Olympics mark China's second coming
By Muhammad Cohen
HONG KONG - They are describing the 2008 Summer Olympic Games as Beijing's
"coming-out party", but that's incorrect. A debutante, no matter how big, just
gets one coming-out party, and China had its moment in 1997. That event was
called the Hong Kong handover from British rule.
The handover was just 11 years ago, but China and the world have changed
enormously. More telling, so have global attitudes toward China and China's
attitude toward the rest of the world.
The handover put China on the global center stage for the first time since the
Tiananmen Square massacre in 1989, which was closer to 1997 than 1997 is to
today. The deadly crackdown on
peaceful anti-government demonstrators made China an international pariah in
many circles. Just as international memory of that debacle was fading in 1996,
China launched a series of missile tests in the Taiwan Strait ahead of Taiwan's
first presidential election. In response, the US dispatched an aircraft carrier
to the strait barely 15 months ahead of the handover, indicative of the doubts
about China living up to its promises in Hong Kong.
'The world will be watching'
When the handover night came on June 30, 1997, even though China had an
invitation to the party, it was still the country cousin, and people counted
the silverware when it came to the table. The team that had orchestrated the
Tiananmen crackdown still ruled, except for Deng Xiaoping, who died in February
1997.
As an international outsider taking sovereignty over established Hong Kong,
China had to prove a lot to the global family. There were questions about
whether China could behave properly among the global establishment and keep its
commitments to Hong Kong. "The world will be watching," US secretary of state
Madeline Albright warned when she came to town for the ceremonies.
Hong Kong residents, even if they were proud to have Chinese rather than
foreign colonists in charge of the city, were also worried about possible
changes on the landscape. We worried about the free flow of information, we
worried whether lower-salaried mainlanders would take our jobs, whether border
controls would stay in place, whether we could still hold a candlelight vigil
every June 4 to remember Tiananmen. No one ever said so, but the large number
of pregnant women around town during 1997 suggested latent fear the mainland's
one-child policy would migrate to Hong Kong.
Between worries, we confidently enumerated all the ways we Hong Kong
sophisticates would enlighten the mainland on complexities of modern business
and living. We expected that China would need decades to catch up with us. The
Basic Law hammered out between Britain and China promised 50 years with Hong
Kong's "way of life" unchanged; at the end of those 50 years, we believed China
would have become much more like Hong Kong. We were also convinced that the
economic freedoms China was experimenting with - and in 1997 China, mainland
stock markets, foreign investment, and even private ownership were still
experiments - would inevitably produce political freedom.
'Rich is glorious'
After nearly two decades of reform, the Chinese economy in 1997 was wobbling on
training wheels. A speculative boom followed Deng's 1992 visit to the southern
special economic zones to re-energize reforms. "To get rich is glorious," Deng
declared, and Chinese rushed to glory by any means, legal or otherwise. The
resulting binge became a bubble, and the central bank to end the party with big
interest rate hikes to rein in speculation and tamp down inflation. In 1997, as
high rates stalled growth, the Chinese economy looked decidedly mortal.
Foreign companies brave enough to invest in China in 1997 still found the
domestic market of 1.3 billion consumers a distant rumor. Even in the
wealthiest urban areas, annual disposable incomes didn't reach US$700. The
potential that excited foreign minds since the 1840s and spiked with China's
opening during the 1980s had given way to the realization that heavy regulation
and tight controls on foreign businesses plus cut-throat competition from
Chinese companies and rampant counterfeiting made it virtually impossible for
outsiders to succeed.
Even the Marlboro Man galloped into the sunset; US tobacco giant Philip Morris
couldn't get a joint venture partner to make cigarettes in China and Beijing
wouldn't aggressively police product piracy, so it withdrew from the mainland
market.
While the handover held the spotlight, developments just over the horizon
loomed to transform China's place in the world. Less than 48 hours after Hong
Kong's return to China, Thailand floated the baht, triggering the Asian
economic crisis. For some Asian countries, such as Indonesia, the impact of the
crisis has been as devastating and widespread as the West's Great Depression of
1929, with tens of millions thrust from the middle class back into a cycle of
poverty and despair that persists today. For other Asia tigers - South Korea,
Thailand, Malaysia - the crisis proved to be a steep, but temporary, detour on
the road to the next economic level. For China, the crisis changed everything.
The crisis was rooted in Western money that came to Asia as portfolio
investment - equity or loans - denominated in US dollars. That so-called hot
money helped finance thriving exporters and businesses catering to expanding
local markets, driving genuine economic growth. With local currencies pegged to
the dollar, the formula worked. But when Thailand broke the link, hot money
ran, and borrowers needed more baht, rupiah and ringgit per dollar of
repayment. The tough times also laid bare the extent of crony capitalism and
corruption in the region, and foreign investors could no longer ignore it.
Summers romance
As the crisis deepened and spread, the US dispatched its deputy Treasury
secretary Lawrence Summers to Beijing. The Bill Clinton administration feared
China would devalue the yuan to maintain competitiveness, plunging Asia into a
new round of devaluations and dooming recovery prospects. Summers met with
then-deputy premier and Bank of China governor Zhu Rongji. Deng had said, "Zhu
Rongji is the only one who understands economics." But unlike most of China's
business and government leadership dealing in the dismal science, Zhu wasn't a
fast-buck artist. Old school down to the well-oiled part in his hair, Zhu
wanted to ensure his mentor Deng's market reforms would outlast the two of
them.
Delighting Summers, Zhu said China wasn't considering devaluation. For several
reasons, Zhu placed China and the US on the same side in the Asian crisis. He
also realized China could find more sustainable post-crisis prosperity by
taking a new tack.
Asia still had two-thirds of the world's people and its cheapest production
base, but the crisis had shattered the old model for foreign investors. China
offered a refreshing alternative. Disdaining hot money from portfolio investors
(back then), China wanted joint ventures bearing jobs wrapped in bricks and
mortar, and it wanted them more than ever.
The Asian crisis choked off one of China's key avenues for foreign investment:
ethnic Chinese in Southeast Asia. So China needed to extend its net further to
find new investors, and Zhu Rongji was the right guy to haul them in.
Joining the club
In 1998, Zhu succeeded Tiananmen hardliner Li Peng as premier. Zhu immediately
reached out for Western investment and focused on joining the World Trade
Organization (WTO)to help raise investor confidence. WTO membership would also
accelerate the pace of China's economic reforms and make those changes nearly
impossible to undo. China largely honored its commitments to Hong Kong,
boosting confidence that Western companies could do business in China without
Red Guards burning the factories and reeducating the managers.
Under Zhu Rongji, China must have seemed like a puppy dog eager to please the
West. It provided Western companies with a platform for investing in Asia and,
as a WTO member - it formally acceded at the end of 2001 - accepted imports on
much fairer terms. It was in the midst of that quantum leap in enthusiasm about
China that Beijing was awarded the Olympics, in July 2001. At the time, China
even promised to improve its human-rights performance in the spirit of the
Olympics.
But the modern Olympic spirit is all about money, a good fit with today's
China. Surging foreign investment over the past decade has made China the
world's factory floor, a central player in the global economy (reducing Hong
Kong to a footnote), rather than the emerging sideshow it was in 1997 and even
2001. Today, China has the world's leading trade surplus and its largest
foreign exchange reserves, including the world's biggest horde of US Treasury
securities.
Rather than a coming-out party, the Olympics signal a coming-in party for the
house that Mao built as a full-fledged member of the global establishment that
dismissed it as an interloper in 1997. Don't expect anyone to be hard on a new
club member and business partner for occupying Tibet or other human-rights
shortcomings. Largely thanks to the accident of the economic crisis and the
policies of Zhu Rongji, the puppy dog of 2001 has grown into a 70 kilogram pit
bull that no one dares cross.
Former broadcast news producer Muhammad Cohen told America’s story to the
world as a US diplomat and is author of Hong Kong On Air (www.hongkongonair.com),
a novel set during the 1997 handover about television news, love, betrayal,
high finance and cheap lingerie.
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