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China’s Role in the North Korean Missile Crisis

On the Fourth of July, North Korea test-fired at least seven missiles, including a long-range Taepodong-2 multistage missile alleged to be capable of reaching some parts of the United States. The launch caused an immediate international furor. North Korea not only shocked the international community by the inferior quality of its missiles but also baffled the entire world as to its motives for provoking the missile crisis.

U.S. military intelligence was among those confused. Defense Secretary Donald Rumsfeld openly expressed his bewilderment: "I’m not a psychiatrist. I don’t know why they are doing what they are doing." Other Bush administration staff showed comparable perplexity.

China Replaced the Soviet Union in Missile Crisis

The North Korean missile crisis was a reminder of the 1962 Cuban missile crisis, when the United States and the Soviet Union were close to nuclear war. In the Cuban missile crisis, it was the Soviet Union that backed Cuba. A would-be war was averted because Khrushchev eventually calmed down and accepted JFK’s deal. Is history repeating itself in the sense that China is playing the Soviet Union’s role in the North Korean missile crisis?

It is interesting to observe China’s behavior before and after the crisis. China was the only country that North Korea notified of the missile test plan beforehand, while Russia, allegedly North Korea’s secondary ally, was kept in the dark as to the launch date until the Taepodong-2 plunged into the sea near Russia’s coast. Russia thus joined the international outcry. China was unconcerned over media reports on the missile test until a week before the launch—June 28—when Chinese Prime Minister Wen Jiabao first called on North Korea to abandon its missile testing plans and requested all parties to restrain their passion. China’s last-minute gesture served a diplomatic function: to divest itself of any involvement with the test plan.

It would be unfair to say that China did nothing about North Korea. In the wake of the missile tests, China demonstrated obvious displeasure with the international furor. China blamed the United States for the missile tests. On July 6, Deputy Minister Wu Dawei told interviewers that "this latest act" by the North Koreans "was in large part caused by American financial sanctions." China even accused the United States and Japan of "causing further tensions and complications." Through the dispatched Chinese delegation, General Secretary of the Chinese Communist Party Hu Jintao sent Kim Jong-il a personal message that offered "warm felicitations." Hu also praised the "friendly and cooperative Sino-North Korea relations."

As usual, China objected to the U.N. Security Council resolution against North Korea proposed by Japan and supported by the United States, Britain, and France, calling it "an overreaction." While threatening to veto the resolution of sanctions, China, along with Russia, presented a counter-resolution that endorsed only voluntary measures aimed at restraining Pyongyang’s ballistic missile and nuclear weapons programs. China’s stand in covering for Pyongyang and blaming the United States on the current missile crisis demonstrated a high consistency with its policy since the North Korean nuclear crisis began in October 2002.{mospagebreak}

Ironically, while China could not exercise its leverage to discourage North Korea from launching the missiles and its influence to bring North Korea to the six-party negotiations, it certainly demonstrated how hard and effectively it worked to avoid sanctions against North Korea. China’s behavior in the missile crisis did nothing more than affirm, once again, its unbreakable brotherhood with North Korea—a relationship historically boasted about by Chinese leaders as being the "lips and teeth."

International Law Meets Communist Hooliganism

Is Kim Jong-il really a lunatic? He openly bragged about North Korea already having nuclear weapons and he threatened to use them. His fanatic words, such as "If we lose, I will destroy the world," certainly have made many think he is. Then, was the missile crisis just a harebrained yet dangerous bit of blackmail?

After North Korea’s missile tests, South Korea held a ministerial-level meeting with North Korea to ease the tensions. At the meeting, North Korea told South Korea that the missiles were needed for the defense of both Koreas—North and South—not just North, and that South Korea should therefore not protest by ceasing to supply food and fertilizer. This logic certainly shocked South Korea. However, it indicated that Kim Jong-il, the maestro of this crisis strategy, clearly had sober loss-gain calculations in mind and that rumors of his being "mentally handicapped" were exaggerated.

On the surface, North Korea fashioned the missile crisis to extort a bigger "ransom" from the United States and Japan. Many believe that North Korea had figured from the beginning that it would confront the international community with a challenge that no amount of maneuvering in the U.N. or tut-tutting among the other "five critical regional powers" could address. Then the United Stated and Japan would have to ask China for help. China would help by asking the United States and Japan to give in. Every international move following the missile crisis seemed to follow the rules of this particular game.

Although the extortion assumption might offer something of an explanation, the main reason that North Korea provoked the missile crisis was to ingratiate itself with China. As a little brother in the communist bloc, North Korea owes China so much, yet it still needs more and more. North Korea needed a way to take some credit and, at the same time, to seek further rewards for its achievements. This is typical of communist hooliganism. The rule goes like this: "Even if a little brother makes trouble for a big brother, the big brother need not get his hands dirty." In other words, while North Korea was creating an international uproar, China only had to seem to be neutral and then to mediate between the different parties to protect the little brother. North Korea did the dirty work while China helped to cover up and diffuse the situation. When international conventions met communist hooliganism in the form of North Korean missiles, Kim Jong-il was very confident that the international community had no cards to play.{mospagebreak}

Has China Helped North Korea or Vice Versa?

For a long time, China has been a major patron of North Korea. On an annual basis, China provides North Korea US$500 million in food and more than 90 percent of its petroleum. Last year alone, when Chinese Communist Party leader Hu Jintao visited North Korea, China gave North Korea US$2 billion in one-time assistance. China’s aid plays a pivotal role in sustaining North Korea’s survival and in maintaining the comrade relationship as stipulated in the 1961 Economic and Military Alliance Treaty. The alliance was concluded at the sacrifice of 54,246 American soldiers killed during the Korean War in the early 1950s. For 45 years, the China-North Korea military alliance has served as a legal foundation for China to commit military forces in case of another Korean war with the United States.

North Korea’s first act of ingratiation to endear it to China was threatening Japan. Given the tense relations between China and Japan, the missile crisis helped China send Japan a clear, intimidating message: China may not need to personally settle with Japan; North Korea could punish Japan with its missiles at China’s whim. The crisis also served as an opportunity for China to take further advantage of domestic anti-Japanese nationalism and help alleviate an accelerating Communist Party legitimacy crisis. Japan was fully aware of this attack by innuendo. In refusing to compromise on the punitive resolution, Japanese Foreign Minister Taro Aso told national broadcaster NHK, "It would be a mistake to alter the stance for the sake of ONE country with veto power [China], even though many countries agree." Commenting on the prospect of China being isolated in the Security Council, Aso told TV Asahi that Beijing should not be backed into a corner.

Secondly, North Korea attempted to please China by using the missile crisis to engage the United States in a two-way squeeze: Iran from the West and North Korea from the East. In a continuing missile and nuclear technology transfer, China is the connector between Iran and North Korea. China was indubitably the invisible hand behind the pincer attack. Reportedly, ten Iranian missile engineers traveled through Beijing last month en route to North Korea’s missile launch bases. They checked the quality and performance of Chinese-made components in the North Korean missiles Iran plans to purchase. By transferring nuclear technology to Iran and North Korea through Pakistan and abetting the sale of Chinese missile components to Iran and North Korea, China created tensions in both areas. While the United States has been hard put to cope with the Middle East and the East at the same time, China experienced relief from international pressure with regard to its deteriorating human rights records and was able to go all out to crack down on popular opposition at home.

North Korea seems to be draining China’s resources. In fact, the two countries are mutually interdependent. China cannot simply abandon North Korea, which is not only a convenient buffer on its northern border but also an indispensable ally in the communist bloc. Pyongyang’s bellicose words and reckless actions—a rather desperate attempt to gain some political leverage—helped Beijing increase its diplomatic maneuvering power and play directly into the hands of Chinese communist leadership. North Korea functioned more as an assistant than a burden to China.{mospagebreak}

China Cashed In on the Six-Party Talks

The United States was able to defeat the Soviet Union but has been humbled by North Korea. A layman would perhaps ask a simple question: Why couldn’t the United States eliminate the North Korean regime just as it did Iraq’s? And why does the United States have to rely on six-party talks to deal with North Korea? The unspoken and bottom-line truth, for all the reasons noted above, has been, in a word, "China." Because of their military alliance, to attack North Korea is to attack China. The United States could afford to go to war with North Korea but not with China. That is why President Bush has persistently rejected solo talks with North Korea and demanded that six-party talks be renewed. In point of fact, five rounds of six-party talks have not changed North Korea one bit. North Korea has continued to develop its nuclear bombs and test its missiles, and it has repeatedly violated its signed agreements. Regional tensions and insecurity were never so menacing when the talks were taking place. North Korea has become more skillful at using military threats to wrest aid from the West and thereby finance its survival.

As a Chinese proverb says, "One stone may kill many birds." Six-party talks have worked for China in multiple ways. First, in the name of promoting the six-party talks, China could brazenly supply economic and military assistance to North Korea without generating criticism from the West, thus sustaining North Korea in the long run. Second, in return for complying with the U.S. request to bring North Korea to the negotiating table, China compelled the United States to soften its condemnations of China’s human rights violations. Third, using U.S. endorsement, China has strengthened its strategic position in the region, which is a traditional Chinese tactic: "The fox borrows the tiger’s ferocity by walking in the latter’s company." Fourth, by deliberately making the North Korea issue a live volcano, China has commandeered a valuable deterrent in its confrontations with the United States in the post Cold War era. Fifth, in return for arranging the multilateral talks, China expects concessions by the United States in its policy toward Taiwan.

Six-party talks have become China’s trump card, which it can cash in at any time. Even though China’s leverage with North Korea may never have been as great as many have assumed, the U.S. attempt to use such leverage has added to China’s power in the region while possibly leading to important U.S. concessions. China’s strategy to become the dominant regional power has already benefited from its role in the North Korea talks. For China to continue to sustain North Korea best serves its interests in an eventual world power struggle with the United States.


By closely and effectively working with its "blood" ally, China has been gaining strength and reducing American influence in the eastern Asian and Pacific regions. Communist China’s support of North Korea in the current missile crisis—and its unbroken support of North Korea over more than 50 years—resemble Russia’s role in the Cuban missile crisis and similarly poses a serious threat to regional stability and security.{mospagebreak}

A total settlement of North Korean missile and nuclear crises can hardly be reached without a regime change in North Korea. A regime change in North Korea is unlikely to happen without a disintegration of the Chinese Communist Party rule in China.

Dong Li holds a Ph.D. in Political Science from Columbia University. He is a China specialist who analyzes news for New Tang Dynasty TV.

China’s Growing Drug Problem

Twenty years ago, few people saw or knew that any drug abuse existed in China; it was wiped out after the communists took power in 1949.

After the 1989 Tiananmen Massacre devastated people’s fundamental values, the Chinese regime diverted social discontent and dampened moral pressure by turning to human greed for motivation. The ensuing get-rich-quick economic reform in China let loose a selfishness that has drastically enlarged the country’s rich-poor gap. People are, as never before, desperate to find a way to make money—for the poor to get out of poverty and for the comfortable to get richer. Unleashing the genie of greed had an unanticipated side effect. Attracted by the huge profits to be made in illicit drug trafficking, and unimpeded by any foundation in morality, many people have become drug makers and drug dealers.

Experts disagree about how many drug addicts there are in China. According to statistics from the Chinese authorities, by the end of 2004, there were about 791,000 registered drug addicts in China [1], with an annual increase rate of 6.8 percent. Experts at the national anti-drug conference held in May 2005 in Lingbo, Zhejian Province, estimated that there were 680,000 active Chinese drug addicts [2], while yet another source reported that the number of registered addicts had grown to 1.14 million in 2005.[3] The 2006 International Narcotics Control Strategy Report (INCSR) reported that China had as many as 1.6 million registered drug addicts in 2004 and double that number in 2005. Yet another analyst estimated that the number of addicts could be as high as seven million. While these figures vary, depending on the source, there is no doubt that the problem is serious and that it is growing.

Getting Worse

It is hard to imagine that in just 30 years narcotics would become such a problem in China. In 2001, the Chinese communist government estimated that there were about one million drug addicts, and in 2003 the government’s Drug Abuse Surveillance Network found that 96.8 percent of those users were addicted to heroin. Amphetamine-type stimulants have nevertheless risen rapidly in popularity in the last few years. In 2002, the government seized three tons (6,720 lbs.) of "ice" (methamphetamine hydrochloride) and three million ecstasy tablets. Moreover, such statistics as have been mentioned probably underestimate the country’s actual drug problem, as certain analysts suggest that the real figure may be as high as seven million addicts in China today.{mospagebreak}

Furthermore, the use of narcotics encourages other criminal acts and creates social disorder, allowing drug dealers to become abusers. It encourages robbery, breeds deception, seriously raises the rate of prostitution, and contributes to the spread of HIV/AIDS. In some areas, 60 to 80 percent of all robberies are perpetrated by drug abusers. At the end of September 2005, China’s Ministry of Health confirmed 144,089 cases of HIV/AIDS. Some Chinese authorities put the figure of estimated HIV/AIDS infected persons at 650,000, but estimates from other sources say that there are likely between one million and three million cases in the country.[4]

Over half of the infections were caused by the intravenous injection of narcotics, the leading cause of such infections in China. Eighty percent of registered drug users have contracted an infectious disease. According to incomplete statistics, since the 1980s, there have been 49,378 accidental deaths resulting from the use of narcotics.


Experience demonstrates that, once HIV enters the injecting population, a country can expect a large and sustained HIV epidemic. This is now the case in China, Malaysia, Vietnam, Russia, and Ukraine—countries where more than 60 percent of all HIV infections are the result of injecting drugs.

Many drug users heighten their risk of HIV and other infections by engaging in risky behavior, such as needle sharing. To support their habit, some resort to prostitution, which provides a conduit for HIV to enter the non-drug-using population. At one surveillance site in Xinjiang, 84 percent of those who injected themselves with drugs had HIV. In the border town of Ruili in Yunnan, around 80 percent of drug users were infected. Infection rates at other surveillance sites in the most affected provinces range from 12 percent to 75 percent.[5]

The first AIDS occurrence reported in China was in Ruili, Yunnan Province, in 1989. On the map that the health authorities maintained in Yunnan, it was just a black dot along the border between China and Murya. Since then, these little black dots have taken over the map of southern China. By 1998, HIV infections had been reported in all 31 provinces, autonomous regions, and municipalities.

Drug injections and border trade are rampant and are helping to spread AIDS like wild fire. As early as 1991, Li Zhirong, an AIDS Doctor, examined 186 drug addicts and found 80 of them were HIV positive. Mangmo Village has been hit hard by the AIDS virus. Drug consumption is routine there and most of the HIV carriers are young people, including children. The most popular drug is heroin No. 4. At one time, the villagers wanted to form a security squad to keep order, but they could not locate anyone healthy enough to take the job. During the harvest seasons, grains were exchanged for heroin right there on the spot.{mospagebreak}

Poverty and Prostitution

The poverty stricken and those involved in prostitution often take drugs as a form of release. In turn, the addiction drags people into poverty and prostitution.

Chinese official statistics put the number of people living in poverty at 64,320,000.[6] The World Health Organization estimates that there are over six million women involved in prostitution.[7]

The number of drug addicts has grown exponentially in recent years. Of an estimated 1.14 million registered addicts in 2005, close to 20 percent are female. In some regions, over 80 percent of drug addicts are female. Ninety percent of these female addicts end up in prostitution.[8]

Ms. Wen was born in a coal-mining family in Xingyang, Henan Province, and has three younger brothers. Her family was too poor to allow her to get a high school education. At the innocent age of 17, Wen dropped out of school to support her family. Her parents advised her to walk her path in an upright manner and not to go astray in life while working in the city. At first, she became a waitress and then a performer in a nightclub in Xiamen City, Fujian Province. Things looked good in the beginning and she was making decent money. Later she started smoking and then a co-worker gave her some heroin. She quickly became addicted and depleted her income, so she became a prostitute just to buy drugs. Her health deteriorated drastically.

As a drug addict, Wen was arrested and sent to a forced labor camp. Once released, she resumed her drug use and prostitution. She even stole when she needed money to buy drugs. "Whenever I think of my parents’ advice, my heart aches and I am full of remorse. I feel that prostitution is filthy indeed, but I cannot stop taking drugs. To get money for drugs, I will do anything, including taking off my pants."[9]

Most discos in China deal in drugs clandestinely. Each ecstasy pill costs 70 to 100 yuan (US$9-12.5). According to drug dealers (usually men), the best targets are young women with good looks. These women chase them around with one single pursuit: white or purple ecstasy pills. Once addicted, the women go into prostitution to pay the hefty cost of the drugs. They account for a large and stable segment of the drug market.{mospagebreak}

From Innocent Youth to Drug Addict

In recent years, some "new types of drugs" have been used to lure people who visit public entertainment facilities, particularly the younger generation. The Ministry of Public Security said in a statement last September that the selling and use of these new types of drugs, such as "ice" and ecstasy, is increasingly evident at many entertainment venues. Many criminals sell drugs to customers, especially youngsters, in places such as disco halls, bars, and other singing and dancing venues. Moreover, many of the owners, for the sake of their own profits, protect those who sell or take these drugs.

Many young drug addicts started taking drugs with the thought that it was only child’s play. "It was just for fun. I didn’t realize that it could be this bad," said a 15-year-old girl from Guangxi Province. A drug research book published by the Xinhua Book Publishing Company documented her story, observing, "She is still childlike and looks confused." The book documents quite a few stories of how young people became drug addicts.

Tian Ting, a 16-year-old student, gave the same answer. Ting is talented in playing the piano, dancing, and modeling, but her talents also nurtured her rebellious personality. She started to skip school and come home late. Her parents repeatedly found that she locked herself in her room. She often asked for a larger allowance and the frequency increased. Her parents’ suspicion was finally confirmed. She was doing drugs.

Yang Yiliu is just 17. His taking drugs started out of curiosity. He wanted to experience feeling happy. His friend told him it was okay to try it just once, so he did. Once he was addicted, he became easily irritated. He now needs to spend 200 yuan (US$25) a day on drugs. He had to lie to borrow money from everyone he knew. Soon no one around him trusted him anymore.

Guqi, a 20-year-old girl, said that she didn’t want to do drugs. She was simply curious and wanted to try them. She said, "After I took ecstasy for the first time, I didn’t feel anything. Soon I felt light and I could elevate. It was that feeling that got me hooked. Now I just can’t help myself."

The author had an interview with a 16-year-old boy from Beijing, who has a tattoo of a woman on his chest and a tattoo of a man on his back. He recently attended his classmate’s birthday banquet with 20 other male and female teenagers. No grown-ups were there. He said the last dish that was served was an ecstasy tablet for each person. "We were so excited. It pushed the party spirit to its extreme," he said.{mospagebreak}

On March 1, 2006, the U.S. State Department published the 2006 International Narcotics Control Strategy Report (INCSR) [10], in accordance with the Foreign Assistance Act. It describes the efforts of key countries in attacking all aspects of the international drug trade in the calendar year 2005.

According to this report, "drug abuse in China continues to rise and there were, as of 2004, 1.6 million registered drug addicts, double the number in 1995."[11]

The report said that youths made up 74 percent of the registered drug addicts.

As a result of China’s economic growth, the focus on avarice, and increasing societal openness over the last decade, the disposable income and leisure time of millions of young urban residents have dramatically increased.

According to the report, "This phenomenon has led to a rapid increase in drug abuse among the country’s youth in large and mid-sized cities." In addition, the rise of nightclubs in urban culture has led to an increased recreational abuse of drugs such as ecstasy.

Financial Cost

A national anti-drug conference was held in May of last year in Lingbo, Zhejiang Province. Experts estimated that 680,000 active Chinese drug addicts would expend about 39 billion yuan (US$4.9 billion) a year on drugs.[12] However, that estimate was conservative because, according to this source, by 2004, China had already identified (caught and put on a drug registry) 1.14 million drug addicts. Furthermore, if the estimate of seven million drug addicts is correct, as certain analysts suggest, the drug cost alone would be about US$40 billion a year.

Many drug addicts soon bankrupt their families to pay for their drugs, and some of them eventually engage in criminal activities to sustain their drug use. China’s Public Security Office estimated that 80 percent of male drug addicts had committed criminal acts, and 80 percent of female drug addicts were engaged in prostitution.

Drug rehabilitation costs China several billion yuan (US$875 million) each year. By the end of 2003, China had created 583 involuntary drug rehabilitation institutions with a total capacity of 116,000 beds, 165 forced-labor rehabilitation institutions with a capacity of 143,000 beds, and 247 voluntary rehabilitation institutions with 8,000 beds. In 2004, 273,000 drug addicts were put into rehabilitation centers and 68,000 were put into forced-labor centers.[13]{mospagebreak}

Factors That Help Drugs Spread

"Bad Neighbors"

In 2005, the Xinjiang Public Security Office discovered nine cases of "Golden Crescent" narcotics being smuggled into China by plane. They arrested 14 foreign suspects and seized 14.5 kilograms (32.5 lbs.) of heroin. The number of investigations, the amount of drugs seized, and the number of people arrested were all substantially greater than the previous year.

There are several reasons for the proliferation of drug trafficking in China. First, due to the Chinese economic and political reforms introduced by Deng Xiaoping in the 1980s, new routes from Afghanistan have emerged to complement the older ones from Burma. These reforms have made it much easier for drug networks to penetrate China’s borders. Secondly, the success of counter-trafficking efforts in Thailand has encouraged the growth of alternate routes through China in order to satisfy the growing demand in East Asia as well as North America. Thirdly, poppy cultivation in Afghanistan increased dramatically after the U.S.-led 2001 invasion. The new Afghan government has not been able to curtail the large-scale opium production.

Last year, according to a report from the United Nations, Burma alone harvested over 30,000 acres of opium poppy, and produced 312 tons (698,880 lbs.) of opium. Afghanistan grew 145,000 acres of opium poppy, producing 4,100 tons (3.2 million lbs.) of opium, accounting for 87 percent of the world’s output. Xinjiang, Beijing, and Guangdong all discovered batches of heroin from Afghanistan and Pakistan.

The route that traffics opium also traffics chemically synthesized narcotics, such as "ice"—in notably higher quantities. In 2005, Yunnan seized 2.62 tons (5,869 lbs.) of "ice," which accounts for 48 percent of the national average.

The foreign demand for easy-to-make drugs and narcotics and their potential profits have resulted in increased smuggling across China’s borders. This smuggling is not easy to stop, especially when domestic economic conditions have made the drug business so attractive.{mospagebreak}

Poverty, the Moral Vacuum, and the Urge To Get Rich Quick

China produces acetic anhydride, ether, methyl benzyl-ketone, piperonyl methyl alkone, potassium permanganate, and so on—all of which get smuggled to "the Golden Triangle," where they make their way to other areas of the world, including Europe and North America. In 2005, the Chinese regime seized 157.9 tons (353,696 lbs.) of easy-to-make drugs nationwide, while the Office of National Narcotics Control Commission seized 3,250 tons (7.28 million lbs.) of easy-to-make drugs through international investigation. At the same time, easy-to-make drugs have made their way into China through illegal means, and this issue has not been effectively addressed. In 2005, China destroyed a total of 34 drug processing centers. The materials and formulas were all made domestically.

The following case of domestic drug manufacturing occurred earlier this year:

On February 26, Chen Ashen, along with his cousin Chen Aqing and his brother-in-law were arrested in Dongping Village, Lianjiang County, Fujian Province, for drug manufacturing. The three of them used to be fishermen who did occasional farm work. Not long ago, they discovered a shortcut to riches—manufacturing "ice." Under the pretext of producing fish powder, they set up an "ice" processing factory in a four-story building full of drugs, raw materials, and "ice" manufacturing equipment.

In Wuhan, on the morning of April 22, the police arrested Professor Wang in the laboratory of a medical school and confiscated 430 grams (15.2 ounces) of "ice" and 406 grams (14.32 ounces) of maguo together with the equipment and tools to manufacture these drugs. Back in March, the three had contacted Dr. Wang, asking him to join their gang by helping to test the drugs. According to the authorities, the gang started the business in 2005 and the delivery to their non-local customers soon reached between one and two metric tons (2,240-4,480 lbs.) per shipment.


Official corruption and police involvement have both been identified as chief ingredients in the "rich soil" for organized crime. These same ingredients are also essential for the proliferation of the drug problem.{mospagebreak}

A case heard in the Tieling Intermediate People’s Court in Northeast China’s Liaoning Province in 2004 revealed how a typical Chinese organized crime group engaged in drug trafficking for its operating income. The gang, headed by Liu Xiaojun, first formed in 1998. By 2002, it had grown into a large-scale organized crime operation. The gang engaged in smuggling, drug trafficking, gambling, burglary, and murder. The ringleader, Liu Xiaojun, amassed a net worth of approximately 40 million yuan (US$5 million). Liu wooed and bribed officials to secure their protection for his gang members’ street activities. Liu Jun, former head of a police substation in the Shuangtaizi District of the city’s Public Security Bureau, is alleged to be a key member of the crime gang. Liu Xiaoming, former Vice Director of the Shuangtaizi Police Branch, is also suspected of being part of the gang.[14]

In addition, many people in society are quite corrupt, morally bankrupt, and driven by the get-rich-quick mentality. What has been called "mafia capitalism" has become an ever-expanding part of the Chinese economy. According to Professor Min Xia of New York City University, a study in 1996 estimated that the hidden economy amounted to 20 percent of China’s GNP. While the drug dealing accounted for 39 to 390 billion yuan (US$4.88-48.8 billion) a year, the estimated revenue from the sex industry came to at least 500 billion yuan (US$62.5 billion) a year.

For many places, "Prostitution promotes prosperity" (PPP) has been an open secret. For example, in 1998, the "sweeping out the sex industry" campaign (saohuang) in Shenzhen drove out thousands of prostitutes and bar girls. With them at least 10 billion yuan (US$1.25 billion) of saving deposits evaporated from local financial institutions within a few days. This moved the economic boom to the surrounding cities and forced the Shenzhen municipal government to rein in its campaign.

As the Chinese financial industry is not well regulated, the corruption there has made money laundering easy. Chinese drug networks have earned billions from the drug trade. As a result, leading Chinese criminal organizations have initiated a range of money-laundering operations. Some sources suggest that banks and companies in Guangzhou launder money for the Triads (Chinese mafia-type organizations). The proceeds have then been used to fund major construction projects and joint ventures in Fuzhou City, Shanghai, and Beijing.{mospagebreak}

A Newly Launched People’s War

In the past 20 years, the increased illegal trafficking and use of addictive drugs has posed a serious challenge to Chinese society. As mentioned, Asia’s two main illicit opium-producing areas-the Golden Triangle in the Southeast and the Golden Crescent in the West-both border China and are convenient suppliers for Chinese drug dealers. The first drug seizure after the country moved from a completely planned economy to one of experimental reform was reported in 1983. However, narcotics smuggling into China did not increase dramatically until the early 1990s. In recent years, China has seen a substantial increase in the production of illegally synthesized drugs, which can be readily distributed across the nation.

At present, heroin is still popular in China. According to one report, for the last three years, the national heroin usage has been around 700,000 people, or 78.3 percent of all drug users. Users younger than 35 years old constitute 69.3 percent; 30 percent are farmers, and 51.7 percent are unemployed.[15] The report states that the number of traditional drug and heroin abusers has remained at a relatively stable 700,000 over the last three years, but the abuse of new narcotics is expanding and spreading. Already in Liaoning, Jilin, and Heilongjiang provinces, new drug abusers outnumber traditional users. The club scene has become a hotbed for the new drugs. The numbers of new drugs are increasing. "Ice," ecstasy, ketamine, "sodium coffee," and triazole have a substantial consumer market in some areas, penetrating deep into society. In many cities, more and more of the younger generation, such as high school students, are falling victim to drug abuse. Because of the Chinese communist government’s ineffective handling, the drug problem has gotten out of control. The impact on society is severe, and people are openly complaining.

Conducting the People’s War

The "people’s war" and grassroots campaigns are familiar tools to the Chinese communist government. However, these tools have been used much less frequently in the last two decades because they interfere with the economy and place a high financial burden on society.

In the past, the Chinese authorities relied mainly on heavy-handed punishment to curtail drug trafficking. Under Chinese law, anyone caught with over 50 grams (1.76 ounces) of heroin or one kilogram (35.3 ounces) of opium can receive the death penalty. Government funding for drug rehabilitation is insufficient. Many rehabilitation centers are self-funded-they make money by charging a heavy fee and selling expensive medication to their drug-addict patients. When these methods failed to work, the government resorted to the practice it was most familiar with: the people’s war.{mospagebreak}

The components of a people’s war usually include (1) a propaganda campaign to create momentum, (2) engaging large number of volunteers to raise awareness and educate community members, and (3) modifying the rules and regulations that apply to the affected parties. The war being waged against drugs is no different.

The Propaganda Campaign

Recognizing the nature of the problem, the Chinese communist government launched a new "people’s war" in 2005 and banned drugs. Through support and coordination from the Central Propaganda Department, the State Administration of Radio Film and Television, and the Ministry of Public Security, major state-controlled media used substantial manpower, materials, and financial resources to propagate drug suppression. According to incomplete statistics, more than 4,500 related news stories and articles have been published. Some programs included Central Committee Television "Focal Point Interview," "Ruling by the Law Online," "News Investigation," "Face-to-Face," "News Reception Room," "Economics Half Hour," "Eastern Space and Time," "Dialogue," "First Line," "Sky Network," and many more. More than 30 popular programs were produced and more than 80 issues on more than 100 of the shows featured anti-drug material. The Ministry of Public Security’s Political Department, the Office of National Narcotics Control Commission, and CCTV collaborated in the production of a television documentary called "China to Suppress Drugs Movement." It reflected comprehensively upon China’s 20-year war on drugs, from its history to its present situation.

The Ministry of Public Security, in order to propagandize the issue, held the First National Anti-Drug Propaganda Educational Workshop in Zhejiang Province, in Ningpo City. In 28 provinces, 41 evening news programs, metropolitan newspapers, and broadcast stations joined the people’s war in disseminating news and propaganda bulletins that explained the dangers of drug addiction. The News Office of the State Council and the Ministry of Public Security together organized nine anti-drug press conferences, announcing their anti-drug stance to the world. For example, Gansu and Hainan provinces organized their own People’s War on Drugs. They featured interviews with drug addicts, their family members, local government policy makers and policemen. Fujian Province initiated its "anti-drugs in Fujian" project, which used Internet anti-drug games. The website showed hits from thousands of people.{mospagebreak}


The number of anti-drug volunteer groups is expanding and covering a larger area. At present only Yunnan, Shanxi, and others, totaling 13 provinces and cities, have established anti-drug volunteer groups. There is a total of 558 groups, with a total of 250,000 people. One such group is the Hainan Province Women’s Federation, which formed the "Thousand Villages Women’s Anti-Drug Federation." It consists of 1,050 villages throughout the province. Women who have trained to become anti-drug activists number at 210,000. At the same time, people are reporting more and more illegal drug activities to the authorities. Since eight provinces and cities have been giving out rewards for drug information, the number of drug-related arrests has risen. From January until October, Yunnan solved 1,707 drug-related cases, arrested 1,957 criminal suspects, and seized 1.8 tons (4,032 lbs.) of narcotics (18 percent of the national amount). Fujian Province has investigated 150 dance-club-related cases, 70 percent of which resulted from people reporting drug activity to the authorities.


Beijing, Hubei, Hunan, Sichuan, and Shaanxi circulated a bulletin urging drug users to register. Guangxi organized its seventh drug survey, and the Inner Mongolian comprehensive drug user database has been updated. The Zhejiang City, Guizhou Province, anti-drug committee published To Identify Local Drug Users Notice, and Temporary Regulations to Monitor Drug Abusers, further regulating drug abuse monitoring and management.

A Responsibility System and Forced Labor

The Office of the National Anti-Drug Committee in conjunction with the Ministry of Public Security and Ministry of Justice, jointly issued the "Urgent Notice on Further Strengthening Reeducation through Labor Rehabilitation (a euphemism for Forced Labor)," specifying that recurring abusers (after they have gone through rehabilitation once) be sent to forced labor camps. In September, the Anti-Drug Committee Office sent a letter, "Suggestions to Further Increase Drug User Abstinence" to the Anti-Drug Committees of six provinces, including Anhui and Hebei. Each province further strengthened its rehabilitation efforts. The number of people sent to compulsory rehabilitation centers and forced labor camps have both greatly increased. During the year 298,000 cases were admitted to compulsory rehabilitation centers, and 70,000 people to forced labor camps. Over the course of a year, both types of rehabilitation have respectively received 9.3 percent and 8.6 percent more cases. Among them, Yunnan Province rehabilitated 61,400 people in centers, and 12,600 people served in forced labor camps. Guangdong also rehabilitated 74,400 people in centers, and 16,400 served people in camps. Gansu Province has also fully implemented an anti-drug responsibility system, which includes educating the public, investigating suspected users, putting every user into the rehabilitation system, and giving social assistance at every level of rehabilitation.{mospagebreak}

The drug problem is rooted in the structure of society. It is related to poverty, crime, corruption, degenerating social values, and declining morality. The current effort of the Chinese communist government may have a short-term effect, as shown in the statistics of increased drug seizure and arrests. However, without addressing some fundamental issues, such as poverty, corruption, and moral decay, any efforts to get quick results may not have any lasting effect, and may not deal with the problem at its roots.

Ann Lee is a correspondent for Chinascope.

[1] People’s Daily Online at:
[3] Chen Peiti, China: Drug Survey at and
[4] Assessing HIV/AIDS Initiatives in China: A Report of the CSIS Task Force on HIV/AIDS, 2006
[5] "Injecting Drug Use Fueling Spread of HIV in China" by Drew Thompson at:
[6] Office of Poverty Alleviation and Development, China State Council
[8] Chen Peiti, China: Drug Survey at and
[15] China Daily:

People’s Liberation Army Given “Carrots” Before Birthday

Right around August 1, which is official PLA Day, the Chinese Communist Party (CCP) newspaper People’s Daily announced the launch of an anti-bribery campaign inside the People’s Liberation Army (PLA).

On August 2, 2006, People’s Daily reported, "To crack down on commercial bribery will become a major task for the army’s supervision work this year and next year."

Preceding the official campaign, the Party fired a deputy commander of the navy for committing a financial crime. According to news released by the regime-run Xinhua News Agency at the end of June, the Central Military Commission dismissed Wang Shouye, a Vice-Admiral, from the post of Deputy Chief of the PLA Navy and expelled him from the Standing Committee of the National People’s Congress (NPC). Other sources reported that the Central Military Tribunal had sentenced Wang to death, with a stay of execution order (a death sentence with a two-year reprieve).

In July, the Central Military Commission approved the establishment of the Leading Group for Auditing Economic Responsibility of PLA Officials. The new Leading Group aims to strengthen supervision of middle- and senior-level PLA officers, and it plans to audit about 1,000 top military officers this year. Wang Shouye is an example to those who cannot show that they have a clean slate.

At the same time, the Party also handed "carrots" to the PLA. Starting from July 1, 2006, PLA salaries were again increased—the average salary for all PLA members was nearly doubled.

The 2.3-million-strong PLA has been the ultimate source of power for the CCP ever since its Red Army formed in 1923. (The name changed to the People’s Liberation Army in 1946.) The CCP charter states that the Party exercises leadership over the People’s Liberation Army and over all other people’s armed forces. The Party’s General Secretary is also Chairman of the Central Military Commission, so it makes sure that "the Party commands the gun." However, the CCP is now facing some challenges to its absolute control over the PLA.

Fan Wu, Chief Editor of China Affairs website, recently analyzed the instability inside the PLA based on PLA publications. Wu referred to an article written by Li Jinai, Director-General of the PLA General Political Department and member of the Central Military Commission. Li’s article "Study the Party’s Charter, Push on Building the Party’s Organization in the Army" was published in the Party’s Qiushi magazine in April. From Li Jinai’s repeated rhetoric of "We must always persist in the Party’s absolute leadership over the Army," to the PLA’s "additional regulations for the Army to implement the ‘CCP’s discipline codes,’" Wu figured out that there have been activities of a serious nature going on inside the PLA:

• Some soldiers and officers privately joined other organizations, participated in religious activities, converted to Christianity, or participated in Falun Gong activities.

• Some soldiers and officers privately possessed serious political materials, including the Nine Commentaries on the Communist Party, and reports on "Quitting the Party."

• Some soldiers and officers published articles or made speeches that were against the Party’s absolute leadership and demanded the Army’s nationalization (that it be loyal to the state not to the Party).

• Some soldiers and officers participated in demonstrations; some were organizing shang fang (appeals to higher-level officials).

Besides the political dissatisfaction, corruption inside the PLA also threatens the Party’s absolute control. In the case of Wang Shouye, the 62-year-old navy Vice-Admiral, he appeared to be a true loyal Party member. He was awarded "Excellent Party Member" and "Excellent Cadre" for four consecutive years in the late 1990s when he was the head of the camp construction unit of the PLA General Logistics Department. However, in private, this married man had five mistresses—all PLA actresses or secretary officers—and he took huge amounts of money from the camp construction fund to finance his corrupt luxurious life. One of his mistresses, Ms. Jiang, even had a son with him. When Wang was promoted to Deputy Chief of the Navy in 2001, he decided to part with Jiang and wanted custody of their son. Ms. Jiang asked for five million yuan (US$0.63 million) from him, but he gave her only one million. After a few years of bitter dispute, Ms. Jiang started reporting Wang’s illegal activities to the Central Military Commission and Navy Headquarters. For about two years nobody in the PLA wanted to listen to Ms. Jiang’s reports. It is said that Ms. Jiang wrote a total of 58 letters before the PLA finally opened a case to investigate Wang.

Wang Shouye was arrested on December 23, 2005, at a routine meeting of navy commanders. He had two loaded handguns in his briefcase and attempted to commit suicide at the time of his arrest. In his two homes in Beijing and Nanjing, the authorities discovered 52 million yuan (US$6.5 million) in cash in a refrigerator and in a microwave, and they found US$2.5 million in U.S. currency in a washing machine. At trial, he was charged with graft and the embezzlement of a total of 160 million yuan (US$20 million).

Of all those ever charged, Wang is the highest ranking PLA official and the amount he stole is the largest ever embezzled. His case reflects the degree of corruption among senior PLA officers.

Another source of instability in the PLA involves leadership succession history. When Jiang Zemin stepped down from the Party’s Central Military Commission Chair in 2005, he assigned his confidants to key positions in the PLA, and left Hu Jintao an empty Chairmanship. To this day, many are still in doubt as to whether Hu has truly grasped control of the PLA.

Hu and Jiang have one thing in common: They are both technocrats and lack a military background. To gain control of the army, they both need to buy favors and build up loyalties. When Jiang was Chairman of the Central Military Commission, he conferred the rank of general to a total 79 P LA commanders. The excessive promotions to the highest rank were widely regarded as Jiang’s effort to buy PLA loyalty. The day after Hu Jintao assumed control of the Central Military Commission, he immediately conferred the rank of general to two senior PLA commanders to show his power.

On June 24, 2006, Hu Jintao personally awarded certificates of command to 10 senior PLA commanders to whom he conferred the rank of general. Those 10 new generals are believed to be Hu’s supporters and will therefore likely be appointed to some key positions in the next Central Military Commission.

According to an article in the July issue of Chinese News Monthly, sacking Wang Shouye was also part of the internal struggle between Hu and Jiang. According to anonymous sources in that article, Wang Shouye had a close relationship with Jia Tingan, director of the General Office of the Central Military Commission. Jia was known as Jiang Zemin’s most trusted confidant. The Central Committee found evidence to show Wang Shouye and Jia Tingan were together in their bribery schemes. To sack Wang Shouye was to threaten Jia Tingan. Hu Jintao’s purpose was to make Jiang Zemin completely hand over his control of the PLA.

To reward those who show loyalty with the rank of general. and to send those who show disobedience to prison, appears to be the simple tactic that Hu Jintao is using on the PLA.

From the Editor

As part of the annual event to promote public awareness against drug use in China, 10,000 people participated in a two-hour march from the Summer Palace to the Great Wall in Beijing to mark the U.N.-sponsored International Anti-Drug Day on June 26, 2006. At the same time, reports of drug seizures and execution of drug traffickers also made headlines, giving an impression that China’s drug problem is being aggressively addressed.

While these are certainly steps toward combating China’s drug problems, the reality may be far grimmer than at first glance. This is particularly true in China because the authorities usually keep a lid on negative news. Such a high-profile public admission is often an indication that the problem may already be out of control. Below are a few signs that point to the magnitude and severity of the problem:

Over the last two decades, drug addicts have increased in number from virtually non-existent to anywhere from 1.1 million to 7 million, depending on the source of the estimate, and the number is continuing to grow.

The majority of drug users abuse heroin. Over 70 percent are under 35 years old.

Geographic distribution has spread from the Yunnan border area adjacent to the Golden Triangle to all over the country, and from metropolitan cities to rural areas.

Poppies are being grown and used to produce premium drugs in some areas.

Eighty percent of male drug addicts have committed at least one criminal act other than drug possession, and 80 percent of female drug addicts have been engaged in prostitution.

Eighty percent of registered drug users have contracted an infectious disease. Over 50 percent of China’s AIDS patients were infected via drug use.

Despite numerous campaigns focused on rehabilitating drug users and harshly punishing the drug dealers, there has been little or no progress in stemming the tide. Drawn by the prospect of making huge amounts of money in a short time, more people are becoming drug dealers and getting better at it.

Many have blamed Chinese society’s moral decline as the root cause. In many instances, corrupt police officers are involved in the drug dealing, mostly providing a security blanket for the drug traffickers. By all indications, China is moving quickly toward becoming not only a big consumer of illicit drugs, but also a new center for international drug distribution.

News Briefs

Russia Faults a Chinese Company for Polluting the Songhua River

[CNA, August 23, 2006] The Niushikou River, a branch of the Songhua River along the Sino-Russian border, was recently polluted by industrial wastes, according to a Russian TV network. The benzene effluent polluted five kilometers (3.1 miles) of the river. A chemical plant in Jilin City was responsible for the accidental discharge of industrial wastes, according to official confirmation.

Surge in Demand for DNA Paternity Tests Among Hong Kong Men with Mainland Wives

[CNA, August 24, 2006] As more and more Hong Kong men marry women from its northern neighbor, problems are also on the rise. Companies that specialize in using DNA to verify biological children have reportedly disclosed that the number of cases of fathers demanding such tests for their China-born children has been steadily increasing. The test results in 2005 verified that about 40 percent of the children tested were not biologically related to their Hong Kong fathers. Zhong Jianhua, assistant professor at the Department of Applied Social Sciences, Hong Kong Polytechnic University, pointed out that the number of these kinds of tests has risen exponentially in Hong Kong. As China’s social structure rapidly changes, the attitude toward marriage among Chinese women is more "open" than those in developed cities in many Western countries. Increase in the divorce rate and out-of-wedlock children, together with distrust between married couples, has resulted in the surge in the number of paternity tests.

Bribery in Business Has Become a Hidden "Rule of the Game" in China

[China Youth Daily, August 21, 2006] According to a recent survey conducted jointly by the Research Institute for International Laws of Economy at Nankai University and the Editorial Committee of "Forum for Government and Party Officials in China" at Central Party School, 94 percent of those surveyed believe that it is common business practice in China to pay commissions, give away gifts, and invite people for dinners. Sixty percent of them lack confidence in the anti-bribery campaign in China’s business world. The main reason for the lack of confidence is their distrust of law-enforcement personnel and authorities. The survey shows that businesses that affect people the most, especially those that involve government intervention, have the most serious problems with bribery. In particular, construction projects and their subcontracting, transfer of land, the trade of state-owned assets, the procurement of drugs and medical equipment, and government procurement all scored 7 (out of 10) points in terms of the degree of bribery.

A Farmer Attempts Suicide in Tiananmen Square to Protest Land Seizure

[Ming Pao Daily, August 11, 2006] Faced with land seizure by the local authorities in Changsha City, Hunan Province, a farmer representing the victims of the land seizures filed many complaints and appealed many times to the local authorities. After failing to resolve the issue, the farmer went to Tiananmen Square on August 6 and tried to commit suicide by stabbing himself in the abdomen. He was found and sent to a hospital but remains in critical condition. The protest letter he left behind states that, as an elected representative for the villagers, he had been appealing for months to various authorities for relief from the land seizures. Not only did his appeal fall on deaf ears, but the police also pursued and tried to capture him. "Only by staining Tiananmen Square with my blood and committing suicide can I offer my apology to my villagers and respected elders," he said in his letter.

Chinese Hospitals Greatly Underreport Death Rate

[The Epoch Times, August 18, 2006] According to a recently published report by the Chinese authorities, one-third of all deaths are not reported to the state monitoring system, while one-fifth of the deaths have never been reported to any organization. Even for the deaths that are reported, the number of deaths is often in error or reported long after the fact. In addition, one-fourth of the deaths are categorized as heart or lung failures.

Beijing Prohibits Foreign TV Programs

[The Epoch Times, August 15, 2006] Beijing authorities held a conference on August 12, calling for a month-long campaign to crack down on the proliferation of foreign satellite TV broadcasts in Beijing. In particular, the key components in manufacturing, sales, and installation of satellite TV equipment will be tightly controlled, and violators will be severely punished. The National Radio and TV Broadcasting Bureau gave orders that, beginning September 1, 2006, all foreign cartoons and their related programming be banned between 5:00 p.m. and 8:00 p.m.

Dell Allegedly Made False Claims in Advertisements in China

[The Epoch Times, August 13, 2006] Dell, the largest personal computer maker in the world, is being sued in China for its alleged false advertising. Some consumers believe that the CPUs used in Dell’s Inspiron 640M notebook computers are inconsistent with what Dell advertised. Dell may face legal rulings and lose its opportunity to gain market shares to compete with Lenovo. China boasts the world’s second largest PC market.

Acknowledging its mistake, Dell’s spokesman in Beijing argued that the discrepancy is the result of the lack of timely updates to its advertisements after replacing its CPUs in some of its notebook computers.

Private Debt Collection Agencies Emerging in China

[CNA, August 12, 2006] As the success rate for collecting debts by legal means decreases in China, private debt collection agencies that use unconventional means are starting to emerge. Some of them have already been registered officially, while others are staying underground. Employees of these companies reportedly terrify the debtors by wearing strange clothes and/or talking and acting weirdly. In addition, they use unconventional means to harass the debtors while staying within the legal limits. As a Chinese lawyer indicated, this phenomenon exists because of the lack of personal bankruptcy laws in China, which results in debtors believing that not paying their debts will not affect their lives or businesses at all. As a result, they would rather squander their money than pay their debts, while their creditors have lost confidence in the authority of the legal system and therefore turn to the collection agencies to collect debts by "marginally legal means."

Scholar Proposes "Two Children and Late Child-Birth" Policy to Overcome China’s Aging Population Problem

[The Epoch Times, August 13,2006] At the publication ceremony for his new book, China’s Population and Its Economic Development in the 21st Century, Hu Angang, director of the Center for China Study at Tsinghua University, argued that, with its low birth rate and low death rate, China has entered the era of an aging population. His new book suggests that the government implement a smooth transition policy of "Two Children and Late Child-Birth" between 2006 and 2010 to battle the aging population problem.

WHO Confirms Present Bird Flu Originated in China

[WHO, August 9, 2006] WHO confirmed on August 9 that the first patient with H5N1 bird flu came from China instead of Vietnam as was previously thought. As a result, it has corrected the pertinent information on its website. WHO previously stated that the case of bird flu infection in Vietnam in December 2003 was the first such case in history, whereas China’s first patient dated October 2005 in Hunan Province. After re-examination by Chinese medical experts, it was confirmed that the patient reported to have died from SARS in November 2003 in Beijing was actually infected with the H5N1 virus.

Taxi Drivers in Hubei Province Strike

[VOA, August 8, 2006] Demanding that the government crack down on unlicensed taxi businesses, over 200 taxi drivers in Shuizhou City, Hubei Province, held a strike on August 7, in front of the municipal building. Despite negotiations with authorities, the official response was that it was impossible to eliminate all underground taxis and that evidence was required to crack down on underground taxi businesses. Dissatisfied with the official response, the angry strikers threw stones at the municipal building. Two representatives of the drivers were arrested.

China to Explore the Chunxiao Oil and Gas Field

[The Liberty Times, August 6, 2006] On August 4, CNOOC announced on its official website that the "Chunxiao Oil and Gas Field Project has entered a period of full-scale exploration and production." Following the announcement, Japan expressed great concerns. A Japanese official indicated that if the quoted announcement is true, Japan will issue a formal protest and it will retaliate by allowing Teikokou Oil to explore the oil and gas fields along the sea borders of Japan and China. As analysts have pointed out, as China enters the Eastern Sea in the name of oil exploration while Japan has expressed its desire to explore oil along the Japan-China sea borderlines to slow China down, the focus of the two countries may not be merely on oil. China’s goal is more likely to expand its military footprint as well as its political might.

Teachers in Hubei Province Protest

[The Epoch Times, August 1, 2006] On December 23, 2005, over 100 teacher representatives from dozens of townships in the Zengdu District of Shuizhou City, Hubei Province, went to the district government to protest. On July 31, 2006, at least 200 teachers from the same townships again went to the Shuizhou City municipal building to appeal. In their official letter of protest, the teachers noted that, although the provincial government issued an annual quota of 500 "local teachers" to be converted to "government teachers" between 1996 and 1998, Shuizhou City authorities did not convert a single civil teacher during those three years [Editor’s note: The latter can enjoy retirement and other benefits that a government worker is entitled to, whereas the former is treated as a substitute teacher although he or she does the same job.]. Instead, many teachers were laid off. So far, the authorities have maintained their hardline position despite the teachers’ protest.

Rabies Spreading in Beijing

[Ming Pao News Net, August 5, 2006] Following the widespread rabies infections earlier in Liaoning and Yunnan Provinces, the number of rabies cases in Beijing is rising every month. From January to June, 69,332 people were infected with rabies. According to a study by the Beijing Health Bureau, the widespread occurrence of rabies infections is due to the hot weather, causing more people to wear less, stay outside their homes more, and walk their dogs more.

China’s Bad Debts Abroad Total US$100 Billion

[Chinese News Services (Hong Kong), August 3, 2006] China’s bad debts from exports total US$30 billion on an annual basis, and it has accumulated US$100 billion in bad debts abroad. According to official media, as of August 3, over 50 percent of China’s companies have delayed their payments. "More and more Chinese businesses are troubled by bad debts abroad. The amount of bad debt has been growing, and so has the risk. Bad debts are multiplied quickly," it says. Studies indicate that 5 percent of China’s export businesses incur bad debts, far exceeding the percentages for European countries, the United States, and many Asian-Pacific countries. The data from China’s National Information Center also shows that among the overdue bills for international trades, 65 percent are overdue for more than six months.

Former Beijing Deputy Mayor Escorted to Xinjiang for Investigation

[Sing Tao Daily, August 2, 2006] Liu Zhihua, the former deputy mayor of Beijing Municipality, and Jin Yan, who is the associate commander general of the Beijing Olympic Games, have been escorted to Xinjiang Province to be isolated and investigated by the Central Commission for Discipline Inspection. Liu Zhihua was removed from his position on June 1, 2006, because of his alleged corruption and "dissolute life." Liu used to be in charge of urban construction and planning and the construction projects for the 2008 Olympic Games in Beijing.

The Largest Private School North of the Yangtze River Closed

[CNA, August 2, 2006] Double Moon Garden (Shuangyue Yuan) School of Linxin City, Shangdong Province, the largest private school in northern China, announced its closure on June 29. This is the second closure of a large private school in China since Nanyang Education Group, the "Carrier of China’s Private Education," collapsed earlier. Zhou Guangjun, director of Luozuang District Education Bureau in Linxin City and representing the operational body of Double Moon Garden School, explained that the main reason for the school’s closure was due to the sudden withdrawal of the "Education Reserve" by students’ parents, which made it impossible for the school’s operators to cover all its debts. The "Education Reserve" is a popular fundraising method that has been adopted in China since 1993. It collects a fee from the family of each student, ranging from tens of thousands to hundreds of thousands yuan (thousands to tens of thousands of U.S. dollars). After paying the fee up front, the parents do not have to pay tuition or room and board for each school year. With the reserve, the school authorities build facilities or invest in other assets. When a student graduates, the school refunds the principal of the original payment by using its interest profits or newly collected reserve funds.

Price Hike for Consumer Products in Guangzhou Exceeds That of Beijing and Shanghai for the First Time

[Asian Times, August 5, 2006] Along with the rise in cost of natural resources over the past year, the consumer price index in Guangzhou shows no signs of decline. Increases in the rates of electricity, gas, transportation, and food all exceed that of Beijing and Shanghai. According to the Research Center for Social Information Surveys, among farmers, the unemployed, and the low income, over half of the people surveyed said they could not afford the price increases in Guangzhou, while most residents feel the (negative) impact of the price increases on their living standard. Almost half of the consumers say they will reduce their purchases.

Abuses of China’s Government Fund To the Tune of US$3.7 Billion

[Xinhuanet, July 30, 2006] In the first half of this year alone, US$3.7 billion in government funds was stolen, abused, or wasted, report the government auditors. China’s State Auditing Administration reportedly charged 252 people for their involvement in abusing government funds. Ninety-eight percent of the people charged have been turned over to law-enforcement or other judicial organizations. The State Auditing Administration said that its main focus in the second half of the year would be to audit the corruption and waste in the agricultural and other rural organizations.

Bank of China Freezes North Korea Accounts

[The Epoch Times, July 26, 2006] Beijing’s North Korea policy has undergone some subtle adjustments after North Korea’s test missile launches. Citing North Korea’s money-laundering and counterfeiting of U.S. dollars, lately China has frozen North Korea’s assets in Chiyu Banking Corporation Limited, a subsidiary of the Bank of China—China’s second largest bank. This is China’s first economic sanction against North Korea.

According to a July 26 Voice of America report, China has allowed three North Korean refugees who forced their way into the U.S. Consulate in Shenyang to seek political asylum status in the United States. Media reports say that this was the first time that China allowed North Koreans to leave for the United States directly without going through a third country.

Three-Fourths of Chinese Studying Overseas Don’t Return

[Radio Free Asia, July 15, 2006] Distinguished scholar Zhang Feng wrote in the blue book China Human Resource Development Report No. 3 that China’s current high-level human resources suffer from severe "brain drain." If the situation continues, it will damage China’s overall human resources and economic security. In the 25 years from 1978 to 2002, China sent 580,000 students and scholars overseas, but only 150,000 have returned.

In the blue book, the author commented that China lacks capable doctoral degree advisors. The data shows that two-thirds of advisors for doctoral candidates in China also supervise master’s candidates, and that each advisor on the average has 5.77 doctoral students under supervision. This number is much higher than the international average of two to three Ph.D. students per advisor.

Seventy Percent of Chinese Intellectuals Risk Death from Overwork

[Radio Free Asia, July 16, 2006] In the recently published China Human Resource Blue Book 2006 edition, death from overwork has become a cloud over the head of Chinese intellectuals. Quoting the 2006 China Human Resource Blue Book published by the China Academy of Social Sciences, Beijing Legal Evening News said that 70 percent of Chinese intellectuals are at risk of death from overwork. Their average life span has declined to 53-54 from the previous 58-59.

The CCP Advocates Building a Strong Army

[Editor’s note: The Chinese Communist Party (CCP) has recently advocated again for building a strong army. The Party’s official magazine, Quishi, published an article in July to emphasize that a "strong army" is one of the essential prerequisites for China’s development. The article maintains that the hostile Western forces do not want to watch the emergence of a strong socialist China in the East, and they try very hard to contain and suppress China’s development. The article points out that there is still a big gap between China’s overall military strength and its counterparts in the developed countries, while elements of instability and uncertainty are growing and the pressure to safeguard China is increasing. The article says that China, as a major socialist power, needs a strong army to explore the global markets, utilize global resources, and protect national interests.

The state media Xinhua News Agency soon republished a condensed version of the article to further disseminate the message to the general public. Below is a translation of this report: "China’s Prosperity Needs a Strong Army as a Guarantee."]

China’s Prosperity Needs a Strong Army as a Guarantee

According to a recent article in Quishi magazine, China is at a critical stage in planning its important strategic opportunities for the first 20 years of the century. The need to balance the development of China’s military with its economy is both urgent and practical. National security and development are the most fundamental requirements of any country since a prosperous economy and a capable military are the two basic prerequisites for a strong nation. They are also China’s two strategic goals for achieving a society of modest means.

"The Quishi article says that China has made tremendous achievements in its economic development since the ‘Opening-up’ policy was first adopted. In particular, its overall economic strength and level of modernization have made rapid improvements. Nevertheless, compared to developed countries, there is still a big gap. Because they possess a leading edge in economic technologies, the Western-developed nations are putting great pressure on China. Such pressure will persist for a long time. In order to resolve its major social conflicts, the only correct choice for China is to liberate and develop its productive forces and constantly improve its economic strength. Continuous, rapid, balanced, and healthy development of China’s national economy is the top priority for achieving the goal of a wealthy society, and it lays the material and technological foundation for the development of a solid national defense. Therefore, China must focus on economic development, take it as a top priority for our government, and firmly take advantage of this important, strategically opportune period to develop its economy. The development of the national defense must yield to and serve this top priority, and the military must plan for its own development by following this top priority.{mospagebreak}

"According to the article, in order for the development of the national defense and the army to serve the big picture of the overall development of the country, a certain level of national defense capacity is a prerequisite. Only when the army possesses the necessary capability for actual combat and the deterrence of force can it provide a guarantee of security for the country’s peaceful development, while laying down a solid defense foundation to take advantage of this strategically opportune period. Today there is still a big gap between China’s overall military development and its counterparts in the developed countries. Therefore China’s military is urgently in need of moving a giant step forward to improve its defensive capabilities in the increasingly hi-tech world of combat. A balanced development of China’s economy and its military is an urgent requirement for the latter to accomplish its mission at this stage in the new century.

"Economic development is the foundation for the strength and development of the country, reports the Quishi article, while military development is the country’s guarantee of stability and security. Without a strong economic base, there can be no modernization of the military. On the other hand, without a strong military, the environment for economic development cannot be protected. The prosperity of the country must be protected by a strong military, while a strong military requires the prosperity of the country. Only with the balanced strength of its military and economy can various risks and challenges be handled proactively.

"The Quishi article states that the global situation has been undergoing profound and complex changes, while the role of military factors on the global structure is escalating. In this environment, our military capability will play an ever more important role in protecting our national security and interests. While peaceful development is still the theme of this period, the elements of instability and uncertainty that affect peaceful development are growing. These elements greatly affect China’s security and highlight the great importance of protecting national security.

"Whether or not China can accomplish peaceful development depends on the establishment of a peaceful, secure, and stable environment. As history shows, the article continues, peace does not come from someone else’s offer. Only with a strong military and a solid national defense can we build a protective screen, provide reliable strategic support for development, maintain a stable external environment, and achieve the longest possible period of time for peaceful development.

"This strategically opportune period is the golden age for development as well as a period with many security threats and challenges. The hostile Western forces do not want to see the emergence of a strong socialist China in the East. They try very hard to contain and suppress China’s development. The political and military situation in China’s neighboring regions is rather complex, with increasingly more unpredictable elements. Stubbornly in favor of splitting the motherland, pro-Taiwan-independence forces have become a significant hidden danger to China’s security.{mospagebreak}

"The Quishi article notes that, as China’s involvement in economic globalization grows and its open-door policy accelerates, its requirements for exploring global markets, utilizing global resources, and protecting its national interest become higher and higher. Today, military innovations and the use of information technologies in the military are widespread. In fact, they are rapidly changing the world’s military forces. In the face of such a complex global environment and the ever increasing demand at home for national defense, China, as a major socialist power that follows an independent foreign policy of peaceful development, must possess a strong military to protect its national security and safeguard the smooth development of socialist modernization."

Translated byCHINASCOPE from July 2006 issue of Qiushi magazine

Behind Baidu’s Glorious Earnings

Investors love winners. So when Baidu on May 9, 2006, reported a huge earnings growth in its first-quarter financial results, the market responded enthusiastically, and Baidu’s stock price jumped 22 percent.

But a closer look at the company’s recent moves has made analysts suspect that some questionable business practices might have aided Baidu in achieving its impressive earnings.

Baidu’s second-quarter earnings report was due on July 26. On July 10, Baidu announced that it would cut jobs in its profitable search engine operations, which had seen a 70 percent annual growth rate. Competitors, including Google, all regard search engine operations as a vital piece of their business. Baidu’s move turned many heads.

At a press conference on July 13, Baidu’s CFO Shawn Wang cited fiscal losses and non-core competence as two key triggers for the "painful decision to shut down the Enterprise Software (ES) division." However, an employee from ES told reporters that in 2002, when ES was under Baidu COO David Chu’s direct watch, it was the major breadwinner for the company. By 2003, its profit had reached 5 million yuan (US$625,000). By 2005, the division had contributed over 15 million yuan (US$1.9 million) to the company.

Insiders believe that the real motive behind Baidu’s job cut was to take away employees’ stock options, which are valued at 20 million yuan (US$2.5 million), to make the numbers look better.

One-Stop Shop Termination with Four-Hour Notice

On July 10, an email was sent to ES employees asking everyone to attend an important meeting at 2 p.m. Both David Chu and Lu Lingming, Baidu’s Human Resources director showed up at the conference. Chu told everyone at the meeting that the company had decided to shut down their division. Lu then announced that to make things easier, the company would provide a one-stop exit process to the terminated employees. More than 20 employees across the country received a four-hour notice. They were ordered to turn in their laptops and key cards, pack their personal stuff, sign the notice, and leave the company by 6 p.m. The front desk was notified. Those who refused to sign would not receive any severance pay.

Employees were stunned that they were fired in such a humiliating way.

"This is pure intimidation," one insider grumbled.

Quite a few of these impacted employees had worked for multinational companies prior to joining Baidu. They have highly marketable skills and solid experience. Many of them have traded their well-paid jobs elsewhere to join Baidu simply because of the stock options. Being treated in such a way is beyond disappointing.{mospagebreak}

"Had they informed me in advance, I wouldn’t have even bothered to take the severance pay. I would walk out of this place without looking back. Obviously, Baidu does not care to respect its employees’ feelings," said one of them.

One impacted employee was angry at the sudden layoff. He said that Baidu’s conduct violates China’s Labor Law, because the company failed to issue any notification in advance or discuss the compensation package with the employees.

He and a few others are considering legal actions against Baidu.

Wiping Out Millions in Stock Options

Baidu’s first-quarter net income was 35.2 million yuan (US$4.4 million), up 43.5 percent over the previous quarter, or 1,309.0 percent year-over-year. Within hours after its financial data was made public, Baidu’s stock jumped 22 percent to a record high of US$74.85 per share.

Achieving this milestone may be a miracle, but sustaining the success and keeping investors happy will take more than just a miracle. The bar is higher now.

To improve the bottom line, Baidu needs to either grow revenue or reduce cost. Among Baidu’s 2,000 employees, nearly half are in sales and telemarketing. Although these employees are playing a major role in Baidu’s rapid growth, the company does not reward them well, according to insiders. Baidu pays them as low as 600 yuan (or US$72) per month as their base salary and does not offer them stock options. Slashing headcount there will bring little impact to its bottom line.

The July layoff is targeted at Baidu’s Enterprise Software, which provides search engine services, such as selling competitive intelligence collected by its search engine to enterprises. The impacted employees were making a six-figure salary on average, and most of them were awarded with stock options, mostly over 4,000 shares or more. "Based on the current stock price, these options are worth at least 10 million yuan (US$1.25 million)," an insider reveals.

But CFO Shawn Wang told reporters on July 13 that only half of the terminated employees had stock options, indicating a much smaller windfall.{mospagebreak}

Pay-for-Ranking to Increase Revenue

To boost its organic growth, Baidu adopted Pay-for-Ranking. Users are not very pleased with this practice. One programmer calls it "twisting the facts with money."

It can be frustrating, too, to many search engine users. They may not get what they want, or simply be misguided by the commercials that pay their way to be on the top.

One user gives this example: When a cancer patient visited Baidu’s home page and typed in "cancer" as a key word for search, Baidu returned four pages of Pay-for-Ranking advertisements before providing meaningful search results on page 5.

Many programmers believe that Pay-for-Ranking severely compromises the accuracy and the credibility of search results. Yet, driven by insatiable appetite, Baidu has pushed hard to promote this practice. Many in the search engine field are worried.

Anti-Baidu Alliance

A group of webmasters who believe that they were unfairly treated by Baidu has formed an Anti-Baidu Alliance to protest certain business practices and sales policies at Baidu.

Ta Xue Wu Hen, or "Stepping on the Snow Without Leaving a Trace," a popular webmaster in China, and some of his Web buddies believe that Baidu blocks their websites to forcefully promote its Pay-for-Ranking product. Many webmasters in similar situations reveal that they have received phone calls from Baidu selling its Pay-for-Ranking product and after they refused to subscribe, Baidu immediately blocked their sites.

Ta thinks that these cases tell a tale of Baidu’s greed. Many programmers believe that Baidu has gone too far to gain instant profit, that its conduct is unethical.

The company’s name, Baidu, was inspired by an 800-year-old ancient poem and literally means "hundreds of times," representing persistent search for the ideal result and winner. In the end, it is the inspired investors and users who will determine the ideal result and real winner, through persistent search.

Helen Chou is a writer based in New York.

Beijing’s Housing Market Bubble Continues to Expand

With surging housing prices, Beijing is becoming the "King of China’s Housing Market" amid China’s macroeconomic control instituted a year ago. While the fear of land shortage has triggered panic home buying, investors are flooding to Beijing, and the central administration is considering a new policy.

On April 23, the number of people waiting in line in the bank lobby—the Beijing Huaxiang Branch of the Agricultural Bank of China—remained at about 50.

There was no money left in the ATM machine outside the bank. "The money has been withdrawn to buy houses," said the bank security guard.

The busy bank is an indication of the heated purchases going on in the apartment building next door. Owners of the Ten-Thousand-Year Flower City, an apartment building next to the bank, had started to sell VIP cards for 10,000 yuan (about US$1,2551). The cards gave buyers priority in selecting their apartment units, and they could apply the cost of the card toward the purchase price. More than 200 cards were sold on the first day.

Located on the southwest side of the Third Ring of Beijing City, this apartment complex has gone through whirlwind increases within the past three months. The selling price in January was 5,700 yuan (US$713) per square meter. (All prices are per square meter, which is about 1.2 square yards or 10 square feet.) The price rose to 6,600 yuan (US$825) in March. When its fourth phase was ready for sale in May, the price was expected to increase to 7,000 yuan (US$962), a 35 percent increase from January.

Housing prices in the capital city have increased steadily since spring of this year. On April 12, the Beijing Urban Construction Research Center announced that the expected average price of residential housing in the city was 6,885 yuan (US$860) per square meter, a 14.8 percent growth over the same period last year. Some media reported that the housing prices in Beijing had exceeded that of Shanghai, making Beijing the "King of China’s Housing Market."

It was a strange phenomenon: The supply, sales, and prices of Beijing’s housing market increased, but there was still a housing shortage.

About the same time last year, the central government maintained an iron grip on the real estate market. The State Council’s Old Eight Regulations and New Eight Regulations were issued in succession and caused housing prices to stagnate.

Why were housing prices increasing rampantly one year after macro-control? What drives the phenomenon? Some real estate agents are starting to worry that this round of price hikes is a dangerous signal.{mospagebreak}

The "Crazy Rise" in Housing Prices

"That is crazy!" Liu Bo just cannot imagine how the price of Coastal Sailuo City could go up several hundred yuan per square meter in a month. "Beijing housing prices are rising like crazy, and people are buying like crazy," Liu said.

"If you do not decide now, you will have to wait for the next phase," Tang Xiaoyuan, the sales lady of Coastal Sailuo City, advised Liu. The longer he waits, the more expensive houses will be.

The sales pitch made Liu nervous. In early March, when Coastal Sailuo City offered to sell at 7,400 yuan (US$925) per square meter, he just smiled and shrugged it off: "Let me wait for a while." In less than a month, the price rose to 7,800 yuan (US$975).

A week later, Liu Bo, still undecided, was informed that some of the models had sold for as high as 8,200 yuan (US$1,025).

"In one evening, Beijing can be covered with a layer of yellow sand, and I have to pay an additional 100,000 yuan (US$12,500) in total purchase in one month," he said.

Liu, who works as an editor in a publishing company, has a monthly income of 7,000 yuan (US$875). After the Chinese New Year, he started to think about buying a house. However after two months of searching, everything he could see had been hit with price increases.

On April 10, when he rushed to register for the pre-selling of the second phase of another residential housing development, Sihao Yijing, the price had already climbed from 8,300 to 8,500 yuan (US$1,038-$1,063) in only four days.

"I just want to have a home of my own," Liu said, but he felt that his home was fading farther and farther away from him. "If there has to be a deadline for me to get a house, it’s better to be before the end of my lifetime."

Zhou Xiaodong, a white-collar employee, planned to buy his new house somewhere around the Fourth Ring of Beijing, where the transportation is convenient and the price was 7,000 yuan (US$875) per square meter with a total price of 600,000 yuan (US$75,000). On April 9, after he attended the 2006 Beijing Spring International Housing Exhibit, he found that residential property in the 7,000 yuan (US$875) price range in the Fourth Ring area was almost gone.{mospagebreak}

One phenomenon evident from the housing exhibit is that the increase in prices is not affecting housing sales. Sales price, supply, and sales volume went up hand in hand.

Over 90 apartment units were displayed at the exhibit, which drew 200,000 people. There were 2,000 purchase offers made: a total of 231,320 square meters (2.49 million square feet), 1.44 billion yuan (US$1.4 million) in sales revenue, and a 300 million (US$37.5 million) increase (40 percent) over the winter exhibits last year.

The statistics of Beijing Real Estate Information Network show that the presold units for the first quarter this year amounted to 3.7 million square meters, while it was 3.2 million square meters for the same period last year, an increase of 15.2 percent from one year to the next. The number of online purchases also grew rapidly, with a daily number of signed contracts reaching over 500 and with a record high of 803 on April 15.

The housing prices in Beijing have even surpassed those in Shanghai, which was believed to have the highest housing prices in China. Data released by the Statistics Bureaus from these two cities showed that Beijing’s housing prices are 27 yuan (US$3.4) per square meter higher than Shanghai’s prices.

On April 13, Nanfang Weekend claimed that Beijing has become the "King of China’s housing market." However, some official statistics do not agree with the price hikes.

On April 12, Beijing Urban Construction Research Center announced that the average Beijing residential pre-sell housing price for the first quarter was 6,885 yuan (US$861) per square meter, 14.8 percent higher than the preceding year. (The price growth for the first quarter in 2005 was 19.2 percent.) The conclusion was that the "pre-sell housing price is stable on a quarter-to-quarter basis, with an evident fall of growth rate on a year-to-year basis."

On April 20, statistics published by the Beijing City Statistics Bureau listed the growth rate of housing prices at 7.6 percent.

However, those statistics are based on the average price of houses in all of Beijing, including those in Miyun and Huairou, which average 3,000 yuan (US$375) per square meter or lower. The price increase in the Fourth Ring area far exceeds these figures.

"Even if the growth rate is lower, the base is already too large," Liu Bo said, and he still cannot afford a house.{mospagebreak}

Driven by Panic Consumption?

"We can unite and not buy houses so that we can drag the prices down," Liu Tao, a buyer, cried out loud in the exhibit.

He drew attention, but prospective buyers immediately turned back to the developers for flyers. It was 4 p.m. on April 9. More than half of the developers at the Spring Housing Exhibit had left, but there were still groups of people crowded at the gate of the exhibit.

"The higher the price increases, the more people buy; the more people buy, the higher the prices will be," Liu said. Buyers fighting for purchases drive the price increases.

Li Wenjie, the general manager of Northern China Region of Zhongyuan Real Estate, thinks that since the beginning of 2006, buyers have been in a wait-and-see mentality. But when they found that prices kept increasing, they started to make purchasing decisions out of fear that prices would continue to go up.

In May 2005, seven ministries and commissions, including the Ministry of Construction, issued a notice entitled "Doing a Better Job Stabilizing Housing Prices" that stated that starting from June 1, 2005, individual buyers would need to pay sales tax for transactions made less than two years after the initial purchase.

Compared with the rapid price decline in Shanghai, the prices in Beijing did not drop even though the real estate market slowed down for a while.

"Macro-control needs to be adjusted," said Wang Yulin, the vice director of the Policy Research Center of the Ministry of Construction. "Last year, the target of macro-control was the real estate investors, but there are not that many in Beijing yet."

Another huge group of buyers were also propping up the prices in Beijing.

On April 9, in Xinghe Bay, outside the East Fourth Ring, several Beijing government officials were showing the houses to officials from other provinces. The price tag of 16,000 yuan (US$2,000) per square meter did not scare the buyers away. In March alone, nearly 80 suites were sold, with sales revenue of 50 million yuan (US$6.3 million).

There are too many rich people and officials wanting to buy houses in Beijing," a sales representative and former employee of the high-scale Zhuyucheng Apartment Complex and Phoenix Real Estate told us privately. Most of the officials come from nearby provinces and cities, and the majority of the business buyers are owners of coal mines in Shanxi Province.{mospagebreak}

"In addition, we have clients such as college graduates, companies relocating or stationing in Beijing from foreign countries or other provinces," said Huang Xiqing, the vice general manager of Thousand-Year Flower City.

Many buyers are under the impression that if they don’t buy, other people will buy.

But insiders analyzed that the buyers’ groups have formed a structure like a pyramid, with people on the bottom of the food chain who are not well off but who have the highest demand for houses.

Many people who were interviewed used "panic" to describe their feeling: "If I don’t buy now, the price will keep rising."

Huang Xiqing, the vice general manager of Ten-Thousand-Year Flower City believes that the three objectives of macro-control are "to tighten the money and land supply, and control price increases." The goal was to lower the risks, adjust the structure, and control the speed of urban development thus inhibiting rapidly rising housing prices. But in reality, tightening the money and land supply turned out to be the factor that is driving housing prices.

Wang Zhigang, the famous strategic real estate advisor and consultant, said in an interview with China Business Newspaper, "the burning fever of Beijing’s housing market is actually driven by panic consumption and investment purchases."

Not a Fair Game

Facing ever-increasing housing prices, can ordinary buyers play games with the developers?

"It is not realistic," Huang Xiqing said. "Unlike the developers, it’s difficult for the buyers to unite."

In the year of macro-control, people were holding money to wait and see—and so were the developers.

"In less than a year, the buyers ended up paying for the increase in several hundred yuan per square meter," one real estate agent explained. If the buyers were playing games with the developers, apparently the buyers lost in the end.

Sales control is a common practice used by every developer and agent in this game.{mospagebreak}

On April 9, 2006, in the Sihao Yijing real estate model home, one sales representative shared the selling strategy: First ask prospective buyers to register. Get to know their situations to determine the selling price. If 500 units are ready for sale, we only put out 100, which are usually not that good. When those 100 are sold out, we immediately raise the price.

From the beginning of the buyer registration to the date of sale, the price at Sihao Yijing had already risen from 8,300 to 8,500 yuan (US$1,038-$1,063) per square meter. Sellers claimed that "the numbers of registered buyers … exceeded total available units."

"Buyers will not be able to play the game with the developers because playing games requires resources," said Duan Meiyuan, the general manager of the Beijing Chaoyang Great Real Estate Agency. "Because developers had a lot of land in hand with financial resources far stronger than [that of] buyers, the buyers weren’t able to fight against the developers."

Earlier this year, in Guangzhou, where the housing prices also went up rapidly, people started to criticize developers’ collusion to drive up prices, calling it "robbery."

This opinion was shared by Zhang Yaoqing, professor and director of the Real Estate Research Center of Capital Economic and Trade University.

Zhang believed that the bargaining power is in the hands of the developers because the real estate market is a semi-monopolized market, and the developers usually collude on pricing.

"They may not openly drive up the prices, but they collude to support the prices," Zhang said. No matter the quality of the houses, new house prices usually follow the highest price in the neighboring area and will be adjusted up periodically.

One real estate developer told our reporter, "In Beijing, no matter how poorly the houses were built and what kind of real estate services were provided, you can always sell for a high price, and they will be gone immediately."

Invisible Hands Promote Fear of a Land Shortage

"If you don’t buy now, you will not be able to buy them no matter how much you spend," said a sales lady for CBD Legend, near the East Three Ring area. She was speaking to a reporter at the State Housing Exhibit. She said that the government will soon stop issuing land permits in the city, so there will be no new construction.{mospagebreak}

CBD Legend is becoming legendary for its price hikes: In December 2005, the opening price was 8,000 yuan (US$1,000) per square meter; it is now 8,800 yuan (US$1,100).

Beijing housing prices continued to go up, and the notion of a shortage of land for new construction expedited the process.

In July 2005, the Beijing Bureau of Land and Resources published the quota for land use for the year, which stated that no new construction for residential housing would be added within the Second Ring area.

Land price increases also jacked up the housing prices.

On April 17, one piece of land in the Fengtai District was sold for as high as 34 million yuan (US$4.25 million) after 64 rounds of auction.

It was calculated that the final price for the land was 3,376 yuan (US$422) per square meter. Tang Wenjian, the winner and the general manager of Beijing Zhengjiang Real Estate said, "We have to put the sale price higher than 8,000 yuan (US$1,000) per square meter to make a profit."

This price is a lot higher than most houses in the area. In September of last year, the opening price offered by Zhonghai City, a 1.7 million square meter development area, was 5,400 yuan (US$675) per square meter, and the current selling price is only about 6,500 yuan (US$813).

An insider estimates that if one uses the recognized ratio of 40 percent of the price for the land, theoretically speaking, if the land becomes sellable for housing, in one year the price can be as high as 12,000 yuan (US$1,500) per square meter.

To Li Wenjie, the growth rate of the selling price for land had far exceeded the normal growth rate of housing prices.

Wang Shu, the general sales manager of Zhongda Hengji Real Estate, said that after the "New Policies for Selling Land" was issued on August 31, 2004, land selling was better regulated while the land price continued to increase with a wide margin. The problem was that while the government benefited from the increase of land sales, the profit margin for real estate developers did not shrink. As a result, the buyers ended up bearing the burden.

"If we don’t regulate the developers, it is useless no matter how much land we sell sell," says Wang Yuling, vice director of the Policy Research Center of the Ministry of Construction. He believes that the government did not do a good job of regulation. It should use administrative means to enlarge the differences in price levels for housing in different categories.

Translated by CHINASCOPE (excerpt) from New Beijing (Xin Jing Bao)