China in Its Chrysalis Requires a Deft Touch by U.S.

What is really going on in China? Hundreds of people are sleeping at railway stations in the rural areas, waiting days for the chance to buy a ticket so they can go to Beijing, Shanghai and other cities to find construction work. Estimates put the number of people on the move in China at over 100 million.

The trains are slow, but they are the mode of travel in China because roads are poor and there is little motor transport. There is insufficient electricity, so factories often shut down a day or more per week. That's why China is determined to build more than 50 power plants in the next five years. It has just arranged $120 million in financing for a power project from a syndicate led by J.P. Morgan & Co. and from Nippon Life Insurance.

The boom in China's economy is real because it's based in part on more than a decade of surpluses in agriculture, which began in the late 1970s when Beijing's Communist government first allowed farmers to earn their own money and decide their own crops.

Now it is moving into the industrial stage, hence rural people leaving the land for big cities in all parts of the country. In Chengdu in Sichuan--the central China province that U.S. restaurants call Szechuan and whose 110 million people make it larger than most countries--construction cranes are busy day and night and workers can earn the equivalent of $20 a month.

But growth of almost 14% a year is too fast, and inflation in the cities has been hitting 40%--imposing a hardship even on college-educated elites who earn $100 a month, more if they work for foreign companies. Corruption is rampant as politicians line their pockets. And robberies and labor unrest are on the rise, so the government has been trying to slow development to a more manageable pace.

Such chaos is normal for a developing nation, but China is no ordinary country. Its population alone--1.2 billion--gives it great potential. Poor as it is today, China has an economy the size of Canada's. And if China could lift its economic output per person--now under $500 a year--to that of South Korea--roughly $7,000--the total Chinese economy would be greater than that of the United States.

Add to that China's military power and its role as cultural and political leader of Asia and you can understand why President Clinton, tacitly acknowledging his own mistake, recently renewed most-favored-nation trading status for China.

He was attacked for "putting profit before principle" in not cutting China off as punishment for government persecution of political dissidents.

But that's nice rhetoric and faulty logic. To begin with, the idea of using trade as a weapon is flawed strategy. If China doesn't comply with U.S. demands, who is penalized? Cutting China's $31 billion in exports to the United States, mostly of shoes and apparel, would only make the country more economically dependent on Japan while hurting American businesses competing for China's market.

More important, it would sharply reduce U.S. influence in emerging Asia, destined to become the wealthiest region on Earth. How far Asia has come can be gauged from the fact that 80% of the investments in China today are not from Japan or the United States but from business people in Taiwan, Hong Kong and Singapore, three city-states that now have a combined capital surplus of more than $100 billion.

Meanwhile, entrepreneurs inside China are busily investing in Hong Kong or sending money for safekeeping to the United States. Politics aside, commercial ties are growing between the United States and China, most prominently in the work U.S. companies are doing.

Caterpillar Inc. has joint ventures to build diesel engines and hydraulic excavators in China. Boeing may be about to get a $5-billion order for planes to upgrade China's air fleet. AT&T; is installing phone systems and upgrading China's air traffic control systems. Raytheon and Foster Wheeler are supplying boilers and servicing power plants. The list goes on.

Yes, but so do arrests by China's government. Has America no choice but to trade with the devil? The answer is that America has many choices, as the Clinton Administration would realize if it developed a real foreign policy. In different circumstances in the past, the United States has kept its principles and done what works. Thus it sold wheat to the Soviet Union but kept guns drawn; in South Africa, U.S. sanctions cut off international bank credit.

And in China, a U.S. tactic is working that in fact may represent a shrewd policy. U.S. thinking is to let the world market flood the country with capital, reckoning that economic growth and modern technology loosen the control of totalitarian government.

Growth is forcing change. Five years after China's army mowed down student demonstrators in Tian An Men Square, the focus of dissent is now economic. Workers and farmers are protesting conditions and arbitrary rules, organizing into unions and cooperatives under the leadership of reformers such as Wei Jingsheng, now the most prominent jailed dissident.

Reports in Washington say such organizations are receiving quiet help from U.S. intelligence agencies, as did the Solidarity union in Poland over a decade ago.

In any case, quiet pressure is the way to go. Trying to push China around won't work, nor will it gain the support of Asian allies who don't welcome foreigners telling them what to do. "The strongest impulse driving Asia today is to erase the humiliation by foreign powers in the 19th Century," says China scholar Chalmers Johnson of UC San Diego.

That doesn't mean antagonism to the United States. It means Asian countries following their own course and expecting the United States to devise post-Cold War policies to deal with them.

China and Asia represent challenge as well as opportunity. The China that is emerging is an energetic place. "They do their homework and learn quickly," says Teddy Huang, AT&T;'s director of Far East switching systems, of Chinese personnel installing modern phone systems.

Another U.S. businessman, who prefers to speak anonymously, compares joint venture partners in three countries: "In Russia and India, top people were eager but the managers and workers most directly affected didn't really listen. In China, everybody listened."

"I'll tell you what America has to do to respond to China today," says a U.S. chief executive who is building power plants in Asia. "It has to educate its own children, so we won't be left behind."

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