International Crisis Group - China’s Myanmar Dilemma

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China’s Myanmar Dilemma

Asia Report N°177
14 September 2009

EXECUTIVE SUMMARY

Each time global attention is focused on events in Myanmar, concerned stakeholders turn to China to influence the military government to undertake reforms. Yet simply calling on Beijing to apply more pressure is unlikely to result in change. While China has substantial political, economic and strategic stakes in Myanmar, its influence is overstated. The insular and nationalistic leaders in the military government do not take orders from anyone, including Beijing. China also diverges from the West in the goals for which it is prepared to use its influence. By continuing to simply expect China to take the lead in solving the problem, a workable international approach will remain elusive as Myanmar continues to play China and the West against each other. After two decades of failed international approaches to Myanmar, Western countries and Beijing must find better ways to work together to pursue a wide array of issues that reflect the concerns of both sides.

Related content Advocacy page Myanmar: Normalising Aid Relations All Crisis Group North East Asia reports All Crisis Group Burma/Myanmar reports

The relationship between China and Myanmar is best characterised as a marriage of convenience rather than a love match. The dependence is asymmetric – Myanmar has more to lose should the relationship sour: a protector in the Security Council, support from a large neighbour amid international isolation, a key economic partner and a source of investment. While China sees major problems with the status quo, particularly with regards to Myanmar’s economic policy and ethnic relations, its preferred solution is gradual adjustment of policy by a strong central government, not federalism or liberal democracy and certainly not regime change. In this way, it can continue to protect its economic and strategic interests in the country. In addition to energy and other investments, Myanmar’s strategic location allows China access to the Indian Ocean and South East Asia.

But Beijing’s policy might ultimately have an adverse effect on Myanmar’s stability and on China’s ability to leverage the advantages it holds. Political instability and uncertainty have resulted in a lack of confidence in Myanmar’s investment environment, and weak governance and widespread corruption have made it difficult for even strong Chinese companies to operate there. Myanmar’s borders continue to leak all sorts of problems – not just insurgency, but also drugs, HIV/AIDS and, recently, tens of thousands of refugees. Chinese companies have been cited for environmental and ecological destruction as well as forced relocation and human rights abuses carried out by the Myanmar military. These problems are aggravated by differences in approach between Beijing and the provincial government in Yunnan’s capital Kunming, which implements policies towards the ethnic ceasefire groups.

At the same time, resentment towards China, rooted in past invasions and prior Chinese support to the Communist Party of Burma, is growing. Myanmar’s leaders fear domination by their larger neighbour, and have traditionally pursued policies of non-alignment and multilateralism to balance Chinese influence. Increasing competition among regional actors for access to resources and economic relationships has allowed Myanmar to counterbalance China by strengthening cooperation with other countries such as India, Russia, Thailand, Singapore, North Korea and Malaysia. The military government is intensely nationalistic, unpredictable and resistant to external criticism, making it often impervious to outside influence.

While China shares the aspiration for a stable and prosperous Myanmar, it differs from the West on how to achieve such goals. China will not engage with Myanmar on terms dictated by the West. To bring Beijing on board, the wider international community will need to pursue a plausible strategy that takes advantage of areas of common interest. This strategy must be based on a realistic assessment of China’s engagement with Myanmar, its actual influence, and its economic and strategic interests. The West could better engage China to encourage Myanmar’s government to commit to a truly inclusive dialogue with the opposition and ethnic groups. In addition to talks on national reconciliation, dialogue should also address the economic and humanitarian crisis that hampers reconciliation at all levels of society. At the same time, China should act both directly and in close cooperation with ASEAN member countries to continue support for the good offices of the United Nations as well as to persuade the military to open up.

Myanmar is heading towards elections in 2010 which, despite major shortcomings, are likely to create opportunities for generational and institutional changes. International policy towards Myanmar accordingly deserves careful reassessment. China is encouraging the government to make the process genuinely inclusive, but will certainly accept almost any result that does not involve major instability. While its capacity and willingness to influence Myanmar’s domestic politics is limited, the international community should continue to encourage Beijing as well as other regional stakeholders to take part in a meaningful and concerted effort to address the transition in Myanmar.

Beijing/Jakarta/Brussels, 14 September 2009

Seoul Amplifies Its Network

By Stephen Kim and Bill Powell

In the sprawling, densely populated capital city of South Korea, Lee Hye-young and her husband Kim Soon-kyo are nothing if not typical citizens. Which is to say, even the most mundane, everyday aspects of their lives are carried out at technology's leading edge.

Consider their respective commutes to work early one recent morning. Lee clambers onto a city bus, headed to her office job in the southern part of the city. She pays using her radio-frequency-identification (RFID) card--it has a computer chip in it--part of a transit program conceived and implemented by the city government. The card is smart enough to calculate the distance she travels on any form of public transit, which determines the fare. She can then use the same card to pay for the taxi she hails to finish her journey to work. Sometimes her husband, the deputy marketing manager at a small chemical company, drives her to work. But not today. A few months ago, he applied online to join a program offered by the city that promises insurance discounts, reduced-cost parking and a tax break if he leaves his car home one business day a week. The city sent him an RFID tag, which he attaches to the windshield so the city can monitor compliance. It took him just minutes to fill out the application on his home computer, and now, he says, he saves the equivalent of $50 a month. From the city's standpoint, the estimated 10,000 fewer cars on the road each day means less congestion and less air pollution in one of the busiest cities in East Asia.

For a decade, Seoul has had the justifiable reputation of being one of the most wired cities in the world. After the Asian financial crisis devastated the South Korean economy in 1997, the Seoul city government, the national government and the private sector all made a concerted effort to move the country's economy from one reliant on heavy industry to one that included information technology--a shift that by most measures has been a resounding success. Today, according to data compiled by Strategy Analytics, a U.S.-based technology market-research firm, an astonishing 95% of households in South Korea have a broadband connection. (Tiny Singapore is second, at 88%, and the U.S. comes in at No. 20, with just 60% hooked to broadband.) The entire city of Seoul, whose metro-area population is more than 20 million, is already one giant hot spot, with wireless access available from virtually anywhere within city limits for a small fee.

That level of connectedness, either via high-speed cable or through the ether, has not only transformed South Korea's economy; it has changed forever the way this massive city is governed, how individuals receive services and interact with city hall and how prospective contractors solicit business with the city.

Start with clean government. All city contracts are now put out to bid online, and all bids are posted. That transparency, Seoul Mayor Oh Se-hoon tells Time, has reduced corruption in the city significantly in the past 10 years. "Since all information is disclosed real time over the Internet, influence-peddling over the bargaining of government permits becomes impossible," he says. "The online system tracks the flow of approval routes and leaves behind evidence in real time. If a manager holds on to an application for too long, he becomes a suspect. So administration becomes faster and uncorrupt." And while every big-city mayor may boast that his government is less corrupt than the last guy's--and corporate corruption has been an acknowledged problem in South Korea--Seoul has been named the world's most "advanced and efficient e-government" for several years by a U.N.-sponsored e-government-evaluation agency.

The city services accessible via Internet technology are already vast and growing rapidly. When Lee was returning home from work one day, she needed to pick up a copy of her social-security certificate. She did so at a subway station near her office, using a fingerprint-recognition kiosk: she placed her thumb on the machine, it read her print, and out popped a copy of the document. If she had so desired, she could have also printed real estate and vehicle registrations. It goes without saying that Lee pays her city taxes and utility bills online--or with her mobile phone's browser--and recently she dialed 120 to find out why the electric company had overcharged her. She was calling the Dasan Call Center, a 24/7 government agency that fields all questions regarding city services. A service rep did a quick check, confirmed the error and made sure her bill for the next month would reflect the correction.

Seoul has even greater e-ambitions. It has begun to implement a project called Ubiquitous Seoul--or U-city--which will extend the city's technological reach. Seoul's nearly 4-mile-long (6 km) Cheonggye Stream walkway, which runs through the high-rises of downtown Seoul, is the site of a U-city pilot project. Via their phones and laptops or on touchscreens located in parks and public plazas, citizens can check air-quality or traffic conditions or even reserve a soccer field in a public park. The city also sends out customized text messages. The city's chief information officer, Song Jung-hee, says those with respiratory problems can get ozone and air-pollution alerts, and commuters can get information about which route is the most congested at any given time. The city calls these real-time, location-based services.

Earlier this year, the city rolled out U--safety zones for children, a program using security cameras, a geographic-information-system platform and parents' cell-phone numbers. Participating families equip their kids with a U-tag--an electronic signature applied to a coat or backpack that allows a child to be tracked at all times. If the child leaves a designated ubiquitous-sensor zone near a school or playground, an alarm is automatically triggered alerting parents and the police. The child is then located via his or her mobile phone. The city plans to increase such zones rapidly. To some Americans, the Big Brother--ish qualities of the U-city push can be a tad unnerving. But Seoul officials point out that the U-safety-zone project is entirely voluntary, and the technologically sophisticated citizens seem to have few objections.

Seoul over the past decade has become a hotbed of early adopters, and global powerhouses from Microsoft to Cisco Systems to Nokia use it as a laboratory. The level of connectivity provided by the city's electronic infrastructure means "ubiquitous life" has become an inescapable catchphrase in Seoul. "Almost all new apartment complexes now advertise home networks and ubiquitous-life features," says Lim Jin-hwan, vice president for solution sales at Samsung Electronics. In a nutshell, that means every electronic device in the home can be controlled from a central keypad or a cell phone. Biorecognition lock systems open apartment doors, and soon, Lim says, facial-recognition systems will be introduced.

As megacities continue to grow and become more complex, it's likely that many will have to get wired just to stay manageable. Seoul took the considerable risk of being out front, but it has demonstrated the potential payback when the city government, and not just the citizens, is one of the early adopters.

China’s New Think Tanks: Where Officials, Entrepreneurs, and Scholars Interact

Source: Brookings Institution

In contrast to many of their counterparts in the West, where independence from the government is usually seen as a mark of credibility, Chinese think tanks often strive for strong ties to the government, and especially value a close connection with the upper stratum of the Chinese leadership. According to its charter, the CCIEE is to operate “under the guidance and supervision of the National Development and Reform Commission [NDRC] in terms of its business scope.” The NDRC, whose purview is the macroeconomic management of the Chinese economy, is widely considered to be the most important ministry in the Chinese government. Another indicator of the CCIEE’s close ties to the Chinese leadership is its physical proximity to the levers of power—its current office is located only a few hundred meters from Zhongnanhai, the headquarters of both the Chinese Communist Party and the State Council.

The growing importance of think tanks in China and the frequency with which they are able to facilitate international exchanges is understandable within the context of China’s rise on the world stage. Many Chinese people are now conscious that their country is not only in the midst of profound socioeconomic transformations, but is also rapidly emerging as a major player in global affairs. They wish to understand the complex and internationally intertwined challenges that China faces in order to take intelligent positions on the issues involved.

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North Korea to Reopen Its Border to the South

By MARK McDONALD

HONG KONG — North Korea said Monday that it would open its highly militarized border with South Korea to allow periodic family reunions and group visits by tourists from the South.

The conciliatory move, coming just after the high-profile releases of two American journalists and a South Korean worker detained by the North, seemed likely to ease the growing anxiety on the Korean peninsula.

Tensions had escalated since spring, beginning with the imprisonment of the Americans, the North’s second nuclear test in May, a series of missile tests and North Korea’s refusal to re-engage in six-nation talks over its nuclear weapons.

But the North, in the announcement Monday by its official news agency, also warned the United States and South Korea about their joint military exercises, which the North said were “obviously maneuvers for a war of aggression.” It said an “annihilating” retaliation could be one consequence. Still, that kind of bellicose language is almost standard from the North and was eclipsed by its outreach about the border and tourism.

Analysts have said North Korea is eager to re-establish contacts with Washington and Seoul in hopes of undermining the United Nations’ sanctions over its nuclear program.

The North said it would allow reunions of Korean families separated by the 1950-53 Korean War, with visits taking place at Mount Kumgang, or Diamond Mountain, during the three-day Harvest Moon Festival, when Koreans traditionally visit their hometowns. This year the festival begins Oct. 3.

Regular visits to Mount Kumgang on North Korea’s eastern coast will start “as soon as possible,” the official North Korean news agency reported, as well as visits to the ancient border town of Kaesong.

Programs allowing tour groups — predominantly South Koreans — to visit the North were expanded in October 2007 but were stopped last year when a South Korean tourist at Kumgang who apparently entered a restricted zone was fatally shot by a North Korean guard.

The announcement on Monday followed a meeting Sunday between the North Korean leader, Kim Jong-il, and the chairwoman of the Hyundai Group, the South Korean conglomerate, which is the biggest investor in the North.

The chairwoman, Hyun Jung-eun, had successfully negotiated the release of a Hyundai worker whom the North held for several months on charges of denouncing the government and encouraging defections.

Japan Joins Recent Wave Of Economic Expansion

By Blaine Harden
Washington Post Foreign Service
Monday, August 17, 2009

TOKYO, Aug. 17 -- Japan announced Monday that its economy has returned to growth, bouncing back from what had been the steepest slide of any industrialized nation during the global economic crisis.

Japan's gross domestic product, which last winter contracted at more than double the rate of the United States', grew at an annual rate of 3.7 percent from April to June, the government said.

Helped by a rebound in exports to China and a large government stimulus program, the world's second-largest economy was able to record its first quarter of growth in more than a year, as the GDP, a broad measure of economic output, expanded 0.9 percent over the previous three-month period.

The return to growth in Japan, where the economy had shrunk at an annualized rate of 11.7 percent in the first quarter of the year, is one of the strongest signals so far that a corner has been turned in the global economy.

It comes amid a surprisingly sprightly economic bounce across Asia, as China, South Korea, Indonesia, Singapore and Hong Kong have all reported growth in the second quarter.

Japan, though, is a laggard in the region, as gains in much of Asia have galloped ahead at nearly 10 percent in the second quarter. Yoshimasa Hayashi, Japan's economic and fiscal policy minister, told reporters Monday that conditions here are likely to remain severe.

Economists have attributed the rapid recovery in Asia to large economic stimulus packages (especially in China), a spurt in manufacturing, an easing of credit, and the health of Asian banks that were largely unscathed by the U.S. and European debt crisis.

In Europe, too, there are signals of recovery, with Germany and France becoming the first two major industrialized nations to officially shake off the global recession. The growth in both countries, though, was an anemic 0.3 percent in the second quarter, and economists said it is far too early to declare an end of the recession in Europe, where Britain, Italy and Spain are still stuck in their worst decline in decades.

The U.S. economy shrank by 1 percent in the second quarter, but the Federal Reserve signaled last week that it expects the downturn to ease and that it will begin pulling back this fall from its intervention in the economy.

Officials at Japanese companies largely think their country's worst post-war recession is nearly over, according to a survey released over the weekend. Representatives of two-thirds of the 108 major companies contacted by Kyodo News said they expect the economy to recover in early 2010.

Drastic production cuts and reductions in inventory have set the stage here for recovery, economists said, as wages fell sharply and unemployment jumped to 5.4 percent, which is exceptionally high by Japanese standards.

A huge government stimulus effort -- amounting to about 5 percent of Japan's GDP -- has also perked up domestic spending and slowed layoffs.

Bank of Japan Governor Masaaki Shirakawa warned last week that the increase in demand may lessen as the effect of government stimulus spending declines. The bank kept interest rates at slightly above zero.

News that Japan's economy is growing appears unlikely to rescue Prime Minister Taro Aso and the ruling Liberal Democratic Party from what would be a historic defeat in a general election Aug. 30.

"It is too late," said Minoru Morita, a political analyst in Tokyo. "Regardless of what the numbers say, a majority of people are struggling day to day. The market will respond, but the general public will not."

Polls show that Aso's party, which has had 54 years of nearly unbroken rule, is likely to be clobbered by the opposition Democratic Party of Japan, which is promising to pay more attention to consumers and small businesses, rather than to the blue-chip corporations that traditionally have had the ear of the LDP.

The Democratic Party is also promising to guarantee pensions for the country's large and growing elderly population. In the past two years, the ruling party has been unable to reassure the elderly, in the wake of a scandal in which millions of government pension records went missing, that their pensions are safe.

The opposition candidate for prime minister, Yukio Hatoyama, a wealthy politician who has a doctorate in engineering from Stanford University, is 10 to 20 percentage points ahead of Aso in recent opinion polls.

"The wind is still blowing for the opposition party," Morita said. "The relationship of the ruling party with the grass roots has been destroyed. People feel they can no longer support LDP, and they want change."

Special correspondent Akiko Yamamoto contributed to this report.

China Villagers Storm Lead Plant

By Michael Bristow
BBC News, Beijing

Hundreds of Chinese villagers have broken into a factory that poisoned more than 600 children, reports say.

Villagers tore down fencing and smashed coal trucks at the lead smelting factory in Shaanxi Province.

Local authorities have admitted that the plant is responsible for poisoning the children. More than 150 were in hospital.

Air, soil and water pollution is common in China, which has seen rapid economic growth over the past few decades.

Toxic metal

The villagers broke into the Dongling Lead and Zinc Smelting Company, near the city of Baoji in western Shaanxi on Monday, according to the state-run Xinhua news agency.

About 100 police officers were sent to the plant to restore order.

The villagers are angry because medical tests revealed that at least 600 children under 14 from two villages near the plant have excessive amounts of lead in their blood.

About a quarter of them were taken to hospital for treatment.

Environmental officials from Baoji city government admitted on Sunday that the plant was "mainly to blame" for the children's lead poisoning, according to Xinhua.

Checks found that water, soil and waste from the factory - a major local employer - all met national environmental standards.

But the lead content in the air around the factory was more than six times the level found a few hundred metres away.

The smelting plant has now been closed down.

Local officials had promised to relocate all residents living within a 500m ( 550 yard ) radius of the factory within three years of its opening, but that plan stalled.

Xinhua said only 156 families had been moved; three times that number are still waiting.

Villages are also worried that the new homes are still not far enough away from the plant to prevent their children from getting sick.

Lead is a toxic metal that can get into the air and water supplies.

It can cause a range of health problems, from learning disabilities to seizures. Children under six are most at risk.

Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/asia-pacific/8204689.stm

Published: 2009/08/17 08

China Warms to New Credo - Business First

By MICHAEL WINES

BEIJING — So far this week, the World Trade Organization has rebuffed China in an important case involving Chinese restrictions on imported books and movies. The Chinese government dropped explosive espionage charges against executives of a foreign mining giant, the Anglo-Australian Rio Tinto, after a global corporate outcry. And on Thursday, the government said it had backed off another contentious plan to install censorship software on all new computers sold here.

Throughout its long economic boom, China has usually managed to separate its aggressive push into the global business arena from domestic politics, which remained tightly controlled by the Communist Party. But events this week raise the question of just how long it will be before the two meet.

In each of those matters, politics and business collided, and business won. Business does not always win, and when it does, as in these cases, the reasons are as often as not a matter of guesswork. But in at least some high-profile matters, China appears to be facing the reality that the outside business world can be freewheeling and defiant when its profits are threatened. And so China’s authoritarian system may also have to evolve in ways its top leaders may not readily endorse.

Beijing has a global footprint now, a consequence of its booming domestic growth and breakneck international expansion. And decisions that once were made on purely parochial grounds — like censoring Web sites, protecting the interests of its state-owned companies and restricting the flow of foreign news and entertainment into China — now have international ramifications.

“This is a country in the middle of a big transition in its global role,” said Kenneth Lieberthal, a veteran China analyst now at the Brookings Institution. “They’ve always looked in the past to what’s good for China, and they still do. But for the first time, added to that is the consideration that they’re in the position of being rule-makers, not just rule-takers.”

China’s leaders, he said, “are just beginning to learn how to handle that.”

Consider the following: Since late May, Beijing’s Industry and Information Technology Ministry had more or less insisted that so-called anti-pornography software, called Green Dam-Youth Escort, would eventually be packaged with every newly purchased computer.

On Thursday, the ministry backed down, calling the requirement a “misunderstanding” spawned by badly written rules. Officials offered no other explanation, but the retreat followed weeks of protests by outsiders — from foreign computer makers to foreign governments to foreign corporate branch offices — that said the software stifled free speech, compromised corporate security and threatened computers’ stability.

Computers are not the only example.

This week, the World Trade Organization told Beijing that it could no longer force providers of American books, music and films to distribute their goods through a local partner. Foreign companies saw that rule as an impediment to reaching a broad Chinese audience with their products. The Chinese market is flooded with pirated CDs and DVDs whose contents’ creators receive no money.

The Chinese legally may appeal the decision, but the foreign minister, Yang Jiechi, indicated in a Geneva speech that simply ignoring it was not an option. China worked for years to join the global trading system and is bound, as much as other nations are, by its rules.

“China will never seek to advance its interests at the expense of others,” Mr. Yang said, according to Reuters.

Similarly, Chinese prosecutors appeared this week to retreat from earlier statements that they would prosecute employees of Rio Tinto as spies for stealing state secrets.

While the espionage allegations were not spelled out, they were apparently related to delicate commercial negotiations over the price of China’s imports of iron ore for its steel mills.

Rio Tinto executives have strongly denied the accusations, and both the United States and Australia said China’s actions could have both business and diplomatic repercussions.

While the Rio Tinto employees still face lesser charges of bribery and theft of trade secrets, the espionage threats stirred broad unease among foreign companies operating in China, which feared that they could face persecution and closed-door trials for engaging in what much of the world would regard as bare-knuckle business tactics.

Yet whether such instances represent trends or exceptions — or neither — remains a matter of some debate.

Increasingly, many experts say, Chinese officials appear to be aware that their actions have far broader ramifications than they might have had even a few years ago.

“Fifteen years ago, the mantra in China was, ‘We’re the victims of a system that’s stacked against us,’ ” said James V. Feinerman, an expert on Chinese law and policy at Georgetown University in Washington.

China’s entry into the world trading system, he said, is slowly helping to change the nation’s view of itself from that of an outsider to an insider with a stake in the global system’s success.

Other experts note, however, that what outsiders see as carefully calculated policy changes may in fact be nothing of the sort.

The government’s decision to install censorship software on computers — and its subsequent reversal — is but one example, they say; the original proposal was probably pushed by a government clique that found itself outflanked once Internet users and foreign corporations began objecting to the plan.

“Is China susceptible to international pressure? Of course it is,” said Charles Freeman, a leading China scholar at the Center for Strategic and International Studies in Washington.

“China does have international interests, and they are impacted by what it does domestically,” he said. “There’s a constant battle between agencies over how much political capital to expend on international issues against domestic interests.”

In any case, few experts are willing to stake their reputations on a prediction that Beijing’s recent softening of some positions signifies a strong trend.

To the contrary, Mr. Feinerman said, China had undergone “a real pushback” in the last five years on some fronts, reasserting political dogma in some areas where commercial norms and the rule of law had begun to have more sway.

And Jonathan Hecht, an expert on Chinese law at Yale University’s China Law Center, said that developments in China should be viewed against a history of great leaps forward on such matters, followed by equally great retreats.

“I’ve given up predicting long-term trends,” he said.

Leaders: China Seeks Friendly Ties with Islamic Countries

China would cement friendship and cooperation with the Islamic countries based on the Five Principles of Peaceful Co-existence, President Hu Jintao told visiting Abu Dhabi's Crown Prince Mohammed bin Zayedal-Nahayanon, Aug. 14, 2009.(Xinhua Photo) Photo Gallery>>>

BEIJING, Aug. 14 (Xinhua) -- China would cement friendship and cooperation with the Islamic countries based on the Five Principles of Peaceful Co-existence, said President Hu Jintao on Friday afternoon.

China and the Islamic countries have maintained mutual respect and trust for a long time, and shown understanding and supported each other on issues concerning the core interest of the other side, Hu told visiting Abu Dhabi's Crown Prince Mohammed bin Zayedal-Nahayan.

Hu said China would like to promote dialogues and exchanges with different cultures and civilizations on the basis of the Five Principles of Peaceful Co-existence.

Abu Dhabi is the capital of the United Arab Emirates (UAE) that is now China's second largest trading partner and important supplier of energy resources in the Arab world.

China and the UAE had enjoyed political trust, mutual support and reciprocal trade cooperation since they forged diplomatic ties25 years ago, said Hu, adding they had also maintained consultations on the international and regional issues.

"We appreciate the UAE government for its adherence to the one-China policy, as well as its support on the Taiwan issue and the issues concerning Tibet and Xinjiang," Hu said.

The president said the two countries were facing new opportunities for furthering relations, and China would work with the UAE to enhance cooperation to benefit the two countries and peoples.

Chinese Premier Wen Jiabao meets with Abu Dhabi's Crown Prince Mohammed bin Zayedal-Nahayan, Aug. 14, 2009.(Xinhua Photo) Photo Gallery>>>

Also on Friday, Chinese Premier Wen Jiabao met with bin Zayedal-Nahayan.

Wen said the common grounds had increased between China and the UAE in coping with the global financial crisis, and both should take effective measures to expand cooperation on energy, trade, investment and financial fields.

He also said China would like to actively consult with the Gulf Cooperation Council (GCC) on the early signing of a free trade zone agreement.

bin Zayed al-Nahayan, who is making his first China tour since he became crown prince, said the UAE hoped to establish strategic cooperation with China in trade, oil and petrochemical fields.

He also said the Xinjiang riot on July 5 was China's internal affairs, and his country supported the Chinese government's effort to safeguard national unity, security and stability.

Editor: An

Can China Save the World?

by Bill Powell

On a steamy saturday afternoon just outside Shanghai, Zhang Yi is in a blessedly cool General Motors showroom, kicking the tires of the company's newer models. He's not there to beat the heat. He drives a small Volkswagen now and wants to upgrade. A middle manager at a state-owned steel company, Zhang has no worries about his job or China's economy. "Things are still pretty good," he says. "I have no problem now affording one of these," nodding toward the array of gleaming new Buicks nearby. (Read "China's Booming Car Market Shifts into Reverse.")

There aren't a lot of places in the world these days where consumers speak with that kind of confidence. With the U.S., Japan and all of Europe mired in the worst global recession in 30 years, China has shown a restorative strength that six months ago many doubted it had. A devastating slump in exports crippled growth late last year, but on the back of a $586 billion government stimulus program — about 13% of GDP, spread over two years — China has snapped back. The economy grew 7.9% in the second quarter and will now probably expand 8% or more this year. Evidence of increasing momentum appears almost every day. Factory production has begun to edge up, in part because Chinese consumers continue to spend money at a healthy pace. Auto sales, helped significantly by government subsidies for small-car purchases, hit an all-time record in April and will easily surpass those in the U.S. this year. Overall, retail sales in China this year are up 16%. (Read "Is China's Economy Strong Enough To Save the World?")

Numbers alone do not capture the sense that the balance of global economic power is shifting eastward. There have been several moments that seemed to crystallize the zeitgeist, none more memorable than U.S. Treasury Secretary Timothy Geithner's speech in June before the best and the brightest at Peking University, the Harvard of China. Not long ago, students there would have been the most respectful and polite of audiences. Yet when Geithner tried to reassure one questioner that China's investments in U.S. government debt were "very safe," the response was perhaps an indication of the onset of a new economic order: the students laughed.

The U.S., the unquestioned leader of the global economy, is now in the midst of a disorienting shift in economic policy, away from the let-it-rip form of capitalism that has guided it for almost 30 years and toward more overt government control and regulation of huge swaths of the economy. No one yet can safely say whether this is wise, but in the U.S. it is certainly the stuff of increasingly fierce debate. No such doubts are evident in China, where the government reacted to the crisis with alacrity and the economy is now responding in kind.

That's why, for global companies like General Motors, China is no longer the future. It's the present. Of the world's 10 biggest economies, China's is the only one that is growing, and it could soon surpass Japan's to become the world's second largest. The Shanghai exchange has soared more than 80% this year, by far the best performance among major markets. Nations that depend on producing commodities, such as Australia and Brazil, have benefited immensely over the past six months as demand from China has driven up the price of raw materials. Helped by trade with China, Asia's export-driven economies are sputtering back to life. Overall, the International Monetary Fund (IMF) forecasts that in the three years from 2008 to 2010, China will, astonishingly, account for almost three-quarters of the world's economic growth. Not surprisingly, China has now become the focus of a world that is looking for a way out of the swamp. As Shanghai-based economist Andy Xie puts it, "Everyone wants to know the same thing: Can China save the world?"

Trading Places
A few years ago, that question — and the notion that China could drive global growth — would have seemed absurd. After all, China's economy was dependent on manufacturing, which was in turn dependent on demand from the U.S., the world's undisputed economic locomotive. But that engine remains sidetracked. The IMF predicts the U.S. economy will contract 2.6% this year. American home prices continue to fall in some cities, while the unemployment rate has soared to 9.5%, the highest since 1983. The U.S.'s much ballyhooed stimulus plan has so far yielded little measurable benefit, save putting some spark back in stock markets. The absence of real signs of recovery has Washington discussing the possibility of yet another round of stimulus spending, despite a ballooning federal budget deficit.

Read "China Takes on the World."

See The China Blog.

The speed and relative success so far of China's stimulus stands in stark contrast with that of the U.S. According to a recent study by the World Bank, Beijing's government spending will generate more than 80% of the country's overall economic growth this year. This is partly because China was already in the midst of a nationwide infrastructure program when the recession hit. Emergency spending measures simply added to existing schemes already under way. In other words, the projects really were shovel-ready, and the money hit the streets quickly — and in large dollops. Outlays on new railway construction, for example, were $41 billion last year. They will be $88 billion this year. Says one senior FORTUNE 500 executive: "In the U.S., NIMBY [not in my backyard] is still the order of the day, whereas in China it's more like IMBY. They build where they want, when they want. And they move fast." (Read "A New Deal for China?")

China's recovery and growing economic importance have led some to suggest that global institutions such as the Group of Eight — the U.S., the U.K., Canada, France, Germany, Italy, Japan and Russia — are becoming obsolete; that the only dialogue that really matters going forward is the conversation between the "G-2": China and the U.S. On July 27, President Barack Obama appeared to acknowledge this when, addressing participants in high-level talks between the two countries, he said Washington's relationship with Beijing would "shape the 21st century." In recent months, Beijing has started to throw its weight around. China seeks — and will almost certainly soon get — greater voting rights in the IMF. In June, China agreed to buy up to $50 billion in bonds issued by the IMF to boost the fund's capacity to deal with the global financial crisis. Earlier this year, Chinese leaders, worried about the strength of the U.S. dollar and the safety of their own $763.5 billion investment in U.S. Treasury Department debt, called for the creation of an alternative to the greenback as a global reserve currency. More recently, Beijing has signaled an intention to slowly establish its own currency, the renminbi, as a dollar alternative in international trade by providing subsidies for Chinese companies to price their exports in renminbi. One economist, Qu Hongbin of HSBC in Hong Kong, goes so far as to say that 40% to 50% of China's overall trade flows could be settled in renminbi by 2012 (though few other economists believe this will happen anywhere near that fast). This willingness to make its positions known publicly and push other governments to see things China's way "is very different from 10 years ago, when Beijing was much quieter and more low-profile," says Jun Ma, an economist at Deutsche Bank in Hong Kong. (See China covers.)

Indeed, China is increasingly open about both its ambitions and its concerns over U.S. economic policy, given its position as Washington's largest foreign creditor. Beijing never signed on to what became known in the late 1990s as the Washington Consensus on global economic policy, which called for free trade, privatization, light-touch regulation, prudent fiscal policies and — at least as many interpreted the consensus — free capital flows. The U.S. Treasury, in the wake of the credit meltdown, has put forward a plan to enhance regulation of its own capital markets, but that is unlikely to prevent Beijing from continuing to push for the IMF to take a greater role in policing global markets. At its core, despite embracing many aspects of the market, China runs a top-down, command-and-control economy, and its success so far in skating through the recession relatively cleanly may encourage other developing countries to adopt its brand of capitalism.

Not So Fast
still, the best possible answer to the question of whether China can save the world is: Not yet. Plenty of economists doubt that China's economy is as sound as it appears or truly on the road to a sustained recovery. And many more dismiss the chatter about China as the world's economic savior as hopelessly premature.

China's overall economic vigor may continue to impress, but there are questions surrounding the quality of its performance. The People's Bank of China, the central bank, is giving great gobs of money to state-owned banks that, with Beijing's forceful encouragement, are lending to state-owned companies participating in infrastructure construction. Skeptics are frightened by the amount of cash being shoveled out the doors. The central bank recently announced that new loans in June totaled $224 billion. That was more than double the previous month's amount and brought new bank lending in the first six months of the year to nearly $1.1 trillion, exceeding the total for all of 2008.

Read "Why China's State-owned Companies Are Making a Comeback."

See pictures of life on the fringes of the People's Republic.

To optimists, the June data showed just how determined the Chinese government is to implement effective monetary countermeasures to fight the downturn. As Peking University finance professor Michael Pettis says, China is "throwing everything including the kitchen sink'' at the problem. There is no question that as a result of the flood of financing, a lot of Chinese have jobs they otherwise wouldn't. But, as Grant's Interest Rate Observer, an influential Wall Street newsletter, points out in its latest issue, "Massive injections of money and credit ... are always bullish before they are bearish." The newsletter draws worrying parallels between China's current credit boom and the gush of lending that produced the U.S. housing bubble, the collapse of which devastated the financial sector and triggered the global credit crisis and current recession.

There are certainly signs that some aspects of China's recovery are ephemeral. Part of the reason China's stock market has soared is that Chinese companies have received so much cheap financing that they have dumped proceeds into the equity market for lack of better alternatives. Andrew Barber, Asia strategist at Research Edge, a New Haven, Conn., investment-research firm, estimates that up to 30% of new bank lending this year has wound its way into equities. Why isn't the money going into new businesses? The evidence suggests that in key parts of the economy growth remains anemic, particularly the important export-manufacturing sector, which continues to suffer from the reduction in global demand. According to a report from Fitch Ratings in the U.S., Chinese lending continues to accelerate even though corporate profits overall are shrinking — suggesting that China may be incubating its own financial crisis that could be triggered when the adrenal rush of the stimulus wears off. (Read "Is a China Stock Bubble Forming?")

Little Big China
Those caveats are important. But China's technocrats are well aware of the risks they are running. "They came into this [crisis period] with eyes wide open," says Barber, recognizing that loans being granted in a relatively weak economic climate could start to go bad in droves. The country's once shaky financial sector was cleaned up several years ago — in 2007, nonperforming loans amounted to just 3% of total bank assets — and vehicles set up to deal with China's last banking crisis still exist. In other words, Beijing thinks its financial system is strong enough to handle the risks of its very loose monetary policy.

To be sure, even if darker scenarios never unfold and China's economy continues to power ahead, it will probably not, on its own, be enough to drag the rest of the world into a recovery. Size matters. The U.S. has a $14 trillion economy; China's is $4.4 trillion. The U.S. accounted for nearly 21% of total global GDP last year; China just 6.4%. Chinese consumption, in other words, is growing — but is still insufficient to lift the world's advanced economies out of recession. Consumer spending drives less than 40% of China's GDP; in the U.S. before the bust, the consumer accounted for almost 70%. With American shoppers now on the sidelines — the U.S. savings rate has soared from zero to nearly 7% in the past nine months as consumers have closed their wallets — the world desperately needs someone to step into that void. (Read "China Won't Ride to World's Economic Rescue.")

China can help. But it remains a relatively poor country, with an annual per capita income of $6,000, compared with $39,000 in the U.S. and $33,400 in the E.U. To be solidly middle class in China's big cities is to have an income of about $12,000. Brisk though auto sales may be, most Chinese still can't afford a Volkswagen or a Buick, let alone a BMW. Even as China's consumers feel richer, their share of its economy may not change much until Beijing enacts reforms to the health-care and social-security systems, steps that would give people more confidence to spend rather than save. Last year, says Peking University's Pettis, China's consumption was about the equivalent of France's. No one is calling on France to save the world. (Read "China's Auto Bailout Takes a Different Route.")

China faces enormous challenges — a massive shift of population from rural areas to cities, cleaning up decades of environmental degradation, continuing to provide the increase in prosperity that has underpinned political stability. Given their scale, it should surprise nobody that it is still most concerned with saving itself economically — not anyone else. Beijing is most unnerved by the prospect of labor unrest of the sort that resulted in the death on July 24 of a steel-company executive in northeast China at the hands of a mob.

But the resilience of the Chinese economy is no mirage. If Beijing can come through the global crisis without an economic meltdown of its own, its leaders' reputation and confidence will be boosted. An economic model that survives the worst downturn since the Great Depression will have undeniable appeal in the developing world, at a time when the Washington Consensus is thoroughly shot. Beijing, before the crisis, was already rising, its global reach and influence expanding. As the rest of the world falters, that is truer than ever. China is not yet the leader of the global economy. But it's getting there.

— with Reporting by Austin Ramzy / Beijing

See pictures of China's investment in Africa.

E-commerce Fever Makes Taobao China’s Newest Internet Darling

By DAVID BARBOZA

YIWU, China — In the months leading up to his college graduation in June, Yang Fugang spent most of his days away from campus, managing an online store that sells cosmetics, shampoo and other goods he often buys from local factories.

Today, his store on Taobao.com — China’s fast-growing online shopping bazaar — has 14 employees, two warehouses and piles of cash.

“I never thought I could do this well,” said Mr. Yang, 23, who earned $75,000 last year. “I started out selling yoga mats and now I’m selling a lot of makeup and cosmetics. The profit margins are higher.”

Taobao fever has swept Mr. Yang’s school, Yiwu Industrial and Commercial College, where administrators say a quarter of its 8,800 students now operate a Taobao shop, often from a dorm room.

Across China, millions of others — recent college graduates, shopkeepers and retirees — are also using Taobao to sell clothes, mobile phones, toys and just about anything else they can find at neighborhood stores and wholesale markets or even smuggle out of factories.

Internet analysts say this booming marketplace — reminiscent of the early days of eBay, when Americans started emptying their attics for online auctions — has turned Taobao into China’s newest Internet darling.

Though just six years old, Taobao (Chinese for “to search for treasure”) already has 120 million registered users and 300 million product listings. Its merchants produced nearly $15 billion in sales last year.

The company claims that sales through its Web site are already larger than any Chinese retailer. And, Internet analysts say, sales on its site this year will surpass Amazon.com’s expected sales of about $19 billion.

“This is the next big segment for China’s Internet,” said Jason Brueschke, an Internet analyst at Citigroup in Hong Kong. “It’s their Amazon and eBay combined.”

Like eBay, Taobao does not sell anything itself; it simply matches buyers and sellers. It has a firm foothold in China because many parts of the country still have poor transportation and some local authorities favor their own government-owned outlets, making the retailing system inefficient.

The global recession also left once-booming factories overflowing with goods the rest of the world does not seem to want.

The so-called Taobao addicts are helping to pick up the slack in a sluggish economy. “I can’t live without Taobao,” said Zhang Kangni, a graduate student in Shanghai. “First, it’s cheaper. I found a dress at a store in Shanghai. It’s a Hong Kong brand that sells for $175. I found it on Taobao for $33.”

But skeptics ask: Can Taobao actually make a profit and emerge as a true Web powerhouse?

The company is not publicly traded and therefore does not disclose financial information, but listings are free on Taobao and the company makes no money from online transactions. Almost all Taobao’s $200 million in revenue comes from advertising, which the company says covers virtually all its operational costs.

The company has been criticized, however, for contributing to a flourishing trade in counterfeit goods. Taobao brushes aside such criticism, saying it has a new program that is effectively cracking down on counterfeits.

Company executives also say Taobao is poised to earn huge profits, but that their first priority is creating an online community.

“Our vision for Taobao is to build a consumer’s paradise, where people can shop online and have fun,” Jonathan Lu, Taobao’s president, said. “If you make the company better and better, profits will naturally follow.”

His confidence in Taobao’s future comes from the company’s lineage. It is a division of the Alibaba Group, which was founded by Jack Ma. In the past decade, Mr. Ma has created an Internet conglomerate with strong financial backing from Yahoo, Goldman Sachs and the Softbank Group of Japan. Yahoo owns about 40 percent of Alibaba.

Alibaba.com — the conglomerate’s flagship Web site — connects small businesses from around the world with Chinese exporters. Taobao.com does something similar for consumers who want to sell to other consumers.

When Taobao was founded in 2003, it appeared to have no chance. EBay and its Chinese partner, EachNet, controlled 90 percent of China’s online shopping. But Mr. Ma, a former English teacher, quickly undermined eBay’s fee-based service by offering free listings on Taobao, essentially giving away ads to anyone who wanted to sell.

At the time, eBay executives ridiculed the strategy, with many repeating that “free is not a business model.”

But almost immediately, the site took off, and in 2006, eBay pulled out of China, citing dwindling market share and large losses. Today, it is Taobao that commands 80 percent of China’s e-commerce market, according to iResearch.

“Taobao is dominant,” said Richard Ji, an Internet analyst at Morgan Stanley in Hong Kong. “They’re like an online Wal-Mart.” Mr. Ji says Taobao is a threat not only to traditional retailers but also to big Chinese Internet companies, like Baidu, a leading search engine, because they are competing with Taobao for many of the same advertisers.

Taobao has thrived, Internet analysts say, because people do not need much capital to start online stores. This year, Taobao says its site could help create half a million new jobs, mostly among young people opening new online stores.

Bao Yifen, a 23-year-old recent college graduate, opened her clothing shop with a $5,000 investment in 2007. Today, her Taobao store has sales of about $4,000 a month.

“Three times a week I go to the wholesale market,” Ms. Bao said. “It’s a huge market. About 70 to 80 percent of the stuff is factory leftovers. There are even some brands, but they just cut the labels off.”

Items smuggled into China from Hong Kong, Europe or the United States are also sold on Taobao, evading high import duties and enabling sellers to profit by undercutting the prices of merchandise in regular stores. An Apple MacBook Air that sells for $2,225 in Beijing, for instance, costs just $1,508 in Hong Kong, a difference of 33 percent.

Counterfeit goods are also readily available, even though Taobao claims to have removed two million “fake branded goods” from the site.

Nevertheless, many Taobao sellers acknowledge dealing in illegal goods.

“I work in an O.E.M. factory that produces laptops and electronic devices for Sony,” said one such seller, who identified himself Mr. Feng, referring to an original equipment manufacturer that produces goods for global companies. “We have Sony’s core technology and exactly the same raw materials and components, so we set up our own store selling netbooks and laptops on Taobao.”

A spokesman for Sony, Takashi Uehara, said the company had no comment but was looking into the matter.

Here in Yiwu, which claims to be the site of the world’s biggest wholesale market, Taobao has started to change the look of Yiwu Industrial and Commercial College.

The school’s vice dean, Jia Shaohua, points out an area designated as a start-up site for students seeking to get rich. He points to students taking orders by computer, packaging products, sorting inventory and taking photos of the items for display online, then adds, “Around the school now, there is a whole Taobao industrial chain.”

Every afternoon, even this summer, when the school should be relatively empty, one can hear the ripping sounds of tape being wrapped around boxes in a building that could pass for a United Parcel Service shipping terminal.

“The students don’t need a lot of money,” Mr. Jia said. “They just get orders and go find the items at local factories.”

Mr. Yang, the cosmetics seller, has become a campus hero. He operates his own warehouses a few miles from the school, in the basements of a pair of residential buildings.

Standing in his crowded warehouse, near boxes of Neutrogena sun block, hairpins, toothbrushes and a wide assortment of cosmetics, Mr. Yang says business could not be better.

“Soon, I’ll reach $150,000 a month in sales,” he said, flashing a big grin.

Activist’s Detention Shakes China’s Rights Movement

By ANDREW JACOBS

BEIJING — China’s nascent legal rights movement, already reeling from a crackdown on crusading lawyers, the kidnapping of defense witnesses and the shuttering of a prominent legal clinic, has been shaken by the detention of a widely respected rights defender who has been incommunicado since the police led him away from his apartment 12 days ago.

Xu Zhiyong, 36, a soft-spoken and politically shrewd legal scholar who has made a name representing migrant workers, death row inmates and the parents of babies poisoned by tainted milk, is accused of tax evasion. The accusation is almost universally seen here as a cover for his true offense: angering the Communist Party leadership through his advocacy of the rule of law.

If convicted, he could face up to seven years in prison.

“We’re all shocked by his detention, because Xu Zhiyong has always tried to avoid taking on radical and politically sensitive cases,” said Teng Biao, a colleague. “His only interest is fighting for the rights of the vulnerable and trying to enhance China’s legal system.”

Mr. Teng helped Mr. Xu establish the Open Constitution Initiative, a six-year-old nonprofit legal center that the authorities closed last month, charging that it was improperly registered and that it failed to pay taxes.

Mr. Xu is not the first rights advocate in China to face the wrath of the authorities in recent years. Gao Zhisheng, a vocal lawyer, vanished into police custody six months ago, and Chen Guangcheng, a blind lawyer, was beaten and then jailed after exposing abuses in China’s birth-control program.

Although rights lawyers and grass-roots social organizations have always been tightly controlled here, the pressure has intensified in recent weeks. More than 20 lawyers known for taking on politically tinged cases were effectively disbarred, and the police raided a group that works to ease discrimination against people with Hepatitis B.

Last week, China’s justice minister gave a speech saying lawyers should above all obey the Communist Party and help foster a harmonious society. To improve discipline, the minister said, all law firms in China would be sent party liaisons to “guide their work.”

But given Mr. Xu’s international stature and reputation for working within the law, legal scholars both in China and abroad say his prosecution suggests a new level of repression.

“What makes his detention particularly disturbing is that he’s a special figure in so many ways,” said Paul Gewirtz, director of the China Law Center at Yale Law School, which helped Mr. Xu establish his legal center, known here by its Chinese name, Gongmeng. “He’s at the forefront of advancing the rule of law, which is something everyone agrees China needs for its ongoing development.”

After 30 years of reform, China’s legal system is at a critical juncture. Law schools continue to pump out thousands of graduates each year, and the courts, even if imperfect, have increasingly become a forum for resolving disputes. Late last month the Supreme People’s Court announced reforms intended to markedly reduce executions.

But as lawyers here discover, there are limits to China’s embrace of judicial reform.

The Constitution, which includes guarantees of free speech and human rights, is unenforceable in court. Judges routinely ignore evidence, making determinations based on political considerations. And when it comes to vaguely defined offenses like “subversion of state power” or the invoking of “state secrets” laws, even the best-trained lawyers are powerless to defend the accused.

He Weifang, a law professor and legal adviser to Gongmeng, said conservative forces in the Communist Party were increasingly wary of lawyers, who they suspect are ultimately seeking to challenge one-party rule. Their greatest fear, Mr. He said, is that advocacy lawyers and civil society organizations could one day lead a pro-democracy movement among the poor and disenfranchised citizens they represent.

“What the authorities don’t appreciate, though, is that lawyers are leading these people to the courts, where their complaints can be resolved by rule of law,” he said. “People like Xu Zhiyong can only help the government solve some of the problems it faces.”

According to Gongmeng, Mr. Xu is being held at the Beijing No. 1 Detention Center, although public security officials have not confirmed that he is in their custody. Peng Jian, a lawyer who is advising Gongmeng, said the authorities had imposed a $208,000 penalty for nonpayment of taxes due on funds received from Yale for cooperative research projects.

A day after the raid on Gongmeng’s office, Mr. Xu held a news conference to say that the accusations were baseless. He described the attack on his research center as a battle between corrupt officials and society’s most vulnerable citizens. “We believe conscience will surely triumph over the evil forces,” he said.

A week later, police officers came to his door and led him away. Another employee of the research center, Zhuang Lu, was also taken away the same day.

Soon after graduating from Peking University law school, Mr. Xu became immersed in the case of a graphic artist who was beaten to death in 2003 in police custody in the southern city of Guangzhou. The artist, Sun Zhigang, 27, had been arrested under vagrancy laws that allowed the police to detain people for traveling outside their registered hometowns without a permit.

Mr. Xu led a campaign to end the practice, which gained widespread media attention. A few months later, the State Council abolished the system.

That same year Mr. Xu rose to the defense of a muckraking editor jailed in Guangzhou after his newspaper, Southern Metropolis, ran a series of articles about Mr. Sun’s death. The editor, Cheng Yizhong, said Mr. Xu helped rally lawyers and journalists, leading to his release five months later. “Only Xu had the courage to take on my case,” he said.

More recently, he was preparing a challenge to black jails, the illegal holding cells that some officials use to silence persistent critics. Last year, friends say, he was roughed up several times while gathering evidence from petitioners who had come to Beijing to press their grievances to the central government.

Although he was less outspoken than some other rights activists, Mr. Xu did not shy away from cases that were bound to upset China’s power elite. Last May Gongmeng published a study challenging the official verdict that blames the Dalai Lama for the 2008 riots in Tibet. The report, disseminated online and sent to government leaders, said legitimate grievances born from failed government policies were largely responsible for the unrest.

Raised in a Christian home in Henan Province, Mr. Xu was fond of noting his birth in a county called Minquan, which translates as “civil rights.” In an interview last year with The Economic Observer, a Chinese weekly, he said this had a profound impact on his social consciousness.

“I strive to be a worthy Chinese citizen, a member of the group of people who promote the progress of the nation,” he said. “I want to make people believe in ideals and justice, and help them see the hope of change.”

Jonathan Ansfield contributed reporting, and Huang Yuanxi contributed research.

Migrants to China’s West Bask in Prosperity

By ANDREW JACOBS

SHIHEZI, China — They marched through the streets of Beijing, Shanghai and countless small towns propelled by patriotic cheers and thumping drums. It was 1956, and Mao Zedong was calling on China’s youth to “open up the west,” the vast borderland known as Xinjiang that for centuries had defied subjugation.

After a monthlong journey by train and open-air truck, thousands arrived at this Gobi Desert army outpost to find that the factory jobs, hot baths and telephones in every house were nothing but empty promises to lure them to a faraway land.

“We lived in holes in the ground, and all we did night and day was hard labor,” recalled Han Zuxue, a sun-creased 72-year-old who was a teenager when he left his home in eastern Henan Province. “At first we cried every day but over time we forgot our sadness.”

More than five decades of toil later, men and women like Mr. Han have helped transform Shihezi into a tree-shaded, bustling oasis whose canned tomatoes, fiery grain alcohol and enormous cotton yields are famous throughout China.

This city of 650,000 is a showcase of the Xinjiang Production and Construction Corps, a uniquely Chinese conglomerate of farms and factories that were created by decommissioned Red Army soldiers at the end of the civil war.

“Put your weapons aside and pick up the tools of construction,” one popular slogan went. “Develop Xinjiang, defend the nation’s borders and protect social stability.”

With a total population of 2.6 million, 95 percent of it ethnic Han Chinese, Shihezi and a string of other settlements created by the military are stable strongholds in a region whose majority non-Han populace has often been unhappy under Beijing’s rule. Last month, that discontent showed itself during vicious ethnic rioting that claimed 197 lives in Urumqi, the regional capital, which is a two-hour drive away.

The government says that most of the dead were Han Chinese bludgeoned by mobs of Uighurs, Muslims of Turkish ancestry whose presence in Xinjiang has been steadily diluted by migration from China’s densely populated east.

“Ever since we arrived they’ve resented us and had no appreciation for how we’ve improved this place,” said He Zhenjie, 76, who has spent his adult life leveling sand dunes, planting trees and digging irrigation ditches. “But we’re here to stay. The Uighurs will never wrest Xinjiang away.”

Even if many Uighurs view the settlers as nothing more than Chinese colonists, many Chinese consider the bingtuan, meaning soldier corps, a major success. In one fell swoop Mao deployed 200,000 idle soldiers to help develop and occupy a resource-rich, politically strategic region bordering India, Mongolia and the Soviet Union, a onetime ally turned menace.

Shihezi and other bingtuan settlements quickly became self-sufficient, a relief to a government lacking resources, and its “reclamation warriors” worked without pay those first few years, steadily turning thousands of acres of inhospitable scrubland into some of the country’s most fertile terrain.

With an annual output of goods and services of $7 billion, the settlements run by the bingtuan include five cities, 180 farming communities and 1,000 companies. They also report directly to Beijing and run their own courts, colleges and newspapers.

“During peaceful times, they are a force for development, but if anything urgent happens, they will step out and maintain social stability and combat the separatists,” said Li Sheng, a researcher at the Chinese Academy of Social Sciences and a former bingtuan member who writes about the region’s history.

In those early years, the ranks of the bingtuan were fortified by petty criminals, former prisoners of war, prostitutes and intellectuals, all sent west for “re-education.” During the mid-1950s, 40,000 young women were lured to Xinjiang with promises of the good life: they arrived to discover their main purpose was to relieve the loneliness of the male pioneers and cement the region’s Han presence through their progeny.

Demographics have always been a tactical element of the campaign to pacify the region. In 1949, when the Communists declared the establishment of the People’s Republic of China, there were just 300,000 Han Chinese in Xinjiang. Today, the number of Han has grown to 7.5 million, just over 40 percent of the region’s population. The percentage of Uighurs has fallen to 45 percent, or about 8.3 million.

Their grievances have multiplied even as Xinjiang has grown more prosperous, thanks in part to its huge reserves of natural gas, oil and minerals. Many Uighurs complain about the repression of their Islamic faith, official policies that marginalize their language and a lack of job opportunities, especially at government bureaus and inside the bingtuan.

During a recent visit to Shihezi, armed paramilitary policemen stopped every car and bus entering the city. But only Uighurs were made to step out of vehicles for identification checks and searches.

Neatly laid out on a grid, its sidewalks graced by apple trees and elms, the city is populated by the sturdy and defiantly proud who think of Xinjiang as China’s version of Manifest Destiny, the doctrine undergirding the westward expansion of the United States in the 19th century. But just beneath the self-satisfaction runs a deep vein of bitterness, especially among those who arrived in the 1950s and 1960s.

“I thought I was going to be a nurse, but I ended up sweeping the streets and cleaning toilets,” said Yue Caiying, who moved here in 1963, and, like many of those with an education, was forced to set aside personal ambition.

Lu Yiping, an author who spent five years interviewing women trucked into Xinjiang from Hunan Province, tells of girls lured with promises of Russian-language classes and textile-mill jobs. In an interview published online, he told the story of arriving women greeted by Wang Zhen, the famously hard-line general who helped tame the region. “Comrades, you must prepare to bury your bones in Xinjiang,” he quoted Mr. Wang as telling the women.

Still, for many early settlers, Xinjiang offered an escape from the deprivation that stalked many rural areas between 1959 and 1962, when Mao’s disastrous attempt to start up China’s industrialization led to famine that killed millions.

Early settlers like Ma Xianwu, who arrived here in 1951 and helped dig the first thatch-covered pits that served as shelter, offer a typical mix of conflicted emotions. He expressed wonder at the city he had helped create, but also sorrow over the hardship he and others had endured.

“People would lose ears and toes to frostbite,” said Mr. Ma, who is 94 and nearly toothless.

But any sense of bitterness has faded. “We were serving the motherland,” he said, waving off the adulation of a visitor. “The glory belongs to the party. I’m just one drop of water in the ocean.”

China Says Migrants Are Employed Again

By ANDREW BATSON

BEIJING -- China's government said most rural migrant workers have found new jobs after mass layoffs last year, indicating the effects of its stimulus are filtering into the job market. But the downturn is still being felt in weaker growth of household incomes, which could hold back consumer spending.

Less than 3% of migrant workers who have returned to cities in recent months are still looking for jobs, said Wang Yadong, a deputy director-general at China's labor ministry. He said 95% of migrant workers preferred to seek work in cities this year rather than go back to farming. He declined to give more detailed figures, and didn't explain how the estimates were made. Mr. Wang's report is the first official update since February on the migrant job situation.

Itinerant rural workers are the backbone of China's manufacturing and construction industries, with tens of millions crossing the country every year for work. Officials previously estimated that 18 million to 23 million of them -- about 13% to 15% of the migrant-worker population -- had lost their jobs as of January.

Since then, China's economy has pulled back from the brink, thanks to a huge expansion of government investment and lending from state banks. "Our economic stimulus plan has had a clear impact on employment," said Liu Yuanchun, an economist at Renmin University in Beijing.

He noted that while the job market is performing better than many expected a few months ago, the picture is cloudy because government figures aren't reliable. "The actual number of migrant workers who have returned to the cities and found jobs may not be as high as the official figures say," he said.

• China Journal: Fears of Migrant Unrest Have Faded

Yet there are other scattered signs of an improving job market. Recent purchasing managers' index surveys indicate many manufacturers added jobs in May and June. And the government's revenue from income taxes rose 2% in the second quarter, according to economist Stephen Green of Standard Chartered, which also suggests payrolls are expanding.

The International Monetary Fund says businesses such as consumer-durables manufacturing and infrastructure construction are absorbing the laid-off workers.

Mr. Wang said the government's estimate of the total migrant worker population had increased by about 10 million since the end of 2008, to 150 million people in June. That figure could be evidence that job opportunities are still drawing more people off the farm this year.

He said the government will continue measures to boost employment, as three million recent college graduates have yet to find a job. "China's employment situation is still very serious," Mr. Wang said. "There are still a lot of companies whose businesses are in trouble, and the risk of job losses is still high."

New jobs for migrants this year may not be as good as those they had before. Some scholars report that migrant workers have often had to accept lower wages to find new work in recent months. The southern city of Shenzhen, long a magnet for migrant workers, recognized this trend by cutting its average wage guideline for this year by 3.8%, to 2,750 yuan ($402) a month.

Official measures of income and consumption are still rising this year, although at a slower rate. The government's survey of rural households shows average income from migrant work grew 7.7% in the first half of 2009, down sharply from 19.6% growth in the same period last year.

Yet a central-bank survey in May found urban households' satisfaction with their income was at its lowest level since 1999. Mr. Liu, the Renmin University economist, said official income figures don't include commissions or bonuses, which are likely to be down sharply. "Many people feel their incomes are declining, and their expectations for future income are not so great, so they are cutting back on their daily consumption," he said.

Write to Andrew Batson at andrew.batson@wsj.com

China’s Tally of 718 Arrests in July Riots Is Questioned

By MICHAEL WINES

BEIJING — Chinese authorities said Tuesday that they had taken 718 people into custody in connection with last month’s ethnic riots in the western region of Xinjiang, but an official with an ethnic Uighur exile group said the true number was far higher.

The new report, released by the state-run Xinhua news agency, left it unclear whether the 718 detainees represented the total of suspects captured since the July 5 unrest, or were in addition to previous arrests and detentions. The government had previously said that more than 1,500 people had been detained after the riots.

Nor was it clear how many of the suspects had been charged with crimes. State radio, quoted by Reuters, reported on Tuesday that 83 suspects had been accused of crimes ranging from murder and arson to assault and disturbing the peace.

The Xinjiang riots in the regional capital, Urumqi, killed at least 197 people — most of them ethnic Han Chinese, officials said — and injured about 1,100 others. The violence broke out after Uighur residents, the area’s original settlers, marched to protest the treatment of Uighur factory workers involved in a disturbance in eastern China.

The resulting unrest was the worst ethnic violence in China in at least a decade. Tuesday’s Xinhua report, a summary of progress in the official inquiry into the riots, quoted the head of Urumqi’s Public Security Bureau, Cehn Zhuangwei, as saying that 718 “criminals who disturbed the peace” had been detained. Investigators were pursuing nearly 600 important leads, he said, and were examining hundreds of photographs and video clips, as well as DNA samples in an effort to track down those involved in the violence.

In Washington, Omar Kanat, the vice president of the World Uighur Congress, an exile group, said that the Chinese reports of detainees were understated, and that the new report of 718 detentions could only add to previously reported totals.

“Many people are calling us every day, and they say the number of arrests exceeds five, six thousand,” he said in a telephone interview. “We cannot confirm that. But we know that the numbers of arrests are much more than the Chinese figures.”

Most of the detained people are of Uighur descent, he said, adding that Uighurs in Xinjiang have told the organization in recent days about a wave of new detentions in Urumqi and surrounding areas.

China Seals Off Remote Town in Northwest After Three Die of Pneumonic Plague

By Ariana Eunjung Cha
Washington Post Foreign Service
Tuesday, August 4, 2009

BEIJING, Aug. 3 -- Chinese authorities have sealed off a remote town in northwestern China after three people died of pneumonic plague and eight others were infected with the highly contagious lung disease.

The Qinghai province health bureau said a 32-year-old herdsman and a 37-year-old neighbor in Ziketan, a Tibetan town of 10,000, have died. A doctor at a nearby hospital where patients are being treated said a third victim, who was 64, died about 6:40 a.m. Monday.

Chinese authorities have said most of the other infected patients are in stable condition, but Wen Xin, a physician at the Tibetan Hospital of Xinghai County in Qinghai, said the wife of the herdsman was in serious condition and coughing up blood. He said an additional 13 people are being quarantined at the hospital for observation.

"City leaders, plague experts and cadres from national and local disease control and prevention departments are all in the village," Wen said.

Pneumonic plague is caused by the same bacterium as bubonic plague, or Black Death, which is estimated to have killed 25 million people during the Middle Ages. While bubonic plague is transmitted by infected fleas, pneumonic plague moves person-to-person through the air, according to the World Health Organization. Patients typically become infected by being in close contact with someone who has the plague and is coughing, or by handling contaminated articles. If left untreated, pneumonic plague can cause death within 24 hours of the onset of symptoms.

Vivian Tan, spokeswoman for the WHO in Beijing, said that the origin of the pneumonic plague outbreak in China is unknown but that similar outbreaks have occurred sporadically over the years in Africa, the former Soviet Union, the Americas and some Asian countries. In 2003, the most recent year for which figures are available, 2,118 people in nine countries were infected and 182 died.

Tan said that the agency was informed of the infections over the weekend and that it is monitoring the situation but has not sent personnel to the affected region. "According to the information we received, the situation is under control and the Chinese authorities have the experience to deal with this," she said.

Since the outbreak of severe acute respiratory syndrome in 2003, during which China's slow and secretive response was blamed for the spread of SARS worldwide, the government has overhauled how it deals with disease outbreaks. Its aggressive approach to swine flu in recent months is credited with keeping the number of infected within its borders to a minimum.

Staff researchers Liu Liu and Wang Juan contributed to this report.