[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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Mr. Chen Yonglin met us for coffee in a suburban hotel outside of Washington, D.C. "Now I don’t have to worry about being sent back to China," he told us. Chen is a former Chinese diplomat who recently defected to Australia. This Chinese insider caused an uproar in the Australian media when he exposed the extensive Chinese spy network in Australia and the Australian administration’s policy of appeasing China. The Chinese communist regime was so angry at being exposed that it sent a hit squad to Australia to assassinate him. He was here in Washington to testify before a House of Representatives International Relations Subcommittee hearing on Human Rights. Chen shared with Chinascope his inner struggle as a Chinese diplomat and the reason why he decided to leave his post and his country.

From a Red Diplomat to a Defector

Growing Up Under the Red Flag

Like most of those who were born in the 1960s in China, Chen had a simple life trajectory. In 1968, he was born into an intellectual family in Zhejiang Province. Scoring high in the national college-entrance exam, he was admitted in 1985 to the China University of Foreign Affairs. He graduated in 1991 with a double bachelor’s degree in Foreign Affairs and in English. In his 14-year diplomatic career in the Ministry of Foreign Affairs, he worked on political analysis and twice went on a mission to Australia. Before defecting to Australia last May, he was the First Secretary and Consul for Political Affairs in the Chinese Consulate General in Sydney.

Chen grew up during the Cultural Revolution, a period of chaos and tragedy that the Chinese Communist Party (CCP) and its leader Mao Zedong brought upon China. In 1966 Chairman Mao, out of his need to solidify his power and forever change China, started the Cultural Revolution that brought the Chinese populace into revolutionary, feverish, political struggles. Law and order were trampled in Chen’s hometown, just like everywhere else in China. His father, a graduate from the elite Tsinghua University, was put in a vocational home in 1971. Later, when the village leaders brought cases against some villagers, the villagers asked him to write out their appeals. When he did, the village leaders arrested him and tortured him to death. Chen was only three years old when his father died. His brother was five and his sister was two. His mother earned 24 yuan (~US$3.00) per month as an elementary school teacher in the village, and the family of four could barely survive. The tragic death of his father cast a shadow on Chen; it made him study harder and think more deeply.
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In Beijing Foreign Affairs College

Upon entering the University of Foreign Affairs in 1985, at the age of 15, Chen began to read Western philosophy books. China’s economic reform at the time led to an intellectual opening to the West. Non-communist books and ideas became selectively available in the universities and pro-democratic thinking was gaining support among students. At that point, he realized the cause of his father’s tragic death: It was not just due to a few bad individuals; it was caused by the inhumane political system itself.

The pro-democratic student movement in 1989 marked Chen’s life. He was a fourth-year student at the University of Foreign Affairs in Beijing. He was also interning at NBC and guided its camera crew. One day, he saw a Western reporter jot down, "Communism is on the brink of collapse." Chen could not believe the prediction. The communist system had been the only political system he knew throughout his life. He couldn’t imagine any other political system emerging. Like many students, the life-long communist brainwashing shackled Chen’s mind. However, the Communist Bloc in Eastern Europe did indeed collapse within a few months, and Chen came to admire that Western journalist’s foresight. Chen believes that the journalist’s prediction is finally coming true in China; he thinks that the CCP is falling apart.

Like most of his classmates, in June 1989, Chen witnessed the People’s Liberation Army shooting the peaceful protestors and bystanders. He saw the bloody crackdown on the night of June 3 in Beijing. The PLA shot three students from the University of Foreign Affairs, severely wounding one. Afterward, the government denied that the PLA ever opened fire on the students. Instead they labeled the student movement a "riot." In order to get their graduation certificates from the University, Chen and his classmates had to write letters saying they regretted their participation in the Tiananmen Square uprising.

A Diplomat’s Contradiction

After graduation, Chen became a staff member in the Ministry of Foreign Affairs (MFA). It appeared he was a lucky man with a good future. Working in the government guaranteed him a decent salary and a chance to travel on missions to foreign countries. He was the envy of his peers. During the years of his mission to Fiji and later to Australia, he researched local political affairs and followed major elections in Oceanic countries. His research enabled him to make pretty accurate predictions. Although his future as a young diplomat looked bright, Chen found his life depressing.

First, freedom of thought is not allowed in the MFA. The Ministry tells its staff that even regarding trivial matters the diplomats have no right to decide anything. They have to seek instruction from the central leaders. The Ministry has a motto, "Nothing is trivial in foreign affairs." In the name of national interest, low-level personnel must act as mindless machines in the government apparatus.
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Second, distrust is the rule in the MFA. The MFA required all new staff members to participate in "political study" sessions for a year. Such long-term brainwashing was used on them because they were the "Tiananmen generation," the students who experienced the 1989 student movement. Actually, the MFA’s distrust of its own staff goes beyond the Tiananmen generation. Inside the Chinese foreign mission, every ordinary staff member is treated with suspicion. They have to live together in the dorms inside the Chinese mission. The senior staff randomly and arbitrarily searches their personal mail. At least two people must go together when attending any outside functions so that they can monitor each other. It is forbidden to make personal friends outside the Chinese Consulate. When a staff member goes outside the Consulate, he must first get approval from his supervisor and afterward he must report whom he has met.

Third, the performance of assignments may mean working against your own conscience. Chen’s promotion to the First Secretary for Political Affairs in the Consulate General in Sydney put him into a position where he often had to act against his conscience. He eventually realized that he had to defect in order to be true to himself and to secure his family’s safety.

In Charge of Suppressing Falun Gong

Chen reported to his new post in 2001. At that time, one of the central tasks in Chinese "political affairs" was the suppression of Falun Gong. Falun Gong is a form of personal cultivation, or qi-gong practice for mind and body that has its roots in traditional Chinese culture. It was the most popular qi-gong practice in the 1990s and many Chinese could be seen doing the exercises in the early morning. Because Falun Gong attained great popularity, however, in July 1999, the Chinese government decided to eliminate it. By 2001, by resorting to a variety of means including firing practitioners from their jobs, expelling them from school or subjecting them to detention, prison, brainwashing, and even torture and killing, the Chinese government severely abated Falun Gong practitioners’ protests in China. Outside of China, however, Falun Gong practitioners in many countries openly protested the persecution. Their public protests drew attention to China’s human rights violations and won international sympathy for the group. Consequently, the Chinese government ordered its diplomatic missions to make the suppression of overseas Falun Gong activities a top priority. Chen was assigned to take charge of the "struggle with Falun Gong" in the Consulate General.

Before he left for Australia, Chen was not familiar with Falun Gong and did not pay much attention to the persecution. People of his age had seen many political struggles and had become "numb." In a short time, his new assignment made him understand Falun Gong and the persecution very well.
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The department of Political Affairs in the Consulate General has the primary responsibility for monitoring Falun Gong and for coordinating with other departments in the Consulate. This monitoring is not limited to searching the Internet and reading newspapers. It also includes attending the Falun Gong activities to collect their handouts and to take pictures of the participating practitioners. The Political Affairs department was able to get a state-paid vehicle assigned to its division so that it could follow Falun Gong practitioners, which it did frequently. As part of his duties, Chen regularly compiled the information on Falun Gong collected by the Consulate and sent a report to the MFA in Beijing. In his contacts with Falun Gong practitioners, Chen gradually found out that these practitioners were in fact nice individuals who should not be labeled as "state enemies."

The Ministry of Foreign Affairs set up an Office of the Falun Gong Issue. It operates under the "610 Office" an agency so named because it was formed on June 10, 1999. The Chinese government vested the "610 Office" with absolute power over each level of administration in the Party and over all other political and judiciary systems in order to persecute Falun Gong. "The Central 610 Office" apparently has other channels to spy on Falun Gong. Chen regularly received briefs from the MFA on overseas activities of Falun Gong, including things happening in Australia. The central government created a database containing information on overseas Falun Gong practitioners. The Chinese consulates have access to the database for the purpose of identifying Falun Gong practitioners as well as dissidents and others it wants to monitor. This database is known as the "blacklist" inside the circle. When a person goes to the Chinese Consulate to apply for an entry visa or, in the case of a Chinese citizen, to apply for a passport renewal, his or her name will be searched in the database. If the person’s name appears on the blacklist, his case will be "specially treated." If a Falun Gong practitioner applies for a visa application or passport renewal, he or she will be interviewed and persuaded to give up practicing Falun Gong. He or she has to show evidence of being persuaded by submitting a written "guarantee" to the Consulate. If the applicant refuses to comply, then the visa application or passport renewal will be rejected.

Chen explained his experience with Falun Gong, saying, "I found two characteristics in those Falun Gong practitioners: one is honesty, the other is kindness. When I ask someone if he is a Falun Gong practitioner, it’s very easy to know the answer. A practitioner either will admit it or will simply keep silent, but he will not tell a lie. Taking advantage of their honesty, the Consulate can easily identify them from all the other applicants coming to the visa office, and put their names in a database. We call it the blacklist. The Consulate has a policy toward the practitioners. If they come to renew their passport, we confiscate it. Unless they agree to write a ‘guarantee’ to renounce Falun Gong, we do not give it back, in order to make their lives more difficult. Normally most Chinese will not hesitate to write such a non-binding statement just to get things done with the Consulate, but Falun Gong practitioners are different. They will not betray their conscience."
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Chen gradually changed his attitude toward Falun Gong practitioners, but at the same time he had to work on the assignment to suppress that same group of nice people. Chen saw a conflict between his career and his conscience.

Besides the "blacklist" that was centrally compiled and maintained by the Ministries of State Security and Public Security, each overseas consulate also created its internal blacklist of local Falun Gong practitioners. The difference between the two types of blacklists is how detailed and how accurate the information is. When sufficient information about a practitioner is reported to the State Security and Public Security Ministries, his or her information, including name, date of birth, passport number, address, and other personal information, is entered into the central blacklist. That central blacklist is accessible to all Chinese embassies and consulates around the world and to border checks in mainland China. The case will be immediately red-flagged if a person on that blacklist applies for entry to China.

The embassies and consulates in respective countries maintain their own local lists, which are normally not shared with other offices. Those local blacklists contain only incomplete information about the suspected Falun Gong practitioners. The Consulate needs to further complete the information. When Chen first arrived in Sydney, the Consulate’s blacklist had over 800 names of Falun Gong practitioners. Many of the entries contained just a name, and it was expected that Chen would complete the records. His conscience, however, led him to do the opposite.

Out of his sympathy for the practitioners and his discontent toward the persecution, Chen started to remove names from the internal blacklist. By the time Chen left his post, he had shrunk the blacklist to about 120 names. Chen’s successor planned to arrive in Sydney in early June and Chen would have to hand his files over to her. Chen realized that eventually the MFA would find out what he did to the blacklist. The Chinese communist government does not tolerate sympathy toward Falun Gong within its ranks. There had been reports that some government officials who helped Falun Gong practitioners ended up in forced labor camps.

Six Weeks of Hiding and Anxiety

Filled with fear and despair, Chen walked away from the Consulate General in Sydney on May 26 and asked the Australian government for asylum. Thus started his difficult path of breaking from the Chinese communist regime.
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Chen later publicly acknowledged that, "To break with the communist regime is the most joyful choice of my life and yet the most difficult to make." However, within 24 hours, the Australian government rejected his application for political asylum. Chen knew that some officials inside the Australian government were eager to appease the Chinese government. Yet he had confidence that, in a democratic system, human rights would not be traded for business. The reality however was disappointing.

Chen found out on May 26 that the Australian government informed the Chinese Consulate about his seeking protection. The immigration officials actually contacted the Chinese Consulate to "check identity." Chen believed that action put him in danger and he immediately went into hiding. On May 31, 2005, Chen met with an official from the Australian Department of Foreign Affairs and Trade (DFAT). He was told that his application for political asylum had been refused, but he could apply for a refugee protection visa instead. These Australian officials repeatedly told Chen that people at the Chinese Consulate were worried about him. They urged him to consider going back.

The refugee protection visa normally takes months to process. It appeared to Chen that it was a way for DFAT to win the Chinese Consulate time to get Chen back. It was later confirmed in an Australian Senate inquiry that the decision to reject Chen’s asylum application came from the Foreign Affairs Minister Alexander Downer. In addition, Downer told Parliament that he had spoken to the Chinese ambassador, Fu Ying, about the matter before Chen went public.

Chen went to the public for help. On June 4, 2005, he showed up at a public rally in Sydney commemorating the Tiananmen Square Massacre of 1989. Chen made a speech at the rally, announcing that he had left the Chinese Consulate and was seeking political asylum because he detested the Chinese government’s violation of human rights, and because he sympathized with the Falun Gong practitioners under persecution. He expressed fear for his life, as he was facing the risk of being sent back to China and jailed. Chen told reporters that he had discovered that Chinese agents were searching for him.

Chen also disclosed to the public that there were about 1,000 Chinese secret agents and informants in Australia, and that agents from China had committed acts of kidnapping on Australian soil. At the rally, Chen also saw faces from the Consulate.

On the same day, Chen submitted a public statement to the Chinese-language newspaper The Epoch Times‘ "Quitting the CCP" website to formally renounce his membership in the Chinese Communist Party.
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Chen’s story drew a lot of public attention. While Chen and his family continued to stay in hiding, Australians questioned whether their government sold out his human rights to the Chinese government. The Australian parliament became very concerned, holding inquiries and hearings to determine whether the administration handled Chen’s asylum case properly. At the same time, the Chinese Embassy tried hard to do damage control, both in the public media and behind closed doors, to discredit Chen and to make a deal with the Australian officials for Chen’s return. A former colleague of Chen’s from the Consulate told him that Chinese authorities were "100 percent sure" that they would be able to take him back to China.

Fortunately for Chen, the Australian media intensively covered Chen’s stories. They scrutinized what seemed to be suspicious dealings between the Australian and the Chinese governments. One security expert told Australia’s media that the administration’s handling of Chen’s asylum was a "monumental bungling, or there’s something more sinister." Chen’s case soon became a hot potato for both governments. Then, on July 8, Australia granted a permanent protection visa to Chen and his family. Six weeks previously, his asylum application was almost instantaneously rejected. Thanks to the publicity, the 24 hours it took for approval of his protection visa was one of the quickest in Australia’s history. Chen was relieved when he finally got the protection. He can now look to the future for a new life of freedom.

Communist China’s Strategy for Australia

In recent years, people have noticed a number of incidents of the Australian administration appearing to sell out human rights principles in order to appease the Chinese communist leaders:

From March 2002 to June 2005, Foreign Minster Downer issued 38 certificates in succession to prevent protesting Falun Gong practitioners from using banners and amplified music in front of the Chinese Embassy in Canberra. On June 8, 2005, practitioners filed a lawsuit against Downer in the Australian Capital Territory’s Supreme Court in Canberra, seeking an injunction to stop the ban.

In July 2004, political dissident Yuan Hongbing, the dean of a Chinese law school, and his assistant Ms. Zhao Jing applied for asylum when they arrived in Australia on an official tour. It was right before the Chinese foreign minister, Tang Jiaxuan, was to visit Australia. The Australian government, in an apparent act of appeasement, rejected Ms. Zhao’s asylum application in less than a week, leaving overseas Chinese dissidents stunned.
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In May 2005, almost 50 Chinese refugee applicants held in Australian immigration detention centers were put in isolation for up to two and a half weeks and interrogated by officials of the Chinese government. According to the Asylum Seeker Resource Center, "Basically, the Chinese officials were given carte blanche to interview anyone who was Chinese. That included those who were seeking asylum from the Chinese government. It’s unbelievable that the Australian government allowed their potential persecutors to interrogate them and get their details, including those of their families and children."

Chen knows the inside stories.

"Turn Australia into a Second France"

"China seeks to make Australia part of its ‘great border zone,’" Chen said. "They want to turn Australia into a second France that will not side with the United States."

In February of 2005, Zhou Wenzhong, the Chinese Vice Minister of Foreign Affairs at that time and now Beijing’s ambassador to Washington, held a meeting at the Chinese Embassy in Australia with the ambassadors and consul-generals to Australia and New Zealand, and consuls in charge of political affairs. Chen attended that meeting.

"The main focus was how to implement the decision that was made during the 10th Meeting of the Chinese Envoys in Foreign Counties held in mid-August of 2004, at the suggestion of Hu Jintao, to make Australia part of the ‘Great Border Zone’ of China. All the consulates were asked to present their view and ideas for the next step," said Chen.

During the meeting, Zhou Wenzhong shared information about the CCP central government’s strategic plan for Australia and the United States, worrying about the close ties between these two democratic countries. The Central Committee was determined to break the military alliance between them and turn Australia into a second France. Chen explained, "They hope to shape Australia into a country that dares to say, ‘No’ to the United States." He claimed that it was all part of Communist China’s global strategy.

The paramount Chinese communist leader Deng Xiaoping laid out a strategy for China: "Hide our capabilities, and bide our time." The communist regime, after 30 years of class struggle from 1949 to 1979, brought China to the brink of economic collapse. Deng wisely figured out that in order to save the regime it must halt political struggles and make economic development its top priority. The Chinese communist leaders fully believe that "sooner or later there will be an inevitable war between the United States and Communist China." The Party leadership recognizes the need to "bide time" to modernize and prepare China for that "inevitable" battle. According to Chen, "The Chinese Communist Party considers the United States to be its largest enemy, the major strategic rival." He pointed out how important it is to understand this U.S. factor in analyzing China’s diplomacy.
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By the end of the 20th century, China declared it had reached a milestone in its economic development: China became a well-off society. The CCP started to look to its next goal: By 2020, before the Party’s 100th birthday, China should be able to contend with the United States in overall strength. According to the CCP’s calculations, China will dominate the Asian and Pacific region, while Europe will continue forming its own union and move further away from the Atlantic Alliance; the United States will continue to dominate North and Central America. If things go this way, China will arise as a regional superpower within two decades. Australia is not within those regional blocks, but its abundant natural resources and strategic South Pacific location is very attractive to the ambitious CCP leaders, and the U.S.-Australia military alliance agreement is a concern for the Chinese invasion of Taiwan.

The Hot Sweet Business Deals

In 2002, China sensed that Australia was rethinking its business trade strategy, planning to give up ties with Asia in favor of stronger ties with the United States. At that time, the free trade negotiations between Australia and the United States were at a high point. Australia had high hopes of being included in the North America Free Trade Agreement. At the same time, Australia was bidding for a large deal with Guangdong Province in China.

The Chinese government sent its foreign minister Tang Jiaxuan to Australia in March 2002 to find out how China could be more attractive to Australia. In August, a few months after Tang’s visit, surprising news was published: China awarded a multi-billion-dollar contract to Australian consortiums to supply liquefied natural gas (LNG) to Guangdong Province for over 25 years. The contract, which was worth US$13.5 billion, had been open for bid for some time. Many analysts believed that the Indonesian company would win the contract. Out of its intention to win over Australia, the Chinese central government made sure the contract was awarded to Australia. To console Indonesia, it then offered an alternative not previously on the negotiation table.

Following that sweet treat, the Australian government became eager to promote business relations with China. According to a People’s Daily report, the overall annual trade value between the two countries has doubled in two years, reaching AUS$20.5 billion in 2004. Different from China-U.S. trade where China enjoys a big trade surplus, China imports more from Australia than it exports. Australia became a major metal supplier for China. Of all of the wheat China imports, the largest amount is from Australia. Close to 300,000 Chinese visited Australia on business travel between 2003 and 2004, and 163,000 more went as private tourists. Some Australian analysts estimate that up to 30 percent of Australia’s economic growth is due to increased export to China. At the same time, Chinese companies, many of which are state controlled, have started to invest directly in the Australian mining and energy industries. According to Chen, China is eager to get access to all of the mines in Australia.
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The Human Rights Sacrifice

The sweet deals from China came at a price. The first thing that the Australian government had to do was to sacrifice human rights.

During his visit in March 2002, Chinese Foreign Minister Tang Jaixuan raised questions on certain issues, including Falun Gong. The Australian officials responded eagerly. On the day before Tang arrived in Canberra, Alexander Downer, the Australian Minister for Foreign Affairs, signed an article banning Falun Gong practitioners from setting up signs and banners or using loud speakers to protest in front of the Chinese Embassy. "His move made the Chinese leadership very happy," noticed Chen.

In 2002, China held a 30-year anniversary celebration of the diplomatic relations between Australia and Communist China. The Chinese government sent many groups to Australia to promote Chinese culture and political ideology. Australia became a favored destination for high-level Chinese officials. It was understood that the host government would protect the "dignity of their mission."

"When Hu Jintao visited Australia in 2003, he received unprecedented protection in Canberra," said Chen. "Bob Brown, a Congressman with the opposition party Greens, was not allowed to enter the building where Congress was being held. The idea was to stop dissidents and Falun Gong practitioners from attending as the Congressman’s guests. Hu Jintao was delighted and commented to his staff that this was a sign that the Australian government could be influenced."

In 2005, when Wu Bangguo, the head of the Chinese National Assembly, visited Australia, he requested the same treatment: not to see or hear any protestors or dissidents.

A Disturbing Trend

Chen’s defection has brought to light how the communist regime has transformed a democratic government into its lapdog. Under the cover of bilateral relations in business and trade and of cultural exchange, the communist regime is eroding fundamental human principles and gradually infiltrating the West. Stories of the Australian government’s work with the Chinese government are good examples of how the communist regime infiltrates and erodes Western democracy.

Chen stated in an interview, "I have witnessed in my past four years working with the Chinese Consulate that the Australian government, especially the Department of Foreign Affairs and Trade (DFAT), has made a lot of compromises on sensitive issues of human rights and Chinese democracy issues."
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For example, Chen claims the Australian government aided the Chinese authorities in quashing a lawsuit filed earlier this year in the Supreme Court of New South Wales by Australian citizens who practice Falun Gong. The lawsuit targeted the ex-president of China Jiang Zemin and the Gestapo-like "610 Office" for torture, genocide, and other crimes against humanity. According to Chen, the Downer Government offered legal assistance to China and worked in cooperation with Chinese authorities. If Chen’s claims are true, Downer is guilty not just of ignoring China’s abuses of human rights, but of actively condoning them.

On June 8, 2005, several Falun Gong practitioners launched legal action against Australian Foreign Minister Alexander Downer in the Australian Capital Territory’s Supreme Court, alleging that his department has unfairly limited their freedom of expression by banning their banners across the road from the Chinese Embassy. Downer first issued the certificates on March 16, 2002. The certificates indicate that the banners should be removed, because they "impair the dignity of the [Chinese] mission." On March 28, 2002, federal police confronted Falun Gong practitioners who were holding a peaceful appeal in front of the Chinese Embassy. According to eyewitnesses, police acting under the Foreign Minister’s orders, forcefully removed banners bearing messages that included, "Stop the killing" and "Truth, Compassion, Forbearance." The ban continues to this day because Downer continues to sign similar certificates every month. (Each signing is only valid for a maximum of 30 days.)

Falun Gong practitioners are seeking an injunction to prevent Downer from issuing certificates under the Diplomatic Privileges and Immunity Regulations, which prevent the use of banners in their human rights appeal outside the Chinese Embassy in Canberra.

The Australia Department of Foreign Affairs said that the rules are in line with an international agreement on the protection of the dignity and security of embassy staff.

Bernard Colleary, the lawyer representing the plaintiffs, said that this case is a test case for freedom of expression in Australia and urged Downer to fall in line with the pronouncements of the Australia Federal Court.
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"Explosive" Testimony in the U.S. Congress

Congressman Chris Smith, Chairman of the U.S. House of Representatives International Relations Subcommittee on Africa, Global Human Rights and International Operations, invited Chen to speak to this subcommittee. Chen flew to Washington, D.C., to testify in front of the subcommittee on July 21, on the subject of Falun Gong and China’s continuing war on human rights.

All of the Congressmen present at the hearing strongly supported Chen’s testimony. Similar hearings concerning the persecution of Falun Gong have been held in the U.S. House of Representatives. In previous years, Congress passed resolutions to condemn the persecution in China. Chen, however, is the first witness who had direct information and evidence from working inside the Chinese Consulate.

Chen told the subcommittee that the CCP’s persecution of Falun Gong is a systematic campaign. All the authorities, especially in the offices of Public Security, State Security, and Foreign Affairs are involved in the persecution. The directing center for the persecution is "The CCP Central Office of Handling the Falun Gong Issue," (the previously mentioned "610 Office"). The government later changed the name to "The Office of Preventing and Handling the Evil Cult Problem of the State Council," and the insiders always used the name, "The Central 610 Office." Massive and extremely harsh measures have been taken against Falun Gong practitioners in China.

The Ministry of Foreign Affairs set up the "Office of the Falun Gong Issue," operating under the general office of the Ministry of Foreign Affairs, as part of the "610 Office" system. In July 2004, it changed its name to the "Department of External Security Affairs." In each Chinese mission overseas, there must be at least one official in charge of Falun Gong affairs.

In February 2001, the Chinese Consulate General in Sydney set up the "Special Group for Struggling Against the Falun Gong." This group is part of the "610 Office" system. Its sole task is to monitor and suppress Falun Gong. Similar Special Groups have been established in the Chinese missions in the United States and other countries where Falun Gong is active.

According to Chen, besides the diplomatic system, there is an intelligence system working against Falun Gong as well. There are over 1,000 Chinese secret agents and informants in Australia, and the number in the United States is at least that many. The CCP’s foreign policy on Falun Gong is to "fight intensely and give no ground, to attack at will, and aggressively."

Chen ended his testimony by saying, "Obviously, there is no freedom of religion and beliefs under the dictatorship of the CCP. The CCP should be stopped from persecuting the Falun Gong and other religious groups."

After Chen’s testimony, Congressman Chris Smith, Chairman of the Human Rights Subcommittee, commented, "Thank you very, very much. I know members in the committee realize your testimony is absolutely explosive for a man who worked for the government of the People’s Republic of China to come before a House committee that deals with human rights, and to tell us in such clear and unambiguous words that there is a war on the Falun Gong going on in China that is not just within the confines of the People’s Republic of China, but it is worldwide."

Victor Gu and Stephen Tian are correspondents for Chinascope.

Chinese President Hu Jintao will attend the U.N. 60th anniversary summit in New York on September 13. Before his U.N. mission, he is scheduled to visit Canada, Mexico and Washington, D.C. and have meetings with the North American leaders.

The U.S. trip will be the first one for Hu Jintao since he came to power in March 2003. Publicly, the meeting between Hu and Bush is expected to focus on issues over trade, Taiwan relations and North Korea’s nuclear program, among other things.

But the Chinese President seems to be more concerned with the scale of his U.S. reception than what will be talked about in the meeting. After more than two years since his ascension to the top position in China, Hu is eager to break out of the shadow of his predecessors and establish his own legacy. The visit to North America, particularly the meeting with U.S. President Bush, is therefore a very significant event, designed to bolster his image back in China as a recognized world leader.

Initially, Bush offered his Texas ranch to accommodate Hu, a perfect opportunity to discuss bilateral relations in a more relaxed environment and make real progress. But in the Chinese leader’s mind, "barbecue at Bush’s ranch" would be too casual and not in keeping with his image. Hu prefers a formal "state visit," complete with red carpet, a 21-gun salute at the White House, a state banquet, and joint statements before the media.

Prior to the trip, China demonstrated its goodwill toward Washington in expectation of a "state visit." On July 21, Beijing announced for the first time that it would allow the Chinese yuan to appreciate by two percent; on July 26, it restarted the six-party talks on North Korea’s nuclear weapons; and on July 28, it announced the purchase of 50 airplanes from Boeing.

These gestures were not enough for Washington to grant him a "state visit." Instead, Hu was offered a "working visit" to meet with Bush for one hour at the White House on September 7. There will be no state banquet, either. White House spokesman Trent Duffy told reporters, "It is not an official state visit." Instead of a state dinner, Bush will host a luncheon for Hu at the White House.

To the Chinese leader, such an offer from Washington must be very disappointing. In order to save face, China’s state-run media continues to interpret it as a "state visit." In response to reporters’ questions, the spokesperson of Foreign Affairs Ministry Qing Gang stated, "Invited by President Bush, President Hu Jintao will make a state visit to the United States between September 5 and 8." Nevertheless, Hu should have gotten the message—the United States is wary of the course that China is taking.
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Before Hu took office, many people had high expectations for him, believing that he would loosen China’s political controls, which would lead to a more open society. But the signs so far indicate that Hu is continuing the communist tradition and assuming an even harder-line approach. Hu is particularly strict on media control and has even vowed to learn from Cuba and North Korea to govern the country.

On August 2, 2005, China issued new rules restricting foreign investment in cultural products and media in China. According to the new government regulations reported by China’s state media, Xinhuanet, China will not permit any more overseas satellite television channels to land on its mainland and will not allow any foreign investment in the country’s news media.

Hu is also applying greater pressure on Taiwan. At the 2005 National People’s Conference, China passed a secession law giving China the "right" to attack Taiwan at any perceived signs of Taiwan independence. Beginning on August 18, 2005, China held an unprecedented, joint military exercise with Russia on China’s Shandong Peninsula. The eight-day military exercise involved nearly 10,000 troops from the two armies, navies, and air forces as well as airborne units, marine corps and logistics units. Although China, which footed the bill for the joint exercise, stated that it was not aimed at any specific target, many viewed Taiwan and the United States as the imagined enemies. Following the exercise, China also signed a massive arms deal with Russia to further put pressure on Taiwan and the United States.