Before the North Korea nuclear crisis showed any sign of resolution, a Chinese general stunned the world with threatening talk that China would not withhold its nuclear weapons in case of a conflict with the United States over Taiwan. Already, the United States is at odds with China over issues like the recently failed bid by CNOOC for Unocal, the currency exchange rate, intellectual property piracy, textile exports and the ever-expanding trade imbalance, but such a statement sent shockwaves of an entirely different nature across the Atlantic. After all, who would have expected the prospect of a nuclear war with a business partner?

No one can say for sure how real the threat of a nuclear showdown is at the moment, but those who are familiar with the Chinese Communist Party (CCP) don’t find the claim very surprising. The CCP has a long track record for breaking promises and placing little value on human life. Indeed, such a statement is quite telling about how the CCP operates. A closer look at its domestic dealings often reveals a clue for its international behavior.

At any given time, the top priority for the CCP is to maintain control at any cost. One long-standing strategy has been to periodically establish an enemy—either domestic or international—in order to consolidate power or silence critics. In doing so, the CCP usually uses violence as an integral part of the strategy, even if it means killing its own citizens in large numbers or resorting to war if necessary. The war in Vietnam in 1979 and the killing of its best and brightest in the Tiananmen Massacre in 1989 are striking examples.

Most recently, the CCP has been committing another gross human rights violation—the persecution of a peaceful spiritual group called Falun Gong. Initially, when former Chinese President Jiang Zemin ordered the persecution, it was meant to be a quick kill. But after six years of relentless suppression that has failed to snuff out the spiritual movement, the CCP is faced with an unprecedented dilemma. Fearing international indignation at its brutality, the CCP has largely turned the persecution underground, but because of an effective grassroots campaign of raising public awareness by Falun Gong practitioners all over the world, the CCP is more afraid than ever that the persecution will fail and that the world eventually will not tolerate such a government. Under these circumstances, throwing out the nuclear threat may divert attention away from its domestic problems such as this one.

In this issue, we publish a documentary report about Falun Gong from its inception to its ongoing effort of peaceful resistance. We also provide articles analyzing friction between China and the United States on the issue of trade.

Indonesian President Visits Beijing 

[Xinhua News Agency, July 28, 2005] Indonesian President Susilo Bambang Yudhoyono, accompanied by several economic officials, arrived in Beijing on July 27, 2005, for a national visit to shore up ties between the two countries. Yudhoyono reached a series of economic and defense agreements with China during the meeting with Chinese Premier Wen Jiabao. The agreements, signed at a ceremony attended by Chinese President Hu Jintao, included a general loan agreement from China to Indonesia of US$100 million of Preferential Buyers Credit, alongside memoranda of understanding or cooperation on defense technology and rebuilding projects in tsunami-affected areas of Indonesia. When Hu Jintao visited Jakarta in April, the two sides signed nine agreements establishing a "strategic partnership" and pledging to increase two-way trade to US$20 billion within three years.

Beijing Strengthens Control over TV And Radio; Foreign Companies Not Allowed

[The Epoch Times, July 16, 2005] In an effort to strengthen control over TV and radio stations, the Chinese government recently issued an announcement forbidding Chinese stations from participating in joint ventures with foreign TV or radio stations. The new rule went into effect July 7. A public announcement posted on the official website of China’s State Administration of Radio, Film, and Television indicates that China’s TV and radio stations are also not allowed to lease their channels to foreign companies. China’s TV and radio stations are eager to obtain foreign investments and foreign programs. Many TV and radio stations have lost government financial support, and because of this, have to stay competitive in an ever-changing market. Yet, the Chinese government remains unwilling to give these stations the freedom to work with foreign companies, because of fears that it may lessen their control over the "political standard for television and radio broadcasting."

Shandong Health Bureau Surrounded By Hundreds of Angry Residents

[The Epoch Times, July 16, 2005] Disregarding national regulations, the Rizhao City, Shandong Province, municipal government is constructing a hospital for infectious diseases in a crowded school and residential area. The construction project has continued despite resistance from residents. Several hundred angry residents recently surrounded the Health Bureau, demanding a stop to the project immediately. Donggang District, where the hospital is being built, is in the old city, with many schools and dormitories, and is a densely populated area. Construction on the hospital started last March, causing extreme discontent among nearby inhabitants. Residents have complained and appealed, and many conflicts have occurred between local inhabitants and contractors since the beginning of the construction. Hundreds of angry locals broke into the work site and smashed the construction tools. The project was therefore suspended, and only recently resumed.{mospagebreak}

Administration Achievement Project: University’s Claim Turns into Scandal

[Asia Times, July 15, 2005] In China, the so-called "Administration Achievement Projects" are not limited to local leaders who launch a great number of superfluous construction projects. Chinese media have recently suspected that the high employment rate of average college graduates in Hubei Province, reportedly 84 percent, might be false. Asia Times Online has also learned from another source that some universities required graduates to provide employment offer letters in order to receive their diplomas. In other words, China’s official employment rate for college graduates might become the latest disaster of the Administration Achievements Project due to various award mechanisms.

U.S. Trade Deficit to China Continues To Rise

[Voice of America, July 14, 2005] The U.S. trade deficit to China continued to rise in May, reaching US$158 billion. According to China scholars, certain methods, such as timely adjustment of China’s yuan exchange rate, and expanding export of U.S. flagship goods, can decrease the trade surplus between China and the U.S. Recent data from the U.S. Commerce Department shows U.S. exports to China during the first five months of 2005 increased 7.6 percent compared to last year. But driven by an increase of 12.8 percent in textile and garment imports, the U.S. trade deficit to China rose from US$147 billion in April to US$158 billion in May, marking May as the month with the largest gain in the deficit since last November.

Report Reveals Fast Growth of China’s Money Laundering

[Southern China Daily, July 13, 2005] The People’s Bank of China issued its first counter money laundering report on July 12, revealing that in 2004, the number of large denomination bills flowing into China increased by a third compared to the previous year. Experts believe that this is related to increased short-term speculative investment in China, as well as the growth of domestic money laundering transactions.

In 2004 the inflow of large denomination bills was US$3.956 billion, compared to an outflow of US$964 million. The total inflow was three times the outflow. The U.S., Hong Kong, Taiwan, Japan, and South Korea are the main sources of these large denomination bill transactions.

Beijing Plans for More Than 4,000 Internet Police

[Xinbao, June 27, 2005] After training, qualified Internet security personnel will be stationed at Internet bars and ISPs in Beijing. Their primary duties will be to assist the public security police to use the central control of the ISPs to monitor user activity in real-time, and determine whether the websites users visit contain pornography, reactionary content, scams, or any content the government deems wrong. According to media reports, Beijing plans to train more than 4,000 network security personnel. After one month of intensive training, the first batch of Beijing network police will start in August.{mospagebreak}

Japan Allows Private Company to Explore Gas and Oil Fields in East China Sea

[Voice of America, July 14, 2005] Japan’s Minister of Economy, Trade and Industry, Shoichi Nakagawa, announced at an emergency press conference on Wednesday afternoon that the Ministry of Economy, Trade. and Industry granted Teikoku Oil Company test-drilling rights in the East China Sea. Analysts believe that Japan’s move shows they disagree with China oil-drilling in the East China Sea without consulting Japan. It is expected, however, that the Japanese government will be very cautious about the approval of the test-drilling, since Japan’s decision may lead to escalation of the dispute between China and Japan in the East China Sea.

This is the first time the Japanese government has granted rights to a private company to explore for oil in disputed waters in the East China Sea near the Chinese drilling platform.

Profits of Chinese Automobile Groups Fall Sharply

[The Epoch Times, July 6, 2005] The two largest automobile manufacturers in China—Shanghai Automotive Co., Ltd. and Chongqing Chang’an Automobiles Co. Ltd.—both announced on July 1 that their profits for the first half of the year fell more than 50 percent, due to falling automobile prices, increasing costs of materials, and a soft market demand. This is a new sign of the severe situation faced by the Chinese automobile industry. It is estimated that, due to huge investments, automobile production in China will more than double, from nearly 3 million vehicles per year to 8 million vehicles per year by 2008. Many worry that over-production could result.

Nine-Month-Pregnant Woman Suffers Forced Abortion

[The Epoch Times, July 13, 2005] A nine-month-pregnant woman in Henan Province, China, underwent a forced abortion because she refused to cooperate with the Chinese government by denouncing the spiritual practice Falun Gong. In addition, she was sentenced to a five-year prison term. The woman filed a complaint on an overseas website and called for overseas communities to pay more attention to China’s human rights issues.

Hu Jintao Strives to Prevent "Color Revolution"

[The Epoch Times, July 9, 2005] The recent "Color Revolutions," such as the "Orange Revolution" in the Ukraine, has caused panic for Chinese President Hu Jintao. Hu issued an internal conference report entitled "Fighting the People’s War Without Gunsmoke," which dealt with "stopping the U.S. and Europe from starting Color Revolutions in Regions Surrounding China and Crushing U.S. Attempts to Start a Color Revolution in China." This report was issued to all county-level governments in late May in the form of an official Central Committee document. The report, disseminated all the way down to the county-level, ordered strict controls over the media, strengthening of the monitoring and control of dissidents and civil rights advocates, and a complete review of all publishing companies.{mospagebreak}

China Bans June Issue of Far Eastern Economic Review

[Voice of America, June 29, 2005] The Chinese government has banned the June issue of the Far Eastern Economic Review (FEER) for carrying a review of the newly published book Mao, the Unknown Story, by overseas Chinese writer Jung Chang and her husband. According to the Wall Street Journal, the book exposes Mao’s crimes during his leadership of China from 1949 to 1976. The FEER review was written by Jonathan Mirsky, a former East Asia editor of the Times of London. China’s National Publications Import and Export Corporation informed the Dow Jones & Company, publisher of FEER, that the June issue would not be allowed into China because of the review of Chang’s book.

Pollution Threatens Ancient Qin Dynasty Terra Cotta Army

[Chongqing Morning Post, July 6, 2005] The terra cotta warriors and horses, dating from the Qin Dynasty (around 210 B.C.), have been seriously eroded by air pollution after surviving for over 2,000 years. Experts are concerned that if no measures are implemented, the Terra Cotta Museum will become a coal pit. Scientists placed a piece of plain white paper in the Terra Cotta Museum. After 24 hours, the paper turned murky and dark from charcoal particles, illustrating the kind of pollutants that tarnish the terra cotta army.

Chinese Communist Party Arrests Underground Bishop for Sixth Time

[Central News Agency, July 5, 2005] The Connecticut-based Cardinal Kung Foundation stated that the Chinese government arrested Bishop Jia Zhiguo on July 4 during the Chinese Communist Party’s harassment of Chinese underground churches. Bishop Jia is the Catholic bishop for Zhengding District, Hebei Province. He has been arrested six times during the past 18 months.

President of Commercial Bank Investigated for Embezzlement

[Southern Daily, July 1, 2005] The general manager of a township branch of the Dongguan City, Guangdong Province Commercial Bank is suspected of taking advantage of his job position, embezzlement, misappropriating funds, and issuing loans illegally during the 11 years he has been in charge of the bank. The amounts involved are said to exceed 51.6 million yuan (US$6.37 million).

Abduction Insurance Policy Launched For Beijing Wealthy

[Central News Agency, July 1, 2005] An insurance company in China is offering kidnapping insurance for the managers or executives of private or state-owned companies. The first of its kind in Beijing, this policy also covers their spouses and children. The policy was introduced in some southern cities in China and had received positive responses from the market. The maximum insurance premium is 500 yuan per year (around US$62), with a maximum compensation of 797,500 yuan (around US$98,000). The renewable insured period is one year.{mospagebreak}

Hu Jintao’s "Historic Visit" to Russia Downplayed by Russian Media

[The Epoch Times, July 4, 2005] On July 3, Chinese Communist Party leader Hu Jintao left Russia on a special jet, completing his official four-day visit to Russia. Hu and Russian president Vladmir Putin signed several agreements, and his visit was highly appreciated by the Chinese state-sponsored media, and called a "historic visit." Reports by the Russian media, however, seemed to downplay the importance of the visit.

China Plans to Import Massive Amounts of Energy from Russia

[Voice of America, July 10, 2005] China wants to strengthen its cooperation with Russia in terms of its electrical energy, with future plans to import 20 to 50 billion kilowatt-hours of electricity per year from Russia. Both sides are encountering obstacles, however, such as Russia’s need to invest huge funds in its electrical energy facilities. In addition, the two parties have not yet been able to reach an agreement on the critical issue of price.

[Editor’s note: Below is a translation from an article published on Xinhuanet.com, a website of the Chinese government official news agency, on July 4, 2005, reflecting the messages that Chinese readers get from the government media about the United States.]

Why Is the U.S. "Annual Report on the Military Power of the People’s Republic of China" Having a Difficult Birth?

During the first term of President Bush, a so-called "Annual Report on the Military Power of People’s Republic of China" was published in May every year. At the time of each publication, a big fanfare was created making it a serious matter as if China was really to threat the Asia-Pacific and America’s security. There were several reasons why it occurred: arms dealers were there adding fuels to the trouble, accompanied by the shadow of cold war ideology always and the ever-present worries of the future of U.S. hegemony.

Now it is the second term of Bush’s Presidency. Apparently, the first "Annual Report on the Military Power of the People’s Republic of China" may gain stronger momentum this year. In addition to the above reasons, America’s anti-terrorism and hegemony strategy has started to enter a relatively new phase. While the United States continues "great task of anti-terrorism," it focuses on the promotion of two models. One is the "Libya’s model" which is to "follow the America’s steps" with an attempt of defeating enemy without any battle. The other is to softly promote the "Georgia’s model," i.e. the so-called "velvet revolution." Meanwhile, the United States strengthens the effort to divert and restrain China’s attention and to shorten "the strategic window" during which China has the opportunity to quickly rise to power.

This time, the U.S. "Annual Report on The Military Power of the People’s Republic of China" is produced right against such background. But the "world eagles" in the U.S. Department of Defense (DoD) only paid attention to strategic coordination with the government and neglected the utilization of necessary tactics. Therefore they fully exposed their evil nature. They said, "China’s military power has caught up with that of the United States in certain aspects," and they even listed China as "regular threat," "upgraded it to the level of top security alert," and "put it in the same list of terrorism." According to a report, the White House National Security Council was "extremely annoyed" by it. The Council requested twice for revision, saying that this report has been "too odd" and too "frightening." Originally, it was prepared to publish this "report" in May. Although the report won’t die, under present international situation its delay in publication speaks for itself.
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On the surface, there is a big disagreement on the "Annual Report on the Military Power of the People’s Republic of China" between the White House and the DoD, even of a strategic nature. President Bush no longer states that China is America’s "strategic competitor," but instead has emphasized that the relationship between the two countries is a "constructive cooperation relationship" and is "complicated." If the main theme of DoD’s "Annual Report on the Military Power of the People’s Republic of China" still takes China as a "strategic competitor," even as a "potential enemy," the U.S. government apparently would fall into an embarrassing situation where it finds difficult to make its story consistent. How does the DoD explain to the U.S. media and people? How does the DoD explain to the international community? How does the DoD explain to China? Because of this, the White House needs to find a balance point between the vague "strategic relations" and the clear "tactics" to get out the embarrassment and to have an explaination.

But, that is hard to do. Not long ago, Goss, Director of the U.S. Central Intelligence Agency, openly said, "the modernization of China’s military poses a direct threat to the United State." Not only that, for a period of time, the United States has used every means to deter European Union from lifting arms embargo against China, to pressure Israel not to sell unmanned aircraft to China and even to include the Taiwan Straits as the common target of the United States and Japan. From these words and acts of the United States, it is not difficult to tell how the United States views China strategically and what is the difference between the White House and the DoD.

http://news.xinhuanet.com/comments/2005-07/04/content_3171013.htm

[Editor’s note: Below is a translation from an article published on Xinhuanet.com, a website of the Chinese government official news agency, on July 4, 2005, reflecting how China views the relationship between Japan and the United States.]

Re-Arm Japan: American Sword Points to China

People know that the United States has used every means possible to restrain China and it is also common knowledge that China-Japan relations have entered the "ice period" since the end of last year. To a certain extent, it was because Japan had the United States to support it from behind. However, what is the strategy that the United States and Japan have actually taken to besiege China?

Is it only because the Japanese government did not acknowledge the history of war or Koizumi (Japanese Prime Minister) insisted on worshipping at Yasukuni shrine? Or is it because the United States has repeatedly promoted the theory of a China threat, requested the appreciation of Chinese currency, and made troubles over the Taiwan issue?
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Recently several things have occurred, which might inspire people to think more: After the United States announced its strong support of Japan’s "joining the Security Council," Shinzo Abe (Liberal Democratic Party Secretary-General), who has declared at Waseda University that "Japan could have large missiles and small atomic bombs," became a welcome candidate for next Prime Minister. After Japanese Emperor Akihito’s worshipping dead soldiers of militarism in Saipan Island, General T. Michael Moseley, who was nominated as Chief of Staff of the U.S. Air Force, said that the Pentagon is making a plan of long-distance offensive strike against China. Taking the events above together, are the words such as "force" and "military" standing out most often in your mind?

A Re-armed Japan Has Become a Reality

In fact, the progress for the United States to re-arm Japan has begun ever since the first Gulf War. The progress has speeded up after Bush became the master of the White House. Now it has entered the phase of a major breakthrough. Firmly supporting Japan to "join the Security Council" is the last step for the United States to have Japan become a "normal country." After that, Japan could play a role of "the U.K. in the Far East."

Japan’s adoption of the "International Peace Cooperation Bill" in 1992 marked the beginning of re-arming Japan, meaning that Japan can send troops to join United Nations peace-keeping operations.

Afterwards, the United States has urged Japan several times to amend its Peace Charter adopted after World War II, which would legally abolish those articles restricting use of force for self-defense and prohibiting overseas troops deployment and export of military technology. Japanese government willingly accepted American "interference with its internal affairs." As of today, Japan has introduced 21 laws related to security, nine of which were introduced in 2004 and were the most important. Its military expenditure has been increasing several years in a row and in 2004, has ranked number four in the world and number one in Asia. Also its troops were deployed to Iraq. Moreover, its joining the U.S. missile defense system is like putting on "the bulletproof vest" for the development of high-tech military strength.

After Bush and Koizumi took power, there has been more tacit understanding on the military cooperation between Japan and the United States. U.S. Deputy Secretary of State Richard Armitage has been urging to arm Japan by increasing military sales to make Japan be "the U.K. in the Far East." During his visit to Tokyo in August last year, former U.S. Secretary of State Powell boldly proposed an "upgraded version": If Japan wants to be a permanent member of the Security Council, the first thing to do is to abolish the Peace Charter.

In February this year, the U.S. government almost had made clear its attempt to re-arm Japan. U.S. Secretary of State Rice signed a new military security agreement with Japan in Washington D.C., which for the first time clearly picked Taiwan as the "common strategy target." It meant that Japan is ready to prepare for war—ending the pacifism policy that it has upheld for more than half a century.
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China Is Now Put in the Center of Surveillance Radar

It is to say that China, not Taiwan, is taken as the "common strategy target." During her visit to Tokyo in last March, Rice emphasized that the purpose of "allowing Japan to act" was to resist the rise of China and make Japan a protection umbrella for American policies in Asia. She said that both the United States and Japan "have already chosen the common values and positions," which is to "indicate, push and convince China." She even implied that the strategic confrontation between China and Japan was helpful to the world economic health. And during his trip to Europe, Bush put a lot of pressure on the European Union, leading to the European Union decision not to lift arms embargo against China.

Now the United States is even more anxious than Japan for Japan to "join the Security Council." America’s purpose is to let Japan indirectly, but not directly, abandon its Peace Charter. It would be similar to the situation in the Kosovo war, where Germany sent troops to combat in the war and, as a result, broke the ban that the German military would not leave its country.

Certainly, there must be visible explanations to the public why Japan is being re-armed. This is why the United States made the "North Korea nuclear threat" and the "China threat" hot issues. In February, the United States rejected North Korea’s request for a "no-hostility guarantee" for the nuclear talk. In March, the United States appointed Bolton, who was welcomed by Japan but disliked by North Korea, as U.N. Ambassador. The United States purposefully enraged North Korea and thus caused the six-party talk to end without any progress. This way, North Korea would then become a threat to Japan.

Another "threat" comes from China. The United States took China’s "Anti-Secession Law" as a signal that China will use armed forces against Taiwan and purposefully created tensions across the Taiwan Straits. During his visit to Singapore, Rumsfeld criticized that China’s military expenditure is the highest in Asia, which could be interpreted as Japan should have higher military expenditure.

http://news.xinhuanet.com/comments/2005-07/04/content_3171158.htm

[Editor’s note: The article below is translated from an article published on Xinhuanet.com, a website of the Chinese government official news agency, on May 15, 2005, reflecting how China looks at the attitude of Iran toward the United States.]
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Why Iran Is Not Afraid of the United States

According to news reports, Iran’s nuclear expert Nasseri, currently in Vienna, is going to hand in an official letter to International Atomic Energy Agency (IAEA), a written notice to officially announce that Iran is going to resume its uranium enrichment program. The action appears to show the total failure of the nuclear talk with Iran that was initiated by Germany, France, and Britain last October. No doubt this is bad news for the three powerful European countries, which have worried that Iran would make nuclear weapons with nuclear materials. It is more disturbing that the United States, the "international police," has warned Iran again and again that if its talk with the European Union fails, it might face "other actions." Therefore, the situation in the Middle East may further intensify.

Facing such pressure from the United States, Iran’s attitude is as strong as usual. Why is it so?

First, Iran has tangible military power and is not afraid of the United States. Since the first Gulf War, Iran has been developing its own military forces and has a most formidable missile storage and an armed force second to none in the Middle East. At present, it has a total of 518,000 soldiers, including 350,000 in the army. The army is highly equipped. Besides tanks, the Iranian army has nearly 100 armored reconnaissance vehicles, over 1,000 armed infantry vehicles and armored transport vehicles, and several thousand different artillery divisors. In addition, the Iranian air force has 30,000 soldiers, over 300 fighters including third-generation fighters such as the advanced F14 and MIG 29. Moreover, Iranians value martial power. Iran has large military reserves. The standing reserve has 350,000 people. It may reach one million during wartime.

More importantly, Iran definitely has the ability to counter-attack the United States. The Iranian missile "Meteor 3" can reach 1,300 kilometers in distance. If this missile is deployed in the western area of Iran, nearly the entire Middle East and Persian Gulf region is within its range. Moreover, the upgraded "Meteor 3" can reach 2,000 kilometers, and the Middle of Europe is within its reach. Although these missiles are unable to reach U.S. territory, they can attack U.S. military bases in the Persian Gulf region and Israel’s strategic targets. In addition, Iran has over 60 C-type Scuds with a range of 550 kilometers, which can attack U.S. military bases in the Afghan areas. Military commentators generally believe that, one should not compare Iranian military power with Iraq or Afghanistan.

In addition to its military power, which is stronger than Iraq’s, Iran also has been preparing for war for a long time. For example, its highest spiritual leader Khamenei repeatedly asks the armed forces to prepare to fight at any moment in order to actively strike back at any provocation by the enemy and to protect the country well. Khamenei even stressed he would put on military uniform, pick up weapons, and prepare to die in battle if the United States invades his country.
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The Iranian military has stated its strategy. If the United States attacks the Iranian nuclear facilities, Iran will launch missiles in counter-attack. If the United States implements the action of "beheaded " to Iran, Iran will take the tactic of luring the enemy deep into its territory and taking advantage of the vast and complicated Iranian territory to attack the invaders. At the same time, Iran will block the Hormuz Channel with munitions and shut down the supply of petroleum overseas, which will spread war flames to the entire region and put the United States in a defensive position both militarily and diplomatically.

Next, besides the "hard work" of preparing resistance in case of a U.S. invasion, Iran has not neglected its "soft work"—conducting positive propaganda through its nuclear facilities. For instance, in March of this year, Iranian President Khatami once accompanied several dozen news reporters from different countries to visit two facilities deemed "the secret facility" by the western world, the Natanz uranium enrichment plant located 250 kilometers away from the Iranian capital of Tehran and a uranium conversion plant near Isfahan. The purpose was to clear the rumor that the Natanz nuclear facility has been secretly in production and to win sympathy of the international communities.

In addition to the above "soft" and "hard" tactics, Iran takes opportunity of the rising international energy price and plays the "petroleum card," seeking help from other countries against the U.S. and Europe. Earlier, the Iranian government indicated that it would provide a natural gas supply to India for the next 25 years, totaling about US$40 billion; at the same time, India was allowed to carry on petroleum exploration inside Iran. As the biggest petroleum customer in Asia, last year, Japan was allowed to increase its import of petroleum from Iran. It has been verified that the proven petroleum reserve in Iran is about 10 percent of the world reserve and the proven gas reserve is the second in the world. The rich petroleum and gas reserve complicates any attempts of the Bush Administration to isolate Iran. Analysts believe that Iran has constructed a protection wall for itself using petroleum contracts, and that the "petroleum weapon" has touched the weak point of Europe and the U.S.
In fact, the above Iranian strategies are indeed effective. CNN and the world’s leading market information company TNS published a survey on the "Iranian nuclear issue" in April. Sixty percent of participants in Britain, France, and Germany did not believe that Iran posed a nuclear threat to Europe. Among those who believed Iran was a threat, 59 percent insisted that the best way to solve the problem was through diplomacy. Only three percent advocated the use of military force. Analysts believe the survey result has clearly shown that the majority of Europeans does not agree with the American view that Iran is a threat to global security. It indicates Europe would deal with "Iranian nuclear issue" in a totally different way from that of the U.S., and that it would be hard to keep Europe synchronized with the United States. All these will make it difficult for the U.S. to take any military actions against Iran.

http://news.xinhuanet.com/comments/2005-05/15/content_2959709.htm

Over the last two decades, China’s social structure has undergone significant changes. While still largely an agricultural country with more than 70 percent of the population being farmers, China has evolved into a mixture of a quasi-capitalist economy combined with an autocratic communist government. Such development has brought about the reshuffling of the old structure and, at the same time, created new social classes.

At the forum of “Harmonious Society” held in Chengdu, Sichuan Province, from July 10 to July 11, 2005, some experts pointed out that the current social structure in China can be categorized into ten groups based on people’s occupations. The report was published by the mainstream media and widely referenced in other Chinese media as well.

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On July 7, 2005, London was targeted by two series of terrorist bombings that killed 56 people and injured many more. While most people from all corners of the world condemned the attacks and expressed their sympathy for the victims, the majority of contributors to a Chinese Web forum openly applauded the tragedy.

On Sina and Sohu, two of the biggest Chinese news websites, comments with extreme nationalist views overwhelmed the forum chat boards during the days following the attacks. If the messages had not been in Chinese, the website might have been mistaken for the official Al-Qaeda website.

The following are typical:

1.Great bombing!!!!!!!!!!!!!!!! Repay blood debts with blood!!! That’s right!

2. The death toll is too small!

3. Bin Laden, you are truly good!! We are so proud of you! Keep going! We support you! Bomb the White House and kill Bush!

4. Bush and Blair are the No.1 terrorists in the world!

5. I don’t sympathize with the British. Invaders are not worthy of sympathy.

6. Support Iraq, support Afghanistan; support all people living under oppression!!!! Would there be such bombings if the U.S. and British governments hadn’t openly invaded other countries?????? It’s justified!

7. Why didn’t they bomb Japan?!!! I hope to see a Chinese branch of Al Qaeda deliver a masterpiece in Japan….

8. The aggressive U.S. and British people selected aggressive presidents! Those two often act in collusion to pick on the weak. This should be avenged! The United States and England are the real Axis of Evil! If it weren’t for their invasions, no innocent civilians would have died in Afghanistan or Iraq or even the Balkans! So the United States and Britain should reflect on this!

9. Terrorism is the only way for the weak to fight back against the strong. No matter what reasons they may have, the U.S.-British attack on the people of Iraq was wrong and constitutes blatant terrorism. All the weak can do in response is to bring you down with them.
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10. I hope another 9.11 occurs in the United States. The United States should be the most condemned in the world. It is the center of the "evil axis" and should be dealt with violently.

11. In the Western world, the people choose the government. Naturally, if the government does something wrong and angers someone else, the people will have to accept the outcome of its government’s behavior. I have no sympathy for the English voters who died, only for those who didn’t vote!

Among about 300 entries on the Sina Net Forum, about 70 percent of the comments expressed similar hate-filled views toward the United States and Great Britain.

This is not the first time that Chinese have expressed such extreme views. When 9-11 occurred, many young Chinese celebrated the carnage. An article carried in the International Herald Tribune reported, "’It was night. Most people were going to sleep—but as the news spread, people came out to dance and cheer,’ says Janice Wu, 28, a hotel manager. ‘They were screaming and lighting firecrackers—it was like a big party.’"

The Internet forums turned into a place for the Fen-Qing (angry youths) to vent their hatred. The majority of the messages carried extremely nationalistic sentiments. If the views expressed online are any indication, then large numbers of Chinese are hostile toward the United States and Britain.

What is the explanation for such callousness among these young Chinese? Jiao Giobiao, a professor of journalism from Beijing University, commented, "The Chinese people no longer have any humanitarian values… (For) most people in China—or at least in the eyes of a large number of people—people don’t count for much. It has been a long time that people don’t treat each other as humans. What’s the big deal about people dying?… If Chinese people die, it is no big deal. If Americans die, it means even less."

According to Professor Jiao, "In China, humanistic values and humanitarianism have declined for too long. Why was there such an explosion of feelings with the incident in America? For too long, the media demonized America. … because America is the most democratic of all countries and it will combat dictators everywhere. All the totalitarian governments of the world control their media and they are hostile toward America because it is their biggest enemy."

Cong Rong, a columnist for Chinese publications, said, "While the Chinese people are not inherently hateful, 50 years of brainwashing with hate-filled communist propaganda and the absence of uncensored news has totally distorted both the minds of the Chinese people and their picture of the outside world."

Hongyi Pan is a freelance writer based in Houston.

The withdrawal of the China National Offshore Oil Corporation (CNOOC) from the bidding war for Unocal made the curtain drop on a mesmerizing drama that has served as an educational lesson for the American public on the complexity of Sino-U.S. relations, but it will surely trigger a new round of discussions and debates.

For people confused about the vaguely worded "political obstacles" cited in the CNOOC’s official announcement as the reason for withdrawal, they need to look no further than a fiery remark by a Chinese general, Zhu Jinwu, which followed on the heels of the CNOOC’s bid, to understand what those obstacles entailed. At a news conference in Hong Kong that saw a gathering of almost all the prominent reporters that an enclave can summon, General Zhu made everyone’s jaws drop by sharing with them an option, or, so to speak, the "ultimate solution," in China’s dealings with the United States—using nuclear weapons to "clean up" Uncle Sam at the expense of its own territory east of Xi’an, a city in the northwest. As a Xi’an native, I thank General Zhu for sparing my hometown, but meanwhile I can’t help but wonder about the feelings of other Chinese, about three quarters of its population, who call the other side of Xi’an, a vast, most prosperous land, their home.

True, General Zhu’s remarks were, in his own words, only his "personal opinions." And some pundits have shrugged them off as just another attempt deliberately engineered by the Chinese leadership to benefit from the confusion that would ensue. The words, however, were by no means inconsequential: The courtship of Unocal by the CNOOC was doomed from that point onward, as General Zhu’s words provided doubtless the most powerful, immediate substantiating evidence to anyone opposing the deal on political grounds.

Indeed, if the number one issue facing corporate America is its governance, stemming from the separation of ownership and control that affords its corporate chieftains the opportunity to benefit themselves at the expense of shareholders, then the number one challenge confronting anyone aspiring to advance Sino-U.S. economic ties is China’s inability to separate its economic interests from political ones. Ostensibly, the CNOOC-Unocal deal was blessed with all the support it could ask for—from the business community as evidenced by editorials in the Wall Street Journal and such illustrious advisors as Goldman Sachs and JP Morgan, to some powerful brokers within the Bush Administration, and even to a few Nobel Prize economists. All this, unfortunately, proved too flimsy to convince, amidst the general obsession with the fallout of General Zhu’s remark.
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If anything can be learned from the ill-fated CNOOC-Unocal deal, it is the seemingly well-known fact that before China solves its version of the "separation" problem, any Sino-U.S. deal, however much economic sense it may make, will be tainted with skepticism from the West. The CNOOC-Unocal saga only proves this rule continues to be true, despite the strenuous efforts of the CNOOC management and its eminent U.S. consultants to preempt it. A careful reading of a short article penned by CNOOC’s Chairman and CEO in the Wall Street Journal, poignantly titled "Why Is America Worried?" reveals nine mentions of "shareholder" or "shareholders" but zero mention of "Chinese government," its biggest shareholder, owning more than 70 percent of its stake. Also troubling is what has been conveniently concealed from the public, the other identity of the article’s author himself: Not only is he the top executive of the company and watchdog of its investor’s interest, he is also the Party secretary of the parent company under full control of the Chinese government.

The investors in Unocal may lament over the lost premiums they could have pocketed as windfall if the deal had gone through. Nevertheless, if they really want to blame somebody, they should point to General Zhu, who, out of his allegiance to the Chinese government, should better time his inflammatory remarks, and to CNOOC itself, whose pressure on Unocal to lobby Congress reportedly only heightened the scrutiny of lawmakers and derailed the deal.

To CNOOC and other Chinese companies planning on similar moves, not only do they have to be more careful about their public relations work, they may have to be more transparent in public disclosures about their motives. While it is widely recognized that China’s thirst for oil necessitates deals like the one between the CNOOC and Unocal, it would have been very helpful if the CNOOC—owned by a government sitting on more than US$700 billion in reserves, second in the world in terms of its size—could have made an economic case for the merger, given Japan’s experience that purchasing oil on the open markets is much cheaper than developing oilfields overseas. On this score, China should find the U.S. stance consistent, as the U.S. also has a problem with the purported goal of Iran’s expensive nuclear program, which is to generate electricity to meet urgent civilian needs even though Iran comfortably sits on one of the world’s largest oil reserves.

The failure of the CNOOC to purchase Unocal, at a price higher than the other bidder, is instructive. While its economic cost is obvious, the source of the loss may not be so apparent. At the very least, however, it puts Sino-U.S. economics into the big picture of Sino-U.S. relations, or reality. Furthermore, it shows that any self-denial in the face of this reality is of little use. On the contrary, we may only expect it to persist before the day arrives when business is only and truly business between the two countries.

Not a day goes by without a glittering news report about China’s attractiveness to foreign investment. China is always eager to harp on its favorable investment climate, and many foreign investors are reinforcing this idea. However, whether foreign investors can truly profit in China remains a big question mark.

At the Fortune Global Forum held in Beijing on May 18, China’s Minister of Commerce Bo Xilai enumerated the achievements of profitability by foreign investors in China, and claimed that out of the 280,000 enterprises with foreign investment, two-thirds of them are profitable. Bo cited a 2004 survey by the American Chamber of Commerce in China: three-quarters of the American firms in China surveyed are profitable, with 42 percent reporting higher profit margins in China compared with the rest of the world. In particular, Bo indicated that the profits of Germany’s Volkswagen joint venture in China accounted for one quarter of Volkswagen’s total profits.

Recently the Chinese version of Fortune magazine published the "2005 Survey of Foreign Investments in China." Once again, it stressed, "Doing business in China is not as unprofitable as rumors may indicate. Another result of our survey indicates that by expanding their existing businesses or establishing their new businesses in China, 56 percent of foreign businessmen believe that they can be profitable within three years, and 90 percent think it is achievable within five years."

However, is the picture so rosy? As a matter of fact, foreign capital flowing into China is near the turning point of a declining curve.

Half of the Foreign Investments Have Been Withdrawn, with Barely More than Half of the Remaining Firms Profitable

The fervent official portrayal of high profitability of foreign investments in China is a warning sign in and of itself. In his report, Mr. Bo omitted two important facts: 1. The retreat of foreign capital in China as a result of investment losses accounts for half of the total foreign investments in China; 2. Out of the remaining half million firms in China with foreign investments, about 220,000 are currently not operational.

These are considered "state secrets" by China, so how did they get leaked? It turns out to be a coincidence. Last year, a fight among high-level officials took place with regard to merging the tax codes of Chinese and foreign enterprises. The State Development and Reform Committee indicated in a report that there is currently so much foreign investment in China that it is threatening the domestic economy. As a result, they proposed to eliminate tax benefits for foreign investors. To counter that, the officials of the Ministry of Commerce in charge of foreign investments disclosed the following data in December of 2004: The foreign investments in China that had been actually used, totaled US$559.023 billion, with nearly half of those funds already withdrawn from China; and 504,568 foreign companies have registered in China, though less than two-thirds of them were actually operational.
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Huang Hai, the Assistant to the Minister of Commerce who disclosed the data, said publicly that because of the lack of statistical data in China for direct foreign investments, the widely used metric of "cumulative actual usage of foreign investments" does not reflect the termination of the operations of foreign enterprises or the retreat of foreign capital. So, as of the end of 2004, the net usage of foreign investments was approximately US$250 billion, which was only about half of the US$501.4 billion—the cumulative usage of foreign investments. [1]

So how is the profitability of these foreign enterprises? The data tells the story.

In July of 2004, Su Xiaolu, an anti-tax-evasion official at the State Bureau General of Taxation of China, publicly disclosed that 55 percent of the foreign enterprises reported losses, although he believed that many of them tried to avoid taxes by doing so. [2]

The local statistics also demonstrate that the profitability of foreign investments in China is not that good either. According to a survey of 696 major foreign enterprises in Guangdong Province, by the provincial Bureau of Statistics, over half of the enterprises on the east and west side of Guangdong and in the northern mountain area had suffered losses. [3]

For the sake of convenience, let me summarize the above statistics:

• As of the end of 2004, US$501.4 billion of foreign investment had flowed into China, with half of it already retreated. The net investment is actually US$250 billion.

• Currently there are 504,500 foreign enterprises registered in China, with approximately 280,000 being actually operational. In addition, only two-thirds of the operational foreign firms are profitable.

So can China still be called the "Land of Fortune" for foreign investments?

It is not exactly true that foreign investors are unaware of the truth. In a February 17, 2005, article published in the Financial Times, entitled "China: the Land of Fortune or Tomb for Foreign Investors?" Geoff Dyer enumerated the data that contradicted Mr. Bo’s conclusion: In 2003, the 1.3 billion people of China provided US$4.4 billion in profit for American firms in China, while the 19 million people in Australia helped American firms to pocket US$4.9 billion, and the 95 million people of Mexico provided US$5.75 billion to American firms.
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China Is Facing the Second Wave of Foreign Investment Retreat

Currently there are flows of foreign investments both into and out of China. In April of 2005, a number of international giants such as General Electric, Alstom, and Siemens retreated from the Chinese market. If the wave of retreat of foreign investment in China’s power industry between 2000 and 2001 is called the first wave, the current one can be named the "second wave of retreat." [4]

Peak Pacific (China) Investment Ltd., a foreign enterprise in China, is ranked No.5 in China’s power industry. It is mostly owned by U.S. company Alliant Energy Corporation. As of the end of 2004, this company has invested US$247.28 million in the seven thermo-electric power plants that have a capacity of 400,000 kilowatts. In 2004, four out of the seven power plants of Peak Pacific in China suffered a loss, while the remaining three plants had meager profits. Overall, the company will report a loss.

Siemens also acknowledged at the end of 2004 that together with a German company called HAW—a subsidiary of Sweden’s Vattenfall, it had sold 40 percent of the stock ownership of the Hanfeng Power Plant of Hebei Province.

For the power plants in China that received foreign investment, 2004 was a year of loss, or a barely profitable year. Currently the remaining foreign investment in China’s power industry totals US$14.86 billion. It is questionable if they can still survive in China. The retreat of many of the investments in China is the result of foreign companies wishing to cut their losses.

The automobile industry is another area that foreign investors have had a hard time with in the Chinese market. As Goldman Sachs predicts, the future of Volkswagen in China is not pretty, with a possible loss of 400 million Euros—the biggest loss in the company’s history. While the performance of Volkswagen in the U.S. and European markets is depressed, the company has been on the declining trend in China, an important strategic overseas market for Volkswagen, as a result of its strategic missteps in its products. Since Volkswagen’s auto sales in China peaked at 690,000 in 2003, this number slipped to 640,000. More importantly, Volkswagen’s profits in China have been declining rapidly. According to the Financial Times, in the first quarter of 2005, Volkswagen’s businesses in China were stuck in operational loss. The company is currently striving to keep themselves from a loss on a yearly basis. As Volkswagen’s CFO pointed out, in the very competitive Chinese market, there are still risks in inventory and pricing. The profitability of Volkswagen’s two joint ventures in China has rapidly changed from the 106 million Euros of profit a year earlier to the 17 million Euros of loss in the first quarter of 2005. In response to such rapid deterioration, Volkswagen is being forced to shuffle their top management in China. [5] It appears that the Chinese Minister of Commerce’s report at the Fortune Global Forum in May was either highly inflated or had grafted Volkswagen’s 2003 profit number to the current one.
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How Much "Cost Advantage" Does China Still Have?

The major reason for China’s attractiveness to foreign investments is its cheap labor and low cost of land and rental properties. In addition, the yuan, the undervalued Chinese currency, also makes it possible for cheap Chinese products to compete in the world market.

Since last year, however, China’s advantages have been challenged. Some foreign businessmen complained that in the past ten years, the three categories of costs including operational, management, and external costs have been too high. This has depressed their business development in China, and negatively affected even the foreign businesses in the special economic zones, where foreign businesses enjoy various tax breaks.

The operational costs certainly rise along with the rise of the cost of energy and raw materials. While the import expenses of these two key manufacturing elements are far higher than the cost of land or labor, China’s reliance on the import of energy and raw materials continues to accelerate. As the cost rises, the over-capacity, the lowering of the barrier for imports, and the official stance of high tolerance for widespread low-return investments in China continue to squeeze the profit margin. As many foreign manufacturers estimated, the domestic manufacturers in China spend a lot more on energy and raw materials than their counterparts in other countries, because they have to bear the shipping costs, the import tariffs, and the 17 percent value-added tax.

The most painful problem facing foreign investors in China comes from the overly high management costs as a result of government behavior. Because of the uncertainty of government policies in the eyes of businessmen, many foreign companies are forced to spend a lot of money to lobby the Chinese government. In addition, taxation and other miscellaneous fees by the government are never transparent, which makes it harder for foreign businesses to adapt or predict. In terms of "external costs," protecting intellectual property is one good example. In the past few years, the United States has had more complaints over the breaching of intellectual property than any other and has been forced to spend the most energy and capital. In spite of tremendous efforts, they have still not solved the problem of intellectual property violations by Chinese companies.

These various problems have made the competitive advantage in investing in China a mirage. While China proudly enumerates the annual foreign investments, they are actually in decline.
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Foreign Investors Begin to Wait and See

On June 13, the Ministry of Commerce of China disclosed that both the number of foreign invested enterprises and the actual dollar amount of foreign investments declined. Between January and May, 16,437 new foreign companies were approved, a 4.75 percent drop from the same period last year; contractual foreign investments totaled US$64.971 billion, a 14.88 percent increase from the same period last year; the actual usage of foreign capital, however, was US$22.366 billion, a 0.79 percent drop from last year. [6]

The trend is also reflected in another major example. At the beginning of this year, Jiangsu Province, the Chinese province with the highest level of foreign investment, saw a slight decline in this area as compared to the year before.

From January to November of 2004, there were US$34.591 billion of foreign investments contractually registered in Jiangsu Province, an increase of 31.17 percent from that of 2003. However, only US$10.172 billion actually registered, reflecting a 1.65 percent increase from the same period in 2003.

Despite the No.1 position that it still maintains in attracting foreign investments, Jiangsu Province witnessed a dramatic decline in the growth of foreign capital inflow. What worries the government of Jiangsu the most is: while the actual utilization of foreign investments totaled US$15.8 billion in 2003, that number dropped to US$10.172 billion during the first eleven months of 2004. In order to keep up with the 2003 number on an annual basis, it needs US$5.6 billion more of tangible foreign investments in the last month of 2004. This is almost impossible. To put it another way, the absolute value of foreign investments that arrived in 2004 actually declined tremendously. No matter how the government of Jiangsu explained the gap, the drop in the inflow of foreign capital is an undisputable fact. [7]

Out of the foreign investment in China, a high proportion is speculative investment. Three agreements have been signed recently between the Chinese and U.S. governments, which will have a profound impact on the flow of speculative investments into China.

The two official documents on the Chinese side include:

1. The No. 11 Document, or "Notices regarding perfecting the administration of foreign investors purchasing foreign currencies," published on January 24, 2005, by the Bureau of Foreign Currency Administration. The main purpose of the document lies in preventing capital from leaving China.
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2. The No. 29 document, titled "Notices on registration of overseas investments by Chinese residents and of foreign investors purchasing foreign currencies in China," was issued on April 8 by the central government because the No. 11 document was not detailed enough and too hard to enforce. In the eyes of international venture capital investors, this document signals a trend of policies to tighten the capital markets.

The two official documents have the same goal, namely, to make it harder for speculative investments to exit.

The "Homeland Investment Act" initiated by the U.S. government back in October of 2003 became effective on May 1, 2004. This act dramatically lowered the income tax of overseas profit by American firms from 35 percent to 5.25 percent within a one-year period, provided that the overseas income is re-invested back to the U.S. According to Morgan Stanley, this will bring over US$400 billion back into the U.S.

It is said that after being broadly impacted by the No. 11 and No. 29 documents, speculative investments are currently stalled. According to people familiar with the industry, the ultimate goal of the speculative investments is to profit from the potential initial public offering (IPO) or the Merger and Acquisition (M&A) of the invested companies in the international markets. Such investments rely on a mechanism of utilizing foreign capital and safely exiting in the overseas markets.

The operational model of speculative investments is described as follows: First invest in a domestic company in China; register an offshore holding company at British Virgin Islands (BVI) in the name of a subsidiary; then let the holding company purchase the operating company in China, and finally push it to the IPO market by the well-financed holding company. For such investments to succeed, the exit channel is critical. Without the exit channel such as IPO or M&A, speculative capital will not flow in at nearly the same rate.

As indicated in the "2004 Investigation and Analysis of the Speculative Capital Industry in China," out of 123 venture capital investments that exited in 2004, 40 percent or 49 investments exited in the form of purchasing domestic firms, while only 3 percent, or four projects, exited in the form of IPO. In 2004, speculative capital in China totaled US$43.9 billion, an increase of 34.93 percent over those of 2003. 8

With both exit routes blocked, the venture capital investments are stalled. This is certainly not the original intent of the two official documents, but they have indeed negatively affected how Chinese firms can be capitalized in the overseas markets.
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Based on the above analysis, the trend is clear: The frenzy in China is fading. Many managers in the investment banking industry admit that the global interest in the IPOs of Chinese companies is declining, and the investment funds are shifting to other markets. The decline of the direct foreign investments in Jiangsu Province and the retreat of foreign investments in the manufacturing sectors are only the beginning of this wave of retreat.

Footnotes:
[1] "Local governments need foreign investment, suspension of the merger of two taxation system," http://finance.sina.com.cn, December 18, 2004
[2] "Foreign companies evade taxes of 30 billion Yuan every year," Global Times, July 7, 2004
[3] "Half of foreign companies in the east and west side of Guangdong and its northern mountain area have losses," Private Economy, May 25, 2005
[4] "Hundreds of billions Yuan of foreign capital retreats, the cause of second wave of retreat," http://finance.sina.com.cn, May 13, 2005
[5] http://www.ouline.com/business/story.php4?story_id=6968
[6] Ke Zhixiong, "Dramatic drop of foreign investment, understand the reasons behind the retreat of foreign investment," 21 Century Economic Report, June 15, 2005
[7] "Will Latin America phenomena appear in South Jiangsu and Guangdong," http://www.sina.com.cn January 12, 2005
[8] "International speculative capital starts to wait and see", http://www.eobserver.com.cn/

Mrs. He Qinglian is a prominent economist and journalist from China.

[Editor’s note: Chinese General Zhu Chenghu’s statement that China would launch a nuclear war against the United States on conflict over Taiwan on July 15, 2005, sent a shockwave to the whole world. Although Zhu’s claim is the first of its kind in public, he is not alone in voicing such a threat. Two transcripts of a top Chinese military official’s speeches published on Chinese websites prior to Zhu’s public statement echoed the same view. The two related speeches, “The War Is Approaching Us” and “The War Is Not Far from Us and Is the Midwife of the Chinese Century,” were believed to be given by Chi Haotian, former Vice Chairman of China’s Central Military Committee and Defense Minister. The speeches argued for the necessity of a biological and nuclear war to destroy Japan and cripple the United States and prepare it for a future massive Chinese colonization.

Independently verifying the authorship of the speech is not possible. However, it is worth reading because it indeed represents the general mentality of the military officials in the hawkish camp in China and is believed to set out the CCP’s strategy for the development of China.

“The War Is Approaching Us” was first posted in January 2003 on websites such as www.mwjx.com and then on www.chinaren.com on October 11. It was most recently published on April 23, 2005, on www.boxun.com. “The War Is Not Far from Us and Is the Midwife of the Chinese Century” was published on February 15, 2005, on www.peacehall.com. Below are the transcripts of the two speeches by Chi Haotian.]

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