At the Shanghai airport on August 8, 2006, Yuan Sheng, the co-captain of flight MU583/586, was about to take off for Los Angeles. What he did not know was that his life would change in the next 24 hours and that he might never see his wife and daughter again.

Yuang Sheng, 39, had been a pilot with the Shanghai-based China Eastern Airlines for 18 years. He had an impressive record of 12,400 hours of safe flying. Since 1995, he regularly flew the Shanghai-Los Angeles route. This time he was the co-captain responsible for the return flight.

The 300-plus passengers began boarding at around 2 p.m. As the return route co-captain, Yuan did not have much to do. He saw a young man in charge of ground safety and noticed he had the accent of someone from his hometown—Shandong Province—so he began chatting with him. He talked to him about the book the Nine Commentaries on the Communist Party, the withdrawals of the Chinese people from the Chinese Communist Party (CCP), and the persecution of Falun Gong in China. Yuan also suggested to him that he quit the CCP. They chatted for over half an hour before the young man left.

A moment later, the young man returned with four uniformed airport policemen. They then called two more local policemen to the site. First, they confiscated Yuan’s work ID and told him loudly, "You definitely can’t leave today! This issue concerns state security. It’s very serious!" They asked the crew to close the airplane door and leave without Yuan.

The passengers had already boarded and the airplane was ready to take off. The crew argued with the police and explained that it was too late to find someone to replace their co-captain.

The local police called in their supervisor, who took Yuan’s information and then said, "You will have to tell us all the details of this matter when you return from the United States." He returned the ID to Yuan and allowed him to board his airplane, as keeping an international flight from taking off was no small responsibility.

On the flight to Los Angeles, Yuan Sheng felt upset and dazed. Based on his knowledge of the CCP, he knew that real trouble awaited him when he returned to Shanghai. He thought a lot about what was happening in China.

He remembered how, at the end of 1997, he started practicing Falun Gong after a friend told him about the practice. He found his health improved, and he had more confidence. He remembered how, after the persecution started on July 20, 1999, when he flew back to Shanghai from the United States, Eastern Airlines made him go through forced brainwashing sessions because he practiced Falun Gong. His supervisors demanded that he write a guarantee letter to give up Falun Gong. If he refused, they would not have allowed him to continue being a pilot. He wrote the letter in order to keep his job, but he cried afterward. It was the only time in his adult life that he ever cried.{mospagebreak}

He remembered hearing of many cases of persecution of Falun Gong practitioners right in his own neighborhood. At the time of the Asia Pacific Economic Conference (APEC), the police secretly arrested many practitioners, including several living on Wuzhong Street near his home.

He also remembered how, in the building next to the Airline Office Building, the police arrested a Falun Dafa practitioner after a housekeeper found a copy of the Nine Commentaries on the Communist Party in an office. They didn’t have a warrant or follow any due process of law.

He knew from these experiences that the police took any incident related to the Nine Commentaries very seriously. The spread of the book and the withdrawals from the Communist Party scared Party leaders. He knew of people who had been sentenced to four-year prison terms just for possessing one copy of the Nine Commentaries.

After landing in Los Angeles, Yuan Sheng called his home. His 12-year-old daughter sounded happy on the phone. Yuan figured that the police had not yet gone there. They would wait for him at the Shanghai airport and arrest him once he passed through customs. Only then would they ransack his home. He was sure that he would not see his family again, even if he flew back to Shanghai.

He spoke to his wife, told her what happened, and explained to her why he could not come back. He asked her opinion. She said to him, crying, "Don’t speak any more! It’s not safe to talk on the phone; please make your own decision."

Flight MU586 was scheduled to arrive in Shanghai at around 6:30 p.m. on August 11, 2006, but its co-captain, Yuan Sheng, was not on board—he decided to apply for political asylum in the United States.

The defection of a Chinese airline captain has drawn attention to the Chinese people’s withdrawals from the CCP and the Chinese regime’s heavy-handed suppression, but not in China. For more than 20 months after the publication of the Nine Commentaries and the subsequent mass renunciations of the CCP, the Chinese regime has kept the facts hidden from the public. On August 11, a reporter from The Epoch Times called the Department of Propaganda and the Department of Security of China Eastern Airlines in Pudong to inquire about the incident. All responded, "We don’t know [anything about the situation]."

As The Epoch Times Commentator Zhang Tianliang points out, the Nine Commentaries has never been openly banned in China, but the Chinese police consider possessing or talking about this book to be an "issue concerning state security. It’s very serious!" After Yuan Sheng’s defection, China Eastern Airlines made a statement that carefully avoided any mention of the Nine Commentaries or the withdrawals from the CCP.

In the safety of the United States, however, Yuan Sheng is now free to talk openly and without fear about the Nine Commentaries and about the persecution. This couldn’t happen in China.

New Tang Dynasty, a Chinese-language TV station based in New York, recently hosted a one-hour live call-in program. Callers from both inside and outside of mainland China congratulated Mr. Yuan Sheng, a flight captain of China Eastern Airlines based in Shanghai, on his successful defection on August 9, 2006. Mr. Yuan is now applying for asylum in the United States.

Mr. Yuan’s story, appearing in this issue’s "In the News" section on page 6, is a modern version of escaping from one’s homeland to avoid religious persecution. Mr. Yuan is no criminal. The only offense he committed was that, while chatting casually with somebody who spoke his hometown dialect before the flight took off, he recommended a book called Nine Commentaries on the Communist Party, and advised that person to quit the Chinese Communist Party (CCP). The conversation also exposed Mr. Yuan’s identity as a member of Falun Gong, a spiritual practice that embodies traditional Buddhist and Daoist principles but has been banned by the CCP since July 1999. Unfortunately, that person reported Mr. Yuan to the police and turned his world upside down.

In China, the CCP regards Falun Gong as a most fearful enemy after its seven-year, ongoing persecution has failed to put the Falun Gong issue to rest. The CCP is even more nervous about the ongoing campaign of quitting the CCP. Those who get caught promoting the book and related information are given harsh sentences. One internal document revealed that simply owning a copy of the Nine Commentaries can spell a four-year jail term for a Falun Gong adherent. Fortunately, the airline and passengers raised an uproar and refused to let the police detain Mr. Yuan at the last minute on the basis of a conversation. The police let him get on the flight, but told him ominously, "We will handle you when you come back."

For Mr. Yuan, the callers’ congratulations could offer him scant comfort. In a matter of hours, he was cut off indefinitely from his job, home, wife, and daughter. Of course, the callers pointed out that if he were in China right now, he would still have none of those things and face jail and likely torture, to boot.

In the United States, Mr. Yuan can now say and practice whatever he believes—privately or in public. For millions of his fellow citizens, however, such freedom is still a pipe dream. Opportunities to escape China are few and far in between. For now, Mr. Yuan has a sense of purpose: take advantage of his newfound freedom to urge others to quit the CCP and call on all democratic governments to take action. To Mr. Yuan, that’s the only way he can help his fellow Chinese and have any chance of reuniting with his family one day.

In March and April this year, I wrote three essays for Taiwan’s New News Weekly at its invitation. When I was visiting Taiwan in July, a journalist friend from the Central News Agency told me that, because of my essays, the mainland’s Taiwan Affairs Office, a department under the State Council (of communist China), had harshly criticized the New News Weekly.

"Why do you handpick Jiao Guobiao when there are so many other writers in the mainland?" the Office demanded.

After I returned to Beijing, I asked the friend working for New News Weekly what had happened. He confirmed that what I had heard in Taiwan was true. "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," he said.

I used to have a good impression of the Taiwan Affairs Office, partially because a good friend of mine got a job at the Office after he received his Ph.D. degree. In my impression, it was an elite organization with no interest in mundane matters. I was surprised at how vulgar it had become. A simple matter as trivial as who wrote what article in a Taiwan magazine caused a stir.

The Degeneration of Taiwan’s Media

I still cannot figure out why the Taiwan Affairs Office dislikes me so much. I’m simply making a living writing these days. It looks as if the Central Propaganda Department has assumed the authority to disallow anyone in China from publishing anything I write, and the Taiwan Affairs Office has assumed the mission of preventing anyone from inviting me to write for any Taiwanese media. Under this bilateral attack across the Taiwan Strait, I could be starved to death.

This is hard to comprehend. Even if I die, the Taiwan Affairs Office would not make it to the list of beneficiaries, let alone inherit any penny from me. So why are they so anxious to see me bite the dust? Furthermore, I don’t have any enmity against the Taiwan Affairs Office.

Can it be that any given communist organization, wherever it is, no matter who’s running it, regards freedom of speech as its enemy?

During my visit in Taiwan, I attended a seminar titled "Why Taiwan’s Media Have Become so Degenerate," conducted by some Taiwanese journalism scholars. I had known little about Taiwan’s media, but I learned from the seminar that the degeneration has manifested in two aspects—smearing Taiwan’s democracy and embellishing the mainland’s autocracy.{mospagebreak}

One speaker pointed out that, according to Taiwan intelligence, at least 17 media have secretively received ill-gotten money from the Chinese authorities, who regard democracy and freedom as enemies.

Bowing to the Chinese Authorities

On the day I visited Mr. Wu Zhaoxie, key member of the Mainland Affairs Council (of Taiwan) and, in front of many Taiwanese media, I accused the Taiwanese journalists stationed in Beijing of being indifferent to the lives of the ordinary Chinese people as well as to democracy, freedom, and basic human rights there.

Since I denounced China’s Central Propaganda Department in 2004, journalists stationed in Beijing from the European nations, the United States, Australia, Japan, South Korea, and other democratic countries have all interviewed me to show their interest in and concerns about freedom of the press in China. However, I have yet to be interviewed by any journalists from Taiwan.

Later my friend in Taiwan told me that the real situation of Taiwan’s media is far more complicated. For example, China Times and United Daily News, two major newspapers in Taiwan, are both obedient and submissive to mainland China, although they do not necessarily agree with the mainland’s suppression of its press. The journalists at these two media have protested many times but ended up in trouble every time.

The Taiwan Affairs Office plays hardball with Taiwanese media. Unlike Western media, which are backed by their embassies in Beijing, Taiwanese media have to behave carefully. Otherwise their journalists could face deportation, and their stations could be forced to close.

Taiwan journalists are orphans in Beijing. They have no one to rely on but plenty to make them suffer.

I told my friend, "If they want to close my station and deport me, so be it. Take Apple Daily (of Hong Kong) for instance. Although they are still not allowed to set up a journalists’ station in Beijing, it does not prevent them from being in high demand. As long as you are determined, you can do well, sometime even better, in reporting mainland news without being stationed there."

My friend could only shake his head in helplessness.{mospagebreak}

Forsaking Work Ethics

During my 10 days’ visit in Taiwan, I sensed deeply that many people resent most of the media’s mainland news reporting. In order to establish journalists’ stations in Beijing, they have forsaken the ethics of journalism. The manipulator behind the scene is the Taiwan Affairs Office, whose initial responsibility was reunification across the Taiwan Strait.

In my opinion, the Taiwan Affairs Office should be held accountable for the current bilateral status because day in and day out, they’ve been doing nothing but driving friends over to the enemy’s side. They have polluted the entire media industry in Taiwan and disgusted 20 million people in Taiwan.

Jiao Guobiao was an associate professor of journalism at Beijing University. His article "Declaration of the Campaign against the Propaganda Department of Central Committee of the Communist Party" criticizes that the Propaganda Department is the largest and most powerful protective umbrella for corruptions in China. The article was popular among Chinese people but angered the authorities. He was later dismissed from his post by the university.

Translated by CHINASCOPE from Apply Daily

The issue of reforming the health care system has always been a sensitive topic in China. On September 16, 2006, the Second Summit Forum for China’s Health Care Industry was held in China Europe International Business School (CEIBS) in Shanghai. The government officials who spoke at the forum remained cautious when dealing with the media.

They repeatedly stressed that reporters must not disclose their names or identities. As one of the officials explained, “I’m concerned about the possible problems it may cause.” Of even more interest, a few officials requested that their host delete their speeches from the forum’s stenographic records.

Contrary to his peers, Yin Dakui was the only speaker who dared to make his name public. The former deputy minister of the Ministry of Health is now the president of the Chinese Medical Association. His speech was titled” Develop a Fair and Highly Efficient Health and Medical Services System.”

Continue reading →

While Common People magazine has long won the hearts of countless citizens in mainland China for its bold stand against social injustice and the Chinese communist government’s persecution of its own people, this same daring publication has offended the authorities. Not long after the November 2006 edition of Common People was published, the Chinese Internet police once again blocked its website.

One reporter from Common People revealed that this is the fourth time the website has been blocked. Speaking of the magazine and its chief editor, the reporter said, "As a reporter, I just have to do my job well—to write a good story. The fate and future of the magazine falls on the shoulders of Chief Editor Huang. In order to speak for justice and righteousness on behalf of the common people, he has been working under enormous pressure. He has so many troubles that he keeps to himself. He tells us very often that, as individuals, we each have to have morals, and as a media we have to have integrity. We have to produce news that is true, to report on the news behind the news, to put aside propaganda to do real news. Were we to be dismissed tomorrow, with such a leader, we would still have a sense of pride."

Following is the transcript of an interview with the chief editor of Common People magazine, Huang Liangtian, on November 4, 2006.

Q: I heard that the Common People website has once again been blocked?
A: Yes, we are already used to it. This is the fourth or fifth time.

Q: What do you think is the reason behind it?
A: I’m not sure of the exact reason this time. The Public Security Bureau told our Web server company that our magazine is too liberal.

Q: So has the magazine stopped publishing?
A: Not yet. They have not told us clearly to stop, because this magazine is still a government publication. In mainland China, all the publication numbers belong to the government. It’s the government who administers them all. We just want to make our government magazine more like a true magazine.

Q: What do you think makes it a true magazine?
A: Well, to speak the truth and not garbage or lies. This is the basic requirement of a magazine. A lot of the media in China are just propaganda tools. After I became the chief editor of Common People, I constantly tried to report the truth to our readers.{mospagebreak}

Q: When did you become involved with Common People? Were there any changes in the style and content of the magazine after you took over?
A: Common People used to be called The Chinese Countryside. It is a government publication by the Chinese Agricultural Bureau. It used to be for the purpose of cultivating the so-called "socialist new people," as the Party calls them [Note: This is a term of Chinese communist propaganda, which means making the people armed with the "socialist ideology" of communism.]. A few years ago, for some reason, it was renamed Common People for the purpose of promoting a socialist ideology among the people and propagandizing things such as socialism around the country.

Two years ago, the government arranged for me to become the chief editor of this publication. However, I am a scholar, so I decided to make this magazine a true news magazine. I want to report on things that people do not know about and to inform them of things they haven’t heard.

However, I never thought, even so, that there would be so many difficulties.

News should be open, and so should our publications. We should report on whatever our readers and the common people need. We should give them the information that they want to know.

As a media, we should not be political puppets. However, in mainland China, all the media are simply political toys. And this is determined by the party nature of Chinese Communist Party news.

Many of us cultured people or media workers have been fooled by the propaganda into thinking that we are also politicians. In fact, we are simply people with culture, and each cultured person should have his or her own independent character.

Q: In the atmosphere of political pressure in mainland China, how do you think you can be an independent person of culture?
A: One needs enormous courage to speak the truth.

Many media divide their readers into two categories: bad guys and idiots. The media seem only to attack the bad guys and educate the idiots. There is no true education or culture involved. There is only propagandizing and struggle.

In fact, these media are very ludicrous. The people are all in the know and the truth is already in their hearts. Every reader has a yardstick in his or her own heart. They each have a right to choose what they want.{mospagebreak}

Our goal is to try our best to create the things that readers need, to allow their agreement with us to come from inside their hearts. This is my guiding principle as the chief editor.

In reality, it is very simple and easy to say, but hard to do. Simply because all the other media are like that, we have thus become the odd one out.

Q: What kind of pressure does the regime put on you?
A: Well, they have all sorts of unwritten "commands" passed down through informal methods. Sometimes they’ll ask me to have a chat with them, sometimes they’ll ask a friend to pass the message, or sometimes they will have a meeting with me so I can listen to their instructions.

These are some of the things they might say, for example, "As a governmental publication, you should do this and that, and you’ll be fine. Otherwise, if you persistently decide to do this or that, things will ‘get messy.’ Why do you have to treat your readers as if they are smart people? Can’t you just treat them as if they are idiots? They are the masses, the common people. The goal of Common People is to educate the public. The purpose of educating them is so that they will become the next class of socialists, support the Communist Party, support socialism, and praise the Party and socialism."

This is what they say. However, I think that this is too easy and too hypocritical. I believe that it is not up to us, as a magazine, to say whether the Communist Party or socialism is good or not. Their actions decide this.

We don’t want to be brainwashing our readers. We hope to bring uncensored news to them, to offer a platform for common people to say what they want to say, and to express their hearts in accordance with the Chinese Constitution. Common People should tell what common people tell each other and spread such information among common people.

Although this is my guiding principle for the paper, it is not in conformance with the typical way that the Communist Party runs other publications.

Q: What is something that you have felt strongly over these two years?
A: My deepest feeling is that it is not easy to tell the truth, but that it is extremely interesting to do so.

We’ve never stopped the magazine—not once. Some issues were delayed; some officials requested that certain articles be removed. This is also the hardest part of my job and my greatest tribulation.{mospagebreak}

Some time in the future, I may be removed from my job, but when I look back, I can say without guilt that during my term as the chief editor, my fellow colleagues and I have never written a single lie or made an unfounded comment in this paper. I have not sold anything spurious to my readers. I have faced up to my own moral integrity, as well as the integrity that should belong to the profession. That is enough.

Q: I heard that many readers called to express their concern after the website was closed?
A: Yes, we received a lot of calls today. Most of our readers are cultured people with a sense of responsibility toward the nation, toward history, and toward the Chinese people; they are concerned with the current state and with the future of our nation.

Since I took over, I have never been concerned over the volume of our distribution. I focus mainly on the quality, so that readers have a sense that we have expressed what is in their hearts and used words that are meant to be said.

Moreover, we also report the truth of historical events uninfluenced by any political or party factors.

Q: Was there any restructuring of the workers when you took over?
A: Not at all. I did not bring a single person with me when I took over. These workers are all the original workers. However, the environment changes people. As long as we cultivate an environment where we dare to speak the truth, all of us will work according to this principle. United, we become a strong force, so we are able to do what we’re supposed to do.

The greatest problem with mainland media is that many media workers have desires to promote themselves— desire for money, power, position, fame, etc., or other fantasies beyond what is appropriate for our profession and for one’s conscience. Things are much easier once one is clear about all of these.

In fact, if everyone is given a more lax environment, we’re all the same. Every Chinese person who goes overseas is so energetic.

Everyone is talking about the ugly Chinese person nowadays. In our current issue, we have an article that specifically discusses this issue. What is the reason behind such ugliness? It is because our system is ugly.

From a certain perspective, we see that the Chinese people become very civilized once they go overseas. Japanese people are normally very polite. However, once they come to China, some of them become very rude; it is the same with Americans. Therefore, we cannot simply point our fingers at the Chinese people. We cannot say that there is something wrong with our race. It is a problem with the system. The Chinese people in Taiwan, Singapore, and elsewhere, are all very polite. They share the same heritage as us, so why are they different?{mospagebreak}

Perhaps it is because of our discussion on this issue that the website has been blocked.

Q: How did you manage to persevere for the last two years under such pressure?
A: A person becomes strong when he lets go of attachments and desires. Once a person is righteous within, the pressure is also reduced. If you stand straight, you’ll be able to bear the pressure. If a person is crooked within, only a small push will make him fall.

I feel very proud of my fellow colleagues. They have done a lot of things that I would never have thought of. We all have the courage to speak up for the truth.

Q: Will the new Xinhua News Agency’s regulations or the government’s regulations on sudden events have any effect on the magazine?[1] A: I don’t think so. The government has its own regulations and the news department has its own regulations. Nowadays, the media has become very advanced. Not everyone is blind. It is not a wise move to blindly regulate the news.

Q: Will you suffer additional pressure for accepting our interview?
A: I guess so, but it’s all right. I am responsible for every single sentence I say. I will still continue to do what I deem necessary. The Common People magazine will still serve its readers as usual.

As long as I am still the chief editor, I will do all that I can. I will try my best to see that the website is soon up and running. I have the confidence and the capability.

Q: Thank you very much for accepting our interview. We hope that Common People will be able to overcome this difficulty and to flourish.
A: Thank you very much for your interview. Please pass my message to all friends outside mainland China: I will not let them down!

Translated by CHINASCOPE from The Epoch Times.

Footnotes:
[1] On September 10, 2006, Xinhua, the Chinese Communist Party news agency, published a new set of government media restrictions, entitled "Measures on Administration of Release of Press Information in China by Foreign News Agencies." The new regulations require foreign news agencies to be examined and approved by Xinhua News Agency, and go through agencies authorized by Xinhua News Agency before publishing any news in China.

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.

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.

Footnotes:
[1] Accounting Times, October 16, 2006, "Liangshui Hebing Maichu Shizhixing Bufa, (A Substantial Step Taken on Consolidation of the Two Tax Systems)" vol 90 http://www.atimes.com.cn
[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)" http://finance.people.com.cn/GB/1045/5011992.html
[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)" http://www.sc.cei.gov.cn
[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)" www.finance.people.com.cn/GB/1037/4685010.html