TWENTY YEARS from now, will China be a friend or foe of the United States? Certainly, China's youngest generation will influence the answer. It controls future policies, the pace of internal development, domestic stability and whether there is a crisis over Taiwan. Yet America's response is also important; the wrong actions could turn China against us.

The United States must adopt a two-pronged policy. The first is to encourage China to become a "responsible stakeholder" in the international community. The second is to hedge against competitive or aggressive behavior by China. Americans are impatient and dislike ambiguity, so successive U.S. administrations have struggled to sustain public support for a policy that to many, at first glance, can seem self-contradictory. But there is no reason for our policy to be self-contradictory. The key is what might be termed "prudent hedging", which does not impede engagement and does not create a self-fulfilling prophecy where treating China as an enemy turns it into one.

Since Chinese military leaders cannot predict the future, they will prepare for the worst even as they hope for the best. Hedging is contagious. The problem is their efforts will appear to Washington as the very behavior against which we are hedging. During the Cold War, hedging and worst-case-scenario assumptions led to a dangerous and expensive arms race.

There is already, of course, a localized but very real "arms race" between the two powers-where U.S. and Chinese forces are committed to direct, head-to-head military competition-over the Taiwan Strait contingency. The United States has a policy, the Taiwan Relations Act, to be prepared to defend Taiwan from Chinese invasion or coercion. (At the same time, Washington opposes Taiwanese independence.) The U.S. military therefore correctly anticipates the long-term mission of ensuring access to the strait and achieving air and sea dominance there. China, for its part, will not renounce the use of force to prevent Taiwan's independence. For the Chinese military, this means being able to intimidate, if not conquer, Taiwan. It also means being able to chase or scare away U.S. forces from the strait by making naval and air operations there too hazardous. For the foreseeable future, the U.S. and Chinese militaries will take each other's measure in the strait and pursue competing military objectives.

To make things more complicated, both China and the United States have other strategic factors driving their military postures. For example, global leadership requires the United States to maintain its forces' qualitative superiority and quantitative sufficiency. The Defense Department will receive in excess of $500 billion (including supplementals) in the 2007 fiscal year for a host of current missions and future contingencies-but many are completely unrelated to east Asia.

For its part, China will be spending about 15 percent of this amount on defense this year (even correcting for hidden subsidies in the Chinese budget). In China's eyes, it has not yet built a military large and strong enough for the large role it sees for itself-no matter how the relationship with the United States turns out. Moreover, China weighs its military power in relation to the neighbors it seeks to deter-Japan, Russia and India-as well as to the United States. So even in a world where Washington and Beijing had the best of relations, China would still build its military to match its global ambitions and pursue its regional rivals.

This should concern the United States, but what should we do? It is important for China's people, its neighbors and the United States to know the size and shape of China's build-up, and the requirement that they be open about it might dissuade the Chinese from an excessive build-up. But emphasizing transparency does not address the question of what would be "excessive." Former Secretary of State Warren Christopher, when characterizing U.S. sanctions on Iran, was fond of saying that the United States should not sell Iran a Kleenex. In the same spirit, the United States would clearly prefer that China arm itself with only a bow and arrow. Between a bow and arrow and an all-out drive to match the United States across all elements of military power, where will China end up? Where should it end up, in terms of American interests?

MAO ZEDONG gave the People's Liberation Army (PLA) a strategy of "People's War" aimed primarily to cope with a Soviet invasion (and, secondarily, a U.S. invasion). The idea was to draw invading armies deep into Chinese territory, enveloping and slowly destroying them in a war of attrition. This strategy required a mass conscript army spread all over the Chinese countryside; a side benefit, as Mao fully understood, was that this army could also maintain Communist Party control over the huge population.

In contrast, Deng Xiaoping and his successors have advocated new theories of "Local War" (versus total war) and "Rapid War, Rapid Resolution" (as opposed to war of attrition). The Chinese have a plan, described in their Defense White Paper of December 2004, to bring the military out of perceived backwardness. It describes the modernization trajectory for the PLA in terms of a "Revolution in Military Affairs with Chinese Characteristics."

First is to deal with the Maoist legacy. The PLA is still too large, with 2.3 million active duty personnel, 800,000 reservists and a People's Armed Police of 1.5 million. In a Chinese version of the American "Revolution in Business Affairs", the PLA is required to shed its farms, businesses and other deadweight features from the peasant army days. In addition, China's defense R & D system and military industry have the features not of today's go-go commercial economy but instead the pathologies of the dated state-owned enterprises: backward, bureaucratic and entrenched. Finally, China is trying to increase the readiness of at least selected units, train them intensively and exercise them realistically (including joint exercises with Russia and other nations).

Second is to emulate some U.S. reforms. The PLA, PLAN (navy) and PLAAF (air force) are undertaking their own version of the Goldwater-Nichols reforms of the 1980s to bring the three military services, today quite separate and dominated by the PLA, into the age of joint operations. The Chinese also stress the need for "informationalization" or what the United States calls "command, computers, control, communications, intelligence, reconnaissance and surveillance (C⁴ISR)." The white paper stresses satellite and airborne sensors, unmanned aerial vehicles and information warfare.

Finally, while China seeks to modernize its own defense industry, it is turning principally to Russia for advanced tactical aircraft, submarines, surface combatants, air defenses, anti-ship cruise missiles and other systems that challenge U.S. forces in ways Chinese-made weapons cannot. The United States and Europe have an arms embargo against China dating from the Tiananmen incident in 1989.

The white paper is more circumspect about the missions it envisions for its growing and modernizing force, but we can nonetheless identify several objectives. First is to maintain strategic nuclear deterrence by maintaining a force of ICBMs and SLBMs. Second is to puncture American dominance wherever possible. China aims to exploit vulnerabilities in key American capabilities, using counter-space, counter-carrier, counter-air and information warfare to keep the United States from dominating a military confrontation, even if eventual U.S. victory is assured.

This second point is important if China hopes to credibly threaten Taiwan and prevent or counter U.S. intervention. The Taiwan-China balance is clearly shifting in China's favor as Taiwan's defense spending decreases. China does not have the amphibious and airborne forces required to invade Taiwan, and such an operation would be disastrous if U.S. forces got involved. Instead, China aims to intimidate Taiwan with short-range ballistic missiles (SRBMs)-700 CSS-6 and CSS-7 missiles are deployed in the military district opposite Taiwan, and this force is growing every year-and attempts to collapse its economy by blocking commercial air or marine vehicles (e.g., by sowing mines near Taiwan's harbors).

While countering the United States is a major preoccupation, there are other missions as well. Long before China can hope to match the United States, it must establish clear regional supremacy. China's adjusted defense spending of $50-$80 billion is already comparable to Japan's $44 billion, Russia's $65 billion and India's $24 billion. Moreover, given that China is a resource-poor country-the world's third largest oil importer, with a clear dependence on Middle Eastern and African sources-China wants to protect its supply lines. Resource politics also help drive outstanding territorial claims, as China continues to contest ownership of the Senkaku, Spratly and other islands. Periodic incidents between the PLA and the navies of the region are not strategically significant, but they have deep emotional resonance given the larger feelings of rivalry and historic grievances among the nations of east Asia.

Finally, the Chinese military is still seen as an important guarantor of domestic stability. China's leaders, all of whom lived through the Cultural Revolution, fear internal disorder perhaps above all other "national security" threats. Public rioting and other disorders are growing-even in the statistics reported by the Chinese authorities. In 2004, 74,000 "mass incidents" were reported. This is the predictable result of rapid and uneven economic change. Unlike the Soviet Union, however, China is not an ethnic patchwork; the likelihood of ethnic disintegration in a country 92 percent Han Chinese is remote. Nonetheless, the regime sees the armed forces as an important deterrent to would-be troublemakers.