Harvard Asian Quarterly

Harvard Asia Quarterly
SPRING 2011, Vol. XIII, No. 1
A Publication of Current Affairs Affiliated with the Harvard Asia Center
THE
of
INTERNATIONAL
PERSPECTIVES
INSIDE
Realigning Global Governance Gregory Chin
COMMENTARY: The Investments of Chinas State-owned Enterprises in
Brazilian Infrastructure Charles Ho & lap chan
COMMENTARY: Chinese Investment in Brazil dani k. nedal
Dimensions of Ambivalence in IndonesiaChina Relations Evan A.
Laksmana
Chinas Relations with South Asia: Why is India Weary? Gunjan

Singh & Avinash Godbole
Evolution of the Policy Process in China Jessica c. teets
COMMENTARY: The Current Status of the Korean Peninsula: A Chinese
Perspective Zhang Liangui
Harvard Asia Quarterly

SPRING 2011, Vol. XIII, No. 1
Editor-in-chief
Iacob Koch-Weser
DEPUTY Editor-in-chief
Marc Szepan
Managing Editor
Allan Hsiao
AREA EDITORS
China Area
Ella Chou
Bin Ouyang
Jennifer Ryan
Ying Xiaofei
Japan Area
Charlie McClean
Dan Sofio
Korea Area
Jasmine Barrett
Robert Lee
Southeast Asia Area

Ivan Boekelheide
Julie Sheetz
layout editor
Gary Norris
LETTER FROM THE EDITOR

The present issue of Harvard Asia Quarterly is being published as Japan faces its most severe national crisis
since World War II. The Sendai earthquake has wrought unprecedented destruction. Such events help us to put
things into perspective culture, politics, and economics ultimately belong to the realm of human affairs, and we
humans are quite small in the face of nature. Our condolences go out to all those who have suffered.
Nonetheless, just as Japan must forge on, we have gone ahead with our publication as planned. The rise of
China has been widely debated in media, academia, and policy circles in recent years. In particular in the wake of
the 2007-09 global financial crisis, China seems to have emerged stronger than ever. True to great power theory, the
rise of China has been variably used to characterize Chinas growing influence on security, global governance, and
the world economy. But in spite of its pervasiveness, the term is fraught with ambiguity. As the authors assembled
here illustrate, in practice, this process has varying implications for different sectors and regions.
In our first section, we consider the political economy of Chinas growing involvement in the developing
world. Gregory Chin, an assistant professor of political science at York University in Canada, conducts an in-depth
study of Chinas support of regional development banks. Chin suggests that China is pursuing the dual aims of
establishing its place in multilateral institutions outside of Bretton Woods, while also using this position to promote
its trade and investment interests in the South.
Building on Chins article, we then move on to Brazil, where China became the largest foreign investor in
2010. We invite industry insiders based in Brazil to analyze this process. Lap Chan of the US energy firm AES and
Stanley Ho of Standard Bank look at how the investment of power supplier State Grid augurs a new generation of
infrastructure investments by Chinese firms in Brazil. They are optimistic that this is a positive game-changer over
the commodities-for-manufactures pattern of commerce that has characterized Chinas relationship with the Latin
America region. Dani Nedal, formerly of the Brazil-China Business Council and the author of numerous articles
on Chinese investment, provides a more sober assessment. He argues that Chinese investment has not lived up to
expectations, and faces considerable obstacles in Brazilian government, industry, and civil society.
Moving across the Pacific, we consider the implications of Chinas growing role in trade and investment
for India and Indonesia. Gunjan Singh and Avinash Godbole, researchers at the Institute for Defense Studies and
Analysis in New Delhi, find that Chinas expanding commercial relations with South Asia pose a strategic challenge
to India, adding to preexisting diplomatic and security disputes. Evan A. Laksmana, a researcher at the Center for
Strategic International Studies in Jakarta, argues that Indonesias evolving relationship with China is characterized
primarily by ambivalence while bilateral trade and diplomacy have evolved, feelings of distrust toward Beijing
remain among both the elite and the wider public.
Having surveyed Chinas rise in terms of political economy and bilateral relations, our final section looks
more generally at policymaking. Jessica Teets, a professor of political science at Middlebury College, examines
the growing role of civil society in informing Chinas international relations. In a short commentary piece, Zhang
Liangui, a Professor of International Politics at the Center for International Strategy at the Central Party School
of the Communist Party of China, assesses the status of the Korean Peninsula conflict from a Chinese perspective.
Instead of emphasizing Chinas role in this process, Zhang argues that South Korea is becoming a more assertive
negotiator with North Korea. At the same time, the US risks adopting unilateral policies that may undermine the
progress that the Six-Party Talks have achieved thus far.
This edition of Harvard Asia Quarterly constitutes the first of two editions on the rise of China. Our next
issue in June 2011 will continue to explore this broad and vital topic.
Please enjoy!
With kind regards,
Iacob Koch-Weser
Editor-in-Chief
Our hearts and thoughts are with the victims of the recent
earthquake in Japan, their families and friends, and the
Japanese people.
With our deepest sympathies,
The Harvard Asia Quarterly
The Harvard University Asia Center
The Reischauer Institute of Japanese Studies
I. Editors Note
II. COMMERCIAL INROADS INTO THE DEVELOPING WORLD

Realigning Global Governance: Regionalism in Chinas Financial Rise Gregory Chin
COMMENTARY The Investments of Chinas State-owned Enterprises in Brazilian
Infrastructure: Assessing the Implications of State Grids Entry Charles Ho & lap chan
COMMENTARY Chinese Investment in Brazil: Cum Grano Salis dani k. nedal
5
16
20
III.CHANGING RELATIONS WITH SOUTHERN NEIGHBORS

Variations on a Theme: Dimensions of Ambivalence in IndonesiaChina Relations Evan A.
Laksmana
24
Chinas Relations with South Asia: Why is India Weary? Gunjan Singh & Avinash Godbole
32
IV. pOLICY MAKING IN CHINAS RISE

Evolution of the Policy Process in China: The Impact of the Color Revolutions and Global
Economic Crisis on Civil Society Participation in Public Policy Jessica c. teets
COMMENTARY The Current Status of the Korean Peninsula: A Chinese Perspective Zhang
Liangui
41
49
Realigning Global
Governance:
Regionalism in Chinas Financial Rise
Gregory Chin york university

Introduction

The global financial system has been
undergoing important shifts over the past decade.
Scholars have analyzed a system rendered more complex
by increasingly sophisticated financial markets and the
dispersion of regulatory authority; or more recently,
by the decentralization in international monetary
power and the fragmentation of the global financial
architecture.1 One dimension that has received less
attention is the expanding role of regional development
I thank Jeffrey Legro, Saori Katada and Wang Yong for their
suggestions. I am grateful to the officials of the Asian Development Bank, the African Development Bank, and the Inter-American Development Bank for their comments.
1
For example, see Louis Pauly, Who Elected the Bankers?:
Surveillance and Control in the World Economy (Ithaca: Cornell
University Press, 1997); Benjamin J. Cohen, The International
Monetary System: Diffusion and Ambiguity, International
Affairs 84, no.3 (May 2008): 455-470; Ngaire Woods, Global
Governance after the Global Financial Crisis: A New Multilateralism or the Last Gasp of the Great Powers?, Global Policy 1,
no.1 (2010): 51-65.
HARVARD ASIA QUARTERLY | Commercial Inroads into the Developing World
banks in the global system. Over the past decade,

the Asian Development Bank (ADB) and the InterAmerican Development Bank (IDB) have lent more than
either the IMF or the World Bank in their own regions.
The African Development Bank (AfDB) has seen steady
increases in its lending as well.

Amid what one might call institutional
devolution or fragmentation, Chinas contributions
to regional development banks have increased
dramatically over the past half-decade. This is seen in
several areas: Growing financial and technical support
to Asian programs of sub-regional integration, fundraising drives of the AfDB and IDB, and regional trade
and investment financing in all three regions. Chinas
financial rise has stirred interest in how the country may
be reshaping the global economy.2
Peter Bottelier, China, the Financial Crisis, and Sino-American Relations, Asia Policy, 9 (January 2010): 121-29; William
Overholt, China in the Global Financial Crisis: Rising Influence, Rising Challenges, The Washington Quarterly 33, no.1
(January 2010): 21-34; Gregory Chin and Eric Helleiner, China

The central questions for this article are: What
factors have motivated Chinas increased regional
financial activism? What are the implications for the
regional development banks and for the global financial
system more broadly?

The article suggests that Chinas rising regional
financial activism has been motivated by two main
considerations. On the one hand, there is a growing
perception among Chinese authorities that regional
development banks have unique advantages over global
multilaterals in supporting sustainable long-term growth.
On the other hand, Beijing has a strong interest in pursuing
trade diversification, particularly through emerging or
new export markets in the South. More recently, China
has been moved by hard currency diversification and
foreign investment leverage objectives. Beijings interest
in reducing Chinas vulnerability from over-reliance on
the US and EU markets by pursuing increased SouthSouth economic cooperation has only intensified since
the onset of the 2007-09 global financial crisis.

New Role in the IMF and World Bank

Chinas emergence as a major creditor
country has provoked debate over whether its growing
international clout now extends beyond the realms of
trade and manufacturing into international finance.
Some analysts have focused specifically on whether
Beijing exerts influence over US economic policy, and if
so, how and to what degree.3 To casual observers, China
has emerged as a major creditor, and the 2007-09 global
financial crisis has accelerated Chinas financial rise.

China actually became a net creditor in 2003,
but its net foreign assets have accumulated very rapidly
since then, totaling US$1.022 trillion by the end of
2007.4 The most dramatic symbol of Chinas growing
creditor position has been its foreign exchange reserves,
which rose to a total of US$2 trillion by the close of 2008,
and close to US$3 trillion by the start of 2011. Chinas
creditor status has emerged alongside the countrys
rapidly growing current account surplus that is presently
the largest in the world (at approximately 11% of GNP).
The emergence of this surplus has been attributed to a
number of developments whose relative importance
as a Creditor: A Rising Financial Power?, Journal of International Affairs 62, no.1 (Fall-Winter 2008): 87-102.
3
Brad Sester, Creditor to the Rich, China Security 4, no.4
(Autumn 2008): 16-23; Daniel Drezner, Bad Debts: Assessing
Chinas Financial Influence in Great Power Politics, International Security 34, no.2 (Fall 2009): 7-45.
4
China End-2007 Net Foreign Financial Assets Up 67 Percent, Reuters, June 20, 2008.
is hotly debated: the countrys increasing savings

rate, declining barriers to Chinese exports, increasing
productivity of Chinese firms, an undervalued currency,
and speculative capital inflows.5 Whatever its cause,
Chinas new financial surplus position has provided
means for a boost in Beijings financial contributions to
the International Financial Institutions (IFIs).

Prior to the crisis, China was already taking,
in the words of World Bank president Robert Zoellick,
modest but significant steps to becoming a multilateral
creditor. China made its first ever IDA contributions
through the World Bank in December 2007. This
occurred just eight years after China had stopped
receiving loans from the IDA. According to Zoellick,
it is a significant breakthrough to have China become
a contributor because it signals Chinas intention to
help shape the international aid architecture through
multinational channels.

In a meeting with Li Ruogu, Chairman of China
Eximbank, Zoellick pursued the idea of cooperation
between the World Bank and China Eximbank via
joint projects in Africa in the fields of urban and rural
development, health care, pension insurance, education,
and finance. Zoellick pledged that China, as a new
contributor, would have a greater say in the decisions
of the Bank. The Bank would also recruit more Chinese
staff.6 Since China was already investing heavily in
Africa, Zoellick hoped that Beijing would contribute to
joint development projects with the World Bank in the
region. Although China no longer needed financial aid,
Zoellick stated that the World Bank could nonetheless
provide China with needed expertise to help shape i.e. improve - its external development assistance agenda
in a number of areas. Building on Zoellicks comments,
the World Bank and China Eximbank established a
Memorandum of Understanding on cooperation in
2008. To insiders, the MOU signifies that both sides have
agreed in spirit to coordinate some of their aid efforts.7

In the wake of the crisis, Beijing has also thrown
more support behind the IMF. An important realization
See for example Morris Goldstein and Nicholas Lardy,
Chinas Exchange Rate Policy. In Debating Chinas Exchange
Rate, edited by M. Goldstein and Nicolas Lardy (Washington
DC: Peterson Institute for International Economics, 2008).
6
The World Bank increased Chinas voice in the institution
when it appointed Justin Yifu Lin as the Executive Vice President and Chief Economist of the World Bank in 2009.
7
The details of this MOU are discussed in Gregory Chin,
Chinas Rising Institutional Influence. In Rising States, Rising
Institutions: Challenges for Global Governance, edited by Alan
Alexandroff and Andrew F. Cooper (Washington, DC: Brookings Institution Press, 2010).
5
Gregory Chin is an Assistant Professor in the Department of Political Science and Faculty of Graduate Studies at York
University (Canada), where he teaches global politics, comparative politics, and East Asian political economy
Commercial Inroads into the Developing World | HARVARD ASIA QUARTERLY
that emerged out of the crisis was that Beijing was not
ready (or willing) to take on global lender-of-last-resort
functions. When the global crisis hit, Beijing therefore
joined with the members of the G20 in strengthening
the financing capabilities of the IMF. Around the time of
the London G20 Summit in April 2009, it was reported
that China had agreed to contribute to boosting the
coffers of the IMF by investing at least US$40 billion in
bonds denominated in Special Drawing Rights (SDR).
In September 2010, the IMF reported that the Peoples
Bank of China had signed a note purchase agreement of
SDR 800 million (US$1.2 billion) out of a total purchase
of SDR 5.3 billion (which also involved Japan, France,
and Britain). This agreement targets the IMFs lending
to low-income countries hit hard by the global financial
crisis.8

China has pushed for enhancing the role of the
SDR mechanism as a supplemental reserve currency
option. Here, in the realm of currency, we see how China
has been working with other great or rising powers especially Russia and Brazil - to advance reforms within
the existing international monetary system. As a result,
these reforms actually strengthen existing multilateral
mechanisms. But in so doing, China is encouraging a
shift toward a more diverse, multiple reserve currency
scenario beyond the current de
facto dollar order.

H o w e v e r ,
notwithstanding
its
new
contributions to the IMF and
increased activism in the World
Bank, Beijing has exercised a
significant degree of caution in
contributing to IFIs. Beijings
support for the IMF has been
measured and conditional. While the Chinese leadership
stated that China was ready to play its part to bring
the crisis under control, it also attempted to manage
international expectations by emphasizing that China
would contribute to this effort within its ability. In
a well-timed op-ed in The Times of London, Chinese
Vice Premier Wang Qishan deflected pressure from his
country by suggesting that the IMF should mobilize
new resources through its quota-based system, as well
as through voluntary contributions. It should strike an
appropriate balance between the rights and obligations
of the contributing countries. He added: It is neither
realistic nor fair to set the scale of contribution simply
by the size of foreign exchange reserves.9

Wangs statements about the fairness of the
relative contributions were also aimed at a Chinese
domestic audience increasingly concerned with Beijings
purchases of US debt. Like Brazil and Russia, China has
made purchases of the IMFs SDR-denominated bonds
conditional on gaining an appropriate voice inside the
IMF. Beijing hopes to use the purchases as an opportunity
to enhance its influence in the institution.
Early Support for Regional Development Banks,
1997-2008

The conditionality and caution that Beijing
exercised toward the Bretton Woods institutions
was a reflection of the growing frustration of Chinese
authorities in dealing with the major IFIs. It was also a
response to the rising popular criticism in China over
the governments lending to rich countries. But it is
important to note the international dimension of Chinas
motivations as well.

In the aftermath of the 1997-98 Asian financial
crisis, China already began working with its regional
neighbors to establish a regional emergency reserve pool.
The Chiang Mai Initiative served as a hedging option
for crisis liquidity provision. But the disenchantment
of Chinese officials towards the
major IFIs intensified as global
macroeconomic
conditions
worsened from 2003 onwards.
From Beijings vantage point,
neither the IMF nor the
World Bank was willing or
able to curtail rising financial
imbalances
by
containing
the loose fiscal policy of the
United States. Li Ruogu, then Assistant Governor of
Chinas Central Bank, warned at the annual meeting of
the International Monetary and Financial Committee the joint Committee that precedes the annual spring
meeting of the IMF and World Bank - that the IMF
needed to tighten its surveillance of the macroeconomic
and financial policies of the major industrial countries.10
Although Chinas foreign currency reserves were only
starting their dramatic ascent at the time, Chinese
authorities were already expressing concern about the
potential for growing imbalances. At a later stage of the
meetings, Chinas Central Bank representative stated:
An important realization that

emerged out of the crisis was that
Beijing was not ready (or willing) to
take on global lender-of-last-resort
functions.
IMF Signs Agreements Totaling SDR US$5.3 billion with

Japan, the Banque of France, the United Kingdom, and the
Peoples Republic of China to Support Lending to Low Income
Countries, IMF Press Release 10, no. 340 (September 17,
2010), accessed on Feburary 22, 2011, http://www.imf.org/
external/np/sec/pr/2010/pr10340.htm.
9
Wang Qishan, The G20 Must Look Beyond the Needs of the
8
Top 20, The Times (London), March 29, 2009, accessed on

February 22, 2011, http://www.timesonline.co.uk/tol/comment/
columnists/guest_contributors/article5982824.ece.
10
Li Ruogu, Statement by the Assistant Governor of the Peoples Bank of China at the Seventh Meeting of the International
Monetary and Financial Committee, April 12, 2003, accessed
on February 22, 2011, http://www.imf.org/external/np/exr/facts/
groups.htm#IC.
[The IMF should examine the] flaws in the

existing international monetary system, and
gradually establish a more equitable, fair and just
international monetary system that more fully
reflects the interests of the many developing
countries, and provides institutional safeguards for
the sustainable growth of the global economy.11

It was not until the 2007-09 global financial
crisis that Beijing saw a serious response to these calls. In
the meantime, the growing disenchantment of Chinese
authorities toward IFIs gave rise to a multi-dimensional
routing-around strategy or what some see as hedging
options.

A key component of this strategy was Chinas
increasing involvement in regional development
banks. Chinese authorities began to see these banks
as focal points for regional cooperation and economic
integration. Due to the dearth of strong national financial
institutions in many regions of the South, Beijing
found that regional development banks could act as
additional financial intermediaries connecting nationallevel financial institutions in developing regions to the
worlds financial centers. But it appears that Beijing
envisages a role for these institutions that goes beyond
financing - they can also help instill a philosophy that
places national projects in the mini-countries of the
South in a (sub)-regional context.

For more than a decade, China has already been
involved in two regional programs coordinated by the
ADB: the Greater Mekong Subregional (GMS) and the
Central Asian Regional Economic Cooperation (CAREC)
projects. The GMS Program, an ADB facilitated initiative
that started in 1992, aims to promote development via
stronger economic linkages and regional cooperation
between the six Mekong River countries of Cambodia,
China, Laos, Myanmar, Thailand, and Vietnam. The
GMS Program has sought to reduce poverty by enhancing
interconnectivity and competitiveness and encouraging
regional community building.12 China continues to be
an active participant in the GMS Program through the
involvement of Yunnan Province and Guangxi Zhuang
Autonomous Region.13 By the start of 2008, GMS had
mobilized US$10 billion for 180 projects in nine key
fields: transportation, energy, telecommunications,

environment, agriculture, human resource development,
tourism, trade facilitation, and investment.14 This may
soon expand to other sectors such as healthcare and drug
prevention.

China is also a leading actor in CAREC, a
Eurasian regional integration program that aims to
accelerate economic growth and poverty reduction
through regional cooperation in transport, trade, energy,
and other key areas of mutual interest.15 Launched in
1997, CAREC was elevated to the ministerial level in
2002. It involves nearly all major Central Asian states Afghanistan, Azerbaijan, Kazakhstan, Kyrgyz Republic,
Mongolia, Tajikistan, and Uzbekistan. In China, it focuses
primarily on those regions bordering on Central Asia
(Xinjiang and Inner Mongolia Autonomous Regions). In
addition, CAREC includes a set of supporting multilateral
institutions, comprised of Bretton Woods institutions as
well as regional development banks like the ADB, the
European Bank for Reconstruction and Development,
and the Islamic Development Bank. It is noteworthy
that Russia participates as an observer country.

By 2006, CAREC had mobilized close to
US$2.3 billion for a series of initiatives in transport,
energy, and trade. Through the Poverty Reduction
and Regional Cooperation Fund, China has provided
technical assistance to some CAREC countries to support
agricultural development, environmental protection,
and capacity building activities. Some of this assistance is
also of direct benefit to Chinas economic interests in the
region: China provided RMB 60 million in concessional
assistance to the Kyrgyz Republic to support the
construction of the China-Kyrgyz-Uzbekistan road
corridor; and another US$900 million in preferential
export credit to certain CAREC member countries under
the Shanghai Cooperation Organization framework to
support projects in the energy and transport sectors.16

While Chinas growing financial contributions
in its own region were somewhat predictable,17 Beijings
growing outreach in Africa caught more analysts by
surprise. The African Development Bank (AfDB) became
a key part of this policy. Although Chinas ties with
the AfDB date back to 1996, relations only grew closer
Country Report on Chinas Participation in Greater Mekong
Subregion Cooperation, joint report of Chinas National Development and Reform Commission, Ministry of Foreign Affairs,
Ministry of Finance (April 2008), accessed on February 22,
2011, http://en.ndrc.gov.cn/newsrelease/t20080430_208063.htm.
15
Asian Development Bank, Comprehensive Action Plan:
CAREC (2007).
16
Zeng Peiyan, Building a Harmonious Region by Strengthening Partnership and Improving Cooperation Mechanism
(speech): Urumqi, October 20, 2006.
17
David Shambaugh, China Engages Asia: Reshaping the
Regional Order, International Security 29, no.3 (Winter 20042005): 64-99.
14
Ibid.
12
Asian Development Bank, Mekong Leaders: Building Capacity in the GMS Countries (June 2006), accessed on February
22, 2011, http://www.adb.org/GMS/phnom-penh-plan/PPP200808.pdf.
13
Chinas participation in the GMS Program helps support its
policy of striving for balanced and harmonious development.
The sectors are: (1) economic corridors, (2) energy, (3) telecommunications, (4) trade facilitation, (5) investment, (6) human
resource development, (6) environment, (7) agriculture, and (8)
tourism. Asian Development Bank, The Peoples Republic of
China in the Greater Mekong Subregion (2007).
11
after May 2007, when China hosted the AfDBs Annual

Meetings in Shanghai.18 The priority Beijing assigned
to these meetings is illustrated by the fact that Chinas
Central Bank Governor Zhou Xiaochuan was present as
chair for the full three-day duration. At the conclusion,
China pledged about US$20 billion of contributions to
Africa over five years.19
Role in Regional Development Banks Since 2008
China in East Asia

The trends above suggest that, heading into
the global financial crisis, China was already interested
in regional collective action and regional development
banks. At the Boao Forum for Asia in April 2009, Central
Bank Governor Zhou Xiaochuan stated that the global
multilaterals had failed to give alarm or diagnosis, let
alone remedies, when problems occurred in developed
countries, and therefore had failed to preempt the
crisis.20 He acknowledged that it was a formidable
challenge for any research institution to monitor global
markets. He therefore recommended greater cooperation
among global and regional organizations; in particular,
the ADB could play a greater role in alleviating the
crisis by increasing spending and boosting regional
cooperation.

Another reason why Beijing gave greater
support to regionalism was due to pressure from other
developing countries in the region. Indonesia wanted
regional development banks to receive a portion of the
US$1.2 trillion the G20 had mobilized to respond to the
global crisis.21 Indonesian officials successfully lobbied
China (along with Japan and Korea) to support the
devolution of funds to the ADB. The ADB, in turn, would
provide well-managed governments in the region
with credit to offset the liquidity freeze. A number of
Asian states are calling to lock-in some of these devolved
lending responsibilities to regional development banks
in the post-crisis period.

After the global freefall was stemmed, Indonesia
agreed to support Chinas call for a greater voice for
major emerging countries in the IMF. Indonesia agreed
to do this as long as Beijing was willing to lobby for
reform of the lending practices in the IMF. It primarily
This was only the second time that the Bank had held its
annual meetings outside of Africa in one of its 24 non-regional
member countries. The other time was in Valencia, Spain in
2001.
19
China Pledges US$20 Billion for Africa, Financial Times,
May 18, 2007.
20
Chinas Central Bank Governor Says IMF Needs Improvement, Xinhua, April 18, 2009, accessed on February 22,
2011, http://news.xinhuanet.com/english/2009-04/18/content_11210468.htm.
21
For details on the Indonesian role see Gregory Chin, Chinas
Rising Institutional Influence.
18
After the global freefall was stemmed,

Indonesia agreed to support Chinas call
for a greater voice for major emerging
countries in the IMF.
sought changes in conditionality and easier access to
credit for counter-cyclical policy.22

Since the onset of the crisis there has been
a marked increase in Chinese support for East Asian
financial cooperation. In particular, China has joined with
Japan in setting new precedents for joint leadership.23
Beijing and Tokyo agreed to be the largest co-equal
contributors in two areas of financial and monetary
cooperation. Before the global financial crisis was fully
contained, states in Asia agreed to increase the total
amount of pooled emergency funds from US$90 billion to
US$120 billion. Japan and China each contributed 32% of
the total to the CMIM, or US$38.4 billion of the US$120
billion pool.24 Important diplomatic precedent was set
on regional bond markets when the two most powerful
economies in the region agreed that they would each
contribute US$200 million to the new Credit Guarantee
Investment Fund.25 The ADB has played a crucial role
in supporting and, at times, guiding these processes of
institutional innovation for regional collective action,
especially in backstopping the risks that are involved in
experimentation.

Chinas growing role in the ADB is part and
parcel of its trade and investment interests in the Asia
region. In May 2009, China Eximbank and the ADB
inked an agreement to jointly prepare at least US$3
billion for projects in developing Asia, especially in
the area of infrastructure. China Eximbank is acting as
the organizational vehicle on the Chinese side.26 The
I thank an Indonesian finance official who participated in the
G20 process for this point.
23
Gregory Chin, Asian Regionalism and the Global financial
crisis: The Evolution of Economic Globalization. In The Political Economy of Asian Regionalism, edited by M. Kawai and G.
Capannelli (forthcoming).
24
Chinas contribution actually consists of US$34.2 billion from
the Mainland and US$4.2 billion from Hong Kong.
25
The ADB agreed to contribute US$130 million, the Republic
of Korea US$100 million, and the ten ASEAN countries US$7
million each. See Asian Development Bank, Institutions for
Asian Regional Integration: Toward an Asian Economic Community (2010): 69.
26
China Eximbank, ADB Sign Co-Financing Agreement,
China Daily, May 4, 2009, accessed on January 19, 2011,
http://www.chinadaily.com.cn/bizchina/2009-10/23/content_114.
22
agreement signed at the 42nd ADB annual meeting in

Bali became effective in June 2009, and is being utilized
for three years. Dr. Schaefer-Preuss, Vice President of
Knowledge Management and Sustainable Development
at ADB, stated:
Access to sanitation, power and transportation
links is still very poor in many parts of Asia.
Massive amounts of funds are needed to address
that if we are to reduce poverty in the region []
This agreement with China Eximbank will ensure
funds get systematically directed towards those
and other urgent projects that will help the region
weather the current global downturn.

The massive amount of funds alluded to here
Schaefer-Preuss have in fact been calculated by the ADB.
It estimates that the region would need US$4.7 trillion
between 2006 and 2015 if it is to meet its developmental
potential.

Related to trade finance are Chinas latest
currency internationalization goals. Here the ADB
is also proving to be helpful to China, as the latter
transitions from a trading and manufacturing power to
also being an international financial and monetary force.
The ADB is playing a key institutional facilitation role
for experimentation on RMB regionalization, where
Chinese authorities are allowing the RMB that is earned
from the settling of trade accounts to be reinvested into
newly created offshore RMB-denominated financial
products. In October 2010, the ADB announced its
issuance of RMB1.2 billion (US$180 million) in RMB
bonds on the Hong Kong bond market. The ADB 10year issue is the longest tenor RMB bond issued in Hong
Kong. Bindu Lohani, ADB Vice President of Finance and
Administration, stated:
[The bonds are] a useful benchmark for other
potential borrowers, helping develop the offshore
RMB bond market into an important source of
funding for borrowers as well as an investment
destination.27
China in Africa

Beyond its own region, Beijing has also increased
support for financial regionalism since the crisis. This can
be seen in its fast-growing relations with the AfDB and
IDB. Rather than lauding its new co-donor arrangements
with the World Bank (discussed above), Chinese Vice
Premier Wang Qishan instead highlighted that China
values the AfDB as its leading partner on development
27
Andy Lau, ADB, IFC Issue RMB Bonds in HK, Yuan
Market, International Business Times, October 19, 2010,
accessed on February 23, 2011, http://www.ibtimes.com/articles/73637/20101019/adb-ifc-hk-yuan-renminbi-rmb-china.htm.
financing in Africa.28 The Chinese government recently

established the China-Africa Development Fund with
a US$14.59 million initial contribution hosted by the
AfDB. China promised a contribution of US$122 million
to African Development Fund XI (2008-2010). In
response to requests from the AfDB for China to help
replenish its main lending facilities, Wang pledged that
China will take an active part in the General Capital
Increase and African Development Fund processes. The
Chinese Vice Premier also complimented the bank for
the active role it played in responding to the global
financial crisis.

It is no secret that Chinas closer relations
with the AfDB go hand-in-hand with its growing
trade, finance, and investment activities in the region.
At the AfDBs Annual Meeting in Shanghai in May
2007, Chinese authorities announced that the country
would invest in African infrastructure and trade to the
tune of US$20 billion over the next five years. In May
2008, the AfDB and China then followed-up by signing
a Memorandum of Understanding to further leverage
their future efforts. China Eximbank was given a pipeline
of AfDB projects in transport, ICT, and agriculture for
consideration.

Chinas economic ties with African countries
have taken a quantum leap of late. Chinese official
statistics indicate that trade has increased tenfold
to US$110 billion over the past decade. Chinas ties
with the AfDB have also seen dramatic expansion.
During AfDB President Kaberukas visit to Beijing in
February 2010, Chinese leaders referred to the AfDB
as the bridge and platform for strengthening SinoAfrican relations.29At a follow-up meeting in Tunis in
December 2010, senior representatives of the AfDB and
China Eximbank discussed concrete plans to strengthen
cooperation between the two sides. Liu Liange, Executive
Vice President of China Eximbank, emphasized that
his bank was looking to co-finance projects with the
AfDB, particularly in infrastructure and agriculture.
He expressed his banks willingness to learn from AfDB
in areas such as multinational project finance, regional
integration, environmental safeguards, and social
protection programs.30 Chinese analysts have also noted
28
President Kaberuka on Official Visit to China, African Development Bank website, February 4, 2010, accessed on January
31, 2011, http://www.afdb.org/en/news-events/article/presidentkaberuka-on-official-visit-to-china-5585/.
29
African Development Bank, China Sees AfDB as Bridge
for Sino-African Cooperation (February 9, 2010), accessed on
January 31, 2011, http://www.afdb.org/en/news-events/article/
china-sees-afdb-as-bridge-for-sino-african-cooperation-5602/.
30
The China Eximbank delegation that met with senior representatives of the AfDB on December 16, 2010 in Tunis was led
by its Executive Vice President, Liu Liange, and also comprised
the General Manager of the Legal Department, Li Jian, and the
Assistant to the Executive Vice President, Liu Yang. Source:
AfDB and Export-Import Bank of China Strengthen Coopera-
10
that China benefits from its membership in AfDB by

gaining opportunities to bid on infrastructure projects
inside the recipient regions, and to deepen economic
relations more generally.

Senior officials of the AfDB themselves state that
the bank is an important bridge
for China-Africa investment
cooperation, especially in the
fields of renewable energy
and technology.31 According
to
AfDB
Vice-President
Ordu, formal institutional
ties have led Chinese firms
to have the largest share in
the procurement for Bankfinanced projects. In the second
quarter of 2011, Ordu will lead
a delegation to China that will
aim to deepen cooperation with
China Eximbank. It will do so
by formalizing staff exchanges
and other arrangements.

AfDB is also aiming to attracht more investment
by Chinese companies to Africa. Ahead of an official visit
to China in February 2010, AfDB President Kaberuka
stated:

Chinas moves into Africa have caught the
attention of NGOs and established world powers. But
at the same time, China has moved quietly into Latin
America and the Caribbean. Initial inroads into the
region were made in the Caribbean when China took
a 5.77% capital stake in the
Caribbean Development Bank
(CDB) in 1998. In 2002, it
contributed a modest US$1
million to a new cooperation
fund established by the CDB.
In 2009, China took the
more dramatic step of formally
joining the much larger InterAmerican
Development
Bank (IDB). The Washington
D.C.-based IDB is the single
largest source of long-term
lending in Latin America and
the Caribbean, significantly
exceeding the World Bank. In
2008, the IDB took steps to help
member companies tackle the global financial crisis. It
approved US$12.2 billion in loans, credit guarantees,
and grants, a record level that reflected the requirements
of its members. It also approved a special US$6 billion
emergency liquidity program.

At the accession ceremony, Chinese diplomats
pointed out that Chinas entry into the IDB had required
15 years of effort.34 One reason for this long delay
was the reluctance of the United States. Similar to
Chinas efforts to gain observer nation status in the
Organization of American States, China had to overcome
long-standing resistance from the paramount power in
the region to get into the IDB.35

To join the IDB, China purchased 184 shares, or
0.004 percent, of the banks ordinary capital. This share
had become available after the breakup of Yugoslavia in
the 1990s. China is now the IDBs third Asian member
after Japan and South Korea, which joined in 1976 and
2005 respectively.36 Although its shares are not large,
China has acquired a seat on the Board of Governors,
the IDBs top decision-making body that meets once a
year to review the Banks operations and to make major
policy decisions. Chinas representative on this board is
the Governor of Chinas Central Bank. China also sits on
Although its shares are not

large, China has acquired a seat
on the Board of Governors, the
IDBs top decision-making body
that meets once a year to review
the Banks operations and to
make major policy decisions.
Given the considerable progress made by this

country [China], I would like to see more Chinese
companies invest more in AfricaWe want to
strengthen our relationships and learn from their
experiences.32

In line with this policy, Kaberuka used his
February trip to meet with the senior management of
Huawei and ZTE, two high-profile Chinese ICT firms
located in Shenzhen. Both companies have become
major investors in Africas IT sector.33

China in Latin America
tion, African Development Bank website, December 20, 2010,
accessed on January 31, 2011, http://www.afdb.org/en/newsevents/article/afdb-and-export-import-bank-of-china-strengthencooperation-7613.
31
AfDB President: Sino-African Cooperation Common Desire
of Both Sides, African Development Bank website, February
2, 2010, accessed on January 31, 2011, http://www.afdb.org/en/
news-events/article/afdb-president-sino-african-cooperationcommon-desire-of-both-sides-5577/.
32
Bank Group President on Official Visit to China, African
Development Bank website, February 2, 2010, accessed on
January 31, 2011, http://www.afdb.org/en/news-events/article/
bank-group-president-on-official-visit-to-china-5561/.
33
The AfDB President was accompanied by Bobby Pittman,
AfDB Vice President for Infrastructure, Private Sector and
Regional Integration, and Bruce Montador, the Banks Executive
Director for China. Source: Ibid.
11
China Joins IDB in Ceremony at Bank Headquarters, IDB

News Release, January 12, 2009, accessed on January 31, 2011,
http://www.iadb.org/news-releases/2009-01/english/china-joinsidb-in-ceremony-at-bank-headquarters-5095.html.
35
Chinas entry was approved after a month-long voting process
ended on October 15, 2008. The 26 Latin American and Caribbean borrowing nations together own 50.01 percent of the IDB,
while the United States holds just over 30 percent of the shares.
36
China became the IDBs 48th member nation. Beijing agreed to
contribute US$350 million to various IDB programs.
34
the Board of Executive Directors, sharing a chair with

other donor nations. Executive directors oversee day-today operations, approve loans, establish policies, and set
interest rates.

Once it joined, China immediately made its
presence felt. It agreed to contribute US$350 million
to various IDB programs. The Chinese funds are being
distributed as follows:

US$125 million to the IDBs Fund for Special

Operations37 that provides soft loans to Bolivia,
Guyana, Haiti, Honduras, and Nicaragua;
US$75 million to multiple IDB grant funds to
strengthen the state institutional capacity of Latin
American and Caribbean countries, including
municipal governments and private sector
institutions;
US$75 million for an equity fund to be administered
by the Inter-American Investment Corporation
(IIC) that lends to small and mid-sized private
businesses;38
US$75 million to be administered the Multilateral
Investment Fund (MIF): an entity administered by
the IDB that promotes growth and poverty reduction
through private sector investment, focusing on
micro and small enterprises and microfinance.39

For IDB representatives Chinas contributions
to these programs have come at an opportune time
when growth is slowing and liquidity is scarce. The
IDB estimated in early 2009 that the regions economic
growth would slow to around 2 percent during the year
its lowest level in six years. According to an IDB press
release, China could help the IDB assist its borrowing
member countries to deal with the impact of the global
financial crisis.40

As is the case in Africa, Chinas growing role
in the IDB has occurred in conjunction with its trade
finance and investment agenda in Latin America. In less
than a decade China has become a major commercial
partner for many countries in the region, as trade
increased 13-fold from US$8.4 billion in 1995 to US$110
billion in 2007. China is the largest trade partner of
Brazil and Chile and the second largest of Argentina,
Costa Rica and Cuba. As a result, it is now the regions

second biggest trading partner after the United States,
while it was ranked just 12th in 1995.

The IDB has been glad to note that this trade
relationship has maintained its dynamism in spite of
Just one year after China joined the IDB

their partnership was further strengthened
when two of Chinas major banks, the
Agricultural Bank of China (ABC) and China
Eximbank, joined the IDB Trade Finance
Facilitation Program (TFFP) as confirming
banks.
the crisis. In a period when the IDB has been aiming
to replenish its finances, IDB President Luis Alberto
Moreno said:
We are thrilled to bring a large and growing
economy like China into a community of nations
that are working together to resolve the complex
development challenges facing Latin America and
the Caribbean. It is a historic decision that takes
Chinas thriving commercial relationship with our
region into the development sphere.41

Just one year after China joined the IDB
their partnership was further strengthened when
two of Chinas major banks, the Agricultural Bank
of China (ABC) and China Eximbank, joined the
IDB Trade Finance Facilitation Program (TFFP) as
confirming banks.42 The TFFP comprises a network
of 227 confirming banks which belong to 87 different
international banking groups in more than 53 countries
and 62 Issuing Banks in 18 LAC countries with US$1.01
billion in approved credit lines. As of March 2010, the
IDB had issued guarantees in support of 876 individual
international trade transactions totaling US$830 million.
China to Join Inter-American Development Bank, IDB News
Release, October 23, 2008, accessed on January 19, 2010, http://
www.iadb.org/news-releases/2008-10/english/china-to-join-theinteramerican-development-bank-4828.html.
42
ABC Executive Director Yang Kun, China Eximbank Vice
President Su Zhong, and IDB President Luis Alberto Moreno
signed the agreement during the IDB 2010 Annual Meeting in
Cancun, Mexico. Source:
IDB Strengthens Partnership with China, IDB Press Release,
March 23, 2010, accessed on January 31, 2011, http://www.iadb.
org/news-releases/2010-03/english/idb-strengthens-its-partnership-with-china-6853.html.
41
The Fund for Special Operations is the IDBs soft-loan window for its poorest member countries.
38
With this US$75 million contribution, China acquired 110
shares in the IIC, or 0.16% of its subscribed capital.
39
China to Join Inter-American Development Bank, IDB News
Release, October 23, 2008, accessed on January 31, 2011, http://
www.iadb.org/news-releases/2008-10/english/china-to-join-theinteramerican-development-bank-4828.html.
40
News Release, January 12, 2009, accessed on February 1, 2011,
37
12

Joining TFFP gives the Chinese banks a
multilateral channel to further expand their trade
finance activities with the region. On the other hand,
the TFFP arrangement helps the IDB to position itself
as a key platform for facilitating bilateral trade flows
between the two regions. In October 2010, China
Eximbank and the IDB agreed to finance up to US$200
million worth of trade activity between China and the
region over the next two years. IDB President Luis
Alberto Moreno stated that the partnership between
China Eximbank and IDB is a groundbreaking initiative
to support increased trade activity.

Representatives of the IDBs Outreach Office
believe that the strengthening of the IDBs partnership
with ABC and China Eximbank allows it to act more
effectively as the platform for economic and financial
integration between China and the region. In October
2010, the IDB co-hosted the China-LAC Business
Summit in Chengdu city (Sichuan province, China)
together with the China Council for the Promotion of
International Trade (CCPIT), Chinas Central Bank,
and the Sichuan Provincial Government. Wan Jifei,
Head of the CCPIT, told reporters that China intends
to build on its partnership with the IDB and further
accelerate trade with Latin America, by signing more
free trade agreements (FTA), especially with the regional
powerhouses Brazil and Mexico. Wan added:
China now has FTAs with Chile, Peru, and Costa
Rica. Once more FTAs are signed with other LAC
countries, it may be possible for China to sign a
FTA with the region, resembling the one between
China and the Association of Southeast Asian
Nations (ASEAN).
China and Regional Development Banks: A WinWin?

Krasner (1981) suggests that Japans influence
has been particularly strong in the ADB, while others
suggest that this influence is exercised through lending,
policy, and staffing decisions.43 By the same token, the
United States is said to play the dominant role in the
IDB.44 Because it challenges these paradigms, China has
had to overcome American congressional opposition to
Chinese membership in both the ADB and the IDB. It
Barbara Upton, The Multilateral Development Banks: Improving U.S. Leadership (Washington, D.C.: The Center for Srategic
International Studies, 2000): 68, 70; Robert Wihtol, The Asian
Development Bank and Rural Development: Policy and Practice. Basingstoke: MacMillan, 1988.
44
In contrast, the AfDB has limited the participation of non-regional countries, and attempted to prevent any regional member
from dominating the institution, in terms of formal voting power
and operations. See Karen A. Mingst, Politics and the African
Development Bank. Lexington: University of Kentucky, c1990.
43
13
was only in 1986 that China was granted membership in

the ADB, and in 2009 for the IDB.45

China may not directly reduce the influence of
the dominant powers inside the regional banks by joining
or increasing its financial contributions. However,
it is also tenable to suggest that the Chinese Foreign
Ministrys official narrative of a win-win decision that
will serve everyones interest46 may not speak to great
power relations inside these regional institutions. It
would be reasonable to expect that some soft balancing
intentions are at play. The depiction of Chinas IDB
accession as simply providing both sides with a platform
for increased two-way trade and investment and greater
technological cooperation deflects attention from the
real shifts in power that this implies.

As a rising donor country, China is gaining
much broader influence inside both the development
banks and their member countries. However, there are
a number of ways in which the regional banks have also
gained from Chinas increased involvement in regional
development cooperation. First, Beijing has thrown its
diplomatic clout behind the developmental cause of
these banks, thereby helping to raise the stature of their
objectives. For example, in his welcoming speech at the
annual meeting of the AfDB which China hosted in
2007, Chinese Premier Wen Jiabao noted the importance
of AfDB-China-Africa relations, but also urged the
developed countries to take more concerted action to
help the region through measures such as delivering aid
assistance, canceling debts, improving terms of trade,
and transferring technology.47

Second, Chinas financial contributions have
helped to strengthen the financial capabilities of the
regional banks. At the AfDBs meeting in Shanghai
(2007), AfDB President Kaberuka stated that, while the
bank has a solid financial record, its first priority is to
consolidate its financial strength in order to fulfill its
fundamental mission of fighting poverty and promoting
economic development in Africa.48 This may explain
See Wihtol, The Asian Development Bank and Rural Development, 102.
46
These statements by Zhou Wenzhong, Chinas Ambassador
to the United States, are cited in China to Join Inter-American
Development Bank, IDB News Release, October 23, 2008,
accessed on January 31, 2011, http://www.iadb.org/news-releases/2008-10/english/china-to-join-the-interamerican-development-bank-4828.html.
47
Wen also took the opportunity to assure the large audience of
African officials that the Chinese government and people are
committed to peace and development in Africa. This indirectly countered the view of some that China has a neo-colonial
agenda.
48
Annual Meetings: Creating an Enabling Environment for Investments, African Development Bank website, May 17, 2007,
accessed February 2, 2011, http://www.afdb.org/en/news-events/
article/annual-meetings-creating-an-enabling-environment-forinvestments-2626/.
45
why, in February 2010, Kaberuka made sure to emphasize

the importance of Chinas contributions to replenishing
the AfDBs funds in meetings with Chinas Central Bank
Governor and the President of China Eximbank.49 The
In Latin America, some traditional

powers are concerned that Chinas entry
into the IDB is providing it with another
foothold into the region.
AfDB president reinforced this message at meetings with
senior representatives of the China Development Bank
and Chinas Deputy Central Bank Governor Yi Gang,
who oversees the China-Africa Development Fund.50

In Latin America, some traditional powers are
concerned that Chinas entry into the IDB is providing it
with another foothold into the region. However, senior
IDB representatives view the relationship as helping to
boost the capacities of regional institutions and regional
multilateralism. Thanks in part to Chinas involvement,
the IDB expected to approve about US$10 billion in
new programs in 2008, and US$12 billion in 2009.
IDB President Moreno summed up Chinas role in the
following terms:
Chinas welcome addition to the IDB family will
further strengthen our institution at a critical
moment for the world economy, when countries
need to protect recent social and economic gains.
These challenging times require bold and unified
actions that will be a key part of the agenda leading
up to our Annual Meeting in March in Medellin,
Colombia. China is an essential partner in the road
ahead.51

Third, China has much to offer by way of its
own development experience to other developing
countries. This has been stated time and again by senior
49
China Sees AfDB as Bridge for Sino-African Cooperation,
African Development Bank website, February 9, 2010, accessed
on February 2, 2011, http://www.afdb.org/en/news-events/
article/china-sees-afdb-as-bridge-for-sino-african-cooperation-5602/.
50
President Kaberukas Visit to Chinas Silicon Valley,
article/president-kaberukas-visit-to-chinas-silicon-valley-inshenzhen-5591/.
51
Press Release, January 12, 2009, accessed on February 2, 2011,
representatives of the three regional development banks.

During his February 2010 visit to Beijing, Kaberuka gave
a talk at the International Poverty Reduction Center of
China (IPRCC). The IPRCC is a new agency that aims
to transfer Chinas own development lessons to other
countries. Kaberuka stated that he welcomed the IPRCC
meeting as a high-level policy dialogue on poverty
reduction and development cooperation as it could help
forge a new consensus on global development with
leading African representatives. Chinas experience in
rapidly reducing poverty through rapid economic growth
could indeed provide relevant lessons to Africa, even if
these lessons would not be completely transferrable.52

Finally, regional development banks have gained
from Chinas management of the global financial crisis.
As Chinas Central Bank Governor Zhou Xiaochuan has
noted, China intends not only to expand its trade and
investment in Latin American countries as a member of
the IDB but also to help both regions jointly tackle the
ongoing financial crisis.
Amid Multilateralism, Bilateralism Persists

Even as Chinas presence inside the ADB, AfDB
and IDB has grown, however, it has at the same time offered large sums of financial assistance via the bilateral
track to counterpart governments in the developing
world.

Immediately prior to increasing their financial
contribution to the AfDB, Chinese authorities pledged
(in a speech at the UN) in September 2005 to provide
US$10 billion for the 200508 period in concessional
loans and preferential export buyers credits to
developing countries to improve infrastructure and
promote economic cooperation. At the Forum on ChinaAfrica Cooperation (FOCAC) meeting in October 2006,
Chinese authorities promised US$3billion in preferential
loans and US$2 billion in export credits to Africa over
the 200609 period. China further announced that it
would double its 2006 grant assistance to build hospitals,
malaria prevention and treatment centers, and rural
schools as well as a conference center for the African
Union.53

In the same year that it joined the IDB, China
also negotiated deals to double a development fund in
Venezuela to US$12 billion, lend Ecuador at least US$1
billion to build a hydroelectric plant, provide Argentina
with access to more than US$10 billion in Chinese
52
President Kaberukas Visit to Chinas Silicon Valley,
article/president-kaberukas-visit-to-chinas-silicon-valley-inshenzhen-5591/.
53
At the 2006 FOCAC meeting, the Chinese government also
announced it was canceling all interest-free loans owed by eligible African countries that had matured by the end of 2005.
14
currency to pay for Chinese imports, and lend Brazils

national oil company Petrobras US$10 billion to secure
long-term oil supplies. These deals focus largely on
China locking in natural resources and energy supplies
in the years to come. China also signed a US$10 billion
arrangement that grants Argentina access to Chinese
currency to help pay for imports from China.

Although exact figures for Chinas external
bilateral lending have not been made public, it is clear
that external assistance and commercial lending have
increased substantially and
perennially over the past
decade. The upward trend
appears set to continue for the
foreseeable future. In brief,
Beijings bilateral assistance
not
only
outweighs
its
contributions to the regional
development banks but also
dwarfs its contributions to the
World Bank.

However, despite the
marked increases in Chinas
contributions
to
regional
multilateral institutions, officials in the AfDB, for
example, have noted delays in the delivery of Chinas
financial commitments as well as some inconsistency
in Chinas support. Officials in the World Bank
have likewise noted that its joint financing of major
development projects with China in Africa have not
been realized, three years after a Memorandum of
Understanding was signed by the World Bank and China
Eximbank.54

The patterns in Chinas application of its
growing creditor power, specifically its relative
contributions at the bilateral versus multilateral level,
suggests that the Chinese state is still a somewhat
hesitant and constrained power that must give careful
consideration to ensuring that its contributions are tied
to securing immediate or medium-term interests, both
for domestic and international reasons. This helps to
explain why AfDB senior representatives have felt the
need to continue to press Beijing for more support on
co-financing of projects to meet the huge infrastructure
needs on the continent.55
Concluding Thoughts

Chinas rise as an international creditor at
all three levels provides momentum in the shift
toward a more diverse, multi-layered, and multicentered global financial system. Chinas contributions
to regional development banks help achieve its goals of
diversifying development policies, trade relations, and
supplies of raw materials and energy supplies. More
broadly, it encourages a shift in the balance of power
in a direction more favorable
to China and arguably also to
other developing countries.
At the same time, Beijings
contributions help strengthen
the capabilities of regional
development banks as lenders
and providers of technical
assistance.
Is China also pursuing a
more comprehensive, longterm objective of strategic
realignment? The analysis
suggests that it is acting more
confidently in the international sphere and advancing
realignments that are beyond the status quo. Chinese
authorities have consistently highlighted that China
wishes to promote reforms of the main Bretton Woods
institutions to create a more fair, just, equitable and
multi-polar global order. However, even as China has
pursued reform of the multilateral system, it has directed
the lions share of its foreign assets through bilateral
channels. A primary objective of this has been to secure
international procurement deals for long-term supplies
of raw materials and energy.

This suggests that China is at a watershed
moment in its evolution. It is becoming more involved
in realigning the structure of the world economy and
in reshaping international rules and norms. At the same
time, it continues to selectively internalize established
global practices. Chinas growing contributions to
financial regionalism strengthen its influence in the
regional development banks, and in process, also raise
the stature of these banks within the global financial
system. Most importantly, China is adding momentum
to the shift toward a more diverse, multi-layered, and
multi-centered international system.
Chinas rise as an international

creditor at all three levels
provides momentum in the shift
toward a more diverse, multilayered, and multi-centered
global financial system.
Discussion with World Bank official: Beijing, September

2010.
55
AfDB and Export-Import Bank of China Strengthen Cooperation, African Development Bank website, December 20,
2010, accessed February 27, 2011, http://www.afdb.org/en/
news-events/article/afdb-and-export-import-bank-of-chinastrengthen-cooperation-7613/.
54
15
C O M M E N TA R Y
The Investments of Chinas

State-owned Enterprises in
Brazilian Infrastructure:
Assessing the Implications of State Grids Entry
Charles Ho Standard Bank in brazil

Lap Chan AES Corporation
A New Phase of Chinese Investments in Brazil

State Grid Corporation of China is the worlds
largest power transmission and distribution company.
Its recent $1.8 billion acquisition of electric power
transmission lines in Brazil indicates the possibility
of a new phase of Chinese investments in Brazil.
This phase is characterized by long-term investments
in critical infrastructure assets. Previously, Chinese
investments in Brazil were motivated primarily by
the need to secure raw materials for Chinas supply

chain, and by the search for new markets for Chinas
manufacturing/export machine. The new investment
trend would help mitigate some of the potential longterm economic distortions of these well-established
trade flows, in which natural resources are exchanged
for manufactured goods.

The new trend can also be characterized as a
transfer of Chinese technology and low-cost engineering
capability to Brazil. In certain fields, such as ultra-high
16
voltage electricity transmission, Chinese companies

not only possess cutting-edge technology but have the
most experience starting up, operating, and maintaining
these technologies. In addition, Chinese technology
advancements are often accompanied by cost-effective
engineering and manufacturing capabilities to enable
these technologies. This may come in the form of
competitively priced equipment or services.

Also in December 2010, a consortium that
has 40% participation by Zhejiang Insigma United
Instead of the traditional, passive,

minority shareholding positions, Chinese
companies are also starting to consider
a controlling stake to establish an
independent entity in the new markets.
Engineer, a Chinese firm, won an auction to build 102
kilometers of transmission lines in the south of Brazil.
Although the estimated US$460 million investment
is smaller than the State Grid deal, it is another data
point to support the theory of increasing commitments
by Chinese companies into longer-term infrastructure
investments.
State Grid Comes to Brazil

State Grid Corporation of China currently
operates the worlds largest network of Ultra-High
Voltage (UHV) transmission lines. Their network
in China utilizes technology to transmit electricity
at 1,000 kV for alternating current and 800 kV for
direct current, compared to 500-765 kV for traditional
transmission found in Western countries. At ultrahigh voltages, lines losses can be reduced 25% from
the typical 6-7%. In addition, more power can be
transmitted per line, reducing the number of required
lines.

This is particularly applicable where there
are great physical distances between generation and
consumption points. Such is the case for China as in
most countries in Latin America. Since Brazil already
has some of the highest electricity rates when compared
with its developing country peer group, any cost savings
from efficiency is a welcome change. In addition,
more advanced transmission technologies will help

address the frequent supply and demand imbalances by
allowing better linkage of far away generation sites.

Instead of the traditional, passive, minority
shareholding positions, Chinese companies are also
starting to consider a controlling stake to establish an
independent entity in the new markets. State Grid`s
interest in purchasing the Spanish-owned transmission
assets was predicated on the ability to achieve complete
ownership and control. This allows State Grid to first
establish an operating beachhead in Brazil in order
to more effectively plan their strategy for expansion
into the market. Control allows for an independent
assessment of future greenfield investments and
other potential local partnership opportunities.
Overcoming Local Challenges

Along with shareholding controls comes the
challenge of managing a local operation. This is no
small challenge considering the language, cultural,
and time differences. Ultimately, the ability to bridge
these barriers and manage the people to make day-today, working-level decisions will have a great impact
on the success of Chinese companies. Chinese company
culture does not make it easy for its employees to
understand and adapt to local cultures.

Besides the language and cultural differences,
Chinese companies are also concerned with the
uncertainties of dealing with foreign governments and
regulatory bodies to seek approval for their investments.
In the case of State Grid, this was of particular concern
given the critical role that the target transmission lines
had in the overall Brazilian power grid. The target
company, Plena, owns and operates several major
power transmission lines that connect many major
Brazilian metropolitan centers. At the outset, it would
have been conceivable to State Grid that these assets
would have been considered too strategically sensitive
to be sold to foreigners. However, in Brazil, there is
already a long history of foreign investments into
critical infrastructure assets. Plena was being sold by
a consortium of Spanish companies including Elecnor,
Cobra, and Isolux, and Abengoa. These companies
have been investing in, owning, and operating key
infrastructure assets in Brazil for decades.

To many Chinese companies, the State Grid
acquisition was a real test of how open Brazil and its
authorities really are to foreign investments in key
infrastructure areas. The deal illustrated that Brazil
Charles Ho is the Head of the China Desk at Standard Bank in Brazil. Standard Bank is a South African Commercial and
Investment Bank partly owned by ICBC of China. Standard Bank acted as the sole financial advisor to State Grid in its
December 2010 acquisition of Brazilian transmission assets.
Lap Chan is the former Head of Latin America Business Development at AES Corporation.
17
actually turns out to be quite open given the lack of any

real interference from government quarters. In fact,
the Brazilian electricity regulatory agency, ANEEL,
was quick to recognize the potential technology
benefits to the country. As a result, it approved the
State Grid transaction rather quickly. It should be
noted that BNDES, Brazils state-owned development
bank, did not extend to State Grid the line of credit
it had provided to the previous Spanish consortium of
owners. However, this is a reflection of their policy to
support greenfield investments as opposed to buying
and selling existing brownfield assets, since the latter
does not create as many
employment opportunities
as new projects. State Grid
can still apply to BNDES to
receive credit support for
future greenfield projects.

How much of this
openness
will
remain
the same under the newly
elected administration of
President Dilma Rousseff
is uncertain. Bilateral trade
disputes are intensifying, as
Brazil has filed an increasing
number of anti-dumping
cases against China in recent years. However, these
cases have mostly pertained to isolated consumer goods
such as tires and electronic toys. Whether or not these
protective concerns spread to Chinese suppliers of
equipment to infrastructure investors remains to be
seen. State Grids continued investment in Brazil will
no doubt be accompanied by imports of equipment
manufactured in China, especially inputs that are
technology-specific.
of China (ICBC), China Exim Bank, and China

Development Bank (CDB), require that any transaction
be given acceptable guarantees (sovereign and
corporate). The transactions that have been financed
so far have involved companies like Petrobras, Statoil,
Abengoa, and others with high credit ratings.

Despite the strong capitalization of Chinese
Companies and deep foreign reserves of its financial
institutions, it is still preferable for these companies
to raise a significant portion of financing locally. This
is primarily in order to match the currencies of its
revenues with the cost of capital. To hedge currency
exposures over 15 to 30 years
can become quite expensive. As
a result, BNDES will still play an
important role in providing lowcost financing.
Despite its low cost, there are
drawbacks to BNDES financing.
There are various restrictions,
such as audited financials, local
content requirements, and limits
on share sales. In addition, the
disbursement of funding can
take quite long, sometimes
necessitating an expensive bridge
loan in the process. For Chinese
companies, there is the option of circumventing
BNDES restrictions via the support of Chinese banks
and the Export Credit Agency. This allows Chinese
companies to avoid local content restrictions by
importing their own equipment or sourcing it from
established supplier networks in China. In addition,
the time-to-funding lag is much shorter in the case of
Chinese financial institutions. In addition, there are
some alternative currency hedging techniques that do
not offer full protection against currency swings, but
can be implemented in a cost-effective manner.

Standard Bank of South Africa is also actively
involved in developing financing solutions for Chinese
companies looking to enter the Brazilian and South
American markets. Many of these solutions involve
structuring domestic Chinese ECA and policy bank
support along with hedging solutions. In addition,
Standard Bank has developed other competitive
financing solutions denominated in local Brazilian
currency. Since October 2007, the bank has been 20
percent owned by ICBC of China, and has been actively
helping Chinese companies invest in Africa.
All of Chinas largest stateowned hydropower companies,

including Hydrochina, Sinohydro,
and China Three Gorges
Corporation, have already
established subsidiaries in Latin
America.
Financing Issues

In addition to technology, engineering, and
operational experience, Chinese companies can also
bring strong financial support to their investment
approach. In the State Grid acquisition, the ability
to self-bridge acquisition financing was critical to its
confidence in closing the deal. Because of the long cycle
of infrastructure investments, some stemming from
auctions won years ago, some Spanish and Portuguese
companies are finding themselves committed to projects
that will challenge their financing capabilities. This is
precipitated by what is happening in their home capital
markets and its effect on the rising cost of capital. As a
result, it is a natural fit for these companies to look for
Chinese capital and technology partners.

Although
eager
to
finance
business
opportunities in Brazil, many of the major Chinese
banks, including Industrial and Commercial Bank
Chinese Hydropower Companies in Brazil

All of Chinas largest state-owned hydropower
companies, including Hydrochina, Sinohydro, and China
Three Gorges Corporation, have already established
subsidiaries in Latin America. But surprisingly, they
18
have opted for Colombia and Peru as their entry points

into the region, even though Brazil has the largest
market for hydropower. One of the reasons is that
these state-owned companies have identified too many
competitors in the Brazilian market. Companies such as
Camargo Correa, Odebrecht, and Queiroz Galvo have
long dominated the domestic market, and compete
for projects in the rest of the Latin America region as
well. In view of this, Chinese companies are targeting
markets where they can more easily outcompete the
local players.

Given the nature of competition, an
alternative way for Chinese companies to enter the
Brazilian energy generation and distribution sector is
via indirect investment. Most notably, in 2009, China
Investment Corporation (CIC) invested US$1.58 billion
in AES Corporation, a US multinational listed on the
New York Stock Exchange. The investment was made
by a wholly-owned subsidiary of CIC through the
acquisition of 125.5 million shares of AES stock for
US$12.60 per share for an approximate 15 percent stake
in the company. AES has a significant presence in the
Brazilian energy generation and distribution sector,
and is also active in other Latin American countries, as
well as in China.
Conclusion

Critical to the successful, long-term economic
relationship between China and its South American
trading partners such as Brazil, is the evolution of
Chinese companies interest into becoming investors
and operators of local infrastructure assets. By investing
into long-term infrastructure, Chinese companies bring
critical capital, technology, and operating experience
19
into sectors where it is needed the most. In return for

these investments, Chinese companies will enjoy the
benefits of opening new markets for their industrial
products and services, in addition to addressing some
of the supply chain challenges faced when exporting
goods back to the Mainland. It is the area of greatest
potential mutual benefit between the trading partners.

Sany Heavy Equipment of China may be
a harbinger of things to come. It has committed to
investing US$200 million to build a factory in Brazil
to produce its excavating, construction, cement, and
road maintenance equipment locally. Like many other
companies, it is betting on the likelihood that other
Chinese infrastructure companies will soon invest in
Brazil.

However, getting to the next stage of local
investments involves more than one type of challenge.
Local operations and management necessitate an
even deeper ability to bridge cultural and language
differences. Regulatory and public opinion challenges
must be managed in a sophisticated and effective
manner. In addition, structuring the investment,
arranging the financing and achieving the optimum
cross-border risk exposure can have a big impact on the
long-term financial viability of the investment. This
last set of challenges can be mitigated with advice and
solutions from an experienced cross-border financial
advisor such as Standard Bank.

The sectors with the most potential for future
long-term Chinese investments include electric
power, rail and port, ship and offshore operations.
These are sectors where Chinese capital, cost-effective
engineering ability, and operating experience can make
the biggest impact to the developing infrastructure of
South American countries.
C O M M E N TA R Y
Chinese Investment in Brazil:

Cum Grano Salis
Dani K. Nedal Getulio Vargas Foundation

China-Brazil relations have attracted a great
deal of interest in recent years.1 This is due to significant
changes in the intensity of bilateral relations in the last
decade - with China becoming Brazils largest trade
partner in 2009 - and Chinas growing presence in Latin
America. It is also due to the hype surrounding socalled emerging countries. I argue that while Chinas
economic presence in Brazil is unmistakably increasing,
this should be interpreted neither as a consequence of
close political ties nor as a development that invariably
contributes to this end. In fact, the intricacies of
1
This article draws heavily on Nedal, D. and Maciel R. China
and Brazil: Two Trajectories of a Strategic Partnership In:
Hearn, A. and Manrquez, L. (eds.) China and Latin America:
Tracing the Trajectory (Lynner Rienner, 2011, forthcoming).
managing the complex and asymmetric interdependence

that results from this increase, especially its domestic
political reverberations, have actually worked against
Brazil-China political relations.

Some of the similarities that were supposed
to bring them together, such as their partial rejection
of liberal norms and principles and the adoption of
more state-centered, nationalistic and mercantilist
development models, actually create friction and push
them apart. The global financial crisis amplified and
cast a light on these ambivalences and paradoxes that
were already present in the Brazil-China relationship.
The increased competition Brazil faces from China
in its domestic and third markets has sparked fears of
de-industrialization or primarization. Even if this
20
anxiety is largely unfounded,2 it has empowered already

strong protectionist voices and fueled resistance to
China, making it harder to sustain a strategy of nonconfrontation, mainly where trade and currency issues
are concerned.

A particularly useful illustration of this strained
relationship is the controversy surrounding Chinese
investments in Brazil. Lauded by many as a sign of new
times, the surge of Chinese investment last year didnt
assuage Brazilian grievances regarding bilateral trade,
but instead reflected the general anti-China feeling
predominant in Brazil. To fully understand Brazilian
misgivings about Chinese investment, some context is
useful.
figure 1
Failed Expectations
increasing disappointment.

Enter the Global Financial Crisis. China
quickly became an important source of liquidity in
global markets, taking advantage of the retraction of
more traditional investors and the depreciation of assets
worldwide. Though this was visible as early as 2008,
it was only in May 2009 during President Lulas visit
to China that it became clear that China was ready to
start investing heavily in Brazil. Petrobras and China
Development Bank (CDB) announced a US$10 billion
loan agreement and, in exchange, Petrobras signed a tenyear oil supply contract with Unipec Asia, a subsidiary
of China Petroleum & Chemical Corporation (Sinopec).
The loan, granted by CDB at a time when liquidity was
scarce, reignited hope about Chinese investment. When
in February 2010 the Brazilian Central Bank announced
that China already figured as one of the top ten sources
of FDI in Brazil, expectations were again at a high. This
feeling, once more, turned out to be very short-lived.

The excitement with Chinese investments lasted
exactly until Brazilians realized that Chinese companies
would not invest only (or even predominantly) in
the sectors the Brazilian government deemed most
important to increase its export capacity, contrary to
what President Lula had indicated in 2004. Instead,
China came to Brazil with an eye to invest in the sectors
that offer the most opportunities and match Chinas
economic needs.

The most publicized of these investments
happen to be related to natural resources such as iron ore
and oil. In only a few months there were announcements
that Chinese companies would acquire a stake in
Brazilian miner MMX, an iron ore mine controlled by
Votorantin in the State of Bahia, and a mining company,
Itaminas, in Minas Gerais. There were also reports

In 2004, an exchange of presidential visits
marked the inflation of a China bubble in Brazil, with
announcements that Chinese companies were ready
to invest enormous sums in the country. The high
expectations were captured by President Lulas speech at
the time. He stated:
The awaited US$7 billion in Chinese investments in
Brazil will help the country regain its competiveness
in strategic sectors such as infrastructure, energy,
steel and telecommunications.3
Chinese investments, however, failed to materialize.
Chinas Foreign Direct Investment (FDI) stock in Latin
America and the Caribbean in 2007 reached US$25
billion, 21% of the countrys total investment abroad, but
96% of that FDI went to the Cayman Islands and British
Virgin Islands, both well-known tax havens, meaning
that great part of that amount was probably redirected
to other countries (some in other regions) or even back
to China. Chinas FDI stock in Brazil as late as 2009 was
still lower than US$600 million (see Figure 1 below).
The only major investment project during this period,
a US$3 billion joint venture signed in 2004 between
Baosteel Shanghai and Vale (then CVRD) was held-up in
negotiations for five years before finally being cancelled
in late 2008. As the years passed, the enthusiasm that
marked the exchange of presidential visits turned into
Brazilian industrial activity has not declined, and domestic
consumption and exports of Brazilian industrial goods have
increased, albeit slightly losing market share.
3
President Lulas speech during a reception dinner for Hu Jintao
on November 12, 2004. Translation is the authors.
2
100
80
100
60
80
60
40
40
20
20
00
Chinese
Foreign Direct
Investment in
Chinese
Foreign
Brazil (US$ mn)
Investment in Brazil- US$

millons
88
2005
2005
2006
24
24
2007
38
38
2008
83
83
2009
Dani K. Nedal is a regular contributor for the Center for International Relations at the Getulio Vargas Foundation, in
Brazil, and co-editor of O Que a China Quer? (FGV Press, 2010). He is also co-author, with Rodrigo Maciel, of China
and Brazil: Two Trajectories of a Strategic Partnership in the forthcoming book China and Latin America: Tracing the
Trajectory (Lynner Rienner, 2011)
21
that it would install a steel plant at the Au Superport

industrial complex under construction in northern Rio
de Janeiro. Rumors also began circulating that Chinese
companies were interested in purchasing land (although
most reports of this are undocumented) and buying
into the oil sector. As predicted, in May 2010 Sinochem
acquired 40% (US$3.07 billion) of Norwegian Statoils
operations in the Peregrino oilfield and in October
Sinopec obtained 40% (US$7.1 billion) of Spanish oil
major Repsols Brazilian subsidiary.
A Less-Than-Warm Reception

Enthusiasm gave way to deep suspicion
of Chinese intentions and the prospect of Chinese
companies holding a relevant stake in Brazilian natural
resources and critical industries. The anti-China lobby,
which used to complain about the lack of Chinese
investment in Brazil, started to vocally denounce these
investments as attempts by the Chinese government to
buy up Brazilian land and resources, distort markets and
destroy Brazilian industry from within. Sinophobia
has also played a part in recent legislation approved by
the Brazilian Congress limiting land purchases by all
foreign companies and individuals. These actors argue
that Chinese FDI is qualitatively different from that of
traditional sources because of the controlled nature of
the Chinese economy, Chinas selectivity in allowing
inbound FDI, and the close association between the
investing companies and the Chinese state.

This discussion benefits from a closer and
more sober look at the numbers and facts. First, it is
clear by now that Chinese investment in Brazil will be
considerably smaller than the US$20-25 billon figure
that has circulated in the press. Not all investments that
were announced will be executed this year, and some
may never be concluded. Chery, a car manufacturer
from Anhui, announced that it will establish a factory
in So Paulo estimated at US$700 million but that
will probably take some time. Votorantims, sale of its
mining asset to Honbridge Holdings and subsequent
investments (appraised at up to US$2.6 billion) are
conditioned upon the results of studies pertaining to
the projects quantitative and qualitative potential.
The Itaminas deal, valued initially at US$1.2 billion, is
rumored to be in danger of falling through.

Accusations that China is bent on colonizing
Brazil are unfounded. Contrary to common belief,
Chinese investments in Brazil are actually quite diverse
in nature. Chinese companies have targeted not only
Brazilian natural resources but also the countrys
booming consumer market and, more recently, basic
infrastructural demands. Chinas State Grid acquired
seven Brazilian electricity transmission assets from
Spains Plena Transmissoras for $1.72 billion. Two large
Chinese machinery manufacturers, Sany Heavy Industry
and XCMG, announced plans for assembly plants in

Brazil. Chinese carmakers SAIC and JAC will probably
join Chery in establishing plants in Brazil in the next
few years. Chinese electronic manufacturers have also
opened assembly plants in Manaus, and telecom majors
Huawei and ZTE have operations in So Paulo.

But even these ventures face serious political
hurdles. Despite smooth and quick approval by
regulatory organs, there was actually a lot of negative
talk about the State Grid deal in 2010, as the Brazilian
media and some key anti-China lobbyists (intentionally
or unintentionally) lumped it together with other
energy sector (namely oil) investments, inflating fears
of a Chinese takeover of Brazilian natural resources. Also,
other key projects like the high-speed rail have very strict
built-in local content clauses. Chinese companies looking
to invest in large greenfield infrastructure projects will
also probably face the same problems regarding the use of
Chinese workers that CITIC faced in the ThyssenKrupp
CSA plant in Santa Cruz. They will also have to cope
with fierce competition with state-owned companies
and local monopolistic and oligopolistic players with
strong government ties, in sectors such as construction,
energy generation and transmission (especially nuclear
and hydropower), shipbuilding, railways, etc. In all, it
very much remains to be seen whether future Chinese
investments in infrastructure will be welcomed or if
State Grid was an outlier mainly due to the fact that it
was acquiring assets that already belonged to a foreign
company.
Accusations that China is bent on

colonizing Brazil are unfounded.
Contrary to common belief, Chinese
investments in Brazil are actually quite
diverse in nature.

Finally, although it is true that some of the
investing companies are state-owned or national
champions, discrimination against them on this basis is
flawed in three fundamental ways. First, Brazils own
state-owned companies (e.g. Petrobras) and national
champions (e.g. Vale, Odebrecht, Embraer) have been
very active in South America, Africa and even, to a
much lesser extent, China, with strong backing from the
Brazilian government and its policy bank, the BNDES.
Second, there is a solid literature questioning the
assumption that strategic considerations and government
directives dominate corporate investment decisions,
even for state-owned companies in the most strategic
22
sectors.4 To the extent that these factors do play a part

in Chinese FDI, it is far from clear exactly how different
they are from Japanese, American, European or other
companies.5 In fact, Brazilian authorities, true to the
tradition of dependency theory, have traditionally been
wary of foreign economic interests of all nationalities.
This leads us to the third problem: These arguments
against Chinese FDI are usually followed, ironically
enough, by suggestions that Brazil should start imposing
limits to foreign investment, just like China.6
The Road Ahead

Apart from the contentious issues of bilateral
trade and investment, Brazil and China are finding
themselves pressed to abandon grandstanding rhetoric
and abstract notions of multipolarization and SouthSee Trevor Houser, The Roots of Chinese Oil Investment
Abroad, Asia Policy 5 (2008); Erica Downs, Business Interest
Groups in Chinese Politics: The Case of the Oil Companies. In
Chinas Changing Political Landscape: Prospects for Democracy, edited by Li, Cheng (Washington, DC: Brookings Institution
Press, 2008); Tunsj, ystein, Hedging Against Oil Dependency: New Perspectives on Chinas Energy Security Policy,
International Relations 24, no. 1 (2010): 25-45.
5
See, for example, Paul N. Doremus, William W. Keller, Louis
W. Pauly, and Simon Reich, The Myth of the Global Corporation (Princeton: Princeton University Press, 1998); Robert Gilpin, US Power and the Multinational Corporation: The Political
Economy of Foreign Direct Investment (New York: Basic Books,
1975); Sally Razeen, Multinational Enterprises, Political
Economy and Institutional Theory: Domestic Embeddedness
in the Context of Internationalization, Review of International
Political Economy 1, no. 1 (Spring 1994): 16192.
6
The Chinese are selective with the capital they let in. They
dont accept every kind of investment. After the election, we
should consider if the same shouldnt happen here. Sergio
Amaral, president of the China-Brazil Business Council quoted
in BBC Brazil, September 17, 2010. Accessed March 12, 2010,
http://www.bbc.co.uk/portuguese/noticias/2010/09/100915_
brasileleicoesasia_mw.shtml.
4
23
South cooperation in favor of a more pragmatic

discussion of the issues at hand, such as the rules of
international trade, currency, nuclear non-proliferation,
UN Security Council reform, climate change and human
rights, where interest clearly dont respect an imaginary
North/South divide. Furthermore, both countries
growing capabilities and interests abroad could also
create new frictions. Some Brazilian officials are wary of
Chinas growing economic presence in South America, a
region that Brazil has come to consider as its own sphere
of influence, and in Africa, where Brazilian companies
are falling behind the Chinese in the rush for resources,
business deals, and markets.

These problems are unlikely to dissipate or
be resolved, and in fact seem poised to worsen in
coming years. Chinas continued growth and persisting
domestic imbalances will make sure that its demand for
commodities, exports of industrial goods, and outward
expansion of capital maintain a rising trajectory.
Internal political dynamics, including the coming
leadership succession, will probably make China less
prone to compromise and more nationalistic. Brazils
own economic and political environment also seem to
be moving in ever more nationalistic and protectionist
directions. President Dilma Rousseff and most of her
new staff are generally more hawkish on China than
their predecessors and have declared rethinking relations
with China a top priority.

At first glance, this contrarian view of BrazilChina relations seems very gloomy but what it suggests
is actually not extraordinary. What it means is that there
are very real opportunities for cooperation and mutual
benefit in trade, bilateral investment, and cooperation
in various fields; yet before they can seize these
opportunities, there are daunting challenges that need to
be addressed and legitimate disagreements with which
both countries will just have to learn to live. Their success
or failure in doing so will have an important impact on
political and economic relations in Latin America and, to
some extent, in the world.
Variations on a Theme:
Dimensions of Ambivalence in IndonesiaChina Relations
Evan A. Laksmana Centre for Strategic and International Studies

When Indonesia signed a Strategic Partnership
with China in 2005, many believed that it was finally
moving away from its historically strong ties with the
United States and straight into Beijings arms. The growth
in military-to-military ties that followed, coupled with
an incredible expansion in economic ties, seemed to
vindicate this argument. Following the implementation of
the ChinaASEAN Free Trade Agreement in 2010, China
even became Indonesias largest trading partner. This
development is remarkable considering that Indonesia did
not resume formal diplomatic ties with China until 1990. Is
it finally joining the Chinese bandwagon?
Upon taking a closer look at the evolution in
bilateral relations, however, the answer to this question is
not so straightforward. Indeed, the picture of Indonesias
policy towards China is not a simple question of hedging,
balancing, bandwagoning, or some variation of the three
- though many analyses of Southeast Asian responses to
Chinas rise focus on these specific strategies.1 This article
See Evelyn Goh, Meeting the China Challenge: The U.S. in
Southeast Asian Regional Security Strategies, Policy Studies
argues that, when located within the broader evolution of

Indonesia-China relations, Jakartas policy towards China
is characterized by persistent ambivalence. Scholars have
made this argument before.2 But they seldom break down
the components or dimensions of that ambivalence and
explore the rationale behind it.
This article aims to explain the ambivalence
in Indonesia-China relations by assessing its four main
dimensions: domestic politics, economics, strategic
security, and foreign policy. Each of these dimensions is
shaped by deeply entrenched sentiments and perceptions
of China that pervade both the wider public and the elite in
Indonesia. They are influenced by a long history of mutual
interaction, the place of ethnic Indonesian Chinese in
16 (2005); Denny Roy, Southeast Asia and China: Balancing
or Bandwagoning? Contemporary Southeast Asia 27, no. 2
(2005): 305-322.
2
See for example Rizal Sukma, Indonesias Response to the
Rise of China: Growing Comfort Amid Uncertainties. In The
Rise of China: Responses from Southeast Asia and Japan, edited
by Jun Tsunekawa (Tokyo: The National Institute for Defense
Studies, 2009): 139.
Changing Relations with Southern Neighbors | HARVARD ASIA QUARTERLY
24
Indonesian society, and Chinas geographic proximity. One

could argue that the Indonesian elite believes that China is
gigantic, arrogant, and expansionist - which would explain
why the vast majority (78 percent)3 are concerned about
the future implications of Chinas ascendancy. On the
other hand, perceptions of China among the wider public
are shaped by views of Indonesias ethnic Chinese as the
other - a separate race with a different religion and
special economic privileges, unwilling to change and only
concerned with its own well-being.
As such, Indonesias perception of China is often
the projection of its image of domestic ethnic Chinese, a
situation compounded by a lack of knowledge about China.
While these images may not necessarily be realistic, they
still influence how Jakarta engages Beijing. Indeed, one
scholar has argued that such perceptions, both within
the elite and among the wider public, serve as the most
important factor in determining how Indonesia formulates
and implements its China policy.4
The Domestic Political Dimension

In domestic politics, ambivalence in Indonesia
China relations initially centered
on three factors: The spread of
Communism, the role of the
Indonesian Communist Party
(PKI), and the loyalty of the
small but economically powerful
Indonesian Chinese. As a result,
China has traditionally been
viewed as a threat to Indonesias
domestic political stability and
national security. This argument
prevailed for much of the first
four decades of bilateral relations
after 1950, which included a
period of frozen diplomatic
relations from 1967 to 1990. Chinas rise in the 1990s and the
advent of democratization in Indonesia in 1998 changed,
but did not fundamentally overhaul, this domestic threat
perception.

For the first two decades of bilateral relations,
Jakartas ambivalence vis--vis China stemmed from

two countervailing issues. On the one hand, Jakarta was
a newborn state in need of Beijings support to secure
international legitimacy. On the other hand, Jakarta
was concerned by Beijings support for the PKI, and by
its potential influence over Indonesian Chinese. These
concerns seemed vindicated by numerous incidents in
the 1950s where Beijing sought to reorient the loyalty
of Indonesian Chinese towards Beijing while providing
excessive protection to the PKI leadership.5 This
apprehension lingered despite the close political alliance
between Beijing and Jakarta in the late 1950s and early
1960s.
The alliance was in fact more of a marriage of
convenience. Sukarno used Beijing - which he never fully
trusted to achieve his domestic political goals of balancing
the military by strengthening the PKI.6 Sukarno was also
privately concerned about how Indonesias economic assets
were controlled from abroad-referring to the financial
strength of the Indonesian Chinese whose loyalty he
doubted.7 Moreover, Muslim groups and the military were
concerned with Chinas capacity to influence domestic
subversion. It is not surprising that by the 1970s nearly
two-thirds of the Indonesian
elite saw China as a serious
threat to Indonesia.8 Even so,
Sukarnos alliance with Beijing at
the time illustrates the pragmatic
foundation
of
Indonesias
engagement.
These
concerns
over Beijings intentions and
possible interference reached
their peak after the attempted
coup of September 1965. It was
attributed to the PKI, allegedly
with the assistance of Beijing and
Indonesian Chinese. While the
precise details of the event remain shrouded in mystery,
the New Order under President Suharto subsequently
As such, Indonesias perception

of China is often the projection
of its image of domestic
ethnic Chinese, a situation
compounded by a lack of
knowledge about China.
Daniel Novotny, Torn Between America and China: Elite Perceptions and Indonesian Foreign Policy (Singapore: Institute of
Southeast Asian Studies, 2010): 181, 281.
4
Rizal Sukma, Indonesias Perceptions of China: The Domestic
Bases of Persistent Ambiguity. In The China Threat: Perceptions, Myths, Reality, edited by Herbert Yee and Ian J. Storey.
(London: Routledge, 2002): 138.
3
In 1951, for example, a serious row erupted when the Chinese

embassy condemned Jakarta for a raid against PKI and granted
diplomatic protection to a PKI leader who had taken refuge
there.
6
See Franklin B. Weinstein, Indonesian Foreign Policy and the
Dilemma of Dependence: From Sukarno to Suharto (Ithaca, NY:
Cornell University Press, 1976): 297-8.
7
Novotny, Torn Between America and China, 175.
8
Franklin Weinstein, The Indonesian Elites View of the World
and the Foreign Policy of Development, Indonesia 12 (October
1971): 2.
5
Evan A. Laksmana is a researcher with the Centre for Strategic and International Studies, Jakarta, and an adjunct
lecturer at the Indonesian Defense University. He was previously a Visiting Associate Fellow at the S. Rajaratnam School
of International Studies, Nanyang Technological University (Singapore), an ASC Fellow at the Asia Pacific Center for
Security Studies (Honolulu), and an analyst at the Institute of Defence and Strategic Studies (Singapore).
25
HARVARD ASIA QUARTERLY | Changing Relations with Southern Neighbors
labeled communism in general and Beijing in particular

as the main threats to Indonesias national security. Bitter
diplomatic exchanges ensued. On October 23, 1967, Jakarta
froze relations with China. Given that the New Order
in its initial phase was premised on the regimes ability to
maintain social and political order, the perception of the
triple China threat (Communism, Indonesian Chinese,
and Beijing) never fully dissipated.
This argument stood for well over two decades,
until Suharto decided to un-freeze diplomatic relations in
1990. Four domestic factors led to Suhartos decision: (1) a
change in the domestic basis of legitimacy from political
stability to economic development, informed by a need to
adjust to Chinas growing economic power; (2) a change in
economic interests, as the drop in oil prices forced Indonesia
to emphasize industrialization and manufacturing, partly
oriented toward Chinas growing market; (3) a change
in domestic power relations, as Suhartos unchallenged
political rule in the 1980s allowed him to go against the
anti-Beijing camp in the military; and (4) a desire for
Suhartos Indonesia to play a more assertive global role,
which necessitated normal relations with China.9
However, even after ties were restored, Indonesia
remained vigilant in its relations with China. Several
prominent military figures continued to harbor doubts,
while conservative Muslim groups still distrusted China
due to tense relations with the ethnic Chinese - though this
may be related more to historical business rivalries between
Muslim entrepreneurs and ethnic Chinese businessmen
than to political factors.10 As such, suspicion and sensitivity
remained prevalent. A rebuke by Beijing over an antiChinese riot at Medan in 1994 reminded Jakarta that China
was still willing to interfere in its domestic affairs.
Indonesia therefore tended to take a wait-andsee approach in developing the newly restored relations.
Indeed, rather than developing direct political-security
relations, Jakarta preferred to deal with China within
a multilateral framework through either ASEAN or
the ASEAN Regional Forum (ARF).11 This reflected
Jakartas concern over Beijings potential influence among
Indonesian Chinese, as well as its growing assertiveness in
the South China Sea in the 1990s.
For more details, see Rizal Sukma, Indonesia and China: The
Politics of a Troubled Relationship. London: Routledge, 1999.
10
See Irman Lanti, Indonesia in Triangular Relations with
China and the United States. In China, the United States, and
Southeast Asia: Contending Perspectives on Politics, Security,
and Economics, edited by Evelyn Goh and Sheldon W. Simon
(London: Routledge, 2008), 131.
11
The Association of Southeast Asian Nations or ASEAN was
established in 1967 and now consists of all ten Southeast Asian
states except Timor Leste. The regional grouping established the
ASEAN Regional Forum in 1993 as a multilateral security dialogue to promote regional confidence building. It now consists
of 28 participants, including all the ASEAN states, China the
United States, Japan, India, Russia, Australia, and other regional
players.
9
Although China remained a complex political

issue in Indonesia for much of the 1990s, the advent of
democracy in 1998 significantly changed perceptions.
In general, post-Suharto governments have been more
inclusive in their outlook. The abolition of discriminatory
practices against Indonesian Chinese effectively removed
what had been a pebble in the shoe of Indonesia-China
relations for decades. The lifting of travel and immigration
restrictions enhanced human and cultural exchanges. Still,
some members of the elite remained concerned that this
would again shift the allegiance of Indonesian Chinese to
China.12 This has led to widespread reluctance to work with
China, despite the fact that the old triple China threat has
diminished considerably.
Among the general public, perceptions of China
are more varied and contradictory than among the elite.
A 2005 poll by the Pew Research Center noted that 60
percent of Indonesians welcomed the idea of a strong
China that could rival American military strength. Seventy
percent thought that Chinas growing economy was good
for Indonesia.13 A 2006 poll by the Lowy Institute suggested
that over half of Indonesians thought that China could
somewhat be trusted.14
However, in a 2010 Pew poll, only 58 percent of
respondents had a favorable view of China, down from 73
percent in 2005.15 In a 2008 survey by the Chicago Council
on Global Affairs, nearly half of respondents worried that
A rebuke by Beijing over an antiChinese riot at Medan in 1994 reminded

Jakarta that China was still willing to
interfere in its domestic affairs.
China could become a military threat in the future. Only
27 percent were comfortable with the idea of China being
the leader in Asia in the future.16 These two sets of figures
suggest strong ambivalence toward China among the wider
public, even a decade after the resumption of diplomatic
Novotny, Torn between America and China, 206.
See The Pew Research Center, American Character Gets
Mixed Reviews in 16-National Pew Global Attitudes Survey
(Washington, DC: The Pew Global Attitudes Project, 2005): 33.
14
Murray Goot, Australians and Indonesians: The Lowy Institute Poll 2006 (Sydney: Lowy Institute for International Policy,
2006): 6.
15
See Pew Global Attitudes Project, Key Indicators Database, accessed on February 24, 2011, http://pewglobal.org/
database/?in dicator=24&survey=12&response=Favorable&mo
de=chart.
16
See Soft Power in Asia: Results of a 2008 Multinational Survey of Public Opinion (Chicago, IL: Chicago Council on Global
Affairs, 2008): 2.
12
13
26
ties.
The Economic Dimension

The economic dimension of the ambivalence
in Indonesia-China relations has internal and external
facets. Internally, the elite and general public often argue
that Indonesian Chinese (five to seven percent of the
population) control 70 percent of the economy - though
there has never been conclusive evidence to support this
myth. The fact that Indonesian Chinese figured among
With the fear of Chinese economic

dominance looming large, Indonesia listed
nearly 400 categories of sensitive and
highly sensitive goods to be excluded
from the 2010 China-ASEAN Free Trade
Agreement (CAFTA).
the closest partners and most rewarded businessmen of
Suhartos New Order certainly did not help to dispel it.17

Externally, economic relations were muted
for much of the first three decades of the bilateral
relationship. Indeed, up until the 1980s, China was not
seen as a significant contributor to the countrys economic
development.18 However, Chinas growing economic
power and openness in the late 1980s changed this. By
then, Indonesias economy was experiencing a downturn
and was in danger of losing out to Malaysia and Thailand
in terms of exports to China. Therefore, when relations
were reestablished between Beijing and Jakarta in 1985,
trade was the primary catalyst. With economic ties slowly
expanding, Indonesias China threat perception began
to take on an economic dimension: Chinas international
competitiveness and economic dominance, given the lack
of complementarity between the two economies, posed a
danger to Indonesias growth.

This threat perception is due in part to Jakartas
prioritization of economic over political relations since the
1990s. From 1991 to 1998, Indonesias exports to China,
excluding oil and gas, increased from roughly US$580
million to over US$1.32 billion, while imports from China
For a discussion on ethnic Chinese businessmen in Indonesia
before and after the New Order and their role, see for example,
Marleen Dieleman, Juliette Koning, and Peter Post (eds.), Chinese Indonesians and Regime Change. Boston, MA: Brill Press,
2010.
18
Ian James Storey, Indonesias China Policy in the New Order
and Beyond: Problems and Prospects, Contemporary Southeast
Asia 22, no. 1 (2000): 147.
17
27
grew from around US$800 million in 1991 to over US$1.2

billion in 1997.19 In the early 2000s, energy started to
feature more prominently in overall economic relations. In
2002, Petrochina acquired six oil fields in Indonesia from
Devon Energy. In the following year, it bought a 45 percent
stake in ship operators in Indonesias oil fields. By 2004, it
owned 25 percent of operational rights at the Sukowati oil
field, along with several others in Jambi, Papua, and East
Java.20 It also launched an official bid to operate or control
ten oil and gas blocks by 2012 and aims to operate 58 oil
wells by then.

Another Chinese oil company, Sinopec, signed
a joint oil exploration agreement in East Java in 2005
and recently focused on deals for developing alternative
energy sources and oil exploration infrastructure.21 Its total
investment in biofuels, for example, has reached US$5
billion. In 2007, it announced an additional US$14 billion
in oil and natural gas investment. China National Offshore
Oil Corporation (CNOOC) has also been increasing its
presence by taking over five of seven oil fields controlled
by RepsolYPF in 2002 and simultaneously investing in
the US$8.5 billion-worth liquefied natural gas project in
Tangguh, Papua. By 2008, it controlled or had shares in 33
gas fields and 85 offshore facilities, and produced crude oil
from 420 wells. This placed CNOOC among the top five oil
and gas companies operating in Indonesia.
Bilateral trade has also expanded. China went
from Indonesias fifth largest trading partner in 2004 to
its largest in 2010 - with an annual trade volume of over
US$40 billion.22 However, Jakarta is concerned by the fact
that its trade deficit with China in the first 11 months of
2010 was more than US$5.3 billion.23 Local industries
specializing in textiles, food processing, electronics, and
other manufactures are losing out to Chinese products.
With the fear of Chinese economic dominance looming
large, Indonesia listed nearly 400 categories of sensitive and
highly sensitive goods to be excluded from the 2010 ChinaASEAN Free Trade Agreement (CAFTA).
More than 800 Chinese-owned businesses worth
around US$2 billion were operating in Indonesia by
2004. By 2005, China had invested in 84 major projects
worth over US$200 million and ranked eighth in the list
Raymond Atje and Arya B. Gaduh, IndonesiaChina Economic Relations: An Indonesian Perspective, CSIS Working
Paper Series 52 (Jakarta: Centre for Strategic and International
Studies, 1999): 9.
20
See Tirta N. Mursitama and Maisa Yudono, Strategi Tiga
Naga: Ekonomi Politik Industri Minyak Cina di Indonesia (Jakarta: Center for East Asian Cooperation Studies, University of
Indonesia, 2010): 117-8.
21
Figures in this paragraph are from Mursitama and Yudono,
Strategi Tiga Naga, 138.
22
See Perdagangan Indonesia China, Kompas, February 2,
2011, 44.
23
See Produk Cina Mengancam Industri Lokal, Gatra, February 3-9, 2011, 40.
19
of the countrys largest investors.24 But China seems most

interested in natural resource investments, particularly in
oil and gas. These investments are undertaken by stateowned enterprises (SOEs), not private companies.25 This
adds to anxieties about Beijings control over the Indonesian
economy.
While China presents
huge economic opportunities,
surveys indicate that over half
of the domestic elite views it as
a competitor.26 Given Indonesias
underdeveloped economy, many
fear that a growing engagement
with China might someday
translate
into
dependency,
especially if Chinas SOEs gain
control of Indonesias energy
sector. Others worry about the
increasing number of Indonesian
Chinese investing in Mainland
China. An Indonesian diplomat
stated that, thanks to the ethnic Chinese community,
China already controls Indonesias economy to a certain
extent.27 Anthony L. Smith, an influential scholar on the
subject, finds that Chinas economic prowess may become
conflated with economic jealousy in Indonesia.28
However, these concerns are largely offset by
Chinas economic aid to Indonesia. During the 1997
Asian financial crisis, it contributed US$500 million to
the IMFs US$43 billion bailout package and provided
US$200 million in export credits.29 It provided US$3
billion worth of emergency aid after the 2004 Tsunami. It
has also used soft loans to finance 40 percent of the total
cost (over US$500 million) of a major bridge linking Java
and Madura, and will help finance a US$1 billion railroad
project in Kalimantan.30 China has agreed to invest in five
major power plants across Java that will have a combined
capacity of over 3,300 megawatts.31
Chinas dual role as economic competitor
and provider of assistance underpins the economic
ambivalence in IndonesiaChina relations. It further
suggests that, while pragmatic concerns have compelled
the Indonesian elite and public to take advantage of Chinas

booming economy, longstanding apprehensions still loom
large.
The Strategic Security Dimension
Ambivalence
in
strategic
security centers on the potential
threat that Chinas military force
poses to Indonesia. It may be
characterized in the following
terms: (1) a conventional assault
by the Peoples Liberation
Army (PLA) from the north,
(2) maritime disputes in the
South China Sea, where
Chinas claims affect regional
stability and Indonesias Natuna
Islands, and (3) Chinas role in
inciting domestic instability
in Indonesia.32 As mentioned
before, the first decades of Indonesia-China relations were
primarily driven by the domestic security concerns inherent
in the triple China threat: Beijings support for the PKI,
its attempts to spread communism, and its connection with
the small but economically powerful Indonesian Chinese.
Such perceptions were more prevalent within Indonesias
military and defense establishment, which dominated
much of the policymaking towards China until the late
1980s.
After the resumption of diplomatic ties in the
1990s, however, the primary concern was no longer
domestic stability but Chinas territorial ambitions in the
South China Sea. As discussed above, the perception of
Chinese expansionism had initially taken a back seat to
domestic political concerns in the 1970s and 1980s. But
doctrinal developments within the military in the same
period suggest that the legacy of the Pacific War in the
1940s left a lingering wariness toward incursions from the
north.33 Chinas attack on Vietnam in 1979, interpreted
as an indication that Beijing was willing to use force to
achieve its interests, reinforced this perception. China was
also involved in many of the 17 military clashes in the
South China Sea between 1974 and 2002.34
It is therefore not surprising that Chinas aggressive
behavior in the South China Sea in the 1990s revived the
specter of a China threat among Indonesian defense and
military planners. The 1995 Defense White Paper warned
that growth in economic and technological capacity could
allow China to become the preeminent military power in
After the resumption of

diplomatic ties in the 1990s,
however, the primary concern
was no longer domestic
stability but Chinas territorial
ambitions in the South China
Sea.
24
Syamsul Hadi, Engaging the Dragon: The Dynamics of
Indonesia-China Relations in the Post-Suharto Era, Indonesian
Social Science Review 1, no. 1 (2010): 63.
25
David M. Lampton, The Three Faces of Chinese Power:
Might, Money, and Minds (Berkeley, CA: University of California Press, 2008): 187.
26
Novotny, Torn between America and China, 214.
27
Ibid.
28
Anthony L. Smith, From Latent Threat to Possible Partner:
Indonesias China Debate, APCSS Special Assessment (Honolulu, HI: Asia Pacific Center for Security Studies, 2003): 5.
29
Storey, Indonesias China Policy, 150.
30
See Berburu Fulus dari Utara, Tempo, May, 2, 2010, 70.
31
See Capailah Listrik Sampai Cina, Tempo, May 2, 2010, 77.
Smith, From Latent Threat to Possible Partner, 2.

Denny Roy, Southeast Asia and China: Balancing or Bandwagoning? Contemporary Southeast Asia 27, no.2 (2005): 317.
34
See Energy Information Agency, South China Sea Dispute,
accessed on February 23, 2011, http://www.eia.doe.gov/e meu/
cabs/South_China_Sea/pdf.pdf.
32
33
28
the region.35 Jakarta has associated Chinas expansionist

agenda in the South China Sea with attempts to dominate
the region. Thus, by the mid-1990s, the military seemed
to have reached the conclusion that China is the greatest
potential direct threat to [Indonesias] sovereignty.36
Beijings attempts to assert hegemony across
Southeast Asia, including over ancient Javanese kings,
in the pre-modern era lend historical legitimacy to these
concerns.37 Indonesias relations with China, dating back
to the third century, have rarely been smooth sailing.
During the Yuan Dynasty (AD 1279-1368), for instance,
Kublai Khan sought to extend Chinas territory and
influence to Java. Stories of Javanese resistance to Chinese
expansionism are still passed down through school
textbooks. This narrative constitutes a small but formative
element in Indonesias perceptions of China. As such, in the
eyes of many Indonesians, China
has always wanted to create a
sphere of influence in Southeast
Asia, and it is believed that it
will continue to do so.38
In contrast to the
New Order, current military
leaders tend to describe China
as a challenge rather than a
threat. However, the substance
of their security concerns has not changed much, especially
not in regard to geopolitics. Nothing is more sensitive than
Chinas ambitions in the South China Sea. This concern
stems from the publication of a controversial map by
Beijing in 1993 laying claim to parts of the territorial waters
surrounding Indonesias Natuna islands, and extending the
demarcation of Chinas territory to include major natural
gas fields in Indonesias jurisdiction.39 Jakarta has sought
clarification from Beijing but has received no clear or
consistent response until now.
Consequently, the Indonesian military organized
a large-scale tri-service military exercise in 1996 around the
Natuna islands involving some 20,000 troops, 40 aircraft, and
50 warships. According to a former high-ranking officer,
the exercise reflected the militarys concern about the
defense of the Natuna islands against a potential Chinese
military incursion.40 Indonesias force development in
the mid- to late 1990s was also influenced by the Natuna
flashpoint. Jakarta not only increased surveillance and

patrols in the area, but also purchased twelve Russian
Sukhoi SU-30K fighter jets in 1997. Although this purchase
was only completed in 2007, military officials have stated
that it will be deployed to assist the maritime defense of
the Natunas.41 Major General Subiyakto, former governor
of the National Resilience Institute, has suggested that
Indonesias straits should be closed to Chinese vessels in the
event that China becomes too aggressive in its claims over
the Spratly Islands.42
This line of thinking is bolstered by Chinas
secretive defense spending and its growing naval arsenal. In
recent years, it has acquired second-generation nuclear and
conventional submarines, frigates, destroyers, and various
platforms for amphibious force projection. Viewed in
conjunction with the PLAs strategy of extending strategic
depth for offshore maritime
operations, China seems to be
gearing up for a preponderant
naval and air presence in
the South China Sea.43 This
reinforces the concerns among
defense planners that if the
Chinese want, they can take the
Natunas.44 Chinas assertiveness
in the area has also led Indonesia
to defend a very narrow interpretation of its obligations
under the United Nations Convention on the Law of the
Sea (UNCLOS), which designates sea-lanes for unimpeded
passage (or innocent passage) in Indonesian waters.45 In
particular, the prospect of a future Chinese navy penetrating
the Java Sea has been an underlying consideration in
withholding access in the east-west sea-lane.46
With this in mind, in 2008 the military organized
the largest ever combined tri-service military exercise in
several areas bordering on or near the South China Sea:
Stories of Javanese resistance

to Chinese expansionism are
still passed down through school
textbooks.
See Ministry of Defense and Security, Kebijakan Pertahanan

Keamanan Negara Republik Indonesia (Jakarta: Ministry of
Defense and Security, 1995): 4-5.
36
Cited in Robert Lowry, The Armed Forces of Indonesia (St.
Leonards, NSW: Allen & Unwin, 1995): 4.
37
See Alan Whiting, ASEAN Eyes China: The Security Dimension, Asian Survey 37, No. 4 (1997): 302.
38
Sukma, Indonesias Perceptions of China, 191.
39
Details on how the map affects the Natunas are in Chi-Kin Lo,
Chinas Policy Towards Territorial Disputes: The Case of the
South China Sea Islands (London and New York: Routledge,
1989): 44.
40
Cited in Novotny, Torn between America and China, 176.
35
29
Cited in Michael Leifer, Indonesias Encounters with China

and the Dilemmas of Engagement. In Engaging China: The
Management of an Emerging Power, edited by Alastair Iain
Johnston and Robert S. Ross (London: Routledge, 1999): 105.
42
Cited in Michael Leifer, Indonesias Encounters with China
and the Dilemmas of Engagement. In Engaging China: The
Management of an Emerging Power, edited by Alastair Iain
Johnston and Robert S. Ross (London: Routledge, 1999): 105.
43
See John Garofano, China Southeast Asia Relations: Problems and Prospects. In Asia Looks Seaward: Power and Maritime Strategy, edited by Toshi Yoshihara and James R. Holmes
(Westport, CT: Praeger Security International, 2008): 167-84.
44
Cited in Novotny, Torn between America and China, 221.
45
Innocent passage amounts to the right to pass promptly
through a countrys territorial waters, doing nothing that is not
directly related to that passage. Trading, fishing, surveying and
military display are from the understanding of innocent passage
under UNCLOS.
46
See Leifer, Indonesias Encounters with China, 99. And
perhaps explains why the official designation for Indonesias
archipelagic sea-lane passages was legally ratified by Jakarta
only in 2002.
41
Batam Island, Natuna Islands, the waters near the Riau

Archipelago, Western Kalimantan, the waters near the
Makassar Strait, and the Sangatta islands. The first such
exercise since 1996, it involved more than 30,000 soldiers
and was based on a foreign maritime invasion scenario.47 The
specific campaign exercises focused on addressing future
challenges on Indonesias northern frontier, which borders
on the South China Sea. Moreover, the military recently
announced that it would increase troop deployment in the
small islands bordering the South China Sea.
Other actions appear to reinforce Indonesias
growing vigilance in its archipelagic waters. First, maritime
Despite all these strategic and security

concerns, however, Indonesia realizes
that China is not only a balancer for
American military influence, but also a
more dependable supplier of weapons
than the West.
patrols have been stepped up. Although concerns over
Malaysias incursions into Indonesian waters have certainly
played a role in this, so has the increasing frequency of
illegal fishing and maritime piracy. It is alleged that two
more submarines and four frigates have been ordered
due to the growing tension in the area. Second, since the
1990s, Jakarta has increased the population in the Natuna
islands through its transmigration program to help protect
the Natuna islands from any would-be rival claimants.48
Finally, Jakarta has sought to ensure that a friendly power
helps develop its gas fields in the area. In January 1995,
state-owned oil company Pertamina signed a contract with
the US oil company ExxonMobil to develop the Natuna gas
field. The contract was renewed in December 2010.
Despite all these strategic and security concerns,
however, Indonesia realizes that China is not only a
balancer for American military influence, but also a more
dependable supplier of weapons than the West. This was
among the key reasons why the 2005 Strategic Partnership
Agreement between Indonesia and China included defense
cooperation. In July 2006, the first IndonesiaChina Defense
Dialogue came into being, and by 2007, an agreement was
signed to enhance technological cooperation. High-level
visits of senior security officials and military officers have
also become more frequent. Chinese-made missiles are
slowly making their way into the inventory of the military,
and there is a possibility of a joint-production venture in
See Presiden akan Saksikan Latgab 2008, Kompas Daily,
June 15, 2008.
48
Cited in Storey, Indonesias China Policy, 159.
47
Indonesia.49 In return, Indonesia hopes to sell military

supplies such as domestically made SS-2 assault rifles to
China.50
These increasing military-to-military ties have
primarily been driven by the need to modernize the
Indonesian militarys ageing equipment and to diversify its
weapons suppliers to avoid repeating the traumatic arms
embargo of the 1990s. It would also appear that it was
motivated by Jakartas desire to get Washingtons attention.
In this sense, the partnership does not manifest an abiding
faith in common strategic interests with China, or even a
genuine acknowledgement of peaceful intentions toward
it - this is still contingent upon how China behaves in the
South China Sea in the future.
This suggests that behind the warming of
bilateral defense relations, pragmatic considerations and
apprehension over Chinese regional ambitions, especially
in the South China Sea, still loom large in the minds of
policymakers. As former Defense Minister Juwono
Sudarsono stated over 15 years ago:
Barring the possibility that China can gain access
to resources other than the South China Sea, then
ASEAN countries will have to face the possibility of
imminent military confrontation with China.51
The Foreign Policy Dimension

In foreign policy, the ambivalence in IndonesiaChina relations is related both to Chinas relations with
ASEAN, as well as to Indonesias goal of balancing the
major powers. With regards to the former, the degree,
pace, and scope of Chinas engagement with ASEAN
are critical for Indonesia. This is not just because Jakarta
co-founded the regional grouping and uses it to project
regional leadership; for defense planners, ASEAN has also
served as a security shield of friendship, a cordon sanitaire
protecting the archipelago from possible threats emanating
from outside the region. Moreover, ASEAN and its related
institutions such as the ARF are seen by Jakarta as key tools
for engaging and balancing major powers in the region.
Chinas relations with ASEAN have expanded
considerably since Vietnams withdrawal from Cambodia
in 1989. They have become more complex, involving
interdependent economic and political-security interests,
and a mix of bilateral and multilateral activities.52 China has
increasingly engaged multilateral security arrangements in
the past two decades, especially through ASEAN and ARF.
49
See Chinese Missile Aid for Indonesia: How Strategic a Partnership, IISS Strategic Comments 11, no. 6 (2005): 1-2.
50
See Indonesia, China Set to Boost Military Relations, The
Jakarta Post, May 22, 2010.
51
Cited in Sukma, Indonesias Perceptions of China, 202.
52
For a detailed discussion, see Alice D. Ba, China and
ASEAN: Re-navigating Relations for a 21st-Century Asia,
Asian Survey 43, no. 4 (2003): 62247.
30
In 2003, it signed the Treaty of Amity and Cooperation

(TAC) and the Joint Declaration on Strategic Partnership for
Peace and Prosperity. Beijing considers these multilateral
security mechanisms valuable in three respects: (1) to
dampen tensions in Chinas external security environment,
(2) to help China extend its regional influence without
upsetting its neighbors, and (3) to counter or circumvent
US influence and power on the Chinese periphery.53
However, given Chinas recent assertiveness
in the South China Sea, as well as its stonewalling in the
discussions surrounding a legally binding Code of Conduct
in the area, Southeast Asian states remain unsure of Chinese
intentions in the long term. In economic terms, of course,
they see China as a vital partner. But there is concern that
China might be trying to drive a wedge between those
states generally considered to be closer to the United
States (Indonesia, Philippines, Malaysia, Singapore, Brunei,
Thailand), and those that seem more receptive to Beijings
overtures (Myanmar, Cambodia, Laos, Vietnam). In this
regard, there is especial concern with Chinas economic
initiatives in the Greater Mekong Sub-region.54 Given
this uncertainty, ASEAN will continue to encourage
multilateralism in an effort to mitigate Chinese influence.
This line of thinking also prevails among
Indonesias foreign policy elite, albeit in a more specific
context. Chinas rise and its growing relations with
ASEAN are embraced insofar as they provide Indonesia
with more room to maneuver vis--vis the United States
and other major powers.55 This is manifest primarily in
three ways. First, in the post-9/11 world, China is often
seen as a balancer to American unilateralist designs in the
region, especially following the invasions of Afghanistan
and Iraq. This builds on the legacy of the Suharto regime,
when China was also a useful ally against Western human
rights pressures. Second, in investment, trade, and defense
cooperation, China could reduce Indonesias dependence
on the United States, at least to a certain degree. Finally,
Chinas willingness to participate in regional multilateral
security mechanisms and institutions has raised the gravitas
and profile of ASEAN and further solidified its centrality in
the region.
However, even here, Indonesian policy is not
one-dimensional. Due to the ambivalent nature of ChinaASEAN relations, Jakarta has sought to formalize its bilateral
security relations and strategic partnerships with other
major powers, including not just China and the United
States, but also Australia, Russia, and India. Thus, Indonesia
sees multilateral engagement and bilateral partnerships
with China and the other major powers as complementary
Bates Gill, Rising Star: Chinas New Security Diplomacy
(Washington, DC: Brookings Institution Press, 2007): 29.
54
See Geoff Wade, Could ASEAN Drift Apart?, Yale Global
Online, February 25, 2011, available at http://yaleglobal.yale.
edu/content/could-asean-drift-apart.
55
Novotny, Torn Between America and China, 174.
rather than mutually exclusive. Ultimately, it seeks a

dynamic equilibrium the new label for balance of
power coined by the Ministry of Foreign Affairs. In fact,
during Indonesias chairmanship of ASEAN, one of its top
three priorities was to ensure that any future architecture
for regional cooperation would be based on this dynamic
equilibrium.56
Conclusions

The preceding analysis assessed four dimensions
of ambivalence in Indonesia-China relations. It has shown
that deep-rooted sentiments toward and perceptions of
China pervade both the elite and the wider public in
Indonesia. These are shaped primarily by a long history
of bilateral interaction in the Asian neighborhood, as well
as by the difficult place of ethnic Chinese Indonesians
in Indonesian society. Whether one looks at domestic
politics, economics, strategic security, or foreign policy,
all these dimensions suggest that Indonesias responses to
a rising China cannot be neatly categorized as strategies of
balancing, bandwagoning, or hedging. The dynamics of
Indonesia-China relations at the official level essentially
reflect a variation of a more pervasive ambivalence toward
China in Indonesian society.
At the same time, history shows that Jakarta has
always been very pragmatic and flexible in its relations with
China. This helps explain many aspects of the relationship
that may seem contradictory: despite the persistence of a
Chinese security threat perception, there is a warming
bilateral defense relationship; despite concerns over
Beijings growing influence over Indonesias economy,
trade and investment continue to expand; and despite
the uncertainty surrounding Chinas regional ambitions,
Indonesia retains a preference for multilateral engagement
with China in an inclusive regional architecture.
However, the reality of these domestic-driven
dimensions of ambivalence implies that there should
not be any illusion regarding the warming of overall
bilateral relations. For the foreseeable future, Indonesian
policy will continue to reflect a negotiation between
pragmatic security and economic factors. The government
must remain responsive to domestic perceptions, real or
imagined, of the potential implications of Chinas rise to
Indonesian prosperity. In the short term, it would behoove
China to tread carefully, both in the South China Sea and in
bilateral economic relations. If not, it may once again incite
deep-rooted anxieties in Indonesia.
53
31
Presentation of Djauhari Oratmangun, Director General for

ASEAN Cooperation, Indonesian Ministry of Foreign Affairs, at
a public seminar on Indonesia and ASEAN in 2011, organized
by the Centre for Strategic and International Studies, Jakarta,
January 13, 2011.
56
Chinas Relations with

South Asia:
Why is India Weary?
Gunjan Singh & Avinash Godbole Institute for Defense Studies and Analysis
South Asia is projected to become the next
flashpoint in the emerging great power politics of Asia.
India and China, as rising powers with unsettled territorial
and border disputes, continue to vie for influence in the
region. India has traditionally considered South Asia to
be within its sphere of influence. It has been wary of
Chinas engagement in the region.
This article analyzes the clash of perceptions
between India and China. It argues that India is a regional
power that waits for normalization before engagement,
while China, on the other hand, is a regional power that
engages to benefit from normalization. Two issues form
the core of this argument: Indias negative experience
with Chinas involvement in South Asia in the past; and
second, Chinas involvement in South Asia over the last
decade. These issues have altered the paradigm of Indias
security policy and South Asia strategy.
The Rise of China
As Chinas weight in the global economy has
grown, debates about the rise of China have gained

momentum. The world has become keener to engage
China both economically and politically. Growing
economic capacity has been accompanied by an
increase in Chinese military expenditures, and changes
in its strategic doctrines to develop advanced warfare
capabilities. Chinas military projections, from the
ASAT test of January 2007 to the test flight of the stealth
aircraft J-20, have been noted as landmark developments
in its military modernization.1 Thus, the rise of China
has had a major impact on the regional balance of power
across the world.
Today, China is heavily involved in the resourcerich regions of Africa, Latin America, and Central Asia.
Resources are required to maintain the level of economic
growth China needs to maintain stability and to ensure
For example, see Joseph E. Lin, Regional Reactions to ASAT
Missile Test & Chinas Renewed Activities in the East China
Sea, China Brief 7, no.3 (October 17, 2007). http://www.
jamestown.org/single/?no_cache=1&tx_ttnews[tt_news]=4026
and Eric Hagt, Chinas ASAT Test: Strategic Response, China
Security (Winter 2007): 31-51.
32
China and the United States. Chinese confidence was

boosted as the country achieved a certain degree of
economic parity, bringing it a step closer to becoming a
great power.
In sum, Chinas economic advances, and the
concomitant expansion in military capability and
increase in resource-seeking investment, have led it to
pose a challenge to the international system. But it should
be emphasized that this challenge is also paradigmatic China is not just rising, but also changing the rules of the
game by adopting a foreign policy that is qualitatively
different from other established powers.5 This implies
that the dominant paradigm of the Western liberal order
will eventually have to accommodate and adjust to the
Chinese model.
Chinas Foreign Policy in Asia: Where Does South
Asia Fit In?
the legitimacy of Chinese Communist Party (CCP) rule.2

Without growth, social unrest and discontent may
increase to an extent that the CCP is not ready to handle.
Chinas rise has also assumed different dimensions
since the onset of an economic slowdown in late 2007.
Chinas GDP growth fell below 7 percent between
2008 and 2009 but rebounded swiftly to double digits
last year.3 During this recovery period, there has been
substantial focus on the relative decline of the United
States and the corresponding rise of China. By 2008,
China possessed foreign reserves in excess of US$ 1.8
trillion.4 Beijing clearly showed that it was better
prepared to deal with the financial crisis than the United
States and the European Union. This event also brought
to the forefront the extent of interdependence between
Ian Burma, Chinas Best Hope, Project Syndicate, January 7,
2009, http://www.project-syndicate.org/commentary/buruma21/
English
3
China GDP Growth Rate, Trading Economics, accessed on
March 4, 2011, http://www.tradingeconomics.com/Economics/
GDP-Growth.aspx?Symbol=CNY
4
C. Fred Bergsten et al., Chinas Rise: Challenges and Opportunities (Washington D.C.: Peterson Institute for International
Economics and Center for Strategic and International Studies,
2009): 209.
An important landmark in Chinas foreign

relations involved the 1989 pro-democracy movements
in Tiananmen Square. When Western countries
imposed sanctions on China after the Tiananmen Square
incident, China was forced to look for alternative
sources of investment and engagement. The opening
up of the economy in 1978 had kick-started economic
development, and there was a need to maintain
this process. As a result, China improved trade and
investment relations with its Asian neighbors, who had
largely refrained from condemning Tiananmen.6 The
large presence of Overseas Chinese in these countries
worked as a catalyst in transforming Chinas diplomatic
influence.
Hu Jintaos Report at the 17th Party Congress
summarized Chinas foreign policy objectives with
reference to different countries in the following words:
For developed countries, we will continue to
strengthen strategic dialogue, enhance mutual
trust, deepen cooperation and properly manage
differences to promote long-term, stable and
sound development of bilateral relations. For our
neighboring countries, we will continue to follow
the foreign policy of friendship and partnership,
strengthen good-neighborly relations and practical
cooperation with them, and energetically engage
in regional cooperation in order to jointly create
For more see Eva Paus,Penelope B. Prime andJon Western

(eds.): Global Giant:Is China Changing the Rules of the Game?
New York: Palgrave Macmillan, 2009.
6
Zhiqun Zhu, Chinas New Diplomacy: Rationale, Strategies
and Significance (Farnham: Ashgate, 2010): 1.
5
Gunjan Singh and Avinash Godbole are researchers at the Institute for Defense Studies and Analysis, New Delhi, India
33
a peaceful, stable regional environment featuring

equality, mutual trust and win-win cooperation.
For other developing countries, we will continue
to increase solidarity and cooperation with them,
cement traditional friendship, expand practical
cooperation, provide assistance to them within our
ability, and uphold the legitimate demands and
common interests of developing countries. We
will continue to take an active part in multilateral
affairs, assume our due international obligations,
play a constructive role, and work to make the
international order fairer and more equitable.7
This statement illustrates that the South Asia
region is not a high strategic priority for China. In
Chinas order of preferences, engagement with the
United States remains a top priority, followed by
relations with its neighbors, and only then with other
developing countries.
One should further note that Chinese engagement
with developing countries through major infrastructure
development projects is fairly recent. It began only after
the Asian Financial Crisis in 1997, and really took off
during the presidency of Hu Jintao. This policy differs
from Chinas former South Asia
policy of Official Developmental
Assistance
(ODA),
where
its involvement was limited
to monetary aid or aimed to
support revolution. China has
used this new policy partially
as a way to gain access to raw
materials in underdeveloped
markets. Such policies increase
its direct competition with
the United States. However,
China has used its identity as a
developing country to make
other developing countries
comfortable with its growing influence.
This background is important for understanding
Chinas growing role in the South Asia region. Initially,
Chinas engagement in South Asia was focused mainly
on Pakistan, Chinas all weather friend. For a long
time, India feared that it was fighting a two-front
war. Chinese involvement in the Kashmir dispute has
remained particularly sensitive, because it challenges
Indian sovereignty. Recent instances in which stapled
Chinese visas were issued to Indian citizens from the
provinces of Jammu and Kashmir only added to these
fears.
But in addition to Pakistan, India is now

concerned with Chinese engagement with other South
Asian countries as well. These interactions are occurring
not only at the diplomatic level, but also involve
increasing volumes of trade and investment. Because
India has traditionally been the major trading partner in
the region, it is very concerned with these developments.
Over the past decade, China has surpassed India as
the main exporter to the region. This trend has been
particularly pronounced since 2004. At the same time,
there has been a decline in the share of exports from
South Asian countries to India. Moreover, China has
made inroads into the textile, machinery, and chemical
industries traditionally dominated by Indian firms.8
China has also been providing aid to a number
of countries in the region. The major recipients are
Pakistan, Bangladesh, Sri Lanka, and Nepal. While
India is concerned with how Beijing is using aid to build
diplomatic relations with several South Asian countries,
its main preoccupation in this regard remains Pakistan.
China has long sought to counter Indian influence by
providing aid to Islamabad. The most worrying aspect
of this is its assistance in developing Pakistans nuclear
program. This occurred in spite of Pakistans history of
nuclear proliferation to support
rogue
regimes.
Pakistani
nuclear scientist A.Q. Khan has
recently confessed that in 1982,
Pakistan received enriched
uranium and other material
from China. As far back as
1966, China provided Pakistan
with a critical nuclear weapons
design.9
Under
these
circumstances, New Delhi was
not pleased with President
Barack Obamas remarks in
2009 calling for China to play a
more meaningful role in South Asia. From New Delhis
perspective, the United States appeared to be legitimizing
Chinas military engagement with Pakistan.
In Chinas order of preferences,

engagement with the United
States remains a top priority,
followed by relations with its
neighbors, and only then with
other developing countries.
Hu Jintaos report at the 17th Party Congress, Hold High the

Great Banner of Socialism with Chinese Characteristics and
Strive for New Victories in Building a Moderately Prosperous
Society in All Respects, accessed on February 1, 2011, http://
www.china.org.cn/english/congress/229611.htm#11.
Whither Indias South Asia Policy?

The increasing interest Beijing has shown towards
South Asian countries challenges Indias primacy in the
region. China has developed numerous infrastructure
development projects in the region, ranging from Sittwe,
Dawei, and Mergui in Myanmar, to Hambantota in Sri
Pravakar Sahoo and Nisha Taneja, Chinas Growing Presence
in Indias Neighborhood, February 5, 2010, accessed on January 17, 2011, http://www.eastasiaforum.org/2010/02/05/chinasgrowing-presence-in-indias-neighborhood/.
9
Whither Pakistan, IDSA Task Force Report, Institute for
Defence Studies and Analyses (2010): 107-109.
8
34
Lanka and Gwadar in Pakistan. It is debatable whether

these dual-use projects form part of Chinas supposed
string of pearls strategy, by which China aims to
encircle India militarily in the Indian Ocean Region in
case of a border conflict between the two.10 In any case,
the level of infrastructural growth that the region has
witnessed as a result of Chinese efforts is phenomenal.
In the past, India took a less proactive and more
benign policy approach toward the region. Since there
was always a fear of a spillover effect into provinces
on the Indian border, India shied away from taking
positions on the intern al issues of its neighbors. For
instance, policymakers were particularly cautious in the
aftermath of the assassination of Rajiv Gandhi, former
Prime Minister of India, by the Liberation Tigers of
Tamil Elam (LTTE), which at the time was a separatist
Tamil group in Sri Lanka.
China entered the scene when several countries in
South Asia were suffering from economic woes. It looked
for path-breaking projects that would boost local and
national economies. As a result, Indias regional strategy
suddenly looked inadequate and weak in the wake of
Chinese advances. New flight routes are emblematic of
this shift: while there is talk of connecting Nepal and
Pakistan to the Chinese Mainland by air, there are very
few direct flights and other
means of transport between
India and her neighbors.
In addition, a slow pace
of engagement and a poor track
record of delivering on promises
have led smaller neighbors
to mistrust India. The more
India has failed to integrate
the region, the more those
countries have started looking
for other options. Even if there
are ideas in India on how to
better engage its neighbors,
these rarely materialize due
to the lack of initiative at the decision-making level in
the Indian bureaucracy. By contrast, China has acted
swiftly.11 Due to its experience of facilitating business
on the Mainland over the past three decades of Open
Reforms, China may now have an upper hand over
India, which has long suffered from an inefficient and
complicated bureaucracy.
Historically, the countries of the region have
been wary of Indian influence because the countrys
geographic preeminence is perceived to translate into
strategic predominance. Indias neighbors have been

reluctant to establish free trade agreements for fear
that Indian companies would flood their small domestic
markets. This is where India faces the paradigmatic
challenge of China in its neighborhood. Chinas growing
interest in the region, along with capital and technology
superior to Indias, has come as an unexpected boon to
South Asian states.
While Chinas interest in South Asia might be
purely economic, an absence of clear communication
with India, coupled with repeated questions over Indias
territorial integrity, is creating a serious perception
gap in bilateral security policies. With an ongoing
border issue and the changing stance of Beijing with
respect to the Kashmir issue, Delhi feels it is being
arm-twisted by Beijing. During the Mao era, Chinas
insistence that smaller South Asian countries like Sri
Lanka follow an independent foreign policy was part
of an effort to assume leadership of all of Asia.12 This
trend has continued even in recent times as Beijing has
endorsed Sri Lankas struggle to protect its sovereignty
and territorial integrity and has opposed any outside
intervention in Sri Lanka.13 Therefore, from an Indian
perspective, the bilateral relations of India and China are
at the core of Chinas South Asia policy.
Gurpreet Khurana, Chinas String of Pearls in the Indian

Ocean and Its Security Implications, Strategic Analysis 32, no.1
(2008): 1-39.
11
S. D. Muni, Engagement with Emerging Asia, in India and
China: The Next Decade, edited by S.D. Muni and Suranjan Das
(New Delhi: Rupa, 2009): 94.
12
It is debatable whether these

dual-use projects form part of
Chinas supposed string of pearls
strategy, by which China aims to
encircle India militarily in the Indian
Ocean Region in case of a border
conflict between the two.
10
35
Bilateral Relations
Between India and China
Both India and China are

growing at phenomenal rates
since instituting economic
reforms in the 1980s. Over the
last decade, this growth has
been matched by an increase
in the level of interaction and
economic engagement between
the two countries. Heads of
state have conducted mutual
visits at regular intervals since
2003, when Prime Minister Atal Bihari Vajpayee made a
landmark visit to Beijing.14 Prior to 2003, there had been
a ten-year gap in visits, most likely due to Indias nuclear
tests in 1998.
Since the 2003 visit, there has been an increasing
flow of business-related travel between Indian and
China. There has also been an increase in the number
of Indian tourists visiting China. Indian people tend to
perceive China as an economic success story, and there
have been calls to use it as a model for Indias own
Swaran Singh, SinoSouth Asian Ties: Problems & Prospects, Strategic Analysis 24, no.1 (2000): 12.
13
J. Mohan Malik, South Asia in Chinas Foreign Relations,
Pacific Review 13, no.1 (February 2001): 89.
14
Harsh Pant, The China Syndrome: Grappling with the Uneasy
Relationship (New Delhi: HarperCollins India, 2010): 16.
development. The many authors comparing India to

China in terms of economics and politics are testimony
to the increase in interest on the subject.15
India-China bilateral trade rose from $2.2.billion
in 2000 to $50 billion in 2008 and was projected to
exceed $60 billion by the end of 2010.16 During this
period, Indias exports also rose substantially. However,
in terms of both volume and quality, trade is still heavily
stacked in favor of China. When China recognized
Sikkim as part of India in 2006, border trade began in
the Nathu La Pass, signaling positive momentum in
bilateral relations. So on the economic front, one could
argue that China-India relations have been moving in
a fairly positive direction, with both sides pushing for
further improvements.
However, despite burgeoning trade relations,
the trust deficit created by the 1962 War has not been
overcome yet. In fact, this deep-seated mistrust helps
explain the lack of bilateral contact in recent decades.
The fourteen rounds of talks between the representatives
of India and China for the settlement of the border issue
have remained inconclusive. Though China and India
have cooperated on a number of international issues like
climate change and the WTO, they leave the contentious
bilateral issues to the next generation, simply because
they are not able to reach an acceptable solution.
Chinas attempt to obstruct loans by the Asian
Development Bank (ADB) to India for infrastructure
projects in Arunachal Pradesh, a province in Northeast
India still claimed by China as southern Tibet, have
raised alarm bells among Indias strategic planners.
Border incursions in the western regions, as well
as stapled Chinese visas for residents of Jammu and
Kashmir, further fuel nationalist sentiments in India.
From the Indian perspective, border incursions amount
to violations of peace. The issuance of stapled visas is
considered a challenge to Indias territorial sovereignty.17
China is unwilling to recognize that all these tactics will
only limit its bargaining capacity in negotiations with
15
See for example, Raghav Bahl, Super Power? The Amazing
Race Between Chinas Hare And Indias Tortoise. New York:
Penguin, 2011. Also Edward Friedman and Bruce Gilley (eds.):
Asias Giants: Comparing China and India. New York: Palgrave
Macmillan, 2008; Pranab Bardhan, Awakening Giants, Feet of
Clay: Assessing the Economic Rise of China and India. Princeton: Princeton UP, 2010.
16
Dean Cheng, Chinas View of South Asia and the India
Ocean, Heritage Lecture 31 (August 2010), accessed on February 1, 2010, http://www.heritage.org/research/lecture/china-sview-of-south-asia-and-the-indian-ocean.
17
Vineeta Pandey, Stapled Visas by China Not Acceptable:
India, January 14, 2011, accessed on March 6, 2011, http://
www.dnaindia.com/india/report_stapled-visas-by-china-notacceptable-india_1494203. Also see Reuters, Border Incursions
Strain China-India Ties, September 18, 2009, accessed on
March 6, 2011, http://ibnlive.in.com/news/border-incursionsstrain-chinaindia-ties/101648-3.html.
India.
Consequently, India effectively sees two Chinas:

an economic China viewed with a sense of awe, and a
political China that is treated with caution. Therefore,
any act that challenges Indias political sovereignty, like
the stapled visa issue, garners bad publicity for China
From the Indian perspective, border

incursions amount to violations of
peace. The issuance of stapled visas
is considered a challenge to Indias
territorial sovereignty.
in the Indian press. Amidst all this, the perception gap
that led to the 1962 War has begun to recast its shadow
on India-China relations. This is compounded by the
absence of an objective narrative on the causes of the
war in Indias official history. Chinas willingness to
walk the extra mile for Indias neighbors, combined
with its challenge to Indias territorial sovereignty, will
remain sources of tension in the years to come.
Chinas Relations with Other South Asian
Countries
In this section, we analyze Chinas bilateral
relations with other South Asian countries to see if there
are any common trends. Indias strategic community
feels that all the countries in the region provide China
with a platform for exerting pressure on India.
Pakistan
Since the founding of Pakistan in 1947, IndiaPakistan relations have been a contentious international
issue. Meanwhile, Pakistans friendship with China has
grown in almost direct proportion to its deteriorating
relations with India. According to Sumit Ganguly,
Pakistan will remain central to Chinas South Asia
strategy.18 Pakistan was one of the first countries
to recognize the PRC, as the countries established
diplomatic relations on May 21, 1951. This friendship
also emerged from the fact that Pakistan was pretty
close to China even during the decades of international
isolation, primarily during the 1960s and 1970s,
following the countrys wars with India in the 1960s.
Additionally, Pakistans role in facilitating Kissingers
secret visit to the PRC is well known.19 China has
18
Jamal Afridi and Jayashri Bajoria, China-Pakistan Relations,
July 6, 2010, accessed on February 1, 2011, http://www.cfr.org/
china/china-pakistan-relations/p10070
19
William Burr, The Beijing Washington Back Channel and
36
helped Pakistan to build a number of missiles and other

military assets like the jointly developed JF-17 aircraft.
It has also provided Pakistan with the technology for its
current nuclear reactors in accordance with the 1974
Sino-Pakistan agreement on nuclear cooperation, which
occurred immediately after the first nuclear test by India
in May 1974. There are also talks about a civil-nuclear
deal similar to the one between Washington and New
Delhi. Chinas willingness to look the other way when
it comes to Pakistans history of proliferation, as well as
its offer of a nuclear deal, have raised serious security
concerns in India.
China and Pakistan have also been working
on a large number of infrastructure projects. During
a 2010 visit by Pakistani President Asif Ali Zardari to
Beijing, the Chinese government pledged to build a
railway line connecting Pakistan with China, via the
Pakistan Occupied Kashmir
(POK), that would facilitate
energy transit between the two
countries. The project would
also include construction of
an all weather highway. The
two countries have also been
cooperating on power plants,
highways, telecommunications,
mines, and other development
projects.
Besides the railway line,
the most important strategic
development has been Chinas
involvement in the building of
Gwadar port, which is located in Balochistan province.
The port is fully operational now. It provides industrial
facilities, warehouse support, and a deep-sea port
servicing more than 20 countries. Using this port, China
gains quick and direct access to the Persian Gulf. It will
try to use it as a way to overcome the current insecurity
of its sea-lanes of communication (SLOCS) and the
Malacca Dilemma. Via Gwadar, China can use multiple
transit routes to the province of Xinjiang.20
It is also noteworthy that there is a sizable

population of Chinese in Pakistan. It is estimated that
there are approximately 10,000 Chinese engaged in over
120 projects. This population increased significantly
after the Free Trade Agreement (FTA) between Pakistan
and China came into effect in October 2009. The FTA
included provision for opening Pakistans service
sector.21 In addition to Chinese engaged in trade, there
is some indication that the Peoples Liberation Army
(PLA) has stationed some 11,000 troops in the Gilgit
Baltistan region of Pakistan Occupied Kashmir (POK)
for infrastructure projects.22 This development is
particularly worrisome for India.23
Nepal
Official diplomatic relations between China

and Nepal began in 1955.24 Initially, Beijing followed a
policy of non-interference in
the internal affairs of Nepal.25
But more recently, it has shown
greater willingness to engage.
In 2009, China announced
62.5 million rupees in military
aid, a 50 percent increase from
the previous aid package. In
exchange, Nepal agreed to
curb any anti-China (pro-Tibet
liberation) activities on its soil.26
There is an increasing
consensus in Nepal that
Chinese investments can make
the country become more selfsustained and independent.27 By 2008, Chinese investors
Chinas willingness to look

the other way when it comes
to Pakistans history of
proliferation, as well as its offer
of a nuclear deal, have raised
serious security concerns in
India.
Henry Kissingers Secret Trip to China, National Security

Achieve Electronic Briefing Book 66 (February 27, 2002),
accessed on March 6, 2011, http://www.gwu.edu/~nsarchiv/
NSAEBB/NSAEBB66/.
20
Chinas Malacca Dilemma is about concerns over the possible
blockade of trade of the Malacca Strait through which majority of the Chinese energy transits. Beijing has been worried
about a future blockade by the United States in case of any
standoff in the Taiwan Strait. This could cripple the Chinese
economy in no time given Chinas dependence on energy
imports from West Asia. For details see Ian Storey, Chinas
Malacca Dilemma, China Brief 6, no.8 (April 12, 2006),
accessed on February 1, 2011, http://www.jamestown.org/
programs/chinabrief/single/?tx_ttnews[tt_news]=31575&tx_
ttnews[backPid]=196&no_cache=1.
37
21
China-Pakistan FTA on Trade in Services Comes into Force
on October 10, China FTA Network, September 13, 2009, accessed on January 17, 2011, http://fta.mofcom.gov.cn/enarticle/
enpakistan/enpakistannews/200911/1454_1.html.
22
Peoples Liberation Army (PLA) is the national army of the
Peoples Republic of China.
23
Selig Harrison, Chinas Discreet Hold on Pakistans Northern
Borderlands, New York Times, 26 August 2010, accessed
on February 2, 2011, http://www.nytimes.com/2010/08/27/
opinion/27iht-edharrison.html.
24
Government of Nepal, Ministry of Foreign Affairs, Nepal
China Relations, accessed on February 1, 2011, http://mofa.gov.
np/bilateralRelation/nepal-china.php.
25
Nihar Nayak, Nepal: New Strategic Partner of China?,
IDSA Strategic Comment, March 30, 2009, accessed on January
18, 2011, http://www.idsa.in/idsastrategiccomments/NepalNewStrategicPartnerofChina_NNayak_300309.
26
China Announces Rs 62.5 Million Military Aid for Nepal,
India-Server, September 27, 2009, accessed on February 2,
2011, http://www.india-server.com/news/china-announces-rs-625-million-4044.html.
27
Prithvi Man Shrestha, Chinas Political and Economic Missions in Nepal: Investment- Yes, Interference-No, September 18, 2010, accessed on January 16, 2011, http://blog.com.
np/2010/09/18/chinas-political-and-economic-missions-in-
in Nepal numbered around 200.28 There has also been

a perennial increase in bilateral trade, which reached
US$257 million in October 2010.29 In order to promote
trade, China has promised Nepal that it would lengthen
the existing Qinghai-Tibet Railway, connecting Beijing
and Lhasa, to Kathmandu.30 China has also promised to
invest in the hydropower and
tourism sectors.31
Considering
this
increasing engagement between
Nepal and China, it was not a
surprise when Nepal proposed
Chinese membership in the
South Asian Association for
Regional Cooperation (SAARC)
in 2010. This move was also
supported by Pakistan and
Bangladesh. This is a significant
development, since Chinas full membership would
alter the structure of this fragile grouping.32 India has
considered SAARC as its primary sphere of influence, so
there is concern that any initiative to bring China into
the group will undermine Indias regional leadership.
If such a move is being supported by three of Indias
neighbors, it is definitely a cause of concern for New
Delhi.
Some observers of Nepalese politics believe that
closer ties between China and Nepal are motivated by
Chinas aim to distance Nepal from India. India has
regarded Nepal as a traditional sphere of influence and a
buffer state between India and China. With the increase
in the level of interaction between China and Nepal,
this traditional buffer zone could cease to exist. Once
China begins the proposed railway line from Lhasa to
Zhangmu, it will alter the character of the landlocked
Nepalese economy and subsequently transform ChinaNepal relations. This is occurring in the context of recent
infrastructure developments in Tibet, as well as Chinas
recent military exercises aimed at quick mobilization

and movement of troops.
Sri Lanka
Indias bilateral relations with Sri Lanka have
been affected by Chinas activism in the subcontinent
as well. As mentioned above,
due to coalition politics in India
and spillover effects of Tamil
ethnic struggle in Sri Lanka,
India could not take any firm
stand on the Sri Lankan crisis
in the past. It is generally
believed that Colombo was
not happy with the refusal of
the Bhartiya Janta Party (BJP)
to provide arms in 1999, when
the Sri Lankan government was
dealing with the insurgency of the Liberation Tigers of
Tamil Eelam (LTTE). At that time, Pakistan and China
came to Colombos assistance.33 In 2009, China provided
Sri Lanka with a billion dollars in aid.34 In 2010, China
finished work on the Hambantota Port in Sri Lanka.
Beijing has also has been investing in roads, railways,
airports, and a coal power station near this port.35
Such investments are a matter of concern
for India. China does not have operational rights in
Hambantota, and there is no provision for oil storage
or refining there.36 Therefore, any Chinese activity in
Hambantota will have to be watched carefully, since it
may be strategically motivated. The building of the port
provides China with access to the Indian Ocean. China
has been working towards building a blue water navy and
its forays into the Indian Ocean are a clear sign of that
intention. China has also been arguing in no uncertain
terms that the Indian Ocean is not Indias ocean.37 There
is no disputing that these are international waters and
that there is scope for India-China maritime cooperation
on the issues of piracy and east-west SLOCs.38 However,
Some observers of Nepalese

politics believe that closer ties
between China and Nepal are
motivated by Chinas aim to
distance Nepal from India.
nepal-investment-yes-interference-no/.
28
Nepal Welcomes Chinese Investment, Xinhua, January 12,
2009, accessed on January 16, 2011, http://news.xinhuanet.com/
english/2009-01/12/content_10642332.htm.
29
Nepal, China Sign MOU for Promotion of Trade, Peoples
Daily, December 21, 2010, accessed on January 16, 2011, http://
english.peopledaily.com.cn/90001/90776/90883/7237260.html.
30
96% of Netizens Support Qinghai-Tibet Railway Extension to Nepal, Peoples Daily, October 15, 2009, accessed on January 16, 2011, http://english.peopledaily.com.
cn/90001/90776/90883/6784371.html.
31
China Increases Aid to Nepal by 50%, Express India, April
19, 2009, accessed on January 16, 2011,
http://www.expressindia.com/latest-news/China-increases-aidto-Nepal-by-50/448796/.
32
Archis Mohan, SAARC Drops Move to Upgrade China
Status, The Telegraph, April 23, 2010, accessed on January
16, 2011, http://www.telegraphindia.com/1100424/jsp/foreign/
story_12375430.jsp.
33
Madhav Malapt, EU Pushing Sri Lanka Toward China,
The Diplomat, January 14, 2011, accessed on January 16, 2011,
http://the-diplomat.com/2011/01/14/eu-pushing-sri-lankatoward-china/.
34
China, Sri Lanka Agree to Deepen Military Ties, DNA
India, September 16, 2010, accessed on January 16, 2011,
http://www.dnaindia.com/world/report_china-sri-lanka-agree-todeepen-military-ties_1438977.
35
Sri Lanka Opens China-funded Hambantota Seaport,
August 16, 2010, accessed on January 16, 2011, http://truthdive.
com/2010/08/16/Sri-Lanka-opens-China-funded-Hambantotaseaport.html.
36
Khurana, Chinas, 15.
37
Andrei Chang, Indo Power Afloat In The 21st Century Part
One, Space War, March 6, 2009, accessed on January 16, 2011,
http://www.spacewar.com/reports/Indo_Power_Afloat_In_
The_21st_Century_Part_One_999.html.
38
Siddharth Varadarajan, Time to Reset the India-China
38
in the absence of any cooperative initiative on Chinas

part, coupled with the usage of aggressive posturing
and showing of strength (an increase in the number of
nuclear submarines which are used for patrolling), India
will continue to feel threatened.39 Improving relations
with Sri Lanka, a vital cog in easing Chinas Malacca
Dilemma, provides Beijing with an important step in
its defensive capacity. However, if one believes in the
string of pearls strategy, its offensive capacity cannot
be overlooked.
Bangladesh
The other Indian neighbor with which India has
always had troubled relations is Bangladesh. In the past
decade, there has been an upward trend in the level
of warmth between Dhaka and Beijing. Bangladesh
India does not want to isolate the

Myanmar junta and let that be an excuse
for continuance of anti-India activities in
Myanmar. Therefore, in order to balance
the Chinese presence, India recently
hosted Senior General Than Shwe
despite serious criticism from home and
abroad.
has always been worried about Indian influence since
its formation in 1971 as a result of the long-running
liberation struggle. Since China has started showing
greater interest in the South Asia region, Bangladesh
has also been trying to attract Chinese investment.
Last year Dhaka asked China to invest in the ceramics,
textiles, machineries, footwear, and fertilizer sectors.40
China has also shown interest in helping Bangladesh to
construct a seaport at Chittagong. In addition to this,
China has also been showing interest in investing in
the telecommunications and infrastructure sectors in
Bangladesh.41 Although China and Bangladesh currently
Relationship, The Hindu, December 15, 2010, accessed on
January 16, 2011, http://www.hindu.com/2010/12/15/stories/2010121553741400.htm
39
Manu Pubby, Chinas Submarine Patrols Raise Eyebrows in
India, Indian Express, February 7, 2009, accessed on January
21, 2011, http://www.expressindia.com/latest-news/Chinassubmarine-patrols-raises-eyebrows-in-India/420466/.
40
Chinas Help Sought for Deep-Sea Port, Road Link,
The Daily Star, March 20, 2010, accessed on January 16,
2011, http://www.thedailystar.net/newDesign/news-details.
php?nid=130836
41
Faheem Haider, Bangladesh China Move Closer on Invest-
39
do not have an FTA, Bangladesh has shown interest in

an agreement ever since China granted Bangladesh the
status of most favored nation in 1984.
While Beijing has been very successful in
providing attention and cooperation, India has been
more concerned with the presence of Indian separatist
groups there. It is rumored that some of these groups
are aided and abetted by Pakistans Inter Services
Intelligence (ISI).
Myanmar
Although Myanmar is generally considered part
of Southeast Asia, it deserves mention here, mainly
because it shares borders with both India and China, and
also because both have similar economic and strategic
interests in Myanmar. For China, apart from the other
South Asian countries, Myanmar is very important
geo-strategically, as it provides China with the shortest
access route to the Indian Ocean. Despite being one
of the first countries to recognize the PRC in 1949,
the upward momentum in this relationship occurred
only in the 1990s. Since then, economic and defense
exchanges have risen dramatically. China is the thirdlargest trading partner of Myanmar after Singapore and
Thailand. China is also the largest foreign investor in
Myanmar.42 Some suspect that Beijing has helped the
Military Junta bring nuclear technology to Myanmar in
return for development and access to Sittwe port and
an oil pipeline that runs to Kunming, the provincial
capital of Yunnan province in southwest China.43 From
Indias perspective, Chinese FDI helps sustain the
military regime in Myanmar, and this regime harbors
leaders from terrorist groups in northeast India. India
does not want to isolate the Myanmar junta and let that
be an excuse for continuance of anti-India activities in
Myanmar. Therefore, in order to balance the Chinese
presence, India recently hosted Senior General Than
Shwe despite serious criticism from home and abroad. In
this visit, some of the companies from the Indian private
sector managed to gain access to some of the oil fields
that are in the territorial waters of Myanmar.
The Maldives
China-Maldives trade relations are relatively small
and favor China by more than 300 percent.44 However,
ment in Infrastructure and Trade, June 15, 2010, accessed
on January 16, 2011, http://bangladesh.foreignpolicyblogs.
com/2010/06/15/bangladesh-china-move-closer-on-investmentin-infrastructure-and-trade/.
42
Khaled Iqbal Chowdhury, China-South Asia Relations: A
Dynamic Contour, BIPSS Focus, accessed on January 12, 2011,
http://www.bipss.org.bd/download/csr.pdf.
43
C. S. Kuppuswamy, China-Pakistan-Myanmar:The triangular
relationship needs careful watch, January 29, 2002, http://www.
southasiaanalysis.org//papers5/paper401.html
44
Embassy of Maldives in China, Maldives China Relations,
n.d., accessed on February 4, 2011, http://www.maldivesem-
there have been a number of important bilateral visits

since 2001, when Premier Zhu Rongji visited Male.
Around the time of that visit, there was news of China
getting rights to develop and operate a submarine base
New Delhi has come to view Chinas

recent engagement in South Asia as a
strategy of encirclement to confine India
within the limits of South Asia.
on one of the Maldivian Islands, Marao. This deal was to
be for 25 years. This project was subsequently reported
to have been delayed but has not been shelved yet.
China and the Maldives continue to insist that
their joint hydrographical surveys are for environmental
purposes only.45 These surveys could very well be for
seabed exploration for future port development in the
area. In general, India might have fewer reasons to worry
about Chinas interest in the Maldives. India-Maldives
relations have grown since Indian forces helped in
ending a coup there in 1988.46
Conclusion
Two points emerge from Chinas present-day
engagement with South Asia that may point to a broader
strategy. First, the Chinese perspective of South Asia
is now fundamentally different from the Mao era.

Second, infrastructure is the centerpiece of this new
strategy. Chinas interests in South Asia appear to be
purely strategic. As Kaplan argues, Instead of hardened
military bases of the Cold War and earlier eras, there
will be dual-use civilian-military facilities where basing
arrangements will be implicit rather than explicit, and
completely dependent on the health of the bilateral
relationship in question.47
Despite repeated assurances under the dictum of a
harmonious world, China has taken a more aggressive
stance toward its neighbors in order to pursue its core
interests.48 There are questions concerning Chinas
commitment to peace that remain unanswered. In fact,
from New Delhis perspective, rhetorical statements of a
win-win strategy begin to appear like mere lip-service.
New Delhi has come to view Chinas recent
engagement in South Asia as a strategy of encirclement
to confine India within the limits of South Asia. The
strongest evidence of this is Chinas challenge to Indian
sovereignty over Kashmir and its conduct vis--vis
the claimed states of Arunachal Pradesh. It seems that
Chinas South Asia policy is partially aimed at gaining
a stranglehold over Indias strategic maneuverability.
Economic engagement from the point of view of Beijing
becomes strategic displacement from the point of view
of New Delhi. Management of this regional game will
depend in all likelihood on how Beijing and New Delhi
manage the strategic perception gap in future.
Srinath Raghavan, Indian Ocean Currents, The Indian
Express, January 29, 2010, accessed on February 3, 2011, http://
www.indianexpress.com/news/indian-ocean-currents/743352/0.
48
Hu Makes 4-point Proposal for Building Harmonious
World, Xinhua, September 16, 2005, accessed on January 16,
2010, http://www.china.org.cn/english/features/UN/142408.htm.
47
bassy.cn/Maldives&china.asp.
45
Sudha Mahalingam, Maldives: Tiny Islands, Big Intrigue,
Asia Times, April 7, 2006, accessed on February 3, 2011, http://
www.atimes.com/atimes/South_Asia/HD07Df01.html.
46
Ibid.
40
EVOLUTION OF THE POLICY

PROCESS IN CHINA:
THE IMPACT OF THE COLOR REVOLUTIONS AND GLOBAL
ECONOMIC CRISIS ON CIVIL SOCIETY PARTICIPATION IN PUBLIC POLICY
Jessica C. Teets Middlebury College
Given the rapid expansion of Chinese economic

and military power, many analysts predict the existence
of a new bipolar world with the United States and
China as reigning superpowers. While the timing of
Chinas ascension to superpower status might be in
question, it is clear that China is integral to post-Cold
War international politics. Thus the question that many
scholars grapple with is what does Chinas rise mean for
international politics? The answer to this question would
shed much light on the debate over how the world should
interact with an ascendant China; however, the key to
understanding this question relies on how policy is made
in Chinawho is involved, does public opinion matter,
and what factors most influence policy decisions?
Great divergence exists in our understanding
of the policy process in China due to the opaque nature
41
HARVARD ASIA QUARTERLY | Policymaking in Chinas Rise
of policy making in this authoritarian, single-party

system. In the past, many scholars contended that policy
decisions are primarily made in an insular fashion by a
small group of Communist Party (CCP) elites in response
to domestic factors like perceived regime instability,
nationalism, and economic growth.1 While I agree with
this analysis, the policy-making process in China has
been changing rapidly over the last decade, with new
individuals and groups participating in the process and
international factors playing a larger role than in the
past. Bonnie Glaser and Evan Medeiros find that even the
1
David Lampton, The Making of Chinese Foreign and Security
Policy, Stanford, CA: Stanford University Press, 2002; Lu Ning,
The Dynamics of Foreign Policy Decision-Making in China,
Boulder, CO: Westview Press, 1997; Susan Shirk, Fragile Superpower, Oxford: Oxford University Press, 2008.
foreign policy-making process has changed to include

new ideas from outside of the formal bureaucracy such as
those from think-tank analysts and university scholars,
and that these new ideas have substantially changed
peaceful rise policies to a peaceful development ones.2
Regarding domestic policy, I argue that civil society
groups increasingly participate in the policy process in
a similar role to that which Glaser and Medeiros find
think tanks and universities playing in foreign policy.
The process of neoliberal reform in China throughout
the 1990s created legitimate space for private individuals
and groups to participate in some aspects of government
policy making, and this participation expanded the
policy sphere to include new voices from society, which
increasingly introduced public opinion into the policy
process. While China is still an authoritarian state, the
policy sphere has slowly liberalized to allow for more
participation in the process of creating both domestic
and foreign policy.
In addition to the expansion of the policy
process to include civil society groups such as private
business associations, non-profit organizations, and even
international non-governmental organizations (INGOs),
international factors play an increasingly important role
in domestic policy decisions. In this article I analyze this
changing policy environment by examining growing
civil society participation in the policy process and
the impact that international factors like the color
revolutions in the former Soviet Republics and the global
economic crisis have had on the more inclusive policy
process in China. I find that these two international
events reinforced the ideas of a faction called the New
Left and influenced changing civil society regulations on
the ease of group registration and foreign funding.
A policy process that is more open to both
societal participation and international influence
has important implications for understanding how
Chinas rising prominence might impact the current
international system. First, a more inclusive process
allows public opinion, not just elite preferences, to be
reflected in public policies. Depending on the dominant
public opinion, hyper-nationalism or cosmopolitanism,
policy decisions might become more aggressive or more
liberal toward the international community. Second,
growing international influence might help transfer
international norms about democracy or provoke a
backlash to perceived foreign meddling in domestic
affairs. While impossible to predict the outcomes of this
new policy process, understanding how policy is made
Bonnie Glaser and Evan Medeiros, The Changing Ecology of
Foreign Policy-Making in China: The Ascension and Demise of
the Theory of Peaceful Rise, The China Quarterly, 2007.
in China helps other states respond to a rising China in

a constructive way.
Civil Society Development in China: Increasing
Participation in the Policy Process
Beginning in 1979 with the advent of economic
reform, many party leaders believed that this process of
economic reform required restructuring state institutions
designed to produce market goods to those designed
to regulate a combination of state-owned and private
firms producing market goods. These reforms consisted
of developing regulatory institutions and policies,
building a professional and technocratic civil servant
corps, decentralizing fiscal and public welfare functions
to local governments, and expanding the private sector
composed of both firms and civil-society organizations.
The central government initiated the small state-big
society reforms in the late 1980s (xiao zhengfu, da
shehui), which envisioned a substantial downsizing of
the party-state apparatus accompanied by the rise of
associational activity to replace the role formerly played
by state institutions.3 As the government withdrew from
society as a producer, it focused on a smaller number
of functions, such as the provision of public goods,
infrastructure development, security, and regulating
both market and society, which created more space for
civil society organizations, ranging from neighborhood
committees to industrial associations and professional
organizations.4
This institutional streamlining included the
decentralization of fiscal and welfare functions to
local governments as a way to place former centralstate responsibilities with either local government or
the private sector.5 Beginning in the 1980s, the central
state increasingly decentralized fiscal policy to local
government under the slogan of cooking in separate
kitchens (fenzao chifan). As the central government
continued to decentralize fiscal responsibility for publicgoods provision to local government, it generated a
resource gap between funding and responsibilities
unfunded mandates. By the early 1990s, the central
government transferred primary responsibility for the
provision of public goods to local governments, such as
Richard Baum, The Limits of Consultative Leninism,
Woodrow Wilson International Center Asia Program 131, (June
2006): 13-20.
4
Shenjing He and Fulong Wu, Property-Led Redevelopment in
Post-Reform China: A Case Study of Xintiandi Redevelopment
Project, Journal of Urban Affairs, 2005.
5
Yingyi Qian and Barry Weingast, Chinas Transition to Markets: Market-Preserving Federalism, Chinese Style, Journal of
Economic Policy Reform, 1996.
3
Jessica C. Teets is an Assistant Professor of Political Science at Middlebury College.
Policymaking in Chinas Rise | HARVARD ASIA QUARTERLY
42
The gap between responsibilities and

funding represents one mechanism
motivating local government to view
an emerging civil society as potential
partners in bridging the resource gap to
meet development promotion goals.
education, health care, infrastructure, and social security
programs like unemployment insurance. Consequently,
the Chinese fiscal system is highly decentralized with
the central government accounting for only 30 percent
of total budgetary expenditures, and the remaining 70
percent distributed among four sub-national levels.6
In comparison, sub-national governments account
on average for only 14 percent of total budgetary
expenditures in developing countries, and 32 percent in
developed countries.7

Despite the transfer of responsibility, local
governments do not possess much fiscal autonomy to
meet these unfunded mandates.8 The central government
restricts the ability to tax local populations and to secure
bonds or loans; and since 2006, the central government
prohibited the collection of agricultural taxes, which
significantly decreases local state revenue in rural
provinces. According to Chinas fiscal budget law, local
governments cannot issue debt and should not run fiscal
deficits; however, in reality, with the demands on local
governments increasing while fiscal transfers from the
central government remain low, most provinces operate
a budget deficit or borrow using special financial vehicles
to fund social programs.9 Funds raised by illicit local
government borrowing or taxation enter the budget as
extra-budgetary revenue, which is especially prone to
corruption or mismanagement.10
The pressure created by these unfunded
mandates is intensified by the cadre evaluation system
which requires that local officials consistently attain
Albert Park, Scott Rozelle, Christine Wong and Changqing
Ren, Distributional Consequences of Reforming Local Public
Finance in China, The China Quarterly 147 (1996): 751-778.
7
Ibid.
8
Christine P. W. Wong, CentralLocal Relations in an Era
of Fiscal Decline: The Paradox of Fiscal Decentralization in
Post-Mao China, The China Quarterly 128 (1991): 691-715;
Hongbin Cai and Daniel Treisman, State Corroding Federalism, Journal of Public Economics, October 2002.
9
Christine Wong, Budget Reform in China, OECD Journal on
Budgeting (2007): 33-56.
10
David D. Li, Large Domestic Non-Intermediated Investments
and Government LiabilitiesChallenges Facing Chinas Financial Sector Reform, World Bank Working Paper, 2006.
6
43
performance goals in order to gain raises or promotions.

In the 1980s, the central government began a series of
civil service reforms to replace the loyalty-based cadre
system with one based on performancethe Target
Management Responsibility System (gangwei mubiao
guanli zerenzhi). Although there is debate over which
performance criteria actually result in promotion, the
two most important goals are economic development
and social order.11 Leading cadres ranked as excellent
under the Responsibility System receive bonuses, pay
raises, medals, honorary titles, and merit records.12
While promotion is not officially considered a reward
under this system, officials who receive excellent
evaluations for two or more years in a row are normally
promoted: In short, today almost all Chinese local
officials have been structured into a highly personalized,
individualized incentive scheme.13 The gap between
responsibilities and funding represents one mechanism
motivating local government to view an emerging civil
society as potential partners in bridging the resource gap
to meet development promotion goals.14
Civil society organizations help local officials
meet promotion goals by running pilot programs to
deliver public goods, generating research and policies
for the use of local officials, and acquiring international
funding and resources to use for government projects.
In fact, many local officials mentioned this as a reason
to partner with civil society groups; not only do groups
offer international best practices in poverty alleviation,
community
participation,
and
environmental
conservation, they also offer financial and technical
resources to help implement these ideas.15 Both the
Susan Whiting, Power and Wealth in Rural China: The Political Economy of Institutional Change, Cambridge: Cambridge
University Press, 2001; Pierre Landry, The Political Management of Mayors in Post-Deng China, The Copenhagen Journal
of Asian Studies 17, 2003.
12
Maria Edin, State Capacity and Local Agent Control in
China: CCP Cadre Management from a Township Perspective,
The China Quarterly 173, 2003.
13
Han Tian, ed., Lingdao ganbu kaocha kaohe shiyong quanshu
(Practical Comprehensive Handbook of Reviewing and Evaluating Leading Cadres), Beijing: China Personnel Press, 1999:
131, as cited in Shu-Yun Ma and Wai-Yin Chan, The Provision
of Public Goods by a Local Entrepreneurial State: The Case of
Preservation of the Nanyue Relics in China, The Journal of
Development Studies, November 2002.
14
Kiril Tochkov, Interregional Transfers and the Smoothing of
Provincial Expenditure in China, China Economic Review 18,
2007: 54-65; Dali Yang, Rationalizing the Chinese State: The
Political Economy of Government Reform. In Remaking the
Chinese State: Strategies, Society, and Security, edited by Chao
Chien-min and Bruce J. Dickson, London: Routledge, 2001.
15
Author interview with local official, Chengdu, Sichuan, 10
July 2008. Note: interviews conducted in China follow the
common practice of protecting the identity of individuals by
listing titles, locations, and dates of interview but not names. If
the group or individual has made public statements or indicated
11
central and provincial governments create innovation

awards to encourage policy innovation at lower levels
that can then be tested and disseminated by provincial
leaders.16 Recognition of social innovation by superiors
helps secure promotion to the next level of government,
as illustrated by the famous example of Zhao Ziyang
pioneering the use of the Household Responsibility
System for privatizing farmland before being promoted to
Premier in 1980 and General Secretary of the Communist
Party in 1987.17 However, as the example of Zhao Ziyang
who endured house arrest for 15
years after the 1989 Tiananmen
protests also illustrates, the
idea of civil society groups
assisting local government in
solving development issues
must be balanced with social
stability concerns. The Target
Management
Responsibility
System
prioritizes
both
economic development and
social order, and the paramount
goal of the party leadership
is preventing unrest that
might
threaten
economic
development and its political hegemony.18 Thus, while
this analysis does not question the still powerful status
of both central and local state in China, I find that the
limited government and small state-big society
reforms created the space for civil society expansion
throughout the 1990s.
Civil society organizations not based on temples
or lineages are fairly new in China.19 Beginning in the mid
1980s and accelerating in the early 1990s, an associational
revolution has been occurring in China, with the number
of civil society groups and participation rates in these
groups increasing dramatically. The Ministry of Civil
Affairs reports that registered groups have increased
from less than 5,000 in 1988 to over 400,000 in 2009,
with informal or unregistered groups greatly exceeding
this number. The number and scope of Chinese civil
society groups (gongminshehui or shiminshehui) have
dramatically increased since the mid-1990s, consisting of
social organizations, business and industry associations,

charities, foundations, and non-profits that formed to
deliver services and advocate for vulnerable populations
in society. In addition to the growth in the number of
domestic groups, Chinese branches of international nongovernmental organizations (INGOs) proliferated during
this time period. For example, The Nature Conservancy
alone opened three offices in Western China and Beijing,
and helped write the initial policy banning thin plastic
bags, adopted nationally in 2008.
The
Ministry
of
Civil Affairs regulates all civil
society groups through a threestep process known as the
dual management system
(shuangchong guanli tizhi):
groups register with the local
Civil Affairs bureau, secure
a government agency as a
sponsor (colloquially called a
mother-in-law), and undergo
an annual review.20 This system
is so expensive and difficult for
most groups to navigate that
many simply register as a forprofit organization and pay taxes, or operate informally
without any legal status resulting in great variation in the
legal status of these associations. Although registration is
difficult, lack of legal status does not completely inhibit
group formation and activity. In fact, Jude Howell finds
that groups appearing to have political goals will be
repressed, but if appearing beneficial local officials will
cast a blind eye towards registration.21
Without securing legal status as a non-profit
and being added to a list of charities and foundations
which allows them to raise funds domestically,
many groups depend on membership dues and local
government grants or international sources of funding.
While membership dues increasingly constitute a larger
portion of overall group funding, small memberships
mean that this source alone cannot support most
groups.22 Mass organizations (and other governmentsponsored groups) are most likely to secure funding from
the government, although grass-roots groups sometimes
Beginning in the mid 1980s and

accelerating in the early 1990s,
an associational revolution has
been occurring in China, with the
number of civil society groups
and participation rates in these
groups increasing dramatically.
a willingness to be quoted, I have used the actual name of the

individual or group.
16
For example, the Innovations and Excellence in Chinese Local
Governance Program: Keping Yu, Innovations and Excellence in
Local Chinese Governance, Beijing: Social Science Literature
Press, 2002.
17
David Zweig, Freeing Chinas Farmers: Rural Restructuring
in the Reform Era, Armonk, NY: M.E. Sharpe, 1997.
18
Thomas Heberer and Gunter Schubert, Political Reform and
Regime Legitimacy in Contemporary China, Asien 99 (April
2006): 9-28.
19
William Rowe, The Problem of Civil Society in Late Imperial China, Modern China 19 (April 1993): 139-157.
Supervisory agencies are often called mother-in-laws to denote their perceived role of monitoring and controlling groups.
This is an important but tricky relationship to navigate, with
asymmetric power and information.
21
Jude Howell, New Directions in Civil Society: Organizing
around Marginalized Interests In Governance in China, edited
by Jude Howell (Lanham MD: Rowman & Littlefield Publishers, Inc., 2004): 151.
22
Xiong Wei and Qin Meng, An Analysis of Chinese NGOs
Weak Capacity and Solution to this Predicament, Chinese
Thought Network, June 17, 2008.
20
44
secure limited funding from their supervising units.23

Many groups illegally fundraise inside of China, but only
raise small amounts of money due to the need for low
exposure of the fundraising events or activities.24 Most
large groups rely almost exclusively on foreign funding
from organizations like the
Ford Foundation and World
Bank.
In addition to legal
challenges with registration
and funding, many scholars
question the autonomy of these
groups from the state.25 For
example, X.L. Ding contends
that civil society groups are
parasitic on the state, meaning
they formally are attached to
official institutions (guakao
danwei) and have overlapping
responsibilities
and
staff
with
formal
government
institutions.26 Since the mid1990s, groups in Chinese civil
society have developed varying relationships with the
state, ranging from complete autonomy matching an
ideal Western grass-roots model to complete cooption
matching a state corporatism model. As a prominent
civil society scholar argues,
In short, the civil society sector is rapidly evolving,

with a great deal of diversity in group types, activities,
funding sources, and registration status.
Despite the diversity of this sector, a common
trend emerges which is the increasing participation
by these groups in the
policy process. In fact, many
scholars have found that civil
society
groups
participate
in both service delivery and
policy advocacy, even if only
informally as part of the
service-delivery role, in policy
areas as diverse as education,
health care, environment,
poverty alleviation, business
regulation and international
trade.28
The
environment
has emerged as a policy area
with the most civil society
participation, with groups
such as Friends of Nature and
the Natural Resources Defense
Council
(NRDC) assisting the government by
drafting regulations, exposing cases of environmental
degradation, and conducting assessments to measure
policy effectiveness.29 For example, after the Chinese
government adopted disclosure regulations which for
the first time required that local governments make
pollution information publicly available in 2008, the
Institute of Public & Environmental Affairs (IPE) and the
NRDC developed a Pollution Information Transparency
Index (PITI) to carry out an assessment of the first
year of implementation. In response to this NRDC
assessment, many local governments, like the city of
Hefei in Anhui Province, were forced to publish lists of
pollution violators to comply with this new regulation.30
Jonathan Schwarz and Shawn Shieh contend that
group participation in the policy process is even more
influential during times of crisis, such as SARS, the 2008
Sichuan earthquake, and the AIDS epidemic in some
Many scholars viewed this

growing civil society activity
as an encouraging sign that the
Chinese government is less likely
than in the past to consider civil
society a threat and more likely
to see it as a useful partner for
the sociopolitical transition that
seems inevitable.
Due to funding sources and relationship with the

government, two models of NGOs exist: one from
above to below and one from below to above.
The first one usually serves as a branch of the
government, sharing its functions, people and
funding. However, recently these groups have
had conflict between serving as the governments
assistant and the interests of the social groups they
serve. The other type of NGO has more autonomy,
but less money and less access points (mostly
informal) to government.27
Author interview with member of indigenous knowledge
NPO, Lijiang, Yunnan, April 5, 2007.
24
Author interview with foreign volunteer for health-related
NPO, Kunming, Yunnan, June 6, 2007.
25
Timothy Brook and B. Michael Frolic, The Ambiguous
Challenge of Civil Society. In Civil Society in China, edited by
Timothy Brook and B. Michael Frolic (New York: ME Sharpe,
1997); Heath Chamberlain, On the Search for Civil Society
in China, Modern China 19 (April 1993): 199-215; Gordon
White, Jude Howell, and Xiaoyuan Shang, In Search of Civil
Society, Oxford: Clarendon Press, 1996.
26
X. L. Ding, Institutional Amphibiousness and the Transition from Communism: The Case of China, British Journal of
Political Science 24 (July 1994): 293-318.
27
(Wang Ming), Chinas NGO and Civil Society Development, Caijing (Finance and Economy Magazine), 2002:
350-352.
23
45
28
Jonathan SchwartzandShawn Shieh, State and Society Responses to Social Welfare Needs in China: Serving the People,
Routledge, 2009; Andrew Mertha, Chinas Water Warriors,
Ithaca NY: Cornell University Press, 2008; Scott Kennedy,
The Business of Lobbying in China, Cambridge MA: Harvard
University Press, 2008; Jessica Teets, Civil Society Participation in Local Governance: Outsourcing Migrant Education in
Shanghai. In Chinas Search for Good Governance, edited by
Sujian Guo (Palgrave Macmillan. Forthcoming December 2011).
29
Peter Ho, Greening Without Conflict? Environmentalism,
NGOs and Civil Society in China, Development and Change 23
(November 2001): 893921.
30
See Cutting Through the Fog with Chinas First Pollution
Information Transparency Index (PITI) at http://www.nrdc.org/
international/piti/files/chinapiti.pdf.
provinces.31
Many scholars viewed this growing civil
society activity as an encouraging sign that the Chinese
government is less likely than in the past to consider
civil society a threat and more likely to see it as a useful
partner for the sociopolitical transition that seems
inevitable.32 However, the debate within central
government centers on how to balance the need for
strengthening civil society with the need for political
stability which groups might challenge. These competing
interests are evidenced by fluctuations in government
policies toward civil society, especially throughout the
2000s in response to international events like the color
revolutions and global economic crisis.
Challenging Small State-Big Society: the Rise of
the New Left
The institutional changes and ideas about
the role of the state that dominated policy discourse
in the 1990s are not uncontested.33 In the mid-1990s,
the New Left (xin zuopai) emerged as a reaction
against the neoliberal policies blamed for many of the
negative externalities of rapid growth.34 Leading New
Jonathan Schwartz and Shawn Shieh, eds., State and Society
Responses to Social Welfare Needs in China: Serving the People,
London: Routledge, 2009.
32
Julia Greenwood Bentley, Survival Strategies for Civil
Society Organizations in China, The International Journal of
Not-for-Profit Law 6, January 2004.
33
Yang Cao and Victor Nee, Controversies and Evidence in the
Market Transition Debate, American Journal of Sociology 105
(January 2000): 117589.
34
Pankaj Mishra, Chinas New Leftist, The New York Times
31
Left thinkers, such as Wang Hui, the former editor of

the influential magazine Dushu (Reading), argued for
a return to socialist principles in the form of greater
social welfare provision, particularly for those groups
left behind by rapid modernization namely workers
and peasants.35 New Left advocates believe the role of
the state should be an expansive one, with the state
mitigating undesirable market consequences such as
income inequality; while regulatory-state advocates
believe the state should pursue a limited role of simply
refereeing or regulating the market and allow social
actors to undertake collective and individual action.36
During this decade, the New Left has seen its
intellectual influence, and more recently its political
influence, consistently rise. It has gone from a fringe
intellectual group with little political clout, to an
elite movement that increasingly informs state policy.
In terms of economic policy, the New Left supports
continued state ownership and greater developmentalstate intervention in directing the market. However,
unlike the old left of hardliner socialists, there is no
question that the market is the fundamental driver of
economic growth. The increasing policy influence of
the New Left is optimized by the current governments
overarching policy framework of building a harmonious
society (hexie shehui), first introduced in 2005.37 This
Magazine, 15 October 2006.
35
Joseph Fewsmith, China Under Hu Jintao, China Leadership Monitor 14 (Spring 2005): 3.
36
See Fewsmith on elite conflicts over market reforms: Joseph
Fewsmith, Elite Politics in Contemporary China, Armonk NY:
M.E. Sharpe, 2001.
37
Leslie Hook, The Rise of Chinas New Left, Far Eastern
Economic Review, April 2007.
46
slogan essentially refers to a package of populist policies

that seek to address the concerns of those disadvantaged
groups (ruoshi qunti) that were left behind by the
regulatory state policies of rapid development and the
dismantling of the state-owned enterprise sector and
the social welfare state. Such policies have shifted the
balance in favor of greater equity to address the concerns
of groups critical of neoliberalism and better manage the
societal impact of economic transition. For example,
in discussing the 11th five-year plan unveiled in 2005,
Mark Leonard argues that it is a template for the new
Chinese model. From the new right, it keeps the idea of
permanent experimentation a gradualist reform process
rather than shock therapy. And it accepts that the market
will drive economic growth. From the new left, it draws
on concern about inequality and the environment and a
quest for new institutions that can marry co-operation
with competition.38
The New Left is
characterized by an emphasis
on state power to redress
the problems of injustice
and other negative effects of
privatization,
marketization,
and globalization. Regarding
civil
society,
New
Left
theorists highlight the negative
effect of the market on civil
society. Following the Marxist
tradition, new left theorists
believe that the capitalist mode
of production is grounded in exploitation, and that a
civil society developed under capitalism is simply a
vehicle for ensuring the dominance of capitalist interest
groups. As Wang Hui points out, the current civil society
developed from a state-sponsored system where many
members of the political elite or their families directly
participate in economic activity and have become agents
for large corporations and industries. Can we call them
representatives of civil society?39 Thus, the New Left
advocates the development of state mechanisms for
participation, and distrusts current civil society in China
as simply representing dominant capitalist interests at
the expense of social justice.
global economic crisis, these international events clearly

accelerated this trend. The color revolution model
from the former Soviet Republics provides examples
of foreign-funded civil society mobilizing protests
and helping overthrow the government. The color
revolution model was developed from the Bulldozer
Revolution in Serbia in 2000, where the United States
spent $41 million on a democracy-building campaign
in the months prior to presidential election, including
US-funded consultants running tracking polls, training
thousands of opposition activists, and helping to
organize a parallel vote count.40 The Serbian model is
characterized by collaboration between international
democracy promoters and domestic opposition groups
to overthrow the existing regime, and was transmitted
by Serbian activists and democracy-promotion groups to
other post-Soviet republics such as Georgia for a Rose
Revolution in 2003, Ukraine for
an Orange Revolution in 2004,
and Kyrgyzstan for a Tulip
Revolution in 2005. Chinese
analysts note that the color
revolution model contains
efforts to infiltrate both
from outside and within the
designated state, using foreign
aid, special Western democracypromotion programs, Western
media, the instigation of what
the Chinese referred to as street
politics (jiedao zhengzhi ), and
youth mobilization.41 In China, civil-society groups were
identified as a chief transmission mechanism: NGOs are
an instrument that the Western states like to use. They
are a Trojan horse planted by the Western intelligence
agencies.42
In response to the color revolutions, in 2005,
President Hu Jintao was reported to have issued a
report at an internal Party conference that called for
vigilance against US efforts to launch a color revolution
in China, and directed researchers to examine the
circumstances surrounding the color revolutions.43 The
lesson of this model for a government desiring to retain
power is repression or revolution, which establishes a
confrontational relationship between state and society. In
The color revolution model from

the former Soviet Republics
provides examples of foreignfunded civil society mobilizing
protests and helping overthrow
the government.
Impact of the Color Revolutions and Global

Economic Crisis
While policy shifts towards the New Left were
already underway before the color revolutions and
Mark Leonard, Chinas New Intelligentsia, Prospect Magazine 144, March 2008.
39
Wang Hui, Contemporary Chinese Thought and the Question
of Modernity. In Whither China? Intellectual Politics in Contemporary China, edited by Xudong Zhang (Durham NC: Duke
University Press, 2001): 185.
38
47
Michael Dobbs, U.S. Advice Guided Milosevic Opposition:

Political Consultants Helped Yugoslav Opposition Topple Authoritarian Leader, Washington Post, December 11, 2000.
41
Jeanne L. Wilson, Colour Revolutions: The View from Moscow and Beijing, Journal of Communist Studies and Transition
Politics 25 (June 2009): 369-395.
42
Pan Rulong and Dai Zhengqin, Yanse Gemin yu Guoji Fei
Zhengfu Zuzhi [Color Revolutions and NGOs], Dianzi Keji
Taxue Xuebao Shekeban 7 (2005): 78.
43
Frank Ching, No Changing Colors in China, The Japan
Times, November 2, 2005.
40
the wake of the tulip revolution in Kyrgyzstan in March

2005, Chinese authorities ordered a comprehensive
review of all registered civil society groups receiving
foreign funding. While the color revolutions sparked
fears about foreign funding of civil society as a path to
democratic revolution among Chinese cadres, both the
color revolutions and the global economic crisis reified
New Left ideas about the superiority of state guidance of
market and society.
Additionally, the perceived failure of US-style
capitalism has greatly undermined neoliberals in China
who would like to see a more complete dismantling of
the state-owned sector. On November 10, 2008, China
announced a historic $586 billion stimulus package to
encourage growth and domestic consumption ranging
from infrastructure investment to environmental
protection. When the State Council representative
announced the stimulus package, he said, As long as we
take the right measures in a resolute and timely way to
grasp the chance and rise to the challenges, we will surely
secure steady and relative fast economic growth. As
predicted, this stimulus was largely successful; and while
the US economy suffered from decreased production
and high unemployment, the Chinese economy quickly
rebounded and by the first quarter of 2010 posted 11.9
percent growth rate5.7 percent higher than the first
quarter of 2009 during the crisis and higher than its
average quarterly GDP growth of 9.31 percent from
1989 until 2010.
According to elite politics experts Bo Zhiyue
and Chen Gang, the crisis opens up avenues for the New
Left to promote a state capacity view of economic
policy, where heavy state regulation and involvement
in the economy are necessary to manage development.44
The critical juncture represented by the global economic
crisis may play a role similar to the one played by the
Great Depression in the United States, where the failure
of free market ideology created the political conditions
for New Deal policies. The rising influence of the New
Left illustrated in the Harmonious Society policies and
2008 stimulus represent in part the influence of these
international events on the policy environment in
China.45
Implications for the Policy Process: Sustained
Liberalization or Reversal?
The color revolution model and successful
weathering of the global economic crisis generated
increasing confidence in New Left ideas that imagined
Zhiyue Bo and Gang Chen, Global Financial Crisis and the
Voice of the New Left in China, East Asian Institute Background Brief 443, 26 March 2009.
45
He Li, Debating Chinas Economic Reform: New Leftists vs.
Liberals, Journal of Chinese Political Science 15, (2010): 123.
44
a larger, more active state role than under the

regulatory-state idea dominant in the 1990s, which was
delegitimized by the decline in the US economy during
the economic crisis. In response, the CCP has changed
the regulations governing civil society to restrict foreign
funding and increase registration.46 This first regulation,
Notice of the State Administration of Foreign Exchange
(SAFE), attempts to control and decrease foreign funding
for groups by adding more bureaucratic approvals to
the transfer of funds. This regulation seeks to avoid
the supposed catalyst of the color revolutionsforeign
democracy promotion via domestic groupswhile
simultaneously providing government funds for these
groups through local government grant competitions.
The second regulation, currently only operating
in Yunnan Province, establishes a documentation
system for INGOs to better track group activities and
interactions. However, this new policy is paired with
the easing of the registration process in several provinces
like Beijing, Shenzhen, and Shanghai. These regulatory
changes attempt to control group activity in some
ways, like making foreign funding more onerous and
requiring registration, but do not attempt to restrict this
participation in the policy process, as seen by increasing
other sources of funding and easing registration.
Returning to the questions posed at the
beginning of this article about how policy is made in
Chinawho is involved, does public opinion matter,
and what factors most influence policy decisionsI
find that the policy process is still open to civil society
participation and that international events increasingly
influence domestic policies, in ways that both encourage
and undermine this participation by civil society in
the policy process. While impossible to predict the
outcomes, this new policy process in China increasingly
functions in a more open way with influence from both
society in the form of civil society participation and the
international community through events like the color
revolutions and global economic crisis. In fact, recent
protests across the Middle East and North Africa have
triggered a response similar to the color revolutions in
China, with increased scrutiny of civil society activities
and funding sources. However, civil society groups
are still functioning and participating in this more
liberalized policy sphere. As Chinas international
prominence grows, understanding this new policy
process is increasingly important for comprehending
and responding to Chinese policy choices.
Karla W. Simon, Recent Developments in Chinese Law Affecting CSOs/NGOs. In Reinvigorating Civil Society in China:
A Socio-Legal Analysis (Oxford: Oxford University Press,
forthcoming 2011).
46
48
C O M M E N TA R Y
The Current Status of the

Korean Peninsula:
A Chinese Perspective
Zhang Liangui Central Party School of the Communist Party of China
Translation by Iacob Koch-Weser

The Cheonan Incident and Yin Ping Island
Shelling Incident in 2010 pushed the Korean Peninsula
to the brink of war. At the decisive moment, North
Korea retreated and evaded conflict, thus restoring
some sense of calm. At the beginning of this year, North
Korea actively worked toward peace negotiations with
South Korea by proposing an unconditional revival
of dialogue. But in February, the bilateral military
discussions fizzled out it without ever having really
begun. This illustrates that South Korea has adopted a
tactic of vigilance and avoidance in peace negotiations
with its neighbor. This foreshadows a status quo of cold
peace for many years to come the two Koreas will
neither adopt aggressive defense measures, nor make
49
any grand gestures to ease tensions. Beneath this faade

of tranquility, however, North Korea will actively and
progressively upgrade its nuclear and missile arsenal.
This will draw the Peninsula and even Northeast Asia
into a still greater crisis.

Below, I discuss four important aspects of the
situation on the Korean Peninsula.
1. Amid Stalemate, Relations Become More
Balanced

The many casualties claimed by the two
Incidents last year, coupled with the ongoing arms race
and North Koreas threat of fighting total war, fighting
nuclear war, has imbued South Korean society with a
deep sense of failure in its policy toward North Korea. It
has rejected the sunshine policy, arguing that the US$7

billion in aid provided to North Korea over the past ten
years have not only failed to improve relations, but on
the contrary have made the South more vulnerable to
the Norths military threat. This has already become
mainstream opinion in South Korea. As a result, the
sunshine policy has lost popular backing. There is
widespread support for the policy stance of the Lee
Myung-bak administration, which makes aid provision,
closer bilateral ties, and promotion of economic
cooperation contingent upon denuclearization by North
Korea. In view of this, bilateral relations are likely to
remain at a stalemate for some time to come.

Looking back at the past ten years of the
sunshine policy, South Korea certainly had the upper
hand in terms of comprehensive national power. But
because South Korea is afraid to lose the war with
North Korea, and even more afraid to win it, it has very
ambivalent strategic aims and limited policy choices.
North Korea, on the other hand, has clear and resolute
strategic aims, as well as flexible and shifting tactics. As a
result, it has had a firm grip on steering bilateral relations.
Tension or detente, conflict or dialogue - North Korea
has called the shots in accordance with its own needs.
Even when dialogues have taken place, the time, place,
and subject of the meetings, as well as their success or
failure, have largely been premised on the notion that
North Korea has the final say.

However,
after
the
Lee
Myung-bak
administration assumed office, and especially after the
two Incidents last year, South Korea has hardened its
stance. In military affairs, it adopted a posture of total
opposition and showed no hesitation to go to war; in
bilateral dialogue, it insisted on naming the conditions,
showing no fear of a renewed breakdown of talks. After
North Korea proposed the 3rd North-South Summit,
President Lee was adamant that we need real results,
and we will not hold a summit just to hold a summit.
He further insisted that, since the last two South Korean
presidents had made the journey to Pyongyang, the next
summit should be held in South Korea. Evidently, South
Korea is fighting for equality and balance in bilateral
ties, and this is beginning to bear fruit. Going forward,
this will have an important impact on the situation in
the Peninsula.
2. In Spite of the Brink of War Policy, the Two
Koreas Maintain Cold Peace

In the Korean Peninsula conflict, North Korea
has consistently adopted a policy of meeting toughness
with toughness. It frequently uses threats like fighting
total war, fighting nuclear war and turning Seoul
into a sea of flames as a way of exploiting the fear of

war prevalent in South Korean society. Its aim is to
coerce the South Korean government into retreat. Past
experience shows that South Korean accommodation
has achieved the opposite of its intended effect,
incentivizing North Korea to resort to aggressive
behavior even more frequently.

The situation last year forced South Korea to
adopt a brink of war policy toward the North in order
to meet toughness with toughness. The government
revised its principles of military defense from peaceful
status quo to enhanced counterattack; revamped
the organizational bodies of the military; converted
the former five-island chain from a base of defense
into a base of attack; and greatly increased defense
expenditures in order to upgrade its military equipment.
Evidently, South Korea is fighting for

equality and balance in bilateral ties,
and this is beginning to bear fruit.
At the same time, it strengthened military cooperation
with the United States, thus making the United States an
even more decisive factor in ongoing developments on
the Peninsula. South Korea and the United States have
perpetually engaged in large-scale military exercises to
exert pressure on North Korea. These exercises have
already grown from a simple show of force into a form
of military mobilization. Should North Korea indeed
declare military resistance actions, the joint exercises
would immediately switch into attack mode.

North Korea is fully aware of this. This is an
important reason why it suddenly changed its policy
from inspiring fear to avoiding war twelve years
ago. It also explains why it adopted an active peace
negotiation policy this year. It is certain that, as long as
North Korea makes sober and rational judgments about
the Peninsula situation, it will blunt its edge and proceed
carefully. So in spite of the brink of war policy adopted
by both sides, they are likely to maintain a cold peace
amid tense standoff.
3. As Six-Party Talks Stall, Participants Should
Also Be Prepared for Failure
To peacefully resolve the North Korea nuclear
conflict, and to maintain peace and stability in the
region, China has actively sought to reinitiate the SixParty Talks. But until now, it has made no progress.
Meanwhile, the United States, Japan, and South Korea
Zhang Liangui is a Professor of International Politics at the Center for International Strategy at the Central Party School
of the Communist Party of China.
50
have already set out two preconditions for resuming

talks: first, the two Koreas must resume bilateral dialogue
in order to improve bilateral relations; second, North
Korea needs to reaffirm its promise to denuclearize.
Of these two preconditions, the former is merely
tactical - it aims to satisfy South Korean demands and
to elevate South Koreas status in the Six-Party Talks.
The latter precondition, however, has real substance.
When North Korea announced in April 2009 that it
would forever withdraw from the Six-Party Talks, it
also announced that it would not accept any restriction
placed on it by an agreement reached at the Six-Party
Talks. This has given the United States, Japan, and
South Korea some reasonable
expectation that North Korea
can be returned to the path of
denuclearization on the basis
of results already achieved
at the Six-Party Talks. North
Korea has stated that it has
already made preparations to
return to the Six-Party Talks,
but thinks the Six-Party
Talks are incredibly harmful
and completely unbeneficial.
Although this statement was
issued by a North Korea foreign
affairs spokesperson at the first
Six-Party Talks in August 2003,
it remains current.
North Koreas position is that, if the Six-Party
Talks were to be resumed, the general purpose, the
items to be discussed, and the form of talks would all
have to change. The Talks should, first of all, be a debate
on a bilateral peace treaty with the United States, rather
than on North Korean denuclearization. And even if
the nuclear issue were discussed, North Korea should
be treated as a great nuclear power that is negotiating
with the United States, Russia, China, and other nuclear
states on equal terms about nuclear disarmament and
a nuclear-free world, rather than discussing only the
North Korean nuclear issue.
Regarding the form of the meeting, North Korea
thinks that its bilateral talks with the United States should
be held alongside the Six-Party Talks. The intention is
to deliberate on important issues bilaterally first before
submitting them to the other parties for enactment. Of
course, the other parties find it difficult to accept this
position. Therefore, it has been a very arduous process
to reinitiate the Six-Party Talks; even if the six parties
were again able to sit down together, the talks would be
acrimonious from start to finish. This makes it extremely
difficult to stick to the purpose and task of prompting
denuclearization and keeping the Peninsula nuclearfree.
4. As North Korea Continues Arms Development,

East Asia Enters a Deeper Crisis

North Korea conducted nuclear tests in 2006
and 2009, in complete disregard of the widespread
opposition among countries from around the world. In
September 2009, soon after the second test, it sent a letter
to the UN Security Council publicly acknowledging
that it had been engaged in nuclear enrichment for
several years. This illustrates that North Koreas nuclear
program has already progressed from the plutonium
to the enrichment stage. Last November, North Korea
showed its nuclear enrichment infrastructure to a US
scientist. It thus sought to exert
pressure on the United States
and international society, and
to force official recognition of
North Koreas status as a nuclear
state. Last May, it announced
that its nuclear fusion program
had achieved breakthroughs,
revealing its interest in
hydrogen bombs. R e c e n t l y ,
the
international
media
released a report claiming that
North Korea had just finished
construction of an even largerscale missile launch base in the
vicinity of the Sino-Korean
border. The report further
stated that North Korea was preparing to engage in a
new round of nuclear tests. If these reports are true, it
illustrates that North Korea is actively and progressively
upgrading its nuclear arsenal. It would also lend credence
to North Koreas earlier statement that it will never
denuclearize.

Not long ago, the US Secretary of Defense
Robert Gates stated that, five years down the road, North
Koreas nuclear capability would pose a security threat
to US territory. The United States is unlikely to sit back
and watch North Koreas nuclear stockpile expand. Japan
and Korea will also adopt a series of countermeasures.
The situation in the Korean Peninsula and Northeast
Asia is facing significant shifts.

If this crisis situation should arise, the United
States should be held directly accountable. There are
several reasons why. First of all, there is a clear difference
between the North Korea problem as such and the North
Korea nuclear conflict. They differ in terms of their
nature, urgency, and broader geopolitical relevance. But
for a long time, the United States and other countries
made no clear distinction between them.

There are two categories of problems that
countries face in international relations today. The
former concerns conflicts of interest and cooperation
between specific countries. In the case of the Korean
North Korea thinks that its

bilateral talks with the United
States should be held alongside
the Six-Party Talks. The
intention is to deliberate on
important issues bilaterally first
before submitting them to the
other parties for enactment.
51
Peninsula, this type would pertain, for instance, to

bilateral relations between the two Koreas, Sino-Korean
and Japan-Korean relations, as well as domestic political
stability and development in North Korea. These
problems are certainly very complex and important; but
ultimately, they only affect particular sectors of certain
countries. These problems must be dealt with calmly
and diplomatically, with frequent adjustments, in order
to gradually explore the most appropriate distribution
of benefits. These are not matters of serious urgency.
However, a second category pertains to comprehensive
issues that affect the future and destiny of mankind. These
issues include not just climate change, environmental
degradation, and the like, but also nuclear proliferation.

The North Korea nuclear conflict falls into the
latter category. It is not just urgent, but to some degree
also irreversible. Once you loosen your grip, there may
be a point of no return. However, for a long time now,
the United States and others have viewed the North
Korea conflict as an issue of international relations
rather than nuclear proliferation. As a result, they lack
the sense of urgency and decisiveness needed to resolve
it.
Secondly, because of qualitative misjudgments,
the methods chosen by the United States to resolve
the conflict have been problematic. For example,
from the very outset, the Six-Party Talks have circled
around the notion of purchasing an offer of
substantial compensation in return for North Koreas
denuclearization. As a result, just like the purchases of
false currency by a bank will incentivize the production
of false currency, the purchasing policy has induced
North Korea to step up its nuclear program. Moreover,
some officials have proposed a wholesale solution to
the crisis, when this in fact only conflates the nuclear
conflict with the North Korea problem. This can only
result in a web of problems that will be difficult to
disentangle.
Finally, and most importantly, the United States
is tending towards an appeasement policy that is
detrimental to resolving the conflict. In August 2009,
soon after former President Bill Clinton visited North
Korea, a scholar in North Korea said in a statement to the
Hong Kong press that North Korea would start promoting
Plan C. This basically makes improvement of relations
with the United States and other countries contingent
upon recognition of North Korea as an established
nuclear power. The reason why North Korea adopted
For a long time now, the United States

and others have viewed the North Korea
conflict as an issue of international
relations rather than nuclear
proliferation. As a result, they lack
the sense of urgency and decisiveness
needed to resolve it.
this plan is that Clinton revealed during his visit that the
United States planned to tacitly recognize North Koreas
position as a nuclear power.
Last November, Professor Siegfried Hecker, a
nuclear scientist at Stanford University who had been
invited to visit North Korea, revealed to North Korea
that the United States was contemplating a policy of
Three Do Nots and One Do. This policy outlines that if
Korea no longer produces, develops, and exports nuclear
weapons, the United States would no longer consider
it to be a security threat. North Korea responded by
agreeing to refrain from both vertical proliferation and
horizontal proliferation of nuclear weapons.
The United States is currently the only country in
the world that can resolve the North Korea nuclear crisis.
Its new line of thinking on the crisis has evidently
had a detrimental effect on North Koreas decision
to denuclearize, as well as on the policy direction of
the other countries involved, including China. These
countries are concerned that, while they are maintaining
the well-established policy of incentivizing North Korea
to denuclearize and maintain a nuclear-free Peninsula,
the United States is brokering peace with North Korea
without consulting its allies. As a result, in the wake of
the Clinton visit to North Korea, some countries have
begun to modify their North Korea policy. If the Three
Do Nots and One Do policy were incorporated into US
government policy, it would represent the utter failure
of all efforts that have been made to maintain a nuclearfree Peninsula. Needless to say, a nuclear-free Peninsula
is in the fundamental interest of all parties involved,
including North Korea itself.
52
Harvard
Project for
Asian and
International
Relations
apply now at
www.hpair.org
HPAIR
2011 Asia Conference

20th Anniversary
At the Crossroads: Decisions in a Dynamic Asia

Seoul, South Korea
August 19 to 23, 2011
Past Speakers
Ban Ki-Moon UN Secretary General
Jeffrey Sachs Director, Earth Institute
Fred Hu Managing Director,
Goldman Sachs Asia
Application Period
Early March 1 to April 1
Regular April 2 to May 1
Late May 2 to June 2
20 Years, 26 Successful Conferences

500 Delegates, 150 Speakers
Harvards Largest Student Connection in Asia
Join Us IN SHAPING THE LEADERS OF TOMORROW

Harvard Asian Quarterly

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Harvard Asian Quarterly

Hochgeladen von

Copyright:

Verfügbare Formate

Harvard Asia Quarterly

SPRING 2011, Vol. XIII, No. 1

A Publication of Current Affairs Affiliated with the Harvard Asia Center

Chinas Relations with South Asia: Why is India Weary? Gunjan

Harvard Asia Quarterly

Southeast Asia Area

LETTER FROM THE EDITOR

II. COMMERCIAL INROADS INTO THE DEVELOPING WORLD

III.CHANGING RELATIONS WITH SOUTHERN NEIGHBORS

IV. pOLICY MAKING IN CHINAS RISE

Gregory Chin york university

HARVARD ASIA QUARTERLY | Commercial Inroads into the Developing World

banks in the global system. Over the past decade,

is hotly debated: the countrys increasing savings

Commercial Inroads into the Developing World | HARVARD ASIA QUARTERLY

An important realization that

IMF Signs Agreements Totaling SDR US$5.3 billion with

HARVARD ASIA QUARTERLY | Commercial Inroads into the Developing World

Top 20, The Times (London), March 29, 2009, accessed on

[The IMF should examine the] flaws in the

fields: transportation, energy, telecommunications,

Commercial Inroads into the Developing World | HARVARD ASIA QUARTERLY

after May 2007, when China hosted the AfDBs Annual

HARVARD ASIA QUARTERLY | Commercial Inroads into the Developing World

After the global freefall was stemmed,

agreement signed at the 42nd ADB annual meeting in

financing in Africa.28 The Chinese government recently

Commercial Inroads into the Developing World | HARVARD ASIA QUARTERLY

that China benefits from its membership in AfDB by

Although its shares are not

Given the considerable progress made by this

HARVARD ASIA QUARTERLY | Commercial Inroads into the Developing World

China Joins IDB in Ceremony at Bank Headquarters, IDB

the Board of Executive Directors, sharing a chair with

US$125 million to the IDBs Fund for Special

Costa Rica and Cuba. As a result, it is now the regions

Just one year after China joined the IDB

Commercial Inroads into the Developing World | HARVARD ASIA QUARTERLY

HARVARD ASIA QUARTERLY | Commercial Inroads into the Developing World

was only in 1986 that China was granted membership in

why, in February 2010, Kaberuka made sure to emphasize

In Latin America, some traditional

representatives of the three regional development banks.

Commercial Inroads into the Developing World | HARVARD ASIA QUARTERLY

currency to pay for Chinese imports, and lend Brazils

Chinas rise as an international

Discussion with World Bank official: Beijing, September

HARVARD ASIA QUARTERLY | Commercial Inroads into the Developing World

The Investments of Chinas

Charles Ho Standard Bank in brazil

the need to secure raw materials for Chinas supply

Commercial Inroads into the Developing World | HARVARD ASIA QUARTERLY

voltage electricity transmission, Chinese companies

Instead of the traditional, passive,

more advanced transmission technologies will help

HARVARD ASIA QUARTERLY | Commercial Inroads into the Developing World

actually turns out to be quite open given the lack of any

of China (ICBC), China Exim Bank, and China

All of Chinas largest stateowned hydropower companies,

Chinese Hydropower Companies in Brazil

Commercial Inroads into the Developing World | HARVARD ASIA QUARTERLY

have opted for Colombia and Peru as their entry points

HARVARD ASIA QUARTERLY | Commercial Inroads into the Developing World

into sectors where it is needed the most. In return for