Asia

Kings of the East

As the war in Kosovo lurches on, there remain broader and more lasting issues to consider than the mysteries of NATO policy making. More important matters were being dealt with in Washington as President Clinton met with Chinese Premier Zhu Rongji. Beyond the question of U.S.-Chinese relations, the entire issue of Asia's status in the world system was on the table. To be sure, there was a fundamental connection between the events in Kosovo and the summit in Washington. The fate of Kosovo province is, from a broad perspective, quite unimportant. What is most significant about Kosovo is that it is the occasion of the first, sharp disagreement between the United States and Russia since the collapse of the Soviet Union. As U.S.-Russian relations deteriorate, U.S.-Chinese relations necessarily improve. Russia and China are in the process of entering into what they call a "strategic alliance" whose primary purpose, in our opinion, is to limit the power of the United States globally, and particularly in Eurasia. Indeed, depending on how far this relationship goes, we could be seeing the reemergence of the Eurasian pact that seemed to be in place from 1948 until about 1962. We have spent a great deal of time recently discussing the evolution of events in Russia, but relatively little discussing Asia. Zhu's visit is an opportunity to consider the other part of the Eurasian geopolitical equation and, more importantly, the role of Asia.

1998 was very much the year of Asia and economics. It was as if the entire globe was obsessed with one issue: how bad will the Asian meltdown be and how badly will it affect the rest of the world? In a sense, the obsession has died down because we have the answer. The Asian meltdown is extremely serious, but it is more serious for some countries than others. From a global perspective, it has been a depressant, but not a terrible depressant. Neither Europe nor the United States has been dragged into recession by the decline in Asia and it appears that if recession is in the cards for either, the causes will be cyclical and internal, rather than of Asian origin. In other words, Asia turned out to be much more important to Asia than to the global economy. No doubt many sectors in the United States and Europe were badly hurt by the Asian depression, but there is no escaping the fact that, taken as a whole, the broad claims of global interdependence did not bear up to empirical or historical scrutiny.

This logically reduces the importance of Asia to the world, at least on the economic level. We have seen Asia collapse in extreme and unexpected ways, and the consequences to the rest of the world were simply not that important, when taken as a whole. With that information integrated into the global knowledge base, it was inevitable that Asia, understood in primarily economic terms, would be relegated to a secondary role. Whether Asia recovers and to what extent, is an important issue, but not an earth shaking one. The earth will do quite well under any circumstances.

Now, there is no question but that Asia has bottomed out for the short-term. What is less clear is whether the bottoming is merely the beginning of a cyclical upturn in a general downtrend or whether it represents a historical bottom from which new heights will be reached. In our view it is likely the former rather than the latter. Japan, far more than China, remains the engine driving the Asian economy. Japan has not made serious strides to solve its problems. Indeed, it has been moving in the opposite direction by reducing Bank of Japan rates to absurdly low levels in a desperate attempt to stabilize the banking system. As a consequence of this strategy, Japan deals with a short-term problem at the expense of exacerbating the long-term problem.

Japan's fundamental problem remains extraordinary economic inefficiency as reflected in unsupportable rates of return on capital. The inefficiency of Japan's economy means both that its ability to generate investment capital internally is severely limited and that its ability to utilize what investment capital it has available is similarly limited. As a result, Japan is like a bird that just can't get off the ground. Japan is now in a historical bind, which means that it will continue to fall behind. It is in a downward spiral in which there is always an uptick that can be confused with a recovery, but it is more an optical illusion than a reality. There are some economies that are having stronger upticks than others and, in general, most of Asia appears to be bottoming for now. But, rather than gaining momentum, the recoveries appear to be straining against gravity. The term malaise still applies to most of East and Southeast Asia.

China is the most difficult to read for several reasons. One is the extraordinarily unreliable nature of its statistics. First, there is the legacy of communism, in which statistics were understood to be political weapons. Second, there is the more recent heritage of a non-transparent banking system. Finally, there are genuinely different definitions of things, such as the meaning of growth. Whatever is happening in China, it is clear from Chinese actions that the internal pressure of economic problems and of dislocations has already led to substantial shifts in political and social policy. In other words, we have seen the consequences of an economic downturn even if the public statistics remain ambiguous.

Which brings us to the crux of the matter and a point we have been making for several months. The degradation in the region's economic life has pushed economic factors to the back burner, and elevated political factors to the front burner. There are two reasons for this. First, during a roaring expansion, the fascination with economics makes political questions appear trivial and even irrelevant. Second, during an economic downturn, dividing the economic pie becomes a much more difficult and politicized task than dividing an expanding one. When there isn't enough to go around, or where there is simply less than there was before, the question becomes "who is the loser," where previously the question was the much easier, "who wins the most?"

We can see this in the internal politics of every country. But what is now emerging are not the ongoing internal tensions from Indonesia to Japan, but the less expected and in many ways more important tensions between nations. Nonsense about borders no longer mattering can be sustained during periods of tremendous prosperity, when the flow of investment capital makes it appear that borders are irrelevant. However, in periods of capital shortage, when nations compete for every dollar or yen, who gets what and when they get it, can become matters of terrible urgency.

We are now in a period where interdependence is real, but it leads to political friction. Low-friction and interdependence exist when a win-win situations is possible. That situation exists when economies are growing quickly. When economies are stable or contracting, interdependence creates win-lose relationships. And when that happens, nations compete. More important, nations tend to interfere in the internal affairs of other nations. For example, in a growth economy, economic decisions made by one country may have consequences for another, but those consequences are subsumed in a general expansionary environment. In declining economies, economic decisions that affect other nations are not covered up, and therefore nations tend to interfere directly in each other's decision-making process, through means ranging from interference in internal politics to generating countervailing policies. As a result, national interdependence increases frictions and expands the scope of political competition from the purely economic as nations seek levers with which to control each other.

The most dangerous situation is one in which there exists what might be called asymmetric vulnerability. That has emerged in U.S.-Chinese relations and U.S.-Japanese relations. The economic downturns in both countries have made them extremely vulnerable to shifts in U.S. economic policy. There is no reciprocal relationship, however. Shifts in Chinese and Japanese policy do not affect the United States in an equivalent fashion because of the booming American economy. This creates a situation in which U.S. actions irritate China and Japan without giving them countervailing levers. American behavior is not circumscribed by a fear of retribution and the United States proceeds oblivious to the consequences. The result is that the weaker country, unable to compete in purely economic terms, seeks extra-economic levers with which to control the behavior of the other.

Consider U.S.-Chinese relations and the manner in which political considerations have supplanted economic relations. China's economic downturn has forced the Chinese government to deal with social unrest by political means. One manifestation of this, and not necessarily the most important, has been the repression of democratic activists. Washington, for its own political reasons, is highly sensitive to those questions, particularly when there are few economic consequences to bear for their concern. In China's reduced circumstances, Washington is not particularly afraid of economic repercussions and therefore is free to attack China's human rights policies. Now China, unable to retaliate economically, is forced to look for countervailing power.

That countervailing power is geopolitical in nature. What we have seen, over the last few months, is China shifting its focus from using economic tools to manage its relationship with the United States and other countries, to using geopolitical tools. Thus, China's relationship with Russia, a subject that has been regarded as both archaic and trivial over the past generation, has now moved to the forefront, although most observers don't recognize the sea change yet. When the Chinese speak to the Americans now, it is no longer in terms of economic opportunities and joint ventures as an offset to American pressure on a variety of issues. Rather, it is the geopolitical pressure that comes to the fore.

That is why relations between China and the United States will remind people of pre-1972 relations more than post-1972. We are not talking about Maoism or the Cultural Revolution. Rather, we are talking about a reversal of the anti-Soviet alignment between the United States and China that took place in 1972. China is reminding the United States constantly of the geopolitical consequences of American economic and political pressure. Indeed, as this progresses, the military dimension joins the political as purely economic considerations take second place.

This is true throughout Asia. Where previously something such as Mitsubishi's new joint venture in Indonesia dominated sophisticated conversation in Asia, today the geopolitical question of whether Indonesia can survive as an integrated nation takes the fore. Likewise, the military balance between China and Taiwan has become critical. In addition, Japan's military stance toward North Korea has emerged. And, the Spratly Island controversy is on the front burner. And so on.

Throughout Asia, the agenda is no longer economic. Both in internal and external policies, the primary issues are now political and they will, over time, become military. The next quarter will see intensifying tension within the region and between some countries in the region and the United States. Increasingly this will be expressed in politico-military terms rather than economic terms. We are continually struck by how much more important Japan's politico-military relationship has become to Japan today, than it was only ten years ago.

Simply put, there are consequences to economic downturns that go beyond economics. If we accept the idea that Asia has entered a long-term period of economic malaise, then it follows that that malaise will have critical consequences beyond politics. The dramatic deterioration in relations between the United States and China is one critical manifestation of that, but it is not the last. The entire relationship between the United States and Eurasia is being dramatically redefined. We believe increasingly that a Sino-Russian entente designed to limit American power is already growing beyond its embryonic state.

This poses an interesting question for an Asia unused to posing its questions in geopolitical rather than economic terms. As tensions between Russia and China on one side and the United States on the other side grow, how will the rest of Asia respond? During the Cold War, the answer was easy. The United States offered allies membership in its trading bloc, which was an enormously beneficial relationship. It was the foundation of Asian prosperity and its benefits far outweighed the politico-military risks. The world has changed and economic relations with the United States, on terms the United States is prepared to tolerate, are far less openhanded. What is the relationship of the rest of Asia, and in particular Japan, to the competition between North America and Eurasia? Each Asian nation will have to walk through a political mine field in order to preserve their economic relations. The age of economics is being replaced once more by the more permanent geopolitical relationships.

The decision-making process for choosing the next World Trade Organization (WTO) Director-General that has been going on for months, has come down to two candidates: Thai Deputy Prime Minister Supachai Panitchpakdi and former New Zealand Prime Minister Mike Moore. Despite the fact that the former WTO head Renato Ruggiero stepped down on April 30, the decision to replace him has already been postponed several times. Not only has no clear consensus emerged, but also there is an increased potential for the organization to halt operations temporarily. Europe and Africa are both divided between the two candidates, although Europe is leaning toward Moore. Supachai has the backing of Asia and the Middle East, while Moore has the support of North and South America, with the United States leading the coalition in his favor.

The U.S. decision to back Moore formally was greeted with disappointment by Thailand, which has been emerging, with U.S. patronage, as a model of economic reform for Asia. Thailand's disappointment has now turned to anger, as it accuses the U.S. of stalling the decision-making process to pull support away from Supachai. The United States' refusal to back Supachai has raised alarms and accusations from other Asian nations that the U.S. is splitting the WTO along economic and regional borders, threatening the efficacy of the organization in the future. The Executive Director of the Malaysian Institute of Economic Research, Mohamed Ariff, has said, "This is most unfortunate; it looks like a North-South divide. By and large developing countries think that many of these international organizations have been dominated by the North." He further warned that a failure to accept Supachai as the next WTO Director-General could lead less developed nations to be unenthusiastic in implementing WTO policies and decisions.

In Thailand, Senate Speaker Meechai Ruchupan has taken a stronger stance, saying, "The lesson of the WTO selection is that it's time we reviewed our foreign policy with all countries, especially the U.S. We have to see who are our real friends and who are our enemies." Thai Foreign Ministry Spokesman Don Pramudwinai has cautioned that "If the selection of the Director-General becomes an increasingly ugly process then the people concerned have to bear the blame." Don further warned, "We feel that everyone is starting to have a lack of confidence in the WTO procedures."

On May 3 at a special meeting of WTO officials, which lasted well into the night, Ali Mchumo, the Tanzanian ambassador who chairs the decision-making general council of the WTO, asserted that Panitchpakdi Supachai is no longer a viable candidate for the post of director general of the World Trade Organization. "As far as the process of identifying the most acceptable candidate is concerned, the process is over for Dr Supachai," he said. Diplomats said Mchumo's comment elicited surprise from the delegates attending the meeting. The camp favoring Supachai immediately fought back with delegates abandoning procedure by arguing out loud their case. "Mchumo's getting a clear answer that Supachai is not dead," said the Malaysian delegate, speaking on behalf of the Association of Southeast Asian countries. "Any attempt to impose a decision on the WTO membership could divide us and, as a consequence, gravely impair not only our preparations for (the upcoming ministerial meeting in) Seattle but the entire organization itself." The meeting deteriorated to such an extent that Mchumo was ultimately forced to recant his statement before the evening session convened.

However, at approximately the same time as the U.S. was confronting Asia over the head of the WTO, it issued several warnings to Asian nations at the end of last week over their trade practices and potential WTO actions regarding them. The U.S. cited the controversial Super 301 trade act and the Title VII Buy American law, thereby warning South Korea, Japan, India, Hong Kong, and Taiwan of potential investigations or, in some cases, WTO actions over unfair trade practices. China, on the other hand, was congratulated for implementing "a functioning system capable of protecting intellectual property rights," particularly in the field of optical media. This U.S. trade stance has put many Asian nations on the defensive, causing anti-U.S. sentiments to rise within these countries.

Concurrent with its domestically focused economic foreign policy (which is being implemented not only vis-a-vis Asia but also Europe, and elsewhere as well), the U.S. has been attempting to strengthen its role as the geopolitical global leader. These two competing goals are working against each other and, so far, the U.S. has failed to realize either one. As it tries to build international coalitions and increase its influence over world events, it is at the same time degrading these relationships with economic policies bordering on all out protectionism. What the United States seems to have forgotten is that political gratitude is often secured by economic generosity. Given NATO's actions in Yugoslavia, the U.S. and Europe are maintaining only a tenuous hold on international cooperation as they seek to avoid the embarrassment of defeat; however, Asia has no such overriding reason to maintain strong cooperation with the U.S. Once the war in Yugoslavia ends, U.S. economic policies may again lead to increased antagonism with Europe and we may very well see the same patterns as those in Asia emerging.

The economic principles being implemented by the U.S. in Asia, including its decision not to back Supachai, are becoming counterproductive to positive U.S.-Asian relations. Only a few months ago, Thailand was showing signs of becoming a close ally and useful associate of the U.S. in promoting its international policy in Southeast Asia. Now it is facing a rise in anti-American sentiments in government circles, while its labor unions, angry at the IMF-proscribed economic reforms, are lashing out at the West in general. Even China, after having been carefully courted to induce economic cooperation, is growing increasingly concerned by changing U.S. military ties with Japan and the Philippines, while the Philippines accuses the U.S. of preferring trade with China over regional security and stability. This tangle will not be easily undone, particularly given the current distractions in Southern Europe.

What has become increasingly apparent is that the Asian powers are expressing, ever more vocally, their antagonism over the U.S. backing of Moore for the WTO post, over the U.S. threatening trade sanctions while these countries are in the throes of an economic downturn, and over IMF-imposed reforms. These issues may ultimately undermine U.S. policy in that they may push Asia toward a closed regional economic grouping, over which it may exercise even less influence.

It has been fascinating over the past two weeks to observe the gyrations of China and Russia, as they carry out their terminal maneuvers on the way to an anti-American, anti-Westernalliance. Right after the bombing of Kosovo began Russia went ballistic, in its more extreme moments even threatening theUnited States with nuclear war. China remained sullen but relatively quiet. Then Russia turned mellow, trying to work withthe West while China went ballistic over the bombing of the Embassy and a host of other issues. It is amazing the extremes at which both countries are operating their foreign policies at the moment.

The intense mood swings are, of course, calculated and have rational goals. Russia and China individually are trying to achieve three things. First, they want to get the attention and concern of the United States and the major powers linked to the United States, like Germany and Japan. Second, they want to generate a substantial level of concern within the United States concerning the direction of relations with each of them. Russia and China both hope to increase their leverage within the relationship and ideally extract political and, more important, financial concessions from a concerned United States that is hoping to appease them and avoid a new Cold War. Finally, they hope to create serious fear among America's allies, like Japan and Germany, concerning trends in U.S. foreign policy, in the hope of being able to split the American alliance, further weakening the United States.

Thus, periodically, each generates a major confrontation with the United States in which it appears that a catastrophic collision is about to take place. They then allow themselves to be placated by the United States and its allies, extracting economic concessions in return for politico-military quiescence. The trick for each is to recreate the image of the Cold War as a reminder of the bad old days. The Russian announcement that the Black Sea Fleet would sortie, and mobs of Chinese hurling stones at the U.S. Embassy in Beijing, all served to remind everyone how bad things could get. That set the stage for the next phase, which was bargaining on the price for not letting things get that bad.

We do not believe that Russia and China are cooperating on this. Quite the contrary. In a certain sense, they are now competitors for the West's limited attentions. Particularly in Washington, where the ability to handle multiple foreign policy issues is at a historical low point, getting priority treatment requires threats of nuclear war and riots in front of embassies. The similarity in Russia's and China's behavior has much more to do with the similarity of their strategic and economic positions relative to the United States than it does to do with conspiracy. Both need the same thing from the United States and the West: financial help and collaboration. Neither will get as much as they want and need, based strictly on economic considerations. Each needs to find levers to extract more. Thus, in an odd sense, they are competitors, posturing intensely to try to get attention and help.

Consider Russia's maneuvering. Immediately after the beginning of the Serbian war, it appeared that Primakov's Russia was about to launch a new Cold War. Yeltsin brilliantly allowed Primakov to position Russia in complete and hostile opposition to NATO. He then brought Chernomyrdin out of retirement. Chernomyrdin, an old stalwart of the reform days, appeared to be a dinosaur out of the past. Chernomyrdin delivered two messages. The first was that there was still a chance at reform in Russia. The second was that Russia would help NATO in Kosovo in return for financial aid. Suddenly, $4.5 billion was shaken loose; not enough to bring Milosevic to the peace table, but enough to cause Yeltsin to dump Primakov and appoint a new Prime Minister of ambiguous ideology. Outmaneuvering the communists in the Duma by getting Zhironovsky to double cross them (the price for that is not yet clear), Yeltsin is now in a position to bargain with the West. Indeed, Michael Camdessus, head of the IMF, said on Sunday that the IMF was now ready to work with Russia on additional funding.

Of course, Camdessus also said that Russia would have to institute new reforms in order to get that money. The new Prime Minister said on Sunday "Everything is simple here. Once the Duma passes legislation and endorses the new government, loans will start coming." Stepashin, of course, is still euphoric at the prospect of becoming Prime Minister, and he is not thinking as clearly as he should. Obviously, the Duma must pass new legislation in order to get the IMF to grant new loans. But that legislation will include massive austerity in an already impoverished Russia, as well as a battle for taxes with oligarchs busy shipping money to the West. If it were really that easy, it would have been done months ago.

This is the problem with all of this maneuvering. It is pointless. No matter how much money the West provides, Russia cannot recover from its problems because those problems are deeply rooted structural and cultural defects in the Russian system that make it impossible for it to, if you will, metabolize money effectively. Put differently, if it doesn't turn into capital, it doesn't become productive. Money sent to Russia remains money to be spent on imported luxuries, used to bribe opposition politicians, or stolen. It does not create economic growth. Thus, the maneuvering gets the West's attention followed by ineffective assistance, inertia, and the return to the crisis stage.

China is a similar case, albeit far from as hopeless economically. Nevertheless, after a series of entirely unsatisfactory bilateral meetings at several levels, tremendous criticism from the United States on human rights, the investigation of Chinese financial aid to Bill Clinton, the espionage scandal and a general decline in relations, the Chinese saw the bombing of their embassy as a marvelous opportunity to redefine their relations with the United States. Taking a page from Moscow's book, they recreated the world prior to the rise of Deng Xiaping, complete with howling mobs and resolutions condemning American hegemonism. The bombing of the Embassy, had it happened in 1991 in Baghdad, would have been managed with a harsh protest and an apology. In 1999, it was turned into opera by a China hoping to make its point.

That got the U.S.'s attention but, as with Russia, it was not clear what the Chinese wanted that the U.S. and the West could give them. Everyone rushed forward to see what could be done about World Trade Organization membership for China. However, given the structural dynamics of 1999 as opposed to 1995 and given China's unofficial economic crisis, it was not clear what WTO membership would do for China. It was also unclear what else could be rationally offered. Massive new investments on the order of the earlier years of the decade are hardly likely when the U.S. economy is so attractive and investors in China are merely hoping to break even at some point.

Nevertheless, China's Cold War posturing is every bit as impressive as was Russia's. For example, the May 13 South China Morning Post reported that China is abandoning the low- key foreign policy established by Deng Xiaoping and moving toward a more aggressive approach. The shift in policy, unnamed sources said in the report, was made following the NATO bombing of the Chinese Embassy in Belgrade. It was partially in response to student demonstrations against the U.S. Embassy in China. The source said, "In internal talks, Politburo members expressed fears that the students would next stage protests against a 'weak central Government' unless Beijing counters threats to national security." The idea that China would take a knee-jerk decision in reaction to a group of students throwing rocks at a foreign embassy and totally reverse a foreign policy that has stood for ten years is unlikely. Instead, China is using the opportunity presented by the anti-American demonstrations to declare to the world that the U.S. and NATO are forcing China into a new role, despite the fact that it has already been pursuing this new policy for some time.

In response to China's overstated warnings of being forced by its own citizens into a more aggressive stance, the U.S. is planning to send in a former admiral as the new ambassador to China. The choice of a military man to take the position reflects the administration's view of the potential Chinese threat. More importantly, the prospective nominee for ambassador to China is Admiral Joseph Prueher, commander of the U.S. Pacific Force from 1996 to March 1999. While Prueher was instrumental in expanding Chinese-U.S. military cooperation and exchanges, he was also in charge in 1996 when the U.S. sent carriers into the Taiwan Strait to demonstrate U.S. resolve vis-.-vis Chinese interference in Taiwan's elections. This makes Prueher a prime candidate in dealing with China who is unlikely to be strenuously opposed by the Republican-dominated Congress.

The real danger here is that during these periodic, ritual chest- thumping episodes, the situation might genuinely get out of hand. Yeltsin skillfully reigned in the anti-Western forces he helped unleash. The old fox never ceases to amaze us. However, he will go to the well one time too many, and unleash forces that even he can't control. The same is true in China. The leadership can whip up anti-American frenzy on demand. It is not clear that they will always be able to control it. In the end, it won't matter. The tendency toward anti-Americanism and therefore to some form of alliance is, we believe, irreversible. The path toward that end, however, is twisted and quite noisy. The noise, whether from Moscow or Beijing, is not the real issue. There is lightning behind the thunder.

A four-day meeting of the Communist Party of China Central Committee (CPCCC) began Sep. 19 in Beijing. The meeting, which will focus on economic reforms, is Beijing's last chance to organize its economic and social stance before the 50th anniversary of the founding of the People's Republic of China. While the CPCCC meeting will coordinate future economic reforms in China, understanding the extent and depth of such reforms will depend on the current power struggle among Jiang, Zhu and elements of the army.

The economic reforms, implemented by Prime Minister Zhu Rongji, have exacted a social and political cost in China, in part contributing to the power struggle in Beijing. Even in normal economic circumstances, the massive restructuring required to liberalize China's economic system would have caused higher unemployment, raising opposition from those who benefited from the inefficient old system. The timing of the reforms, however, coincided with Asia's economic crisis, further compounding these side effects.

As pressures from the swelling ranks of the unemployed began to rise, Jiang decided to add to the reforms by divesting the People's Liberation Army (PLA) of its business ties in an effort to centralize control over the military. Jiang, concerned that social instability would require a solid central military structure, feared the possible fragmentation of the PLA as regional leaders maintained and protected their own business empires, rather than the interests of China.

As the reform processes moved forward, a three-way split began to open in Beijing. Zhu and Jiang disagreed on the divestiture of businesses by the PLA over concerns that the central government would not be able to absorb the costs incurred by the military [ http://www.stratfor.com/SERVICES/GIU/090399.ASP ]. Jiang, deeply concerned about China's internal stability, weakened Zhu's reforms, ultimately weakening his powers as well. The PLA, upset at the loss of finances from its businesses, blamed both Zhu and Jiang for its economic difficulties.

While rumors of Zhu's resignation or dismissal have floated for months [ http://www.stratfor.com/asia/specialreports/special20.htm ], Jiang has instead undercut Zhu's power. Jiang has reportedly taken control of the government policy on state-owned enterprises (SOEs) from Zhu, giving the on-the-ground implementation to Vice Prime Minister Wu Bangguo. Zhu's dismissal is unlikely, as it would undermine China's international image and present an appearance of instability in the regime. Keeping Zhu in place, albeit with limited powers, appeases both the reform elements in the government and international investors interested in China. It also lets Jiang keep a close eye on Zhu's moves.

While Jiang has taken power from Zhu, the PLA continues to focus attention on Taiwan, emphasizing the army's importance to Chinese unity and stability. According to PLA sources quoted by the Wen Wei Po Sept. 20, the PLA considers the prevention of Taiwan's independence its primary task. It has repeatedly used the Taiwan issue to push for an increased budget, in part to make up for its loss of business revenues. If China were to act against Taiwan, as it has threatened to do repeatedly since Taiwanese President Lee Teng-hui's state-to-state comments, the military would then effectively take control of Chinese foreign policy as long as shots were being fired.

Zhu's powers have been virtually stripped away. At the same time, he faces military cadre who accuse him of unpatriotic behavior for attempting to block their push for bigger military budgets vis-a- vis Taiwan. In this precarious state, Zhu has attempted to shift the responsibility for the reforms to Jiang. In a statement quoted in the People's Daily last week, Zhu emphasized that economic reforms were being carried out "in accordance with the spirit of the important speech on state enterprise reform and development by Jiang Zemin."

With both the PLA and Jiang acting against Zhu, the results of the CPCCC meeting on economic reforms will hinge on the relationship between Jiang and the PLA. Jiang's attempts to reign in the PLA have to a large extent backfired. Rather than gain more centralized control, his military reforms have caused the military to assert a more independent line, primarily on the issue of China's response to Taiwan.

In an attempt to retake control on the Taiwan issue, Jiang has now set up an independent military control unit, which he oversees, but is operated by Vice Chairman of the Central Military Commission (CMC) Zhang Wannian, according to PLA sources cited by the Ming Pao Daily. The unit oversees all military concerns regarding Taiwan. The appointment of Zhang puts a close ally of Jiang and a staunch opponent of military corruption in charge of China's strategic Taiwan policy.

The price Jiang is paying to wrest control of both China's economic and military policies is unclear. Jiang's moves against Zhu may be an attempt to appease the military, perhaps as part of a deal to maintain power while keeping the military in its barracks. However, at the same time he continues to try to maintain an upper hand over the PLA, both to emphasize and ensure its loyalty to the Communist Party and central leadership.

What is clear, however, is that Zhu is effectively finished, the PLA is an ascending power and Jiang is working to maintain a balance between control and stability. The CPCCC meeting will likely result in a weaker reform process than the one endorsed by Zhu, and may even defer to the military on some economic issues, including the possibility of a softened stance on military divestiture. As China enters a new era and Jiang takes his position as a true successor to Mao and Deng, it is likely that, at least for a while, China's opening up has run its course.

Chinese government offices and businesses will be closed from Oct. 4-7, the government announced, extending the scheduled Oct.1-3 National Day holiday by four days. According to Chinese officials in the United States, the longer vacation is because the actual holiday falls on the weekend. Sources inside China have suggested the last minute extension was the result of a heated debate in the National People's Congress. The winning faction claimed that the weeklong holiday was "in order to spur consumer spending." With the sudden announcement of such a long vacation so soon before the celebration, neither explanation is particularly convincing. This is especially true given the ongoing power struggles in Beijing and suggests something more extraordinary is about to happen.

President Jiang Zemin, who has been strengthening his grip on power for some time, has referred to 1999 as a make or break year for the Communist Party of China (CPC) and for China as a whole. To do so, he has appointed his allies to high level military positions [ http://www.stratfor.com/asia/specialreports/special80.htm ] and slowly stripped power away from Prime Minister Zhu Rongji and the economic reformers. Since early this year Jiang has played an important role in the reorganization of officials, even down to the county level in civil society and divisional level in the army [ http://www.stratfor.com/asia/aiuarchive/b990204.htm ].

A massive celebration in Beijing is planned for October 1, 1999, the fiftieth anniversary of the founding of the People's Republic of China. Security preparations in Beijing began as early as January when the city government started conducting a systematic cleansing of all unofficial and migrant residents. [ http://www.stratfor.com/asia/aiuarchive/b990128.htm ] A final sweep by deputized citizens is currently underway. In addition, both the paging system and gas supplies will be shut down Oct. 1 as the 500,000 strong parade marches through Tiananmen Square. Buildings within two miles of the parade route will be emptied by noon Sept. 30. The city has been meticulously cleaned and modern billboards have been removed.

Beside efforts in Beijing, China has conducted nationwide crackdowns on potential ethnic separatists, opposition political movements, and religious organizations. All domestic travel to Beijing has been banned from Sept. 20 to Oct. 5, although foreigners and those traveling from Hong Kong, Taiwan and Macau will still be allowed into the city. In order to ensure nothing unexpected happens during the celebration, Beijing has made a point of not inviting foreign dignitaries to the celebration, though they are still allowed to attend.

Tightened security and other advance preparations support the idea that Jiang is about to make a move and perhaps fulfill a longstanding rumor that he wants to become the Chairman. Pictures to be displayed during the celebrations have been kept secret, but there is talk that Jiang's face may appear next to those of Mao and Deng. In addition, Jiang's wax likeness is conspicuously absent from the Museum of the Revolution's Great Men of China exhibit, suggesting a new likeness is being prepared. Adding to the importance of the position of Chairman, China is keeping its banks open Oct. 1 to release new money, including a redesigned 100 yuan bill featuring a solo picture of Mao, instead of the pictures of Prime Minister Zhou Enlai, former President Liu Shaoqi, and former Marshal Zhu De.

While the transportation infrastructure will reportedly remain in operation during this lengthened vacation, the Chinese have traditionally reacted to such extended holidays by visiting family or staying home. The Shanghai and Hong Kong stock exchanges are officially closed Oct. 1-3, though a Chinese diplomatic official in the United States suggested the Shanghai market may be closed for the entire seven days. The move to effectively close China for a week suggests an extraordinary event is about to unfold in Beijing, one that will have nationwide repercussions.

The National Day celebration gives Jiang the prime opportunity to re-establish himself as head of the government, quite possibly taking on the title of Chairman. Aside from its obvious symbolic effect, it would allow Jiang greater leverage in returning to a centralized control structure. Taken to the extreme, Jiang could erase Deng from Chinese history. But stripping power from Zhu and revising the central planning role of the Communist Party is effectively the same thing.

If Jiang is bold enough to declare himself Chairman, essentially ending economic reforms, it is not Beijing he has to fear, but China's economic centers like Shanghai, Guangdong, and even Hong Kong. The threat of a redistribution of wealth from the coast to the interior, already a part of Jiang's plans, could trigger a response from those directly affected, including civilian businessmen, high-ranking People's Liberation Army (PLA) officers and Communist Party officials. By shutting down the country for a week, Jiang could identify and suppress any opposition from these economic strongholds. With the markets closed for a week, capital flight could be prevented and it would allow time to convince the international community that despite the shift to centralized control, investments remain safe in China.

While it is unclear what will happen on National Day in China, it is clear that Jiang has been making obvious moves to consolidate power over both military and economic matters. The international community will be eyeing the events in Beijing to see China's future. Sources in China have said that the government of Singapore has warned its citizens to be prepared to leave, further suggesting a major upheaval within the government structure. The question is whether Jiang can maintain his increasing grip on power and resolve the power crisis in Beijing.

After a recent meeting with representatives from the Central Committee of the Chinese Communist Party, Indonesian presidential candidate Abdurrahman Wahid said he looked forward to a possible new alliance among India, China and Indonesia. Wahid reportedly said such an alliance would help rectify the "lopsided" power of the West. He also indicated plans to visit the People's Republic of China.

After the initial shock of such a statement, Western Asia-watchers dismissed Wahid's comments as pre-election posturing. But a quick dismissal of this idea is unwise. While many obstacles stand in the way of an India-China-Indonesia bloc, there are indications of a trend in this direction. Such an alignment would necessitate a major adjustment of U.S. policy.

For an alliance to form among India, China and Indonesia, the countries would need to overcome some significant historic differences. Relations between China and India have been stormy, as China has traditionally backed neighboring Pakistan. Chinese-Indian tensions erupted into a brief war in 1962, resulting in the current Chinese occupation of Indian territory.

Indonesian-Chinese relations are apparently improving, but it was only 40 years ago that the threat of a Chinese Communist insurgence in the archipelago triggered a government purge that left thousands dead. Ethnic Chinese are still targeted during periods of unrest in Indonesia. Indonesia is also an historical ally of the United States, while Chinese and Indian relations with the United States have been cooler. On a more ideological and cultural level, Chinese communism, Indian Hinduism, and Indonesian Islamicism do not appear to be easily compatible world-views.

Yet several recent events portend a possible warming of relations. The Far Eastern Economic Review reported that the cancellation of the Australia-Indonesia military cooperation treaty led Jakarta to consider Beijing as a source for weapons and spare parts. An aide to Indonesian President B.J. Habibie also indicated these moves stem from a desire to counter Indonesia's reliance on the West. Although the Indonesian military still maintains links with the United States, it may be tempted to ally with a nation, like China, that doesn't interfere in internal affairs.

Sino-Indian relations began to show signs of improvement during the recent conflict in Kashmir. Instead of supporting its ally Pakistan, China was noticeably neutral during the fighting. In fact, Indian Foreign Minister Jaswant Singh commented June 18 on China's "serious approach" to resolving the conflict, and said that the two would extend bilateral cooperation and hold a security dialogue. A month later, Singh said "some of the past misunderstandings with China are now behind us." He added, "India does not see China as a threat and China does not see India as a threat."

The most obvious point of agreement among India, China and Indonesia is apprehension over U.S. power. All three have expressed concern about U.S. hegemony in the wake of NATO's intervention in Kosovo. China went so far as to call for the establishment of a "just" new international order.

Interestingly, at the same time that China has been moving toward Indonesia and India, Russia has moved toward China and India. All three nations have already agreed to combat cross-border terrorism in Central Asia. This is not strategically significant in itself, but it paves the way for increased cooperation on other matters. Russia agreed Oct. 13 to upgrade India's air force with enhanced MiG-21 and SU-30 fighter planes. Russian President Boris Yeltsin and his Chinese counterpart, Jiang Zemin, met in August and agreed on the necessity of a multi-polar world. The two are scheduled to meet again before the new year.

Increased diplomatic and military cooperation is a far cry from a formal multinational alliance. Nor is there any indication of contact between Indonesia and Russia. However, even an increase in foreign policy coordination is a major concern for the United States. Russia, China, India and Indonesia cover a majority of the Eurasian landmass, and contain almost half of the world's population, as well as a tremendous amount of resources. By the mere fact of geographic proximity these nations already exert a tremendous influence on the Indian and Pacific Oceans, the Middle East, South Asia, Southeast Asia and Eastern Europe. Coordinated geopolitical strategies would increase that influence dramatically.

If confronted by a newly bipolar world, the United States would need to increase and solidify its alliances, especially in Asia. NATO still covers Europe, but military relations with "border" nations such as Australia, the Philippines, Malaysia and Pakistan would dramatically increase. Concerned by overarching geo-strategy, the United States would overlook relative trivialities like currency controls, human rights and coup attempts.

Alliances are difficult to form and even tougher to maintain, but we are seeing the first steps by Russia-China-India and China- India-Indonesia. These nations are separated by ideology, culture, history and geography, but linked by a general strategic interest - concern over the United States. The question is whether this shared concern is enough to overcome obvious differences. The answer depends largely on whether the direction of future U.S. policy will provide sufficient motivation for these countries to align.

Koo Chen-fu, Taiwan's unofficial envoy to China, tried Oct. 14 to call in a year-old promise by his Chinese counterpart to visit the island. Asserting that "goodwill and mutual trust" should power relations between Beijing and Taipei, Koo stated that differences in defining the status of Taiwan should not be allowed to hamper unofficial dialogue. Koo even proposed that he visit the mainland instead, due to his respect for Wang, who is older.

Koo's statements come on the heels of Chinese diplomatic posturing that emphasized the connections between the mainland and the Taiwanese people, despite the squabbling between the governments. While this is a fairly consistent theme in Chinese foreign policy, Taiwan's response is new. Koo seems to be intentionally misinterpreting China's post-Earthquake paternalism to give both countries an excuse to renew talks.

In the aftermath of Taiwan's earthquake, Chinese statements toward the island have softened to a somewhat paternal attitude. Though never backing down from the goal of reunification, Chinese government officials have repeatedly expressed their sympathy and connection to the people of Taiwan. On Oct. 14, the Chinese Red Cross emphasized the separation between earthquake aid and politics. To Beijing this was not a deviation, as it claims that Taiwan is a province; China would send aid and support to any of its provinces. It would logically follow that China should be open to Koo's gesture, since he is - at least, to Beijing - one of its citizens.

In the past week, the Chinese government has accepted nonofficial visits from several Taiwanese citizens, reinforcing its connection to the "province's" people. Yesterday, Jiang Zemin met a delegation of female entrepreneurs from Taiwan. Last week, a Taiwanese basketball star signed with a Chinese team. While neither of these are groundbreaking moves - as China sees all the above as its citizens - they have symbolic value. One of the first breakthroughs in U.S.-China relations came with an exchange of ping-pong teams.

Koo is the chairman of Taiwan's Straits Exchange Foundation (SEF), an unofficial body authorized to handle cross-straits exchanges in the absence of official ties between the nations. Exactly a year ago, Koo made an historic visit to the mainland where he was received by Wang Daohan, the head of the Beijing-based Association for Relations Across the Taiwan Strait (ARATS) and China's top envoy to Taiwan. In what was hailed as a major diplomatic move, Wang promised to reciprocate Koo's visit.

While it is possible that Koo's request was motivated by the one- year anniversary of Wang's promise, he appears to be interpreting China's recent statements as an invitation to renew talks. Both the SEF and ARATS are officially "private" institutions with no connections to their home governments. Unofficially, however, they are the main diplomatic channels between Beijing and Taipei, and are responsible for bilateral negotiations.

We believe that Koo is intentionally misinterpreting recent Chinese moves in an effort to re-establish a dialogue with the mainland. Continued talks between Beijing and Taipei are in Taiwan's interest, as Taiwan is unlikely to join the mainland and China is unlikely act militarily in the midst of "normal" relations. Lurking in the background is the Dec. 19 handover of Macau from Portugal to China. After that, the only piece of China still not unified will be Taiwan. China has made it clear that after Macau is restored to the nation, it will focus its attention on Taiwan. Therefore, increased Chinese ties and improved relationships are in Taiwan's interest.

This intentional "misunderstanding" may elicit a Chinese response, as negotiations work to Beijing's benefit as well. While the possibility of eventual unification through negotiations is slim, military action, even against symbolic targets like Taiwan's outlying islands, will bring down a chorus of international criticism. The reactions may impede Beijing's economic ties or its diplomatic goals, like joining the World Trade Organization. The alternative, to play along with Taiwan's "mistake," holds benefits for both sides.

Malaysian Prime Minister Mahathir Mohamad has called for a pan- Asian security force. On Dec. 2, he urged Asian nations to "forget the war which was fought 50 years ago," in order to join together to maintain peace in the region. Mahathir suggested that China and Japan could play leading roles.

While a unified security structure is likely years away, Mahathir's statement unmistakably articulates an ongoing shift in Asian governments' attitudes. The region is becoming increasingly convinced that its historical policy of non-interference in each others' domestic affairs is no longer adequate.

Since World War II, Asian nations have followed a doctrine of non- interference in regional relations. Each nation has dealt with its own internal security issues. In recent years, regional events have challenged that policy. Asian countries are beginning to realize that the instability of individual countries affects the security of the entire region. For example, the region-wide currency crisis in 1997, as well as the ongoing recovery, has shown Asian nations that their economies are closely intertwined. Also in 1997, ASEAN did everything but intervene when a violent coup stalled Cambodia's entry into the organization.

Indonesia's growing instability sparked a debate over the rigid policy of non-interference, starting with East Timor's violent transition to independence. East Timor's pro-independence vote threw the island into chaos in early September, and began a downward spiral of separatist activity that increasingly threatens Indonesia's stability.

With East Timor, Asian countries faced a difficult decision: defy their longstanding policy of non-interference, or risk Indonesia's stability -- and their own. A healthy Indonesia is extremely important to the region. The country guards the Straits of Malacca, the region's major shipping route. Indonesia is also ASEAN's largest member.

Yet the region failed to respond quickly when the situation in East Timor grew violent. Instead, the first troops to arrive on the island Sept. 20 were almost entirely from Australia, Britain and New Zealand. While Asian countries did eventually send troops, Australia remained the dominant force, with 4,303 out of 5,651 troops on Oct. 18. Asian troops will finally take a more substantial role in January 2000. Kofi Annan announced Nov. 17 that the Philippines and one other country, yet unnamed, will takeover control of the U.N. peacekeeping force.

Now, Indonesia is dealing with another threat to its stability: urgent calls for independence from separatists in Aceh, one of many restive provinces inspired by East Timor. Both the Indonesian government and military have said that Aceh would not be allowed to vote on independence. Meanwhile, Aceh has set Dec. 4 as the deadline for the government to agree to a referendum on independence. With compromise unlikely, violence could ensue.

All 10 countries of ASEAN, plus Japan, China and South Korea, have agreed that they are committed to protecting Indonesia's sovereignty and stability. This is a significant departure from the past. However, they are not prepared to back Indonesia militarily. The countries do not likely have the necessary force projection to carry out such an operation. Moreover, forming an integrated security alliance would be logistically difficult. Trying to integrate the militaries from more than a dozen different countries would be no easy task.

Asia is clearly unready to launch Mahathir's suggested alliance. Nevertheless, it realizes the need for a regional approach to security, as is seen in a plan approved at the recent ASEAN summit to establish a permanent ministerial-level group to deal with rapidly emerging security issues. Asia has crossed the threshold and is moving faster than ever toward acting like a regional bloc.

Russian President Boris Yeltsin was released from the hospital Dec. 6 following a week-long stay for a respiratory infection. Following his release, the Kremlin announced that Yeltsin will attend an informal summit with Chinese President Jiang Zemin in Beijing December 8-10. The meeting between the two leaders has largely been ignored by the West but widely anticipated both in Russia and China. And throughout the autumn it has been repeatedly and inexplicably postponed.

The sudden visit by Yeltsin to Beijing is not likely to be a mere coincidence. Indeed, it appears to be an attempt by Russia to guarantee political backing from China for what it is about to do: make a concerted and unpopular push in the conflict in Chechnya. The announcement of the summit came as the Russian military issued an ultimatum to civilians and rebels alike in Grozny, the Chechen capital, warning that if they fail to leave by Dec. 11 they will be "annihilated with air and artillery bombardments."

Yeltsin's visit to China suggests urgency. It has been postponed several times this year. He has canceled or postponed other international trips, such as the one to Japan, which implies the importance Moscow places on China's support. The Russian Duma elections are just two weeks away, and stories of Russian casualties have leaked out of Chechnya.

Russia is likely concerned that its apparent intention to flatten Grozny will trigger a backlash from Islamic fundamentalists, particularly terrorist organizations. Opposition to the war is growing among Islamic nations, unconvinced by Moscow's diplomatic campaign to emphasize that the rebels are terrorists and that religion has nothing to do with the conflict. Fundamentalist clerics in Egypt are calling for a boycott of Russia. The Organization of the Islamic Conference has sent a delegation to Moscow and called for a peaceful solution to the war in Chechnya. If Russia and China share a worry, it is the prospect of increased terrorism and separatism in Central Asia.

Moscow is also likely to try to enlist China's support during what will surely be an even more trying economic period. Because of the war in Chechnya, the West has threatened to withhold the next disbursement of International Monetary Fund (IMF) loans. Without the $640 million, Russia cannot pay off previous loans ( http://www.stratfor.com/cis/commentary/c9912020015.htm ). More important, if Russia defaults, it stands to lose the future confidence of foreign investors. The Russian government may be warning Beijing that it will forego the money to wage the war in Chechnya and is telling the Chinese government to brace itself for economic turmoil.

Or Moscow may be trying to signal the Chinese leadership that economic ties will continue - regardless of what the West and the IMF do. On Dec. 1, Russian oil giant Yukos signed a deal with China that will double the amount of exported Russian oil. ITAR-Tass reported that Yeltsin and Jiang will discuss a proposed gas pipeline, which would bring Russia $2 billion to $3 billion annually.

Like Moscow, Beijing does not want to see the West continue to intervene in internal separatist struggles.

Russia appears to be engaged in a broad effort to shore up international political and economic ties in advance of a renewed assault on Grozny. Until recently, Yeltsin has been too ill to talk to visiting dignitaries. But Yeltsin rose from his sickbed to meet with Ukrainian President Leonid Kuchma - and offered to restructure Ukraine's $1.8 billion debt for Russian gas. Yeltsin is also scheduled to sign the treaty for Russia-Belarus unification before heading to China. As well, Moscow has recently reinforced ties with India.

This meeting between Yeltsin and Jiang is only a precursor to re- defining the broader relationship between Russia and China. The real strategic relationship between the two nations will most likely be shaped in January at a formal summit, which will include Prime Minister Vladimir Putin. Right now, the internal pressure to deal swiftly with Chechnya is strong. Russia has delivered an ultimatum and appears bent on solving the problem once and for all. In courting China, Russia is seeking support in advance of international economic and political backlash.