The Clinton administration's China policy has come under attack from
many quarters for being too conciliatory, too optimistic and too
compromised by a nexus of money and insider politics. But the
President and his aides deflect each jab by contending that, despite
episodic problems and pratfalls, a policy of engaging China on a
broad range of issues has the best chance of maximizing American
influence and impelling China toward positive change. The key dynamic
is assumed to be rapid economic growth, which, it is tenaciously
held, will result ultimately in political liberalization. That, in
turn, would not solve all problems between the United States and
China, but it would conventionalize those problems and, presumably,
make them easier to manage.

In this line of assumptions the administration has many scholarly
allies. Henry Rowen, Minxin Pei and many others have argued that one
of the few hard conclusions of comparative politics--that rising
income levels are conducive to political democratization--applies to
China no less than it has applied to Europe and Latin America. In
this view, increased wealth, information and trade will create and
mobilize a new middle class whose interests and social power will
ultimately undermine the Communist Party's monopoly on political
power, leading in due course to some form of democratic politics.
According to this view, too, elections in rural China, advances
toward the rule of law, the strengthening of the National People's
Congress (NPC) and media liberalization exemplify political change
already afoot in China as a result of economic marketization and
growth.

While continued growth cannot be guaranteed, China's leaders have
demonstrated an impressive ability to manage the economic
difficulties foisted on China by the post-July 1997 Asian crisis.
More important, they have demonstrated seriousness and flexibility in
pursuing continued economic reform. President Jiang Zemin's policy
proposals at the 15th Party Congress, held in September 1997, were
bold. Promising to reform moribund state-owned enterprises (SOES),
Jiang reinterpreted the Marxist concept of state ownership of the
means of production to include publicly held stocks (by both
individuals and other firms). Bankruptcy law, takeovers, mergers and
acquisitions--all features of a capitalist economy--received the
Party's official blessing. Since then, China has demonstrated a
further commitment to reform by reducing housing subsidies and the
volume of public employment generally--efforts quite likely spurred
on by revelations of structural deficiencies in the "Asian model"
that have triggered the region's continuing economic crisis.

It is likely, therefore, that China's economy will grow enough over
time to keep the basic question relevant: Will economic growth
produce political liberalization? The answer is unclear. For economic
growth to produce democratic politics--or at least more liberal
politics--a middle class of private property owners who want to get
the state off their backs must emerge. To generate such a class,
China needs the growth and expansion of market forces, an effective
system of property rights protected by the rule of law, and a much
reduced role for bureaucratic authority in the economy. Ultimately,
too, it needs enough political stability to allow this middle class
to emerge, and it will require new political institutions to manage
the demands of that class in a way that will not push Party leaders
to co-opt it or even crush it before it achieves greater
liberalization.

Many signs point to these positive trends, but strong counter-trends
are also working against political liberalization despite--and in
some cases because of--the rapid economic growth of recent decades.
To sort out the evidence, three questions need especially careful
examination. First, who will check the enormous power of China's
bureaucrats whose authority and personal economic interests depend
upon their ability to manipulate market forces? Second, if labor
unrest stemming from the current reform of the SOES threatens
socialstability and business profits, will managers advocate a more
open political system? Third, will China "open" more to the outside world
in terms of trade, and what would the social and political consequences
of such an opening be?

In my view the answers to these questions do not support current
assertions that China is rapidly liberalizing but suggest that the
process of change will be slower. Let us take them in turn.

A Rent-Seeking Culture

Many observers assert that powerful political and economic forces are
pushing for a continued transition to market capitalism in China. As
their argument goes, the decentralizing of economic decision-making
authority from the center to the localities, combined with a shift
from planned allocation of goods to market allocation, is leading to
greater decision-making freedom for individuals and firms. This
means, in turn, expanded market activity and, ultimately, a
transition to free-market capitalism.

There is a logic to this projection. As enterprise managers pursue
greater efficiency, economies of scale and lower transaction
costs--i.e., the cost of doing business--they advance liberalization.
Firms with comparative advantage in particular products are helping
to dismantle regional barriers so that they can expand their markets.
When foreign-funded enterprises expand their market share, domestic
firms become more competitive and more responsive to market
forces--or else they do not survive. Popular hostility toward
pervasive corruption is also impelling Chinese leaders to further
embrace the market economy. Much of the dual price system has
disappeared as more and more goods are exchanged on the open market.
As early as the end of 1992, only 5.9 percent of retail sales, 12.5
percent of agricultural sales, and 18.7 percent of the sale of
capital goods came from products priced by the state. The decisions
of the 15th Party Congress are likely to accelerate these trends. In
particular, with less pressure on banks to prop up inefficient SOES,
markets are likely to play a greater role in the allocation of
domestic capital. So there is, indeed, plenty of hopeful news.

But rapid growth alone does not ordain a liberalized economy. How
exchanges occur, limits on interregional flows of goods and services,
the scope of bureaucratic interference, the scale of transaction
costs, and the ability of local state agencies to intervene in
economic decision making are all important indicators of where
China's economy really rests, and of where it is headed. These
indicators suggest that a mixed economy, where decentralization
empowers non-democratic forces, is equally likely. China's property
rights regime and the ferment of economic development may not be
creating a large middle class of private property owners who will
seek autonomy from the state. Instead, economic growth without
privatization, in a society that has experienced little democracy,
could create a semi-private managerial class that does not support
democracy. Add to this a strong ethos in China favoring collective
interests, and the likelihood of a corporatist China seems far
greater than a democratic one.

This likelihood is increased by the cultural reality that economic
power in China already rests largely with bureaucrats, as it has for
a very long time. The deep involvement of administrators in the
economy makes China, above all, a rent-seeking society. "Rent" in
this context is defined as the difference between free-market prices
and higher prices that exist because regulations limit competitors
from entering the market. Regulation acts to limit supply, yielding
above-market prices. Rents nourish corruption, as bureaucrats find
themselves in a position to charge fees both for services and for
selectively ignoring the regulations that they and their colleagues
create. The payoffs can be substantial. Higher tariff
barriers--another form of rent--insure higher profits than would
occur in a non-tariff economy for those who smuggle goods into China.
The Customs Service itself and the People's Liberation Army (PLA) are
two actors that benefit handsomely from the rents arising from tariff
barriers.

According to Wu Jinglian, a leading Chinese economist, rents created
by the difference between free-market and planned commodity prices,
between the official value of foreign exchange and its free-market
value, and between low official interest rates and the real cost of
money, accounted for 20-25 percent of GNP in 1981-89--a higher rate
than in India or Turkey in the 1960s, both of which are considered
classic rent-seeking societies. Little wonder, argued Wu, that
government-connected Chinese businessmen "try by every means to
maintain the existing rent system and establish a new rent system to
expand the scope of rents."

Also, in the current transitional economy, managers of corporatist
economic structures, army officers, semi-public companies, and mayors
of towns, cities, development zones, and former people's communes
(now called townships), and even Party secretaries in villages
control and manage key sectors in China's developing economy. They
are all rent-seekers in one way or another.

Hence, despite assertions that a growing private sector is creating a
strong middle class, one actually finds severe limits on the role of
the private sector in China's cities. No doubt, the validation of the
private economy as "an important part"--not just a "complementary"
sector--of the national economy at this year's National People's
Congress will create an upsurge in the private sector's role in
China. Many private firms who have worn a collective hat to protect
themselves may, over time, be more willing to admit the private
nature of their property rights. However, private entrepreneurs build
government networks as protection from rapacious bureaucrats who
would otherwise plunder their profits and extort funds for their
local coffers. Such norms of high government interference are,
needless to say, not conducive to the ethic of the free market as we
know it in the West.

Nor is it the intention of the present reformist government to build
such an ethic. While Jiang Zemin has called for increasing the
diversity of investors in SOES in order to separate "administrative
functions from enterprise management and change the way enterprises
operate", he has also called for continued state management of
China's core enterprises. That means insuring that bureaucrats will
continue to dominate the commanding heights of the economy. That, in
turn, means that managers of the 500-1,000 key state enterprises will
remain beholden to state bureaucrats for cheap capital and technology
inputs. Jiang also echoed pre-Congress commands to managers to rely
on their factory's Party committees before deciding on layoffs,
prices and production levels when he said that enterprises must "give
play to the role of the Party organizations" in the plants "as
political nuclei."

China's top leaders still reject genuine privatization even in
principle, preferring that shares be sold to workers or to other
companies. One key reason, at least according to researchers at the
Chinese Academy of Social Science in Beijing, is precisely their deep
fear of the emergence of a real, autonomous middle class. As a
result, the stripping of state assets and the sale of land and
equipment to other companies need not, and probably will not, create
a large private ownership class. Bureaucrats will retain a
significant hand in making key decisions; a distorted market will
persist; and close relations between captains of industry and the
state will continue.

This means, too, that despite a shift of decision-making authority
from the center to the localities, many key economic decisions remain
under the purview of local governments. What is emerging is a form of
local economic corporatism, replete with regional monopolies,
rent-seeking opportunities and "relational contracting"--a
characteristic of early capitalism (as well as socialist transitional
economies) where firms carry out business transactions based on
long-term, personalized trading relations and trust, not on
maximizing profits and market efficiency.

This system of local protectionism is a phenomenon already a decade
in the making. In the mid-1980s China reformed its fiscal code,
creating a tax farming system under which all levels of government
were given tax quotas to pass up to the next level of government.
Some or all enterprise profits and taxes above the quota were
retained by local governments. Further, as the state withdrew tax
subsidies, many local governments suddenly had to swim on their own.
These conditions gave local governments powerful incentives to
maximize local output, sales, profits and taxes. It also provided
incentive to establish barriers to trans-regional trade in order to
keep products from other regions out. Thus, for example, taxi
companies in Shanghai can buy only Santana vehicles produced by the
city's joint venture with Volkswagen. The prospect of discontented
unemployed workers laid off by bankrupt SOES under Jiang's new reform
initiative could increase pressures on cities to protect their
remaining SOES from regional competitors.

Most businessmen avoid inter-regional trade for other reasons as
well. Shortages of quality goods, weak market signals and
information, and widespread corruption create great uncertainty for
enterprises in China's emerging semi-market economy. There is little
sense of the sanctity of contracts, and the legal system favors local
firms. When money alone cannot insure supply, firms resort to
relational contracting. Thus in the 1980s Wuhan's department stores
bought most of their stock from factories with whom they had
long-term relationships. Similarly, officials in the First Machinery
Factory in a large urban center used close government ties to secure
loans at rates significantly below those available to their
competitors. The result is a far less than perfect market,
significant waste, limited inter-regional competition and high
transaction costs as firms invest excessive time and money maximizing
business-bureaucracy relationships as the major mechanism for making
profits.

Finally, Chinese firms, awash in a sea of rent-seeking, accept
payoffs to bureaucrats as part of doing business. Many of these
companies resulted from "downsizing with Chinese characteristics", a
process in which governments lay off bureaucrats from their official
payrolls only to help them establish new semi-public firms. Situated
strategically between the government and genuine enterprises, these
firms earn income by charging a handling fee for transferring goods
and resources. Like barnacles on ships, they draw their sustenance
from their parastatal relationships with the ministries from which
they were spun off.

Labor Unrest as a Liberalization Brake

Jiang and Zhu's plans for restructuring the SOES suggest their
commitment to greater liberalization of China's transnational
economic relations and their understanding that there is a close link
between international competition and domestic reform. As China
continues to lower its barriers to the outside world and takes steps
to accede to U.S. demands for World Trade Organization accession,
most of its SOES will face economic extinction. In the face of such
threats, China's leaders know, too, that they can no longer afford to
throw good money at bad firms. Unprofitable SOES will fend for
themselves, while the state will choose and help "winners."

But the social stresses liable to be generated by the winnowing out
of China's SOE sector are staggering. China's approximately 350,000
SOES employ over 70 million workers, pay benefits to another 20
million retirees, and in total support about another 200 million
dependents. With as many as 45 percent of them in the red, China's
SOES have a combined debt of 620 billion Renminbi (RMB), or $75
billion. The past decade's policy of paying laid off SOE workers
their "basic" salary--usually comprising 40 percent of current wages
and excluding all subsidies and bonuses--worked much like
unemployment insurance schemes in the West. But that strategy has now
left China with a welfare problem of catastrophic proportions.

Even in a very imperfectly competitive market, ending subsidies will
expose many SOES to the pressures of competition. But if closing down
large numbers of SOES, without an effective unemployment insurance
scheme to cushion the impact, promises to put 10-12 million workers
on the streets, regional and local governments may strongly resist
such a policy. Recent eyewitness reports from Sichuan Province tell
that threats of worker violence have so frightened managers that they
hesitate to fire workers until they have been retrained and helped to
find a new job. In fact, these pressures forced the Politburo in
June 1998 to decide to stop laying off urban workers in order to
avoid an urban explosion. Instead, many unprofitable firms may be
merged with stronger firms that may be pressured to keep on more
workers. Already powerful conglomerates (jituan) are buying up the
assets of weaker firms. A more oligopolistic economy could emerge in
which a few large firms dominate different sectors. This would not
promote increased marketization in China any more than a roughly
similar situation has promoted broad marketization in Russia.

The reform of SOES also directly affects the liberalization of
China's financial system, which needs to become more market-oriented.
Chinese banks have loaned money according to national or local
policy, not at its real cost. In 1996 alone China's banks loaned out
over 4 trillion RMB, of which 75 percent went to support SOES. Many
of those loans are non-performing. Clearly it will take years to sort
out these problems. Even if widespread selling of bank shares occurs,
the banks will still be under enormous political pressures to make
loans based on personal and political, rather than market, factors,
until the day that the central and local banks really do become
independent of the political system. But that day is far off.

The politics of regional disparities will further limit genuine
economic reform. Under Deng, China deregulated the economies in
coastal provinces, granting them preferential treatment that helped
their economies boom. Inland areas remained apart from global
markets, even as the state suppressed the prices of the natural
resources that are the heart of their economies. Consequently, the
coast flourished while inland areas languished. Based on my own
calculations, while 60.8 percent of China's gross value of industrial
output (GVIO) was produced in coastal cities in 1984, a decade later
those same cities produced 70 percent. Although inland areas might
prefer an end to policy favoritism and an even playing field, they
are also home to some of the most inefficient SOES, whose closing
will only exacerbate their economic plight. Under the current regime
their interests lie in supporting central bureaucrats who believe
that the state--not the free market--must redistribute resources and
resolve regional inequalities.

It is likely, then, that looming instability will undermine any
impulse toward political liberalization. The current middle strata of
corporate directors and local government leaders--those locked into
the existing property rights regime of state or publicly owned
industries--will surely prefer corporatism and soft authoritarianism
to democratic change. If social unrest stemming from SOE reform
challenges their managerial rights and threatens them with
recrimination for their side payments to bureaucrats, they will even
support hard authoritarianism if it is necessary to protect "public
order." They are likely to interpret democracy under such
circumstances as tantamount to chaos.

In the countryside, too, where most private firms exist, there is
little support for democratization among the rural business elite. As
of 1992, only 0.5 percent of the millions of rural enterprises at or
below the county level had trade unions, and there is little reason
to believe that the number of union shops has increased since then.
And even as China's leaders let farmers elect villager committees in
order to stabilize the countryside, weaken oppressive cadres, and
persuade farmers to invest in public works projects, elections remain
restricted to the lowest levels of rural society. Top Party leaders
are likely to prevent these elections from sparking a nationwide
democracy movement. The key test will be whether similarly open
elections as those taking place in China's villages will take place
at the next level up in the rural bureaucracy--the township level. As
for the more economically advanced coastal areas, rural people there
seem too busy making money to care about political liberalization,
and so long as limited economic reform allows them to do so they are
unlikely to become a source of democratic advocacy.

China's Opening to the World

The role of the bureaucracy is also critical when it comes to foreign
trade. Opening China to the outside is, according to the optimists, a
key dynamic in China's eventual marketization and eventual political
liberalization. But it hasn't worked out that way so far. China's
official foreign trade, which has grown from $30 billion in the late
1970s to $290 billion in 1996, at an average annual rate of 16-17
percent, has surpassed all expectations. Few predicted that such a
large country could become so trade dependent, with some estimates
suggesting that over 40 percent of GNP is now derived from
international trade. Indeed, the level of foreign direct
investment--by 1997 totaling $250 billion--which allows foreigners to
be directly involved in managing Chinese enterprises, suggests that
China's economy in recent years has been more open than those of
Japan and South Korea, which have relied more heavily on,
respectively, foreign purchases in equity markets and foreign loans.

China's comparative advantage in foreign trade has created thousands
of relatively small, labor-intensive, export-oriented firms in the
countryside that want to expand their export opportunities. Both they
and SOES want to import resources duty free and circumvent state-run
foreign trade companies so they can deal directly with foreign
markets. The result is a "joint venture fever" that undermines state
controls over China's boundaries. That seems good, if greater
economic integration between China and the rest of the world is the
end to be sought.

But rent-seeking of a different sort propels the search for joint
venture partners, and it is not of a sort likely to advance
marketization. In protected sectors, where high tariffs prevent
imports of competitively priced foreign goods, joint ventures help
Chinese partners create products that are highly competitive within
the domestic market. Even if their prices are a little high and their
quality a little low, Chinese firms and their joint venture allies
can nevertheless earn large profits since their goods face no serious
competition. Therefore, those apparent advocates of increased
internationalization have strong interests in limiting that process
as well. The profits are rent in that they flow from a
non-competitive market arrangement. Real competition would make such
ventures less attractive, not more.

Indeed, due to its highly regulated nature, the foreign trade sector
remains rife with opportunities for corruption. China's bureaucrats
know that excessive restrictions and fewer foreign transactions mean
fewer rents, so they favor more trade and investment--but only under
their administrative purview. For them the choice is clear: no flow,
no dough! The result, however, is de facto, not de jure, trade
liberalization, for much trade ensues through smuggling and
corruption. According to the World Bank, goods smuggled from Hong
Kong to China equal 15 percent of all legal trade between the two
economies. According to the South China Morning Post, the scale of
smuggling actually forced China's television manufacturers to cut
domestic prices by 10 percent.

Other data broaden the picture. While the World Bank reported that
China's nominal tariff rate in 1995 averaged 32 percent, the
effective rate that was collected was only 6 percent. While half of
that seepage was due to special policy privileges given to foreign
invested enterprises, the other half was the result of bureaucrats
who waived regulations in return for payoffs. Today, for
infrastructure projects in Hong Kong, for example, large foreign
companies reportedly must give large equity shares to mainland
brokers who provide no value-added except to certify that the project
can go forward. One American firm working in east China froze its
power project because it refused to donate an equity share to a
company run by a top leader's son.

Such high-placed Chinese intermediaries have no interest in a
transparent trade system. Thus while China has carried out the easy
part of trade liberalization, or what the World Bank calls "shallow
integration"--reforming its import regime and limiting controls on
foreign exchange transactions--China has balked at "deep
integration", including greater market access, regulatory
transparency, non-tariff barriers and wage policies. China's trade
liberalization essentially plateaued in 1994 and has not moved
forward since.

At the bottom of such problems is the plain fact that China has never
wanted an open trade regime. Since 1978 it has erected a
transnational sector--Special Economic Zones, Export Processing
Zones, joint ventures, swap markets for foreign currency
conversion--to cordon off the domestic economy from external
influences. These special deregulated spaces and organizations
receive what the Chinese call "preferable policies" that exempt them
from tax, trade and investment rules governing non-open territories.
This has created a dual economic system of open, favored localities,
and more closed, highly regulated regions. According to Chinese
economist Hu Angang, the inequalities generated by this system create
"all sorts of special and independent economic and political interest
cliques within the state apparatus", who "although they are
communists, regard it as their goals to maximize the interests of
their own cliques, and to seek monopolies and privileges through
their economic and political pursuits."

In light of these interests, one must marvel at the audacity of Zhu
Rongji's WTO offer, which, if accepted and fully implemented, will
severely limit bureaucratic rent-seeking and management of foreign
trade. But the deal is not completed, and China remains a
mercantilist state where the majority of leaders, bureaucrats,
industrial managers and regional officials support state involvement
in China's foreign trade. Their view is that China's trade should
grow but in directions set by official definitions of China's
interests, rather than by domestic or global market forces. Chinese
leaders still advocate an East Asian style "developmental state",
with an industrial policy geared at competitive export industries. As
was the case in South Korea and Japan, China wants to "create"
comparative advantage where it does not now exist. In particular,
Chinese industrial policy is meant to protect sunrise industries,
which bureaucrats see as the source of future trade competitiveness.
It has targeted the electronics, telecommunications, transportation,
pharmaceutical and other high-tech export industries as key sectors
that will drive its economy in the next century. Similarly, insurers
and banks that have yet to adapt to global competition would get
swamped should China open these sectors up. It is worth remembering
that China is hesitating to open to the WTO too quickly in order to
protect and develop its own future global Fortune 500 companies;
otherwise, these sunrise companies would get swallowed by the global
giants. Still, protection leaves these firms with little incentive to
become fully market-oriented.

The same applies to government ministries. China's bureaucrats
benefit far more from regulated trade than from anything approaching
real free trade. As China opened up in this constrained and selective
manner, ministries were empowered to establish monitoring agencies
that control threats to their own industries posed by trade
liberalization and global competition. The Ministry of Machine
Building established an Equipment Approval Division to monitor and
approve all imports of equipment, including equipment for joint
ventures. In 1995, as China opened the construction industry to
foreign direct investment, strict guidelines were introduced and new
foreign-funded enterprises needed approval from the Ministry of
Foreign Trade and Economic Cooperation as well as the Ministry of
Construction, which owns and operates its major competitors.
According to the U.S. Trade Representative, one of the strongest
advocates of continued protection is the vulnerable pharmaceutical
industry, whose State Pharmaceutical Administration issues quality
certificates for pharmaceutical products.

In sum, despite the conventional wisdom that increased global
transactions will liberalize China's trade regime, forcing it from
autarky into global interdependence, strong forces will limit China's
movement along such a trajectory. Also, the involvement of foreigners
in China's economy does not necessarily support the emergence of a
market-oriented middle strata. Foreign direct investment throughout
China is partnered with local governments or the PLA at all levels of
the system. Even Hong Kong's investment partners in wild and woolly
Guangdong Province are mostly local township officials, not private
entrepreneurs. Rather than undermine government authority, foreign
direct investment strengthens its legitimacy by increasing economic
growth and helping local governments meet social welfare obligations.
Opening China to the world, therefore, does not necessarily translate
into opening China within itself.

China as a Democracy?

It appears, then, that while there are social and economic trends in China pressing for greater marketization, strong counter-trends seem to limit it. There are some impulses toward greater political liberalization, but again strong counter-impulses that would stymie it as well. As for the picture as a whole, there is no evidence of a necessary or automatic lockstep relationship between economic development and market liberalization, broadly defined, and the political liberalization that many pundits and politicians have predicted.

The truth is, no one really knows what will happen in the political domain in China. On the one hand, the confluence of corruption, inflation and economic recession could again trigger massive protests. In 1989, 30 percent annual inflation dropped real incomes for Beijingers even as a nouveau riche or "princeling" class composed of the children of high-ranking cadres emerged. If a substantial sell-off of state enterprises in 1999 brings large profits to managers even as it puts millions of unemployed workers on the streets, new protests could bring the regime to its knees. On the other hand, without alternative political parties in readiness, such a collapse would be far more likely to lead to a military dictatorship than to a democratic regime.

And there is little reason to anticipate the emergence of competitive political parties or an institutionalized movement for democracy. As in Hungary, where factions in the communist elite in the 1980s turned into competitive parties, stark differences over development strategies among Chinese factions made a similar scenario seem plausible in the China of the 1980s. But today is different. Jiang Zemin's struggle to maintain legitimacy as the "core" of the leadership makes concessions and institutionalized division of authority or separation of powers difficult. The core of any factional opposition, Qiao Shi, was removed from office in 1997, and such a party structure simply cannot arise outside mainstream influences under current circumstances.

Tiananmen sent a message to the Chinese people that public protest will be met with violent counterforce. Since then - and despite some signs of division at the top - most urban Chinese have accepted the government's offer to pursue private interest through business; to seek personal freedom through amassing wealth; and to maintain economic growth through political passivity. Chinese also compare the chaos in the former USSR to their own country's economic vigor and say the equivalent of "there but for the grace of God go we." As far as political models are concerned, the specter of Russia more than outweighs the lure of Hong Kong to most Chinese who have political power.

American Choices

This reality poses hard choices for U.S. policy. The widespread belief in an evolutionary process in which economic liberalization drives political democratization in China is narcotic in its policy impact. Through it one can excuse nearly any short-term accommodation, using the rationale that buying time makes sense because time is on the side of all that is benign. But what if this is wrong? China may change more slowly than anticipated; it may become corporatist rather than democratic; or it may even implode violently.

All three developments would be problematic in one way or another for the United States. But all three, and particularly the first two, are more likely than the comforting thesis of inevitable, rapid and smooth democratic transformation. While marketization is forcing economic institutions to liberalize somewhat, political liberalization, in terms of the emergence of real competitive politics, appears nowhere on the national agenda. Powerful vested interests would be threatened by a free press and public disclosure of the activities of China's middle and upper strata, particularly as they seek to profit from SOE restructuring. Moreover, the social unrest likely to emerge from massive layoffs simply cannot be accommodated by a system undergoing political liberalization. A reality check on China today tells us that - pace Henry Rowen - China is very unlikely to be a democracy by the year 2015.

So what should the U.S. government do? It must accept that while a major swing in economic reform and global market liberalization appears to be looming, those changes will face severe domestic opposition that could in the end push China in a decidedly illiberal direction. In the mid-term, it might be that encouraging China to liberalize - by holding out the prospect of WTO membership, for example - would instead trigger a system collapse. Corruption could easily accelerate under the current SOE reform strategy, and the sell-off of state firms might be more vigorously pursued if China attained WTO membership. According to various reports, as much as $10 billion worth of state assets have been stripped by private and public interests in the name of economic reform. The sale of shares in public firms could exacerbate this problem: factory managers and bureaucrats could borrow bank funds to buy up large amounts of shares in public companies, and then sell off the companies to other firms who lay off redundant employees. The result would be windfall profits for bureaucrats while workers are dumped on the streets. Could such a state of affairs persist for a long time without an explosion? Perhaps, but it would not be a sound bet.

Would a collapse in China be a good thing for American interests? A collapsed Soviet Union is widely interpreted as having been a favorable development - although the hobbled Russia that emerged from it has won decidedly mixed reviews. If the Chinese political system today is in fact unreformable, as the Soviet system proved to be, could people really still prefer that the system collapse? The negative global repercussions would be enormous. Who knows what would arise in place of the semi-reformist Chinese government we have now? While there is little doubt that a democratic China would be a better partner than an authoritarian one, China's long march from authoritarianism to democracy must traverse many dangerous passes, where a simple misstep could lead to disaster. Does the United States want to push China onto a path that could undermine the first extended period of economic growth and development experienced by the Chinese people in over a century and a half? Would that make for long-term stable relations? American policymakers need to address these questions, rather than operate on the flawed assumption that economic reform will produce political liberalization without radical political discontinuity in the bargain.

What is needed, then, is a continued policy of engagement that helps China move down the road of liberalization, but that does not justify that policy on short-term predictions of dramatic political change. The United States must engage China because of China's rising power and influence, because of its market, and because greater American involvement in China increases the likelihood of more positive, long-term developments. But the administration must not win supporters for its China policy based on promises it cannot keep and on developments in China that it can neither predict nor control. China will change at its own pace, taking into consideration the need for social stability, the power and interests of its now frightened bureaucrats, and the real limits that exist on the power of the top leaders. Only then will Sino-American relations be established on a stable footing that will weather the difficult times that lie ahead as China continues its dangerous, but nonetheless remarkable, reform program.

David Zweig is associate professor, division of social science, at the Hong Kong University of Science and Technology, and research associate for the Joint Centre for Asia-Pacific Studies, York University/University of Toronto.

Essay Types: Essay