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LAST WEEK WAS THE FINAL WEEK OF

group. Inspirational music soars as the

seems to be a BMW or Mercedes. Here,

the zoro World Expo in Shanghai, the

event that used to be called the World's Fair and a place where countries traditionally come to mark where they have been, and where they are headed. Chi-

family changes almost imperceptibly, prospering, becoming more Westernized, shinier, and, it seems, happier.
By the time the lights come up, a large extended family, looking like characters in a Procter & Gamble ad, housed in a city high-rise complete with flat-screen TV and midcentury-modern furniture, celebrate the birthday of a young boy with an enormous American-stvle cake. The film isn't just propaganda. For a burgeoning Chinese middle and upper class, it's reality. A quick tour around Shanghai shows just how far China has come since it opened itself to the outside

and throughout much of China's rich coastal areas, millions of people live on $1o,ooo or more a vearj representing a nation within a nation of upwardly mobile consumers. A large number are

na's own journey, laid out in multimedia splendor within an enormous, deep red pavilion shaped like a rice bowl, was something to behold. In the main theater, millions came to watch a zo-minute film depicting 30 years ofprogress and change through the life of one family.

worth significantlr' more-the

latest

Merrill Lynch Capgemini World Wealth

Report found that for the first time ever, Asia (led by China) surpassed Europe in terms of millionaires. And don't forget the billionaires. For everl one of those we've found, we've probably missed one, notes Rupert Hoogen-erf, founder of the Shanghai-based Hurun Report, which publishes a list of the richest Chinese and estimates that there are now more billionaires in China than in any other country in the world.

When the lights go down, the four

are seated in a humble one-room apart-

ment, dressed in padded clothing, eat-

ing from the communal bowl. Slowly,

the picture changes-a radio becomes
a

world, and capitalism, three decades ago. Luxury boutiques and Eastern
outposts of the top French and American restaurants thrive. Everv other car

black-and-white television, then color, watched by a larger and better-clothed

But while individuals in China are

POLITICS ECONOMICS

BY RANA FOROOHAR AND ISAAC STONE FISH

PHOTOGRAPHS BY LORENZO CICCONI MASSI

second.largest economy. And while its population of r.3 billion means that it's only about rooth in the world in per capita income, according to the World Bank, that figure is tallied using China's notoriously unreliable statistics, which fail to take into account the massive amount of gray income, from sources like gifts, unreported bonuses, stock manipulation, and shady property deals. Prof. Wang Xiaolu of the China Reform Foundation conducted a study for Credit Suisse that found that the top ro percent of households in China earned g2o,Zoo a year, more
than three times the official figure. And

getting rich fast, the state as a whole is getting even richer. This year, China passed Japan to become the world's

not undervalued; a modest increase of 15 percent would bump China further

up in the rankings. Already, China is the world's fifth-largest consumer economy.

will be added by the end of this

year.

While China was once a destination for capital, it is increasingly a source of it.
Chinese state-owned firms flush with
cash are snapping up natural resources and other firms abroad. Venture capi-

Salaries have been rising as much as 25 percent a year in parts of the countrv for the last several years, and the fact that the government allowed this summer's labor protests at Foxconn to carry

on suggests that

it is willing to allow

them to continue to rise. As everyone knows by now, China soared through the financial crisis and recession with ease, registering average growth rates of just under 9 percent a year, even in the darkest

that's assuming that the currency is

days. The result is that the country now sits on the world's largest capital pile-gz.+ trillion in foreign currency reserves, to which another g3oo billion

Chinese, too-nearly 50 percent of private-equity money in China is now run by Chinese firms, up from almost nothing five years ago. In another five years, experts say, Chinese firms will own some 7o percent of the private-equity market. The upshot of all of this is that while the IMF still labels China a "developing nation," much of the rest of the world does not. Banks like Credit Suisse and Goldman Sachs have moved it out of the typical emerging-markets basket and into a category of its own. "China

tal is becoming

't*

"F'

+
can exert a lot more clout than the development label would suggest that
they have. No developing country in the history of the world has had 92.4 trillion to throw around," says Victor Shih, an expert on China's political economy at Northwestern University. Indeed, China has become the world's growth engine-it represented some 50 per-

ment in the larger world. From Deng Xiaoping onward, China has eschewed the role of global leader, preferring

to focus on a completely domestic agenda of development. "We must

stick to our own principles," says Nan. "If we can continue to lift t.3 billion people out ofpoverty, isn't that the best thing that we can do to help the rest of the world?"

In the U.S., the currency issue is ofter mentioned in the same breath as jot, for political gain. But the truth is that I
matter how much the renminbi apprec. ates, low-end factory jobs aren't comin. back to the U.S. en masse, nor should rr'want them to. For the Chinese, revalua tion is also an issue ofjobs; they'd iner': tably lose some to lorver-wage natior, like Vietnam and Bangladesh, as the; already have, and that's a social-stabilit issue. But more than that, the currenc, issue is one of control-Chinese leac ers simply don't want t. be perceived as kowtorr-

cent of overall world GDP growth in zoo9, and the country's stimulus package alone created some 22 million jobs. This question of whether China is rich or poor is at the heart of the deterioration in U.S.-

It's a powerful

argument,

but it

ignores the fact that China occupies a role that no developing nation has ever

China relations over the last few months. So many

ing to Western pressur

especially at a time whe: they are feeling flush ani

of the things that America is asking China to do-including revalue its

currency, improve human rights, play a bigger role in energy security and financial stability, and stop favoring its own state businesses-are predicated on the notion that China is now prosperous enough to play the role of a developed nation. But just as there are two Americas, so there are two Chinas.

powerful.

Still, allowing the renminbi to rise would hel:

China rebalance its economy, a problem that is a: the heart of the rich-poor debate. A recent graphidone by the Council or Foreign Relations shou'.

that consumer spendin:

power and currency valur

tend to rise in
held. "China is a country with both
developed-world and developing-world characteristics," says Abe Denmark, director of the Asia-Pacific Security Program at the Center for a New American Security. It's the world's largest polluter, and faces poor-country problems like social strife and a vast richpoor divide. But it is also the world's largest exporter and the world's largest manufacturer. And yet it remains the only major trading economy that uses capital controls to keep the value ofits currency down.

tandem

A ride outside Shanghai will So-minute

quickly give you a picture of the second one: 36 percent of the country's population lives on less than $z a day, and an incredible rlo million are living on a dollar or less. As the vice chairman of China's Foreign Affairs Committee,

Minister Nan Zhenzhong, is quick to

point out, "We are second only to India

That would go a long war toward helping bridge its wealth divide because it would take power away fron a very rich state and pui it in the hand= of more of its citizens. Putting aside the wealth of China's nen' coastal middie class, which is large in numbers but stil small in terms of percentage of the overall population, the majority of the Mid' dle Kingdom's riches are in the hands
of the state. Since 1929, China's development model has been to use cheap labo:

in terms of sheer numbers of poor people. In this sense, the only role we can play in international affairs is the role of
a

large developing nation."

It's the

conventional wisdom in

China, an argument that nearly every

This, of course, has been a major sticking point between the U.S. and
China since the financial crisis began. It's a conflict that has deep psychologi-

political figure or high-profile econo-

and cheap capital to compete on the world market. That means Beijing subsidizes big business at the expense o: individuals. Capital controls on Chinese citizens mean they have little choice but to put their money in state-ownec
banks at low interest rates; the monev is then funneled back into state business.

mist will put forward to justify the country's traditional lack of engage34

cal underpinnings for both nations.

NOVEMBER

s, 2o1o

It's become very clear that a richer china doesn't + mean a china more like the united states.
induced social upheaval decreases,
many experts believe China will grow into a global leadership role. 'Already we're beginning to see a greater willingness on the part of China to engage in peacekeeping activities and also collective activities like dealing with piracy," says U.S. Deputy Secretary of State Jim Steinberg. But that doesn't mean that the foreign-policy tiffs will be over any time soon. In fact, they are probably just heating up. One thing that has become eminently clear since harder for China to make a case that it shouldn't have to play by global rules.

Recent backlash over the wealth divide has brought the problem to a head. Among other expressions of
unease, currently viral on the Chinese Internet is the story of how the son of a

local high-level police officer drunkenly ran over two pedestrians with an expensive car. When accosted by guards, he shouted, "Sue me if you dare, my dad is Li Gang." Perhaps it's not surprising, then, that the October meeting of the National People's Congress in Beijing dedicated to the creation of the country's next five-year development plan, focused largely on the idea of "inclusive

Given'that China's current development model means the majority of the country's wealth is still going to build up what is already perhaps the richest and most powerful state business elite the world has ever seen, rather than speeding up poverty reduction, it's tough for the elite to plead poverty without seeming hypocritical.
Examples of the discontinuity between

China's "developing"-nation status 1 and its increasingly rich-

their national budget

growth." As one party official told NEwswEEK, party leaders have begun to see
as

country reality are rife. It has been awarded nearly

gr billion in grants from the

Global Fund to Fight AIDS, Tuberculosis, and Malaria

being "against the people." While the details of this

rz,th Five Year Plan won't be

over the past eight years,

making it the fourth-largest recipient of funds and

announced till March, the buzzin Beijing is that it will include big cash infusions

a drain on

resources for

sub-Saharan African coun-

to

areas

like

education,

health care, and pensions.

Last week, the

Central

tries, none of which have $2.4 trillion in foreigncurrency reserves. China also continues to eschew

Bank also raised interest rates, something that will help individual consumers rather than
big state businesses. To the extent that more Chinese citizens begin to feel better off, Beijing may be a bit more willing to play a global role befitting its new stature. China's claims that it needs to spend the vast majority of its resources enriching its

."
the financial crisis is that a richer and more successful China doesn't necessarily mean a China that's more like the

climate-change standards

ful

while growing some of the biggest and most power-

green-energy firms in the world. Finally, as Sarah Raine, research fellow

United States. Middle-class Chinese young people are nationalistic-a brief voyage into the Chinese blogosphere shows that they're proud when their
country stands up to America on issues

at the International Institute for Strategic Studies and an expert on China-

Africa relations, points out, China is developing a formidable navy, but onlookers are told to ignore the serious power-projection implications of
this, because these advances are merely
defensive. The bottom line is that China is now demanding a seat at the table at all the

own citizens are not without reason; revolutions in the Middle Kingdom have mostly started in the poor rural interior, and the future of the Communist Party depends on its ability to spread the wealth beyond the urban elite. It's a measure of how insecure the party feels that it spends as much on ensuring social stability (in the form of police, censors, etc.) as it does on its military. As the risk of poverty-

from North Korea to trade relations. And while many Chinese would like the government to ease up on censorship, there are plenty who also view the awarding of the Nobel Prizeto human-

rights campaigner Liu Xiaobo as an attack on China's legal system that is particularly pernicious because it travels from West to East.

big foreign-policy discussions. yet it

also shies away from enforcement of the decisions taken at this table. It's a contradiction that undermines China's new heft on the global stage. And it's one that

and climate change, it's

Yet on issues like currency, trade,

becoming

the Middle Kingdom-will have to own upto, soonerorlater. n

NEWSWEEK,coM

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