Category Archives: China

Niall Ferguson on the Rise of China and the Decline of the West

Colleagues: A must read article by economic historian, Niall Ferguson. I am an avid follower of his works on the history of Western civilization, currently reading his History of Money and earlier read his compelling piece in Foreign Affairs (April, 2010), “Empires on the Verge of Collapse”.

Ferguson’s thesis is that “all empires, no matter how magnificent, are condemned to decline and fall”. There is no doubt that he feels that many indicators now point to the United States having passed its apogee and is in a state of rapid decline. He cites historical examples of “imperial overstretch” like ours today, the “slow march of demographics” in which our retirees outnumber our workers, the rise of public and private debt, and the U.S. anticipating a deficit of more than $1.4 trillion–11% of GDP, the biggest in 60 years.

In this article, Ferguson reflects on a recent trip to China, where he met with a number of now very self-confident economists. The underlying theme he felt was, that after 500 years of being crushed, “we are the masters now”. He notes the rapid rise in Chinese economic growth–just 30 years ago their per capita GNP was 4% of ours, as was much of Asia. Today Singapore and Hong Kong per capita GNP is HIGHER than that in the US, and Korea, India and China are right behind.

In the Foreign Affairs piece I mentioned, Ferguson remarked on how fast the Roman Empire collapsed after centuries of dominance. He clearly worries here that we may follow in that path–“Nothing”, he states, “is more certain to accelerate the shift of global economic power from West to East than the looming U.S. fiscal crisis.” I agree. Right now it may be true that China and the U.S. are in a MAD–Mutual Assured Destruction–relationship. That is, both countries have a vested interest in a stable and prosperous American economy. Right now, anyway.

However, Ferguson argues, the Chinese have a plan to escape their “dependence on dollar reserve accumulation”. As the PRC becomes more confident of its own capabilities, it may decide not to buy whatever we print!

What happens then? Perhaps the “end of 500 years of Western dominance”.

Read this, and the piece in Foreign Affairs. Then go back to the Eagles-Giants game. What Michael Vick or Eli Manning can do might not seem so important, however!

THE SATURDAY ESSAYNOVEMBER 18, 2010

In China’s Orbit

After 500 years of Western predominance, Niall Ferguson argues, the world is tilting back to the East.

“We are the masters now.” I wonder if President Barack Obama saw those words in the thought bubble over the head of his Chinese counterpart, Hu Jintao, at the G20 summit in Seoul last week. If the president was hoping for change he could believe in—in China’s currency policy, that is—all he got was small change. Maybe Treasury Secretary Timothy Geithner also heard “We are the masters now” as the Chinese shot down his proposal for capping imbalances in global current accounts. Federal Reserve Chairman Ben Bernanke got the same treatment when he announced a new round of “quantitative easing” to try to jump start the U.S. economy, a move described by one leading Chinese commentator as “uncontrolled” and “irresponsible.”

“We are the masters now.” That was certainly the refrain that I kept hearing in my head when I was in China two weeks ago. It wasn’t so much the glitzy, Olympic-quality party I attended in the Tai Miao Temple, next to the Forbidden City, that made this impression. The displays of bell ringing, martial arts and all-girl drumming are the kind of thing that Western visitors expect. It was the understated but unmistakable self-confidence of the economists I met that told me something had changed in relations between China and the West.

One of them, Cheng Siwei, explained over dinner China’s plan to become a leader in green energy technology. Between swigs of rice wine, Xia Bin, an adviser to the People’s Bank of China, outlined the need for a thorough privatization program, “including even the Great Hall of the People.” And in faultless English, David Li of Tsinghua University confessed his dissatisfaction with the quality of Chinese Ph.D.s.

You could not ask for smarter people with whom to discuss the two most interesting questions in economic history today: Why did the West come to dominate not only China but the rest of the world in the five centuries after the Forbidden City was built? And is that period of Western dominance now finally coming to an end?

In a brilliant paper that has yet to be published in English, Mr. Li and his co-author Guan Hanhui demolish the fashionable view that China was economically neck-and-neck with the West until as recently as 1800. Per capita gross domestic product, they show, stagnated in the Ming era (1402-1626) and was significantly lower than that of pre-industrial Britain. China still had an overwhelmingly agricultural economy, with low-productivity cultivation accounting for 90% of GDP. And for a century after 1520, the Chinese national savings rate was actually negative. There was no capital accumulation in late Ming China; rather the opposite.

The story of what Kenneth Pomeranz, a history professor at the University of California, Irvine, has called “the Great Divergence” between East and West began much earlier. Even the late economist Angus Maddison may have been over-optimistic when he argued that in 1700 the average inhabitant of China was probably slightly better off than the average inhabitant of the future United States. Mr. Maddison was closer to the mark when he estimated that, in 1600, per capita GDP in Britain was already 60% higher than in China.

For the next several hundred years, China continued to stagnate and, in the 20th century, even to retreat, while the English-speaking world, closely followed by northwestern Europe, surged ahead. By 1820 U.S. per capita GDP was twice that of China; by 1870 it was nearly five times greater; by 1913 the ratio was nearly 10 to one.

Despite the painful interruption of the Great Depression, the U.S. suffered nothing so devastating as China’s wretched mid-20th century ordeal of revolution, civil war, Japanese invasion, more revolution, man-made famine and yet more (“cultural”) revolution. In 1968 the average American was 33 times richer than the average Chinese, using figures calculated on the basis of purchasing power parity (allowing for the different costs of living in the two countries). Calculated in current dollar terms, the differential at its peak was more like 70 to 1.

This was the ultimate global imbalance, the result of centuries of economic and political divergence. How did it come about? And is it over?

As I’ve researched my forthcoming book over the past two years, I’ve concluded that the West developed six “killer applications” that “the Rest” lacked. These were:

• Competition: Europe was politically fragmented, and within each monarchy or republic there were multiple competing corporate entities.

• The Scientific Revolution: All the major 17th-century breakthroughs in mathematics, astronomy, physics, chemistry and biology happened in Western Europe.

• The rule of law and representative government: This optimal system of social and political order emerged in the English-speaking world, based on property rights and the representation of property owners in elected legislatures.

• Modern medicine: All the major 19th- and 20th-century advances in health care, including the control of tropical diseases, were made by Western Europeans and North Americans.

• The consumer society: The Industrial Revolution took place where there was both a supply of productivity-enhancing technologies and a demand for more, better and cheaper goods, beginning with cotton garments.

• The work ethic: Westerners were the first people in the world to combine more extensive and intensive labor with higher savings rates, permitting sustained capital accumulation.

Those six killer apps were the key to Western ascendancy. The story of our time, which can be traced back to the reign of the Meiji Emperor in Japan (1867-1912), is that the Rest finally began to download them. It was far from a smooth process. The Japanese had no idea which elements of Western culture were the crucial ones, so they ended up copying everything, from Western clothes and hairstyles to the practice of colonizing foreign peoples. Unfortunately, they took up empire-building at precisely the moment when the costs of imperialism began to exceed the benefits. Other Asian powers—notably India—wasted decades on the erroneous premise that the socialist institutions pioneered in the Soviet Union were superior to the market-based institutions of the West.

Beginning in the 1950s, however, a growing band of East Asian countries followed Japan in mimicking the West’s industrial model, beginning with textiles and steel and moving up the value chain from there. The downloading of Western applications was now more selective.Competition and representative government did not figure much in Asian development, which instead focused on science, medicine, the consumer society and the work ethic (less Protestant than Max Weber had thought). Today Singapore is ranked third in the World Economic Forum’s assessment of competitiveness. Hong Kong is 11th, followed by Taiwan (13th), South Korea (22nd) and China (27th). This is roughly the order, historically, in which these countries Westernized their economies.

Today per capita GDP in China is 19% that of the U.S., compared with 4% when economic reform began just over 30 years ago. Hong Kong, Japan and Singapore were already there as early as 1950; Taiwan got there in 1970, and South Korea got there in 1975. According to the Conference Board, Singapore’s per capita GDP is now 21% higher than that of the U.S., Hong Kong’s is about the same, Japan’s and Taiwan’s are about 25% lower, and South Korea’s 36% lower. Only a foolhardy man would bet against China’s following the same trajectory in the decades ahead.

China’s has been the biggest and fastest of all the industrialization revolutions. In the space of 26 years, China’s GDP grew by a factor of 10. It took the U.K. 70 years after 1830 to grow by a factor of four. According to the International Monetary Fund, China’s share of global GDP (measured in current prices) will pass the 10% mark in 2013. Goldman Sachs continues to forecast that China will overtake the U.S. in terms of GDP in 2027, just as it recently overtook Japan.

But in some ways the Asian century has already arrived. China is on the brink of surpassing the American share of global manufacturing, having overtaken Germany and Japan in the past 10 years. China’s biggest city, Shanghai, already sits atop the ranks of the world’s megacities, with Mumbai right behind; no American city comes close.

Nothing is more certain to accelerate the shift of global economic power from West to East than the looming U.S. fiscal crisis. With a debt-to-revenue ratio of 312%, Greece is in dire straits already. But the debt-to-revenue ratio of the U.S. is 358%, according to Morgan Stanley. The Congressional Budget Office estimates that interest payments on the federal debt will rise from 9% of federal tax revenues to 20% in 2020, 36% in 2030 and 58% in 2040. Only America’s “exorbitant privilege” of being able to print the world’s premier reserve currencygives it breathing space. Yet this very privilege is under mounting attack from the Chinese government.

For many commentators, the resumption of quantitative easing by the Federal Reserve has appeared to spark a currency war between the U.S. and China. If the “Chinese don’t take actions” to end the manipulation of their currency, President Obama declared in New York in September, “we have other means of protecting U.S. interests.” The Chinese premier Wen Jiabao was quick to respond: “Do not work to pressure us on the renminbi rate…. Many of our exporting companies would have to close down, migrant workers would have to return to their villages. If China saw social and economic turbulence, then it would be a disaster for the world.”

Such exchanges are a form of pi ying xi, China’s traditional shadow puppet theater. In reality, today’s currency war is between “Chimerica”—as I’ve called the united economies of China and America—and the rest of the world. If the U.S. prints money while China effectively still pegs its currency to the dollar, both parties benefit. The losers are countries like Indonesia and Brazil, whose real trade-weighted exchange rates have appreciated since January 2008 by 18% and 17%, respectively.

But who now gains more from this partnership? With China’s output currently 20% above its pre-crisis level and that of the U.S. still 2% below, the answer seems clear. American policy-makers may utter the mantra that “they need us as much as we need them” and refer ominously to Lawrence Summers’s famous phrase about “mutually assured financial destruction.” But the Chinese already have a plan to reduce their dependence on dollar reserve accumulation and subsidized exports. It is a strategy not so much for world domination on the model of Western imperialism as for reestablishing China as the Middle Kingdom—the dominant tributary state in the Asia-Pacific region.

If I had to summarize China’s new grand strategy, I would do it, Chinese-style, as the Four “Mores”: Consume more, import more, invest abroad more and innovate more. In each case, a change of economic strategy pays a handsome geopolitical dividend.

By consuming more, China can reduce its trade surplus and, in the process, endear itself to its major trading partners, especially the other emerging markets. China recently overtook the U.S. as the world’s biggest automobile market (14 million sales a year, compared to 11 million), and its demand is projected to rise tenfold in the years ahead.

By 2035, according to the International Energy Agency, China will be using a fifth of all global energy, a 75% increase since 2008. It accounted for about 46% of global coal consumption in 2009, the World Coal Institute estimates, and consumes a similar share of the world’s aluminum, copper, nickel and zinc production. Last year China used twice as much crude steel as the European Union, United States and Japan combined.

Such figures translate into major gains for the exporters of these and other commodities. China is already Australia’s biggest export market, accounting for 22% of Australian exports in 2009. It buys 12% of Brazil’s exports and 10% of South Africa’s. It has also become a big purchaser of high-end manufactured goods from Japan and Germany. Once China was mainly an exporter of low-price manufactures. Now that it accounts for fully a fifth of global growth, it has become the most dynamic new market for other people’s stuff. And that wins friends.

The Chinese are justifiably nervous, however, about the vagaries of world commodity prices. How could they feel otherwise after the huge price swings of the past few years? So it makes sense for them to invest abroad more. In January 2010 alone, the Chinese made direct investments worth a total of $2.4 billion in 420 overseas enterprises in 75 countries and regions. The overwhelming majority of these were in Asia and Africa. The biggest sectors were mining, transportation and petrochemicals. Across Africa, the Chinese mode of operation is now well established. Typical deals exchange highway and other infrastructure investments for long leases of mines or agricultural land, with no questions asked about human rights abuses or political corruption.

Growing overseas investment in natural resources not only makes sense as a diversification strategy to reduce China’s exposure to the risk of dollar depreciation. It also allows China to increase its financial power, not least through its vast and influential sovereign wealth fund. And it justifies ambitious plans for naval expansion. In the words of Rear Admiral Zhang Huachen, deputy commander of the East Sea Fleet: “With the expansion of the country’s economic interests, the navy wants to better protect the country’s transportation routes and the safety of our major sea-lanes.” The South China Sea has already been declared a “core national interest,” and deep-water ports are projected in Pakistan, Burma and Sri Lanka.

Finally, and contrary to the view that China is condemned to remain an assembly line for products “designed in California,” the country is innovating more, aiming to become, for example, the world’s leading manufacturer of wind turbines and photovoltaic panels. In 2007 China overtook Germany in terms of new patent applications. This is part of a wider story of Eastern ascendancy. In 2008, for the first time, the number of patent applications from China, India, Japan and South Korea exceeded those from the West.

The dilemma posed to the “departing” power by the “arriving” power is always agonizing. The cost of resisting Germany’s rise was heavy indeed for Britain; it was much easier to slide quietly into the role of junior partner to the U.S. Should America seek to contain China or to accommodate it? Opinion polls suggest that ordinary Americans are no more certain how to respond than the president. In a recent survey by the Pew Research Center, 49% of respondents said they did not expect China to “overtake the U.S. as the world’s main superpower,” but 46% took the opposite view.

Coming to terms with a new global order was hard enough after the collapse of the Soviet Union, which went to the heads of many Western commentators. (Who now remembers talk of Americanhyperpuissance without a wince?) But the Cold War lasted little more than four decades, and the Soviet Union never came close to overtaking the U.S. economically. What we are living through now is the end of 500 years of Western predominance. This time the Eastern challenger is for real, both economically and geopolitically.

The gentlemen in Beijing may not be the masters just yet. But one thing is certain: They are no longer the apprentices.

—Niall Ferguson is a professor of history at Harvard University and a professor of business administration at the Harvard Business School. His next book, “Civilization: The West and the Rest,” will be published in March.

Copyright 2010 Dow Jones & Company, Inc. All Rights Reserved

CHINA: A MORE MILITANT AND AGGRESSIVE PRC?

Colleagues: Considerable attention was directed at China this past weekend, with every major media outlet having at least one story regarding the PRC’s perceived increasing aggressiveness, the expansion of its military capabilities into new areas, and, of course, it’s growing economic power.

The primary perspective reflected in these publications focuses on the PRC “beginning to throw its weight around Asia” as it becomes a global economic force and, with developing power projection capabilities, at least a more dominant regional player. The growth of Chinese military capability now “appears designed to threaten our freedom of action in the region”, CINCPAC Commander Admiral Robert Willard observed. Others have noted that with the United States bogged down in the wars in Iraq and Afghanistan, now is a propitious time for China to challenge America’s regional “hegemony”.

Chinese Military Power: New Weapons Systems Cause Concern

  • China is developing significant new capabilities to project power, prevent America from exercising freedom of the seas, protect the homeland from air/missile attack, and to maintain command and control (C3) in a wartime situation. China is building an “asymmetric warfare” capability; that is, it does not choose to contest us with equivalent systems to where our strength lies, but to offset and reduce the effectiveness of our most important weapon systems (especially carriers).
  • The most impressive advances have occurred with respect to very accurate “anti-ship” missiles, with a range and accuracy that effectively prevents our naval carriers from entering waters anywhere near the China coasts. The newest “anti-ship” ballistic missile has a range in excess of 1,000 miles! China now has 66 submarines, almost as many as the U.S. possesses (not of the same quality—yet).
  • According to the Pentagon’s recently issued “Chinese Military Power”, China is also developing advanced defensive missiles (SAMs), new surface to surface missiles (SSMs), fighter bombers with cruise missiles, and an advanced C3 system which we understand poorly. It is now the world’s 2nd biggest naval power, far behind the U.S. and certainly not capable of global power projection, but enough to challenge our freedom of action on the high seas. The focus, the Pentagon report says, has been on “anti-access” and “area-denial” weapons. Concern has also been expressed over “joint Chinese military-civilian cyber warfare” units armed with computer viruses to attack foreign cyber networks.

The PRC is flexing its muscle to assert greater influence in Asia

  • The U.S. and other regional powers consider the East and South China Seas as international waterways; China is claiming these waters to be its “core national interest”.
  • China strongly objected to planned U.S. and South Korea naval maneuvers in the East China Sea. As a result, the US and Korea “postponed” the exercises.
  • China and Japan have clashed over sovereignty over the uninhabited, Japanese-held Senkaku Islands and over naval maneuvers in the nearby Straits. Japan also seized a Chinese fishing vessel which it claimed “rammed” two of its naval ships.
  • China and its neighbors disagree as to who owns hundreds of islands in the East Asia seas, and more importantly, who has control over what might be vast oil and gas riches surrounding the islands. China is building a huge naval base on Hainan Island to provide forward basing.
  • Viet-Nam is increasingly at odds with the PRC, specifically over growing Chinese claims to control over the South China Seas. The Chinese Navy seized Vietnamese fishing boats in the area for “encroaching on Chinese territory”.
  • Robert Kaplan notes that with its growing missile arsenal, increased commerce between them, and fledging “blue water navy”, “China is quietly incorporating Taiwan into its dominion”.
  • Further away, China is building or assisting in the construction of naval facilities in Burma, Sri Lanka, Bangladesh and Pakistan, to be sure more commercially oriented and not true naval bases—for now.
  • China cut off military to military talks with the U.S. earlier this year, in protest against the proposed $6 billion arms sale to Taiwan.
  • Beyond Asia, China continues to develop close ties with Sudan, Brazil, and South Africa, primarily in the hunt for new energy and mineral resources.
  • The Asian regional powers are reacting to what is seen as China’s diplomatic initiatives as becoming more arrogant. As the PRC’s military power becomes more evident and as the country emerges stronger than ever from the global economic crisis, such arrogance and aggressiveness will escalate.

What is driving the increased Chinese aggressiveness?

  • No doubt that much of the new Chinese assertiveness is driven by its increasing economic strength. China recently passed Japan as the world’s #2 economic giant, and could surpass the U.S. by 2030! The PRC economy is growing at an impressive 9% annual rate, despite the global recession. China’s huge accumulation of foreign currencies, American debt, and growing dominance of trade, give it the psychological as well as tangible confidence to assert its power. As Ken Miller observes, “Never before has China had this much financial might, and it is now experimenting with how best to use it in its relations with other states” (“Coping with China’s Financial Power”. Foreign Affairs, July-Aug, 2010)
  • China is a growing economic power, but one with an increasing need for energy and mineral resources. In 1995 the PRC was self-sufficient in handling its oil requirements; today it is 50% dependent on imports and that need will grow substantially.
  • There is a perception in Beijing that “imperialists” and other entities had taken advantage of China when it was “weak”, and these wrongs need to be redressed. Plus, there is a growing sense of nationalism—not yet xenophobic, but close to it.
  • The PRC is testing its neighbors at a time when the U.S., the traditional dominant power in the region, is beset with economic problems, is more and more dependent on China to purchase its debt, and is preoccupied with fighting wars in SW Asia.

The Backlash: Suddenly all of East and SE Asia Loves the U.S.

  • President Obama recently met with ten very worried ASEAN member nations. Rising frictions between China and all of its neighbors over security issues have handed the U.S. an opportunity to reassert itself. Japan, which had been increasingly at odds with America and prepared to junk the postwar alliance, now sees the U.S. as a vital partner in “balancing” growing Chinese assertiveness. The new Japanese PM Kan has repudiated previous harsh attacks on American military presence and now calls the alliance the “cornerstone” of Japanese foreign policy.
  • Viet-Nam welcomed a visit last year of a U.S. naval vessel (ironically commanded by a Vietnamese refugee!), invited an American carrier to “park outside” its coast, and began first ever bilateral defense talks this year—15 years after “normalization” (Isn’t there a certain irony in this developing U.S.-Viet Nam “anti-China” alliance?

In the near term, friction with China will continue to grow, not only between the U.S. and the PRC, but between China and virtually all of its neighbors. Buoyed by its economic prowess and developing power projection capabilities, Beijing is likely to be not only a regional power, but increasingly one with global influence. The United States can benefit from this challenge by developing stronger relationships with China’s neighbors, but with the ongoing wars, a devastating recession and a political stalemate at home, our ability to deal with the challenge represented by a resurgent China.

  • Tyrus W. Cobb

September 27, 2010

Note: I have run this commentary by some friends—old and young China hands—and they have some areas of agreement, but some significant disagreements. I will post that Friday so if you have any viewpoints you would like considered, pleas forward them to me.

Below is a map published by the WSJ last week showing areas of conflict in the East and South Asian Seas).

NSF: China–Thoughts on the economy, the currency, and politico-military…

Colleagues:
Over the past few months I have been collecting facts and opinion pieces on China–it’s economic prowess, its currency “reform”, its overseas involvement, and its increasingly tension-filled relationship with the U.S.
I decided to put these random thoughts together in the form of a “point paper”, that favored Beltway form of communication, and have attached that “China Update” for your perusal.
Fortunately, we now have a real China expert in our midst here in Reno. Retired Foreign Service Officer Richard Mueller moved to Reno this summer and will become an active member of the NSF. Among his many notable assignments, Richard served as the U.S. Counsel General in Hong Kong in the 1990’s, as well as in Beijing, and later ran the International School in HK for a number of years. I look forward to Richard sharing his expertise with us in a future Forum.
Ty

An Interesting Look at China’s Ruling Class

Missed this when it first came out. An interesting look at the ruling party in China. Ty
  • The Wall Street Journal

China’s Private Party

The Communist Party has made strenuous efforts to keep signs of its enduring power out of sight to the Chinese public and the rest of the world. Richard McGregor on the secrets of the world’s largest political machine and its role in Beijing’s growing clout.

By RICHARD MCGREGOR

On the desks of the heads of China’s 50-odd biggest state companies, amid the clutter of computers, family photos and other fixtures of the modern CEO’s office life, sits a red phone. The executives and their staff who jump to attention when it rings know it as “the red machine,” perhaps because to call it a mere phone does not do it justice. “When the ‘red machine’ rings,” a senior executive of a state bank told me, “you had better make sure you answer it.”

The red machine is like no ordinary phone. Each one has just a four-digit number. It connects only to similar phones with four-digit numbers within the same encrypted system. They are much coveted nonetheless. For the chairmen and women of the top state companies, who have every modern communications device at their fingertips, the red machine is a sign they have arrived, not just at the top of the company, but in the senior ranks of the Party and the government. The phones are the ultimate status symbol, as they are only given out—under the orders of the Party and government—to people in jobs with the rank of vice minister and above.

The phones are encrypted not just to secure party and government communications from foreign intelligence agencies. They also provide protection against snooping by anyone in China outside the party’s governing system. Possession of the red machine means you have qualified for membership of the tight-knit club that runs the country, a small group of about 300 people, mainly men, with responsibility for about one-fifth of humanity.

The modern world is replete with examples of elite networks that wield behind-the-scenes power beyond their mere numerical strength. The United Kingdom had the “old-boy network,” originally coined to describe connections between former students of upper-class, non-government schools; Japan has the Todai elite, graduates of the law school of Tokyo University, an entry point into the long-time ruling Liberal Democratic Party, the Finance Ministry and business. The U.S. has the Ivy League, the Beltway, K Street and the military-industrial complex, and a host of other labels to signify the opaque influence of well-connected insiders.

None can hold a candle to the Chinese Communist Party, which takes ruling-class networking to an entirely new level. The red machine gives the party apparatus a hotline into multiple arms of the state, including the government-owned companies that China promotes around the world these days as independent commercial entities. As a political machine alone, the Party is a phenomenon of awesome and unique dimensions. By mid-2009, its membership stood at 76 million, equal to about one in 12 adult Chinese.

China’s post-Maoist governing model, launched by Deng Xiaoping in the late 1970s, has endured many attempts to explain it. Is it a benevolent, Singapore-style autocracy? A capitalist development state, as many described Japan? Neo-Confucianism mixed with market economics? A slow-motion version of post-Soviet Russia, in which the elite grabbed productive public assets for private gain? Robber-baron socialism? Or is it something different altogether, an entirely new model, a “Beijing Consensus,” according to the fashionable phrase, built around practical, problem-solving policies and technological innovation?

Few describe the model as communist anymore, often not even the ruling Chinese Communist Party itself.

How communism came to be air-brushed out of the rise of the world’s greatest communist state is no mystery on one level. The multiple, head-spinning contradictions about modern China can throw anyone off the scent. What was once a revolutionary party is now firmly the establishment. The communists rode to power on popular revulsion against corruption but have become riddled by the same cancer themselves. Top leaders adhere to Marxism in their public statements, even as they depend on a ruthless private sector to create jobs. The Party preaches equality, while presiding over incomes as unequal as anywhere in Asia.

The gap between the fiction of the Party’s rhetoric (“China is a socialist country”) and the reality of everyday life grows larger every year. But the Party must defend the fiction nonetheless, because it represents the political status quo.

The Party’s defense of power is also, by extension, a defense of the existing system. In the words of Dai Bingguo, China’s most senior foreign policy official, China’s “number one core interest is to maintain its fundamental system and state security.” State sovereignty, territorial integrity and economic development, the priorities of any state, all are subordinate to the need to keep the Party in power.

The Party has made strenuous efforts to keep the sinews of its enduring power off the front stage of public life in China and out of sight of the rest of the world. A decade into the 21st century, the Beijing headquarters of the big Party departments, whose power far outstrips that of mere ministries, still have no signs outside indicating the business inside and no listed phone numbers. For many in the West, it has been convenient to keep the Party backstage too, and pretend that China has an evolving governmental system with strengths and weaknesses, quirks and foibles, like any other. China’s flourishing commercial life and embrace of globalization is enough for many to dismiss the idea that communism still has traction, as if a Starbucks on every corner is a marker of political progress.

Peek under the hood of the Chinese model, however, and China looks much more communist than it does on the open road. Vladimir Lenin, who designed the prototype used to run communist countries around the world, would recognize the model immediately. The Chinese Communist Party’s enduring grip on power is based on a simple formula straight out of the Leninist playbook. For all the reforms of the past three decades, the Party has made sure it keeps a lock-hold on the state and three pillars of its survival strategy: control of personnel, propaganda and the People’s Liberation Army.

Since installing itself as the sole legitimate governing authority of a unified China in 1949, the Party and its leaders have placed its members in key positions in every arm, and at each level, of the state. All the Chinese media come under the control of the propaganda department, even if its denizens have had to gallop to keep up in the Internet age. And if anyone decides to challenge the system, the Party has kept ample power in reserve, making sure it maintains a tight grip on the military and the security services, the ultimate guarantors of its rule. The police forces at every level of government, from large cities to small villages, have within them a “domestic security department,” the role of which is to protect the Party’s rule and weed out dissenting political voices before they can gain a broad audience.

China long ago dispensed with old-style communist central planning for a sleeker hybrid market economy, the Party’s greatest innovation. But measure China against a definitional checklist written by Robert Service, the veteran historian of Soviet Russia, and Beijing retains a surprising number of the qualities that characterized communist regimes of the 20th century.

Like communism in its heyday elsewhere, the Party in China has eradicated or emasculated political rivals; eliminated the autonomy of the courts and press; restricted religion and civil society; denigrated rival versions of nationhood; centralized political power; established extensive networks of security police; and dispatched dissidents to labor camps.

The Party in China has teetered on the verge of self-destruction numerous times, in the wake of Mao Zedong’s brutal campaigns over three decades from the 1950s, and then again in 1989, after the army’s suppression of demonstrations in Beijing and elsewhere. The Party itself suffered an existential crisis after the collapse of the Soviet Union and its satellite states in 1992, an event that resonates to this day in the corridors of power in Beijing. After each catastrophe, the Party has picked itself off the ground, reconstituted its armor and reinforced its flanks. Somehow, it has outlasted, outsmarted, outperformed or simply outlawed its critics.

Few events symbolized the advance of China and the retreat of the West during the financial crisis more than the touchdown in Beijing of Secretary of State Hillary Clinton in February 2009. Previous U.S. administrations, under Bill Clinton and George W. Bush, had arrived in office with an aggressive, competitive posture towards China. Before she landed, Ms. Clinton publicly downplayed the importance of human rights. At a press conference before leaving, she beamingly implored the Chinese government to keep buying U.S. debt, like a traveling saleswoman hawking a bill of goods.

Deng Xiaoping’s crafty stratagem, laid down two decades earlier, about how China should advance stealthily into the world—”hide your brightness; bide your time”—had been honored in the breach long before Ms. Clinton’s arrival. China’s high-profile tours through Africa, South America and Australia in search of resources, the billion-dollar listings of its state companies (including PetroChina and the Industrial & Commercial Bank of China) on overseas stock markets, its rising profile in the United Nations and its sheer economic firepower had made China the new focus of global business and finance since the turn of the century. China’s star was shining more brightly than ever before, even as its diplomats protested they were battling to be heard on behalf of a relatively poor, developing economy.

The implosion of the Western financial system, along with an evaporation of confidence in the U.S., Europe and Japan, overnight pushed China’s global standing several notches higher. In the space of a few months in early 2009, the Chinese state committed $50 billion in extra funding for the International Monetary Fund and $38 billion with Hong Kong for an Asian monetary fund; extended a $25 billion loan to cash-strapped Russian oil companies; set aside $30 billion for Australian resource companies; offered tens of billions more to various countries or companies in South America, central and Southeast Asia, to lock up commodities and lay down its marker for future purchases. In September, China readied lines of credit of up to $60 to $70 billion for resource and infrastructure deals in Nigeria, Ghana and Kenya.

Beijing’s ambition and clout were being lit up in ways that would have been unthinkable a few years previously. The Chinese central bank called for an alternative to the U.S. dollar as a global reserve currency in early 2009, and reiterated its policy as the year went on. France obediently recommitted to Chinese sovereignty over Tibet to placate Beijing’s anger over the issue, after Beijing had canceled an E.U. summit in protest at Paris’s welcome for the Dalai Lama. On its navy’s 60th anniversary, China invited the world to view its new fleet of nuclear-powered submarines off the port of Qingdao.

The giant Chinese market had become more important than ever. Just ahead of the Shanghai auto show in April 2009, monthly passenger car sales in China were the highest of any market in the world, surpassing the U.S. A month later, Wang Qishan and a team of Chinese ministers met Catherine Ashton, then the E.U. trade commissioner, and about 15 of Europe’s most senior business executives in Brussels to hear their complaints about Chinese market access. Sure, Mr. Wang conceded after listening to their problems over a working lunch, there are “irregularities” in the market. “I know you have complaints,” he replied. “But the charm of the Chinese market is irresistible.” In other words, according to astonished executives in the meeting, whatever your complaints, the market is so big, you are going to come anyway. Even worse, many of the executives realized that Mr. Wang was right.

The rise of China is a genuine mega-trend, a phenomenon with the ability to remake the world economy, sector by sector. That it is presided over by a communist party makes it even more jarring for a Western world which, only a few years previously, was feasting on notions of the end of history and the triumph of liberal democracy.

In just a single generation, the party elite has been transformed from a mirthless band of Mao-suited, ideological thugs to a wealthy, business-friendly ruling class. Today’s Party is all about joining the highways of globalization, which in turn translates into greater economic efficiencies, higher rates of return and greater political security.

In the absence of democratic elections and open debate, it is impossible to judge popular support for the Party. But it is indisputable that support for the Party has grown with reform since Mao’s death. The Chinese Communist Party and its leaders have never wanted to be the West when they grow up. For the foreseeable future, it looks like their wishes will all come true.

Printed in The Wall Street Journal, page W1

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