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East Asia Forum

Understanding the Chinese-EU investment relationship

Author: Hinrich Voss and L. Jeremy Clegg, Leeds University Since China embarked on its ambitious opening and reform process, its commercial relationship with the European Union has flourished. Although bilateral trade growth has been an important part of this, European multinational enterprises (MNEs) have been swift to  target China for foreign direct investment (FDI). With the path blazed by large MNEs, increasingly smaller firms are following in the footsteps of the European majors such as the carmaker Volkswagen, or the chemical firm BASF, to use FDI to get a foothold in the Chinese market. Now the roles are shifting as Chinese investors descend on Europe. Reportedly, Chinese firms have been willing to acquire any ailing European firm, and are lining up to make major new large-scale investments. These perceptions are fuelled by acquisitions like Nanjing Automobile Corporation’s and Shanghai Automobile Industry Corporation’s acquisition of UK-based MG Rover in 2004–5, by Geely of Swedish-based Volvo in 2010, or of business units belonging to Thomson and Alcatel by TCL in 2004–5. These developments have caused two types of reactions. European governments and regional institutions have started to court Chinese companies and quarrel about who has been most successful in doing so. In some countries investment attraction has been nationally orchestrated to more effectively increase Chinese FDI, as in the case of the United Kingdom, with its government-run UK Trade & Investment network within China reaching out to Chinese firms. This network has been supported within the UK by regional investment promotion agencies. Other European countries have followed suit, by establishing their own networks within China. Cautionary voices have argued that, if the enterprise sector in the EU is bought out by China, the EU will risk losing its domestically-owned industrial capabilities and technological leadership. This has led to a call to  monitor and screen investments into the EU, in particular from China and other emerging markets, for their fit with European objectives. Both stances — positive and apprehensive — toward Chinese FDI need to be put into perspective, and understood in terms of the motives of the Chinese investors themselves. Broadly speaking, there are two types of Chinese investor. Large state-owned firms with favourable access to government capital seek to diversify their portfolios of real assets, and thereby the wealth portfolio of the Chinese state, through the acquisition of western assets. In contrast, investors originating in the vibrant Chinese domestic private sector are seeking profitable investment opportunities to upgrade their industrial capabilities and to grow their business. For these firms the purchase of strategic assets is made on the basis of fit with their corporate industrial strategy. However, for private firms, the opportunities offered by Chinese domestic market growth reduce the pull of markets abroad, which are growing at a slower pace. This certainly applies to EU market growth, with the exception of the high growth (but generally small) economies of the twelve countries joining in 2004 and 2007. The implications of this Chinese investment behaviour are visible across the EU. The EU-27 has collectively played only a very minor part in China’s outward investment strategy. Less than 3 per cent of China’s global investment stock was located in the EU in 2009. However, discounting the  entrepôt and investment hub Luxembourg, of this investment the 12 newly acceded countries attracted over 10 per cent of the EU’s total. This is a greater proportion than their share of EU GDP, and suggests that Chinese investment decisions are driven primarily by growth. If we were to characterise the spatial distribution of Chinese FDI within the EU, it might be said to mirror that of South Korean investment, rather than Japanese, which favours the larger economies. However, Chinese investment in the EU is still at a level where a clear pattern is yet to be established; over the last decade there is little evidence of a continuous and focused investment strategy in particular countries. While the EU has been of limited importance in China’s outward investment strategy, Chinese investment has equally  kept a low profile within the EU . The numbers of Chinese affiliates are low across the Union, and Eurostat figures show that their contribution to employment is minor — it should be noted that individual member states can report significantly higher values for selected FDI data than Eurostat does. Can we expect Chinese investments in the EU to grow? Chinese investments in Hungary, Poland and Romania have recently picked up. These transition economies have been especially attractive to Chinese firms, largely because they offer growth and are coupled with deep privatisation and liberalisation (Hungary), a large market (Poland) and a favourable business environment in the eyes of Chinese investors (Romania). The recent increase in Chinese investments in Central and Eastern European countries may also reflect a change in Chinese investment strategies towards targeting lower production cost sites within the EU, as a means of expanding market shares across the EU via export. Another development that could lead to an increase of Chinese investment over the coming years is the Treaty of Lisbon. Following this Treaty, as with Trade, one commissioner represents the EU in the sphere of FDI and is responsible for investment liberalisation. Now the authority for FDI policy resides at the EU level, it can have a single, united voice when dealing with China. This should make it easier for the EU as a whole to articulate its policy towards China, and to bring some coherence to the bewildering range of diverse institutional systems within the EU that are faced by the much sought after Chinese investor. Hinrich Voss is Roberts Fellow at the Centre for International Business at Leeds University Business School. L. Jeremy Clegg is Jean Monnet Professor of European Integration and International Business Management at Leeds University Business School. Europe needs to screen Chinese investment Traps for Chinese investment overseas Chinese investment in Australian resources

Hu visit ends any dream of a US-China duopoly

Author: Amitav Acharya, American University The US-China relationship is often touted as the most important for the world’s future, but bilateral tensions between the two powers over domestic politics will prevent a US-China duopoly from being a global problem-solver. The silver lining is that this leaves room for others to play a more meaningful international role. No one should be disappointed by the outcome of the US-China summit in Washington on 19 January, because nothing much was expected from it. For Hu, it was a ‘legacy’ visit, his swansong as the head of the world’s most populous and potentially most powerful nation before stepping down as the leader of the Communist Party of China in 2012. The Obama White House obliged by allowing him to make the first state visit to the White House since a state visit by Jiang Zemin in 1997. This too is not surprising. During the past year, China’s image and soft power have taken a battering, especially in the Asia Pacific, where it rekindled mistrust by asserting claims over the South China Sea, refusing to condemn North Korea for its aggressive tactics towards the South and restricting exports of rare earth elements. The US has gained considerable mileage out of these Chinese missteps, despite the Chinese snub to Obama at the Copenhagen climate talks in December 2009 , and Beijing’s harsh condemnation of the $6.4 billion US arms sale to Taiwan and the Dalai Lama visit to the White House. As fears of China are rekindled in Asia by Beijing’s own assertiveness, there is a new recognition of America’s role in the region’s security . The Obama administration could thus afford to look generous and reward China for taking some conciliatory steps in the months leading up to the Hu visit — like letting its currency appreciate a bit, and hosting a visit to China by Defence Secretary Robert Gates. But for those who see the US and China as leaders of the 21 st century global order, the summit holds an important lesson: while the uni-polar moment in international relations is over, it will not be replaced by a China-US duopoly, at least not an effective one that addresses the global challenges of our time. No one can deny the power shift , although the US President did try. At their joint press conference, Obama told the visitor (and more the American people perhaps): ‘What we have to remind ourselves is that the United States’ economy is still three times larger than China’s, despite having one-quarter of the population’. But just over a decade ago, in 2001, the US economy was more than seven times larger than China’s. To be sure, the US-China relationship is often touted as the most important relationship for the future of the world. But the Hu visit made two things very clear. First, America’s domestic politics would prevent the two sides from developing the trust needed for that, and, second, issues in the bilateral relationship take priority over tending to the problems of the world at large. Even as the White House prepared to welcome Hu, across the Mall the Congress fumed by holding a hearing on human rights in China and blaming it for the largest number of political prisoners in the world (allegedly ‘millions’). The newly anointed speaker of the House of Representatives, John Boehner, refused the invitation to the White House dinner. And in a show of bipartisanship that has all but vanished these days, Senate Majority leader Harry Reid called Hu a ‘dictator’. The thrust of the entire visit has been bilateral issues, America’s trade deficit, China’s currency manipulation and, of course, China’s abysmal human rights record . Hu seemed more conciliatory than usual on human rights, keeping in mind his visit to Congress later in the visit. After initially avoiding a question on the subject (because of a translation glitch) at his joint press conference with Obama, Hu conceded in a follow-up that: ‘A lot still needs to be done in China in terms of human rights. We will continue our efforts to improve the lives of the Chinese people, and we will continue our efforts to promote democracy and the rule of law in our country’. But he also asked ‘to take into account the different and national circumstances when it comes to the universal value of human rights.’ The joint statement noted ‘significant differences’ over the issue, especially the Chinese insistence that ‘there should be no interference in any country’s internal affairs’. Over global governance issues, Hu mentioned at the press conference China’s support for the G20 to play ‘a bigger role in international economic and financial affairs’, and to ‘work with the United States and other countries to effectively address global challenges’ such as climate change and terrorism. By all indications, the United States is coming to terms with the end of its ‘G1’ world, although it is still impolite to mention the ‘D word’ (decline). Although Secretary of State Hillary Clinton did talk about ‘the new American moment’ in international affairs, it was a call for sharing the burden with others, including emerging powers — China being one but not the only one of them. It also called for working through global and regional institutions to advance American interests. When the United States replaced Britain as the global hegemon after the end of World War II, it did not shy away from accepting international obligations and making sacrifices. Why is China not following the US path to global leadership, albeit a shared one with the US? When the US under the Bush administration was riding high in the uni-polar moment, China was (secretly) thrilled to be counted as the main challenger to US dominance. Many Chinese still do, but being a challenger is not the same as being a leader. Some blame it on Deng Xiaoping, China’s late paramount leader, who is supposed to have warned against China becoming a leader in the world. But this is a myth. Deng was more nuanced and qualified, and China today is far more powerful than during Deng’s time. The Chinese are scared of global leadership because they it see it as a ploy to force them into prematurely accepting responsibilities that will undercut their ‘ peaceful rise ‘. The idea of a joint leadership with the United States has been dismissed not because China does not want it, nor because they do not think they are up to it. They dismiss a ‘G2’ branding because it calls for sacrifices that they are unwilling to make, like accepting significant binding cuts in their carbon emissions. However, there is a silver lining here. If the burden of domestic politics and bilateral mistrust limits the ability of the US and China to jointly manage global issues, it leaves room for others — Canada, India, Europe and other G20 nations — to step in and have their say. This may not be such a bad thing. Amitav Acharya is Professor of International Relations, School of International Service, American University and Senior Fellow at the Asia Pacific Foundation of Canada. Clinton’s visit to Indonesia Anticipating Obama’s visit to Indonesia and Australia Obama goes to China

China and India and the transition of regional power

Author: Peter Drysdale, ANU Through 2005 to 2007, diplomatic flirtation with the idea that a new quadrilateral alliance in Asia and the Pacific centred on India’s anchor role, with the United States , Japan and Australia, in a soft, ‘values-based’ containment initiative (Quad Initiative) directed at its strategic encirclement of China blossomed briefly and faded from public view. As Sourabh Gupta reminds us in his thoughtful essay reviewing the state of the China-India relationship this week, in the northern summer of 2007, joint naval exercises conducted ostentatiously in the Bay of Bengal by the four Quad powers plus Singapore, allegedly under NATO operational procedures and with facilitated access (for India) to the American military satellite system, added to irritation in the relationship between Asia’s two great emerging powers. Beijing’s frustration with developments at the time derived more from Washington’s willingness to bend international non-proliferation norms and reinstate India as a country in good standing in the international nuclear regime, Gupta suggests. That the US-India civil nuclear agreement materialised barely a couple of weeks after Premier Wen’s departure from New Delhi in 2005 added to the feeling that China had been caught diplomatically flat-footed as well as betrayed by India’s transactional approach to US ties. Beijing chose to respond, significantly, by putting pressure on questions over territory to signal its disaffection.  In a pattern, Gupta notes, that has seen China calibrate its stance on outstanding territorial issues to the tenor of its overall bilateral relationship and perceptions of friendliness or hostility — it was swift to pursue its claims inflexibly on the ground and at the negotiating table. The next few years saw retreat from the Quad idea. Abe lost power in Japan. The new Hatoyama government in Japan sought a different course with China. The Obama administration in Washington and the Rudd government in Australia were inclined to a more nuanced approach to how India might counter-balance the growing power of China and its particular characteristics. But underneath the surface, the Quad idea was not dead — in hibernation perhaps, but not dead. In pol-mil circles, it offered the promise of continuity for the established order of regional power, a comfortable reassuring retreat to an augmented familiar security framework. It also offered, however thinly, the moral fig leaf that rationalised a strategy of Chinese containment, whatever that might mean. Come the troubles with China of 2010, mutations of Quad-type thinking came out of the closet once more, not in public diplomacy but privately, pushing the idea at the margins of circles of influence in India and in the putative Quad constituency . It remains, active, purposeful, but below the radar. But India, and China, not unexpectedly, have moved on. To those in Washington, Tokyo or Canberra, who incline to the Quad strategy, not as a contingency but as some kind of in-your-face alternative to Chinese engagement, politically and militarily, as well as economically, it is well to reflect upon the independent evolution and challenges of India’s relationship with China. These are two powers, with common borders, each their own vulnerabilities, inexorably growing economic complementary, shared interests and objectives in global governance and the need to deal with each other’s growing power in its own Asian space. Engaging with China bilaterally is an imperative for India, not an option. The challenge for New Delhi is – and it has always been – to factor calculation of national self-interest (and security) into dealings with China without foreclosing the potential of a resurgent Asia with China and India at its core. Third-country strategic partners are a useful adjunct in this process … but an adjunct at best, and relegated in most part to narrow aspects of the security realm. India’s self-image as an aspiring great power and a peer of China demand that the burden (and instruments) for managing and engaging China will rest primarily on its own capabilities. And it will have to discharge this self-imposed obligation in its own time frame, not at the whim of others. Gupta’s careful analysis of China-India affairs reminds us once again, should we need reminding, that as India and China face these realities, whatever the baggage in the history of their relationship, India can afford to be nobody’s pawn in dealing with China or rely on the dream of appeal to distant American power to solve its problems with its neighbour. And China will have every reason to treat India with increasing care and appropriate respect . No related posts.

Indian growth has lifted all boats

Author: Jagdish Bhagwati, CFR India’s economy again exceeded expectations , growing by 8.9 per cent in the second quarter. Those outside India often show exuberance at such high and rising growth, following the nation’s economic reforms in the early 1990s. At home, however, you are just as likely to hear condemnation from those worried about the underprivileged this prosperity has bypassed. Such voices present India with a double challenge: they misrepresent the successful way growth has cut India’s poverty, but more importantly their critiques stand in the way of a much needed new wave of reforms, which would further benefit India’s poorest. The reform naysayers, among them the socialists in the ruling Congress party, reject the ‘miracle’ that may soon see India overtake China’s rate of growth. Instead they argue that gains have accrued to the rich, while inequality has increased. The most articulate critics include India’s progressive novelists, chief among them Pankaj Mishra, who recently wrote of the need to defend the downtrodden against ‘the pitiless exploitations of the new business-minded India’. Of course, in a country with more poor people than anywhere else on earth, desperate poverty remains a fact of life. But the evidence is fairly clear now, despite the deterioration in governance symbolised by the current corruption allegations over the sale of mobile phone licences in 2008, that the growth which followed India’s liberal reforms actually pulled as many as 200m out of poverty. Had the reforms started a quarter-century earlier, more would have followed. These improvements are also shared by nearly all underprivileged groups, a fact now documented in a series of studies. The political scientist Devesh Kapur, for instance, examined the fortune of the Dalits (or ‘untouchables’) in India’s most populous state, Uttar Pradesh, between 1990 and 2008. His research found that 61 per cent of those surveyed in the east of the state, and 38 per cent in the west, said that their food and clothing situation was now ‘much better’ than in the past. Al Stepan and Yogendra Yadav, also political scientists, found an even more striking result: less than a quarter of those in disadvantaged groups had seen their financial situations worsen between 1996 and 2004. What of inequality? Economist Amartya Lahiri recently studied India’s ‘scheduled’ castes and tribes – two very disadvantaged groups – and concluded that the past 20 years ‘have seen a sharp improvement’ in their relative economic fortunes. Two more economists, Pravin Krishna and Guru Sethupathy, found that while inequality (measured by a widely used index) had risen initially, it then fell back to the 1988 levels by 2004. So while the picture on Indian inequality is complex, a straight-line rise certainly cannot be asserted. But it is the finding on poverty that is more striking. Its implication is that being poor is now seen by India’s underprivileged as a removable condition. India is witnessing what I have called a revolution of perceived possibilities. In the 1980s, when growth was stagnant, Indians showed an attitude of resignation. Indeed I, along with my fellow economist Arvind Panagariy, predicted some years ago that economic aspiration would see India’s voters increasingly vote for politicians who promise to deliver more growth. This was underlined dramatically by the November election in India’s most backward state of Bihar, where a coalition led by pro-development chief minister Nitish Kumar won a landslide victory. Mr Kumar’s popularity in an impoverished region suggests that his fellow politicians can now be braver. They should look to augment reforms, not reverse them as the misguided progressives urge. This would mean a new push to expand trade liberalisation further in all sectors of the economy. Reforms could also further free up India’s labour market, accelerate privatisation, and open up its retail sector to investment from the rest of the world. All these can produce high economic returns, alongside improvements for the poor. These moves offer an added dividend too. Earlier rounds of reforms have generated revenues which can now be spent on targeted health and education programmes for the poor. This is what Indian planners wanted from the 1950s, but could never afford when revenues were as stagnant as the nation’s growth rate. Now the current generation can finally deliver. Jagdish Bhagwati is a Professor at Columbia University and senior fellow at the Council on Foreign Relations, New York. This article is based on the Lecture that Professor Bhagwati gave to the Indian Parliament (Lok Sabha) on December 2nd 2010. The full text of the Lecture is available here , at the Lok Sabha website. This piece was originally published in the Financial Times, on 1 December 2010. FDI and Indian growth: the new paradigm India: sustaining high growth needs new reform momentum Now for an Indian ‘miracle’

In search of a new climate change paradigm

Author: Mutsuyoshi Nishimura, Advisor to the Cabinet, Government of Japan The international approach to climate change is currently based upon the arbitrary ambitions of nations . Although these bottom up attitudes have propelled huge climate investment, no goals have been set in relation to climate stability. Future generations will surely ask why such investments did not achieve climate stability. The international community has to have a specific stability target and adopt strategies capable of achieving such a target on time . These strategies must be effective, inexpensive and not economically stifling for any country. They must provide equity in real terms. The surest and the cheapest strategy is a global cap on emissions with a carbon budget that will ensure the best allocation of carbon. Let governments own carbon space as their common property and sell such space to carbon emitting enterprises of all nations. Countries can earn new revenues which would be primarily given to individuals, business, industries and countries in need. Let us internalize externalities by putting a price on global carbon and let the world consumers share the equally passed-on costs of fossil fuel burning. Under such a scheme, governments would force all CO2 emitting enterprises of all countries to buy allowances before they burn fossil fuels. There would be a very simple and effective compliance system based on national registry of imported fossil fuels and fossil fuels domestically shipped. If the total amount of fossil fuels imported and domestically shipped is equal to the total of surrendered allowances, countries would be complying. The new paradigm would provide the most vulnerable nations with a larger part of the auctioned revenues so that they could cope with the rising carbon price, provide basic energy services to their people, adapt to future impacts, and join the march to the low carbon transformation. It is only by creating new wealth through the selling of allowances by auction, and providing them for developing countries that equity can be realised in real terms. There are now discussions about a re-allocation of carbon space from developed countries to developing countries. There is talk about a fair share, and how such a share must be achieved on the basis of equity. There is an argument for the entitlement and partition of carbon space. But some basic questions must be asked. What do the proponents of the partition idea propose to do with the partitioned carbon space? Since the proponents of entitlements are so keen on applying an equity formula to determine partitions, there is a question about what they are going to do with carbon space once an equitable partition has been decided. How is the partition going to be enforced? Does carbon space take the form of allowances? If not, how will the partition be measured and verified? The experience of resource nationalism in the 1960s tells us that entitling and partitioning resources was ruinous to the economies of countries in which practiced it, and, as a consequence, to the world economy. Resource nationalism soon faded; it was overwhelmed by the force of global economic growth. Modern day economic rationalism would call the concept of entitlement or partitioning economic manipulation. Partitioning on the basis of today’s equity considerations can hardly stand as valid 10-20 years into the future as nations grow and wither vertiginously and their relative power positions change interminably depending upon an untold number of factors and circumstances. Such ‘equity’ risks becoming the fodder of a protean world. In more detail, giving away carbon space to internationally competitive companies is a waste of resources as those enterprises can purchase carbon space and still compete in the global market. The governments can instead use partitioned carbon space for other useful purposes. And giving away carbon space for free to non-competitive enterprises does not ensure sustainable growth of those enterprises as such enterprises are without the means to improve their energy efficiency. A global carbon market with auctioning can deliver equity in real terms by enabling developing countries to burn less fossil fuels and grow quicker. It can be a new way to raise untapped revenues, save the most vulnerable countries from poverty and bring them low carbon growth for the first time in history. Thus, a global carbon market with auctioning can achieve both real equity and a thriving world economy. Equity can be built on sound economic rationalism. Today, the international community is indeed at a crucial crossroads. The choice is between institutional monstrosities, or the promise of something which promises to achieve climate stability at the lowest cost. Incentivising investment and growth costs far less than all other solutions and provides equity and a real chance for sustainable growth. . Cancun is the finishing point for the Bali Road Map. As both the Bali Road Map and the Copenhagen Accord do not spell out any action plan for long-term climate stability, a search must begin for a new road map that gives certainty that climate stability is achievable and enables the world economy to continue thriving. And this must be done before 2020, if not earlier. The paradigm started in 1960s must be replaced with a new one if we are to face the new challenges for decades to come and win this battle to preserve equity and economic growth. What we need is a new global alliance where the most vulnerable countries become an integral part of the second industrial revolution for clean growth. What is needed is a global carbon market. Mutsuyoshi Nishimura is the former Ambassador of Japan for the Global Environment. His views are strictly personal. Tiddlywinks on climate change US climate change bill – how international provisions work The international effort on climate change: Unravelling or shifting gear?

Time for change in Korea’s rough-and-ready China policy

Author: Moon Chung-in, Yonsei University, Seoul There is flashing red light in Korea’s China diplomacy. Turning a blind eye toward us, China adopted a neutral stance in the Ch’ŏnan incident, and in the case of the Yŏnp’yŏng Island incident, China even gave the impression it was taking North Korea’s side by its use of terms such as ‘cross-fire’ to refer to the shelling. On North Korea’s uranium enrichment program, China has taken an essentially passive stance by not only stressing the importance of ‘verifying the facts’ in reference to the reported enrichment facility, but also recognizing North Korea’s right to peaceful use of atomic energy. The visit to Seoul by State Councilor Dai Bingguo on which great hopes had been pinned came to an end without producing fruit. South Korea-China relations actually became more strained after his visit to Seoul. Dai once again called for a reconvening of the Six Party Talks, and strongly urged both the North and the South to exercise restraint, without making any mention whatsoever of the Yŏnp’yŏng Island shelling incident. How have South Korea-China relation deteriorated to this state after having been upgraded through great effort to the level of a ‘strategic partnership’ as they were characterized in the declaration issued following the South Korea-China summit meeting in May 2008? Before we place the blame on China’s diplomatic behaviour, we need to engage in a meticulous self examination of Korea’s China diplomacy. Aren’t perhaps the shortcomings of Korea’s China diplomacy the result of the bad move we’ve made in the game of diplomacy of underestimating China? Lacking a cool-headed understanding and analysis of ‘rising China’ we now are seeing that problems are arising as we approach China simply from the perspective of the situation in the 1990s when diplomatic relations between South Korea and China were opened up. Whether it is the nuclear issue or something else, we believe China can be convinced to follow our lead provided we are sufficiently persuasive. Is there any reason to expect China to have warm and fuzzy feelings toward the South Korean government when it is taking a position that implies there is no need for the Six Party Talks, in direct opposition to China’s assessment of the talks as the core diplomatic legacy of Chinese President Hu Jintao, or by putting forth proposals such as ‘Denuclearization Opening 3,000’ and ‘Grand Bargain’ in an effort to claim for itself the leading role in resolving the North Korean nuclear issue? In light of the longstanding, close ties between China and North Korea, there certainly is no reason for China to look favourably on South Korea when it is proposing a three-party strategic dialogue (South Korea-U.S.-China) on ways to deal with a contingency in North Korea. What is the background for disconnects of this kind?  It is quite clear that the problem is the excessive expectations the South Korean government has of the United States. Due to a belief that the U.S. is the only country uniquely able to control or influence China, it is thought that South Korea will be able to resolve its problems with China automatically and simply by strengthening its alliance with the United States. In the end, it is a valid assessment to say that the cause of the failure of South Korea’s China diplomacy is the Lee Myung-bak administration’s deeply rooted perception of the U.S. as a ‘panacea’ for South Korean diplomacy. Although jumping on the bandwagon with the U.S. is a position that is beyond reproach when viewed purely from the perspective of the traditional alliance relationship, it is apparent that there also is a problem with this way of thinking. In the course of promoting a strategic alliance with the U.S., the Lee Myung-bak administration has placed great emphasis on the shared values of a market economy and liberal democracy. This emphasis seems entirely natural from our point of view. From the perspective of China, however, these moves by South Korea are interpreted to mean that South Korea is playing an active role in the efforts of the U.S. to enlarge its sphere of influence as a way of containing or encircling China. It is difficult for China to countenance behavior that looks as though it is intended to bring pressure to bear on China by building an alliance based on values that have no regard for the combination of democracy and socialism that is a distinctive feature of contemporary China. Another problem is the self-centered approach taken in South Korea’s China diplomacy. These days, isn’t China a great power? It is necessary to take China’s perspective into consideration and to understand the country in a manner appropriate to its status as a great power. As an alliance partner of North Korea, for China it is very difficult to take South Korea’s side on the Ch’ŏnan incident while North Korea is strongly disavowing any role in the vessel’s sinking. Just as it was natural for the U.S. to take South Korea’s side, China tilted toward North Korea’s side. In the case of the Yŏnp’yŏng Island incident as well, the context of China’s reaction has to be understood. Given the circumstances at the time of the shelling incident, it certainly would not be warranted to give China low marks as a country in terms of rejecting international norms. After all, it was China that took the position of calling on both North Korea and South Korea to exercise mutual restraint while also urging them to seek a resolution of their issues through dialogue. As for putting national interest ahead of international norms, in reality, moralistically competing with China in terms of accountability, reputation, credibility, and the like rather than being helpful would have a negative effect on South Korea-China relations. Why do these kinds of problems arise? Above all, the core of the problem is the lack of professional expertise on China. Take the lineup of the Lee Myung-bak administration in the diplomatic and national security areas. For the most part, U.S. and Japan experts have a monopoly on positions and dominate these affairs as well as in the top posts in the executive branch and the National Intelligence Service. For them, it is easy to view issues from the American and Japanese perspectives not the perspective of China. The more serious problem is that the point of view taken by the core officials in the current administration is that there is no need for China experts. It seems they think it is better not to have China experts because of their client-grounded attitude that would advocate the Chinese perspective rather than the South Korea’s. Just as fatal as this lack of expertise are the flaws in the construction of the network of human resources. What’s known as ‘connection (guanxi)’ is a critical asset for improving relations with China. However, the current administration has completely eliminated all the key personnel dealing with China that were part of a network of experts that past governments had gradually assembled over a period of years. China relations are being spearheaded these days by conservative officials that are focused on protecting the points of view of the current administration. The way things are going, never mind building ‘connections’ and promoting constructive dialogue, you just have to hope that there are no heated debates with Chinese counterparts, and that meetings are being held to hear mutual differences rather than to enhance mutual understandings and improving relations. President Lee’s misperceptions and lack of knowledge also are a serious matter. While I was residing in China over a six month period last year, I witnessed a sharp cooling of South Korea-China relations. Up until the moment the Ch’ŏnan incident, the majority of government officials took the position that there was nothing unusual about the state of South Korea-China relations. President Lee Myung-bak also took the position in a statement that there were a few problems in the private sector but there were no problems on the government-to-government level. But was that so? Looking back from the present, there seems to be one of two possibilities: either the president was deceived by receiving incorrect advice or the President misrepresented the facts even though he had received an accurate advice from his subordinates. We have to change our way of thinking. Our future is with China. We have to have good relations with China. To do that we need to develop a more balanced practical diplomacy. A triangular alliance that is ‘anti-China’ made up of South Korea, Japan and the U.S. cannot be the alternative. Relations between the U.S. and China as well as relations between Japan and China must be good to ensure the peace, stability and prosperity of the Korean peninsula. In particular, it is necessary to put emphasis on the improvement of North-South relations. After all, ultimately, isn’t the North Korean problem the major reason for the deterioration of South Korea-China relations? Going forward, the government has to take a forward-leaning stance on the resumption of the Six Party Talks. North Korea’s acquisition of a uranium enrichment facility proves that the sanctions that have been in place are not effective. We need to acknowledge that there is no military option. We have to engage in dialogue. If bilateral talks are difficult then we have to make every effort to return to the suspended Six Party Talks. This is the best choice available for South Korea-China relations. Dr Moon Moon Chung-in, Professor of Political Science at Yonsei University and former adviser on North Korean affairs to President Kim Dae-Jung. An earlier version of this essay was posted here , on Nautilus. A more effective US policy on North Korea Obama’s North Korea policy and the June 15 South-North Joint Declaration North Korea provokes again