9.    CHINA

9.1   China's fundamental national goals are attaining and maintaining territorial integrity and national unity and achieving economic and political power commensurate with the size of its population, the depth of its history and its sense of itself as one of the world's great powers. These objectives link together the very different regimes that ruled China in the 20th century, and the successive leaders of Communist China. But how to achieve that goal has varied. China's leaders since 1978 have eschewed revolutionary isolationism as a path to strength and prosperity, instead choosing to engage with the rest of the world. China's accession to the World Trade Organisation will confirm that path. Despite controversy within China as to the costs and benefits of global integration we do not see that fundamental change of course being reversed. The adverse effects of the Great Leap Forward and of the Cultural Revolution still loom large in the minds of Chinese policy makers. Two statistics capture this: the trend rate of growth in China for net material product between 1949 and 1978 was about 5.8%; between 1978 and 1997 the equivalent figure for GDP was 9.6%. The policy debates that do take place within China increasingly resemble those in other economies.

9.2   The economy is still growing. But heavy spending on infrastructural development, along with low interest rates, while keeping the economy buoyant, is unlikely to re-ignite private demand. Responding to the Asian recovery and the health of the world economy over all, Chinese exports grew by 6% in 1999 over 1998, boosting China's GDP by 1%. The financial sector needs urgent remedial action. The government has begun to recapitalise the banks and clean up the non-bank financial sector. Reform of the state sector is also an imperative but carries huge risks of social dislocation, as urban workers lose their lifetime guarantees of employment and associated benefits. China will adjust the pace of reform to ensure sufficient economic growth. Despite these pressures China adopted a medium term perspective on its exchange rate, to the benefit of the region.

9.3   China's commitment to economic growth is not just directed at improving the living standards of its vast population. China's leaders are determined that China will never again be at the mercy of foreign powers. Given the emphasis placed on China's need to be strong, it is not surprising that China's leaders are equally committed to China's unity. This is reflected in China's 20th century history and in its approach to the Taiwan issue. China is fearful of secessionist impulses in Tibet and Xinjiang, both of which it believes are aided and abetted by forces outside China. But the most neuralgic issue for China is Taiwan. Reunification with Taiwan will remain a top priority for China; it will never renounce the right to use force to achieve this; but it is unlikely to resort to force unless the provocation is intense.

9.4   Taiwan aside, China's leaders consistently state that China needs a stable and peaceful environment in which to pursue the modernisation of its economy. China has been diligent in resolving problems with many of its neighbours, including the new republics of Central Asia. It has successfully reincorporated Hong Kong and Macau. China does have other unresolved territorial issues with Japan (the Senkakus/Diaoyutai) and in the South China Sea, but while not retreating from its assertions of sovereignty, it has managed these disputes with some skill. But China's determination to underpin its status with modern and capable military forces does arouse concern in the region, given the changes to the balance of power that this might, even if only gradually, bring about.

9.5   In ten years time China is likely to be a significant regional power, able to project limited military power beyond its borders. It still will not have forces as capable as those of Japan and will be nowhere near US levels. There are several aspects of China's security policy which are worth noting in this context.

• China will retain its nuclear capability at least as long as the other declared nuclear powers do so. It would not welcome the acquisition of nuclear capabilities anywhere else in its region. It reacted sharply to the South Asian nuclear tests.

• Given that China is building up a missile capability, China is naturally concerned about US and Japanese interest in missile defences.

• In future, China's conventional capability relative to the United States (but not regional neighbours) may further erode. China may increasingly turn to development of other capabilities.

• China generally prefers to deal bilaterally with other countries. China is critical of the US-Japan alliance, which it regards as being directed at it.

• But China has also become much more relaxed about participating in multilateral institutions such as APEC and the ASEAN Regional Forum (ARF); in APEC it accepts the membership of Taiwan and in the ARF it has accepted some constrained discussion of security issues.

9.6 China remains concerned about any possible rise in Indian military power along its southern border and would not wish to see the balance there to be sharply altered in India's favour. Otherwise, China's security focus is heavily on its eastern frontier. The fault line, which divides China and North Korea from Japan, South Korea and Taiwan, while much less active than in the 1950s, is still major.

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