Very recently Minxin Pei, Senior Associate at the Carnegie Endowment for International Peace reminded us in his “sober” and sobering analysis of China what a difficult issue China poses. In his Financial Times article of February 24, 2006 called “China is Stagnating in Its ‘Trapped Transition’ ” and also in the “Dark Side of China’s Rise,” in the current March/April 2006 issue of Foreign Policy reminds us about, ‘the anomolies of the Chinese economic transition’ and the failed efforts at democratization. Pei suggests “the ruling elites have little interest in real reforms. They may pledge reforms, but most such pledges are lip service or tactical adjustments aimed at maintaining the status quo.” And in the economic sphere Pei points to the bottom line: not withstanding the economic structural reforms the Chinese state still, “owns 60 per centof fixed assets and dominates vital industrial sectors, from financial services to energy. Today, Beijing’s guiding principle not to exit these Leninist “commanding heights” but to strengthen their control. The private sector remains hobbled by onerous government restrictions and discrimination.”

From a “New Multilateralism” prespective two major issues arise. First, anything like a “democracy league” or a coalition of democracies is simply not likely to be a possibility in any reasonable time frame. I think it is perfectly possible to accept the view of our colleague John Ikenberry that the real focus of attention for the United States and and for the developed economies is Asia but the notion that we can construct a league of democratic powers including China remains remote. So while American foreign policy, according to John, and possibly more broadly global governance may aim for “open markets, democratic community, and cooperative security,” how to fit China in remains a central problem in the construction of the “New Multilateralism.”

The second issue and the one I have raised - harped on - might be better term but will do so again, is the impact on global trade and investment of Chinese state ownership. Just a few facts from Pei are enough to suggest the problem. In 2003 the Chinese state controlled $1.2 trillion worth of capital stock or 56 per cent of the country’s fixed assets. There are today only 40 private firms among the 1,520 Chinese companies listed on domestic and foreign exchanges. In about half the cases of of large and medium SOEs, the chairman of the board and the Communist Party secretary were the same person. In 70 percent of the 6,275 large- and medium- sized SOE (classified as corporatized as of 2001) the members of the party committee were members of the board of directors. In Pei’s eyes these and other facts establish the basis of a virulent crony capitalism, “as the ruling elites convert their political power into economic wealth and privilege at the expense of equity and effciency.” These SOEs can create havoc for the Chinese economy and may have serious implications for non Chinese corporations subject to takeover.

But more on this later.

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