketization is limited, however, by the fact that China still controls utility pricing via government mandate rather than allowing prices to fluctuate based on supply and demand, as they should in a market-based system. Beijing fears that if utility prices were to rise too high or too fast, potential inflation and social discontent could result in mass protests and declining public support for Communist Party rule. To avoid that and keep consumers happy, the state dictates wholesale and retail electricity rates and sets those rates at submarket prices. Utility rates differ for commercial versus residential users, with commercial users paying a higher rate to subsidize the residential side and keep prices low for Chinese households. These price controls can make it impossible for electric power generators to stay afloat—particularly when coal prices are high—so to placate these generators, Beijing also sets prices for coal and other inputs, and pegs those prices at below-market rates.

This market interference has far-reaching side effects for renewable energy. With coal prices set artificially low, power generators have no pricing incentive to invest in renewable power, which is more climate efficient but also more costly. China has feed-in tariffs for wind and solar power to reduce costs, but the preset tariffs are still much higher than the price of coal. On-grid prices for coal-fired power are around 0.3 RMB per kilowatt-hour, but wind runs between 0.51 and 0.61 RMB per kilowatt-hour, and solar runs between 1 and 1.15 RMB per kilowatt-hour. In other words, even with the renewable feed-in tariffs, wind energy can cost twice as much as coal-fired power for grid operators to purchase, and solar can cost more than three times as much.

And since the selling prices for electricity are controlled by the state, grid operators cannot raise rates to counteract investment costs for renewable grid connections. This leaves grid operators no strong incentives to invest in the technology upgrades needed to hook up renewable power. As a result, many of the wind and solar farms that account for China’s rapidly expanding capacity are struggling to get hooked up to the national power grid. For those providers who do manage to get hooked into a local system, that system may not be able to connect with China’s overloaded cross-country transmission lines, which allow providers to export their excess power to other regions.

These market distortions result in China’s power generators sticking with coal, grid companies transmitting and distributing coal-fired power instead of renewable energy, and China’s emissions continuing to increase.

The West is currently focused on trying to reform utility pricing systems to incorporate climate impacts—to make, for example, power companies pay a higher premium for heavily polluting energy sources. But China is still struggling to make prices reflect actual production costs—tacking on environmental costs is even farther away.

Beijing is working hard to find solutions to these problems. China’s National Development and Reform Commission has two new developments in the works: 1) a plan to require China’s state-owned grid operators to purchase a certain percentage of the power they distribute from renewable sources; and 2) a plan to potentially scrap state price controls for coal in an effort to make coal prices more market based. Policy change is in the wings but it will take time to implement. In the meantime, China’s greenhouse gas emissions will continue to increase, and Chinese leaders will continue to do all they can to evade international calls for actions that they believe would constrain their ability to keep their economy growing.

Beijing’s reluctance to reform China’s problematic utility sectors is certainly not a valid excuse for climate inaction, so the international community should keep up the pressure for Beijing to do more on this front. Such pressure is growing within China as well, which is the driving force behind the upcoming National Development and Reform Commission policy reforms mentioned above.

Local governments are hindering national efforts to improve energy efficiency and reduce emissions

Central leaders in Beijing are devoting a huge amount of political will toward increasing energy efficiency and replacing fossil fuels with renewables. They view this as a survival issue, and not just because of the negative environmental effects of pollution. The Chinese Communist Party cannot maintain enough citizen support to stay in power unless they keep the economy growing. That will require continued access to energy supplies at stable rates, and because Chinese demand is growing so rapidly, the global market simply will not be able to provide enough coal to meet those needs without sending prices skyrocketing.

Environmental pollution is also increasingly becoming a deal breaker for Chinese citizens. They are turning out in droves to protest the construction of new coal plants, and Beijing is taking notice.

Where things get tricky is converting Beijing’s national-level policy mandates into local-level action. Chinese climate officials describe their situation as an inverse version of the U.S. policy landscape. The United States struggles to get congressional policymakers to sign on to major federal policies, but there is a huge amount of activity going on at the state level, and that is resulting in major change across the nation. In China, however, Beijing is on board for more ambitious energy and climate policy action, but is struggling to get local officials to actually implement those policies, making real change hard to achieve.

Beijing uses a top-down target system to give local officials an incentive to act. They set energy and climate targets in national five-year plans such as the current goal to reduce carbon output per unit GDP by 17 percent between 2011 and 2015. Once Beijing sets this overall national target, it then parses individual targets out to the various local-level governments and routinely evaluates local officials to determine whether those goals are being met.

But those local officials are generally more interested in evading these targets than they are in implementing them, and there is enough slack in this system to allow many officials to do so—and get away with it. In the 11th five-year plan (2006–2010), for example, Beijing set a national-level target of reducing China’s energy intensity—the amount of energy consumed to produce one unit of GDP—by 20 percent. Instead of accomplishing that with steady gradual change, however, some localities allowed local businesses to operate as usual for most of the planning period and then cut off residential power near the end of the plan term to ensure they met their overall targets.

Overall, there are limits to the types of meaningful change Beijing can bring about through top-down policy mandates. What Beijing really needs to do is to use market mechanisms—such as market-based coal and utility pricing—to give power companies an incentive to switch to renewables and consumers an incentive to economize. Unfortunately, that would bring a degree of economic and political risk that Chinese leaders may not be quite ready to face at this point in time. Again, these internal problems certainly do not constitute an excuse for climate inaction, but they are real problems that the international community should be aware of—particularly when attempting to craft a climate treaty that Beijing can sign on to.

Conclusion

In conversations going on between U.S. and Chinese counterparts outside of the official climate negotiation process, some Chinese climate officials and analysts are showing increasing openness toward the idea that “common but differentiated responsibilities” could be more like a sliding scale than a firewall. This would be more consistent with the way U.S. negotiators look at the concept. Chinese leaders realize that as their country climbs up the development ladder, it will become increasingly difficult to align with the poorest developing countries in climate talks. China is already facing huge pressure to take on more climate responsibilities in line with its increasing economic might, and that pressure will only increase going forward. It is in Beijing’s own interests to find a way to start edging toward some sort of middle-of-the-road strategy that recognizes China’s changing economic status but does not immediately lump China in with the United States and other already fully developed upper-income countries.

At present, Beijing still does not appear to have come to an internal consensus on what an acceptable middle-of-the-road strategy might look like. China’s top decision-making institution for climate policy is the National Leading Small Group on Combating Climate Change—a multiministerial policy coordination group that includes 25 leading officials from more than 20 different government agencies ranging from the Water Ministry to the Ministry of Science and Technology. Bringing that disparate group to consensus is not an easy matter.

Given the above-mentioned challenges that China is currently facing domestically, it is unlikely that Beijing will agree to make an internationally binding absolute emission-reduction commitment before the 2015 Durban Platform deadline. From Beijing’s perspective, that is simply too risky at this point in their economic development trajectory.

Where Beijing likely does have more maneuvering room is on the legal nature of their emission-intensity commitments—commitments to reduce the amount of carbon emitted per unit of gross domestic product. It is important to note that although China’s Copenhagen emission intensity commitment is only binding at a domestic level, from the Chinese Communist Party’s perspective, failing to meet that domestic target would be a political disaster. The party’s ability to meet its five-year plans is a cornerstone of regime legitimacy. Upgrading that internal plan-based commitment to a commitment that includes the international community should not be a major step for them. If China could do that, it would go a long way toward bringing other countries on board and laying the groundwork for a new global treaty.

But China is not going to give the international community what it wants without getting something in return, and what China wants most are clean energy technology transfers from the United States and other developed countries. Basically, China wants the United States and other developed countries to give it free access to cutting-edge clean energy technologies so that it can transition toward a low-carbon economy without having to pay for intellectual property imported from abroad.

Problem is, that would likely give China a competitive edge over the United States in the global clean energy market. That might be acceptable to the United States if China’s clean energy companies were not major U.S. competitors, but at present the opposite is true: Chinese companies are already dominating global markets for wind, solar, and smart-grid technologies. Since Chinese companies are already dominating these markets without technology assistance, providing that assistance may give China an unfair advantage in those markets and make it impossible for U.S. companies to compete, particularly on price, because U.S. companies would be paying for their clean energy technologies—via research and development costs or intellectual property licensing fees—but their Chinese counterparts would not.

Furthermore, Beijing is already drawing Washington’s ire in the clean energy sphere by taking actions that appear to violate global trade rules at the United States’ expense. Chinese officials are subsidizing their clean energy companies via programs that appear to be aimed at driving U.S. competitors out of the market, and that is triggering rising trade tensions. Some Chinese companies are even stealing proprietary technologies from their U.S. counterparts with what appears to be tacit consent from Beijing. Many in Washington, for example, are closely following an intellectual property dispute between American Semiconductor Corp. and Sinovel, the Chinese wind turbine manufacturer. American Semiconductor Corp. has clear evidence that Sinovel stole its engineering secrets and used that information to manufacture and sell wind turbine equipment based on American Semiconductor Corp.’s proprietary designs. Sinovel has strong government backers in Beijing, however, and the case keeps getting thrown out of Chinese courts.

Due to these issues, it may be difficult for the global community to provide Chinese negotiators the types of technology transfers they want. Without those technology transfers, though, it may be difficult for Chinese negotiators to get the other bureaucratic agencies represented in China’s climate leading group to support the types of legally binding commitments that the United States wants.

One thing we can do to increase the probability of a successful agreement by the end of 2015 is make it a top priority to find a way around these technology concerns. The United States and China are already experimenting with new frameworks for joint intellectual property development under the bilateral Clean Energy Research Centers, which are government-sanctioned projects bringing U.S. and Chinese clean energy companies and university research labs together to work on clean vehicles, advanced coal technology, and energy efficiency solutions for buildings. This joint technology development could be a model for the types of technology transfer that speed China’s access to higher-end clean energy technology without putting U.S. firms at a disadvantage.

Many of the Chinese activities that are currently triggering trade tensions between the United States and China will unfortunately be hard to curtail in the short term. There are limits to what China can do to enforce intellectual property rights without a more independent court system, for example, but releasing the nation’s courts from political control would also weaken the Chinese Communist Party’s ability to maintain a grip on its authoritarian power. That does not mean progress cannot be made, but it does mean progress will likely require outside-the-box solutions. One way to address U.S. intellectual property concerns, for example, is to set up a third-party dispute-resolution mechanism to reduce U.S. company reliance on the Chinese court system. The United States and China are currently discussing this option as part of the bilateral investment treaty negotiations that the two countries relaunched this past May.

Luckily, these types of technology solutions that could help the United States and China come to agreement on the climate front would also address trade frictions plaguing the U.S.-Chinese economic relationship more broadly, so there should be plenty of political will both in Washington and in Beijing to pursue these discussions.

Overall, it does look like there is some room for maneuvering, and it does look feasible for the United States and China to come to some sort of agreement between now and the 2015 Durban Platform deadline. The issues blocking that agreement will not be resolved by the time the Doha meeting concludes, but we do have another three years to work these issues out. In the short term, the least we can expect from U.S. and Chinese climate negotiators is that they keep the communication lines open and continue making steady progress toward identifying what a mutually acceptable 2015 climate deal might actually look like. Finalizing a 2015 climate deal will likely require outside-the-box thinking and concessions from both sides. Since the stakes could not be higher, however, that should be something our two nations can accomplish.

Melanie Hart is a Policy Analyst for Chinese Energy and Climate Policy at the Center for American Progress.

Thanks to Andrew Light and Katie Valentine for their comments on and contributions to this issue brief.

SOURCE: AP/Carolyn Kaster

U.S. President Barack Obama, left, and Thai Prime Minister Yingluck Shinawatra talk before a meeting at Government House in Bangkok, Thailand, Sunday, November 18, 2012.

President Barack Obama is visiting Southeast Asia this week—his fifth trip to the region in four years. While there, he will continue solidifying gains from the major foreign policy hallmark of his first term—the rebalance of our focus to Asia.

While the United States has long been a Pacific power, the Obama administration is focusing more energy and resources on this dynamic region, as America winds down from a decade of war in the Middle East. The logic of the rebalance is simple: As the president’s national security advisor Tom Donilon said late last week, “America’s success in the 21st century is tied to the success of Asia.”

President Obama’s itinerary will take him to Thailand, one of America’s longest-standing allies in the region; Burma, where the president will try to nudge forward the government’s transition to a democracy; and Cambodia, where he will attend meetings with the Association of Southeast Asian Nations and the East Asia Summit—two key regional organizations where the United States and China both wield influence.

President Obama’s visit to Thailand marked 180 years of diplomatic relations between our two nations. The president’s meetings with King Bhumibol Adulyadej and Prime Minister Yingluck Shinawatra will serve to highlight one example among many over the past four years of America’s concerted efforts to deepen and broaden alliances and partnerships in the Asia-Pacific region.

Much ink has already been spilled on the question of whether the president is visiting Burma too soon, considering that the government still has a long way to go in liberalizing the political system, halting ethnic violence, and improving human rights. Being the first sitting American president ever to visit that country, he offered the government in Rangon the most prestigious political reward—a gesture that some have called into question.

While this is a valid concern, the trip is designed not only as a pat on the back to President Thein Sein for Burma’s “remarkable progress,” but also a push to accelerate progress in the democratization of the Burmese government. The trip is likely to further catalyze change in the Southeast Asian nation: More than 450 prisoners were released on Friday on the eve of President Obama’s trip. Most importantly, the presence of President Obama will instill confidence and pride in the Burmese who are fighting for their rights.

The Obama administration also wants to show the world what wonderful things can happen—and quickly—when a dictatorship makes the tough decision to become responsible and give its people a political voice. We’ve seen already that when regimes make irresponsible decisions away from the rules and norms of the international community, this administration will show no mercy and, in the case of Iran, has led the international community to impose crippling sanctions.

But Burma is a rare case where the United States and the international community can reward and, importantly, continue to push enlightened leadership. In some two years, Burma has gone from being a near-pariah state with little foreign investment to a promising fledgling democracy with multinationals knocking at its door and the most powerful man in the world dropping by to visit the country and check in on its progress. The administration knows that North Korea will take note of the kind of treatment it could theoretically get if it gives up its nuclear weapons program.

But the president’s last stop, Cambodia, might have the biggest regional implications.  Washington hopes that the East Asia Summit—meeting in Phnom Penh today—will grow to become the premier political forum for Asian leaders, a counterpart to the economic forum of the Asia Pacific Economic Cooperation forum.

At the 2011 East Asia Summit—the first one an American president attended—leaders chose to discuss the territorial tensions in the South China Sea despite China’s objection. There was hope this year that China and the Association of Southeast Asian Nations might sign a “code of conduct” based on an earlier 2002 agreement, which would formalize some rules as to how countries can pursue their conflicting territorial claims in the South China Sea.

China seems to have unfortunately squashed the idea of unveiling a code of conduct at this summit. But China and the Association of Southeast Asian Nations are at the very least discussing a code—and even that fact is hopeful. While the United States is neutral on the eventual disposition of the territorial claims in the South China Sea, it has strong interests in the way these disputes are resolved: without coercion, peacefully, and according to international law.

President Obama’s trip to Asia showcases not only the rebalance to Asia but also the rebalance within Asia. All the countries President Obama is visiting are members of the Association of Southeast Asian Nations, and he will also meet with the leaders as a group when in Cambodia.

As Tom Donilon argued last week, we ignore Southeast Asia at our own peril. With a combined population of 600 million and, taken together, the third-largest economy in Asia—not to mention the major trade routes that pass through these countries—America has vital interests at stake in maintaining positive relations with these nations.

While the president’s time is the most precious political commodity there is, he is spending it well on this trip.

Nina Hachigian is a Senior Fellow at the Center for American Progress.

SOURCE: AP/Vinecnt Yu

From left, members of the new Politburo Standing Committee Xi Jinping and Li Keqiang wave as they meet journalists in Beijing's Great Hall of the People on Thursday, November 15, 2012. The seven-member Standing Committee, the inner circle of Chinese political power, was paraded in front of assembled media on the first day following the end of the 18th Communist Party Congress.

See also: Meet the New Politburo Standing Committee by Ken Sofer

China watchers around the world have spent most of 2012 placing bets on which of the Chinese Communist Party’s rising stars would take over when the country’s outgoing leaders retired this fall. The big news everyone was waiting for was the makeup of the Politburo Standing Committee, China’s top ruling body. Now those names have been announced.

As expected, China’s Politburo Standing Committee for 2012 through 2017 is smaller compared to the previous version, down from nine members to seven. This new group of leading cadres will basically serve as China’s new board of directors. During their tenure China will face major policy choices across a range of hot-button issues, with hopes that this smaller decision-making group will find it easier to reach consensus than their predecessors. In party rank order, this new group consists of:

1. Xi Jinping, replacing Hu Jintao as party general secretary (head of the party) and chairman of the Central Military Commission (China’s version of military commander in chief). In addition to these party posts, Xi will also become China’s president (head of state) when the government transition takes place in March 2013
2. Li Keqiang, who in addition to his Politburo Standing Committee position will officially replace Wen Jiabao as premier and head of China’s national cabinet during the March 2013 government transition
3. Zhang Dejiang, who in addition to his Politburo Standing Committee position will likely replace Wu Banguo as head of China’s National People’s Congress in March 2013
4. Yu Zhengsheng, who in addition to his Politburo Standing Committee position may replace Jia Qinglin as chairman of the Chinese People’s Consultative Conference in March 2013
5. Liu Yunshan, who in addition to his Politburo Standing Committee position may replace Li Changchun as chairman of the Ideology and Propaganda Leading Small Group. That would make Liu the top party leader in charge of media control and censorship. Liu is already the deputy head of that leading small group and head of the Chinese Communist Party Central Committee Publicity Department (the Party’s propaganda bureau).
6. Wang Qishan, who in addition to his Politburo Standing Committee position is also replacing He Guoqiang as head of the Party’s Central Discipline Inspection Commission, making him the party’s new anticorruption boss
7. Zhang Gaoli, who in addition to his Politburo Standing Committee position may also replace Li Keqiang as executive vice premier in March 2013. If so, he will serve as Li’s second-in-command (after Li is promoted to premier) to help manage government affairs, particularly economic policy.

In addition to their Politburo Standing Committee posts, each of these seven leaders will also be appointed to additional issue-specific posts within the party and/or government. Two critical party posts were just awarded: Xi Jinping received the party’s top military post and Wang Qishan received the top post for internal party discipline. The remaining party portfolio assignments will unfold over the coming months as Chinese leaders appoint new heads to the different party-leading small groups and commissions.

The only transitions that have officially occurred so far are those party leadership posts. The separate but overlapping government transition is still to come. Most Chinese leaders wear multiple hats: They have top party leadership positions as well as top government positions. The Chinese government leadership transition will occur at the big National People’s Congress meeting in March 2013. At that meeting Xi Jinping will officially replace Hu Jintao as president (which is Hu’s top government position), and Li Keqiang will replace Wen Jiabao as premier. Another critical government post is head of the National People’s Congress. That top legislative post always goes to one of the highest-ranking cadres on the Politburo Standing Committee, and given the rank order above, that will likely go to Zhang Dejiang.

Now the million-dollar question becomes what these new leaders will actually do. China’s leadership handovers occur via secret backroom negotiations. There are no public campaigns, and until the new leaders walk out onto the stage, many Chinese citizens have no idea who is actually in the running for these key posts or how those candidates differ from one another. Our best predictions for how these new leaders will rule are basically just speculations based on which retired leaders these new leading cadres are known to align with and how they have behaved in previous posts. Even if we do make accurate assumptions about the policy preferences of these individual standing committee members, it is hard to say how this group as a whole will interact, and those interactions are critical because all key decisions are made via consensus.

Right away, the new leaders will have to figure out how to both rebalance the Chinese economy and also how to combat internal corruption. Those are the two biggest problems facing the Chinese Communist Party’s survival at this point in time, and everyone will be watching to see if this new group can do well enough on those two issues to keep the current system going.

Prospects for economic reform still uncertain

Many analysts are concerned that this standing committee lineup reflects a return to political conservatism. The majority of these new leading cadres are considered staunch allies of Jiang Zemin and his camp of political hardliners. Jiang served as party general secretary before current outgoing General Secretary Hu Jintao, and Hu Jintao is generally considered more open to political reform than his predecessor. Some of Hu Jintao’s key protégés—particularly current Organization Department head Li Yuanchao and current Guangdong Party Secretary Wang Yang —were considered the party’s best hope for political reform in the 2012–2017 period, but those cadres did not make it into the standing committee.

It is important to remember, however, that Hu Jintao and outgoing Premier Wen Jiabao actually were not the great reformers many had hoped they would be. Their tenure was rather disappointing on the reform front, both economically and politically. In contrast, although Jiang Zemin is definitely a political hardliner, his administration actually made great progress on economic reform. When Hu Jintao and Wen Jiabao took over they had to dedicate substantial time and resources toward cleaning up the results of those earlier reform successes (such as creating social safety nets for the workers laid off during state-owned enterprise reforms). They often made progressive statements calling for more reform and liberalization, but in terms of real action they did not make much progress.

It is hard to say with certainty which party leaders are more likely than others to push for reform, particularly economic reform. Xi Jinping is himself a wild card; no one is completely sure at this point in which direction he will go on economic reform and whether he will have the political capital to actually follow through. In recent months he has developed a reputation in Beijing of being willing to listen to everyone, including the extreme reformers and the extreme hardliners.

One thing we do know about this new group is that it will not be long lasting. Based on current retirement norms, Xi Jinping and Li Keqiang are the only two leaders that will serve a full 10 years (two five-year terms) in these positions. The others will all step down and be replaced at the next Party Congress in 2017, because they will be over 68 by that time and therefore ineligible for another five-year appointment. It is hard to say how that will impact decision-making behind closed doors. In theory, that could give Xi and Li extra political clout vis-à-vis the rest of the group, and that would speed up the decision-making process. The shorter time horizon will certainly give this standing committee as a whole a relatively narrow window to actually do something and cement a positive legacy. This means there is no time for a slow and gradual handover of power.

The word in Beijing is that Xi Jinping and Li Keqiang have been preparing to come quickly out of the gate and that the outgoing leaders are keen to hand the reigns over quickly lest they be blamed for any problems (particularly economic problems) that emerge during the transition period. Hu Jintao’s decision to give Xi Jinping the top military post now instead of hanging on to it for another two years (as Jiang Zemin did previously before giving it up in 2004) reflects that desire for a fast and effective transition. It is in everyone’s interest for this new group to get up and running quickly.

Fighting corruption is critical, but real progress will be difficult

The 18th Party Congress made it clear that as far as the party is concerned, although the sluggish economy is a major cause for concern, internal corruption is still their biggest threat. That is no big surprise after the year the party has had, which has seen one big scandal after another. First Bo Xilai’s spectacular fall in Chongqing, then one scandal after another at the railway ministry, and now even Premier Wen Jiabao is facing corruption allegations.

When you talk to the average Chinese citizen on the street, the anger over these corruption scandals is palpable. The economy is also a concern, but economic difficulties can be shrugged off more easily than the realization that your country’s leaders are getting rich at the public’s expense.

Chinese leaders use these big meetings in Beijing to send messages about what their latest priorities are. Hu Jintao and Xi Jinping both made fighting corruption a focus of their speeches, and Hu Jintao opened the big meeting with a stark warning that “cracking hard on and effectively preventing corruption is crucial in gaining popular support for the Party and ensuring its very survival.”

The appointment of renowned fixer Wang Qishan to the new standing committee and simultaneously as head of the party’s Central Discipline Inspection Commission also sends a strong message on corruption. Many had hoped Wang would be given a serious economic portfolio so that he could focus on economic reform. Over the past month, however, rumors have been swirling in Beijing that Wang would get the corruption post instead. That is viewed positively by some pro-reformers in China because Wang is considered a very capable leader. Any headway he makes on holding party cadres and government officials more accountable to the Chinese public will be a major improvement.

But it remains to be seen what Wang Qishan and the rest of the leadership can actually do on the corruption front. Chinese leaders clearly understand that the party cannot survive unless corruption is addressed, but corruption is a systemic issue with single-party authoritarian rule. The only way to really address this problem is with political liberalization—such as freeing up the media and the judicial system—and from the party’s prospective, that would be just as damaging.

The most we are likely to see from these new leaders overall is marginal change. Unless China experiences a major shock in the near future—such as a sustained economic crisis or a major political scandal that tarnishes the Politburo Standing Committee—the biggest incentive all of these leaders have is to keep the current system going, and that will rule out the more disruptive reform options for the time being.

Melanie Hart is a Policy Analyst for Chinese Energy and Climate Policy at the Center for American Progress.

See also:

• Meet the New Politburo Standing Committee by Ken Sofer

SOURCE: AP/Vincent Yu

Chinese Communist Party General Secretary Xi Jinping, left, speaks as other new members of the Politburo Standing Committee, from second left, Zhang Gaoli, Liu Yunshan, Zhang Dejiang, Li Keqiang, Yu Zhengsheng, and Wang Qishan, stand in Beijing's Great Hall of the People, Thursday, November 15, 2012.

Endnotes and citations are available in the PDF version of this issue brief.

For more on what the announcements from the 18th Party Congress mean for China, see CAP Policy Analyst Melanie Hart’s new column, “China Selects Its 7 New Leaders.”

Xi Jinping

November 15 appointments: General secretary, Communist Party; chairman, Central Military Commission; Politburo Standing Committee member
Expected additional appointments: President, China People’s Government (March 2013)
Previous appointments before November 15: Vice president, China People’s Government (will remain until official March 2013 government handover); vice chairman, Central Military Commission (ended November 2012 with promotion); Politburo Standing Committee member (renewed November 2012)
Age: 59
Factional ties: Princeling by birth; considered to be a Jiang Zemin protégé

The son of a high-ranking People’s Liberation Army General, Xi Jinping worked on a farm in rural Shanxi province for six years, until the age of 22, after his father was imprisoned during the Cultural Revolution. Xi managed to leave the farm, join the party, and graduate from the prestigious Tsinghua University with a degree in chemical engineering. After graduation, Xi worked in administrative roles for the People’s Liberation Army. After serving in increasingly senior party and PLA roles in Hebei, Fujian, and Zhejiang provinces, Xi was promoted to the standing committee, became party secretary of Shanghai, and took on a series of new titles that suggested he would succeed Hu Jintao as China’s next party general secretary and People’s Government president.

Xi’s family ties place him closer to the Jiang Zemin faction, which imply that his approach to economic development will be more market friendly and focused on protecting wealth than some of his Hu Jintao-affiliated peers. Xi has been relatively opaque, however, about how he would act economically or politically, which has contributed to his positive standing among both factions and enabled his rise to the general secretary.

Xi solidified his position as general secretary in waiting when he was promoted to the Politburo Standing Committee in 2007. In 2008 Xi was appointed as vice president of the Chinese People’s government. Since then he has traveled to Latin America, Europe, Asia, and America on diplomatic missions. Xi is married to a famous Chinese folk singer, Pei Liyuan, and their daughter is currently studying at Harvard.

Xi Jinping was named party general secretary, China’s highest leadership post, at the 18th Party Congress in November and will be named president at the National People’s Congress in March 2013.

Li Keqiang

November 15 appointments: Politburo Standing Committee member
Expected additional appointments: Premier, China’s State Council (the national cabinet) in March 2013
Existing appointments before November 15: Executive vice premier on China’s State Council (the national cabinet); Politburo Standing Committee member
Age: 57
Factional ties: Tuanpai (Youth League) member; considered to be a Hu Jintao protégé

After working in rural Anhui for four years after graduating from high school, Li joined the party and was accepted to Peking University in the “Class of 1977.” In that year China re-opened many of its universities after nearly a decade of closure during the Cultural Revolution, and 5.7 million students competed for only 273,000 university spots. In the early 1980s Li worked in the Communist Youth League’s 11-person governing body directly under Hu Jintao and alongside future Politburo members Liu Yandong and Li Yuanchao. Hu Jintao nominated Li for promotion in the league several times, and he succeeded Hu as the head of the league in 1993.

Following his time with the Communist Youth League, Li was sent to Henan province to gain more provincial experience. Given Li’s close ties to President Hu and his work in Henan, as premier he may focus on income equality issues such as the provision of better social services. Li will not be able to determine policy programs on his own, however, and will instead require consensus with President Xi Jinping and other leaders.

Li’s stint as party secretary and provincial government leader in China’s coastal Henan province was haunted by a serious AIDS crisis caused by unscrupulous blood plasma buyers. Li’s provincial government covered up the crisis and prevented journalists from visiting sick villagers. Hu Jintao unsuccessfully lobbied for Li to succeed him as China’s next party general secretary, but managed to get his protégé the premiership, which was solidified by his 2007 appointment to the Politburo Standing Committee.

Li Keqiang will be named premier of China, the nation’s second-highest leadership post, when the National People’s Congress meets in March 2013.

Zhang Dejiang

November 15 appointments: Politburo Standing Committee member
Expected additional appointments: Could replace Wu Bangguo as chairman, Standing Committee of the National People’s Congress in March 2013
Existing appointments before November 15: Chongqing party secretary; vice premier; Politburo member
Age: 65
Factional ties: Princeling by birth; apparent Jiang Zemin protégé

The son of a PLA major general, Zhang worked on a farm in rural Jilin for two years during the Cultural Revolution after graduating from high school. In 1971 he joined the party and was promoted to secretary of his county’s Propaganda Department. After graduating from Yanbian University with a degree in Korean studies, Zhang moved to North Korea for two years to study the language. After serving as Yanbian University’s vice president and in local and provincial Jilin government, Zhang became the province’s party secretary in 1995.

In 1998 he was appointed party secretary of Zhejiang, a rich and economically important province in southeastern China. In 2007 he joined the standing committee and has worked on industrial, telecommunications, energy, and transportation issues.

The party has often deployed Zhang to fix major crises. He headed the disaster relief response and investigation to the July 2011 Wenzhou high-speed rail crash that killed 40 and injured 200 more. Zhang was sent to Western China to replace scandal-ridden Bo Xilai as the party secretary of Chongqing in March 2012.

Zhang Dejiang was promoted to the standing committee at the 18th Party Congress. He is expected to replace Wu Banguo as head of China’s National People’s Congress at the March 2013 meeting. Based on his past policy positions, Zhang will likely support a state-centric model of economic growth.

Yu Zhengsheng

November 15 appointments: Politburo Standing Committee member
Expected additional appointments: Could replace Jia Qinglin as chairman of the Chinese People’s Consultative Conference in March 2013
Existing appointments before November 15: Shanghai party secretary; Politburo member
Age: 67
Known patronage ties: Princeling by birth; apparent Jiang Zemin protégé.

The son of an early party member, Yu became close friends with Deng Xiaoping’s son, Deng Pufang, and married the daughter of another People’s Liberation Army and Chinese Communist Party veteran. After serving in several party and management roles in a radio factory, he left to work in government planning and oversight of the electronics industry. Yu succeeded Xi Jinping as Shanghai party secretary in 2007 following Xi’s promotion to the standing committee, a position that in recent years is often given to influential members of the Jiang Zemin faction.

Yu’s brother, a senior Chinese intelligence official, defected to the United States in 1985 and exposed Larry Wu-Tai Chin, a Chinese spy in the CIA active for almost three decades. Yu’s high-level connections salvaged his political career, but he remains a controversial figure within the party. His family’s past did not ultimately prevent him from receiving a seat on the standing committee, as some analysts believed.

Yu Zhengsheng was promoted to the standing committee at the 18th Party Congress, but his portfolio has yet to be named.

Liu Yunshan

November 15 appointments: Politburo Standing Committee member
Expected additional appointments: Could replace Li Changchun as chairman of the Ideology and Propaganda Leading Small Group, which would make him the top party leader in charge of media control and censorship

Existing appointments before November 15: Director, Chinese Communist Party Propaganda Department; Politburo member
Age: 65
Known patronage ties: Tuanpai (Youth League) member

After working as a Xinhua reporter and rising through Inner Mongolia’s Propaganda department, Liu joined the national political scene in 1993, becoming the deputy head of the CPC Central Committee’s Propaganda Department, the party agency in charge of media censorship. Along the way, Liu served in the Communist Youth League branch in Inner Mongolia’s deputy secretary, but never advanced further in the organization.

As a top official in the Propaganda Department, Liu helped oversee the creation of China’s Great Firewall, the world’s most extensive Internet-blocking campaign, as well as censorship of the press and television media. And according to a report by The New York Times, Liu coordinated the campaign that eventually drove Google out of China in 2010.

Liu’s experience developing the Great Firewall might imply he’s a political hardliner, but there is little disagreement at the upper echelons of the party about the need for strict media censorship. In early 2012, 16 retired party officials in Yunnan province circulated a petition calling on Liu to step down and accusing him and Zhou Yongkang, China’s top security official, of supporting Bo Xilai and using repressive tactics to block reforms.

Liu Yunshan was promoted to the standing committee at the 18th Party Congress, but his specific policy portfolio has yet to be named.

Wang Qishan

November 15 appointments: Politburo Standing Committee member; secretary, Central Commission for Discipline Inspection
Expected additional appointments: Still uncertain, but his primary role is settled (discipline inspection head)
Existing appointments before November 15: Vice premier on China’s State Council; Politburo member
Age: 64
Factional ties: Princeling by marriage; considered to be a Jiang Zemin protégé

After studying history at Shanxi’s Northwest University and working in a local museum for nearly a decade, Wang joined the Chinese Academy of Social Science, a government-sponsored think tank, as an analyst, and then worked in the government’s Rural Development Research Center. In the late 1980s Wang embarked on a stunningly successful career in finance, taking top roles in several Chinese banks, helping them transition to modern financial practices and guiding them through loan restructuring. As the head of the China Construction Bank, Wang helped create China’s first joint-venture investment bank, a partnership with Morgan Stanley.

After 1997 he rejoined the government, helping Guangdong province through a severe financial crisis as its provincial party secretary. Wang worked with Henry Paulson, then the chairman of Goldman Sachs, to help restructure an important Guangdong firm’s financial obligations.  After serving as Hainan’s party secretary from 2002 to 2003, Wang became the mayor of Beijing in the midst of the SARS crisis. In a major reversal from initial government efforts to downplay the severity of the epidemic, Wang enforced a quarantine and collaborated with the World Health Organization.

Wang also planned and managed the 2008 Beijing Olympics as chairman of the Beijing Olympic Committee. Since joining the standing committee in 2007 as a vice premier, he has overseen China’s financial system and traveled widely abroad to negotiate with the United States. He reportedly gets along very well with Western leaders and many see him as a capable and open-minded reformer.

Wang Qishan was promoted to the Politburo Standing Committee and named secretary of the Central Commission for Discipline Inspection, the party’s anticorruption commission, at the 18th Party Congress. Given his prior performance record, some hoped that an economic portfolio would be created for Wang to promote liberalization of the Chinese financial system and greater foreign investment in the economy. It appears, however, that Wang’s role in the standing committee will be focused on rooting out corruption in the party.

Zhang Gaoli

November 15 appointments: Politburo Standing Committee member
Expected additional appointments: Could replace Li Keqiang as executive vice premier in March 2013
Existing appointments before November 15: Tianjin party secretary; Politburo member
Age: 65
Known patronage ties: Apparent Jiang Zemin protégé

After graduating from Xiamen University with a degree in statistics, Zhang worked in one of China’s biggest oil refineries as a party officer and manager. During his seven years at the company, he joined the party and the Communist Youth League, rising through both organizations and the refinery’s management. In his political career, Zhang served as the deputy governor of Guangdong and was appointed the party secretary of Shenzhen, China’s flagship export processing zone. Zhang is often described as one of Jiang Zemin’s protégés in part because of his time in Shenzhen, one of the southern coastal regions often associated with Jiang Zemin loyalists.

In 2000, Zhang joined the Central Committee and left Guangdong to serve in top party roles in Shandong province before moving to become the party secretary of Tianjin, a major Chinese port city. Zhang’s Tianjin government has been accused of covering up a June 2012 mall fire. Initial reports suggested that only 10 people died, but rumors began circulating online that many more lost their lives. Those rumors have been repeatedly denied by the Tianjin and national government, and have generally been disproven as more details have emerged.

Zhang Gaoli was promoted to the standing committee at the 18th Party Congress but his specific policy portfolio has yet to be named.

See also:

• China Selects Its 7 New Leaders by Melanie Hart

SOURCE: AP/Ng Han Guan

Communist Party General Secretary and Chinese President Hu Jintao, center, stands with the current members of the Politburo Standing Committee in Beijing's Great Hall of the People in 2007. The 18th Communist Party Congress meeting next week will usher in a new cadre of leaders of the Standing Committee who will be in office until 2017.

This is the fifth in a six-part series highlighting the research and recommendations of a recent Center for American Progress report, “China’s Real Leadership Question.” The report explains the major players and factors in China’s upcoming political transition and describes the numerous challenges the country faces during the transition and well into the future.

Next week the 18th Chinese Communist Party Congress will commence in Beijing. Everyone in China refers to this meeting as the shibada, or “the big 18th.”

These big meetings always include lots of pomp and circumstance. Local officials are lining the streets in Beijing with flowers to welcome party delegates from across the country. Bookstores have already rolled out their requisite precongress displays of books glorifying the party and explaining why the country simply would not work without its leadership. Red banners are hanging from buildings and overpasses around Beijing.

When the big meeting commences next week, China’s state-run news networks will cover it the same way NBC did the Olympics. Lest the average citizen assume no one is really paying attention, China Central Television will broadcast footage of office workers watching the speeches on TV and diligently taking notes. For those of us watching some of this unfold on the ground in Beijing, it is a fascinating experience.

Chinese leaders always put on a good show for these meetings. Leadership handovers are a critical time. They are introducing a new crop of leaders that the public did not have an opportunity to vote on, so they need this process to look as legitimate as possible to avoid triggering public challenges or discontent. The only legitimacy the new leaders will have is the fact that the old leaders chose them. For this to work, the party has to appear strong.

They need to appear particularly strong this year. The leaders in Beijing faced an unprecedented array of challenges in 2012. The economy is slowing. Beijing is struggling to manage public fury over a territorial dispute with Japan. Corruption allegations are swirling around China’s current premier and threatening his legacy at a particularly sensitive time.

In general, the bigger the challenges, the bigger the political theatre, so this year’s meeting will likely be quite a spectacle. As flashy as the public show may be, however, the real action will be going on behind closed doors. In fact, the real action has already commenced.

Before current party leaders present their successors to China and the world, they have to decide who that group of cadres will be. The big question is who they will appoint to the Politburo Standing Committee and how they will distribute critical policy portfolios among those new leading cadres. Over the past few months, some of the top contenders for those posts have already become familiar names in the United States. The latest rumors suggest that the next Politburo Standing Committee (in office from 2012 through 2017) will include seven cadres (down from the current nine), and China watchers around the world have been speculating furiously about exactly who that top seven may include.

It is important to note, however, that it is not just the final group of names that we should be watching for. Their policy portfolios are also important. This column gives a brief overview of what those portfolios are and what we should be watching for when party leaders announce how they will be divided in November 2012.

Division of labor on the current Standing Committee

China’s Politburo Standing Committee operates in much the same way that a board of directors with specific portfolios assigned to each member does. Every member has a voice in all policy decisions made at the Standing Committee level, no matter the subject area. Their individual portfolios are important, however, because that determines which issues each member will have the most authority over for routine policymaking.

Portfolio assignments also determine who will be in charge of deciding which policy proposals to put on the table for Standing Committee consideration. On economic issues, for example, the premier generally has primary authority, so other Standing Committee members are unlikely to vote on economic proposals that have not been put forward by the premier.

Current (2007–2012) Standing Committee members and their key portfolios include (in party rank order):

1. Hu Jintao is general secretary of the Central Party Committee, president of the People’s Republic of China, and chairman of the Central Military Commission. That makes him simultaneously the Chinese Communist Party’s top leader, China’s head of state, and China’s military commander-in-chief.
2. Wu Bangguo is chairman of China’s National People’s Congress, which is the country’s top legislative body.
3. Wen Jiabao is China’s premier, which means he leads China’s State Council (the national cabinet) and manages all government affairs, including economic affairs.
4. Jia Qinglin is chairman of the Chinese People’s Consultative Conference, a representative body designed to give alternative political parties, ethnic minorities, and other public interest groups a voice in government affairs.
5. Li Changchun is chairman of the Ideology and Propaganda Leading Small Group, which makes him the top official in charge of media control and censorship.
6. Xi Jinping is a member of the Central Party Committee Secretariat, chairman of the party-building leading small group, vice president of the People’s Republic of China, and vice chair of the Central Military Commission. He has a lower-ranking version of Hu Jintao’s portfolio, which will come in handy when he steps in as Hu’s successor. Hu Jintao may follow the Jiang Zemin succession model and hold on to the top military post for a few more years, in which case Xi would be head of Party, head of state, but not yet military commander-in-chief.
7. Li Keqiang is executive vice premier and deputy party secretary in China’s State Council (the national cabinet). He serves as Premier Wen Jiabao’s second in command to help manage Wen’s large economic and social portfolio (and to help himself prepare to succeed Wen as premier). Li Keqiang has focused particularly on health care and public housing, two hot-button issues where Beijing has been rolling out new policies to address public complaints.
8. He Guoqiang is secretary of the Party Discipline Inspection Commission, which makes him the top party leader in charge of investigating and removing wayward cadres.
9. Zhou Yongkang is secretary of the Politics and Law Commission. That makes him China’s domestic security chief. He heads China’s police and paramilitary operations and has a massive budget for maintaining law and order (which includes preventing and suppressing mass protests).

Chinese citizens and many China-watchers around the world are waiting to hear what the next iteration of this committee will look like. Two questions are generating particular interest and speculation: whether China’s current leaders will once again give the executive vice premier a major economic reform portfolio, as they have done in some past Standing Committees; and how they will rearrange these portfolios if the committee decreases in size from nine members to seven, as most analysts are predicting.

What to do with Wang Qishan

Only two of the current nine Politburo members will remain: Xi Jinping will replace Hu Jintao as party general secretary, and Li Keqiang will replace Wen Jiabao as premier. Based on the current composition of the Standing Committee, that means seven portfolios will be up for grabs, including National People’s Congress head, Chinese People’s Consultative Conference head, propaganda chief, party discipline chief, domestic security chief, and executive vice premier. The cadre most likely to receive one of those seats is Wang Qishan, the current vice premier in charge of financial affairs. The big question is which portfolio he will get.

That is a delicate question in Beijing. Some had considered Wang Qishan to be a better fit for the premier slot than Li Keqiang. The premier manages China’s economy, and Wang Qishan boasts significant economic experience. He is also considered to be a competent and reliable fixer—so much so that he has been nicknamed the “firefighter.” Chinese leaders have called on Wang Qishan to reform provincial governments in Hainan and Guangdong, to repair China’s image after the SARS crisis, and to manage Beijing’s 2008 Olympics debut. He succeeded in every task.

Wang also happens to be a protégé of former Premier Zhu Rongji, the economic and finance czar who cleaned up China’s banking system in the 1990s and ushered the country into the World Trade Organization. Overall, Wang is widely seen as a competent fixer with serious economic chops—and China is definitely in need of economic fixing.

In the past, some iterations of the Politburo Standing Committee have included a second economic portfolio that combined the executive vice premier position with a specialized economic appointment. Zhu Rongji, for example, was simultaneously executive vice premier and governor of the People’s Bank of China, which is China’s central bank. When the executive vice premier has a serious economic or financial post in addition to the more general second-in-command responsibilities on the State Council, it means China has a second leader who can focus major time and resources on economic reform.

Zhu Rongji was certainly effective in that regard, and many who look at Wang are reminded of his mentor. Given China’s current economic problems, many observers are hoping that Wang Qishan will receive a similar role and use that position to once again push for serious economic reform.

Reinstating that second economic specialist position and giving it to a financial market veteran such as Wang would certainly send a signal that China is about to get serious about economic reform. From Li Keqiang’s perspective, however, that could also send a signal that he is a weak premier who cannot handle economic affairs on his own. Li may resist efforts to divide up his economic portfolio and give a critical piece of it to someone who many viewed as his key rival for the premiership.

Other likely posts for Wang Qishan include National People’s Congress head or head of the discipline inspection commission. In recent days the latter has risen in the rumor mill around Beijing. Some are speculating that where the party really needs Wang Qishan’s talent as a fixer is in rooting out corruption within the party. Given the spate of scandals that have erupted this year, that argument certainly has merit.

In terms of official party rank, we will not know for sure how Wang Qishan would be ranked vis-à-vis other standing committee members until the party releases the final appointment list in rank order. Informally, many China-watchers and high-ranking party members consider Wang to be a major heavyweight on par with front runners Xi Jinping and Li Keqiang. Many in China will be watching where the leadership puts this big contender, and many will view that decision as an indicator for where the party will be focusing major political capitol over the next few years.

How to allocate portfolios in a potentially smaller Standing Committee

If Chinese leaders do what the current rumors are predicting and reduce the Standing Committee from nine members to seven, that will mean they have to figure out what to do with the remaining two portfolios. There are two most-plausible options: eliminate two, or double up and require some members to manage more than their predecessors.

There is some speculation that the propaganda and domestic security portfolios could be demoted to allow for a smaller Standing Committee. Under that scenario, retiring Propaganda Chairman Li Changchun and retiring Domestic Security Secretary Zhou Yongkang would still be replaced by rising cadres, but their successors would not be Standing Committee members. That arrangement has precedent: In the 1997-2002 Jiang Zemin era, the Standing Committee had just seven members, and the propaganda and domestic security portfolios were not managed at the Standing Committee level. A return to that model would mean that the cadres in charge of propaganda and security would not have a seat at the table for critical decision making at the Standing Committee level, which would weaken the ability of those two sections to influence national policy.

Leaving the propaganda and security heads outside of the Standing Committee would also increase the Standing Committee’s ability to reign in those two very powerful bureaucratic interest groups. If party leaders do demote those two positions, many will view that development as a signal that serious political reform could finally be in the pipeline.

Another alternative is to double up these posts so that some of the new leaders will be managing more portfolios than their predecessors. Proponents of that scenario argue that given all of the challenges the party is facing, now is not the time to weaken the social controls that are keeping it afloat.

Then again, Chinese leaders could surprise everyone by breaking expectations and rolling out a full nine. That is not likely at this point, but as the recent New York Times expose illustrates, individual political capital can change very quickly. Shifts of that sort could easily throw off precarious power balances among current and former party leaders, and that could easily impact personnel negotiations behind the scenes.

The curtain rises on November 8. No matter what happens in the remaining days before the big meeting commences, by the time it ends China will have a new party leadership. Many in China and around the world will be watching to see just what they can do.

Melanie Hart is a Policy Analyst for Chinese Energy and Climate Policy at the Center for American Progress.

SOURCE: AP/Feng Li

U.S. Secretary of State Hillary Clinton, left, stands with Chinese Foreign Minister Yang Jiechi during her visit to Beijing, Tuesday, September 4, 2012.

This is the fourth in a six-part series highlighting the research and recommendations of a recent Center for American Progress report, “China’s Real Leadership Question.” The report explains the major players and factors in China’s upcoming political transition and describes the numerous challenges the country faces during the transition and well into the future.

China’s once-a-decade political transition does not just affect its own leaders and citizens. It also has repercussions throughout the world, especially in the United States. From a U.S. perspective, we need to prepare to deal with a China that is increasingly divided and uncertain about its future. Going forward, different Chinese leaders may send very different signals about where their country is headed. That will require U.S. policymakers to spend more time examining and understanding what exactly is happening in Beijing and what the Chinese leadership is facing at home.

At present, at almost every high-level leadership meeting between the United States and China, it is a fair bet that the Chinese know more about what is going on in the United States than vice versa. That is partly because the United States has a more transparent political system, but also because Chinese leaders consider our nation to be their most important counterpart. Beijing therefore places a very high priority on understanding our society and our federal system. That prioritization and attention is not fully reciprocated.

To be sure, we have top China analysts at the State Department and in other government agencies who do a very, very good job of tracking what the various elements in China are doing. But we simply do not have enough of them. Until recently, that has not been a major problem because as long as the Chinese Communist Party spoke with one voice, China has been fairly easy to deal with. Now, however, the party is becoming more fragmented both in Beijing and around the country. There is a huge amount of confusion and indecision in Beijing and at the provincial and local levels over how to deal with China’s growing challenges.

All of these multiplying voices coming out of the party are making China a more complex foreign policy partner. The United States will have to get smarter and learn to deal with this new dynamic. U.S. policymakers must develop a better understanding of where individual Chinese leaders, bureaucratic agencies, and regions stand on critical bilateral issues. Approaching China without that understanding would be like approaching the United States without knowing the U.S. political party divides or the different roles of state and local governments and the federal government. It could easily lead to major foreign policy miscalculations.

And as the United States begins to put more focus on Asia, it is crucial for both countries to not let growing insecurities about each other’s role and power dominate the decision-making process and lead to actions based on fear and distrust. Both nations must instead come to terms with the importance of a productive relationship and not lose sight of the big picture: Both countries need each other, and working cooperatively can lead to desired results on all sides.

The United States will also need to keep a vigilant eye on China’s domestic problems and be prepared to deal with any attempts by Chinese leadership to deal with those problems by pointing accusing fingers abroad. When Chinese leaders fail to meet citizens’ demands on critical domestic issues, one way to deflect blame is to shift the public’s attention toward foreign disputes, especially those involving the United States.

On economic issues, for example, the Chinese Communist Party propaganda machine may blame slowing economic growth on U.S. import tariffs, U.S. refusals to share key technologies, or an international trade system designed to benefit the United States and other developed countries at China’s expense. If the United States is to keep these types of accusations from triggering major bilateral conflicts, then we will have to deploy a steady and knowledgeable hand.

Similarly, the Communist Party might turn to military jingoism to deflect rising domestic anger, pushing already well-developed nationalist buttons in the state media and even in the independent social media by paying people to post comments online. Government-paid Internet commenters are so common in China they are now known as the “fifty-cent party”—in reference to the amount of money they reportedly receive for each pro-government posting.

The 2008 protests in Tibet demonstrated how quickly Chinese leaders can use nationalist rhetoric to throw the Chinese pubic into an antiforeign furor. The Tibet protests attracted a huge amount of media attention and sparked a wave of international criticism over rights abuses. The last thing Chinese leaders wanted to discuss was Tibetan complaints about rights abuses under Chinese Communist Party rule, so they framed the international criticism as a case of Western nations (particularly European nations) interfering in China’s sovereignty and territorial integrity. Chinese citizens responded by rallying behind Beijing and staging nationalist protests at home and around the globe.

Fast forward to 2012. A series of tense military standoffs over a contested island chain in the East China Sea resulted in the Communist Party once again fanning the flames of nationalism, this time against Japan. The Japanese government announced plans to buy a contested island from a Japanese family, which in the Chinese view is a departure from the mutually agreed upon status quo. China’s state-run press flooded the Chinese airwaves with strong statements accusing Japan of violating Chinese sovereignty and Chinese officials encouraged their citizens to flood the streets with anti-Japan mass protests. This was not the first time Beijing used nationalism to send the citizens out into the streets to up the pressure on Japan to back down in a bilateral dispute. Things got a bit out of hand this time, however, with Chinese mobs attacking Japanese cars on the road and assaulting the Japanese embassy. The result is a downturn in the sale of Japanese goods in China, a sharp drop in Japanese tourists to China, and Japan Inc. rethinking its reliance on China as its cheap factory assembly floor.

This pattern of government-stoked nationalism is very dangerous, because once Chinese leaders whip their citizens into a nationalistic fury they may then have to take a very hard line to avoid appearing to cave in to foreign pressure.

To avoid unnecessary conflicts and steer the U.S.-China relationship through these challenges, U.S. leaders will have to learn more about who they are dealing with. There is no way around that. In particular, U.S. leaders need to better understand:

• China’s elite leadership politics in the broadest sense of the term, including leadership transitions, the formal and informal norms that guide political behavior in China, and the factional politics that may grow increasingly contentious over the next 10 years. China’s power dynamics are complex, but the only way U.S. leaders can understand how their Chinese counterparts will behave on the policy front is to understand the chess games being played behind closed doors in Beijing. China has long followed U.S. elections and congressional scuffles to predict what our leaders will do. It is time for us to do the same.
• The problems Chinese leaders are facing domestically and the policy tools they have (or do not have) at their disposal
• The dynamics between central and local government leaders. Beijing makes a lot of promises, but local governments are often responsible for carrying them out, and they do not always do so. On issues such as intellectual property enforcement and export subsidies, most of the action is at the local government level. The United States needs to develop better approaches to those problems, and the way to do that is to develop approaches that take China’s central-local enforcement problems into account.
• The Chinese citizens’ increasing demands and the challenges Chinese leaders face when they attempt to meet those demands without democratizing. Beijing’s ability to do that will determine how long the current system can last.
• How China views the United States—both at the elite level and among the populace—and how domestic issues impact China’s foreign policy behavior

Chinese leaders are master strategists. They have to be to make it up the ranks in the Chinese Communist Party. They apply those same tactics to their dealings with the United States, and one of the first things they do is get to know their opponent very, very well.

Washington is not a utopian playground—our own politicians are also very good strategists. It’s time for us to follow China’s example and apply the skills we have developed at home to better understand our foreign policy partners abroad. That is the only way we can manage this relationship and protect our interests while China deals with the challenges ahead.

To read the full report, “China’s Real Leadership Question,” click here.

Melanie Hart is a Policy Analyst for Chinese Energy and Climate Policy at the Center for American Progress. Alex Lach is an Assistant Editor at the Center.

SOURCE: AP Photo

Protesters, right, confront with police officers, left, near the local government office building in July in Qidong, Jiangsu Province, China. Protests are becoming more commonplace, as Chinese citizens begin to demand higher quality of life from Communist Party officials.

This is the third in a six-part series highlighting the research and recommendations of a recent Center for American Progress report, “China’s Real Leadership Question.” The report explains the major players and factors in China’s upcoming political transition and describes the numerous challenges the country faces during the transition and well into the future.

For the past three decades, the Chinese Communist Party has maintained power by offering its citizens a bargain they could not resist: The citizens support the Communist Party’s authoritarian grip on power, and in return the party keeps the economy growing and uses the cash to give everyone a better life. As China moves into its next development phase, it’s going to be harder for the party to keep up their end of the deal. To complicate matters further, instead of accepting less, the Chinese people are going to be demanding even more.

Many Chinese people—particularly in China’s growing middle class—already have decent homes, cars, and plenty to eat. Now they want a more transparent government, cleaner air and water, safer food and drug supplies, and a judicial system that actually works. That creates a big problem for the Chinese Communist Party because those benefits are very hard for an authoritarian regime to deliver without losing its grip on power.

Beijing may not have a choice, however, because when the party does not give the Chinese people what they want on some of these quality-of-life issues, the people increasingly have been responding by going to the streets in mass protests. That strikes terror in the hearts of the Chinese leadership because any time their citizens protest, they worry that the unrest could spread and trigger another Tiananmen-style crisis. If that were to happen, it would likely bring an end to the Communist Party regime because in the modern Internet era, Chinese leaders cannot launch another Tiananmen-style crackdown and maintain any vestige of popular support.

To survive, Chinese leaders must find a way to deliver enough quality-of-life improvements to keep their citizens—particularly the urban middle class—from protesting. Unfortunately, that will not be easy to achieve. Whether the new leadership can manage to do so will depend to a large extent on economic growth.

Current state of protests

It is difficult to say for sure exactly how many protests erupt in China every year. Statistics vary depending on how different government agencies define the term “mass incidents,” but over the past few years the central government’s annual protest statistics have ranged between 50,000 and 100,000 per year. This is despite the fact that the Chinese central government budget for “public security” (preventing and stopping mass protests) has eclipsed the country’s national defense budget for two years running. The 2012 budget allocated more than RMB 700 billion ($110 billion) to domestic police and paramilitary forces—$5 billion more than Chinese leaders gave the People’s Liberation Army for national defense.

Here are just two examples of the types of protests incoming Chinese leadership will face if demands do not start being met:

• This July in Qidong, a coastal city near Shanghai, thousands of residents took to the streets to protest a waste-discharge pipeline that would have decimated fisheries and polluted drinking water. Enraged protesters, however, did more than just march through the streets. They also attacked city government buildings and overturned cars.
• That same month in Shifang City, Sichuan Province, thousands of citizens surrounded and attacked government buildings to protest a copper factory.

These protests are sprouting all over China and presenting Beijing with a major red line. If the incoming Chinese leaders cannot address the corruption problems in government and quality-of-life issues, then the protests will likely get bigger and more frequent until they grow into something the party cannot shut down. Chinese leaders need look no further than Hosni Mubarak’s regime in Egypt to see what that would entail.

The Chinese people basically want a lifestyle that looks a lot like what we have here in the United States. Problem is, the United States is a democracy—and China is not. Beijing answers to no one, and local governments are their own corrupt little kingdoms. The leaders in Beijing know they have to fix problems such as environmental pollution and poisonous food products to keep people from protesting. Local governments are generally more interested in making money, however, and not so interested in enforcing regulations to improve quality of life.

Beijing can order them to do so, but China is a big country, and Beijing is—for the most part—far away. Local businesses are much closer, and they have a lot of cash. When local officials have to choose between following Beijing’s orders and protecting business in exchange for kickbacks, the latter often looks like a much better deal. That creates major corruption problems.

Infrastructure development projects in particular are hotbeds of corruption. Businesses can site those projects anywhere in China so regional governments compete with one another to attract investors and win the tax revenues and kickbacks those deals can bring. That often involves ignoring the laws that protect citizen rights. Local officials kick people out of their homes with little or no compensation, lease the land to a developer at extremely low rates, and then allow that developer to violate a whole host of environmental standards. Businesses save millions in construction costs, but citizens suffer—first by losing their land and homes, then by exposure to dangerous pollution.

As protests over these and many other practices have grown, China’s central leadership has taken measures to try and appease the masses, but often hasn’t gone far enough.

Attempts to quell protests

One way Chinese leaders are trying to solve these problems is by borrowing strategies from western democracies, without going so far as to actually democratize. Chinese leaders are trying to improve the functioning of their courts, for example, so that their citizens can sue local officials when they ignore Beijing’s laws (for example, by kicking people off of their land without providing adequate compensation). Beijing also is giving Chinese journalists and nongovernmental organizations a bit more leeway to expose problems such as environmental pollution and food-safety incidents.

Problem is, they never go quite far enough. The courts are still not independent, so cronyism derails most cases. Journalists and social organizations are still kept on a tight leash. Local governments can still have journalists or activists fired if their investigations get too political, and that cuts many watchdogs off at the knees. Overall, Beijing flirts with elements of a democratic society but never goes far enough to enact real change. The end result is that they are not fully addressing their citizens’ growing complaints, raising the question of whether Chinese leaders will be able to keep things going in a more economically developed era.

Some foreign observers saw China’s reaction to the Wukan protests (in Guangdong Province) last fall as a sign of progress. Party leaders in Wukan had to decide how to reassert control after local officials and police clashed with angry residents over corruption problems and then retreated, ceding Wukan Village to protesters. Instead of sending in tanks—as Deng Xiaoping did to clear Tiananmen Square in 1989—Guangdong party leaders sent in representatives to hear the people’s complaints, and they even allowed the villagers to hold a special election to appoint a protest leader as the new village party chief.

This was a fascinating and positive development, but Wukan’s experience is not likely to be repeated nationwide. Wukan is located near Guangzhou and Hong Kong, two major international cities—meaning the Wukan crisis attracted international media attention, which made the party’s response as much about public relations as it was about maintaining social stability. With most Chinese protests, local officials are more likely to respond with crackdowns than elections.

Looking toward the new regime

As China ushers in a new cadre of leaders, those leaders will have to understand that, at a fundamental level, there is only one way forward. They have to give their growing middle class more of what they want, and what they want is looking more and more like the kinds of government goods, services, and accountability that Western democracies deliver. Marginal reforms and small political concessions will not achieve that, though they will buy time, which alone is a big accomplishment. The question is how much time they have left.

That will be largely determined by how well China fares on an economic front. As long as the economy is booming, most Chinese people can put up with some political frustrations, because as long as the political frustrations don’t get too bad, they still seem like a worthwhile price to pay for economic growth. If the economy slows down too much, however, that bargain no longer looks like a good deal, and protests may grow stronger and louder.

To read the full report, “China’s Real Leadership Question,” click here.

Melanie Hart is a Policy Analyst for Chinese Energy and Climate Policy at the Center for American Progress. Alex Lach is an Assistant Editor at the Center.

SOURCE: AP/Shannon Stapleton

Chinese scholars in Beijing claim Hu Jintao, pictured above, is planning a big innovation policy push for this fall that will focus not on channeling more R&D funds toward state-owned enterprises, but rather on the systemic barriers to a more competitive innovation environment.

This is the second in a six-part series highlighting the research and recommendations of a recent Center for American Progress report, “China’s Real Leadership Question.” The report explains the major players and factors in China’s upcoming political transition and describes the numerous challenges the country faces during the transition and well into the future.

As China prepares for its upcoming political transition, the country’s new leaders will be asked to handle an economic downturn in which Chinese growth could hit lows not seen since the 1989 Tiananmen Square crisis. After a decade of nearly unprecedented growth, including exceeding IMF expectations for growth for 10 straight years, China’s economy is starting to slow down, with analysts suggesting the growth rate for this year may only be 7.5 percent.  If that proves correct, it will be China’s lowest growth rate in more than 20 years.

To be sure, a slowing Chinese economy is not necessarily a bad thing. In recent years, China’s high growth rates have been fueled by unsustainable investments in infrastructure and real estate, and if the country can shift away from that model toward something more sustainable, that will be a positive development. Problem is, that shift will not be easy to achieve. And for a Chinese Communist Party that has staked its legitimacy on keeping the economy booming, any slowdown brings new political challenges. That is particularly true at this point in time because in addition to managing growth rates, Chinese leaders must also figure out how to deal with a growing middle class that is starting to demand a higher quality of life and a larger chunk of the benefits of China’s economic prowess.

This column intends to explain the following:

• The model by which the Chinese economy has enjoyed such long economic growth
• Why the current model is no longer sufficient to maintain that growth
• The manner in which China can and should promote more innovation and domestic consumption of its goods
• The difficulties the country will face in trying to upend its current growth model, especially in taking power away from local government authorities, specifically in the energy sector

With China’s new political leaders set to ascend in the near future, they will have to recognize the need for change in their economic plans to keep the economy growing at its robust rate. They will also have to prepare to make some difficult political choices.

Rebalancing the economy to meet the demands of China’s rising middle class

For the past three decades, Chinese economic growth has depended primarily on exports and state-funded fixed asset investments in infrastructure and real estate. That model is now running out of steam. Domestic wages are rising, which is eroding China’s cost advantages as a low-value-added manufacturer. Fixed-asset investments are consuming too much energy, polluting the environment (which triggers destabilizing mass protests), and concentrating wealth among the leaders of state-owned enterprises and their buddies in the local government who dole out these big infrastructure contracts, sometimes in exchange for lucrative kickbacks.

To keep the country growing and to keep their citizens happy enough to support the regime instead of protesting against it, Chinese leaders must shift the country toward a new growth model that will depend less on exports and fixed asset investments and more on domestic consumption and higher-end technology innovation. Consumption and innovation are connected and both benefit China’s growing middle class.

If Chinese companies can move up the value chain from lower-end to higher-end manufacturing, they can pay their employees more, which will expand job and wage opportunities for average Chinese citizens. Once Chinese citizens have better jobs and higher wages, they can then buy more, allowing Chinese companies to sell more of their goods domestically instead of depending primarily on export markets, which can be unpredictable. Higher wages for Chinese workers would also address one of the biggest complaints about the current system—that wealth is too concentrated in the hands of a well-connected few at the expense of ordinary Chinese.

Technological innovation is particularly important in this quest. Thus far China has primarily served as a manufacturer for western designs. If they can shift not only toward higher-end goods but also from western to indigenous Chinese designs, then Chinese firms will get a larger share of those profits. Today western firms hold the intellectual property rights for most of the higher-technology goods China produces. That means western firms get a large cut of the profits for every unit sold. If China can keep more of those profits at home, that would provide new revenue streams for the Chinese economy.

But moving toward a modern, higher-tech, consumer-driven economy will require the type of independent regulatory governance and judicial structure that it is very hard for an authoritarian regime to provide. One of the biggest stumbling blocks is providing a good domestic environment for technology innovation. Investments in innovation will not deliver good returns without a good legal system to protect intellectual property rights. The United States has such a system, which is why U.S. technology entrepreneurs and venture capitalists are willing to risk so much on new ideas.

In China, however, the Chinese Communist Party worries independent courts would turn against it, so the party keeps the courts on a short leash. There is no judicial independence in China. If party cadres do not like the way a judge rules in a case, they can have that judge fired. That gives party leaders sway over every court decision and opens up the possibility that they will use that sway to protect favored companies. And that means investors cannot trust Chinese courts to enforce intellectual property rights laws in a fair and impartial manner.

That was all fine and good as long as most intellectual property cases were being filed by foreign companies against Chinese defendants. In that situation, weak IP enforcement was just another form of protectionism. The American Semiconductor case is a recent example of that traditional dynamic. American Semiconductor Corp., or AMSC, has clear evidence that Sinovel, the Chinese wind turbine manufacturer, stole AMSC engineering secrets and used them to produce a Chinese product based on AMSC designs. American Semiconductor responded by filing suit against Sinovel in the Chinese court system. In the West AMSC’s suit would be an open-and-shut case, but Sinovel has strong party and government backers, so Chinese judges keep throwing the case out of court.

Chinese leaders may not mind giving foreigners a hard time, but now they want Chinese companies to come up with their own engineering secrets. If ownership rights are hard to enforce, however, few Chinese companies will have an incentive to do so. That is particularly the case for private-sector companies who would have to invest their own funds or take out large loans to develop new technologies. And those are exactly the types of companies China needs to encourage if it wants to move up the technology value chain.

This past May current Party Secretary Hu Jintao convened a Politburo meeting to address this problem. At that meeting party leaders talked about the need to build a more supportive environment for innovation and announced a new goal: making China one of the world’s most innovative countries by 2020. Chinese scholars—interviewed for our main report—in Beijing claim Hu Jintao is planning a big innovation policy push for this fall that will focus not on channeling more R&D funds toward state-owned enterprises (which has not worked that well so far), but rather on the systemic barriers to a more competitive innovation environment, including intellectual property enforcement.

No matter what the party comes up with, however, we can bet that it will not include judicial independence. As long as the party insists on maintaining control over the courts, China’s intellectual property regime will favor whoever has the best political connections, not the best innovators, and that will deter some of China’s best and brightest technology prospects from taking a gamble on new ideas.

Reducing government support for state-owned industries

Shifting the economy toward a new growth model will also require reducing government support for the state sector, and that is not easy to do. For the past 10 years, the Beijing leadership directed by Party Secretary Hu Jintao and Premier Wen Jiabao has had to focus more on social stability and less on economic reform. When economic problems emerged they threw money at those problems instead of making difficult political adjustments. This culminated in China’s 2008 stimulus package, which doled out RMB 4 trillion ($586 billion) over two years to keep the economy running throughout the global financial crisis.

More than 80 percent ($468 billion) of those stimulus funds were earmarked specifically for infrastructure and construction projects. Beijing issued treasury bonds to finance some projects and ordered state banks to support the rest by providing long-term, low-interest loans to the companies involved. Local government cadres were thrilled because they got to decide which projects to build and which companies to award the contracts to. Overall, the stimulus program put China’s local government officials in charge of huge amounts of pork, and pork can buy a lot of friends in China. Most of the stimulus projects were contracted out to state-owned enterprises with connections to China’s local governments and state banks. All across China, elite groups of government officials, bankers, and well-connected state-owned enterprises were passing around huge amounts of money, and they could not have been happier.

Now Chinese leaders need to redirect that spending from local governments and state-owned enterprises to private-sector innovation by allowing banks to choose projects based on profitability rather than political connections. China must shift from letting its government officials pick winning companies based on those same connections to letting the market pick the winners based on who has the best technology. That is the only way China can climb up the value chain to become a major global innovator. It will not be easy, however. Local officials and the heads of local state-owned enterprises (often one and the same) strongly resist any reforms that redistribute wealth at their expense, and those are very powerful interest groups in China.

In China’s political system, the leaders in Beijing—who today can claim neither democratic legitimacy nor Mao-era ideological legitimacy—need support from the lower levels to make big policy decisions. The Politburo (the top 25 party leaders) and the larger Chinese Communist Party Central Committee include not only national leaders based in Beijing but also powerful provincial officials. Just like congressional representatives here in the United States, China’s provincial officials bring their own interests to the table when they participate in economic decision making in Beijing. And key policy decisions are always made via consensus, so Beijing has to take those regional interests into account. Top national party leaders such as Hu Jintao today and Xi Jinping in the future cannot ram reform plans down the throats of their subordinates—they have to get their support.

During the first era of economic reforms, Deng Xiaoping bought that support by giving local government cadres more authority over the local economy. The next era of reforms will require taking some of that economic authority away. For economic rebalancing to succeed, local cadres can no longer be in charge of picking winning firms and awarding lucrative contracts for massive infrastructure projects. Instead, commercial banks will allocate capital to the projects and technologies that show the most promise, regardless of which region they are located in or who their friends are.

This would be good for China in the long term, but not so good for local government officials and state-owned enterprises in the short term, particularly if they have sunk investments into less-competitive industries and technologies that would be phased out under a more market-based system. Those officials and state-owned enterprises will fight hard to keep that from happening.

Chinese leaders have plenty of cash, so they can easily funnel resources into new industries. They are already directing funding toward strategic emerging industries such as green technology products and next-generation information technology equipment and software. Where they run into trouble, however, is in actually getting those new industries off the ground. That requires turning off the spigots of government support flowing toward the older and more inefficient industries and state-owned enterprises, a tough task when local government officials are fighting hard to keep them alive.

In green energy, for example, Chinese leaders have directed substantial resources toward wind and solar. That has paid off in clean energy manufacturing: Chinese companies are using cost innovations to manufacture cheaper versions of wind and solar technologies developed abroad, and they are exporting those products all over the world. What Chinese leaders really want, however, is to develop their own technologies and sell more of them at home, and that is not going so well. Chinese leaders are doling out funds for clean energy R&D, but they distribute them through government channels, and government officials direct the money toward old friends instead of new prospects. Resources go to the well-connected instead of to the entrepreneurial. Many private enterprises cannot get financing, and private enterprises are more likely to generate the new ideas China needs.

China’s ability to buy and install those clean energy products at home is also lagging behind, particularly in the solar industry. Chinese solar panel manufacturers export more than 90 percent of the products they produce, and those exports are currently being hit with tariffs. Chinese solar manufacturers want Beijing to increase domestic solar energy consumption so they can sell more solar panels at home and depend less on exports (thus limiting their exposure to tariffs), but the growth of solar demand in China is much slower than it could be.

That’s because China’s electricity sector is dominated by state-owned enterprises that prefer to stick with the coal infrastructure they already have instead of investing in new technologies such as solar. Solar generation is still more expensive than coal, and China’s generation companies can’t make a profit even using coal because Beijing fixes electricity prices at below-market rates to keep consumers happy.

Over the past few years, coal prices have gone up, but electricity prices stayed low, so China’s state-owned power generators have been selling electricity at a loss and getting government bailouts to balance the books. The last thing those companies want is to increase their costs and losses even further—and Beijing cannot increase electricity prices too much because that would slow down the economy and infuriate consumers.

China has a “Golden Sun” program that provides government money to build solar generation plants, which should help bring down costs, but local governments are not managing it well, and many Golden Sun projects have been plagued with fraud. For the solar generation projects that have been built, getting connected to the grid is also problematic because China’s State Grid Corporation (a state-owned enterprise) controls 88 percent of the country, and State Grid is dragging its feet on renewable energy connection.

All of these factors keep China tied to coal and lock China’s clean energy economy into the old model of depending primarily on exports instead of selling more goods at home. Overall, then, China is locked into a situation where the central government is trying to push their economy in new directions, but central-local political dynamics constrain Beijing’s ability to transform the system in a meaningful way.

To be sure, the country has made some progress. When measured by annual growth rates, China’s domestic clean energy markets are booming, and no one doubts Beijing’s determination to turn its country into a clean energy powerhouse. The problem is that things are just not moving quickly enough, particularly on domestic consumption and home-grown technology innovation—and those are the clean energy improvements that China really needs.

Overall, it seems as though every time Beijing comes up with a new idea, vested interests stand in the way. If China’s incoming party leaders cannot find new solutions to these problems, then economic growth may slow dramatically. And that has major implications, not only for the economy, but also for the Chinese political system more broadly.

To read the full report, “China’s Real Leadership Question,” click here.

Melanie Hart is a Policy Analyst for Chinese Energy and Climate Policy at the Center for American Progress. Alex Lach is an Assistant Editor at the Center.

SOURCE: AP/Ng Han Guan

Former Chongqing Party Secretary Bo Xilai attends the closing session of the Chinese People's Political Consultative Conference in Beijing's Great Hall of the People. It was announced today that Bo has been expelled from the Communist Party as a result of the scandals surrounding him and his wife.

This is the first in a six-part series highlighting the research and recommendations of a recent Center for American Progress report, “China’s Real Leadership Question.” The report explains the major players and factors in China’s upcoming political transition and describes the numerous challenges the country faces during the transition and well into the future.

Today in Beijing the Chinese Communist Party’s 25-member Politburo sealed the fate of scandal-embroiled former Chongqing Party Chief Bo Xilai. The Politburo expelled Bo from the Chinese Communist Party and publicly accused him of multiple major offenses ranging from bribe-taking to “improper sexual relationships with a number of women.” When the party leadership publicizes that degree of criticism against one of their own, that is a clear and unrevokable message that a cadre is going down. All that remains is Bo’s official judicial trial, which likely will not unfold until after the Party Congress meeting that we now know will likely commence on November 8. In Beijing, however, the party is the real judge and jury, and the party has officially spoken. Things do not look good for Mr. Bo.

Party leaders have been signaling their plans for Bo over the past month. Earlier this month at the trial of Wang Lijun—Bo Xilai’s notorious police chief and right-hand man—Chinese state media suggested that Bo himself had known of his wife’s murder of a British businessman, thus further implicating Bo in the crime. That news came on the heels of Bo’s wife, Gu Kailai, being sentenced to what experts expect to be life in prison. This multifaceted scandal has dominated the news in China for almost the entire year, and party leaders are moving quickly to wrap it up before the new leadership takes the helm at the big November meeting.

Corruption scandals are certainly nothing new in China, but this particular series of events left the Communist Party leaders particularly divided and flatfooted at a particularly sensitive time. What’s more, the Bo scandal—with its hints of serious domestic political intrigue—occurred amid a new communications era sweeping China, thanks to the country’s increasingly boisterous microbloggers and the general public’s demand for more information about how their country is run.

This column explains the significance of the Bo scandal and the general presence of corruption through China’s recent history, while demonstrating how the party generally handles these incidents and why party leaders will recognize the need to demonstrate a united front to prevent this scandal from doing any further damage.

Corruption scandals and cadre ousters not uncommon in Chinese Communist Party politics

Without a doubt, the ongoing Bo scandal definitely has some unique elements to it. In terms of sheer tabloid drama, this particular case really has no comparison in modern Chinese history. Previous high-ranking members of the party have been murdered, purged, or isolated indefinitely under house arrest during previous political transitions, but the difference in Bo’s case is in the way the case is unfolding, the characters involved, and the new media environment in which it is all being reported—an environment where scandalous details are hard to keep quiet.

In short, the current and future party leadership is engaged in the purge of one of its own, while for the first time having to answer to an aware Chinese public about the reasons why it’s happening.

It is important, however, to remember that the Bo scandal is certainly not the first major corruption scandal to rock the Chinese Communist Party since Deng Xiaoping led the nation into the modern economic era. It is virtually impossible now to climb the party ranks and stay completely clean because China’s authoritarian political system encourages corruption at every level. That means corruption scandals are inevitable, and the party knows how to deal with them.

When scandals emerge, party leaders have two key priorities: keep the party together and keep most Chinese citizens convinced that the current system is still working fairly well and is still a better bet than pushing for democracy and risking political turmoil. Toward that end, party leaders go to great lengths today to convince Chinese citizens that corruption scandals are isolated incidents caused by a few bad eggs rather than a systemic problem with single-party rule. Corruption scandal response, therefore, is all about damage control, and the party’s handling of these cases follows a predictable pattern.

Their first step is to determine who will take the fall. Those cadres caught up in a scandal will be framed as those few bad eggs wholly responsible for the problem. Party leaders will pin all of the blame on them and take action against those cadres to appease the public. In 2007, for example, party leaders responded to a series of food and drug safety scandals by ousting and executing the head of the State Food and Drug Administration, Zheng Xiaoyu. Indeed, harsh remedies, including capital punishment, are not uncommon when the party needs to make an example of one of its own.

Corruption cleanups are always designed to take out just enough key people to remove internal threats and assuage the public. If they go too far by exposing and removing too many cadres (and thus publicly airing too much dirty laundry), then that could send a message to the party’s rank and file that their leaders are not looking out for them. It could also send a message to the Chinese public that the entire system is problematic.

Once party leaders decide which cadres to axe (either literally or figuratively), they use the state-run media as a propaganda machine to pin everything on those cadres and present the case to the public as a done deal. Media control is critical for cauterizing these scandals to keep the political damage from spreading. Once top leaders decide how the scandal will be presented and how it will end, all media outlets must present that version of the facts. Any media attempts to independently investigate corruption scandals and present an alternate version of the facts are severely punished. Most journalists and editors know better than to even try.

These official media announcements also demonstrate to the public that party leadership has reached an internal consensus on how to handle a particular case. What is currently very interesting in the Bo scandal is that so many months went by without hearing much on this case from the leadership or the state press. That suggests top leaders were struggling to come to consensus on exactly who will be taken out (other than Bo himself) and what the various punishments would be.

Party leaders absolutely had to do so before the upcoming 18th Party Congress commences in November. If they had not, that would have signaled to the Chinese people that the leadership is seriously fractured and will encourage China’s social discontents to voice their complaints more boldly—most likely via sustained mass protests. That is something the party must avoid at all costs if it wishes to remain in power.

From a strictly administrative standpoint, the Bo scandal has a precedent. Bo Xilai was a Politburo member and a provincial-level party secretary, but so was former Shanghai Party Secretary Chen Liangyu when the national Party Secretary Hu Jintao purged him in 2006. What complicates things with Bo is the fact that he has a revolutionary pedigree. He’s the son of Bo Yibo, a Mao-era revolutionary leader who survived the Cultural Revolution to become one of the “Eight Immortals,” the eight powerful officials in Deng Xiaoping’s inner circle. Bo Xilai was also expected to ascend to the Politburo Standing Committee this fall, and that puts him very close to China’s top echelon. If the party paints him in too dirty of a light, then it may be hard for the leadership as a whole to remain clean in the eyes of the Chinese public.

Bo Xilai was also a media darling—a new phenomenon in China—and his “give everyone a slice of the cake” rhetoric was a big hit among Chinese peasants and poor city dwellers who feel they have been left out of China’s postreform economic success. That makes it even trickier to tar and feather him in the Chinese state press because any strikes against Bo could easily make his opponents look like antipopulist elitists. In the modern authoritarian China, this actually now matters.

From that perspective, the murder allegations against Bo Xilai’s wife were a political godsend for Current Party Secretary Hu Jintao and his allies. Bo had always been like the cat with nine lives—tenacious, connected, and extremely hard to get rid of. In 2007 Hu Jintao demoted Bo from commerce secretary—a high-profile national leadership position—to the party secretary of Chongqing, a backwater municipality in Western China. Instead of viewing the Chongqing post as a path to retirement, however, Bo Xilai turned it into a national political platform. He rolled out people-oriented development policies, launched a “smashing black” campaign to take out organized crime rings, and encouraged local citizens to dress up in red outfits and sing “red songs” that harkened back to a more egalitarian era.

China’s urban and rural poor were captivated by the images of Chongqing citizens singing en masse and apparently being lifted into a better life by Bo Xilai. But many wealthy elites and liberals were horrified by Bo’s glorification of the Mao era. Hu Jintao and his allies were equally horrified. Hu repeatedly snubbed Bo by refusing to take an inspection tour to Chongqing and refusing to show up for a red songs competition Bo staged in Beijing. Bo Xilai had other friends in the central leadership, however, and those leaders saw his growing popularity among the disenfranchised as a major political asset.

Everything came crashing down when internal investigations (reportedly launched by Bo Xilai’s enemies in Beijing) unearthed a murder and sent his police chief running to the U.S. consulate with a handful of scandalous documents in February 2012. That gave the Hu Jintao camp enough political maneuvering room to turn Bo Xilai’s red song campaigns against him and paint him as a crazed leftist who was trying to drag the country back to the Cultural Revolution era and wipe out decades of reform. Party leaders removed Bo from his official positions, but they did not announce at the time what they were actually charging him with or what further punishments he would receive. That part is trickier because it impacts not only Bo Xilai himself but also a whole host of his allies—many of whom such as former Party Secretary Jiang Zemin are extremely influential.

Some analysts believed that the judicial proceedings against Bo Xilai’s wife Gu Kailai signaled that an agreement had also been reached on how to handle the corruption allegations against her husband. The Chinese state press claims that when her trial commenced, Gu Kailai confessed to the murder charges, accepted responsibility for inflicting harm on the Chinese Communist Party, and promised to “accept and calmly face any sentence.” Those statements certainly suggest she is keeping up her side of a bargain, but that bargain may only include protection for her son—not leniency for her husband.

As for Wang Lijun, Bo’s right-hand man, on September 24 he was found guilty of defection, abuse of power, taking bribes, and bending the law for personal gain, and was sentenced to 15 years in prison, according to a state media report. That report said both prosecutors and Wang’s defense asked the court for leniency because Wang had cooperated on the investigations of the transgressions of others, which means Wang may have helped the inquiries into Bo’s role either in the murder or other corruption issues or both. The party’s strong condemnation against Bo Xilai suggests that may be the case.

At the end of the day, party elites know they must stick together

This case is no doubt triggering a huge amount of internal debate. At the end of the day, however, China’s top party leaders know that they must either stand together, or they will all fall together. Elite splits—if they become public—would almost certainly lead to a decline of party power and a loosening in social control, which could send people out into the streets in mass protests, just as the last elite split did in 1989. The lessons of Tiananmen provide a strong incentive for all factions within the party to make whatever concessions they must for the group to reach consensus.

Chinese leaders knew they could not fail to deal with the Bo scandal before the 18th Party Congress. That would have signaled to the Chinese public and to the lower party and government administrative ranks that the top leadership is divided and therefore weak. Protesters would have seen the failure as a signal that now is the perfect time to take to the streets in mass protests to push for change on contentious political issues such as environmental pollution and rural land expropriation. Lower-level officials would have seen that as a signal that now is the time to push back on policies they do not like. That would have made governance even harder for the next round of party leaders and further reduce popular support for single-party rule.

Signaling a lack of consensus at the top also would have sparked absolute panic through Chinese financial markets and further destabilize the economy. A healthy contingent of China’s wealthy elite was already panicking over the possibility that Bo Xilai would ascend to the Politburo Standing Committee and push for a return to antimarket socialism, however improbable. His ouster assuaged those fears somewhat, but it also painted Beijing in a politically instable light. Chinese elites reacted to that instability by moving even more capital abroad and frantically applying for foreign immigration visas at even higher rates than before. If it had begun to look like the party was cracking up, these fears would have only escalated, and Chinese markets would have suffered.

The party is still strong enough to deal harshly with any cadres who break discipline. Anyone considering such a move need not look any farther than Bo Xilai himself. His red song campaign and brazen play for a central leadership position broke one of the party’s most important rules: Always present a united front and keep personal career ambitions and internal divisions out of the public eye. Once he broke that rule, Bo gave his critics within the party major ammunition to go after him, which launched the internal investigations that led to his downfall.

Overall, at this point, the forces holding the party together are still much stronger than the forces pulling it apart. If things become extremely fractious at the top—if Beijing is wracked by another epic corruption scandal, for example, or if the economy tanks, and current leaders are unable to turn things around—then that might create new openings for elite splits of the Tiananmen variety.

At the moment, however, China has not reached anywhere near that kind of crisis point. Until it does, it will still be in everyone’s best interest within the upper echelons of the party to reach a consensus and stand together. Based on what we are hearing today, it looks like they have again managed to do just that on one of the hardest issues they have faced to date.

To read the full report, “China’s Real Leadership Question,” click here.

Melanie Hart is a Policy Analyst for Chinese Energy and Climate Policy at the Center for American Progress. Alex Lach is an Assistant Editor at the Center.

SOURCE: AP/Alexander F. Yuan

In this photo taken May 4, 2012, Chinese Vice President Xi Jinping speaks at a conference to celebrate the 90th anniversary of the founding of Chinese Communist Youth League at the Great Hall of the People in Beijing.

See also: China’s Real Leadership Question by Melanie Hart

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Introduction

Predicting China’s next round of party leadership appointments is not always an easy game to play, particularly this year, as our colleague Melanie Hart details in her new paper, “China’s Real Leadership Question.” Her analysis demonstrates why knowing who may or may not make it into the remaining seats on China’s ruling Standing Committee of the Chinese Communist Party is not as important at this point in time as is predicting whether the new Standing Committee as a whole will meet the serious economic and political challenges facing their nation in the coming decade.

The top two positions were settled months ago, and are highly unlikely to change. Current Vice President Xi Jinping is slated to become party general secretary while Vice Premier Li Keqiang is slated to become premier, the highest positions in the party and the government, respectively.

The rest of the Standing Committee is much less certain. The Chinese political system thrives on predictability and we can make fairly accurate guesses about who will be promoted into these posts based on the positions, seniority, and factional affiliations of the current candidates. This year, however, the ongoing scandal surrounding former Communist Party high-flier Bo Xilai—who ran one of China’s biggest municipalities in central China before a rapid downfall—is adding an additional element of uncertainty. Bo’s now definitely out of the running for a seat on the Standing Committee, but his downfall makes predicting who will fill some of the seven to nine available seats difficult.

To disrupt expectations at this point in the game would suggest that it is not business as usual within the party, and that is not a message Beijing wants to send. We can make a confident prediction about four likely members of the Standing Committee—Xi Jinping, Li Keqiang, Li Yuanchao, and Wang Qishan—but determining who will fill the remaining three to five seats is more difficult. The most likely candidates are divided between the Hu Jintao faction of Communist Youth League members and the Jiang Zemin faction of socalled princelings, individuals with family times to China’s revolutionary elite.

Below is a list of the 10 most likely candidates to fill the Standing Committee heading into the Chinese Communist Party’s leadership transition this fall.

Xi Jinping

Current position: Vice president, China People’s Government; vice chairman, Central Military Commission; member, Politburo Standing Committee
Age: 59
Factional ties: Princeling (son of Xi Zhongxun, former vice premier); considered to be a Jiang Zemin protégé

The son of a high-ranking People’s Liberation Army general, Xi Jinping worked on a farm in rural Shanxi province for six years, until the age of 22, after his father was imprisoned during the Cultural Revolution. Xi managed to leave the farm, join the party and graduate from the prestigious Tsinghua University with a degree in chemical engineering. After graduation, Xi worked in administrative roles for the People’s Liberation Army. After serving in increasingly senior party and army roles in Hebei, Fujian, and Zhejiang provinces, Xi was promoted to the Standing Committee, became party secretary of Shanghai, and took on a series of new titles that suggested he would succeed Hu Jintao as China’s next party general secretary and People’s Government president.

Xi’s family ties place him closer to the Jiang Zemin faction, which implies that his approach to economic development will be more market-friendly and focused on protecting wealth than some of his Hu Jintao-affiliated peers. But Xi has been relatively opaque about how he would act economically or politically, which has contributed to his positive standing among both factions and enabled his rise to the general secretary.

Most recently, in 2008 Xi was appointed to vice president of the Chinese People’s government. Since then he has traveled to Latin America, Europe, Asia, and America on diplomatic missions. Xi is married to a famous Chinese folk singer, Pei Liyuan, and their daughter is currently studying at Harvard University.

Xi Jinping will almost certainly be appointed to party general secretary this fall, China’s highest leadership post.

Li Keqiang

Current position: Executive vice premier, China’s State Council (the national cabinet); member, Politburo Standing Committee
Age: 57
Factional ties: Tuanpai (Youth League) member; considered to be a Hu Jintao protégé

After working in rural Anhui for four years after graduating from high school, Li joined the party and was accepted to Peking University in the “Class of 1977.” That year China re-opened many of its universities after nearly a decade of closure during the Cultural Revolution and 5.7 million students competed for only 273,000 university spots. In the early 1980s Li worked in the Communist Youth League’s 11-person governing body directly under Hu Jintao and alongside future Politburo members Liu Yandong and Li Yuanchao. Hu Jintao nominated Li for promotion in the league several times and he succeeded Hu as the head of the league in 1993.

Following his time with the Communist Youth League, Li was sent to Henan province to gain more provincial experience. Given Li’s close ties to President Hu and his work in Henan, as premier he may focus on income equality issues such as the provision of better social services. Li will not be able to determine policy programs on his own, however, and will instead require consensus with Xi Jinping and other leaders.

Li’s stint as party secretary and provincial government leader in China’s coastal Henan province was haunted by a serious AIDS crisis caused by unscrupulous blood plasma buyers. Li’s provincial government covered up the crisis and prevented journalists from visiting sick villagers. Hu Jintao unsuccessfully lobbied for Li to succeed him as China’s next party general secretary, but managed to get his protégé the premiership.

Li Keqiang will almost certainly be named the next premier of China, the nation’s second-highest post.

Li Yuanchao

Current position: Director, Chinese Communist Party Organization Department; member, Politburo
Age: 61
Factional ties: Tuanpai (Youth League) member; considered to be a Hu Jintao protégé

The son of prominent party officials purged in the Cultural Revolution, Li worked on a rural Jiangsu farm for four years after graduating from high school. After studying mathematics at a teacher’s college, Li taught middle school for several years before attending Nanjing’s Fudan University. In school he joined the Communist Youth League and rose through its ranks after graduation. Li served on the 11-member Communist Youth League Secretariat with Li Keqiang and Liu Yandong and directly under Hu Jintao in the early 1980s.

Li served in several party posts in Jiangsu province before being appointed its provincial party secretary in 2003. During his time in office, he won praise for attempts to fight a dangerous algae bloom in a major lake caused by pollution. Li has been supportive of President Hu and Premier Wen Jiabao’s macroeconomic policies and a strong advocate for domestic political reforms.

In 2007 he was promoted to director of the CCP Central Organization Department, a crucial position that has put him in control of designing and tweaking the rules for promotions and advancement within the party, which was previously held by Deng Xiaoping.

Li Yuanchao will almost certainly be promoted to the Politburo Standing Committee.

Wang Qishan

Current position: Vice premier, China’s State Council; member, Politburo
Age: 64
Factional ties: Princeling (son-in-law of Yao Yilin, former Standing Committee member); considered to be a Jiang Zemin protégé

After studying history at Shanxi’s Northwest University and working in a local museum for nearly a decade, Wang joined the Chinese Academy of Social Science, a government-sponsored think tank, as an analyst, and then worked in the government’s Rural Development Research Center. In the late 1980s Wang embarked on a stunningly successful career in finance, taking top roles in several Chinese banks, helping them transition to modern financial practices and guiding them through loan restructuring. As the head of the China Construction Bank, Wang helped create China’s first jointventure investment bank, a partnership with the Wall Street firm Morgan Stanley.

After 1997 he rejoined the government, helping Guangdong province through a severe financial crisis as its provincial party secretary. Wang worked with Henry Paulson, then the chairman of Goldman Sachs Group Inc., to help restructure an important Guangdong firm’s financial obligations. After serving as Hainan’s Party Secretary from 2002 to 2003, Wang became the mayor of Beijing in the midst of the SARS crisis. In a major reversal from initial government efforts to downplay the severity of the epidemic, Wang enforced a quarantine and collaborated with the World Health Organization to tackle the crisis.

Wang also planned and managed the 2008 Beijing Olympics as chairman of the Beijing Olympic Committee. Since joining the Standing Committee in 2007 as a vice premier, he has overseen China’s financial system and traveled widely abroad to negotiate with the United States. He reportedly gets along very well with Western leaders and many see him as a capable and open-minded reformer.

Wang Qishan will almost certainly be promoted to the Politburo Standing Committee. Given his prior performance record, it is likely that he will use that position to promote liberalization of the Chinese financial system and greater foreign investment in the economy. His ability to do so, however, would depend on internal political dynamics.

Wang Yang

Current position: Party secretary, Guangdong; member, Politburo
Age: 57
Factional ties: Tuanpai (Youth League) member; considered to be a Hu Jintao protégé

After working in an Anhui food processing factory for four years, Wang joined the party and became political instructor in a local party school. Beginning in 1981 Wang took several positions in Anhui’s branch of the Communist Youth League, becoming the provincial organization’s deputy secretary in 1984. Wang served in several positions in Anhui’s local and provincial governments in the 1980s and 90s. In 1999 Wang joined the national government as the head of the National Development and Reform Commission, a planning body with extensive authority over the Chinese economy.

In 2005 Wang was appointed Chongqing’s party secretary and presided over strong economic growth in the province. His successor, Bo Xilai, later accused him of tolerating organized crime, in part due to an intense political rivalry between the two men. In 2007 Wang moved to serve as the party secretary of China’s economic engine, Guangdong Province, where he pushed free market reforms and resisted government stimulus efforts in 2009. Wang stressed limited government, openness, and business-friendly practices, leading some to label his philosophy “The Guangdong Model,” in contrast to Bo Xilai’s more centralized, populist, and more opaque “Chongqing Model.”

In late 2011 Wang offered concessions to protesting villagers in Wukan, a Guangdong village, who had been protesting against illegal tax hikes and despotic rule by their village chief. After Wang intervened, the villagers were allowed to choose a new village chief and even allowed them to elect one of the protest’s leaders in his place. Wang’s handling of the Wukan protests should be viewed through the public relations sensitivities and intense international media attention he faced at the time as opposed to a push for greater political reform.

Wang Yang is a strong contender to receive a Politburo Standing Committee position.

Zhang Dejiang

Current position: Party secretary, Chongqing; vice premier; member, Politburo
Age: 65
Factional ties: Princeling by (son of Zhang Zhiyi, former PLA major general); apparent Jiang Zemin protégé

The son of a People’s Liberation Army major general, Zhang worked on a farm in rural Jilin for two years during the Cultural Revolution after graduating from high school. In 1971 he joined the party and was promoted to secretary of his county’s propaganda department. After graduating from Yanbian University with a degree in Korean studies, Zhang moved to North Korea for two years to study the language. After serving as Yanbian University’s vice president and in local and provincial Jilin government, Zhang became the province’s party secretary in 1995.

In 1998 he was appointed party secretary of Zhejiang, a rich and economically important province in southeastern China. In 2007 he joined the Standing Committee and has worked on industrial, telecommunications, energy, and transportation issues.

The party has often deployed Zhang to fix major crises. He headed the disaster relief response and investigation to the July 2011 Wenzhou high-speed rail crash that killed 40 and injured 200 more. Zhang was sent to Western China to replace scandal-ridden Bo Xilai as the party secretary of Chongqing in March 2012.

Zhang Dejiang is a strong contender to receive a Politburo Standing Committee position. Based on his past policy positions, Zhang would likely support a state-centric model of economic growth.

Liu Yunshan

Current position: Director, Chinese Communist Party propaganda department; member, Politburo
Age: 65
Known patronage ties: Tuanpai (Youth League) member

After working as a Xinhua reporter and rising through Inner Mongolia’s propaganda department, Liu joined the national political scene in 1993, becoming the deputy head of the Central Committee’s propaganda department, the party agency in charge of media censorship. Along the way, Liu served in the Communist Youth League branch in Inner Mongolia’s deputy secretary, but never advanced further in the organization.

As a top official in the propaganda department, Liu helped oversee the creation of China’s Great Firewall, the world’s most extensive Internet-blocking campaign, as well as censorship of the press and television media. And according to a report by The New York Times, Liu coordinated the campaign that eventually drove Google out of China in 2010.

Liu’s experience developing the Great Firewall might imply he’s a political hardliner, but there is little disagreement at the upper echelons of the party about the need for strict media censorship. In early 2012, 16 retired party officials in Yunnan province circulated a petition calling on Liu to step down and accusing him and Zhou Yongkang, China’s top security official, of supporting Bo Xilai and using repressive tactics to block reforms.

Liu Yunshan could receive one of the remaining Politiburo Standing Committee positions.

Zhang Gaoli

Current position: Party secretary, Tianjin; member, Politburo
Age: 65
Known patronage ties: Apparent Jiang Zemin protégé

After graduating from Xiamen University with a degree in statistics, Zhang worked in one of China’s biggest oil refineries as a party officer and manager. During his seven years at the company, he joined the party and the Communist Youth League, rising through both organizations and the refinery’s management. In his political career, Zhang served as the deputy governor of Guangdong and was appointed the party secretary of Shenzhen, China’s flagship export-processing zone. Zhang is often described as one of Jiang Zemin’s protégés in part because of his time in Shenzhen, one of the southern coastal regions often associated with Jiang Zemin loyalists.

In 2000 Zhang joined the Central Committee and left Guangdong to serve in top party roles in Shandong province before moving to become the party secretary of Tianjin, a major Chinese port city. Zhang’s Tianjin government has been accused of covering up a June 2012 mall fire. Initial reports suggested that only 10 people died, but rumors began circulating online that many more lost their lives. Those rumors have been repeatedly denied by the Tianjin and national government, and have generally been disproven as more details have emerged.

Zhang Gaoli could receive one of the remaining Politiburo Standing Committee positions.

Yu Zhengsheng

Current position: Party secretary, Shanghai; member, Politburo
Age: 67
Known patronage ties: Princeling (related to Yu Dawei, former defense minister; marriage ties to Mao Zedong); apparent Jiang Zemin protégé.

The son of an early party member, Yu became close friends with Deng Xiaoping’s son, Deng Pufang, and married the daughter of another People’s Liberation Army and Chinese Communist Party veteran. After serving in several party and management roles in a radio factory, he left to work in government planning and oversight of the electronics industry. Yu succeeded Xi Jinping as Shanghai party secretary in 2007 following Xi’s promotion to the Standing Committee, a position that in recent years is often given to influential members of the Jiang Zemin faction.

Yu’s brother, a senior Chinese intelligence official, defected to the United States in 1985 and exposed Larry Wu-Tai Chin, a Chinese spy in the CIA active for almost three decades. Yu’s high-level connections salvaged his political career, but he remains a controversial figure within the party and his family’s past may prevent him from receiving a seat on the Standing Committee.

Nevertheless, Yu Zhengsheng could still receive one of the remaining Politburo Standing Committee positions.

Liu Yandong

Current position: State councilor; member, Politburo
Age: 66
Factional ties: Princeling by birth (daughter of Liu Ruilong, former vice minister of agriculture; family ties to Jiang Zemin); professional ties to Hu Jintao and the tuanpai (Youth League faction)

The daughter of a prominent official in the early days of communist rule, Liu grew up alongside several future party leaders, including Zeng Qinghong, a powerful associate of former President Jiang Zemin. She attended Tsinghua University, studied chemical engineering, and began working in a chemical plant after graduation. After filling party posts in a series of chemical plants and joining Beijing’s municipal government, Liu worked with Li Keqiang and Li Yuanchao under Hu Jintao in the Communist Youth League’s governing body in the early 1980s.

In 1991 she moved to the national government’s United Front Work Department, which handles Tibet, Taiwan, Hong Kong, and Macau, as well as relations with overseas Chinese and elites outside the party. She is currently the director of the United Front Work Department and a state councilor. Her portfolio includes China’s education and cultural policies. Liu has traveled abroad to tout the opening of Confucius Institutes and people-to-people exchanges with the United States and Great Britain.

Liu is closely connected to Hu Jintao professionally, but has family and personal ties to Jiang Zemin, and remains the highest-ranking woman in the party. Liu in many ways transcends the distinction between “princelings” aligned with Jiang Zemin and Communist Youth League members aligned with Hu Jintao. Before Bo Xilai’s fall from favor, few considered Liu as a promising candidate for the Standing Committee, but after Bo Xilai’s fall significantly more attention has been paid to her possible promotion.

Liu Yandong is a potential dark horse who could be pulled into the Standing Committee.

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Endnotes are available in the PDF and Scribd versions.

See also:

• China’s Real Leadership Question by Melanie Hart

SOURCE: AP/ Greg Baker

Politburo Standing Committee member Xi Jinping, standing, will become Party General Secretary, but very little else is certain about China's upcoming political transition.

See also: China’s 2012 Party Leadership Transition by Philip Ballentine and Ken Sofer

Top Chinese Communist Party leaders met this month in Beidaihe, the beachside retreat on the Yellow Sea where they gather every summer to hash out critical political and economic decisions in comfort and seclusion, far from the prying eyes in Beijing. These summer meetings are always important but this year is particularly critical. This summer they must forge a consensus to settle years of heated negotiations over who will take the helm when the current leaders retire later this fall.

The big question seemingly is who will take the remaining spots on the Politburo Standing Committee, the group of seven to nine top leaders who will guide the party and the country for the next 10 years. The top two positions are already locked in. Current People’s Government Vice President and Politburo Standing Committee member Xi Jinping will become Party General Secretary and current State Council Vice Premier and Politburo Standing Committee member Li Keqiang will become the next Premier. The remaining positions are still being hashed out and will most likely have been the focus of intense debate in Beidaihe.

These internal personnel negotiations get more contentious with every leadership transition, because each time marks 10 more years removed from the Communist Party strongman eras of Mao Zedong and Deng Xiaoping. Today there are no aging revolutionary leaders left to serve as tiebreakers when internal party factions butt heads. And this 2012 transition is the most contentious yet because none of the next generation of leaders were approved or anointed in any way by the last of those strongmen, Deng Xiaoping.That leaves a relatively open field for the various factions to fill the top seats in the standing committee-and plenty of room for internal political infighting.

Look no further than the scandal and intrigue involving Bo Xilai, the red princeling previously considered a strong contender for one of those top leadership posts. He and his wife now stand accused of so many wrongdoings it is hard to keep them straight. His fall from grace earlier this year is still sending shockwaves through the halls of power in Beijing and across China.

For Pekingologists-those China experts around the globe who try to discern what’s going on in Zhongnanhai, the Chinese Communist Party’s small enclave near the Forbidden City in downtown Beijing-watching Bo Xilai fall and the Chinese leadership scramble to explain it all has been absolutely fascinating. This particular scandal provides a rare glimpse into the political negotiations that usually occur behind closed doors among a tiny circle of senior communist cadres who lead various political factions within the party.

But we should not get too excited about this particular incident. The Bo Xilai saga has certainly been interesting, but at the end of the day not much has changed in Beijing. The current standing committee will manage to come to a consensus on their successors and those successors will most likely continue plodding down the same economic and social policy paths that China has followed for the past 10 years under the leadership of Party Secretary Hu Jintao and Premier Wen Jiabao.

And therein lies the reason why the final composition of the next Politburo Standing Committee doesn’t really matter as much as how these new leaders will actually deal with some of the biggest challenges facing China since the initial economic reforms initiated by Deng Xiaoping in the late 1970s. In the coming decade this new leadership team must attempt to transition the Chinese economy from an export-led juggernaut to one dominated by domestic consumption and the types of investments that improve the everyday lives of the Chinese people, who, despite living under an authoritarian regime, are finding myriad ways to express their deep frustration with the direction their nation is headed.

Several decades ago, facing even more daunting challenges in the wake of Mao’s utter destruction of the Chinese economy, Deng rolled out a bold set of reforms that propelled China through its first big transition period from closed to open markets, lifting tens of millions of Chinese out of poverty and carrying the coastal provinces of the nation into the ranks of East Asia’s and Southeast Asia’s so-called tiger and dragon economies. But Deng could do this confident his authoritarian grip on China was secure and that the primacy of the Chinese Communist Party would remain unquestioned. He proved those two points in June 1989 by crushing the first open opposition to the party in Tiananmen Square and in other cities around the nation.

In contrast, the new leaders who will take the helm in late fall of this year will have to navigate a new economic and social transition from much more precarious starting points. The transition from export- and investment-led growth to domestic consumption-led growth based on technology innovation, and from lifting tens of millions out of abject poverty to satisfying a more demanding middle class will be even harder for the party to execute. The reason: It will require the kind of deft governing skills that authoritarian regimes are generally not good at using. To further complicate matters, based on their performances thus far, it appears there is not a single bold leader in this new group who can push the necessarily ambitious economic and social reforms while also preserving the Chinese Communist Party’s absolute grip on power.

The new standing committee will include an interesting group of cadres, but none of them appears to be another Deng Xiaoping-a visionary reformer and steely-eyed dictator who could enact sweeping change while maintaining the communist party’s absolute grip on power.

That means this new crop of Chinese Communist Party leaders may not be able to repeat Deng’s successes amid what promises to be a very rocky next 10 years in China. And as interesting as 2012 has been for Pekingologists, China’s current leaders and their incoming replacements are already dealing with something far more important: figuring how to adapt China’s political, social, and economic systems to power through the next development phase and avoid falling into economic stagnation and political turmoil. To do so, they must answer two questions correctly:

• What combination of economic growth and social improvements will they have to deliver to maintain popular support over the next 10 years?
• What changes will the Chinese Communist Party have to make in order to meet those goals, and how can they do so while also maintaining their grip on power?

The answers to these questions will ultimately decide how long the Chinese Communist Party can stay in power and whether China’s rise can continue over the coming decades. This report takes these two questions as its core mission, attempting to provide a framework for considering them rather than trying definitively to answer them, which of course would be impossible. It is difficult to predict exactly how China’s new leaders will behave once they take over this fall. But framing the problems facing China is a perfectly fine way to define the challenges the new leadership must tackle, which in turn informs how the Chinese leadership may react to these problems for the good or ill of the party and the Chinese people.

This report explores these two questions first through the prism of the ongoing Bo Xilai case to explain why the corruption scandals and political intrigues currently making headlines do not pose new or insurmountable problems for the party. The report then explores the two challenges that could potentially be insurmountable: overcoming the vested interests resisting central government attempts to rebalance the economy and improving quality of life for China’s growing middle class without sacrificing single-party rule.

In the pages that follow, this report will detail those anticipated challenges and how China’s new leaders may deal with them. But, briefly, here is a synopsis of the analysis:

The Bo Xilai scandal has led many to question how much longer the Chinese Communist Party can maintain its grip on power, but corruption scandals and factional infighting are old problems with familiar solutions. The real threats facing the party today are the new problems that do not yet have clear solutions, two of the biggest being economic rebalancing and figuring out how to satisfy China’s growing middle class.

Rebalancing the economy will require political capital that this group may not have

For the past three decades, the Chinese Communist Party has maintained its grip on power by promising to keep the economy growing and to keep improving living standards. The first stage of growth (from lower to middle income) was enormously successful. The next stage (from middle to upper income) will be harder to traverse, and that makes it harder for the party to keep delivering on their promises to the Chinese people.

The only way Beijing can keep the economy growing and avoid falling into the so-called middle-income trap-falling into a period of economic stagnation, as happened in Malaysia, the Philippines, and Thailand-is to shift from export- and investment-led growth (which is producing diminishing returns) toward a new growth model based on domestic consumption and technology innovation. To do that, Beijing must reduce government support for state-owned enterprises and traditional industries such as coal and steel and increase the support given to private enterprises and the industries of the future such as clean energy and next-generation information technology.

Beijing must also stop channeling credit through state banks and local government officials, who make investment decisions based on cronyism. Instead, Chinese leaders need to rely more on commercial banks, which have incentives to lend to the best companies and technologies regardless of their political connections. Expanding the profit incentives and reducing the political incentives driving credit allocation is the only way that Beijing can ensure that the technologies China produces will actually be competitive on the global market.

The problem is, all those reforms require Beijing to transfer money and policy support from the politically powerful-local government officials, state-owned enterprises, and traditional industries-to the politically weak, private enterprises and infant industries. That is hard to do in any country. It may get even harder to do in China once the new leadership takes the stage this fall because this new group appears to be more divided and politically weaker than its predecessors.

Beijing faces massive challenges meeting its economic promises to the Chinese people, and China’s growing middle class is demanding even more

For many Chinese people, the first stage of economic growth provided bigger homes, better access to new consumer goods, and the freedom from worrying about having enough to eat. Now they want more-particularly China’s growing middle class. They want quality-of-life improvements such as a cleaner environment, higher food-safety standards, and protection from local government abuse, but those things could be hard for the Chinese Communist Party to deliver.

The United States can deliver those things because we have a strong democracy, independent courts, and a free press. In China, local governments are their own little kingdoms. They control the courts and the press, and they don’t have to worry about elections. As a result they are often more interested in making money than improving the quality of life for local citizens-and there is not much those citizens can do about it. Local officials expropriate their citizens’ land and homes without paying for them and then let developers move in to build factories that pollute the environment.

In previous decades, many people felt that the opportunity to work in those factories made the other problems worthwhile. That balancing is now shifting. Many Chinese people are no longer willing to put up with problems such as excessive environmental pollution, and they are flooding the streets in mass protests that give Beijing nightmares.

It will be extremely difficult for Beijing to address environmental pollution and other quality-of-life problems without becoming open to major political reform, and they do not want to do that quite yet. Until then, the best they can do is to make small improvements and hope that will be enough to prevent major social unrest. Whether that works will depend largely on whether Beijing can keep the economy growing. As long as the economy is booming, most Chinese citizens can put up with at least some political frustrations. If growth slows too much, however, Chinese Communist Party rule will begin to look like a bad deal on multiple fronts.

The United States will have to learn to deal with a China that is increasingly divided and uncertain about its future

For the United States, China’s neighbors in Asia, and the world at large, how China’s new leaders carry their country through perhaps wrenching social and economic changes in the coming years will help determine their own economic growth prospects.

Whether the Chinese leaders succeed or fail will also impact how China deals with the world around it and whether China will play a positive or negative role in global peace and cooperation. Understanding how this all plays out in China could not be more important for policymakers around the globe. We attempt to set the stage in this report.

See also:

• China’s 2012 Party Leadership Transition by Philip Ballentine and Ken Sofer

SOURCE: AP/Charles Dharapak

President Barack Obama and China's President Hu Jintao take part in a joint news conference.

The headlines for the upcoming G-20 meeting in Los Cabos, Mexico, from June 18 to June 19 will focus on the financial crisis in Europe. But the role the G-20 plays in the U.S.-Chinese relationship—and vice versa—are important to watch. The actions and interactions of these two economic heavyweights will greatly influence how successful the G-20 can be over the long run in steering the world’s economic ship.

At G-20 meetings, and at those of every other major international institution, the United States makes the argument that as China grows, so too do its duties to the international system of laws, norms, and institutions. That system drove the globalization of world trade and enabled China’s explosive growth over the past three decades. In the words of former President George W. Bush’s Deputy Secretary of State Robert Zoellick, the United States wants China (and every other emerging power) to become a “responsible stakeholder” in the international system.

This is not a request for China to act against its own national interests—no nation can be expected to do that. It is instead a call for China to ensure that its decisions strengthen the international system instead of undermining it, and for China to consider its own interests in the context of other nations’ interests.

China’s incredible growth rate, huge foreign currency reserves—$3.3 trillion worth as of December 2011, the most in the world—and track record of implementing ambitious projects such as the Three Gorges Dam, the largest hydroelectric project in the world, mean it is more able than most to contribute to the needs of the global community. China has the world’s second-biggest economy, and it has raised its gross national income per capita by roughly 3,000 percent in real terms since 1980.

China, on the other hand, suspects that America’s desire to see it play a larger global role is part of a strategy designed to stifle its growth and challenge its autonomy.

China’s record as a responsible member of the international community has improved greatly over the past 30 years. China is not intent on overthrowing the international order—instead, it seeks to shape the system to its own ends. Still, China’s international posture can best be described as a “selective stakeholder,” to use Secretary of State Hillary Clinton’s term. Beijing chooses to contribute in some areas such as peacekeeping but not in others such as intellectual property protection.

We can hope that the G-20 process will help push China further along the curve in taking up the burdens of a modern pivotal power for several reasons. First, for the economic issues at the core of the G-20’s mandate, China is not just a “stakeholder.” It has become a “systemically important” player in the global economy. China’s actions affect the system that supports the global economy on which it depends. In other words, it has tremendous self-interest in having the G-20 make sensible, well-coordinated, long-term decisions about the global economy.

Second, the G-20 is a powerful symbol of the interdependence that characterizes today’s world. But more than that, all the discussions before, after, and during the G-20 summits reinforce the essential truth: “What you do affects me.” China can resent the obligations that come along with becoming a major power in the modern age, but they are simply a function of the globalized world in which we live. The G-20 is framed around this reality.

Third, the G-20 is the first major international organization where the People’s Republic of China was in on the ground floor. Unlike the International Monetary Fund, the World Trade Organization, the World Bank, and others, where China was a fairly late addition to the party, China was among the 20-some nations President George W. Bush called to Washington at the height of the financial crisis for the first leaders meeting on November 14, 2008.

Because China was there at the creation of the G-20, it cannot easily offer one of its standard rebuttals to American pressure—that being a “responsible stakeholder” actually just means satisfying U.S. interests, furthered by institutions the United States created, and according to rules that the United States drafted. Beijing wants to remain highly focused on its domestic problems and argues that it is being internationally responsible in many ways, though it is not always fulfilling America’s wishes.

Over time China’s sense of ownership of the G-20 could help encourage a greater willingness to shoulder the burdens of economic problem-solving. Indeed, China has been an active and often constructive player at the G-20.

To start, it coordinated with the United States to jolt the world economy with a significant stimulus measure—China’s was a $586 billion direct-stimulus program and a campaign of monetary easing and state-spurred lending to jumpstart its economy in late 2008 and through 2009. The United States, of course, enacted a $787 billion stimulus in early 2009 and embarked on several rounds of its own monetary easing through the Federal Reserve. Together these efforts helped pull the world back from the economic cliff.

Further, China has accepted efforts to inject a measure of accountability into the process of rebalancing the global economy. It is participating in the ongoing Mutual Assessment Process, whereby countries reveal their economic plans to their peers and get feedback about the effects those plans will have on others. China also signed on to the Framework for Strong Sustainable and Balanced Growth, which involves commitments to rebalance the world economy by increasing American exports and savings, as well as Chinese imports and consumption. Of course to date these commitments have not resulted in China taking bold steps to shift away from export-led growth to a more domestic consumption oriented economy, as it knows it must.

But in the lead-up to the G-20 meeting in Los Cabos, China has announced that it will join the rest of the G-20 in boosting the International Monetary Fund’s resources by $430 billion. This marks a meaningful first step in China’s helping to contain the European debt crisis in the interest of sustaining the world economy.

The G-20 forum even seems to have had an effect on a particularly thorny issue in the U.S.-Chinese relationship—the value of the renminbi. The United States successfully introduced the question of China’s undervalued currency to G-20 discussions about global economic imbalances. Since then, Beijing has raised the value of the renminbi before almost every G-20 meeting (though not the upcoming one). At the previous G-20 meeting in Cannes, France, for the first time the G-20 adopted language that specifically mentioned the importance of flexible exchange rates:

We affirm our commitment to move more rapidly toward more market-determined exchange rate systems and enhance exchange rate flexibility to reflect underlying fundamentals, avoid persistent exchange rate misalignments and refrain from competitive devaluation of currencies.

Multilateral pressure from the G-20 has proven a very useful venue on the issue of China’s undervalued currency.

But two can play that game, and Beijing used an earlier 2010 G-20 meeting in Seoul, South Korea, to criticize Washington’s second round of “quantitative easing,” wherein the Federal Reserve stimulated growth by purchasing Treasury bonds with newly created money.

The G-20 plays other roles in the U.S.-Chinese relationship as well. It has helped the United States and China find common ground on less high-profile issues such as food security and anticorruption. In the future the G-20 forum might help to dampen flare-ups in the U.S.-Chinese rivalry because the other nations represented will be affected by whatever steps Washington and Beijing take to punish the other.

Finally, because it was born out of the 2008 financial crisis, the G-20 symbolizes one of the bigger goals the United States and China share—global financial stability and economic growth. Reminding everyone in both countries about that shared interest, especially during a period where both countries face uncertain leadership transitions and deepening distrust on security issues, is useful in and of itself. Giving it a practical framework is even better.

Nina Hachigian is a Senior Fellow at the Center for American Progress.