The international community, and particularly policy makers in the United States, put great expectations on the contribution that China can make to global economic recovery by rebalancing its economy through promoting consumption growth.

The Chinese authorities broadly accept this priority and have put in place a number of policy measures that aim to achieve it.

Piecing together a complete picture of Chinese consumption by drawing on both official and unofficial data reveals some interesting detail about how far China is along the way to boosting domestic consumption.

China’s consumption share of GDP was probably underestimated by an average of 3.1 percentage points during the past decade, as it declined steadily from 64 per cent in 2000 to 50 per cent in 2008, in line with official statistics, but recovered afterwards to 54 per cent in 2010.

These figures could mean that China’s long-awaited economic rebalancing has already begun, especially if the sharp decline in the country’s trade surplus from 7.5 per cent of GDP in 2007 to 2.1 per cent in 2011 is taken into account. If these changes continue, the Chinese economy may transition from an economic ‘miracle’ toward more normal development, as growth slows, inflation rises, industrial upgrading accelerates and economic cycles become more dramatic.

Boosting China’s domestic consumption has been a key government policy in trying to rebalance the economy. But according to official statistics, the consumption share of GDP declined persistently from 62 per cent in 2000 to 47 per cent in 2010, highlighting a serious policy failure.

Even more surprising is the widening gap between retail sales growth and total consumption growth in recent years. The fact that consumption-related retail sales grew increasingly faster than total consumption indicates the relative weakness of components of consumption unrelated to retail sales. This weakness is mainly in China’s services sector. But this is at odds with common sense, as normally the income elasticity of demand for service goods is much higher than that for other consumer goods.

The Chinese National Bureau of Statistics derives consumption data from household survey data. If household income was significantly underreported, as various studies have suggested, then it is quite possible that household consumption was also grossly underestimated, and likewise for consumption growth rates in general.

A re-estimation of China’s consumption share of GDP, taking into account these distortions, suggests that China’s consumption share of GDP actually declined from 64 per cent (with official statistics recording only 62 per cent) in 2000 to 50 per cent (officially 48.4 per cent) in 2008, but then recovered to 54 per cent (officially 47 per cent) in 2010.

What could have driven the improvement?

There is a strong argument that both China’s ‘growth miracle’ and its economic imbalances during the country’s reform period are attributable to widespread distortions in factor markets. These distortions generally repress factor costs and, therefore, are like subsidies to producers, investors and exporters. At the same time, they also tax households. This explains both the increasing dominance of investment and exports in Chinese growth and weakening consumption during the past decade. This implies that the key to rebalancing China’s economy lies in further liberalising its factor markets and removing cost distortions.

Anecdotal evidence suggests that the climate for increased consumption has started to improve in recent years. This seems to have been mainly triggered by changes in factor costs and returns, but more importantly, the changes are by and large natural market responses, instead of deliberate policy adjustments. The government certainly took steps to reform pricing mechanisms for factor markets, most clearly in energy prices and exchange rates. But a rapid growth in wages and the increased role of market-based interest rates were still the most significant changes.

While the People’s Bank of China has not taken concrete steps to liberalise interest rates, those that are market-based have started to play an increasingly important role in China’s financial intermediation. Changes in both labour and capital markets are also positively impacting on consumption in at least two ways. First, they increase household income, while also reducing ‘subsidies’ to Chinese enterprises. And second, rising wages and interest income advantage low-income households, and should help improve income distribution.

This analysis has encountered both disbelief and scepticism.

Some critics have argued that retail sales are a poor proxy for consumer demand, since China’s figures must incorporate wholesale business, and government and business procurement. But Chinese retail sales figures do not include wholesale business, and the analysis does not use retail sales as a proxy for consumption.

Others object to the analysis because China’s undervalued currency, relatively low wage growth and repressed interest rates show little sign of reversal — and these are crucial factors in repressing household income growth.

But with a decreasing trade surplus, declining foreign exchange reserves and even occasional expectations of a currency depreciation, estimates of the renminbi’s undervaluation have been significantly re-evaluated downwards. Wages have in fact grown rapidly, and while regulated interest rates did not change much, the proportion of financial intermediation subject to market-based interest rates has risen sharply. These are exactly the types of changes that are driving a rebalancing of the Chinese economy and recovery of consumption.

Reports of China’s declining consumption share are exaggerated, and the official statistics are partly to blame. Rather, the opposite appears to be true, with China’s consumption share already starting to expand.

Yiping Huang is Professor of Economics at Peking University and Professor at the China Economy Program, the Australian National University. He is also Chief Economist for Asia at Barclays Bank, Hong Kong and co-authored the report The Great Wave of Consumption Upgrading (January, 2012).

1. Rebalancing China’s economic structure
2. Sustaining economic growth in China
3. Malaysia’s New Economic Model as a rebalancing strategy

As developed countries struggle to recover after the global recession and try to confront the looming sovereign debt crisis in Europe, big emerging markets are now driving global growth.

Given the slow down in developed countries, emerging economies are trying to boost domestic demand to sustain growth — and this is particularly the case in China. But in recent months these developing economies have started to feel the pressure from the slowdown in the West, leading the G20 to put global growth high on its agenda.

Emerging economies have managed to keep up their growth rates and exports, and have thus experienced a trade surplus, while developed countries are facing huge trade deficits and have come to favour protectionism. The importance of recovering growth and jobs in the US, for example, and efforts to sustain export-led growth in China are now creating trade and currency friction between these two countries. For several decades there has also been a consistent increase in the trade deficit between the two — in favour of China — and this imbalance reached over US$200 billion per annum in 2010. The US kept quiet over this for a long time, as the trade deficit helped contain inflation due to cheap imports from China, and the unemployment level was still manageable. But as soon as the US realised this trade friction with China was affecting employment and there was no level playing field for its domestic industries, the Americans resorted to protectionism.

A major allegation against China is that its exchange rate is fixed and is not allowed to appreciate — all in the name of stability. As a result, China’s currency is undervalued, making its exports particularly competitive in the international market. The US has adopted several measures to counter the growth of Chinese exports and boost its own domestic economy. First, it has upped the number of anti-dumping cases against China. And second, the US government passed legislation to punish Chinese exports, as it believes that China is heavily subsidising its export items to the US. There have also been instances of tariff hikes on several import items from China.

The currency friction between China and other developed and developing economies is a matter of concern for the G20. China and the US are not only the world’s biggest economies, but they are highly dependent on each other for their growth — and of course the rest of the world also depends on them. China has nearly US$1.5 trillion worth of dollar-denominated assets, and it will be problematic for the US if China stops buying US government bonds. The US is equally dependent on China for its exports of primary commodities such as meat and fruit, and many US companies are based in China in the hope that domestic demand will rise and they will make profits. But Chinese domestic demand is still largely suppressed, meaning the US is not able to obtain sufficient market access. Meanwhile, China depends largely on the US market to sell its labour-intensive manufactured items. Nearly five per cent of China’s GDP comes from exports to the US. So, the trade friction continues.

The world’s two largest economies must work together toward solving this trade friction and to help avoid a currency war. China must allow its currency to be market determined, while the US must do away with its harsh protectionist measures.

India is an active member of the G20 and works alongside China and other developing countries on major international issues, including the restructuring of global financial architecture, and achieving progress on climate change and the Millennium Development Goals. India is aware the trade and currency friction between the US and China will not only hurt the G20’s agenda and the world economy, but will also affect its own future growth prospects. The US and China are India’s major trading partners, and any slowdown in these two countries would affect India as well. So Delhi has been opposing any protectionist measures adopted by developed countries, and pushing for market reforms by phasing out wasteful and distorting subsidies in countries like China.

India also understands the impact of China’s undervalued currency on its exports and expects China to understand the fair principles of trade. India believes there are bigger and more pressing problems that need the attention of the G20. Its member countries need to focus on solving the European debt crisis, help countries resolve trade and currency friction and give fresh impetus to the Doha Round. Against this backdrop, India needs to play a proactive role in the G20 to make it an effective body for dealing with these issues.

Dr Geethanjali Nataraj is a Fellow at the National Council of Applied Economic Research, India.

1. India losing ground to China on trade with Bangladesh
2. The India-China Strategic Economic Dialogue
3. India, China and Asian economic integration

Since China’s reform and opening-up policies began in the 1970s, the country’s average annual economic growth rate has hovered around 10 per cent.

Currently, China’s gross domestic product is second only to the United States; it is the world’s largest exporter and importer and the largest holder of foreign exchange reserves. Along with China’s remarkable economic rise comes an increase in China’s role in both regional and global development and governance.

With the economies of the US, the EU and Japan reeling from weak growth and burdensome debt levels, China is a key driver of global economic growth, contributing, along with other major emerging economies, nearly two-thirds of new global economic output. According to many projections, China will surpass the US as the largest economy in the world by 2030.

As its power emerges China will naturally become a more important player in shaping regional and global development and governance. Likewise, with its economy moving into a new phase through steady technological innovation and an explosion of domestic demand, China will play a bigger role as a major market and capital resource for regional and global economic growth.

China’s economy is highly integrated into the global market, so the country should participate actively in initiatives to reform the international economic system. While a stable and evolutionary reform process is important to China, the desired outcome should see structural changes that produce a new, more effective international system.

China is active in promoting efforts to improve regional governance through various forums involving the Asia Pacific region as a whole, East Asia, Central Asia and Northeast Asia. The goal is clear: to help create a favourable environment for economic cooperation, enhanced political trust and regional security.

It is significant that China’s strategy is focused broadly, encompassing more than just economic issues. An important part of these efforts are free trade agreements, whether bilateral or sub-regional, such as the FTA between China and the Association of Southeast Asian Nations (ASEAN). They are different from market-driven integration, because in addition to being compliant with the rules of the World Trade Organization, they provide a broader framework for cooperation among governments of different countries. Experience shows that FTAs can have a profound impact on improving governance in individual economies and regional systems.

In the past decade, China took the initiative to establish the China-ASEAN Free Trade Agreement (CAFTA) and played a leading role in the feasibility study for the East Asia Free Trade Agreement. China also actively sought to promote trilateral cooperation with Japan and South Korea. For China, CAFTA is more than just a trade agreement. It helps to provide a comprehensive framework for cooperation between China and the ASEAN countries. China is now the largest market for ASEAN exports, but relations go well beyond trade to include infrastructure, connectivity and capacity building for human development.

Although China participates in all regional arrangements, it views ASEAN +1 as its core regional relationship followed by ASEAN+3. China worries that the recent enlargement of the EAS from ASEAN+6 to include the US and Russia may weaken the cooperative spirit of East Asia because of different strategic interests.

Recently, the Trans-Pacific Partnership (TPP) led by the United States has received a lot of attention. Although China is the second-largest economy in this region, it is excluded from the TPP negotiations. China’s view is that the Asia Pacific Economic Cooperation (APEC) forum is the more appropriate for regional issues of the kind envisioned for the TPP.

While the United States is touting the TPP as a kind of high-level FTA for the 21st century, it will fundamentally change the nature of the APEC approach to regional relations. It can also be seen as a move by the United States to weaken East Asian integration and co-operation. This should worry ASEAN for two reasons. First, many member states aren’t included in the TPP. And second, it could have a negative impact on ASEAN’s central role in building an East Asian community.

In this context, a great concern is how China manages its relations with the US. That relationship today encompasses both economic prosperity and political security. By focusing on common goals such as global growth and prosperity, China and the US can establish and promote a partnership that will benefit both countries, as well as the rest of the world.

But promoting economic interdependence requires creating common interests and reducing incentives for conflict or instability. This is difficult in the current climate, where structural trade imbalances between China and the US are fuelling tensions. The US is pushing hard for China to allow the renminbi to appreciate quickly, while China is insisting on a gradual appreciation of the currency. With the US now part of the East Asia Summit, hopefully the two countries can use this framework to manage their interests and relations in a collaborative way.

The rise of China will end the current Western-dominated world order, but it will not end the Western world, as some alarmists in the West fear. In a highly interdependent world, human society’s future rests on true co-operation from all sides.

Zhang Yunling is Professor of International Economics, and Director of International Studies, Chinese Academy of Social Sciences.

1. Asia’s global responsibilities: Delivering through global and regional arrangements
2. A regional solution to global imbalances: We need a Beijing Accord
3. China’s Soft Power v America’s Smart Power

China’s vice president, Xi Jinping, is set to make a hugely important visit to the US next week, prior to succeeding President Hu Jintao as China’s next president later this year.

The visit will set the stage for interaction between the next generation of Chinese leaders and American political leadership and help to shape how the most important bilateral relationship in the world will be managed over the medium-term future.

In recent times, the political-security dimension of the Sino-American relationship has received increasing attention, as the US ‘pivots’ toward Asia. But core and immediate challenges concern the economic relationship and how rapid change in the Chinese economy plays into US and global interests. These matters will be at the forefront of Mr Xi’s meetings when he visits Washington.

In a recent interview in the Wall Street Journal Nick Lardy argues that ‘if China does not accelerate the pace of reforms that support rebalancing, when global growth resumes a more normal pace, China’s external surplus likely would expand again. That would mean that China again would be subtracting from economic growth in the rest of the world, including the United States. That would make it more difficult for the United States to reduce its budget deficit to put its government debt on a more sustainable path’.

Lardy’s lead essay this week reflects the view set out in his new book that correcting the numerous imbalances is necessary to propel China toward a new and sustainable growth path.

Among the problems, Lardy says, are: a low share of private consumption expenditure and a super-elevated share of investment in GDP; an outsized manufacturing sector and a diminutive service sector; an unprecedentedly large hoard of official holdings of foreign exchange; and an increasingly high and probably unsustainable rate of investment in residential property. Mitigating these imbalances will require fundamental market-oriented reforms. The pace of reform will need to be accelerated to achieve sustainable, domestically driven growth and harmonious relationships in the international economy, notably with the United States.

Chinese economists, such as Yiping Huang at Peking University, have made the same point about the distortions in Chinese markets that need to be addressed to correct imbalances in the economy.

Lardy worries about the tardy pace of reform in China. ‘Market-oriented interest rate liberalisation, eliminating the under-pricing of energy and other factor inputs used predominantly in manufacturing, greater flexibility of the exchange rate and an even more rapid expansion of the social safety net are essential to moving China onto a consumption-driven growth path. Many of these reforms have been on the agenda for a decade or more’, he says, ‘yet with the exception of increased social expenditures, progress has been painfully slow’.

According to Lardy, the explanation is that financial repression, the undervaluation of the currency, and factor price distortions advantage some sectors and regions of China at the expense of others. The benefits of unbalanced growth flow to export- and import-competing industries (which enjoy elevated profits at the expense of firms in the service sector), coastal provinces (which have enjoyed supercharged economic growth at the expense of inland regions), the real estate and construction industries (which have benefitted from interest rate policies that have made residential property a preferred asset class), and China’s banks (which enjoy lofty profits that come with the high spread between deposit and lending rates set by the central bank) who have acquired disproportionate influence over economic policy. And to date they have been able to block much-needed policy reforms. These reforms are necessary if China is to move toward a more balanced, sustainable growth path.

Lardy also argues that there are immediate dangers to strong growth in China from excessive investment in housing and real estate. The share of residential investment in GDP has doubled to more than 10 per cent between 2003 and 2010, a share far higher than that in countries with comparable per capita incomes. This was induced, Lardy argues, in part by households channelling their savings into housing in the face of negative real deposit rates in the state-owned banking system.

While Huang sees less immediate risk of collapse in the housing market, residential housing has become the single most important driver of China’s economic growth since the middle of the last decade. Lardy is right in observing that this cannot last indefinitely, although how long it lasts is a very important question.

Peter Drysdale is Editor of the East Asia Forum.

1. Sustaining economic growth in China
2. Reform in China: Experience with economic system reform
3. Chinese economic risks

On 14 January, Taiwan’s incumbent president, Ma Ying-jeou, won a second term in office, obtaining 51.6 per cent of the popular vote while Tsai Ing-wen, his Democratic Progressive Party (DPP) opponent, managed 45.6 per cent.

Ma’s party, the Kuomintang (KMT), thus retained control of the Legislative Yuan, securing 64 of the 113 seats. Based on the numbers, President Ma will be able to govern with both a clear majority of popular support and legislative freedom over the next four years. Beijing and Washington were also visibly relieved by the KMT’s success, as Tsai’s appointment may have created a new source of instability in East Asia that neither the US nor China was keen to face — given the current state of their own domestic politics. In autumn 2012, China will undergo a leadership succession during the 18th Party Congress, and in November, the US will face its own presidential elections.

The election campaign and results in Taiwan highlight two emerging dynamics. First, figures from Taiwan’s Central Election Commission reveal that although President Ma won, the total number of votes he received dropped by more than 767,000 compared to 2008, when he received 58.45 per cent of the total vote. Conversely, votes for the DPP’s presidential candidate increased by 648,000, a growth of 4.05 per cent. The KMT coalition also lost 18 seats in the Legislative Yuan, a significant portion of its majority, while the opposition DPP coalition gained 16 seats. These gains signify that the KMT’s second term may not be as smooth as the first; President Ma will likely be constrained by increased opposition in the legislature, and this is likely to limit how much he can offer Beijing in enhanced cross-strait relations.

Second, the voting landscape looks to be evolving beyond the generational colour-coded political divisions, which have traditionally divided Taiwanese society into Pan-Blue (pro-unification) and Pan-Green (pro-independence) camps. This was illustrated by the addition of James Soong’s orange-coloured People First Party, which focused on campaigning in the ‘neglected’ central provinces and to Taiwan’s rapidly aging population. Moreover, socio-economic concerns dominated the campaign more so than in previous elections. Consequently, the issue of cross-strait relations became inseparable from the question of Taiwan’s economic security.

Ma’s economic policies — in particular the 2010 signing of the Economic Cooperation Framework Agreement — were juxtaposed with Taiwan’s slow economic growth, regressive taxation system, declining public investment, reduced job opportunities for new graduates, and a widening income gap between rich and poor. On the one hand, Ma argued that Taiwan’s future prosperity and greater regional stability both required a reduction in cross-strait tensions — and this would be achieved by promoting pragmatic economic and socio-cultural ties with the mainland. On the other hand, Tsai argued that further integration should be approached with caution; that it will lead Taiwan down the path of becoming a Chinese ‘special administrative zone’ and threaten its de facto independence.

As such, Ma’s slipping popularity and the increased public concern over his cross-strait economic policies suggest that many Taiwanese remain suspicious of Ma’s ties with mainland China. So while the election may not have reconfigured cross-strait relations, the risk remains that Beijing could become impatient with its limited influence over Taiwan’s democratic government, especially with the re-election of a pro-China KMT-dominant legislature.

Ma’s victory has almost certainly raised Beijing’s expectations; China’s leaders may pressure Ma to begin formally discussing Taiwan’s political future, and among other measures, Beijing may call upon Taiwan to halt the purchase of arms from the US and phase out its military ties with Washington. Rather than stabilising the cross-strait status quo, the KMT’s election victory may usher in a new period of instability — not one in which Taiwan calls for de jure independence and recognition as a sovereign nation — but one in which China may intensify its demands on Taiwan.

Sheryn Lee is Project Officer and Research Assistant at the Languages of Security in the Asia-Pacific project, and Research Assistant at the Strategic and Defence Studies Centre, Australian National University.

1. Taiwan and Hu Jintao’s end-year overtures
2. Taiwan, China, and the WHO
3. Taiwan: The Democratic Progress Party’s ‘China Syndrome’

Vietnam is arguably the most ‘sinicised’ country in Southeast Asia, a distinctive result of more than 2000 years of intense interaction between Vietnam and China.

But the Vietnamese absorption of Chinese culture is neither a straightforward process nor an inescapable outcome of geographical proximity; it is much more nuanced. China’s cultural influence forms only one layer of Vietnam’s cultural identity. The most important and substantial element still rests with indigenous norms, customs and practices, while Vietnam’s cultural borrowings from Southeast Asia and the West form yet another layer.

Two distinct features characterise the Vietnamese absorption of Chinese cultural elements over the past 2000 years. First, Vietnam has been willing to borrow culturally from China as long as it is a voluntary, internal process rather than a forceful imposition from the north. Second, Vietnam’s borrowing from China is a selective process — most Chinese influences are filtered and adapted to fit local needs. So the ‘sinicisation’ of Vietnam could also be understood as the ‘Vietnamisation’ of Chinese elements. At the core of Vietnamese society and culture is still the overwhelming presence of its indigenous cultural and social values and norms, which shape Vietnam’s national identity and guide its perception of, and relations with, China.

One particular example is the spread of Confucianism into Vietnam. Confucianism was introduced during the Chinese-domination era that lasted more than 1000 years. But it could not gain a foothold in Vietnamese society until the country won its independence from China and began to treat Confucianism as a tool of nation building rather than a cultural legacy imposed by the north. Accordingly, the Ly dynasty built the Temple of Literature in 1070 to worship Confucius and established the Imperial Academy six years later to educate Vietnamese nobles and bureaucrats along Confucian lines. By the time the Lê dynasty came to power, Confucianism had been enthusiastically embraced as the ideological framework on which the Vietnamese state and society operated.

The Vietnamese also made a number of significant modifications to the imported ideology. For example, contrary to the Chinese Confucian tradition, Vietnamese society had a much greater recognition of women’s rights and accorded them a higher social status, and while Chinese Confucianism emphasises loyalty to rulers only, Vietnamese Confucianism stresses both loyalty to rulers and a sense of patriotism.

China’s historical cultural influence on Vietnam began to dwindle in the late 19th century, and the sinicisation of Vietnam symbolically faded away in 1918. This occurred with the abolition of all civil service examinations which had tested candidates’ knowledge of Confucian classics, and skills in prose and poetry using both Han and Nom characters. But more than 2000 years of interaction with China has left Vietnam with a multitude of Chinese cultural influences that cannot be undone overnight.

More recently, with the resurgence of China as a global power, Vietnam has been subject to a Chinese ‘charm offensive’, as the country seeks to spread its soft power worldwide. Since the early 1990s, Vietnam has been engulfed in a Chinese ‘cultural tsunami’ brought about by the overwhelming success of Chinese historical television series, music, movies and kung-fu novels. The popularity of Chinese cultural products in Vietnam — while partly explainable by the dearth of comparable Vietnamese products — can also be attributed to their quality, which has earned them a positive reception from Vietnamese audiences.

But this excessive Chinese cultural influence seems to have alarmed the government and Vietnamese Communist Party ideologists. Some critics have even complained that popular Chinese television series have made Vietnamese people more familiar with Chinese history than their own national history. This has triggered a number of reactions from the Vietnamese government, including a government-issued decree that ordered Vietnamese movies and television series to account for at least 30 to 50 per cent of the allotted time for movies on any Vietnamese television station.

Despite the apparent success of Chinese popular culture with Vietnamese audiences, resistance to unwarranted Chinese cultural influence still seems to become stronger when China makes purposeful, self-interested attempts to impress its cultural values. For example, the Confucius Institute initiative, one of the major components of China’s global soft power project, has made little headway in Vietnam despite its global success.

The Chinese ‘charm offensive’ is likely to expand globally, but may encounter major setbacks in Vietnam. While voluntary borrowings from China have formed a substantial layer of the country’s culture, Vietnam is also a country where memories of a millennium of forceful Chinese cultural assimilation are still alive today. Consequently, Chinese attempts to spread its soft power into Vietnam are likely to be limited by the country’s over-familiarity with Chinese culture. Vietnam’s traditional resistance to unwarranted Chinese cultural influence now stands as yet another obvious challenge that China must overcome if its ‘charm offensive’ is to ever succeed in this particular southern neighbour.

Le Hong Hiep is Lecturer at the Faculty of International Relations, Vietnam National University, Ho Chi Minh City, and is currently a PhD candidate at the University of New South Wales, Australian Defence Force Academy, Canberra.

1. China’s new media charm offensive
2. Japan eyes North Korea’s charm offensive
3. Vietnam: back from the brink?

The whirlwind visit of President Barack Obama to Australia on the way to the East Asia Summit in Indonesia last November, many believe, forever changed the Asia Pacific strategic landscape with a re-assertion of American primacy and power in Asia.

What was the thinking behind the moves that Obama announced in Canberra and how will it shape Southeast Asia’s strategic future?

American power is already well entrenched in Asia and the Pacific. A modest elevation of American troop presence on rotation and training in northern Australia — one concrete outcome of the visit — will have at most a marginal impact on the immediate strategic landscape. But Mr Obama’s visit, and in particular his declaration to Australia’s Parliament that America is ‘all in’ in Asia and the Pacific, changed the tone of the contest for influence between America and China in the region and cast it in more confrontational terms.

In this week’s lead Geoffrey Wade suggests that ‘the Darwin deployment is only one part of a much larger regional strategy, placing US forces far enough from Chinese missiles to be comfortable, but still sufficiently near to maritime Southeast Asian allies to swiftly engage if necessary. The proposed stationing of the US Navy’s newest littoral combat ships in Singapore and the growing American naval and air force cooperation with Indonesia serve a similar function’.

Wade sees these moves as the beginning of a major increment to US-led East Asian security architecture, involving the creation of a Southeast sector to the ‘Offshore Asia’ security zone. He says that the Northeast American security zone is already entrenched, with US bases and facilities in mainland Japan, Okinawa, South Korea and Guam being equipped with over 80,000 service personnel and some of the world’s most advanced defence hardware. The concept of a maritime security umbrella in the Southeast sector of ‘Offshore Asia’ (including the maritime ASEAN states, Australia, New Zealand, Papua New Guinea and some of the Pacific states) is now seen in Washington as key to maintaining a balance of power in East Asia, and achieving the US’s stated aim of preventing the emergence of a regional hegemon.

It might seem puzzling that the US would seek to create a security shield just for ‘Offshore Asia’ — the maritime Southeast Asian states and Australasia. One rationale, according to Wade, is that sea lanes in this region are vital to East Asian economic security, a critical choke point in the flow of Middle Eastern oil and Australian resources to Japan, Korea, and also to China. Maritime routes need to be kept open, ‘especially while the South China Sea disputes continues to fester and demand attention’. More straightforwardly, Wade claims, this new strategy is built on the reality that the US and its allies currently have overwhelming superiority in terms of maritime power. The US Pacific Fleet alone comprises 180 ships, nearly 2000 aircraft and 125,000 service personnel. If the US is to maintain influence and allies in East Asia then it needs to provide these countries with some persuasive evidence of its defence commitment and capacities. The ‘Offshore Asia’ security shield — utilising US ‘Air-Sea Battle’ forces — is a low-cost posture that might convince.

There is related hype among the region’s security community about Australia’s integration into a forward American military hub in Southeast Asia. It is, for the moment, just that: hype and hyperbole. That the Australian base has the advantage of having direct access to the Indian Ocean and, therefore, together with the substantial US naval, air and communications facilities in Diego Garcia, provides the US and its allies with unrivalled access to, and surveillance of, Indian Ocean maritime routes is one dimension of this hype. The reports that B-52 long-range strategic bombers, F/A-18 fighters, C-17 transport aircraft and aerial refuelling aircraft will be stationed at the Royal Australian Air Force Base at Tindal, about 320 kilometres southeast of Darwin is another. At another level altogether are reports suggesting that as part of the increased collaboration, Australia is preparing to purchase or lease Virginia-class nuclear submarines from the US. The antidote to this hype is to take a Bex and have a good lie down. Dreams for the so-called American pivot towards Asia need to be based on firmer fiscal and political stuff.

The mainland Southeast Asian states, as Wade argues, are increasingly embedded in tighter developmental and economic relations with China. In all of that the US is a big player. This is no Chinese imperial plot, as the incautious readers of Wade might conclude: it’s simply the product of the weight of Chinese economic growth interacting with the growth and development ambitions of the Southeast Asian mainland states. It is no different in fact from what is occurring with Japan, Korea, Indonesia or for that matter Australia. In mainland Southeast Asia, it has been promoted with the help of the Asian Development Bank (driven more by Japanese than Chinese agendas), through the creation of a Greater Mekong Subregion linking China and mainland Southeast Asia through economic corridors, which include a Chinese high-speed rail network linking mainland Southeast Asian capitals directly to Yunnan.

Unravelling these economic-security interests from political-security postures is not as easy as it might seem to the economically untutored defence strategist. Put simply, in this theatre, Chinese maritime security interests are legitimately and fundamentally interwoven with East Asian and all our economic security interests.

The complexity is reflected in the caution of Indonesian Foreign Minister Marty Natalegawa about the Canberra declaration, lest ‘these developments were to provoke reaction and counter reaction … a vicious circle or tensions and mistrust or distrust’, even the ‘innocent’ Indonesian suggestion that China might well be invited to join joint exercises at the Australian base. At APEC earlier in November Indonesia’s President, Susilo Bambang Yudhoyono, observed that, while he welcomed America’s regional presence, it was no longer desirable for the region to be dominated by a sole superpower. ‘New power centres are growing rapidly and power relationships are changing and becoming fluid’, he said, calling for what he called a ‘dynamic equilibrium’.

Therein lies the crux of it. Playing one hand into ‘Offshore Asia’ security might be a reasonable first move. But it is certainly not a viable long-term security strategy. Whether that hand will serve the preservation of peace or contribute to future tensions in East Asia will assuredly depend also on whether another hand can be extended to China, one that provides reassurance of its role and interests in regional security.

Peter Drysdale is the Editor of the East Asia Forum.

1. The emergence of ‘Offshore Asia’ as a security concept
2. Southeast Asia: Patterns of security cooperation
3. ASEAN divides

North Korea’s leadership succession from Kim Jong-il to Kim Jong-un has gone according to script.

The Korean Workers’ Party and the Korean People’s Army are supporting Kim Jong-un as North Korea’s new leader and North Korea’s propaganda machine has not missed a beat in announcing new titles, manufacturing accomplishments and portraying Kim Jong-un as a Great Successor worthy of the name. But despite these efforts, there are two notable missing pieces: Kim Jong-un’s brothers Kim Jong-nam and Kim Jong-chul. The failure of these brothers to publicly appear at the funeral clarifies that they are excluded from power, but their apparently differing fates raise important questions about Kim Jong-un’s power and the sustainability of his leadership.

Kim Jong-chul, in his thirties, is Kim Jong-il’s second son (the first son of Kim Jong-il’s second wife, Ko Yong-hee, who is also the mother of Kim Jong-un). Although Kim Jong-chul is Kim Jong-un’s elder brother, he is rumoured to have been dismissed by his father as a potential successor for being too effeminate. Kim Jong-chul’s absence is disturbing because it raises questions about how far Kim Jong-un might go to squelch even perceived contenders for power. North Korean purges have historically been ruthless, but family members have usually been exiled rather than executed. Kim Jong-il’s half-brother Kim Pyong-il was assigned to decades of diplomatic service abroad in Europe rather than eliminated. Kim Jong-chul’s fate may hold telling clues to the character of leadership under Kim Jong-un.

If Kim Jong-chul’s silence raises questions, Kim Jong-nam’s visibility poses even more serious challenges. Kim Jong-nam, aged 40, is Kim Jong-il’s child with his first wife, Sung Hae-rim. As Kim Jong-il’s eldest son, Kim Jong-nam is reported to have been groomed for succession until he fell out of favour in 2001, after being detained at Narita Airport in Japan with a fake passport. Since that time, he has lived in apparent exile in Macao and Beijing. Kim Jong-nam has emerged as a surprisingly voluble critic of North Korea’s leadership succession, directly challenging the legitimacy and capability of Kim Jong-un as a leader. Tokyo Shimbun journalist Yoji Gomi quoted an e-mail from Kim Jong-nam received on 3 January, in which Kim Jong-nam states that ‘I expect the existing ruling elite to follow in the footsteps of my father while keeping the young successor as a symbolic figure . . . It’s difficult to accept a third-generation succession with normal reasoning’, he added. He also said he doubted that a young successor ‘with some two years of training can retain the absolute power’. (Gomi’s book, based on several years of e-mail exchanges with Kim Jong-nam, was published a few days ago in Japanese.)

This forthright public assessment of North Korea’s succession makes Kim Jong-nam the foremost external critic of Kim Jong-un’s succession and a direct challenger to the viability of Kim Jong-un’s leadership. It directly contradicts North Korean efforts to burnish Kim Jong-un’s legitimacy, and raises questions about whether sibling rivalry might be a sign of discord among Pyongyang’s elites.

External public criticism of the succession cannot be viewed as helpful to Kim Jong-un’s efforts to consolidate power, and it is presumably in Kim Jong-un’s interest to prevent his older brother from providing ongoing commentary regarding his succession, if for no other reason than that quieting Kim Jong-nam would be one means of proving that Kim Jong-un is not a puppet or ‘symbol’ of the North Korean elite.

Kim Jong-nam’s public criticisms of the succession from his base in China also raise the question of who is Kim Jong-nam’s protector, especially given rumours last year that Kim Jong-un had instigated purges against leading supporters of Kim Jong-nam in Pyongyang. China presumably sees utility in protecting Kim Jong-nam — as a reform-minded Kim family member who is indebted to China — as a potential alternative leader if Kim Jong-un’s leadership fails. A more complicated factor is that in 2002 and 2003, shortly following his exile from Pyongyang, Kim Jong-nam appeared to have an open line of communication from Beijing with his uncle Jang Sung-taek and his aunt Kim Kyong-hui, who are now critical supporters of Kim Jong-un.

It is ironic that Kim Jong-nam is able to robustly exercise his freedom of speech from his home base in China despite his presumed dependence on China to allow him permanent residency in that country. This circumstance complicates Kim Jong-un’s ability to silence Kim Jong-nam as compared to Kim Jong-chul, but it also raises a potentially awkward situation for China at a time when North Korea’s leadership surely seeks assurances that China is not hedging its support for Kim Jong-un.

Scott A. Snyder is Senior Fellow for Korea Studies and Director of the Program on US–Korea Policy at the Council on Foreign Relations.

This article was first published here on the Council on Foreign Relations Asia Unbound blog.

1. North Korea: new opportunities in a post-Kim Jong-il landscape
2. North Korea: Kim Jong-il snubs Jimmy Carter in lead up to succession
3. Power, lies and secrecy in North Korea

Kim Jong-il’s sudden death spurred yet another round of fevered speculation over the DPRK’s imminent demise.

Some analysts gave the North Korean state only a matter of months to live, and renewed calls on Beijing to engage in ‘contingency planning’ with Washington and Seoul to pre-empt catastrophe when collapse finally comes. This scepticism is not without foundation. The new leader, Kim Jong-un, is young and inexperienced. He does not yet project his father’s power, let alone his grandfather’s charisma. His policy preferences are unknown, but his grooming period witnessed ill-advised initiatives on the economic and political fronts — from the botched currency reform to the tragic shelling of Yeonpyeong Island. Despite these shortcomings and questions, the succession process seems to be going smoothly. There is no evidence of near-term political crisis, confusion as to the new pecking order, popular revolt or systemic breakdown.

Why is near-term crisis unlikely? For the simple reason that the country’s political system is unified around the new face of North Korea, Kim Jong-un. He does not need to build charisma; his Baekdu bloodline is sufficient to endow his rulership with legitimacy. And his power base is solid.

Think of Kim Jong-un surrounded, and protected, by three inner circles. The first circle is the ruling family. The second is the Korean Workers’ Party itself, which has been going through a period of resuscitation in recent years. The revitalised network of Party members, who now carry cell phones and who are eager to travel abroad, see their prospects linked to the grandson’s success. The third circle is the military, which would be the logical competitor for power. But here, too, there is no sign of high-level disaffection, like that seen in many Arab Spring states. The military has been the primary beneficiary of the North’s ‘military-first politics’ campaign that Kim Jong-il initiated in 1995. And so far, the military has pledged its unfailing loyalty to Kim Jong-un.

But what, then, of the outer circle — the 20 million or so North Koreans not in the Party? Kim Jong-il was not beloved like his father, and pragmatic North Korean civilians are likely to take a wait-and-see approach to the new leadership group. Even those who may wish to rebel have no networks or organisations through which to do so.

Consequently, the chances of political crisis in the near term appear remote. But in the medium to longer term, the new leadership is likely to face a dilemma, and this should be the focal point of international responses to the transition process. It is a dilemma created by two mutually conflicting goals the regime has set for itself.

Pyongyang has been loudly promising its citizens that 2012 marks the year of North Korea’s emergence as a ‘strong and prosperous great nation’ (Gangsong Daeguk). Kim Jong-il managed to achieve at least one thing for North Korea — the ultimate ‘strength’ of nuclear deterrence. Now, it is up to his son to achieve the other half of the equation: prosperity. There have certainly been unmistakable signs of a push to improve the national economy over the past few years — from growing trade with and investment from China to revived plans for special economic zones.

But the issue at stake is whether Kim Jong-un can enhance North Korea’s prosperity without undermining the source of its strength — its nuclear weapons program. Food aid and foreign economic assistance are urgently needed to ensure a smooth path through the first year of Gangsung Daeguk. Comprehensive economic development would also require foreign investment, trade, and financing — all requiring an initial loosening and eventual lifting of the sanctions regime that surrounds the North Korean economy. Achieving this will require substantive nuclear concessions on Pyongyang’s part.

This transition from security-first to security-plus-prosperity will pose the greatest challenge to the unity of the North Korean political system. Elements in the military might oppose sacrificing their prize possession. Hardliners will argue it would leave their country exposed to an Iraqi or Libyan fate. Therefore, the path to getting the North over that hump must start now.

So, the essential question is, what should the international community do? The most prudent course for key regional players is to re-open or expand channels with Pyongyang. The better we know the new leadership, the better we can respond to events as they unfold. Seoul, Washington and Beijing should focus energies on drawing out North Korean officials as the leadership consolidates around its new core, Kim Jong-un.

Fortunately, the US has some modest positive momentum to build on in crafting this kind of proactive diplomatic outreach. The US and DPRK were engaged in substantive bilateral talks on humanitarian aid and denuclearisation on the eve of Kim Jong-il’s death. The timing is fortuitous, and Washington should make the most of these revived channels, signalling readiness to work with the new powers. US Secretary of State Hillary Clinton seems to be taking a measured, constructive approach to Kim Jong-il’s passing — an encouraging sign that the US will be persistent and proactive.

Seoul’s reaction is even more crucial, and delicate. The South Korean public is divided over inter-Korean relations, and President Lee Myung-bak takes a hit whichever way he steps. But there have been increasing signs of fatigue with a hard-line approach, and this president, who has proven his conservative credentials, is uniquely positioned for a kind of ‘Nixon-in-China’ moment. In fact, President Lee has sent a New Year’s message to Pyongyang, noting the South’s willingness to reopen talks and foster cooperation with the North. Nonetheless, Pyongyang’s response has been quite hostile.

Beijing may have the best model for handling North Korea, as Chinese realists spend less time thinking about scenarios of North Korea’s collapse, and instead keep diplomatic channels open while supporting economic engagement. China also has military-to-military ties with the North, and can exert some leverage when it comes to moderating military behaviour.

In an optimistic scenario, China, South Korea and the US could use this changing of the guard to embark on a coordinated engagement policy to normalise, and denuclearise, the Korean Peninsula. For years, political analysts and military planners have discussed ‘contingency plans’ in the event of Kim Jong-il’s death. But now, with no sign of chaos or collapse, we need prudent and realistic diplomacy that lays the foundations for progress.

John Delury is Assistant Professor of East Asian Studies at Yonsei University, Seoul, and a book-review editor for Global Asia. Chung-in Moon is Professor of Political Science at Yonsei University and Editor-in-Chief at Global Asia.

1. North Korea provokes again
2. North Korean realities
3. Dangers lurk in North Korea’s leadership transition

The sudden death of Kim Jong-il changes North Korea, in Donald Rumsfeld’s useful phrase, from a known unknown to an unknown unknown.

With Kim senior we knew where we were — to some extent: the old trickster liked to keep us guessing. But his son is a blank — so far.

Anything is now possible. The range of possible scenarios runs from benign to apocalyptic. The world wants North Korea to come in from the cold and embrace peace and reform. That seems unlikely, alas. The Kim regime is heavily invested in an avowed military-first policy, and in continuity — despite marching down a cul-de-sac. The mighty Korean People’s Army (KPA), whose clout grew under Kim Jong-il, has much to lose from any outbreak of peace.

China is the key power. It could have been South Korea, had not President Lee Myung-bak’s hard line eclipsed the former sunshine policy of engagement. That was ill-advised, for it left Seoul with no influence in Pyongyang — which retaliated viciously, sinking a Southern ship and shelling an island last year. And it left a vacuum, which Beijing hastened to fill.

The Chinese will press for economic reforms, and probably get them — at long last. Boosting a broken economy is one way for Kim Jong-un to make himself more popular. But the fear is that he, or the generals behind him, may instead choose to make a splash with a provocation.

That could be a fresh nuclear test or long-range missile launch. More risky, as hopefully they realise in Pyongyang, would be another attack on South Korea. That would be third time unlucky. With two elections upcoming, President Lee cannot afford to look weak. This time Seoul would strike back, hard — with the risk of hostilities escalating out of control.

Another dilemma for South Korea, and its US and Japanese allies, is what to do in the event of instability in the North. Kim Jong-un’s succession might not succeed. Will Pyongyang’s elite really entrust their future to an untried youth, with only his genes to recommend him?

Aidan Foster-Carter is Honorary Senior Research Fellow in sociology and modern Korea at Leeds University and a freelance consultant, writer and broadcaster on Korean affairs.

This article first appeared here in The Telegraph, UK.

1. North Korean apocalypse avoided?
2. North Korea: new opportunities in a post-Kim Jong-il landscape
3. North Korea: Kim Jong-il snubs Jimmy Carter in lead up to succession