Asia Centre

The Hong Kong press seems to be opting for the latter response. For analysts of Chinese political life, it is now commonly accepted that Marxist ideology no longer allows the Chinese elites to respond to the needs of what is now a more diversified society or to the challenges posed by a more complex economy. In their view, political thinking has no choice at all but to adapt to the Chinese reality after almost three decades of reform and opening up. Since the "three represents" of Jiang Zemin, there has been no political innovation from the Party, thereby creating a vacuum and a drop in motivation.

During the months of July and August, the central government therefore organised a working conference in two parts, bringing together experts from the Party’s research department, the Party’s school, the Ministry of Propaganda, the Chinese Academy of Social Sciences and others from the local branches of these institutions, around the question of ideological and theoretical construction. Hu Jintao, who took part in the second part of the conference, is said to have emphasised the importance of consolidating an ideological line serving as a guide for the Party and the population, in the absence of which the gains of the country could not be consolidated or expanded.

The experts involved, again in the words of Chengming, stressed this ideological vacuum and the inability of Marxism to fill it. Hence the need to affirm the constitution as the basis of the country’s political activity. For the experts, the socialist nature and underpinning of the country having collapsed, social, political and economic contradictions are now emerging and it is becoming urgent to find solutions to them. In some provinces, so they say, the society can be characterised as "capitalist with Chinese characteristics"… The two-paced development  of economic reform on the one hand and political reform on the other has enabled the emergence of privileged groups and given rise to a profound polarisation of Chinese society, intensifying the break with its socialist foundations.

Similarly, the notion of "stability above all else" was called into question by the participants at the conference, as it has given a new legitimacy to governance by the person and the Party (as opposed to government through the rule of law) and to a new form of the concentration of power. Given this, the more one fights corruption, the more one becomes corrupted, which leads to a form of "structural corruption". What is more, in the name of "stability above all else" pressure is exerted on society and infringes on civil rights. The Party cannot therefore avoid implementing a reform of the constitution and its own statutes.

In this mould, Wen Jiabao’s meeting with four prominent intellectuals was the opportunity for Zhu Guangya, the physicist who was involved in the fabrication of the first Chinese atomic bombs, to offer a warning to the Party that without reform it will lose power[1]. The solution, according to Qian Xuesen, the founding father of the Chinese spatial programme, is rule by law, with independent legal bodies having oversight over the political organs.

Whilst there is unanimous agreement about the social problems, there is still heated debate as to the solutions to them and the way to reform the political system. Liu Xiaobo chooses to report on two recent series on Chinese television to relay the confusion of the Chinese leaders: the first TV film, entitled "The Rise of the great Powers", studied the rise and fall of nine historical powers. The production of this documentary, supported by the top echelons of the Chinese regime, passes favourable judgment on the powers of the United States and the United Kingdom, as well as on the values that they represent, such as free trade, the market economy and constitutional democracy. Likened by some to He Shang[2], this series could be understood as an announcement by Messrs Hu and Wen of their intentions in terms of political reform. However, there is another documentary with a completely different tone entitled "Vigilance in time of peace" (apparently supported by none other than Hu Jintao himself), which explains the Soviet Union’s decline and draws conclusions from it. Basically, it is the refutation of Stalin’s legacy and the betrayal of Marxism-Leninism begun by Khrushchev and continued by Gorbachev and Yeltsin which were determining in the decline of Soviet power. For Liu Xiaobo, the broadcast of the two documentaries is a patent demonstration of the indecision of the Chinese leadership concerning the ideological renovation of the Party. According to him, social polarisation has led Hu Jintao to look for answers in Maoist ideology. But Maoism, he goes on to say, was discredited a long time ago, to be replaced by nationalist sentiment and hollow slogans. The result is that the ruling team is clearly taking China in a certain direction without knowing where it will end. Messrs Hu and Wen are thought therefore to be seeking to fill the ideological vacuum through a return to Maoism but on account of the weakness of their political authority[3] and the emergence of strong interest groups, they could not easily accept "the values and institutions of a modern political culture". On the other hand, a return to Maoist ideology also seems unlikely as "Deng’s opportunism and pragmatism have transformed the Party into a skilful calculator of costs and benefits", which would not easily return to more rigid ways of doing things.

Whilst it is not unusual to read this kind of commentary in the Hong Kong press, which is openly calling for the democratisation of the Chinese political system and the liberalisation of society, a similar call has come from Beijing. In the latest issue of Yanhuang chunqiu (China through the Ages)[4], Mao Zedong’s former personal secretary published an open letter to Hu Jintao in which he pleads for a constitutional democracy in China (at the same time as avoiding to talk about multi-party elections), and calls for freedom of the press and freedom of expression and publication. In his text, and with his predecessors in the democratic debate in mind, Li Rui has far-reaching demands, but also shows great skill in the way in which he presents his argument.

First of all, he talks in terms of an "imminent crisis" to describe the urgency of political reform, which is lagging far behind economic reform, before going on to sing the praises of democracy. Quoting Chen Duxiu and trying to appeal to the sentiment of solidarity of the Communist Party veterans[5], Li Rui advocates the adoption of democracy in China. "Democracy is not exclusively capitalist; it is a concept which is not bound up with one social class but is the result of long years of struggle. Before the communist party came to power in China, the goal was to overthrow anti-socialism. However, once in power, we regrettably lost sight of this and made capitalism and the bourgeoisie our principal enemies. By joining the Party, we were opposing the autocratic domination of Chang Kai-shek with a single ideology, a single party and a single leader. We wanted to found a new China that would be free, democratic, strong and prosperous."

Li Rui would like to see in China a critical study of the history of the country and the Party, to put less importance on the legacy of Mao and rethink the place of his thought in the ideological foundations of the country. "After 1949, the country suffered significant losses, not only of a material kind, but also intellectually. These are detestable phenomena which could not have happened in a democratic system with checks and balances (…). I think that the root of the problem comes from within the Party". Hence, for him, the need for the Party to reform itself: the Party cannot carry on as a privileged class, and will have to be exemplary in its application of the constitution. It will also have to guarantee the freedom of the press and of expression and thus come under the control of the people. In contemporary history, many autocratic parties have managed the transition to government by law, and it remains for us to carry out this historical task". To return to the political programme set out at the time of the 13th CC[6], which should, according to Li Rui, be studied once again, it advocated the withdrawal of the Party from all the echelons of government. The "party in power should respect the law and limit its actions to those spheres defined by the law… the Party must of course govern, but (…) with the consent of the parliament and the government for its actions. The Party should not be authorised to intervene in the activity of government, just as judicial power should be independent".

Constitutional democracy is thus seen as the only possible response for China, but adopting it would mean seeing that the constitution is respected by all, making the Chinese population aware of its rights through a process of education, such as citizenship training, so as to strengthen the civic consciousness of the Chinese. "We have changed the constitution seven times, but it is still inefficient. From the time he came to power, President Hu Jintao stressed the importance of the constitution. This gave hope to the people." Li Rui is thus clearly positioning himself within the system and the Party, and does not seek anything more from the Party than that it keep its promise.

Finally, for Li Rui the principle of "stability above all else" can only condemn the reform process to an early end. "Democracy is a good thing (…), it can only serve social stability. Admittedly, each country has its own unique circumstances and experiences", referring to statements that China should not copy other political systems[7]: "there is no point in imitating others just for the sake of imitation, but we can benefit from a wide range of experiences. We must weigh up the lessons of History carefully".

Even if it seems unlikely that any thoroughgoing political reform will be announced by Hu Jintao at the time of the 17th CC, reformist pressures are making themselves felt in discussions as reflected in the press. The urgent need for new political thinking is often evoked, but the factors for such a rethink do not yet seem to be in place. The latest editions of the journal Yanhuang Chunqiu are not available on line, but the texts are reproduced by other websites, showing on the one hand the willingness of the propaganda organs to restrict the range of such debates, and on the other the impossibility (or being resigned to the impossibility) to do away with them altogether.

The press believes that the political innovation announced on 15 October will be limited to the introduction of slogans like "the harmonious society" and "scientific development" in the constitution. However, given the proliferation of discussion, it is possible to think the announced constitutional change might be taken further.

Good Bye Red Chips, Long Live A Market

Until September 2006, private equity funds traditionally operated in China according to an off-shore circuit. A fund that had been invested in foreign capital and registered outside China took a share in a Chinese company, (a so-called Operating Company) via an off-shore Special Purpose Vehicle (SPV), itself often registered in a tax haven. A merger of the two entities was made before proceeding to a public listing on foreign stock markets, most often Hong Kong or Singapore. A directive in September 2006[1] put a stop to this "red chip" method, by giving the Ministry of Commerce (MOFCOM) the right of refusal for any acquisition of a Chinese company by an off-shore SPV.

There are three main reasons for this change in regulation. The first is the concern the authorities have to keep hold of the country’s best assets. The second is the wish to attract firms of quality onto the domestic markets. The sole raison d’etre of private equity funds is to ensure that their investments can be taken out, and the best way for this to happen is through a public listing on the stock exchange. By having the A market as the focus of any investment in private equity in China, the regulators are reacting to the critical lack of successful listed companies on the domestic markets. The third reason is that the new legislation favours the establishment of funds in RMB, which enables to absorb a part of any surplus liquidity cash.

Since last June, an amendment to the law on partnerships in commercial law  ("合伙企业法[2]") allows local incorporation of private equity funds. These can now raise funds in RMB  and thereby benefit from a favourable fiscal policy enabling them to avoid the impost of double taxation. Local groups are gaining ground. Hony Capital (弘毅), the Lenovo fund, and CDH-Investments (鼎晖), whose manager, Wu Shangzhi, introduced the red chips method by listing Eagle Ceramics (鹰牌陶瓷) in Singapore in 1999, are enjoying the most success. Companies listed on the Stock Exchange, such as China International Capital Corp. and Citic Securities, have also set up their own private equity funds. A great many foreign franchises have also now sprung into existence: Temasek and Goldman Sachs have just entrusted this mission to some of their most experienced bankers, while Carlyle, Texas Pacific Group and CVC, among others, are also adapting to the new regulatory climate. All in all, Beijing has approved 11 funds in RMB since 2006, amounting to some 10.6 billion dollars US (according to the Centre for Asian Private Equity Research).

The government has also set up pilot investment funds that Caijing puts under the "Private Equity" label. The Bohai Industrial Fund in the Tianjin region, with a value of 20 billion yuan, was established in late 2006, while four further funds in different sectors, worth a total value of 46 billion yuan (4.3 billion euros)[3], obtained approval from the State Council in September 2007. At a time when the foremost investment fund, China Investment Corp., is officially starting up its asset management portfolio, with 200 billion US dollars, the setting up of public investment funds confirms the importance placed by the authorities in private equity investments in areas of strategic importance for Beijing. (energy, environment, new technologies, financial services). These funds, despite not having any asset portfolio, are nonetheless being felt as a threat to the "original spirit" of private equity, which in China is facing the twin problems of bureaucracy and political nepotism.

Directed Private Equity

The new  legislation largely determines the direction taken by private equity type investments in China. They are seen as a means of identifying the country’s best companies, of helping in their development through acquisition of interests and listing them on an A grade stock market keen to have quality assets. The Chinese authorities have noted the fact that companies involved with private equity funds turn in better performances over the long term than more traditional companies[4].

Private equity Chinese style is very far from what Michael Jensen has characterised as the "eclipse of the public corporation"[5]. It is grounded, according to  the Jingji Guancha, in a "Pre-IPO" logic in China, in which the cases of public-to-private, frequent though they are in well-developed markets, are here the exception[6]. The bulk of transactions take the form of  a partial acquistion (capital development) and rarely of a full buy-out. KKR’s recent acquiring of an interest in the cement manufacturer Tianrui to the tune of 43.2% is a typical example of the kind of operation likely to take place from now on in China[7]. KKR has invested 115 million dollars US of its own funds and has secured financing syndicated by Morgan Stanley worth some 335 million dollars US. Private equity expertise is thus of considerable assistance to Chinese firms in their search for new securities.

But companies need to have the regulatory bodies on their side. This has been recently shown with the tribulations of a major regional player, Carlyle. The Washington fund saw the rejection of one transaction with the construction equipment manufacturer, XuGong Construction Machinery Group  (XCMG), as well as of its acquisition of 7.99% of Chongqing City Commercial Bank.

A delicate balancing act

Granting a dominant place to private equity in the development of Chinese companies is a strategy that is paying off, and at first flush it would seem to justify the efforts being undertaken by the Chinese authorities.  Liu Chuanzhi, the manager of Hony Capital, identifies three key factors of success, in particular. To begin with, China is benefiting from the expansion of key sectors (public works, textiles, foodstuffs, pharmaceutical industries) where companies are able to produce high, stable and regular profit margins. The private equity funds then contribute to the introduction of better management practices which result in further wealth creation for the company and a better international profile. Lastly, private equity is a unique tool to pilot the reform of state-owned enterprises: Blackstone’s entry into the chemical group China National Blue Star via a 20% capital purchase (600 million dollars) is one striking example of this.

There are, however, some structural factors that paint a slightly different picture of the relevance of private equity, both as a government strategy and as a source of returns on investment.

First of all, while domestic markets are offering exceptional growth, they remain extremely volatile. This fact is important both in the light of the three-year waiting period, starting from the day of a public listing, before shares can be freely disposed of – compared with the period of six months in force in most of the world’s markets. We might add to that the fact that a company must also show three full years of positive results before being able to be publicly listed on the Stock Exchange. Taking the investment out is thus put off for 6 years if the regulation is strictly adhered to. The only fund to have managed to liquidate a part of its investment is IDG Venture Capital, which sold half of its holding in Guangdong Ygsoft for 50 million yuan (4.7 million euros). These structural constraints are likely to undermine the new role of private equity in China. As Wu Shangzhi, the managing-director of CDH-Investments, points out, the funds then tend to reduce the risks by giving preference to investments in more well developed companies and by downgrading the share of risk capital in their asset portfolio.

This situation further reduces the number of potential targets in a context where the supply of liquid assets exceeds demand. By way of illustration, over the same period, private equity transactions amounted to 752 million dollars while the funds raised reached 5.3 billion[8]. The increased competition between Chinese and international funds, combined with the scarcity of quality targets, will henceforth contribute to an overvaluation of assets and consequently to a greater difficulty for the funds to attain the hoped-for internal return. Moreover, the disparity between the amount of funds raised and the reserve of transactions runs the risk, moreover, of lowering their standard in order to use the funds, which are quoted in RMB, a non-convertible currency, during their lifetime.

The private equity market in China is a market with a strong growth potential, but whose outlook remains unclear by reason of the opacity of the decision-making process of the regulatory authorities. The success of the new role that those in power have entrusted to private equity will largely depend on the flexibility of the regulators, particularly concerning the operation of stock exchanges, as well as on the health of the domestic financial markets. By way of example, the lifting of the three-year moratorium following the date of a company’s public listing could allow private equity funds to engage in higher risk investments, something that would be of benefit to the best Chinese companies as it would to the partners of these funds, and would go a long way towards satisfying private equity’s new mission as a tool for improving the Chinese industrial landscape.

These measures did mean that the crash was avoided, but not that the Chinese economy slowed down. The problems  could not but recur. On 11 September last, the National Bureau of Statistics announced that the consumer price index for August had increased by 6.5%, a ten year high. In July, the cost of foodstuffs climbed by 15% and that of pork by 90%. Earlier, during the spring and summer, people had started to talk about an oversupply of liquid assets  (流动性过剩), a new expression that took the place of the "overheating" of three years ago.

The article in Zhongguo Guoqing Guoli offers a very pessimistic report on this "objective" situation (一个客观事实). For its writer, the only way to resolve the problem of this oversupply of liquidity is to reevaluate the yuan, a diagnostic shared by many Chinese. At the present time, China has deposits of 35 000 billion yuan (that is, an increase of 1 875 billion yuan over the previous year), 15 000 billion yuan worth of A shares, and, on average,  600 billion new investments in cities every year. According to estimates, the June excess went from 1100 to 3600 billion yuan (3 000 billion according to Zhang)[1]. The relation monetary mass M2/GDP amounted to 165% in 2006 (209 000 billion yuan of GDP, 346 000 billion of M2), compared with 55% in the United States.

Chinese monetary aggregates at the end of March 2007

Where do these surpluses come from?

For Zhang, the surplus liquidity is not related to policies broadening the monetary base, but to the exchange rates. The "double surpluses" in the trade sector (双顺差, – 46 billion dollars in the first semester, that is, over 23 billion more than the previous year – and exchange reserves of 1200 billion dollars[3]) admittedly bring China important foreign exchange reserves, but also potentially create unprecedented surpluses in liquid assets. The exchange rate is thought to be responsible for 70% of currency creation. Furhtermore, the savings/investment ratio is imbalanced. Savings continue to increase and currently represent 44% of GDP, which is well above the international average. The Chinese economy is characterised by an important current account surplus, which reinforces the surplus in liquid assets.

These structural imbalances are China’s illness, and one that rsisk getting worse with the excess in liquid assets. Besides the foreign exchange imbalance, there is also an imbalance in the investment/consumption ratio. For Zhang, the problem does not come, as one often reads, from low consumption by the Chinese, but from a too rapid increase in China’s investments. Thus, in the first semester of 2007, retail sales shot up by 14.9%. Over the same period, investments increased by 23.7%, such that the investment/consumption ratio now exceeds 70%, a ratio that is clearly not sustainable. In 2006, overall investments reached 1000 billion yuan, which represents an increase of 8.7%. Zhang estimates that of these 1000 billion, 80 billion are due to surplus liquidity. However, 92% of this liquidity surplus has gone into real estate. In the first semester of this year, fixed investments amounted to 1 752 billion yuan, of which 354 billion were in real estate, that is, 20.22% of the total.

Furthermore, the surplus in liquid assets exposes the financail sector to very significant risks. For trading banks, the abundant supply of capital runs the risk of causing a flood of loans, which will force banks to lower the requirements for the obtention of a loan. Zhang suggested that at the time of writing his article the number of loans had grown by 16.3% since the start of the year, and M2 had climbed by 17.3%, that is to say, beyond the 16% target. In terms of the stock market, the indices keep on breaking all records, and then of course there is the real estate bubble.

Monetary policy:  both inflexible and vague

The Central Bank has used quite a few levers to try to stem the flow of these liquid surpluses by issuing bonds, opening up the market, increasing mandatory reserves, adjusting interest rates, etc. But no measure has turned out to be adequate; nor has any been carried through to its logical conclusion. The issuing of bonds is not enough, and the scope of this measure remains far too   narrow in relation to the reserves of foreign currency. The gradual opening up of operations has been restricted to Treasury bonds. The Central Bank has lifted the level of mandatory reserves sevenfold over the past year. If one thinks that these measures have involved about 160 billion yuan each time, then overall it becomes apparent that there is now an unprecedented freeze of 1 120 billion yuan. We should note that implementing decisions of this kind is no easy matter, as they imply that banks will reduce their profits.

But the principal problem comes from the fact that the increase in mandatory reserves does not allow the two main causes of the surplus to be addressed. These are the rate of savings, which is too high, and the exchange rate. Nor, paradoxically, according to Zhang, does it allow for any settling of the problems associated with the increase in credit, over-investment or the real estate bubble.

In addition to these measures, the Central Bank has increased the interest rates of trading banks on five occasions within a year[4]. The lifting of rates allows an increase in the the cost of investments and should therefore see a reduction of them. At the present time, Chinese savings and bank deposits are at quite a high level. Lifting rates therefore contributes to increasing the burden borne by trading banks. In addition, rate increases runs the risk of attracting speculative capital from aborad, which has been a major fear of the Chinese since the Asian financial crisis ten years ago.

A change in economic strategy has therefore become a matter of urgency. Firstly, there needs to be less of a dependence on foreign trade. Chinese growth must be based on three strengths (三力): investments, consumption and exports. Furthermore, a social security system (i.e. improving access to health care, education and public services through greater investment in these areas) needs to be set up. This is the only way of seeing a drop in the level of savings and over-investment – and at the same time being a means of kick starting consumption.

Zhang is also encouraging further deregulation, particularly of the exchange market and in the yuan market. The best solution would be to increase by 3% thez alue of the yuan in relation to the dollar.

Disagreements

Zhang’s viewpoint is not shared by everyone. To begin with, the reevaluation of the yuan would not necessarily produce the desired effects.

The former Morgan Stanley economist, Andy Xie, cites the examples of Japan, Korea and Taiwan in the 1980s, countries which reevaluated their currencies by 30% to 50%, yet without succeeding in reducing inflation.  Any reevaluation would have only a temporary effect[5]. For Albert Keirdel, of the Carnegie Endowment for International Peace, it would have the consequence of making Chinese goods more expensive internationally, which, coupled with high inflation, would risk truning a surplus into a trade deficit[6].

What then is to be done? For Xie, as for Keirdel, the authorities have no choice but to introduce a sharp rise in interest rates as a way of showing their willingness to fight against inflation. Keirdel fears a rise in social tension. These social questions are of less concern to Xie who is calling for very tight measures to be taken, of the type adopted by Paul Volker in the United States in the 1980s. These recommendations run counter to Zhang’s proposals which aim at reinvesting in social services any surpluses in liquidity.

China participated in this dialogue with a certain detachment, by only sending low level non-ministerial delegations and showing a certain reticence in expressing her own views on the need for peaceful co-existence and for new ideas on security. He reminds us that before 2007[1] China participated in working parties but never made any statements to the general assembly. The hostility of the United States reached a high point in 2005 when there was a "verbal combat" between the American and Chinese delegations over the issues of military transparency and modernisation. Donald Rumsfeld in particular declared that Chinese military expenditure was "the third largest in the world and the largest in Asia[2]". He asked why China "while it faces no menace from any other country, constantly increases its investment in defence". Cui Tian-kai's response was to ask whether the United States, yes or no, believed China to be a menace, thus obliging his opposite number to reply, "no, that is not the case"… 

But Sun Ru notes that following Rumsfeld's visit to China in the Autumn of 2005, there was a complete change in the language from the US side, and in the following session they no longer questioned China's right to develop her armed forces. With this improvement in place, China sent a more substantial delegation to the 2007 session, including a member of the military high command. This meeting had a successful outcome "as shown by two distinctive features: China speaking out loud and clear, and the development of interactive relations between China and the United States".

So Sun Ru makes the shift in American attitudes the main factor of change within the multilateral space of the Shangri-la Dialogue. But in that case, the higher level of the Chinese delegation shows that Beijing had anticipated this success, which could not therefore have come as just a welcome surprise. Moreover, the impression which Sun Ru gives of this first speech to the general assembly is certainly that of a more relaxed China which has made itself felt more or less everywhere over the last year or two.

The main demands come from the American side

A close reading of Sun Ru shows him to be saying that the change has come about because at the end of 2005 the United States stopped criticising China for modernising her armed forces, in order to focus exclusively on a demand for transparency. In this respect, according to him, the United States kept to the line taken by Mr. Gates after the publication of the Chinese defence budget figures for 2007, which had risen by 17.8%: "the steady rise in the Chinese military budget is not a menace in itself, unless that budget increase is accompanied by aggressive intentions towards the United States". At the 2007 session likewise, "Chinese aggression was no longer the issue" and the references to the need for transparency "were more moderate and steered clear of any provocative remarks on China's military modernisation". This new attitude, which consisted in no longer questioning China's right to modernise her defence capability, puts China in a less difficult position, and the writer makes use of this to put her in a position of rhetorical parity with the United States. He explains that the latter "never stops pressurising China to increase her military transparency, but the US's own intentions in a number of areas are very often lacking in transparency. For example, on the question of American involvement in a conflict over Taiwan, or on the areas covered by the Japanese-American alliance, the United States is keeping a quite intentional "strategic ambiguity" (战略模糊). Once the strategic doctrine on maintaining the status quo in the Taiwan Straits is set aside, this ambiguity boils down to exactly what the United States reproaches China for, namely a pure and simple concealment of its intentions. This rapprochement allows both sides to pursue similar objectives; the removal of uncertainties over their mutually shared goals is leading the two sides to a kind of strategic parity.

This change allows the bilateral Sino-American relationship to become part of the SLD since, the writer emphasises, one of its functions is "to follow a pattern set by other multilateral frameworks, and to manage two-sided scenarios within an ongoing engagement involving many protagonists" (多边塔台,双边唱戏); at the same time, "such scenarios in no way detract from the importance of the multilateral dialogue itself". Thus, Sun Ru reminds us that during the 2006 session Mr. Rumsfeld held bilateral meetings with the defence ministers from Japan, South Korea, India, Australia, Malaysia, and Mongolia; and that during the 2007 session, the United States, Japan, and Australia set up the first trilateral meeting of their defence ministers in order to exchange views on the North Korean nuclear question and anti-missile defences. This enables a better understanding of why China does not wish to be confined within multilateral discussions, and why only this bilateral dimension gives her participation a real value.

Given all of this, Sun Ru at no moment voices any Chinese demand for such developments. On the contrary, his text is sprinkled with references to Washington's need for a rapprochement, and a "greater willingness for military exchanges". The events of September 11th, followed by the Iraq war, call for a downplaying of the antagonisms arising from the bombing of the Chinese embassy in Belgrade (炸馆), and of the "dogfights" which had frozen early moves towards the institutionalisation of the Sino-American military relationship. Echoing statements from American officials and researchers, he lists the many motives underlying the American requirements (for the avoidance of errors and misunderstandings, for influence, for improved understanding, and for transparency), without going so far as to critically inspect those of Beijing.

In these ways the United States is not only presented as the cause for the improvement within the Shangri-la Dialogue, but increasingly as the country which needs it from China, with the result that one is left wondering what China is seeking to gain from this representation of this shift in American desires towards rapprochement.

What, then, does China want from the SLD?

Or in other words, what purpose does Sun Ru see in this particular aspect of bilateral exchanges within that multilateral space? There are three possible hypotheses:

-   A containment of American influence within a forum originally intended for handing down Washington's diktat;

-   A need for substantial improvements in Sino-American military relations;

-   A desire to share in America's leading role in Asian security.

These three hypotheses are obviously not necessarily separable. One can even go so far as to detect in Sun Ru's presentation an arrangement of perspectives, with one masking another. From the most visible to the least, they could be classified as follows:

- The opportunity presented by America's strategic difficulties allows at the very least a restraint and containment of the Pentagon's aggressivity at its lowest possible level in relation to the PLA[3], and to establish a Chinese presence in the regional structures, taking advantage of the weakening of "the idea of a Chinese menace" in order to dissipate it entirely (in a best case scenario). In its more modest aims the article echoes the views of officials for whom "the main focus of the military exchanges is not military co-operation but simply to keep the dialogue open"[4].

- The need to increase military exchanges is revealed, one might say, to be all the more pressing for the Chinese by the fact of its total absence from this analysis[5]. The SLD holds out opportunities, which must not be left exclusively to China's regional competitors[6], for closer ties with the American military leadership;