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U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION HOLDS A FORUM ENTITLED "CHINA'S INTERNAL DILEMMAS," ROUNDTABLE - NEWS EVENT

U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION FORMUM ENTITLED "CHINA'S INTERNAL DILEMMAS," ROUNDTABLE

FEBRUARY 25, 2011

SPEAKERS: ELIZABETH ECONOMY, C.V. STARR SENIOR FELLOW AND DIRECTOR FOR ASIA STUDIES, COUNCIL ON FOREIGN RELATIONS

JAMES MANN, FOREIGN POLICY INSTITUTE AUTHOR-IN-RESIDENCE, JOHNS HOPKINS UNIVERSITY MARTIN K. WHYTE, PROFESSOR OF SOCIOLOGY, HARVARD UNIVERSITY

MURRAY SCOT TANNER, CHINA SECURITY ANALYST, CNA

YUKON HUANG, SENIOR ASSOCIATE, CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE

STEVEN DUNAWAY, ADJUNCT SENIOR FELLOW FOR INTERNATIONAL ECONOMICS, COUNCIL ON FOREIGN RELATIONS

[*] (UNKNOWN): Thanks, everybody, for coming down. As I said in the beginning, this is a kind of an experiment, and I don't know if it's going to work or not. We'll find out. But, it's designed to have -- create more of an interactive environment. We have -- most of our witnesses have joined us. Elizabeth Economy had to return to New York to fulfill a family responsibility, which is always top priority.

We've also been joined, I'm happy to say, by Jim Mann, who's down there at the -- at the far left, I think. Is that -- who is the Author in Residence at Cise (ph), former Beijing Bureau Chief for the Los Angeles Times, foreign affairs columnist, author of the China Fantasy - How Our Leaders Explain Away Chinese Repression. And Robin (ph) and I thought that he would have a lot to contribute to this.

And I'll -- Jim, I'm going to warn you, I'm going to actually give you the first crack if you'll give me a minute to give you a minute to think. But, I -- we noticed that you were there listening at least to the -- a good part of the last panel. So, I made the -- I think we'll begin by just by asking you if you have comments you want to open up with, and then I've got some themes I want to raise.

The format that we're going to follow is semi-informal. We're not giving everybody five minutes to ask questions. It's, you know -- .

(UNKNOWN): (inaudible)

(UNKNOWN): Yes. We'll stop you if you have five-minute questions. I've got some themes that I -- that we want to, I think, tease out based on things that came up in the hearing. So I'll begin by asking some questions, and I'm going to ask the questions primarily of our experts.

What commissioners will do, I hope, is break in if you have a question or if you have a thought or comment. We'll try to get a dialog going between us and the experts or among the experts themselves. We've tried to choose you on the assumption that you don't agree on everything, which I think was demonstrated today. And I can tell from side conservations that not all of us agree with all of you. So, we should have a lively conversation.

So, just feel free to -- or try to break in or raise your hand, or if it gets to unruly we can do the old thing where you go like this with your little thing, and that will -- whatever these things are called, and I'll call on you. What I will try to do is keep things pointed in a coherent direction so that we don't go off on tangents and get mired in details.

What I'll also say to our guests in the audience is John Weston (ph), I think, is going to -- if you have questions, John, who's in the back, write it down, he's got little cards for you, and he's going to be submitting the -- if you have questions that you want taken up, write them down, give them to John, he in turn is going to give them to Paul Magnusson (ph), who's at the table. And Paul will digest them and meld them into uniform, you know, pointed questions. And if we have time at the end we'll get to them, but no promises.

So with that, let's turn back to the topics of the day, and I think I will do what I just said I was going to do, which is call on Jim if he wants to make any comments of his own about what he heard today.

He's, among other things, an expert on this question that we've been wrestling with, which is whether political liberalization follows economic liberalization. And you, I think, could tell from the previous panel that there's some differing views on that subject. So, maybe you want to start with that, or start with whatever you want and we'll go from there.

MANN: Well, thank you. Let me just commend the discussion I heard at -- the starting point, when you look at the question of political stability in China, the better part of wisdom is to realize that this is not a pro-China or anti-China division, that -- I mean, it's true for better or worse that many of us think when we see American debates about China we tend to divide things up, unfortunately, into teams and who's critical and who's sympathetic and so on.

Well, this one doesn't work. And I think my -- because there are people who are deeply critical of the Chinese government, who think that the regime is going to last and people who think it doesn't -- it won't. And that's true on the other side of the debate.

My introduction to this was immediately after the -- in the year or so after the Tiananmen crackdown. There was, of course, intense debate about what the United States should do. There was debate over the Bush Administration's efforts to maintain relations with Beijing.

And whatever you thought about that argument, I would point out that as a reporter in those days I would go to people who were critical of the Bush Administration for trying relations with Beijing. And they would say, "Why are we doing this, because this regime is not going to last?"

And then, I would turn around and I would go to people who supported the administration's policies and who said, "You know, well, I don't see why the critics are so upset about this. We have other reasons to do this, short-term reasons, cold war and so on, and the regime's not going to last. So, why do they care?" And as it turns out, both were wrong. So, you are -- you're asking the right questions.

It's not -- this is not a matter of pro or anti or teams or anything. What the part I did not hear -- I -- and many of the factors laid out in the second panel that I attended were valid and important.

But one thing I didn't hear, and it may have been in the first panel, is the question of the Chinese leadership and the leadership since -- particularly since '89 and increasingly since '89 has always looked at how to maintain the lessons it can learn from instability in other countries.

And among those lessons are to -- there was mention of another Gorbachev, and there -- and divisions in the party. And one thing that we have seen, and increasingly so, I think it's -- it becomes increasingly clear, more so even than when I wrote that book three years ago, is that the leadership has been quite successful, strikingly successful, at preventing -- at establishing political succession in ways that weren't clear before.

That is, it's managed the succession from Chan Zu Min (ph) to Hu Jintao (ph), and it looks like it will manage the next succession without -- there are factions. There are divisions and so on, but it's avoided the kind of succession crisis that it, among others, had in the past.

And as they look -- and then, I'll stop. As they look at the events in the Middle East, they may -- they draw a lot of lessons, but they distinguish themselves by saying, "You know, we don't have a Mubarak or a Gadaffi." You know? "We have -- we don't have an aging leader."

And they have actually succeeded also in getting sort of retirements. You have all noticed, asked and written about the role that Jiang Zhi Min (ph) plays, for example, but they have managed to get people to retire as well. So that, to me, is one factor not mentioned that contributes to my view that it's much more stable than these regimes.

And another -- the lesson that they draw from Egypt, as they drew from South Korea a long time ago, is that they were militarily dependent on the United States and that China is not. And when China does not want to -- is not particularly eager to have military-to- military ties with the United States, this is something of the factors it has in mind.

But, let me hold up there. That's --. (UNKNOWN): Well, let's pursue the leadership issue first. Several of the panelists this morning, I think Patrick Huang was one and someone else, talked about the -- what I would -- the -- sort of in the last ten years there seems to be a turn toward greater repression, and that may be the wrong word, but greater control.

And we've had testimony in past hearings where people have talked about a fairly significant, I guess, left turn would be the right -- would be the correct phrase in economic policy as well in the last ten years, a return to more state control, more subsidies, more state intervention in the economy and, as was mentioned this morning, a return to more control of the population.

Why do you think that's -- well, number one, is that accurate? Is that an accurate assessment? Do all of you agree with that? And second, why do you think that's happening in the face of, you know, significant growth and a lot of success? Who wants to -- anybody?

(UNKNOWN): These are our guests. Let me just add -- let me add a few -- by the way, is this on the record?

(UNKNOWN): Yes.

(UNKNOWN): Yes, you're on.

(UNKNOWN): OK.

(UNKNOWN): Everything we do is on the record. It's the wonderful thing about the --.

(UNKNOWN): (inaudible)

(UNKNOWN): Government today.

(UNKNOWN): Yes. It's interesting, if you look at Chinese political foreign policies or even domestic policies, the -- a large number of people characterize China as becoming more assertive, more assertive because -- partly because it's economic strength has increased.

There are some others. Now, I actually -- from that camp who actually feel that the problem is that China is not assertive. It's reactive. It's conservatively reactive. An event happens and it then reacts, and it chooses to react in a defensive, conservative way.

And the mistake they made was they had not established before these themes arose what should they be response and how should they deal with it? And then when it happens, they're caught off guard.

And now, my personal feeling is the Chinese should actually think a little bit more about all these pensions and issues and formulated a position as to what will happen or could happen, what should be China's policy, how would it affect others, etcetera, etcetera.

Now, in terms of the domestic issue that you indicated, why are there more protests? Well, it's natural to me. You have more tensions, more people moving around, all sorts of strains on the system. This country is growing incredibly rapidly, but its institutions have not kept up. So to me, it's not unnatural that more protest contingents emerge.

So then the question I think -- which is more interesting is, what is China doing in terms of institutional change in policy so that it becomes better prepared to deal with these in a more effective way. And my view, right, is right now they have not evolved that.

They have not figured out a way to let these responses be dealt with in ways, which I would say would be seen as more responsive and less defensive and more constructive. And I think that is the challenge.

(UNKNOWN): Others? Go ahead.

(UNKNOWN): Oh, somebody wanted (inaudible)

(UNKNOWN): Well, I would just say just on the point of whether their system has gotten, you know, more coercive and controlling people more and so forth, I think it's a complicated question.

I would, you know, defer to my colleagues, to Scot at least, who's still here to let -- my impression is there's certain indicators in that direction, mainly the more likelihood of arrest of activists who step forth to defend the rights of poor people and so forth. So, that's very worrisome.

But, I don't sense that in the lives of ordinary men in the street types that there's some kind of reimposition of thought control or whatever. I think in those regards the, you know, increasing access to the Internet and cell phones and people moving around much more and so forth that I don't sense that there's a -- somehow the people are more under control or more fearful about, you know, say -- telling jokes about the leaders and so forth.

I think in those regards, you still have a sort of gradual pressure moving toward more and more people feeling free to say things. But, I -- but, the prominent people who stick their necks out are more likely to get treated very harshly now, I think, than they were ten years ago, say.

(UNKNOWN): Sorry, I guess I disagree with that. I think --.

(UNKNOWN): Yes?

(UNKNOWN): That what you need to look at is opposition, organized opposition, and I think it has -- that they've tightened up on control of any kind of organized opposition. So, you can say what you want as a joke about a leader, but you can't form, you know, an organization --.

(UNKNOWN): Yes.

(UNKNOWN): Outside of party control, and then that's less true. I mean, there's less tolerance, I think, of civil society than there was a year -- a few years ago.

MANN: I'm not quite sure I'd characterize it the same way. First of all, a lot of sorts of things we're describing now have a much longer lineage than we're talking about now. I recall thinking, this was 13, 14 years ago, that there was a fairly clear two-sided strategy that they were moving toward in terms of social control.

And I -- and then the reason I choose the word 13, 14 years ago is because it was -- it became increasingly apparent when they revised their criminal and criminal procedure codes in the last 1990s, '96, '97, that what they were trying to offer the vast majority of Chinese people, apolitical Chinese people, was a deal whereby if you continued to stay out of politics they were going to try and offer a system that was relatively clean, had a fair amount of oversight, was legally predictable and relatively clear.

If you chose to be either in an officially suspect religious group or politically active and dissident, then they were very deliberately making the state and its coercive system as opaque and unpredictable and potentially repressive and high-risk as they possibly could.

And the place where you could -- where you could see this most clearly back then was the invention of this category of law for crimes against national security. If you've ever -- and I really don't recommend this for a pastime, but if you've ever sat down and read through any of those crimes of state security, my god in heaven, they are the vaguest --.

(UNKNOWN): That we have a hearing on.

MANN: Things.

(UNKNOWN): (inaudible)

MANN: Yes, yes, yes. And it --.

(UNKNOWN): (inaudible)

MANN: It -- it's -- in other words, you've committed a crime when they decide you've --.

(UNKNOWN): Yes.

(UNKNOWN): (inaudible)

MANN: Committed a crime, and that's not a accident. They had plenty of -- they had plenty of good, smart lawyers looking that over who could have that made that a lot clearer and who have tried to battle to clarify things since then. We had another whack at the state secrets law just recently, right?

Well, I think we saw that as the strategy for a decade. But, what motivated my pessimism this morning in talk -- in questioning whether they really are committed to political and the institutional reform anymore is the fact that I'm not even sure that they -- that apolitical people who try to make any use of this legal and institutional system can count on not having the system come back on them anymore.

And I think you particularly see this in things such as the just unpardonable way that they have treated parents trying to get to the bottom of what happened in the earthquake or the milk -- the poison milk incident. You know, throw a man in jail for trying to find out why his kid got poison milk, for god's sake.

And those aren't professional dissidents. Right? So, at that point, you has -- have to ask yourself, is -- are they still going forward with the portion of the strategy that creates greater predictability for average apolitical citizens. And then, I have serious questions whether they are.

(UNKNOWN): (inaudible)

(UNKNOWN): Yes. I wanted to ask question, which was -- or put down a proposition and let everyone react to it, which is essentially this. I mean, let -- you know, let's say we're all wrong about the stability in China. OK? So, we've be wrong so many times and I -- about the Soviets, wrong --.

(UNKNOWN): Speak for yourself.

(UNKNOWN): Except for Bill, I guess, was -- predicted the collapse in the Soviet Union. I -- which I didn't know until now.

(UNKNOWN): Every year, but --.

(UNKNOWN): So hard to -- I mean, I was just rereading some of the East Asia stuff from the '90s, Arian, 98, people were writing about how stable he was. He was gone a year later, you know. So, let's say we're all wrong. So, all the indicators you look for in a successful transition to democracy, civil society, rule of law, social trusts, you know, don't seem to be there in China.

So, let's say we're all wrong, and I know nobody likes to -- you know, I'm the policy and analytic business too, and nobody likes to predict. But, at some level of probability, what do we see coming next?

And would we, in the United States, even know who to talk to when -- in our policy of engagement right now is -- seems to me to be so narrowly based on the existing party and government leaders, would we even have a clue who to talk to if we're wrong and the party can't go -- won't last even the next succession, let's say?

(UNKNOWN): Can I --?

(UNKNOWN): Go then --.

(UNKNOWN): (OFF-MIKE)

(UNKNOWN): There. When you ask who we don't -- do we know who to talk to, who should we talk to now? (UNKNOWN): Yes. That's part of the premise of my question, which is -- you know, it seems to me that we had to build some hedges into this policy of -- that assumes the linear course over the next 25 years. I mean, it's -- so, my questions really are what if we're -- you know, what if we're all wrong and who -- and somebody -- and they can't last if somebody comes next? Who are those people? Second, do we know who those people are? Third, are we talking to them? And fourth, how can we be talking to them now?

(UNKNOWN): OK. Who wants to handle that, that the --?

(UNKNOWN): The part, having just come down the hall from Foreign Operations where the majority of staff there was lamenting the fact that up until a matter of weeks ago we were still letting AID decide who in Egypt would get US democracy grants. We were letting the Egyptian government make that decision for us. So, in an effort to avoid that -- or to repeat that mistake --.

(UNKNOWN): Yes, yes. Another concept --?

(UNKNOWN): (inaudible)

(UNKNOWN): Yes. Adding another concept into the question, I mean we've -- the whole conversation so far has been about the -- essentially the coastal regions of --.

(UNKNOWN): Yes.

(UNKNOWN): Of China, majority of the landmass of the geography of China is inhabited by ethnic minorities where -- or a significant portion. So, what about Tibet, Zhinzhang (ph), where would that play in?

(UNKNOWN): Let's not load too much onto --.

(UNKNOWN): Yes.

(UNKNOWN): On to the slot, who wants to take a crack at it? Anybody?

(UNKNOWN): (inaudible)

(UNKNOWN): Yes. So -- so --.

(UNKNOWN): Don't load anymore.

(UNKNOWN): No. What if we're -- what if we're wrong and, you know, we'll ask who comes next. And again, you know, put your cards on the table. Now, is this something much worse or it -- is it a democratic transition? But, the other one is do we -- would we have a clear who to talk to in a case of a crisis like this? Did -- do -- can we get a clue right now and actually start to reach out to some of those people?

(UNKNOWN): Yes. That -- I was so upset that --.

(UNKNOWN): Well --.

(UNKNOWN): Well (inaudible) talk for a few minutes first. Scot, do you want to go -- do you have --?

TANNER: My pessimistic gut reaction to that is that they have done such an extraordinarily effective job of rooting out any sort of potential leadership in society that, first of all, I don't think this government is going away anytime soon.

(UNKNOWN): Right, yes.

TANNER: But -- but, assuming I'm wrong, I fear it's going to have to be somebody who's already a member of the party, who becomes changed in the course of a crisis.

(UNKNOWN): (inaudible)

(UNKNOWN): OK, Jim? What were you going to say?

MANN: I would -- well, it's hard to separate that from what would cause this, but I would say, you know -- first, I agree with Scot that it's not going to be an -- I just don't think it's going to be a democratic transition. I think if something happened really quickly, it would be a military leader.

If -- if it was against the entire party, I mean if -- and again, I don't think that's going to happen. But, if you had a populist uprising against the party, then it would be someone from within the military. I don't think it would be a democratic transition.

(UNKNOWN): Chau (ph)?

(UNKNOWN): Anyone?

(UNKNOWN): In the middle.

(UNKNOWN): Oh, I can see it.

(UNKNOWN): Next to the red light.

(UNKNOWN): I got her.

(UNKNOWN): It's next to -- close to the red light.

(UNKNOWN): OK, just two points, one is the ambiguity about what next the party uses quite effectively to preserve its position. So, that's part of why it's difficult, even among the Chinese.

The other is that one possibility is the dissolution of China, which is a major concern that China could easily break up into essentially economic zones in -- with splits between the north and the south and the west. And I would think that that would be kind of a more likely scenario in the event that party legitimacy was totally negated.

(UNKNOWN): Who else buys that? There's historical precedent, but the [survivor in me] lately says that that's not likely. I'm just not close enough to it.

(UNKNOWN): (inaudible)

(UNKNOWN): It says that that's unlikely to happen.

(UNKNOWN): Who said that, it's unlikely?

(UNKNOWN): Lots of people, I mean, I think it's --.

(UNKNOWN): It's --.

(UNKNOWN): I mean, we --.

(UNKNOWN): You ask any Chinese and they'll tell you that.

(UNKNOWN): Really?

(UNKNOWN): Yes.

(UNKNOWN): OK.

(UNKNOWN): And in particular --.

(UNKNOWN): (inaudible) hold up.

(UNKNOWN): If you talk to young, educated Chinese and you raise the question of the party slipping from power, and the first thing they'll tell you that, no, that would create instability and could potentially lead to the dissolution of China. And that couldn't be tolerated.

(UNKNOWN): I think that's --.

(UNKNOWN): But, it already --.

(UNKNOWN): Success in getting people to vote.

(UNKNOWN): Yes. I think this is just -- I think there's a difference between the party's ability to create a nightmare in the back of peoples' minds --.

(UNKNOWN): Yes.

(UNKNOWN): And what is a likely scenario, and I mean this all has a familiar ring about it. We debated this whole question of -- about multi-regional division of China for about four or five years after Tiananmen. I, for one, never became persuaded that there were organized forces in place to bring together coherent, separate parts of China.

(UNKNOWN): But, isn't that part of the 5 1 (ph) issue do you think?

(UNKNOWN): Everybody should just --.

(UNKNOWN): If they let --. (UNKNOWN): Yes.

(UNKNOWN): If they let Taiwan go to the same hole, it may unravel.

(UNKNOWN): Huh?

(UNKNOWN): Well, that's an argument that they put forward a lot. I think to, you know, why I would suggest that there would be this possibility of breaking up along regional lines, because it goes back to a point that Dr. Huang made during the testimony is, you know, we have a tendency to think of China as a monolith with the government in Beijing and the leaders in Beijing, you know, putting down the dictots that everybody follows.

But, there's -- the old Chinese saying is, you know, the emperor is in Beijing, and Beijing is far away. So, local officials do carry a lot of influence in their local regions. So, you could see -- and again, at the end -- at the end of the day, it's going to be factions of the communist party that would kind of break apart.

(UNKNOWN): Obviously, this is the -- one of the hardest things of -- in human activity to predict. But we have to, it seems to me, be prepared for something that, you know, is going to happen. And I wonder, the last part of my set of questions was what should we be doing now to hedge against this authoritarian resilience and if this continues forever?

(UNKNOWN): I'm sorry. I didn't quite follow your question.

(UNKNOWN): What -- I mean -- so --.

(UNKNOWN): Has the (inaudible) policies basically based the hedge against authoritarianism?

(UNKNOWN): Well, yes, so we're not caught completely surprised.

(UNKNOWN): You mean if authoritarianism continues unabated?

(UNKNOWN): No, no.

(UNKNOWN): Or to prepare in the event that it doesn't --?

(UNKNOWN): Yes.

(UNKNOWN): Continue, oh, OK.

(UNKNOWN): Yes, that the scenario everyone says is impossible, which is that they don't last as long as we think they will or in the current configuration that they're in, you know, what should we be putting into our policy that prepares for that?

(UNKNOWN): Because -- Jeff (ph)? Let me ask just a quick question. Does -- we -- we all say that nobody believes in communism. They sort of don't believe in the party in the same way that they did before, although it delivers to them privileges. Therefore, isn't there a large number of people who play along with the party for privilege who are not necessarily believers -- I mean strong believers in that, so that there's this whole sort of amorphous group of elites, if you will --.

(UNKNOWN): (inaudible)

(UNKNOWN): No. I mean, it's -- I mean, I actually say the middle class doesn't believe in it at all and is afraid of the party. We're talking now -- I think he was talking about who would occupy leadership positions in a new government.

And I'm talking about -- so I believe, much to my chagrin, that that will be elites again. It'll come from the group that already exists in power, but it is hedging right now not to be too rapid in the change that they want to see.

(UNKNOWN): Yes. I guess my first one is, is there a way for the US to prepare for a massive discontinuity in China today? Can we begin to do things to prepare for that?

(UNKNOWN): I mean that's Dan. What's going on in the Middle East begs that question. I mean this is the reason that we've been --.

(UNKNOWN): Caught flat --.

(UNKNOWN): Caught so flat-footed in the Middle East, because we're not thought about --.

(UNKNOWN): Dan, if I can say something --.

(UNKNOWN): I'll think about it.

(UNKNOWN): If I can say something that's apt to be unpopular in this room, that strikes me as a very strong and persuasive reason to try to have at least a reasonably solid mil/mil -- relationship with the Chinese military.

(UNKNOWN): By the way, all of us want actually -- we don't disagree about strong mil-to-mil relationships.

(UNKNOWN): Yes, I understand your point. I mean I --.

(UNKNOWN): Yes. I mean I want to talk --.

(UNKNOWN): (inaudible)

(UNKNOWN): The only thing worse than the Chinese communist party comes apart at the seams is the Chinese communist party comes apart at the seams and none of our general officers is on --.

(UNKNOWN): Yes.

(UNKNOWN): Decent terms with any of theirs.

(UNKNOWN): Anyone else just on the question? (UNKNOWN): Anybody else want to comment?

(UNKNOWN): Well, there are -- I mean there are a range of other things we can do. What Robin Cleveland (ph) mentioned before on aide in Egypt, I don't know where things stand on this in China now, but when I was there in theory we had a full pride (ph) program to -- it met Chinese to the full pride (ph) program in the United States.

And in theory -- I mean in theory we picked, and in practice we gave the decision to the Chinese government. And that's -- that happens over and over again, and we shouldn't be doing that, I mean really.

And we need -- we need to find ways to break lose from the reliance on students and children in the United States and to find -- we need to find ways to form relationships. And I don't -- I'm not -- off the top of my head I'm not full of answers on this, with people outside the elite. We need to find a forum of ways to do that.

(UNKNOWN): (inaudible)

(UNKNOWN): As with the elite, we talk about mil-to-mil situations, and we've seen this is in the past, and I'm a supporter of IMET (ph) and having channels. But ultimately, these individuals do what's in their national interest. It may give you access, but it doesn't mean they're going to do your bidding.

So you have to remember that, and that some people put this hope that because General knows So and So and General So and So knows General So and So that that's going to mean to sip (ph) a big difference.

But we have found out, going all the way back to Indonesia and other places, even those relationships, you know, ultimately they will do what's in their national interest or in their interest, even though you may have a challenge. So you can't bet on that, and it's about the best you have. But, you can't be on that (inaudible)

(UNKNOWN): Like their Inon Island (ph) incident.

(UNKNOWN): I mean, look at --.

(UNKNOWN): Trying to get a hold of this --.

(UNKNOWN): Well, I mean it's -- we see -- we've seen this time and time again, although I am a supporter of IMET (ph) and other things, I mean the fact of the matter is is that you can't count on that because they're going to, once again, decide what's in their interest. But --.

(UNKNOWN): Any potential thoughts on --?

(UNKNOWN): Go ahead. Let's --.

(UNKNOWN): It's --.

(UNKNOWN): Yes, no.

(UNKNOWN): I wish I had -- I wish I had a list of --.

(UNKNOWN): Broadening the scope of --.

(UNKNOWN): Who would -- in terms of groups that are sort of logical, and I'm sure if Elizabeth was still here she'd talk about environmental groups where you'd --.

(UNKNOWN): (inaudible)

(UNKNOWN): OK.

(UNKNOWN): Yes. She'd probably talk about building partnerships between the US and Chinese environmental NGOs, but are there --?

(UNKNOWN): Churches and things.

(UNKNOWN): Yes. I mean what are the organizations? And particularly, Dr. Huang, in the context of the rural/urban/coastal/interior cleavages, what are the organizations that we should be looking to, not necessarily to accelerate or hasten the day when there's regime change, but who may be active at the local level? Who are viable, potential partners, political or economic partners?

HUANG: I don't have a good answer to this question. Let me just change the issue around. If someone were to ask me in the United States who would you reach out for if it was to collapse, my answer would be you can't reach out to any specific group. This country is too diversified with too many interests and too many groups and everything else. And they're all pretty sophisticated.

(UNKNOWN): Yes.

HUANG: So, it's not going to be that simple. Now, you're talking about a country with 1.3 billion with all sorts of diversified issues, Chinese, and it's not the same as the people in Guangdong province. People from Hunan can't even hardly stand the people in Beijing, etcetera, etcetera. You've got all sorts of issues here.

So, I actually don't see it as necessarily -- I mean it's a one/one option, but I don't it as particularly productive, define a group in a country of this size and diversity.

(UNKNOWN): But --.

(UNKNOWN): Now --.

(UNKNOWN): Oh, go ahead.

(UNKNOWN): It's one more thing, who do the Chinese look at --?

(UNKNOWN): Yes.

(UNKNOWN): In terms of evolution, and the closest they've come to is Singapore.

(UNKNOWN): Yes, the smaller --.

(UNKNOWN): OK? Now, what do they say to themselves? Here is a domination of the one party, captured 95 percent of the seats --.

(UNKNOWN): Happens to be China.

(UNKNOWN): And still feels insecure.

(UNKNOWN): OK.

(UNKNOWN): And it's not like a communist regime, it's basically promising people prosperity, good life, etcetera, etcetera, a delivery, you vote me back into power and they give support to those who enroll. And change, if it occurs, occurs within the party. They find an opposition leader they think is bright or whatever, they conscript them. They buy them into the system.

(UNKNOWN): Well, I don't think the -- I don't think the Chinese look to Singapore. I think certain authoritarians within China look --.

HUANG: Would like to.

(UNKNOWN): (inaudible)

HUANG: But, my point in China is not -- actually I don't think it --.

(UNKNOWN): (inaudible)

(UNKNOWN): I think that's actually very well put.

(UNKNOWN): And I -- I also don't think that that helps in terms of our discussion here because who's the Li Quan Yu (ph) in this scenario?

HUANG: No, no, no. My point is actually the following. The most likely scenario, of course, is that the change in channel will occur from within the party. OK. If you speak to the vast numbers of the peoples and plays into the position, at least of half of them you would find to be their own sit-by stereotype of a communist leader.

They are educated in the States. Their children go to the States. They have all sorts of connections to move all around there. They are there because if you can't them to the vice minister level, whatever, once you're a member of the party you can't be head of the central bank unless you're a member of the party.

So, if you're (inaudible) member using media commerce (ph) in the same in coronation it's not the same as someone else. So, I think what you have to basically do is that there's this level of people throughout the system who are basically saying this system's going to change. It will change because I'm thinking differently. It's changing because my kids are thinking differently. And the party's posting (ph). I've lectured at the commerce party school. I'm shocked by how much they wanted to listen to -- all through the day you wouldn't think a commerce system would want to think about, because they also recognize they can't continue in the same way.

What we cannot predict is how they incorporate those ideas in the system and who it actually affects. But, the fact of the matter is they realize that something is going to happen, and a lot of their people are hearing the same things we're talking about. And the challenge is what do I do with this? What do I do with this?

(UNKNOWN): Can I make a comment?

(UNKNOWN): What --?

(UNKNOWN): I'm a little puzzled by part of this discussion. It -- the suggestion that we're only dealing with the status quo leaders at the top and their children coming to our colleges. I mean one of the things that's developed over the last 30 years is an extraordinary network of contacts between Americans and Chinese at all levels in all kinds of --.

HUANG: Yes, no. I --.

(UNKNOWN): And we -- and, you know, I mean --.

HUANG: I take your point.

(UNKNOWN): The Kennedy School at Harvard, you know, has these regular groups of mayors and governors and ministerial types and --.

(UNKNOWN): Military officers.

(UNKNOWN): (inaudible) coming at, you know -- they're -- obviously American companies are dealing all the time with not only officials but also, you know, local firms and so forth all over China. There's all kinds of educational exchange. I mean there's just a huge network of contacts.

Now, this doesn't give us one person, a Li Quan Yu (ph), that we can look through, oh, let's -- maybe he'll come on top. But nonetheless, I think we have a lot of contacts with people that we can't count on them to do our bidding or something like that.

But, I think the prospects for a lot of people in the system at all levels who want the change in the system and to -- who look to time they've spent in America, people they've dealt with in other countries that they think can help them in this effort, I think that gives them much more positive, you know, possibility at least in this idea that there's going to be this unknown vacuum.

(UNKNOWN): OK, Jeff (ph), then Robin (ph).

(UNKNOWN): There are a couple of things it's a little too much of a top-down discussion. HUANG: Yes.

(UNKNOWN): Thank you. In defense of -- yes, I understand the policy need for like who's going to be the government and who are we going to deal with and, therefore, should we cultivate them?

But this notion and, Dr. Huang, you said in answer to a question that Hun Yun Bau (ph) had been talking about petitioning this, that and the other thing, and that was a -- like a beginning of the liberalization. But, if I wanted to talk about that as a Chinese citizen in Beijing and wanted to talk about it with three or four other people I'd be in jail for ten years. So, the liberalization is not quite --.

So, this notion that change will only be delivered from the top has been contradicted by what is happening in --.

(UNKNOWN): Everything.

(UNKNOWN): North Africa, and if you stop and look, change from the top is called a coups de tete generally speaking. And elsewhere, whether it be the Philippines in the Akina Lu (ph) or whether it be in Indonesia, the -- change came from the bottom, from ordinary people who we don't know. And change within China will come from ordinary people we don't know.

(UNKNOWN): Pushing it, question becomes will the elites who have governmental experience seize onto that and occupy new positions of power? And in the end, I actually don't think that we need to know who they are, that it's dangerous to cultivate them because it puts a target on their chest and a number of other things. I think there's plenty of people there who can handle this. Now, I don't know if you agree or disagree with that notion.

(UNKNOWN): Robin (ph)? No?

(UNKNOWN): I have a comment if I could throw it out.

(UNKNOWN): Well, wait a minute. Does anybody want to react to what Jeff (ph) just said first before we turn to Pat? And I want to come back to this.

(UNKNOWN): You know, well, I generally agree with Adam, and I think we can't pick leaders. In fact, I think we should be -- I mean, to the extent that we focus on individuals at all, we should be focused -- focusing on anti-reformers to.

I had a sort of unique experience in China in the 80s where the dissidents that I was speaking to, some of the dissidents I was speaking to were the old guard. And those were the meetings you had to have for your don't bring your translator. That was a different time, but we should be talking a lot to the people who don't want things to change either.

(UNKNOWN): Yes.

(UNKNOWN): Because it's --.

(UNKNOWN): (inaudible) Pat?

(UNKNOWN): Jim, I read your book some years ago, but as a -- I think -- did you talk about the communist party as not really -- it's a ruling party now, and that people will hook into it because it provides a -- avenues to be in the elite and to be running things and that the concentration of wealth could be managed by these guys.

So, I keep wondering why do we think that China is going to move toward a democracy or something that -- I don't see it in their history. We've got a -- I'm not a great China scholar, but I don't see a lot of democracy in their history. Why do we think there's going to be some big revolution in China? I just don't --.

MANN: I don't think anybody said --.

(UNKNOWN): Yes --.

(UNKNOWN): Most --.

(UNKNOWN): OK, well, I thought we were talking about some big change coming. I just don't see it.

MANN: No. I think they were talking about a change of -- a change away from the party, but we didn't really address of --.

(UNKNOWN): Yes.

(UNKNOWN): Toward --.

(UNKNOWN): Democratize towards what --.

(UNKNOWN): Towards systems.

(UNKNOWN): Yes.

(UNKNOWN): But, Dick, do you want --?

(UNKNOWN): Yes. On that point, I mean you'd mentioned earlier you thought that the civil society was shrinking or the discourse that --.

(UNKNOWN): Yes.

(UNKNOWN): But then, there was an interesting part to Elizabeth Economy's testimony this morning about what's going on in Shenzhen --.

(UNKNOWN): Yes.

(UNKNOWN): Whether there's some real political reform and some electioneering, private money coming from overseas, a number of other political reforms that'll sort of be sponsored by the mayor of that time along with the premier, which is a kind of contradictory kind of trend. I wondered if you knew anything about that and what that was all about. The economy (ph) says that the leadership is interested in experimenting with political reform at some levels and see what -- how it plays out. (UNKNOWN): (inaudible)

(UNKNOWN): Is that true, I --.

(UNKNOWN): For allowing it --.

(UNKNOWN): For allowing it, one of the -- I don't know if you're familiar with the Shenzhen experiment.

(UNKNOWN): I'm not very familiar with it, but it -- I would -- you see also mentioned, I think, that Shenzhen is a place for experimentation.

(UNKNOWN): Yes.

(UNKNOWN): It was originally, and sometimes -- sometimes they allow an experiment rather than a policy. It's a way of delaying. And people in China tend to think of Shenzhen as not --.

(UNKNOWN): Not a --.

(UNKNOWN): Not all -- not necessarily a --.

(UNKNOWN): (inaudible)

(UNKNOWN): OK. I want to return to the -- return. But, Robin (ph), one more thing and then I'll (inaudible)

(UNKNOWN): Well, I wanted to shift the topic back to economics, and these --.

(UNKNOWN): OK.

(UNKNOWN): If you want to -- go ahead.

(UNKNOWN): No, I -- well, I was -- I wanted -- let's just spend one more minute, if we can, on -- thanks to Blumenthal (ph), we kind of skipped to the end, which was, all right, what happens if there's a crisis and a regime change, if you will? How do we prepare for that? What do we do about it, which is I think a goo lot -- a good line of inquiry? Can we spend a couple of more minutes on whether or not is actually likely to happen and how we might -- how we might get there?

It -- I'm -- it seems to me, going back to what Dr. Huang and several others of you said, that there's a lot -- and this is -- I apologize for chronically bringing this up. But, it seems to me the dilemma they face is that to address the problems that you've identified, they can only -- the only way they can address the problems that they've identified is to undermine the party's leadership and control of the government and that that's kind of a catch 22 for them.

They can't solve the problems that we've been talking about without damaging the system that they've created and, therefore, the people in it. Now, in a way, that suggests that that could lead you to Dan's hypothesis. If they take those steps because they feel they have to deal with economic problems, they have to deal with urban/rural problems, they have to deal at some level with inequality problems, they have to deal with, you know, the -- what was the -- not distributive justice, the other --.

(UNKNOWN): Social.

(UNKNOWN): Procedural.

(UNKNOWN): Procedural, procedural justice, thank you, they have to deal with those issues. As they deal with them, if they deal with them successfully, they end up making the party less significant and they end up de facto creating other centers of power. Or, is that wrong?

(UNKNOWN): No. I think -- I think that largely is their dilemma that they have now been trying for 15, 20 years to try to create a more cleanly governed, efficient, somewhat accessible and transparent system.

And one of the points I was trying to make this morning is that, you know, through all of this period of time, the abuses in the system that were causing unrest 10, 12 years ago are still the same ones. They haven't had much luck with that though.

And you are right, that most of the models, most of the next models that are available for dealing -- for trying to give people a better voice in government, to mobilize people to attack these abuses, are fairly liberal ones, more independence of courts, more -- more returning to encouraging village elections that are relatively competitive, that sort of thing.

And I think that's where they have, in the last decade, come up to the edge, looked over, looked down and said, "You know, I -- I don't think that's the direction we want to go." But, that is the next collection of models for them if they want to go ahead with this.

(UNKNOWN): Others?

(UNKNOWN): I mean, it seems to me the -- what -- that what suggests is that their dilemma is if they go forward along that lines they undermine their control. If they don't do anything, they simply encourage more protests and we end you potentially with the kind of scenario we're seeing.

Although, I should add that there's -- that doesn't mean that's the only thing that anybody's going to put forward. Marty, tell me if you agree with us. I mean, there's always a market in China for somebody to come forward and say what we need to do is centralize power and take it away from these local clowns.

Now, I don't that's going to be -- I don't think that's going to be any more successful the next around than it's been any other time in the past, but there may be some -- there may be some effort to try and put that forward.

(UNKNOWN): Do you want --?

(UNKNOWN): Well, I -- yes. I don't want to respond specifically to that point, because I don't -- I mean, I think power's already still pretty off -- pretty centralized. But I guess I'm, as I already indicated this morning, a little more -- you know, I don't see them as stuck and dug in and not willing to change.

They're, in fact, you know -- the surprising thing, I don't really understand it. I mean, I don't personally have a high regard for Hu Jintao and these other leaders as, you know -- but, on the other hand, there are an extraordinary number of very well educated, very bright people in the party in state bureaucracy. And somebody is making some very good decisions on some fronts and making real progress.

So, I talked about the -- you know, rebuilding of a health insurance safety net, you know, extending welfare backup payments for the countryside, other kinds of things. Now, this doesn't seem to me a kind of immobilized, we got to the end of the line and, you know, we -- you know, whatever, get -- we do further is going to undermine the system.

I think the leadership still feels -- I think they feel confidence that they don't have to significantly democratize of decentralize or whatever and that by continuing their strong state- led, not only economic development but social policies and so forth, that they can in fact you know keep control, not have the -- even the rising tide or protests.

I mean when you think about it, the rising tide of protests so far, you know, they're kind of like mosquitoes, you know, compared to this great, you know, leviathan kind of political system.

They're not -- 1989 seemed very close to destabilizing things.

But, since then --

(UNKNOWN): And, take out of the leadership of small protest early, you don't have large protests.

HUANG: OK. But, anyway, so, I see them as at least trying to make a number of policy reforms to improve the lives of the people and deal with some -- I mean, some of the sources of popular grievances and I'm not even -- I don't know about, I don't study the legal reform and so forth. But, it's not inconceivable to me that they could decide, well, clearly, we've got to get people away to be able to have lawsuits with some protection against local officials who are abusing them.

And, that would make people happen and it would also keep our local officials under more control. So, let's take them on. I don't know if it's going to really happen. They talked a lot about it, but as we heard this morning, it's not that much of a reality. People are still taking a big chance if they try to amount a lawsuit against abuses of power against local officials. But, it's not inconceivable to me that they could say, at the bottom of the system, we've got to make changes to relieve pressures and give people more ways to prevent their discontent without destabilizing the system. And, if we do that, we're going to be able to keep riding the tiger, as Gordon White's book said years ago.

(UNKNOWN): Dr. Huang, you said in your testimony, you pointed out three things that they could do to reform the Hukou system. And, I will not do it justice if I try to repeat it. But, that seems to get at your point, Dr. Whyte, that there are more than marginal policy changes that they could -- that the party would put in place, that would continue to [eye] the good will of the citizens -- most of the citizens.

What you didn't say in those, sort of, three things that would reform the Hukou system and address a number of these grievances is whether or not you thought they would do what you thought was necessary. You laid out the path and left open the question of the likelihood.

HUANG: On the Hukou, think about it, it's the same tensions and debates as the United States about immigration. Which is stuck --

(UNKNOWN): The fee for Chinese citizens?

HUANG: Right. No, the difference between the Chinese citizens, but these choices don't have the right to live in Beijing or Shanghai. They don't have the right to go to the local schools. They're not given the same treatment, privilege, in getting a job. They don't move their families there, OK?

To me, it's almost similar to illegal immigrant or somebody. They can't get a social insurance number, they can't go to local schools, they can't promo bono, they have substandard jobs. They could be deported, and they are. During the spring festival or Olympics, they're all gathered up, they're sent back to their home provinces. It's the same as the retreats of illegal workers. And, that's the contingent issue.

So, that's why I'm saying, maybe, a very obvious change. Now, even if you did perceive this, it's fraught with political tensions for the government. Because, that means the natives in Beijing and Shanghai will start blaming the government for allowing these people to come in there. Maybe wages are going to be lower, there's more crime.

They're going to say, "Government, you need to stabilize my city".

But, here's the big issue here. Urban wages are increasing 9-10 percent a year. That's a record globally. Rural wages are actually increasing by 4-5 percent a year, which is also a record globally.

So, the great irony in both rural and urban people in China, their incomes are increasing historically and globally, the highest rates we've ever seen, yet, 10 percent compared to 5 percent legion and inequality.

So, the real issue as a person, even though you're getting richer and better, do you feel worse off that your neighbor or somebody else is growing 10, and 4 and 5, and I've come to the conclusion that everything compensates, you say, you shouldn't be bothered and you're getting a lot better? I've come to the conclusion that human beings are really envious of those who's chances are much worse.

(UNKNOWN): According to Dr. Whyte as well.

HUANG: Yes, I understand that.

ECONOMY: I liked your -- I can't remember --

HUANG: Our surveys in the World Bank, we used to get 95 percent ratings for various things we're doing, now we're down to 85 percent or 80 percent .

Now, 80 percent approval rating in the US would be fantastic. But, not so fantastic when it was 95 percent . And, that's the question for me because if you actually told me, "Are they going to riding or nothing?" No. Are they reasonably happy? Yes. (inaudible).

But, is the pressure, a sense of this enchantment worse today than it was ten years ago when I was starting off? Definitely so.

I look at my staff in the Beijing office, who are paid fantastic salaries compared to what they were earning before, five times what I was paying five years ago. They are unhappier now than they used to be.

(UNKNOWN): Money's like a vacuum.

HUANG: Because there's all sort of things going on in the economy where they say, "I'm being scooted (ph) from, I can be doing better". But, they're better off, but, nevertheless, the satisfaction is lower.

They're actually expressing their views publicly or in different ways that they never would have done 10 years ago. And, they challenge (inaudible) and others, whoever's coming to the backboard, than we've ever had.

And, that, I say, is fine. It's good. But, that's what I'm saying. Even this success generates a breed of pressure. That's, to me, actually, good. That's the only way something will change.

(UNKNOWN): A couple of quick notes. One is, according to our most recent data, the Hirschman's "tunnel effect" is still working for the people in the countryside. The tunnel effect is if you're stuck in some tunnel, the old style tunnel, and the lane next to you starts moving, do you get angry because they're moving or do you say, "Hey, pretty soon, I'm going be moving".

ECONOMY: Or, you can change lanes. (UNKNOWN): Well, assuming you can't change lanes. And, Hirschman argues that for at least a considerable period of time, you're going to be optimistic. You're not going to be envious. And, that still seems to be -- at some point, you think --

But, the fact is, the rural people do feel that they're moving ahead and, so, they're not really comparing themselves with the urban people, so far as we can tell.

But, back on the Hukou system, very broadly, I think policy makers, ordinary citizens, realize that it has to be changed, dismantled.

So, I think is an area that they're trying to address. In fact, some of the things they claim they've addressed but they're being enforced.

So, it's supposed to be possible for migrant kids to go to urban public schools now, but they're not letting them in or they're still charging them huge fees and so forth.

So, I think there's a recognition that they've got to take this on and that it harms China's economic development. It creates social tensions and so forth.

So, I think that is an area where I tend to be somewhat optimistic. But, they've been saying, they've been announcing since the late 90's, "Here's a fundamental Hukou reform. This is going to get rid of these bad features".

And, each time they announce it, and then a few years later, the local officials have watered it down.

But, I would say urban citizens in our surveys are as much or strongly critical of the discrimination built into the Hukou system.

If you ask anybody in any society, "Is it fair if somebody just because they're born in a rural area, if they move into the city, they're working in the city, they can't send their kids to the public school?"

Large majorities of civilians of anywhere are going to say, "No, that's obviously unfair".

So, there's very little support on principle for urban people for the Hukou system and its discrimination, but when you get to the reality of what's happening to my wages, what's happening to the cleanliness (ph) of my neighborhood, that's a different story.

(UNKNOWN): I wanted to make that point, that there have been, supposedly, several reforms of this system. And, supposedly, the large elements have, by now, supposed to have disappeared.

I think one of the big factors on why it persists is something very common here in the US in terms of funded mandates. Because, the provision of healthcare, education, that's the responsibility of the local governments. And, the local governments, in turn, aren't getting the resources from the central governments to be able to fulfill those obligations.

And, on their own, they don't necessarily have the taxing to be able to raise substantial resources.

So, I think that's a big hindrance.

ECONOMY: Speaking of unfunded mandates, that's actually where I wanted to go.

(UNKNOWN): Well, [it's yours now].

ECONOMY: Is stimulus policy in China? I mean, what they did with 700 -- what was it? $752 billion package, are we going to see more of that in terms of an approach buy goodwill?

And, then, what are the implications in terms of local governments having to any up to match whatever the demands are from Beijing or the offers from Beijing?

(UNKNOWN): Yes, I think you're going to see continuing stimulus. And, the key reason being is, I think, in the absence of that stimulus, growth will fall shorter than target.

Because, as I explained, the key thing that keeps China growing is how well it can maintain investment and export growth. And, I don't think it's going to be able to do that going forward so that you'll see the government step in.

Now, in terms of, again, unfunded mandate in terms of what they did with the stimulus package during the economic and financial crisis where they passed it off -- a substantial portion of it, off to the local governments.

Well, in turn, the local governments, essentially, passed it on the banking system.

And, so, you'll see more of that continuing.

(UNKNOWN): So, Yes, the ones left holding the bag at the end of the day is going to be the banks, and then it's going to end up in the government budget eventually or hidden somewhere in the government. The government has to step in and restructure the banks again.

(UNKNOWN): Didn't they do something like that around 2000, where they recapitalized four state banks and put the non-performing loans in something called, "Asset Management Companies"? And, then, the stimulus package, part of that was $1.4 trillion, directing the state banks to loan those funds with expectation, in many cases, that those funds -- that those loans will not be paid back.

So, when you talk about hiding it or hiding it inside the system, it seems to me that this is -- hiding these loans, these non- performing loans in the system and refinancing them and just putting them off to another day, how long can that be sustained? (UNKNOWN): Well, it can be sustained for quite a while.

(UNKNOWN): Foreign exchange --

(UNKNOWN): Well, in terms of recapitalization, it doesn't matter about foreign exchange, as long as I have the ability to print money, they can take care of it.

The original '98 decapitalization of the banks and then the subsequent recapitalization again, and commercialization of the banks in 2003, all of the financing for that has been kept of the government's budget.

In the '98 restructuring, the AMC's stepped in, took all of the bad loans off the books to the banks at face value, and issued to the banks bonds.

Now, the AMC's managed to collective out 20 percent of the face value of the loans, which was barely enough to do the servicing on the bonds, and the bonds that had a 10 year maturity.

OK, so, in 2008, they supposedly matured and the AMC's were supposed to go out of business. Well, they didn't. They extended them, they extended the payment on the bonds, and they made some quasi-public guarantee about the repayments of the principle.

On the restructuring of the banks in 2004, a lot of that was done with central bank money. Whether central bank just, basically, gave big loans to the banks and, in some cases, loans to the MC's to buy non-performing loans off the books of the banks.

And, again, all that debt is sitting out there and the AMC's don't have the money to pay it back.

So, at some point, someone's going to have to recognize the debt and the proper thing to do would be to take the debt on to the books of the central government.

(UNKNOWN): Just write it off.

(UNKNOWN): Well, not write it off. They're just going to have to pay it off.

And, that payoff, in large part, will probably come from, in essence, from printing money.

(UNKNOWN): OK, Huang?

HUANG: Yes, I wanted to step back a bit and summarize my own feelings about some of these policies. By many standards, I personally feel that China's economic parts have been extraordinary. Extraordinarily successful.

And, the effect of why I think it's successful is that they've been able to adjust to fit a change circumstances. Now, it doesn't mean I don't see vulnerability. So, we've talked a lot about the vulnerabilities they're shaping up. And, I'm personally saying to myself, they now need to do the next step of adjustment. If they don't, they're going to have some problems.

That's why I personally think issues like Hukou, one (ph) policy, mobility, tax reform. Things are going to be things you'll see in the next administration.

And, that's why I'm a little less critical of what's happened in the past. Because, I say to myself, take the stimulus program. This is a country whose revenue GDP ratio is around 24 percent , yet you have this extraordinary, powerful socialize state-led economy, but the revenue GDP ratio is extraordinarily low.

Most commies of the form would have a revenue GDP ratio of 40 percent not 24 percent .

So, what do you do? You push out the money to the banks. And, you know it's not going to be paid back because it's really a budgetary expenditure, not a banking expenditure.

And, then, you recapitalize. And, then, you say, "Well, that's not bad". I say it's bad eventually, but not necessarily right now.

It's extraordinary we're getting the economy to fund your expenditures now when you have a very tax system. It's a terrible way of approaching it if you had a sound fiscal system, which they don't have.

So, they've got to strengthen the fiscal system and, if you ask me, I know they're going to do this. And, then, they won't have to do this.

So, the critical question in China is, "Will they do the things that they need for the next ten years?" When I say earlier, there's two or three major things that this leadership needs to deal with that this current leadership didn't deal with. And, said, specially, would not.

And, I think is something to bear in mind.

(UNKNOWN): Let me add one thing. If you look at it in terms of, you know, the total stock of debt in China, if you would take on to the books of the government, all of this previous restructuring and even allowing for further restructuring or the banks. Compared to the potential assets in the government, it's very small.

Because, the government owns, what, 60 percent to 70 percent of the major corporations. And, so, the market value of those firms is quite high and would be more than enough to offset it.

So, it's not a question of creating a big fiscal problem in China by now or in -- over the medium term.

Jim? MANN: Well, to tie it into visibility again, I mean, the question was asked this morning, "What happens if the growth rate goes down below 8 percent ?"

ECONOMY: I said it I did --

MANN: Yes, what's magic about the 8 percent . But, so, suppose it does go down to 3 percent or 4 percent . The economic tensions that exist now -- I mean, we see on currency, the economic tensions between the export sector and other sectors. They got played out on currency policy.

Well, those tensions become much more acute. What happens to rural, urban, right now, it looks -- the divisions look not that great and extremely manageable.

I can't tell if you have -- if the growth rate goes down by quite a bit how people are going to -- how that's going to effect people's attitudes towards Hukou, people from the rural areas and schools.

So, that is a source of tension overall. On the other side of the equation, I think they're doing what they need to maintain general stability and Bill's point is right.

The dilemmas undermined are control in a general sense, but in the specific sense of the party and underlying belief system. I think there are a lot more people in Chinese cities now who agree with the idea -- it's a minority overall, but agree with the idea of a one party state than the overall ideology of the party.

And, in that sense, they're maintaining -- they are succeeding in maintaining control.

(UNKNOWN): Let me ask you about the last piece of that for just a minute. We were talking earlier about the party, and I think -- actually, I think Fela (ph) made the point, or maybe it was you, I can't remember who made the point.

But, basically, if all these people who joined the party not because they believe in the party or its doctrine, but because they perceive it as being the only way to get ahead.

(UNKNOWN): Not me.

ECONOMY: Feedler.

MANN: OK, that was Feedler, OK. They see it as --

WHYTE:I wouldn't disagree that much.

MANN: Well, that suggests -- well, maybe the question is how many of those people are there? It kind of implies a party that is hollow at the core. I mean, all these people belong to it because they have to, not because they believe anything.

That's not, to me, a prescription for -- a decision that's going to survive a long time. Are there lots of people in the communist party that actually buy into the theory of it?

ECONOMY: Well, what is the theory?

(UNKNOWN): Well, it's the theory one party control. When there is a more general one party control than I would say, Yes. If it's beyond that, I'm not so sure.

(UNKNOWN): No, I think they buy into -- I agree, as does Marty, that a certain amount of the motivation for this, for party membership, is a way to get ahead. But, you don't have a lot of other ways to get ahead in China that you didn't have 30 years ago.

And, I also think that these folks are in on a strongly governed, hopefully, relatively efficient, and militarily strong and internationally respected China. We shouldn't understate the appeal in China of a party that can offer that.

MANN: Let me also just mention, I mean, it's always struck me -- educated Chinese, they wear their country on their sleeve. They worry about China all the time.

So, you don't just join the party because you want to get ahead personally and have a better life, but the, sort of, nationalism, if you like, the feeling that the party is where it's at and if you want to contribute to the development of the party, you better get on board. That's very strong. And, this sort of commitment to China's growing strength and stature in the world --

Now, it's certainly true that whenever they mention socialism, Marxism somewhere, then people -- "Well, what is that?" And, the obvious hypocrisy of claiming China's socialism with Chinese characteristics, it's -- these people actually had, the older ones, had the studies of what socialism really was back then. And, they don't have it anymore.

So, I'm not convinced that this strong sense of patriotism and the idea that I can advance my own interests while also helping to build by country is not a strong enough reason.

Now, does that mean people will defend the party to their last drop of blood as Muamar (ph) said, I'm not sure.

But, I think the party rests on more than just personal opportunism.

(UNKNOWN): And, I think another aspect of what makes that appealing is one thing they've been very successful at doing for the last 20 years, is defining the party in terms of and implied anomy.

And, one of those -- in terms of an implied anomy. And, that's us. I'm continually amazed at how many of my Chinese colleagues really do seem to believe that we have these extraordinary elaborate strategies for surrounding and engulfing and undermining and dividing their country. When, I come home and I read the paper and we barely seem to be able to get anything done at home, let alone --

But, that idea does sell. ECONOMY: It certainly does. Have the rules for joining the party changed? Is that what you're saying? How you go about it and what's the --

(UNKNOWN): In all periods, the whole nature of a Leninist party is the party is not formed by the social background of the base. The party determines what kind of people they want in and then they change.

And, so, the beginning of the reform period, they made huge changes in who's in. So, the cultural revolution, if you were a political activist, loyal [and all], the helicopter cabris and so forth. Those people, most of them got demoted, kicked out, and so forth. And, many of them did.

And, then, all of the sudden, college degrees. Gees, you know.

So, China is trying to get college educated people in the cultural revolution period. If you were well educated, that was a mark against you in terms of getting into the party.

ECONOMY: What's the template now?

(CROSS-TALK)

(UNKNOWN): -- To bring more businesspeople into the party was the major push.

(UNKNOWN): Leading people in all spheres of society, well educated people, narrative cracy (ph), technocracy, whatever, but including knocking down all kinds of barriers. Including, particularly, the one about private entrepreneurs can now be in the party. Millionaires can be party members.

ECONOMY: I should know this, but how do you join? You sign up, somebody sponsors you? What happens?

(UNKNOWN): Through a recommendation.

ECONOMY: Contributor. Like, what's the actual --

(UNKNOWN): Oh God, if Mike Oxenberg knew I can't remember.

(UNKNOWN): I assume it's changed. --

(UNKNOWN): -- Multiple members.

(UNKNOWN): There used to be party courses. You had to study for months, you had to have a mentor in a party member that individually mentored you. Had regular heart-to-heart talks.

And, then, there had to be, actually, a vote in your party branch that was approved at the next higher level of the party. And, that only got you to be a probationary party member. And, then, six months or a year later, if you had behaved all right, you would be admitted to full party membership. ECONOMY: But, I doubt that's happening now. Which, may speak to Bill's initial question, which is what's the ideology holding it? I can't believe businessmen are going through that kind of six months of mentorship and probationary period.

So, does that suggest that the process for becoming a party member has changed so fundamentally that what we keep talking about in terms of this organization that is maintaining stability that is not there any more. The definition of.

(UNKNOWN): Well, there's a difference between a party member and a party conduit. This party conduit is a full time party official. And, for those people, there's party schools, party academies, training courses and so forth. And, then, you're sent on various assignments. You have to prove yourself and so forth.

And, they're the people that really matter. So, the fact that a millionaire is a party member is more symbolic in some sense. And, you may get invited to meetings and so forth, but he's not a full time party official.

And, the full time party officials, there is more -- they haven't invited me to join the party, so I can't really tell you from the inside.

But, there's more in the way of structure. It's more like joining the US military or something like that that in which there's a regular set of training and promotion routines and so forth. And, sort of, common activities that are designed specifically to meld people together.

MANN: It just seems to me that -- I'm going to get to that in a second, it just seems to me that an organization who, perhaps not overtly, but who's real goal is its own self-preservation, is not a recipe for long term success.

On the other hand, they've been around for a long time. So, they've done it a long time. Dennis?

(UNKNOWN): Yes, just following the same vein about party membership, I was wondering if our guests could talk about the princling (ph) in China. The princling (ph) is a source of social resentment, tension. Anybody want to talk about that?

(UNKNOWN): Well, it's been a source of tension and growing since the 80's when, for the first time, Chinese kids could -- first, two things happened.

One, people could go out to the United States. That created -- Chinese leaders sent our kids to the United States and, more importantly, as they started to open up the economy, kids would go in to develop their own economic interests.

And, it's hard -- it is a source of huge resentment at two levels. At the central level, which never gets -- is untouchable in the press. There's the relatives or kids of senior leaders going into business. That's one corruption issue.

At the local level, it does get covered and, actually, it's a source of instability and you get -- (inaudible). The son of --

(UNKNOWN): (OFF-MIKE)

(UNKNOWN): Exactly. And, that does get covered and, in fact, the local press is on and off over the last 30 years, is encouraged to cover local corruption.

But, at the national level, it's not. And, that's the heart of questions of political reform.

(UNKNOWN): And, I believe it's the case that if he becomes the new party head, he's the first true, pure princling (ph) to succeed. There had been -- Li Peng (ph) was an adopted --

(UNKNOWN): Adopted, Yes.

(UNKNOWN): But, he was an actual princling (ph), who doesn't seem to be -- people don't seem to think that that is barring him from succeeding.

(UNKNOWN): Well, let me ask you a quick challenge about how serious that is. In 1989, in the run up to the protest, yes, this was an issue. I vividly remember one of the most popular wall posters at Beijing University was an enormous nepotism chart that somebody put up listing all of the top leaders here. And, right over next to them was his brother in law holds this position and all this sort of thing.

And, people gathered around that all day and, indeed, it was a living document. People would get out pens and say, "No wait, you forgot, his sister is law is the party secretary of such and such".

That angered people because in 1989, the opportunities for getting ahead in the system and for getting into business and stuff like that were, I think, relatively limited.

But, the opportunities to get ahead in Chinese society right now are, I would argue, far greater than then. And, I really wonder if this issue has quite the purchase in angering people that it had in the past.

I'm not saying it doesn't anger people, but should we not exaggerate its influence?

ECONOMY: Tabloid moment rather than a serious --

(UNKNOWN): I would, just to answer that, I would -- one, it's not whether I think it is, I've just been through those certain cables that no one is supposed to read.

And, the U.S. embassy in Beijing seem --

And, the embassy in Beijing seems to report from time to time that it's a serious issue, so. (UNKNOWN): That the princlings are --

(UNKNOWN): Yes, Yes, Yes.

(UNKNOWN): I want to come back to this issue of the party. When I studied Marxism and Leninism, I think the party was the vanguard of the proletariat.

ECONOMY: That was a long time ago.

(UNKNOWN): And, then, I thought what he did was he brought the -- the three represent. He brought all these other quotes in.

So, it ceased to be a communist party, it became the ruling party. That's what I saw going on.

And, then, I'm thinking to myself, "OK, these guy's got the power and they're doing what they're doing. Why wouldn't we work with these guys" -- I just don't understand regime change as being something that we have to be interested in rather than just working with these guys and --

OK, I guess I should ask this question. Does anybody think anything in China's history is going to drive them towards a democracy or a functioning democracy or are they going to have something else? Which is what my impression is, that's what I think. But, I just want to get the view of the experts, here.

(UNKNOWN): Well, Taiwan --

(UNKNOWN): I was going to say, most of history would argue in your favor, but there are examples, including Taiwan.

(UNKNOWN): Where would you put your money, though? Just on your judgment, where is this headed?

(UNKNOWN): None of my money's going into China or way or another. I think that the pressure for that is going to be there. The pressure for a more democratic system is going to be there.

The party has -- at least on the question of the rhetoric of democracy has thrown in the towel. When it speaks about itself and justifies itself, it increasingly uses the language, the names of institutions and things of democratic systems.

I think that idea is very persuasive.

Now, am I sitting here and predicting that China's going to go democratic in my lifetime, which I hope has quite a few more years yet --

(UNKNOWN): We do, too.

(UNKNOWN): Thank you. No. Because, the institutional changes that would be involved in carrying that off in a country of that many size -- of that big size, that population, and that many administrative levels, are just mind boggling.

But, yes, I think the pressure is always going to be on them to, at least, be able to claim that they are moving in that direction.

HUANG: Can I offer my personal thoughts here?

First of all, Taiwan, to me, a very unusual situation. I'm not quite sure whether it would have become a democracy if it didn't have this 20 percent mainland, 80 percent Taiwanese mix. And, how do you evolve into something which is acceptable to everyone? It's a very unique situation. So, that's not the case in China.

Princlings can be both positive and negative. There's a lot of respect for people who are princlings. If they, basically, show that they're interested in the good of the people, doing political things, it gives them a lot of respect and admiration. If you are out there, apparently, just making money and doing very sunny things is a very negative thing.

So, I think you can interpret it either way.

The third point I would make is I think there is also -- this is a purely personal observation. I think the concept of conflict of interest among family members is less of an issue in Asia, frankly, than United States.

You look at Singapore, for example, how can you have your wife as being, essentially, secretary of treasure, when you have a brother or father who's guarding the federal reserve system or something like that? Or, another person who runs the franchise and it seems perfectly fine. No conflict of interest here, the fact my wife is secretary treasurer.

ECONOMY: I think as long as it's -- I think there's some perception in Singapore that it's clean. You've got to draw the difference between conflict of interest where there are ethical and --

HUANG: And, it's clean, but I don't think in America, no matter whether it's clean or not, you could possibly appoint your relative to be secretary treasurer to the president. It just wouldn't happen.

(UNKNOWN): Kennedy had Bobby Kennedy as --

It did illicit a certain amount of controversy when he appointed Bobby as he --

HUANG: No, today, I don't think that would happen. I think people would basically say, "Maybe it's possible, but why do I want to do that?"

Now, there is also a big difference in Singapore because it's legal. This family's income when you total it is beyond recognition. It's legal, but beyond recognition in terms of the total amount. They're getting multiple salaries from multiple sources. They're all legal. And, if you have a Prime Minister's salary of a million and a half, and in the cabinet you get a million dollar salary, and another one a couple million dollars, pretty soon this family is making $20 million. It's all legal. You would never do this in the states because the states would see these conflicts of interest.

ECONOMY: They pay their cabinet ministers a million dollars?

HUANG: Yes.

You all have greater control of this. But, I don't think it ever happened in the States. You would never pay -- if you're paying your president a million dollars, you're going to pay a cabinet minister a million dollars.

I think that the other point I would make is there is, I think, frankly, a streak in Asian size of respect for all authoritarianism.

(UNKNOWN): Yes, that's what I said.

HUANG: I've been in States here probably longer than most of you. I've been in Washington since 1949, OK?

I've never served our jury a criminal case, although I get called to a panel. And, the reason I know is the defense lawyer says, "I will never take a Chinese on this panel on this case".

(UNKNOWN): Because they'll convict?

HUANG: No, because the Chinese believe too much in the rule of authority.

Now, I'm always selected for cases which has some kind of financial thing or involving money, they want me to [calmest]. But, if it's a criminal case, Asians are excluded. Because, Asians respect authoritarian regimes or authority much more than westerners.

I've been here for 65 years and it's still that way. My mother has been here since 1944. When the (inaudible) was demonstrating whatever. I asked her what's going on because for me, it looked like it was overdone, as she would say to me, "This is not good. Destabilizing the country, they should put him down".

There's a large streak of that in China, who basically feel that we've got all these tensions, we've got all these things. We need a fairly strong government. As long as my life is improving and I can feel I'm getting better, I'll live with this.

I don't think that would be in the case in many other countries.

(UNKNOWN): What happened to the South Koreans?

HUANG: I don't want to get into --

(UNKNOWN): This is a good segue to one more topic I want to cover. But, do you want to comment on authoritarianism? (UNKNOWN): I think there is both a long historical trajectory in China of -- Dick Solomon wrote about fear of one (ph), fear of chaos. But, I think then, the party leadership plays that up very big.

And, it also, by nipping off potential up and coming leaders outside the party and so forth, they try to make it. We're the only game in town. We're the only ones protecting you from chaos.

Now, it didn't work very well for Mubarak. You know, he said the radical Muslims are going to take over and now he's gone. But, I think there is something to that.

But, I don't think it prevents some kind of eventual democratization. Democracies can be very strong rule of law, orderly societies and so forth.

So, there's a difference between chaos and being more democratic.

ECONOMY: But, is the issue -- I mean, I draw a distinction here. I think in most Asian cultures, there's a respect for consensus and authority, hierarchy and authority. Which, I distinguish -- I think is very distinct from authoritarianism.

And, so, you both kept mixing those words. Which --

(UNKNOWN): I'd agree with you on that.

ECONOMY: And, the question is, when does authority move to authoritarianism than people lose -- I mean, it's no longer accountable and --

(UNKNOWN): I mean, China also has a long tradition of respect for authority, but willingness of people to risk their lives to challenge corrupt authority figures.

ECONOMY: Well, that's where you get to the authoritarian -- Yes.

(UNKNOWN): So, both things exist. It doesn't mean my leader's right or wrong.

MANN: That's a good transition to a topic that I wanted to raise. Surprisingly, it hasn't come up very much all day. Although, it's been implicit in a lot of comments. And, that's the question of corruption. Which, we've looked into before.

But, we haven't really -- our panelists, haven't really alluded, didn't go into it in any detail. And, I think for me, it's an important question. Because, it illustrates some of the dilemmas that the government has. I'm not sure they can deal with the problem without causing -- undermining themselves. It goes back to the same thesis I preponderated before.

I wanted to ask you to comment on that. Let me just -- can somebody or some of you put the corruption issue into perspective, if you will, or scale for us. Is this a mosquito on the hippopotamus or is this a fundamental endemic problem that ultimately can destroy them? Or, is it somewhere in between?

(UNKNOWN): I have always felt that this is potentially -- this is one of, if not potentially, the most serious threat that they face.

The Chinese government has been relatively successful, I would say, in the last half dozen or so years in getting the corruption issue out of the headlines as much. And, by the way, just on the side, we're talking about things the United States can do in its relationship. I do think perfectly justified in spotlighting that problem, particularly, vis-a-vie, our businesses over there.

But, I think that this is -- I think that this is one of the things that could really be an issue that could be the banner that brings together a large number of people to form a large protest. What we have right now, as a couple people pointed out, is a lot of small scale protest.

In 1989, there were a couple of slogans that brought together all these people of different backgrounds, students, middle class folks and whether the worry of inflation was the biggest one or corruption was the biggest one, I can't say, but the two of them were tremendously powerful.

And, when you asked folks who were screaming for democracy -- "What does this word mean to you, democracy?" The answers that came back were frequently, "Do something about corruption". Not multi- party elections or anything that I taught a generation of students to define as democracy. It was getting rid of corruption.

So, I personally think that that's potentially the most serious one.

HUANG: May I interject here? I think corruption -- when we do these surveys and indicators, I don't think -- it would be hard to differentiate whether corruption is worse or better in China, India, Indonesia, Malaysia, Bangladesh, some are democratic, some are not, whatever.

Actually, they're all grouped very closely together. So, I think in all those countries, corruption is actually a big concern. It really bothers them. So, that's the case.

Now, in China -- and, people are [mainly rely on a daily basis] effected in ways which I think causes some very bad activities and stresses. Is likely contributed to this talk about democracy, or if somebody's a democratic.

My personal view is not necessarily. It generates a sense of, "There's something unfair. There's no long a just society". And, people not doing things which are right. Doesn't necessarily go to the next stop, I think, democracy or whatever it is. They don't see that as a necessary solution. OK.

So, I don't know where that goes. In other societies, and I've seen this in some of our studies, corruption gets to a certain point where people think that it is corrupting the top by getting the largest share. And, they get 60 percent and next we have 30 percent , 40 percent , 20 percent , down the level.

And, they basically say, "To solve this problem, I have to get rid of the top". I was trying to say that in this morning testimony. You have this unique situation in China. You may have princlings who operate (ph) but the person at the top doesn't get 60 percent . He almost gets nothing.

So, regime change can't be the end of a corruption concern. There may be all sorts of things you have to do and you have the fight the local systems, the polices, the petty party [officials] locally. And, then, you have to focus on, "How come they have so much control over resources?"

I mean, there's this highly publicized case of a truck driver who was sentenced to jail for 20-30 years for not paying his tolls. Remember this case?

Not paying his tolls. And, they sentenced him to 10-20 years for not paying the tolls on the toll roads. Somehow he got around it. And, it came up -- I don't know exactly the number. He was accused of not paying something like $150,000 worth of tolls. But, this guy only made $10,000 a year, OK?

So, what they exposed is a very corrupt local transport toll system which is ripping off people because how do you expect people making $10,000 a year driving trucks and freight to pay $150,000 in tolls? The answer of course: you can't.

So, when that became publicized, in just, unfair, he was released from jail. And, I think that's very good. But, that kind of corruption, this kind of ridiculous abuse of what I call the rights of people at local levels, does get people extremely angry.

But, it doesn't necessarily mean that you throw away the top leadership that's something different.

(UNKNOWN): I might also mention that this is an area that the party keeps trying to get on top of and get credit for. So, you do have these high profile arrests of officials thrown in jail and so forth. And, for certain kinds of corruption, of course, people are executed in China. Which, I don't think we're doing that in our society these days.

But, so, they can play very tough, but the problem is, of course, still, this is where you run up against the, "Are we going to change our system politically?" Corruption is still managed by the party. There's not an independent Hong Kong-style anti-corruption commission or something that was brought in to clear up things.

So, there's inevitable suspicion that the party in the top officials are making decisions to scapegoat this guy and let this other slide, and so forth.

So, I think the population has a considerably jaundiced view about whether the party's anti-corruption measures are really being fairly and vigorously pursued. MANN: Well, a couple points on that.

First, yes, this is something where American businesses could help. I'm actually pessimistic on that. I mean, it's hard enough to get American businesses to bring a WTO complaint. I have not yet seen a foreign corrupt practices act case involving China.

When people are extorted, they tend to -- if they're going to say, they tend to just pull out.

But, corruption, again, on a local versus national level, if you get a case of a car accident of a kid of a leader or police brutality, people take to the streets.

But, for people to protest on corruption on a national level, it requires, again, an organization. You have to plan a protest about high level corruption. And, the remedy, again, is press coverage or an independent press, but that's where that's, again, where the leadership -- they exam and says -- no, they tend to -- the language used is that the party wants to make itself more accountable.

And, it means we'd like to be, among other things, that we would like to be accountable on corruption. But, then, they can't quite see their way to do it.

The cutting edge issue would be if there was a consumer issue like milk again that was a nation-wide import and was vastly worse even than that milk scandal. Yes, I guess that could bring people out. But, overall, I'm pessimistic.

(UNKNOWN): Jim, since you addressed something I brought up, I wanted to clarify something.

I think a foreign corrupt practices case is an interesting way of going at it, but what I was thinking of specifically was this: I can't remember the last time I heard a high ranking US government official talk about doing something about corruption problems that US business faces in China.

And, the other thing, the other place where it's disappeared, and you talked an independent press, I can't remember the last time I saw a major international news media report on China focused on the problem of corruption.

And, I'm not just talking about Chinese-government controlled press sources, I'm talking about all the international ones I see in my hotel room when I'm over in Beijing.

It's an issue that people who survey corruption say is there. The Chinese people seem to believe is there that we are somehow not -- I judge, that we are not spotlighting nearly enough either in our official communication or in our press coverage.

(UNKNOWN): I'm not judging our companies, but do you think the companies have to accommodate themselves to that? The companies have to accommodate themselves to that reality over there?

MANN: Well, under US law, they can't.

(UNKNOWN): A week ago, you had the minister for transportation for train dismissed. Big story across the international press.

So, the stories are still there.

(UNKNOWN): I was unclear why he was dismissed.

(UNKNOWN): Yes, but, there was no hesitation on the part of the newspaper to indicate the reasons why he was dismissed.

(UNKNOWN): At the level of transport ministry --

(UNKNOWN): High speed rail.

(UNKNOWN): American companies at the level of, actually -- we'd like a trip to the United States for myself and 12 of my best friends, sure, all the time. I don't know about all the time.

But, at the level of -- $1 million under the table, I don't know and I don't think we're going to -- it's going to be hard to find out.

MANN: Well, it's maybe hard to find out. Those would be violations of US law. And, for the last ten years, there's been a fairly significant uptake in prosecution of the statute by the last administration and this one.

I don't remember offhand if there's been more China cases. I'm inclined to think not. There are -- I guess the politest way to put it is there are more target rich environments to look for if you're a prosecutor. Particularly, when you think about accessing information and discovery in your ability to get somebody to talk, China is a much more difficult place to develop the information you need to prosecute an American.

Because, with all these cases, unless it's something that happened here inside our borders, you have to build a case under U.S. law and you have to prosecute under US law, which is not the easiest thing to do.

My sense, though, about what's going on in China is the approach is incredibly superficial, and it follows exactly what Dr. Whyte described. There's a big campaign, they arrest a few people, they shoot a few people.

And, then, it all goes away and two or three years, it comes back and they do it again.

They don't fundamentally change anything. They can't change anything because if you wanted to route it out, if you will, you need to have a government system that works differently.

ECONOMY: I think we're, to some extent, confusing terms. And, I guess, I'd be interested in what we define as corruption and having had a miserable experience at the bank trying to do this, there's a big difference between the fees and bribes and the problems at local levels, which I think most people have trouble with, deal with. Whether it's the local tax office or fees they pay under the table to get their kids into school, that issue is separate.

And, you both just mentioned corruption is the issue of the milk scandal. That was more about -- demand for specific levels of production, cutting corners. It wasn't what we just talked about or, I guess, you just mentioned, the million dollars under the table being paid in a bribe.

So, I guess, my question is, what are we, when we're talking about corruption, what do we mean by that? Because, I think it does have the potential to put pressure on the regime if, indeed, high level officials were found to be accepting gratuities for services performed or engaged in. That's one order of issues that has the potential to [rally] all kinds of people against the government versus what people endure on a daily basis. Which, I don't see as a catalyzing --

(UNKNOWN): Well, I don't want to put words in Jim's mouth, but I think the examples he cited and my response was really focused on, sort of, the bribery issue of --

ECONOMY: But, when we talk about corruption as a potential pressure point or a factor that would influence either a police change by the government or neglect by the government, what are talking about as the basket of issues?

MANN: Well, the kind of day-to-day corruption you were talking about, I see that as having a potential economic cost. There used to be this discussion in Southeast Asia, particularly with reference to Indonesia versus the Philippines.

So, you had clean corruption in Indonesia. Somebody came, told you what the bribe was, and you knew that no one else would come. OK, so, you could predict your cost and you could predict when your shipment would clear customs so you could operate efficiently.

The contrast, the Philippines, was there was a case where it was unclean corruption where one guy would come in and ask for a bribe, and the next thing you know, five other guys would come in on top of it.

So, there's that element, but the problem is that even the clean corruption over time becomes the unclean.

And, so, then you end up with this economic problem because you fall into a situation where it becomes increasingly difficult for you as a business, then, to predict what your costs are.

It's a fascinating term, you know, "Clean corruption".

ECONOMY: Right, but are you --

MANN: No, it's an old term. ECONOMY: Are you talking that as a businessman, it makes it challenging to operate. Are you talking about the local factory in Chunking that's got a revenue stream of a million bucks, or are you talking about international? I guess, what I'm asking is, at what level does it become really relevant to a political community as well as the national economy?

MANN: It's going to hit at all those levels in different forms. If you're a large foreign direct investor and you've come in, OK, a lot of it [will hinge and hinge] in terms of what kind of land situation you get in terms of utilities and what you may have to pay. And, also, in terms of taxing. It can have an impact --

(UNKNOWN): I would throw out the idea that domestic corruption is, politically, is a more explosive issue than foreign companies. And, we've been through this with other countries, but privatization, who ends up with what shares, how. Those are, potentially, explosive issues always.

(UNKNOWN): I would say it's very hard to draw a boundary around what people consider as corruption because -- if we talk about two of the incidents that have given rise to the greatest anger: the milk scandal and the school children killed in the earthquake.

Neither of those, as far as I know, involved direct playing of bribes, but both of them involved people who were supposed to be doing things to protect people who were cozying up with people that allowed them to cut corners. And, the result is people are harmed.

Well, is that corruption?

I think lots of Chinese that's official corruption, but it didn't involve, "I'm going to bribe you so I can build this school with shoddy materials".

(UNKNOWN): I think in the research I've done, one of the most common and annoying scenarios for people concerns the taking over of the illegal confiscation of land or the destruction of houses, moving people off the lands. The stereotypical scenario is people have their houses, people have their apartments, people have their land taken away by local authorities, who are working in collusion with a developer.

ECONOMY: Right. Actually, the bank has a very good study on this right now. And, they talk about the lands they expropriated. It's value is paid for is substantially less than what it's worth, then, it's turned around to the local developer, who sells it or develops it. And, each step of the way, the little guy is left out of the equation.

And, so that would be a framework for corruption, but how would you translate that's the national definition? Separate from the land expropriation.

(UNKNOWN): I'm not following what you mean by translate it to a national definition. (UNKNOWN): Are you saying combining a milk scandal with a member of the standing committee of the public bureau with money being exchanged, if that type of situation was exposed, would that trigger a political event? Is that what you're saying?

ECONOMY: Yes, I'm trying to get at, first of all, what the threshold definition is of corruption. And, I think, Marty, you sort of said it doesn't tend to be about money.

So, is there a common --

WHYTE: Well, I'm not sure that in the case that I just described, I'm not sure that it isn't about money.

Certainly, people who protest and get angry about these things appear to suspect that large amounts of money changed hands with the local official.

In fact, you'd probably have a hard time persuading them that it didn't.

ECONOMY: But, does that have the potential to turn into a national, I guess, political event, but does have the potential to trigger nationwide protest? It doesn't sound like it. It sounds like a local --

WHYTE: I think, possibly, regionally. Because, one of the other complaints -- one of the other complaints that you read is that they've coined a new term, "mass incidents with no direct interest".

And, this is, again, if you think it's bad in English, you ought to try to read --

ECONOMY: Mass incident with no direct interest.

WHYTE: Yes, and it's a case where somebody has been wronged, as in having their land taken away. And, they start a protest.

And, everybody else either has had the same thing happen to them, knows somebody who's had something happen to them, thinks they know someone, and, these things get a size and a seriousness that goes way beyond the direct interest, personal interest, that was involved.

Again, you don't want to necessarily confuse police claims with reality, but they claim that this is something that they're increasingly seeing.

ECONOMY: Dr. Huang was --

HUANG: I would say my destination here is very broad. My definition is very broad that corruption is where you have some private interest gaining at the expense of public interest.

And, I see the milk scandal -- the milk scandal or the school earthquake damage ultimately reflects the fact that somebody pocketed something which allowed someone to sell something or bill something at a higher value than it cost them.

The standards of the school's construction was below what was specified. Some contractor pocketed money.

The milk scandals means that they didn't regulate well enough because people were using cheap powder (ph) and getting or selling for something that should have been purer and; therefore, they saved costs and they made money at the public expense.

And, then, you have what I call a very clear case. "I'm bribing you to get a contract". In each case, the public is getting something that's costing the public more than it should because someone is taking a bribe, someone is pocketing it.

And, I don't think in China, actually, that they would actually sit there and try to differentiate the instances. What they, basically, see is somebody taking advantage of the system to make money for themselves somehow. And, it's all relatively --

ECONOMY: It's distinct from taking advantage of the system to make money for themselves to get ahead, and that's OK because --

HUANG: No, I think they're all bad, I think they're all bad. And, I would say they would complain about -- they've said the fact that all the foods are adulterated, all the cooking is adulterated. Somebody is pocketing the money and I'd be really careful.

I mean, what I see bad is when that purveys the feelings of the people. Eventually, you get the sense of someone saying, "There's nothing with our system", or whatever.

I think the milk scandal really shook up everybody because it's health risk. Everybody hates risk, our kids are at risk and people didn't seem to care?

ECONOMY: That's the cycle back --

(UNKNOWN): I'm sorry.

HUANG: No, go ahead.

WHYTE: In addition, I agree on the milk scandal or the building and the earthquake. Large scale financial scandal becomes part of the background to political issues.

And, this is not just China. With Mubarak, I couldn't have told you beforehand how many businessmen were profiting and members of the family in what way, and this goes -- this is true. It's part of the context, whether it's Chiang Kai-shek or Batista or Marcos or anyone. And, if things build up to a certain level, then you get a loss of confidence in the regime.

And, then, it's a security issue.

ECONOMY: Back to your initial testimony. Is it a loss of confidence in the regime or is it a loss of confidence in your happiness factor? Your opportunity to get ahead, how did those two connect in terms of you --

WHYTE: Again, we didn't ask questions directly about how people feel about who's in power or something like that. But, my sense is that from other people's surveys, that you're not at anywhere near that state regarding China.

In other words, the people do not look upon Hu Jintao as Ferdinand Marcos, or Mubarak, or whatever.

They certainly may recognize a certain amount of cronyism and children in business and other kind of things, but I think they also feel that this is a strong and relatively effective government that is still moving China ahead in positive ways.

So, you're not at any -- I would say you're not at anything like the level of disenchantment with the top leaderships or the system as a whole or anything like that.

(UNKNOWN): No, I agree. It's just that that is a danger.

WHYTE: That's the danger, yes, yes. And, I mean the worry is, could this change overnight? And, if certain information is revealed that the Chinese people don't know about that becomes widely circulated or whatever, rumors of much more blatant high level corruption and so forth, that that could be much more threatening.

(UNKNOWN): OK. We're getting to the end of our time.

This has been very helpful. I just want to build on something that Dr. Whyte just said.

Something that Dr. Whyte said, the idea that -- here's what I think. I have the sense that the Chinese sense that they were the great civilization and superior, kind of, to other people and other civilizations and they fell apart.

(UNKNOWN): With some reason.

(UNKNOWN): And, a couple hundred years -- and, it mainly fell apart because the Westerners came in there and beat 'em up and all that.

And, they're on the road back to being numero -- I think they're really driving to be numero uno again. Does everybody -- is that kind of what people sense?

ECONOMY: That's a different debate.

(UNKNOWN): Well, I think, no. I think it's because I think if you've got a regime that's moving you back toward being numero uno, you're going to be pretty happy with those guys.

If that's a burning thing that's in them, I think it is, they'll put up a lot if they're moving in that direction, won't they?

HUANG: I think there's some truth in that. They take a lot of pride in some of these things that have been happening. And; therefore, maybe, the tolerance for other things is increased in the process.

MANN: Well, the whole question is the last words you said, "If they're moving in that direction, what happens if there's a downturn". But, yes.

(UNKNOWN): You have to remember, the Soviet Union once was the first people up in space, the first satellites, seem to be catching up and so forth. And, where is the Soviet Union today? So.

ECONOMY: So, the concluding comment is that China has not reached its start (ph) moment.

(UNKNOWN): They have some people up in space; however.

(UNKNOWN): We have more.

MANN: Well, on that note, let me thank everyone. Let me thank, particularly, our guests and our panelists, both for their work this morning and for sticking with us this afternoon.

I, for one, think it's been enlightening and very, very helpful to us. It will be reflected, I think in the annual report that we do which we'll be sure to get to all of you.

So, thank you very much, all of you, and thank you also to the people in the audience who stuck with us but didn't have any questions. So, I don't have any of those to ask.

And, with that, we're adjourned.

Thank you.

END