For those so inclined the big money in investing and high returns lies in the economic accession and growth of India and particularly China. Chinese index funds returned more than 40% in 2006 and expect more of the same in 2007. Chinese and Indian demand will keep oil and commodity prices high for the next 5 years. Another play on the China syndrome? ? buy Exxon and hold. For the small investor the awakening of Napoleon's sleeping giant is a boon but how about for the political-economy of East Asia and the Pacific? How should we view China beyond being a place of profits and high returns? China's inaction on North Korea and its stalking of Russian resources should provide some clear clues.



There are actually 2 China's. One China is the 1.3 billion strong Communist dictatorship that is selectively opening up its markets in order to survive and compete with the USA. This is the China that bulled its way into the World Trade Organization. There is a however a second and far more powerful China. The intertwined economies of mainland China, Hong Kong, Taiwan, and the expatriate Chinese communities of Southeast Asia are an extended Chinese state. The second and more powerful China is a regional unit based on Chinese economic and political power. Such a grouping will have important ramifications for the East Asian sphere in the future as China expands into Siberia taking over Russian resources, and modernizes its army and navy.

The first China's recent 30 year economic success has propelled more people from poverty than other epoch in history. It is a blessing. Yet recently heavy hitters of US trade policy descended on China to discuss the implications of the $60 billion per annum trade deficit with the US. This is really a political canard. China's trade surplus with the US is a little larger than Japan's and most large exporters are US and Western firms re-exporting product from China. In fact foreign firms account for 75 % of Chinese exports. The argument that a Chinese deficit means a loss of jobs in the US is sheer bunk. In fact it is the opposite. Cheaper offshore products produce jobs locally through expanded retail operations; more product supply and spin-offs throughout the entire production cycle; and cheaper inputs and more capital for consumers and businesses.

In spite of its economic reformation in the past half century, China does suffer from some serious problems. State bureaucracy still weighs heavily on the economy. More than 50 % of China's factories are state owned and many industries receive generous government assistance. Nationalized firms are home for hundreds of thousands of redundant employees. Wide scale unemployment and huge inequalities throughout various regions are threats to Chinese political stability. There is also a close connection between government bureaucrats, business people and party officials. It is still one of the world's poorest countries where corruption, theft of intellectual property; a lack of legal processes, undemocratic politics; state theft of profits and repression are supreme. Not many people I know would trade Chicago for Chungking.

If China does not reform its political processes it will most likely disintegrate. Market liberalism ? even one as controlled and narrowly targeted as China's ? creates a middle class that will demand political power. If China ignores the rising wealth of certain areas of the country and ?classes? it will dissolve into civil strife. Too many people remain poor, disenfranchised, or repressed for the state to survive solely on government managed capitalism. The Chinese state has about 15-20 years it is estimated to bring reform and accountability to both its political and economic processes before civil strife appears.

If one assumes that China will do nothing major about reforms it will still almost certainly experience a surge in economic performance in the coming generation. Assuming that the Chinese economy continues to maintain the pace to which it has grown accustomed during the last 15 years of globalization and liberalization (not a certainty but not out of the question), its emergence as a potential US rival in the Asian region may be reached faster than some experts expect. Such a development will not only affect the dynamic of Japan's role in a re-vitalised East Asia, but also may well introduce new stresses and strains in Sino-American economic and political relations as both actors jostle for influence within an East Asia increasingly split between the second ?Greater Chinese? area and the rest who would still be dependent on the US and Japanese markets. The splitting of East Asia into two spheres is a more probable outcome of Sino-US IPE competition than a coalesced East Asian bloc of like-minded nation states.

If Asia is splitting into 2 zones of influence than is conflict inevitable?

Conflict over Chinese ambition in Siberia, Taiwan or the oil deposits that may lie in the China Sea is almost assured. There is no multi-lateralism in East Asia of the European variety that can defuse escalating tensions. Even interdependent trade does not stop conflict if one side is powerful and driven by a one party dictatorship. In fact increased interdependence among unequal partners can lead to friction, especially when one side sees the other party as being unfair, as were the cases of the US-Japan or Korea-Japan relationships. This is especially certain when one party perceives that its vital security interests are at stake. In this case even rising economic interdependence is not sufficient to keep the peace. For instance, expanding economic ties with Taiwan have not dissuaded Beijing from threatening Taiwan with the use of force including firing missiles and sailing out the Chinese navy to threaten the island.

And let's face facts East Asia has never been a region of peace, cooperation or even shared values and mores. All of the major actors in North-East Asia - the US, China, Russia, Japan and the two Koreas - have all fought each other in the past. Even having multilateral security dialogues is not sufficient to rule out the possibility of radical changes in the political map of the region. For example, major internal political disruptions in Russia, China or North Korea can result in radical shifts of the region's balance of power and threaten peace and stability. Unresolved historical legacies, asymmetry in power, conflicting national interests such as territorial disputes and national unification are limiting factors in the regional security system. The region also lacks prior habits and experiences of cooperation. Thus, in North-East Asia multilateral institutions are not only underdeveloped, but even those existing are not looked upon as essential for peace and security.

What does all this mean?

It means that a surging China, with its extended Chinese community of interests is a good candidate to bring about an East Asian conflict over Taiwan, Siberian resources or hegemonic aspirations of regional control. If China does not go through a political-cultural change that opens up democratic and government processes to Western concepts of transparency, honesty, legality and rights than don't expect peace. The Chinese are in many ways akin to the Russians. They are in the game to win and selective market capitalism should not hide the fact that China is a one party Communist dictatorship who still believes the universe revolves around the Middle Kingdom.

In any event before China melts down into civil and international conflict enjoy investing in Chinese funds and earning high returns.