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Chinese Foreign Exchange Reserve Surpasses One Trillion U.S. Dollars

Chinese authorities recently disclosed that China’s current foreign reserve has exceeded US$1 trillion in late October 2006. Not long ago, China had already replaced Japan as the country with the world’s largest foreign currency reserves. The news has once again shown a spotlight on China’s currency, with many of China’s trade partners believing that the yuan is seriously undervalued.

One trillion U.S. dollars is equivalent to one-fourth of the total market value of stocks listed on the Dow Jones Index—enough to buy Microsoft, Citibank, and Exxon Mobil combined, with the remaining enough for General Motors and Ford Motor Company. Although experts have suggested that the funds be appropriated to health, rural education, environmental protection, and other social security projects, Wu Xiaoling, the deputy governor of China’s Central Bank, recently made an explicit statement that the foreign currency reserve should not replenish the social security fund accounts. He reiterated that agencies that wished to use foreign currency reserves ought to pay an equivalent amount of Chinese currency in exchange.

While Chinese people may find it difficult to benefit from the huge reserves, they may have to suffer from the potential consequences. On September 12, 2006, the Bank for International Settlements (BIS) issued a warning to several emerging market economies, including China, that the huge reserves may present a dilemma, necessitating either raising their exchange rates or bearing the aggravated risk of inflation.

China’s foreign currency reserves come from exports and foreign investment. The Central Bank has been using the Chinese yuan to purchase U.S. dollars and other foreign currencies from enterprises and individuals. A recent article in the Wall Street Journal reported that, in order to maintain the unreasonably low Chinese RMB exchange rate, China’s Central Bank has to purchase about US$20 billion every month. In order to raise the money to buy dollars, the Central Bank either needs to issue more bonds or to put more cash into circulation. Infusing cash into the market will lead to inflation. On the other side, if the government distributes bonds, it will accumulate debt and the government will have to pay the dividend.

In the United States and China, many economic experts have already pointed out that the huge foreign currency reserve is not only a serious waste of resources but also a detriment to the interests of China. Chinese officials, who have thus far avoided facing the issue, have just begun to recognize this as a serious problem.

When Jiang Dingzi, vice chairman of the China Banking Regulatory Commission, was interviewed by the Study Times, the Communist Central Party School newspaper, he described China’s huge foreign currency reserves as one of the biggest economic problems. He added that China’s foreign exchange reserves are invested mostly in U.S. bonds. Although the liquidity of such assets is not a problem, the rate of return is not high. Because the value of the U.S. dollar has exhibited a long-term trend of decline, China is facing the risk that the U.S. bonds that China holds will depreciate.{mospagebreak}

With China’s rapid export growth, it is estimated that its foreign currency reserves will add another US$200 billion by early 2007. Mao Yushi, chief economist of Beijing Tianze Economic Research Center, a private economic research institute, said that, because Chinese officials are only now realizing that this is a serious problem now, it might already be too late. He added, If we had adjusted the exchange rate three years ago, when our foreign exchange reserves were only more than US$200 billion, we would not have today’s problems.

Economists worry that if China starts to sell U.S. dollars, it will cause the exchange rate of the dollar to plummet. As a result, the value of dollar-based Chinese investment will be greatly reduced. At the same time, the U.S. Central Bank will have to increase its interest rates. The U.S. economy will then stagnate or even enter a recession. The demand for imported products will drop dramatically, causing more damage to both China and the United States.

In today’s global economy, any move by either China or the United States will affect the entire world. Economists and politicians in both countries are painstakingly looking for ways out of this currency predicament.

Serene Lee is the hostess for NTDTV’s Economy Program.

China’s Policy Toward Foreign Investments Undergoes Dramatic Changes

Aseries of revisions to China’s foreign investment policy took place in October 2006. The most significant changes include: First, on October 8, 2006, the State Council passed a draft resolution merging the domestic corporate tax and foreign corporate tax systems. It is expected to become law—the Corporate Tax Law[1]—at next year’s "Two Conferences." Secondly, a number of the official research institutions reported that, in the future, as part of a long-term plan, various policies highly favorable to foreign investors would be discontinued.[2]

Such a directional change in government policy signals that the golden era of foreign investors acquiring large profits without paying taxes is coming to an end. Although in the past 20 years, only one-third of those investors actually realized their gold-mining dreams in China, the dream itself motivated them to keep pouring money into China.

China’s Economic Environment Has Experienced Tremendous Changes

As China’s policies on foreign investments have tightened up, the infusion of foreign investments into China has been shrinking. This is echoed by the recent official figure—the actual foreign investments in China dropped by 1.52 percent in the first nine months of 2006.[3] Such a drop is well within the expectations of the Chinese communist government. It is the result of the policy changes on foreign investment. The policy shift comes from changes in China’s domestic economic environment.

First of all, the thirst for foreign capital has decreased. By the end of September, China’s foreign currency reserves had jumped to US$987.9 billion, higher than any other country in the world, according to the latest data from China’s central bank.[4] In the past, China’s policy provided foreign investors with tax advantages over domestic corporations in order to stimulate more foreign investments in China. Since capital is no longer the bottleneck for China’s economic development, the foreign investment policies naturally changed to favor hi-tech investments.

Secondly, the problem of China’s limited resources is becoming increasingly severe. In particular, many resources, including energy, mineral resources, land, and low-cost labor, all lean toward the export-related industries. There are hardly any rules on environmental violations and labor rights. The boom in China’s exports has developed at a huge expense to the country’s resources, environmental damage, and energy consumption. On the other hand, the social benefits have not increased in proportion to the profit, despite all the development. Therefore, there is no significant increase in demand in the domestic market; "sustainable development" has become a pipe dream.

These two factors have determined that China must revise its foreign investment policies.{mospagebreak}

What Changes Have Been Made to the Foreign Investment Policies?

The current changes to the foreign investment policies are based on two criteria. One is to check if the foreign investment policy in the relevant areas will conflict with China’s economic interests. The second is to examine whether the current degree of openness will cause any economic security issues—although "economic security" is not a clearly defined topic in China. Despite the standard list of sectors established by the regime to exclude the involvement of foreign investors, some attempted takeovers by foreign investors in sectors and industries that do not fall in the prohibited list did not eventually go through because of "national economic security" concerns.

The recent revisions to the foreign investment policies fall into the following two major categories.

Consolidation of the Two Tax Systems

The so-called consolidation of two tax systems is to implement the same tax standards for both domestic and foreign corporations. In the past, due to the two different taxation systems for the two different types of entities, domestic corporations had to shoulder heavier tax burdens while foreign companies enjoyed lower tax rates. According to publicly available data in China, the actual tax rate that China’s domestic corporations paid averaged 25 percent while their foreign counterparts paid a tax rate of only 12 percent—a difference of 13 percent. The tax advantages used to be the main incentive for foreigners to invest in China. In the past three years, however, as the amount of foreign investment has surged, a viewpoint unfavorable to foreign investments has gradually come to dominate mainstream thought. Such a viewpoint holds that the foreign investments in China have reached the saturation point, and China’s domestic enterprises are in a disadvantageous position due to the heavy corporate taxes. Thus the voices calling for the consolidation of the two tax systems became ever louder. In the end, the State Administration of Taxation, the Ministry of Finance, and the National Development and Reform Commission, all of whom are proponents of a single tax system for both, won the battle within the circle of decision makers, leading to the present adjustments and changes in China’s foreign investment policies. It appears that the motion of the "Corporate Tax Consolidation" will likely be passed at the People’s Congress in March 2007, and it will be implemented in 2008 at the latest.[5]

The Ministry of Finance has pre-announced the consolidated tax rate to be 25 percent. The Research Institute of Finance under the Ministry has finished an evaluation of the impact of the merged tax rate on fiscal revenues, based on a range of 25-28 percent. To please the local governments, the central government promised a transitional period of one to two years, with a larger degree of freedom for regions in the West.{mospagebreak}

The tax consolidation will have a significant impact on foreign investors, who enjoy many tax advantages in China, including the "Two Waivers and Three Halves." (Presently, foreign corporations enjoy tax benefits for five years, starting from the first year of making a profit. The first two years are free of tax. In the following three years, they pay half of the tax.) Local governments usually take the approach of taxing them first and giving them a refund later. Many foreign corporations, especially those from Hong Kong and Taiwan, have been relying on the tax advantages and export tax reimbursements as their main vehicle for profits. Once the new tax system is in place, many of these companies will likely pull their investments out of China. For multinational corporations, however, the situation could be different. Since China is merely the production base or the host country for their subsidiaries, the multinational corporations can sell their China-produced products to the parent companies and therefore use the internal price to transfer the profits to countries with lower tax rates. As a result, they can avoid the potential disadvantages caused by the new tax policies. There are also multinational corporations whose markets are in China. For them, the only choice is to hold on to the business until they no longer make a profit.

The argument that domestic corporations are the biggest beneficiaries of the "corporate tax consolidation" is not true either, as they will pay the same tax rate as before and will not enjoy lower taxes. The benefits to them, if any, are indirect at best. For example, compared to the same products made by the foreign corporations in China, the products made by the domestic corporations are usually of lower quality, albeit with comparable prices. However, in the past, the foreigner companies enjoyed lower tax rates; thus they could set lower prices to expand their market share. Now, with the consolidated tax rates, the domestically made products can use a lower pricing approach to take the market shares from their foreign competitors.

It is the Chinese regime that will benefit the most, as it will be able to collect significantly more taxes as a result of the new policy.

Policies on Takeovers by Foreign Investors

Another major policy change concerns the takeovers by foreign investors. In the last two years, the investment strategy of the Ministry of Commerce has been to encourage foreign investors to acquire Chinese firms. Take the 2004 data as an example. In 2004, the foreign investments in the form of acquisitions consisted of 10 percent of the overall foreign direct investments (FDI). In the recent couple of years, the pace of foreign takeovers has been accelerating. The most noticeable include the takeover of Xugong Construction Machinery by the Carlyle Group of the United States, and the purchases of Sichuan Shuangma Cement Co. Ltd by the Lafarge Group, Shenzhen Development Bank Co. by the New-bridge Capital Group of the United States, Qingdao Beer by Anheuser-Busch, and the Lanwu Steel Corporation by Arcelor. Among the acquisition attempts, some succeeded and some failed. The main reason for the failures, according to the Chinese media, was the concern for "China’s national economic security."[6] After three years of continuous media exposure, the list of sectors and companies that may affect the national economic security has greatly expanded.{mospagebreak}

With the alleviation of the thirst for capital and the ever-rising nationalism, the door opening for foreign mergers and acquisitions has become even narrower. "Provisions on the Takeover of Domestic Enterprises by Foreign Investors," announced on August 8, 2006, and effective on September 8, is the indicative official document on the policy changes for foreign takeovers. In addition, there are a few other noticeable trends, including:

1. The State Council is discussing the formation of an inter-ministry commission similar to the foreign investment investigation committees in other countries. Led by the National Development and Reform Commission and involving the Ministry of Commerce and the Ministry of Finance, this new organization will collaboratively investigate all of the major foreign takeovers in the machinery and manufacturing industries.

2. Restrictions on takeovers or stock ownership by foreign investors will be placed in the seven key manufacturing sectors, including nuclear power plant equipment, power plant equipment, electric power transmission and distribution equipment, shipbuilding, gears, petrochemical equipment, and the steel industry. Twenty to 40 key enterprises have reportedly been added to the list that is under the State Council’s direct protection.[7] The criteria for the status of "key" enterprises are based on the market shares, asset amounts, production scales, and revenues of the corporations.

While the Ministry of Commerce has long been a proponent of providing favorable terms to foreign investors, it made a sharp turn this year by issuing the "Report on the Control of China’s Industries by Foreign Investors," and by reexamining the effectiveness of attracting foreign investments to China over the past few years. Full of national economic security concerns, the report has the tone that foreign investors have already taken control of China’s industrial sectors.

As far as how to properly decide on a policy for foreign takeovers, China’s press widely believes that two red lines must be drawn. One is to ensure that foreign investors do not disturb China’s economic order. The other is to check on whether the foreign investors have threatened the security of the industries. Any foreign acquisition within these two red lines will likely be the target of protectionism, while the foreign investments that are beneficial to the transformation of the industrial structure or means of economic growth will be encouraged.

Who Is Influencing the Foreign Takeover Policies?

Before asking the question, one may first ask who is actually most concerned about industrial security.{mospagebreak}

Widely quoted as the supporting evidence that China’s industrial security is being compromised, a report distributed by the Research and Development Center of the State Council indicates that in each of the industries open to foreign investors, foreign investors almost exclusively control the top five enterprises. In particular, foreign investors own the majority rights of asset control in 21 out of 25 of China’s industries; they control the majority of the shares of the largest five elevator manufacturers, which produce 80 percent of China’s market shares. In the home appliances industry, 11 out of 18 national-level enterprises are joint ventures with foreign investors, while in the cosmetic industry, foreign investors control 150 Chinese companies. In addition, 20 percent of the medical industry is under foreign investors’ control, and 90 percent of the sales in the auto industry come from foreign brands.[8]

The aforementioned industries were not previously on the list of strategic industries for national economic security. Nor do Beijing authorities believe they are related to economic security. It is no exaggeration that the fact that these industries are now related to national economic security is the result of the widespread media coverage in the past two years. Then who is concerned about the economic security of these companies?

There are only two groups of people who have a vested interest in these industries: the domestic competitors and the consumers. From the perspective of protecting consumer rights, Chinese consumers get much better quality from the merchandise and services from foreign companies in China. Moreover, the Chinese consumers are forced to tolerate the price monopolies and the inferior products and services in the industries that are not threatened by foreign investors’ control or subject to economic security. These industries include telecommunications, oil and energy industries, and the financial systems. The extent that the public interest is harmed by these state-owned monopolies is demonstrated in the following incident. On October 4, 2006, during the 16th Party Congress this year, to crack down on the overly powerful ministries and government departments, the central authorities published an article in the name of the Xinhua News Agency—"Take Measures to Suppress and Prevent the ‘Special Interest Groups’ from Growing"—publicly acknowledging that the state-owned monopolies infringe upon the public’s interest and damage "social harmony."

It is fair to conclude that the media coverage linking these non-crucial industries with the national economic security must come from the domestic companies that compete with their foreign counterparts doing business in China. The major players in these industries are all state-owned enterprises, not the domestic private companies.{mospagebreak}

We should not overlook the power of these "special interest groups" in influencing state policies and legislation. To maintain their monopoly positions, these groups have been utilizing various means, including hiring scholars to appeal for them in the name of protecting the national industries. The outcome is the directional adjustments of the foreign investment policies. As a matter of the fact, it is more appropriate to call in these special interest groups to protect their monopoly interests than to protect national economic security. If these examples are still insufficient, the new regulations China is currently pushing forward to restrict the expansion of the large international chain stores in China, including Wal-Mart Stores, and the Carrefour Group, are surely unrelated to national economic security.

The Chinese companies are cleverer now because they know how to protect their own interests by waving the nationalism flag. Many industrial associations are involved in the foreign takeover debates. For example, the Bearing Industry Association of China publicly expressed its opposition to the preliminary acquisition agreement between the Schaeffler Group of Germany and the Luoyang Bearing Group. The China Cement Association is also demanding that the central authroities investigate the M&A activities of foreign investors in the domestic cement industry.

Should the domestic companies demand the protection of their industries in order to gain more time to renovate and improve the quality of their merchandise and services, their actions would not deserve criticism. On the other hand, if the purpose of their demand is to protect their monopoly interests by compromising the interests of consumers, the protectionism under the disguise of the nationalism flag needs to be questioned.

Blocking Chinese Firms from Being "Fake" Foreign Investors

Another indicative change of the foreign investment policies is that they block many Chinese firms from enjoying favorable terms by disguising themselves as "foreign investors."

Among the foreign investments in China, one-third of them are actually from native Chinese who have transferred their assets abroad and then infused them back to China in the name of foreign companies. According to a conclusive study by the Chinese government, there are three forms of "fake" foreign investments. The first scenario is that the Chinese companies in Hong Kong, Macau, or other countries, out of their strategic needs, come back to China to form foreign investment companies. The second scenario is that to raise capital, the domestic corporations register some shell corporations overseas, then return to China to acquire their former domestic corporations, and finally bring them to IPO. The last form is that the formerly domestic corporations register some shell companies with offshore financial centers and then become foreign corporations in China.{mospagebreak}

It is estimated that the third form of "fake" foreign investments is very common in China. As of today, not only Hong Kong, with its single tax system, remains the best place for China’s domestic companies to register their shell companies; but also the Virgin Islands, the Cayman Islands, and the Samoa Islands have become the second, seventh, and ninth most popular regions for Chinese companies to register their offshore entities. With regard to the ratio of "fake" foreign investments in China to total foreign direct investment (FDI), the World Bank estimated that in 1992, it was as high as 25 percent. Some experts say that today that number is over 33 percent [9]

"Provisions on the Takeover of Domestic Enterprises by Foreign Investors" presented by the Chinese authorities in August introduced the regulations on "actual control." Provisions 11 and 15 require the applicants to disclose to the investigation authority their administrative relationship and their actual holders. Under these rules, the takeovers actually controlled by domestic corporations must be subject to approval by the Ministry of Commerce. Provision 9 provides that the acquisitions of domestic companies by overseas corporations that are actually controlled by domestic entities will not, in principle, enjoy advantageous treatment. In addition, provision 59 provides that when the natural stockholders of domestic corporations change their nationalities, the nature of the corporations they own cannot be changed (to a foreign investors’ venture).[10]

These provisions make it improbable for "fake" foreign investments to profit from their outflanking tactics. Nevertheless, such a change indeed conforms to the Chinese government’s political principle of consistently treating overseas Chinese as citizens of China.

Ms. He Qinglian is a renowned economist from China.

Translated by CHINASCOPE from Finance and Culture Weekly of Taiwan News, November 8, 2006, Issue 263.

[1] Accounting Times, October 16, 2006, "Liangshui Hebing Maichu Shizhixing Bufa, (A Substantial Step Taken on Consolidation of the Two Tax Systems)" vol 90
[2] Xinhua News Agency, October 20, 2006, "Weilai Zhongguo De Waizizhence Jiang Zubu Xiangzhongxingwaizi Zhuanbian, (China’s Future Foreign Investment Policy Will Gradually Change to a Neutral Policy)"
[3] Same as above.
[4] Website of People’s Daily, November 8, 2006, "Waihuichubei Tupo Yiwanyi Meiyuan, Ju’e Waihui Ruhe Shiyong, (Foreign Currency Reserves Exceed US$1.0 trillion; How to Make Use of Foreign Currency Reserves)"
[5] Same as [1].
[6] Xin Caijing (New Finance magazine), January 5, 2006, "2005 Niandu ‘Zhongguo Shida Binggou Shijian’ Dianping, (Comments on the 2005 ‘Top Ten M&A’s in China’)" by Li Bing
[7] Sichuan Jingji Xinxiwang (Sichuan Economics Information Network), June 28, 2006, "Liubuwei Yu Lianxi Bufang, Waizibinggou Congyan Shencha, (Six Ministries and Commissions Work Together to Seriously Investigate M&A’s by Foreign Investors)"
[8] Global M&A Research Center, China’s Map of Industries, 2004-2005, April, 2005, published by People’s Post & Telecom Press
[9] 21st Shiji Jingji Baodao (21st Century Economic Report), June 19, 2006, "Waizi Shuishou Loudong, (Loopholes of Taxation on Foreign Investment)"
[10] Website of People’s Daily, August 10, 2006, "Guanyu Waiguo Touzizhe Binggou Jingneiqiye De Guiding, (About Regulations on M&A’s of Domestic Enterprises by Foreign Investors)"

New Emergency Plan Gives Military Power over Government

On November 14, 2006, China’s state-run media Xinhua News Agency on its website, Xinhuanet, reported that the Chinese Central Military Commission (CMC) issued Army General Contingency Plan to Deal with Emergencies. The document is similar to, but conflicts with, the National Master Plans for Responding to Public Emergencies issued by the State Council (Xinhuanet, January 8, 2006). So why did the CMC issue such a document? What is the background? What triggered the Chinese military generals to take this action?

Let’s compare the two documents.

In the State Council’s Master Plan, based on the development, characteristics, and mechanisms of public incidents, public emergencies are categorized as:

1. Natural disasters, including droughts, disastrous weather conditions, earthquakes, geological catastrophes, ocean and biological disasters, and forest and grassland fires, etc.

2. Accidents, including various safety-related accidents in factories, mines, and other business entities, traffic and transportation accidents, accidents of public infrastructures and equipment, environmental pollution, and ecologically damaging incidents, etc.

3. Public health incidents, including the breakout of infectious diseases, unidentified group sicknesses, food-safety-related and occupational incidents, breakout of infectious animal diseases, and other severe public safety and massive life-threatening incidents.

4. Social security incidents, including terrorist attacks, incidents related to economic security, and various incidents involving foreign countries.

The State Council is the supreme administrative organization for handling public incidents. Led by the premier of the State Council, the Executive Sessions of the State Council and the National Command Center for Public Incident Response will be in charge of the administrative work involved in responding to public incidents. When necessary, State Council working groups will be dispatched to guide the work.

The State Council Master Plan provides organizational guidelines for command and communication systems within the central and local governments. It stipulates that, in the event of a severe or major sudden incident, those in charge in the various regions and organizations must notify the organizations in charge immediately, within four hours at the latest, and at the same time notify any potentially involved regions and organizations. In managing the incident, progress updates must be made in a timely manner.{mospagebreak}

In the Army General Contingency Plan to Deal with Emergencies, it states that the military has five responsibilities in responding to incidents, including:

1. Handling incidents involving military conflicts.

2. Assisting the local governments to safeguard the social stability.

3. Participating in handling major terrorist attacks.

4. Participating in local disaster recovery and rescue work.

5. Participating in handling sudden incidents of public security.

When responding to incidents, the army contingency plan allows division and regiment organizations to bypass their immediate levels of leadership. This means that, in emergencies, the leadership can bypass immediate subordinates and directly take charge of lower-level organizations. The argument for such a plan is that when the sovereignty of the country and the safety of people’s lives are in jeopardy, collapsing the chain of command will enable the military to respond more rapidly to sudden incidents.

Comparing these two plans, except for the military involvement, the remaining four responsibilities are virtually the same. The creation of two such plans actually may imply that the Chinese Communist Party (CCP) feels itself in danger of collapse and that the Party’s relationships with the government, the military, and the people have changed.

The CCP’s Ultimate Survival Plan: Military Takeover of the Government

The ultimate authority in managing public incidents supposedly rests with the State Council. With the new army plan in place, the State Council is being replaced with the CCP’s military. The military can handle the incidents first, and the local governments will be under quasi-military control. Evidently the military will replace the CCP organizations in responding to sudden incidents, or, at the very least, the military will dominate in such situations. The existence of this contingency plan seems to signal a potential military takeover in an emergency situation.{mospagebreak}

What does this say about the current balance of power between the Party, the government, and the military? First of all, it signals the deterioration of relations between China’s military, the State Council, and the CCP’s local governing bodies. It also highlights the suspicion and distrust of the abilities of the local governments to rapidly respond to sudden incidents. This is the reason behind the independent publication of a military contingency plan by CMC as opposed to the State Council plan. While the State Council’s plan has the merit of law and lays a legal foundation for China’s responses to emergencies, the military version does not have any legal underpinnings and relies simply on military order. Once the military controls the country, the constitution and all laws will be nullified. Second, the CCP is feeling the impact of the rapid progress of the Quit the CCP movement. In the face of the CCP’s potential collapse, the CMC’s contingency plan intends to prevent chaos if the CCP loses power by taking full control of the government in case of dramatic changes. Third, in case of sudden incidents, the military will immediately supervise or take over all the critical infrastructure, including radio and TV stations, Internet centers, banks, airports, train stations, docks, seaports, long-distance bus service, water supplies, power plants, post offices, gas stations, oil and gas reserves, grain reserves, newspapers, printing factories, important scientific and research institutions, and so on.

Learning a lesson from the collapse of the Communist Party in the Soviet Union, former Chinese communist leader Deng Xiaoping initiated the open-door reform policy to develop China’s economy, hoping that economic development would overcome the shortcomings perpetuated by his Soviet counterpart and enable the CCP to maintain absolute control in China. Nevertheless, after nearly 30 years of economic development without political change, China’s social conflicts and economic crises are ever deepening, corruption is widespread, the gap between the rich and the poor is rapidly widening, its ecosystem is damaged almost beyond repair, and the crisis of worsening living conditions is threatening the very survival of the Chinese people. In the meantime, the nationwide human rights movement is gaining momentum. Even though the CCP has no solutions to these serious problems, it is not willing to give up absolute control. The CCP has realized that economic development alone will not in the long run ensure its supremacy and that it will not escape the fate of its Russian counterpart. As a result, individuals in the CCP’s most powerful circles have concluded that military control is the only way to ensure their survival.

Struggles Among Factions in the Military

There are two factions in the military. One is the Conservatives, represented by Chi Haotian, former defense minister, who is a big proponent of hard-line military suppression inside the country and military expansion around the globe to realize the CCP’s dream of everlasting total control.

Liu Yazhou represents the other faction, the Liberal Reformists. They demand that the government and the Chinese people reach some agreement to proactively advance the reform of the political system and to push China into an era of Rule by Constitution.{mospagebreak}

Both factions have powerful supporters in the military and they are fiercely opposed to each other. Given the corruption of the CCP and the ever-deepening social conflicts, is it good or bad for China’s military to issue a contingency plan at this time?

If the liberal faction in the military prevails, they would need to implement military control to end the CCP’s rule. Assuming it leads China toward democracy, freedom, and rule by constitutional law and then returns power to the people, the majority of the people in China would no doubt support such a scenario. Since May 2006, the voice of the military that proposes a military coup has been echoed several times in China Watch and Future China Forum. These sympathies must represent the liberal reformists in the military. It is one of the ways to end the CCP’s dictatorship.

If, on the other hand, the conservative faction prevails, a military coup would result in absolute control by the military—a nightmarish outcome.

The army contingency plan stipulates that divisional and regimental organizations can report incidents by bypassing their immediate leadership. In other words, divisions and regiments can bypass their regional superiors to report incidents directly to the CMC and General Staff Headquarters. Whereas the leadership can also command the lower-level organizations by bypassing their immediate subordinates probably implies that the CMC or General Staff Headquarters can command divisions and regiments directly.

This is the very first time that such a command system has been made public in peacetime during the CCP’s half-century rule.

China’s military has its own, independent communications systems—secret fiber-optic-based telephone, fax, and videophone systems, military data network, and satellite telephones. China’s military is even building videophone systems that directly link its border patrols to General Staff Headquarters. From the standpoint of communications technology, there is no obstacle to subordinate military organizations being able to report incidents to their superiors instantly. Any delays in reporting up through the chain of command would be due to human factors. Officials in the local governments, the military regions, the group armies, and the provincial troops all at one time or another purposely withhold information for their own political reasons. Alternatively, some local government officials make fake reports or cover up certain military incidents in order to maintain their excellent political records and to keep their political posts. The issuance of the Army General Contingency Plan will counter such situations by encouraging divisions and regiments to bypass their superiors to report incidents.{mospagebreak}

Furthermore, the first item in the contingency plan concerns handling incidents dealing with military conflicts. The designation military conflict incidents leaves room for interpretation. Does it mean internal conflicts within China’s own troops or conflicts with foreign military?

A look at China’s diplomatic and military relationships with its 24 neighbors precludes the possibility of conflicts with foreign military. As of today, China is not under any threat of military conflict with its neighboring countries or regions. Japan, China’s long-time foe, is still constrained by its peaceful constitution, which prevents Japanese troops from being dispatched to fight in other countries. The Russian military is hardly capable of maintaining its normal training regimen or safeguarding its own borders, let alone attacking China. Vietnam is busy developing its economy. Tired of a half-century of battles, the Vietnamese people and officials are more than willing to enjoy their peacetime and not fight with China. Taiwanese capital and technologies are pouring into China, so the Taiwanese are only interested in maintaining the peaceful status quo. North Korea has to rely on China for grain and energy to feed its people and fuel its nation in order to maintain the dictatorship of Kim Jong-Il. North Korea is in no position to fight with China. While India is developing its military, it will not likely cross the Tibetan Mountains to attack China. Other countries around China do not have the ability to or interest in mounting an attack on China. In conclusion, China is not subject to any obvious immediate external conflicts along its borders. The military conflicts, therefore, will more likely come from inside of China, more specifically, from the CCP’s military itself.

The new contingency plan includes a provision for handling incidents of military conflicts so it recognizes a need to be able to respond to a possible military coup in China. As a matter of fact, the conflicts inside China’s military have already been made public. In May 2006, while Party head Hu Jintao was inspecting the marine drill in the Yellow Sea, two other battleships bombarded the missile destroyer from which he was viewing the proceedings. He fled to Yunnan Province. The news was published in the November 2006 issue of Dongxiang Magazine (Hong Kong) as well as in the headline of the November 17, 2006, issue of World Journal, one of the top Chinese-language newspapers in North America.

Wu Fan is Chief Editor of a U.S. based Chinese web site

Translated by CHINASCOPE from

The Influence of the PRC on Taiwan’s Media

Since early September 2006, waves of reports started to appear in Chinese state-run media concerning the anti-Bian movement in Taiwan, with detailed descriptions of mass demonstrations held in Taiwan against President Chen Shui-bian of the Republic of China.

Meanwhile, the pro-China media in Hong Kong (such as Ming Pao and Wen Wei Po) and Taiwan (such as China Times, United Daily News, and TVBS) posted daily anti-Bian headlines, highlighting such words such as revolution, bloodshed, execution by hanging, and on strike, with pictures showing seas of people dressed in red protesting President Chen. Few reported activities that were in support of President Chen.

Some political commentators questioned such one-sided reporting: Several TV stations acted in concert to broadcast only anti-Bian red news. Is this still news reporting? Have the market-oriented Taiwan media become the political propaganda tools of communist China?

Overview: Media in Taiwan

There are about 350 newspapers in Taiwan, all of which are privately owned. The largest two are United Daily News, with a daily circulation of 1,300,000, and China Times, with a circulation of about 1,270,000. There are three English language newspapers—the China Post, Taiwan News, and Taipei Times. China Post is the most popular of the three, with a readership of around a quarter of a million.

There are 105 TV channels. Five are satellite stations and 100 are cable. Taiwan’s multi-channel cable television penetration rate is a high 85 percent. China Television Company (CTV) is one of the world’s leading providers of Chinese-language television content, reaching audiences around the world.

There are currently more than 170 radio stations in Taiwan, with the same number of underground radio stations.

With the exception of a handful of larger and more established media concerns, most companies are similar in size and capital and are privately owned.

The PRC Communist Regime’s Global Media Strategy

On May 11, 2006, the Chinese Academy of Social Science, the leading research institute of the communist government in the People’s Republic of China (PRC), issued the first Yellow Book on Socialism in the World. It laid out the Chinese strategy to spread socialism worldwide and replace the United States as leader of the world in the 21st century. Its media strategy is one of its key elements.{mospagebreak}

In the United States and many countries in Europe, Asia, Latin America, Africa, and the Middle East, Chinese-language media is dominated by those funded or otherwise controlled by China’s communist government.

For example, a handful of top newspapers in Hong Kong such as The Sing Tao Daily, Ming Pao, Wen Wei Po, and Ta Kung Pao are actually mouthpieces for the mainland communist government. The deceased prominent democratic activist, Jin Yaoru, was a long-time editor-in-chief at Wen Wei Po and, unknown to all, an underground Chinese Communist Party member throughout his stint with the newspaper. After the June 4
Tiananmen Massacre in 1989, he stepped forward and defected from the Chinese Communist Party.

According to former Xinhua News Hong Kong Chief Xu Jiatun, the PRC funneled US$30 million into the pro-PRC newspaper Zhong Po, with circulation in Hong Kong and the United States, during his term from 1983 to 1989.

The PRC’s Infiltration of Taiwan’s Media

Experts have observed that Taiwan media limits its coverage of PRC issues. Negative reports on the PRC are hard to find. According to Dr. Chin-hua Chang, the director of the Media Research Institute of National Taiwan University, Taiwan newspapers publish fewer negative reports on the PRC than the PRC’s own media in mainland China.

As cultural and economic relations between the PRC and Taiwan expand and Taiwan political conflicts intensify, the PRC’s influence in Taiwan increases.

In the 1990s, the PRC and Taiwan agreed to an exchange of journalists. The PRC’s national state-run media, including Xinhua News Agency, People’s Daily, China Central Television, Central People’s Broadcasting Station, and China News Services, have journalists stationed in Taiwan on a monthly rotational basis. Taiwan journalists from eight newspapers and TV stations are allowed to base themselves in China. They include Central News Agency, China Times, China Post, MUCH TV, and TVBS.

The PRC’s China Central Television (CCTV) has aired in Taiwan via satellite on local stations eight hours a day since 1993. Its programs range from talk shows to news programs, including news conferences by Beijing’s leaders and other political programs. In March of 2003, the Taiwan government took CCTV off the air as a reprisal for Beijing’s refusal to license four Taiwanese TV stations—Eastern TV, Era Communications, Set TV, and USTV. These stations sought to reach the half million Taiwanese who live on the mainland yet have no access to the island’s TV stations. Only luxury hotels in China receive Taiwanese programs. In 2005, CCTV returned to the air in Taiwan as part of the Asia Great Wall Satellite Platform.{mospagebreak}

According to Liberty Times, back in 2002, the PRC’s Taiwan Affairs Offices in Beijing set up a center to monitor Taiwan media 24 hours a day, seven days a week.

The Taiwan government has, to some extent, limited the mainland media’s presence in Taiwan either through leveraging the issue to open the door in favor of Taiwan media or through diplomatic maneuvering at times of political crisis. Unfortunately, China has directly or indirectly influenced and changed the Taiwanese media in a subtle and sophisticated way.

Investment in Taiwanese Media

In 2003, Liberty Times reported that Taiwan intelligence confirmed that the PRC had made enormous investments in 17 Taiwan media outlets.

In the summer of 2004, the KMT (Kuomintang or National Party of China) was required by the Broadcasting and Television Law to sell its interests in China Television (CTV), the Broadcasting Corporation of China (BCC), the Central Motion Picture Corporation, the Central Daily News and China Daily News by December 26. There were reports that Beijing had been trying to buy shares of the KMT’s media. The Taiwan Information Office issued a determination that TVBS was a foreign-owned company and therefore in violation of Taiwanese law.

Lin Chia-lung, head of Taiwan’s Government Information Office, stated at a legislative session on October 6, 2004, that mainland China was penetrating the island’s media by proxy, specifically that mainland-controlled entities had applied to set up radio stations and acquire mismanaged radio stations. One of these entities is the so-called Taiwan Radio Listeners Friendship Gathering Association. The mainland has been broadcasting to Taiwan with programs highlighting mainland nationalism. Mr. Lin estimated that 300,000 people in Taiwan listened to mainland broadcasts. Taiwanese radio listeners have been invited to the mainland for friendship sessions organized by the official Central People’s Broadcasting Station.

Infiltration of Taiwanese Media Staff

In November of 2002, Kinmen’s Prosecutors Office in Taiwan charged the former president of the now defunct Kinmen Evening News, Peng Chuei-bin, with collaborating with the enemy. Peng allegedly used his media work as a cover and took photos of sensitive military areas in Kinmen and Matsu. He was charged with passing the photos to the PRC military.{mospagebreak}

In April of 2003, the Investigation Bureau under the Taiwan Ministry of Justice investigated another Taiwan journalist suspected of obtaining and providing the PRC with intelligence on Taiwan’s annual defense budget, defense weaponry, and military procurement. According to Liberty Times, the Investigation Bureau discovered that the PRC government believes that Taiwan has an active and prosperous news media sector, and thus it is easy for media management or journalists to have direct or indirect access to Taiwan government affairs. Therefore, the Chinese regime has gone all out to infiltrate the news media in Taiwan.

CCTV’s Asia Great Wall Satellite Platform

During the last decade, the systematic expansion of PRC propaganda began to appear in Chinese-speaking communities throughout the world at an accelerated pace. Take the PRC’s China Central Television as an example. According to the CCTV Chinese-language website, CCTV is the most important news agency in China. It is an important mouthpiece for the [Chinese Communist] Party, government, and people. It is an important base of mind and culture. The safe broadcast of CCTV is an important political task.

CCTV began its global expansion in 1992 by carrying out a systematic implementation plan aimed at reaching Chinese audiences around the world. The focus from 1992 to 1995 was the Asia Pacific region, the United States, and the Middle East. The target group in 1996 was European overseas Chinese. The year 1997 saw expansion into Africa and in 1998, more penetration into the United States.

In October 2004, CCTV launched its partnership with EchoStar to bring a Great Wall Satellite Platform to EchoStar’s over 10 million DishNetwork subscribing households in North America. The platform included 17 channels, such as the CCTV-E&F channel, CCTV-9 English channel, and other Chinese-language channels. CCTV claimed on its website this indicates that propaganda to foreign countries has stepped up to another level. It shows that CCTV’s propaganda work in foreign countries has experienced a huge change in both concept and operational mode.

The Asia Great Wall Satellite Platform, beginning on February 1, 2005, is an extension of the North America Great Wall Platform. It contains 11 TV channels broadcasting from PRC through Ku-Band Section of #5 Asian-Pacific Satellite. Its signal covers Hong Kong, Macao, Taiwan, Japan, Korea, Myanmar, Thailand, and others.

The channels that the Asia Great Wall Satellite Platform provides are CCTV-4, CCTV-9 (English), CCTV-OPERA, BTV (Beijing), Dragon TV (Shanghai), TVS (Cantonese), Jiangsu International, SETV (Fujian International), HTV (Hunan), SZTV (Shenzhen), and Strait Star.{mospagebreak}

Multichannel Engagement and Influence: Money Talks

Ever since the PRC and Taiwan opened a dialog, the PRC regime has embarked on increasing its interactions with Taiwanese society through trade and business investment, cultural and educational exchange programs, international conferences, and other social activities. As the economy grows, the PRC’s propaganda tactics have also become increasingly sophisticated. Communist doctrine has been embedded in attractive amusement programs and cultural spectaculars. Sharing a common cultural heritage with mainland China, the Taiwanese people are more apt to be influenced. However, it is not a two-way street. While the PRC regime has taken advantage of the freedom of Taiwan, it has kept the Taiwanese democratic ideologies outside of China through tight media control and censorship.

One effective strategy is to build up a United Front by inviting selected overseas media to contribute at overseas Chinese media forums. The Second Worldwide Chinese Media Forum hosted by China News Agency, the Changsha City government in Hunan Province, and the Office of Overseas Chinese Affairs in Hunan Province took place in Changsha City, Hunan Province, between September 22 and 24, 2003. About 180 overseas Chinese media, including some Taiwan media, attended the forum. None of the many overseas media outlets that openly refuse to toe the CCP line or those regarded by the CCP as potential threats or those who openly challenge CCP propaganda were invited to the forum. Some highlighted topics on the agenda were how overseas Chinese media can cooperate with media in mainland China and how to objectively report news related to China.

Stories have often been heard about how a certain journalist had changed his or her view of the PRC after taking a complimentary silk road trip in China offered by the PRC government. According to an article published by a U.S.-based think tank, the Jamestown Foundation, in the World Journal, one of the six branch-newspapers of the United Daily News (UDN)—Taiwan’s most influential newspaper—has developed business ties with mainland China. When Chinese Consulates in both New York and San Francisco pressured World Journal‘s local offices to not publish ads related to Falun Gong, a spiritual movement banned by the PRC government, the New York office complied. Its San Francisco office still prints Falun Gong ads, yet most of the time on the paper’s least-viewed page.

Alarming Trend

How effective is the PRC in infiltrating Taiwan and influencing Taiwan politics?

In January 2004, PRC Premier Wen visited the United States. At least two reporters of Taiwanese TV media, including TVBS, stated to the Taiwan Falun Dafa Society that their managers in Taiwan ordered the reporters to remove from their footage any background that shows Falun Gong.{mospagebreak}

Between March and April 2006, Taiwan’s New News Weekly invited Jiao Guobiao, a former professor at Beijing University and an advocate of democracy in China, to write three essays. The publication of these articles led mainland China’s Taiwan Affairs Office, a department under the State Council, to launch an investigation. The Taiwan Affairs Office was even investigating who actually invited you to write the essays, so I was scared of asking you to write for us again, said a journalist at New News Weekly.

Lack of objective media coverage of the PRC may have contributed to the overheating of investment in the mainland PRC by Taiwan businesses. Information from the Investment Commission of the Taiwan Ministry of Economic Affairs shows that over 70 percent of Taiwan’s Foreign Direct Investment went to mainland China. The estimate of business communities puts it at a high 90 percent. Less than one-third of them see profits.

Xiao Tian is a correspondent for Chinascope.

Beijing Uses Film to Promote a Rising China

From November 13-24, 2006, the business channel of China’s state-run media Chinese Central Television (CCTV) broadcast a 12-episode documentary series called The Rise of Great Nations. The film analyzed the rise and fall of nine strong countries during the past 500 years, including Portugal, Spain, the Netherlands, England, France, Germany, Japan, Russia, and the United States. To complement the program, the station concurrently published a series of eight books on the topic.

According to, a state-owned television crew (all television stations in China are owned by the government) produced the film. Guided by Qian Chengdan, a history professor at Beijing University, and Wang Jisi, chairman of the International Strategy Institute of the Chinese Communist Central Government’s Party School, the crew spent three years making the series.

Xinhuanewsnet, Beijing’s mouthpiece, used a quote from Mr. Qian to explain the reason to produce the film: It was based on Hu Jintao’s speech about learning from the advanced experience of others and probing our own path of development.

According to an article from CCTV’s website, the inspiration for making the film came when a few selected scholars gave a lecture series about investigating the development of major countries since the 15th century. The central government’s Political Bureau first organized this collective study session on November 24, 2003.

Beijing claims that the film emphasizes thinking about reality from a historic perspective. To promote the program, the authorities arranged a series of activities around the film. CCTV aired the series a second time, three days after the first showing. Special guests were invited to participate in live interactive discussion. On November 22-23, and, two of the biggest official websites in China, invited the author and the producer of the film as well as some specialists to conduct online interaction with the readers.

Not only was the film made available to the general public, but top-level officials were also strongly encouraged to watch it. According to the overseas pro-CCP media China Press, The nine members of the Politburo started to study The Rise of Great Nations while CCTV was airing the film, suggesting that China is facing the reality of the ‘rise,’ and is repositioning itself.

The film quickly became a hot topic on the Internet. According to Voice of America, a Google search revealed that more than 1.55 million websites were found to have contents related to The Rise of Great Nations.

On December 8, for example, the Wall Street Journal published an article entitled The Rise of Great Nations by Hong Kong University researcher David Bandurski. The article criticized the film as a flashy series, ordered by Hu Jintao, whose purpose was to echo the ideology of China’s peaceful rise and to eulogize the Party.{mospagebreak}

It was pointed out that, during the 90-minute section about the United States’ rise, the word democracy was mentioned only once on the occasion of talking about the Democratic Party. During the total 9-hour program, democracy was mentioned a total of 12 times.

Many also criticized the film for avoiding the real reason for these countries’ rise—focusing instead on the economy, the military, and the government—thus giving a distorted picture of the reason for their rise.

For example, the film made no mention of the importance of the spirit of the U.S. Constitution, and the constitutional protection of freedom. Rather, it emphasized science and technology, including patents in the United States. One analyst commented that the film conveyed the message that the rise of the United States resulted from the protection of patents.

In the section on Russia’s rise, the film eulogized the communist revolution as an example of great success in leading the Soviet Union from an agricultural country to an industrial one. There was not a single word mentioned about Stalin’s repression in the late 1930s, as if the episode never occurred.

A BBC commentary expressed that the film proposed the following logic for China: The development of the world is based on fortune. Fortune can be achieved through power, technology, and war.

EastSouthWestNorth quoted a viewer as saying: The intent of this film ‘to learn from the West’ is obvious. But what does it suggest that we should learn? To make your nation strong, do you get it? Getting rich, universal suffrage, human rights, constitutional governance and all that are only means that serve to make the nation strong. There is one and only one true goal: to be a strong nation.

As Chinese journalist Li Datong points out: The true ingredients of national greatness are very far from those imagined by the official Chinese mind.

From the Editor

A prominent documentary series, The Rise of Great Nations, is being broadcast during prime time on state-run China Central Television (CCTV). The series is fueling a fresh round of discussion and debate on the already hot topic of China’s own rise. In recent years, China’s torrid pace of economic advancement and military buildup has certainly drawn its share of attention and concern from Western countries. Such a high profile film aired by the state’s flagship TV station is certain to receive scrutiny. So indeed, what kind of message is Beijing trying to send?

The Rise of Great Nations is a 12-part documentary series that analyzes the rise and fall of nine Western powers during the last 500 years. Rumor has it that the idea for the film was born during a collective study session of the Central Politburo in 2003, when elite scholars briefed top Chinese communist leaders on their research into the development of major powers since the 15th century. According to the government-owned Xinhuanet website, the original idea came from Chinese President Hu Jintao, who wanted to guide China’s development using lessons learned from the past.

At first glance, the film has a mostly scholarly slant, with refreshingly few communist buzzwords that infest most productions from the Propaganda Department. However, it is telling that the film was mostly focused on the subject countries’ scientific progress, military strength, diplomatic relations, and government activities, whereas very little was said about the importance of human rights, democracy, rule of law, and religious freedom as factors in the countries’ rise. The viewer is likely to get the impression that a nation’s rise is primarily due to a powerful economy and military.

Such a sentiment is consistent with the Chinese regime’s mantras that backwardness will inevitably be exploited and attacked and China’s prosperity requires a strong army as a guarantee. During former Chinese leader Deng Xiaoping’s reign, Deng established the internal diplomatic policy of hiding our intentions, buying time, and striking when ready to avoid potential confrontation. However, Hu does not have the same level of authority in the leadership as Deng and needs to establish his own legacy. Since coming to power, Hu has adopted the policy of playing a prominent role at times in international affairs. On one hand, Hu wants to bolster his image as the leader of a great nation. On the other hand, he continues to sell the peaceful rise theory to mitigate international criticism and concern. In that regard, the film may have elements of both approaches.

Domestically, the film could serve as a call for nationalism and a temporary salve for the severe social problems associated with China’s rapid, but at times reckless, economic development. As the nation is facing unprecedented official corruption, an ever-widening gap of wealth distribution, and alarming amounts of social unrest, the current regime is left with few choices.