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Saturday, May 26, 2012
Before China’s Transition, a Wave of Nationalism
BEIJING — As an English-speaking talk show host on China Central Television, Yang Rui likes to think of himself as a bridge between East and West.
He has a soft spot for tweed newsboy caps and Sherlock Holmes-style pipes and takes pride in his communications degree from Cardiff University in Wales. He may exult in China’s growing might, but made sure his son attended college in the United States. His program on the state-run CCTV, “Dialogue,” often includes both foreign and Chinese guests.
“I have to remind myself that I’m not representing myself,” he once remarked. “I’m representing the image of a country.”
But this week Mr. Yang revealed another side of his persona in a torrent of microblog messages that derided some foreigners as “trash” and accused Western men of seducing local women in an effort to spy on China.
“The Ministry of Public Security must clean out foreign trash, arrest foreign thugs and protect innocent girls,” he wrote to his 820,000 followers. “Behead the snakeheads, the unemployed Americans and Europeans who come to China to make money, traffic in people and mislead the public by encouraging them to emigrate.”
Mr. Yang’s comments aggravated what many residents from abroad say is an increasingly palpable rush of antiforeign hostility that often quietly coexists, paradoxically, alongside effusive admiration for the West. Two ugly situations involving foreigners have helped stoke the antipathy.
In one, a Russian-born cellist with the Beijing Symphony Orchestra was captured on video using boorish language to attack a fellow train passenger who objected to him putting his bare feet on her seat. Despite a videotaped apology, he was fired this past week.
The more serious case involved a drunken British tourist apparently sexually assaulting a Chinese woman on a Beijing street. The video, also posted on the Internet, showed a group of passers-by pummeling the man into unconsciousness.
In the days that followed, the police in Beijing announced a 100-day campaign to rid the country of foreigners who are living or working in China illegally. The initiative, promoted through banners and articles in the state news media, encourages citizens to report those suspected of violating the law to the authorities.
Whether coincidental or not, the campaign dovetails with a fusillade of attacks in the state news media. Xinhua, the state-run news agency, ran an editorial at the top of its home page last week that accused other governments of using reporters from their countries to “tactically control” China’s image in the overseas news media.
On Friday, People’s Daily, the ruling Communist Party mouthpiece and a political weather vane, described Western efforts to export democracy and human rights to China as a new form of colonialism. “They are evil acts that would harm society,” the article said.
Analysts suggest the rising nationalist sentiment may be related to a spate of events that have unnerved the Chinese leadership, including territorial disputes in the South China Sea, a sharply slowing domestic economy and the political turmoil prompted by the downfall of the populist up-and-comer Bo Xilai. Mr. Bo, accused of corruption and violating party discipline, is in detention and awaiting his fate, as is his wife, Gu Kailai, who is implicated in the death of a British businessman. The backdrop for these uncertainties is the once-a-decade change in leadership scheduled for later this year.
While the party has in the past stirred the nationalist caldron during times of uncertainty, some analysts said they thought that following that script today could prove harmful to China when it is trying to burnish its soft power.
“It doesn’t help the party’s image to be retaliating against foreigners during the leadership transition,” said Bo Zhiyue, a Chinese political analyst at the East Asian Institute of the National University of Singapore. “I find the whole campaign puzzling.”
The upshot has been a host of inconveniences for those with foreign passports. In recent weeks, scores of scholars and tourists have had their visa applications rejected by Chinese embassies around the world. In Beijing, foreign journalists are on tenterhooks, wondering whether the expulsion this month of an American correspondent for Al Jazeera is a taste of things to come.
(Mr. Yang, the CCTV host, for one, has called for a crackdown on journalists who “demonize” China. He also cheered the departure of the Jazeera reporter, Melissa Chan, with a word that could be charitably translated as “shrew.” Mr. Yang did not respond to requests for comment.)
On Friday night, a phalanx of three dozen officers made the rounds of Sanlitun, a neighborhood popular with foreigners. After checking passports at a Mexican restaurant, the officers could be seen leading away an African patron.
Western culture has also taken something of a hit. A joint Chinese-American jazz training program scheduled for June was canceled over “visa issues.” Last weekend, the police cited a missing permit when they forced the sudden cancellation of the musical “Oklahoma!” — which was largely cast with non-Chinese and partly financed by the United States Embassy. Desperate organizers found a new location but at substantial cost. The Philadelphia Orchestra, which performs next week at the National Center for Performing Arts in Beijing, has been dismayed to find many of its Chinese corporate sponsors inexplicably backing out at the last minute.
“We’re used to periodic crackdowns, but the atmosphere for foreigners seems to be more hysterical than in the past,” said Jeremiah Jenne, an American researcher and history professor in Beijing who maintains the blog Granite Studio. “This time feels different, because people are being encouraged to dial in and report their neighbors.”
In addition to the consternation and hand-wringing, foreign residents have expressed bewilderment over the rapid shift in public sentiment. It is a seesawing of emotion that can veer from the worshipful to the venomously resentful.
Those conflicting impulses have deep roots. When the British statesman Earl Macartney arrived in China in the late 18th century seeking trading concessions, he was politely rebuffed by the Qianlong emperor, who thought China was sufficiently wealthy and cultured. In the century that followed, as coastal China was carved up by foreign powers, educated Chinese began wondering whether their civilization might be inherently inferior to that of the West. In the first half of the 20th century, the tensions between those advocating Chinese self-reliance and those seeking modernization through opening up to the West were a frequent source of strife.
Mao Zedong and his Communist Revolution sought to put an end to any lingering self-doubt by banishing most foreign residents — and Western notions of human rights and electoral democracy. The next three decades, which brought famine, political upheaval and economic stagnation, turned out to be disastrous for liberal thinkers.
Hong Huang, an entrepreneur who was one of the few Chinese to study in the United States during the peak of xenophobia in the 1970s, says many Chinese were confused by the sudden change in official attitude that followed the end of the Cultural Revolution in 1976. Once branded as enemies of the people, foreigners were placed on a pedestal in the 1980s, when Beijing was eager to court Western expertise and capital. In those days, she recalled, foreigners used special currency to shop at well-stocked Friendship Stores and stayed in hotels that were off limits to Chinese.
“The government made people feel like second-class citizens in their own country and inadvertently created these feelings of massive insecurity,” said Ms. Hong, whose mother taught English to Mao and whose stepfather was foreign minister. “When you have this kind of insecurity, it doesn’t take much for people to turn uncontrollably emotional.”
More recently, many Chinese have come to feel maligned by the West despite the marked contrast between the robust growth in China, even if at a slower pace, and the economic frailties of Europe and the United States.
But apart from the enviable achievements, there is a simmering sense among educated Chinese that something is missing. The self-doubts are fed by corruption, censorship and the widening gap between the haves and have-nots. Even with their weakened economies, Western countries — with their rule of law and sense of security — still have an enduring appeal when contrasted to the vagaries of authoritarian rule.
Dai Qing, a dissident writer who often criticizes the Communist Party, said those long-buried frustrations were awakened when ordinary Chinese saw official favoritism toward foreigners, but felt their own government was unresponsive. “If a Japanese tourist has his bicycle stolen, an entire city department will work around the clock to retrieve it,” she said. “They would never do that for a Chinese person.”
U.S. Declines to Name China a Currency Manipulator Amid ‘Undervalued’ Yuan
The U.S. declined to brand China a currency manipulator, while asking the world’s second-largest economy to strengthen the “significantly undervalued” yuan.
In its semi-annual report to Congress on exchange-rate policies, the Treasury Department said yesterday that it will continue to “closely monitor” the pace of yuan appreciation and push for “policy changes that yield greater exchange-rate flexibility.”
The Obama administration says China’s policies keep the yuan undervalued and produce an unfair advantage in global trade. Politicians including presumptive Republican presidential nominee Romney and Senator Charles Schumer, a New York Democrat, have complained that the administration should be more aggressive in pushing China on the currency. No country has been designated a manipulator by the U.S. since China in 1994.
“With recession in Europe starting to slow China’s economy, now is not the time to rock the boat with one of America’s most important trading partners,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said in an e-mail after the report was released.
“Greater foreign-exchange rate flexibility and the need to monitor are going to be in this report for the next several years, but the nuclear option to declare China an outright manipulator is unlikely to be used with the global outlook so uncertain right now,” Rupkey said.
European Crisis
In its report, the Treasury said the deepening European crisis “is a significant risk to the U.S. outlook as our recovery remains vulnerable to events abroad.” A “tightening” of the region’s financial markets could “adversely impact the willingness of U.S. banks to lend and invest.”
The Treasury said the Chinese yuan has appreciated 40 percent against the dollar, after taking inflation into account, since China initiated currency reform in July 2005. This year through May 15 the Chinese currency was “virtually flat” against the dollar.
“It is in China’s interest to allow the exchange rate to continue to appreciate, both against the dollar and against the currencies of its other major trading partners,” the Treasury said in the report, which was originally due to be released April 15.
The Treasury frequently delays the report. The last one, due Oct. 15, was released Dec. 27. The previous one, due April 15, 2011, was released May 27.
Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics, said the report was overly critical of China.
More Credit
“Treasury is making a mistake in not giving China more credit for the appreciation that it has undertaken and the large reduction in its global external imbalance,” Lardy said in an e-mail. “They should not stick with the ‘significantly undervalued’ language.”
The Treasury is required to report twice a year on exchange-rate policies of major trading partners and enter into direct talks with those it designates as manipulators.
China’s economy may grow in 2012 at its slowest pace in 13 years, a Bloomberg News survey showed earlier this month, as Europe’s debt crisis curbs exports, manufacturing shrinks and demand for new homes wanes. China’s gross domestic product expansion, which dropped to 8.1 percent in the first quarter, may further slip to 7.9 percent in the three months ending in June, according the survey. That would be the sixth quarterly deceleration.
IMF Projection
The International Monetary Fund last month projected that China would grow 8.2 percent this year and the global economy will expand by 3.5 percent.
The yuan dropped for a third week on signs China’s economy is slowing and as concern that Europe’s debt crisis is worsening hurt demand for riskier assets. The yuan fell 0.24 percent this week to 6.3439 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency was little changed yesterday and touched 6.3525, the weakest level since Dec. 20. It has declined 0.53 percent in May, heading for its worst month in at least five years.
The Chinese currency is “getting closer to an equilibrium price,” said Kenneth Lieberthal, director of the John L. Thornton China Center at the Brookings Institution in Washington. “The U.S. Treasury recognizes that, although politically you would not be able to say it officially. So they say that the Chinese need to go further. They do need to go a little further.”
China Aims to Support IPO Market
SHANGHAI—China's securities regulator said it will take measures to support initial public offerings and refinancing of private companies, part of the government's broader campaign to tap the country's private sector for help at a time of weakening economic growth.
The move is the latest in a series of measures unveiled by Beijing in recent weeks to stimulate the world's second-largest economy while at the same time opening up greater space for the country's private sector, which is a key element in the authorities' long-pledged financial reforms.
In a statement Friday, the China Securities Regulatory Commission said it will also lower relevant regulatory thresholds in order to support overseas listings of private enterprises.
In addition, it will simplify the approval process for private companies to raise funds in the domestic corporate bond market.
The CSRC said it will also encourage private capital to invest and take stakes in the country's mostly state-owned securities and futures companies.
The securities regulator said it will support private capital in its effort to accelerate industry consolidation and upgrading through mergers and acquisitions.
The CSRC said it will also continue to support private capital's investment in domestic asset management companies.
Also Friday, China's state assets regulator said it would encourage more private investment in state-owned enterprises to aid their restructuring.
The invitation to private capital comes at a time when the profitability of the state sector is flagging. According to figures from the Ministry of Finance, profits earned by central state-owned enterprises fell by 8.6% from a year earlier in the January-April period to 669 billion yuan ($106 billion).
Last week, the Ministry of Railways issued a statement saying it will invite private investment in the railway market, which has traditionally been one of the most state-dominated sectors of the Chinese economy.
In a bid to attract new capital, the highly-indebted Ministry said it is considering establishing railway-industry investment funds, new initiatives to issue railway bonds, and encouraging initial public offerings of railway companies.
And on Wednesday, China's State Council, its cabinet, said it would encourage private investment in industries including energy, telecommunications, education and health care.
The China challenge—— Why do mergers and acquisitions so often fail in China
Most industries are far more fragmented in China than in developed countries. Each city or province may feature a full portfolio of breweries, pharmaceutical makers and real estate developers – a vestige of central planning and China’s lack of nationwide sales and distribution networks.
Since reforms began in 1978, however, Chinese industries have begun folding in on themselves. Market leaders are gaining capital and swallowing up smaller competitors, making China a land of milk and honey for mergers and acquisitions (M&A). According to research firm Zero2IPO, companies completed 1,157 M&A deals in China in 2011, up from only 622 in the previous year.
But this number could have been much higher. “M&A is not active enough in China,” said Gary Liu, deputy director of the China-Europe International Business School’s Lujiazui Institute of International Finance. “For many industries, actually there are many potential opportunities for integration, but it doesn’t happen with very high efficiency.”
M&A advisors agree that the failure rate of deals in China is higher than in developed countries, for a variety of reasons, including the lack of legal transparency, inflated company valuations and cultural barriers. “Typically in the US and the UK, of the deals we get involved in, about 80-90% go through,” said Curt Moldenhauer, a partner in PwC’s Transaction Services Group in Shanghai. “In China, it’s about 44% – well south of what you expect in a developed market.”
One of the biggest barriers is a lack of transparency that makes suitable acquisition targets harder to find. In developed markets, industry leaders like General Electric receive thick books daily filled with M&A opportunities, Moldenhauer said. In China, however, little company information is available, even online. Advisory companies often have to go out and “beat the bushes” in lower-tier cities to identify good targets.
China’s lack of transparency and rule of law create a slew of other obstacles for the M&A process. Many acquirers are unable to detect non-compliant practices such as accounting fraud, tax evasion or bribery, or to sue for compensation once they do. Acquirers also have difficulty accurately pricing the target company.
Chinese executives have earned a reputation for demanding sometimes outlandishly high prices for their companies. In the US, many non-tech companies are acquired at a price-to-earnings (P/E) ratio (the price per share divided by the company’s per share profit) in the high-single or low-double digits. But some Chinese companies demand many times that. Some are right to have high expectations, owing to their country’s fast economic expansion. But others are not.
“Chinese companies have unrealistic expectations oftentimes about the value of their business. Part of that is due to the fact that we have an irrational capital market here in China,” Moldenhauer of PwC said. Because China gives its citizens only limited options for investing their money, more funds are parked in domestic stock markets, driving up company valuations. From 2008 to 2011, the average P/E ratio of A-shares on the Shanghai and Shenzhen stock exchanges was 20 and 33, respectively; the average P/E ratio of shares listed on Hong Kong’s main board, which is not subject to the mainland’s strict capital controls, was 13.
The immature financial system results in far fewer deals led by private equity firms than in developed economies. China lacks a high-yield corporate bond market and well-developed IPO and secondary markets, all necessary for PE firms to raise capital to buy a stake and later exit their investments. There is also little appetite for restructuring companies, which often requires mass lay-offs anathema to China’s strict labor laws. “[Restructuring] is just not part of the business, and/or you can’t get a large enough stake to make an impact,” said Tony Skriba, an analyst with Z-Ben Advisors.
Finally, China’s rapid development can also present obstacles. The market is changing so fast that sometimes deal negotiations cannot keep up, said David Lee, a partner at Boston Consulting Group. Companies that spend eight months to a year and a half to negotiate a deal may emerge to find that the market has already changed dramatically.
Bottom fishers
Cultural barriers can also be a stumbling block for cross-border M&A deals, especially among Chinese companies shopping for acquisitions abroad. Chinese companies completed 110 cross-border deals in 2011, up from 57 the year before, according to Zero2IPO; slightly more than half were foreign-funded deals.
But behind each successful acquisition a Chinese company made abroad last year, there were many more failures, wrote Clare Chen, an analyst at Zero2IPO. “The volume of foreign transactions is obviously increasing, but it’s worth noting that Chinese companies abroad have one of the world’s highest failure rates.”
One barrier for both domestic and cross-border M&A is the deficit of management talent at Chinese companies. Gary Liu of CEIBS blamed this shortcoming for the failure of TCL’s joint venture with France’s Thomson Electronics, then the world’s largest TV manufacturer. “TCL aggressively integrated with Thomson,” Liu said. “But unfortunately, the Thomson people, they didn’t respect the Chinese at all. The result was a disaster; TCL lost a huge amount of money.”
Facing the gap
China’s leading companies have taken note of this example and are adjusting their strategies to preserve the brand strength and technological know-how that motivated them to make overseas acquisitions in the first place. Chinese car company Geely chose to remain a passive shareholder after acquiring Sweden’s Volvo, Liu said, while computer maker Lenovo moved its headquarters to South Carolina to show respect for US employees after it acquired IBM’s PC division.
“I think this is the right strategy for Chinese companies, because we have to admit the huge management gap between Chinese companies and Western companies,” Liu said. “No matter how much money you have, you’re still a student in front of the Western companies.”
Would-be acquirers of Chinese companies face many obstacles. But contrary to conventional wisdom, this list does not typically include government intervention, said Moldenhauer of PwC. While the rejection of Coca-Cola’s bid for juice maker Huiyuan in 2008 due to the Chinese anti-monopoly law still looms large in the public consciousness, that example is far from representative, he said. “How many cases have been rejected under the anti-monopoly law? One. That’s it.”
There are limitations, of course: Foreign companies are allowed to take only a 50% stake in some strategic sectors, and are banned entirely from others. The government has also adopted new priorities for investment to encourage environmentally-friendly and high-tech industries. But these rules are clearly published in China’s National Security Review and Foreign Investment Catalog. Within those guidelines, the government is not really blocking anything, Lee of Boston Consulting Group said.
China is now looking to attract technology, brands, international distribution channels, management experience and intellectual property, rather than straight-up capital. “It’s difficult to answer the question, ‘Is it getting worse or better?’ I think it’s different,” said Moldenhauer of PwC. “If you’re planning on building a tire factory in Shanghai, it’s pretty tough… But talk to anyone who wants to open a high-tech company in Chongqing, they’re ecstatic.”
Liu of CEIBS cautioned that local governments can be an obstacle to some deals, particularly when labor comes in the mix. He cited the attempt by electronics company Midea to acquire Little Swan, a washing machine maker in Wuxi, in 2008. Workers who were slated to be fired surrounded the factory in protest, and after several days of tension Midea gave in. “In this situation the local government put pressure on the acquirer. For the local government, stability is more important than anything else,” Liu said.
In the dance
Some of these barriers are sure to fade in the years to come, as Chinese companies acquire better management techniques and the country gradually opens its capital markets. But some obstacles, like China’s unclear legal environment, will be slower to change.
Doing deals in China may be tough, but it’s better than the alternative. No matter how hard the deal process may be, domestic market leaders need to consolidate their positions, and foreign companies want access to the market.
“People are still buying. I think that’s the good news,” Lee of Boston Consulting Group said.
Friday, May 25, 2012
China's WTO suit hits back at U.S. duties
(Reuters) - China launched a complaint at the World Trade Organization on Friday against U.S. import duties on 22 Chinese products that the United States says are unfairly priced or subsidized, including solar panels, wind towers and steel products.
"China firmly opposes the abuse of trade remedy measures and trade protectionism," China's Ministry of Commerce said in a statement.
The complaint, which also encompasses such diverse products as citric acid, kitchen shelving and lawn groomers, covers exports to the United States worth $7.3 billion, the Ministry said.
A spokeswoman for the Office of the U.S. Trade Representative, Nkenge Harmon, said it was studying the complaint and would respond in accordance with WTO rules.
"The Obama Administration strongly supports the trade remedy laws, and was the first Administration ever to apply a 421 safeguard to imports from China," she said. A 421 safeguard is a U.S. measure that allows manufacturers to request emergency restrictions on Chinese imports in response to a surge.
China's complaint counter-attacks in areas where the United States has been critical of China in the past few years.
Eight days ago the U.S. Commerce Department set punitive tariffs on Chinese solar panels, which it said Chinese exporters had dumped on the U.S. market at unfairly low prices.
The United States also launched a trade suit over Chinese government grants to wind power manufacturers in December 2010, although it did not pursue the case to the arbitration stage at the time, and hit Chinese steel pipe imports with hefty anti-dumping duties earlier in the same year.
COMPLAINT WON
But last year China won a WTO complaint similar to Friday's against U.S. duties on imports of Chinese steel pipes, off-road tires and woven sacks. U.S. Trade Representative Ron Kirk called that decision "a clear case of overreaching" by the judges.
The latest case, China's seventh against the United States since it joined the WTO in 2001, begins with China "requesting consultations" with the United States to seek an amicable settlement.
But it may move to arbitration if the two cannot agree, and the United States could be forced to scrap its duties and even compensate China if it is found to have broken the rules.
The dispute adds more heat to a trade relationship that has barely stopped simmering despite the United States seeing signs of China "making progress" towards easing restrictions on its currency, one of the biggest causes of friction.
Although the overall pace of China's export growth has slumped to single digits this year, its trade surplus with the United States set a record of more than $295 billion in 2011, putting extra pressure on U.S. manufacturers whose markets are still recovering from the financial crisis.
WTO dispute panels are due to rule on two more Chinese-U.S. trade disputes within days or weeks.
One concerns China's exports of grain-oriented electrical steel.
The other is a U.S. complaint that China's electronic payments market is closed to foreign firms such as VISA (V.N), Mastercard (MA.N) and American Express (AXP.N), while China UnionPay enjoys a monopoly.
Analysis: China's nine-dashed line in South China Sea
(Reuters) - Alongside an armada of paramilitary patrol vessels and fishing boats, China has fired off a barrage of historical records to reinforce its claim over a disputed shoal near the Philippines in the South China Sea.
While this propaganda broadside makes it clear Beijing will take a tough line with Manila as a standoff over Scarborough Shoal continues into a seventh week, the exact legal justification for China's claim and the full extent of the territory affected remain uncertain, according to experts in maritime law.
Like most of its claims to vast expanses of the resource-rich and strategically important South China Sea, Beijing prefers to remain ambiguous about the details, they say.
This allows the ruling Communist Party to demonstrate to an increasingly nationalistic domestic audience that it can defend China's right to control a swathe of ocean territory.
And, it avoids further inflaming tensions with neighbors who are already apprehensive about China's growing military power and territorial ambition.
"This ambiguity serves China's domestic purpose which is to safeguard the government's legitimacy and satisfy domestic public opinion," said Sun Yun, a Washington D.C.-based China foreign policy expert and a former analyst for the International Crisis Group in Beijing.
POTENTIAL FLASHPOINT
Rival claims to territory in the South China Sea are one of the biggest potential flashpoints in the Asia-Pacific region.
China, the Philippines, Vietnam, Taiwan, Malaysia and Brunei all have territorial claims across a waterway that provides 10 per cent of the global fisheries catch and carries $5 trillion in ship-borne trade. Half the world's shipping tonnage traverses its sea lanes.
The United States, which claims national interests in the South China Sea, recently completed naval exercises with the Philippines near Scarborough Shoal. It is stepping up its military presence in the region as part of a strategic "pivot" towards Asia after more than a decade of wars in Iraq and Afghanistan.
The acrimonious confrontation over Scarborough Shoal, known as Huangyan Island in Chinese, began last month when Beijing ordered its civilian patrol vessels to stop the Philippines arresting Chinese fisherman working in the disputed area.
Beijing and Manila both claim sovereignty over the group of rocks, reefs and small islands about 220 km (132 miles) from the Philippines.
The Philippines says the shoal falls within its 200 nautical mile Exclusive Economic Zone(EEZ), giving it the right to exploit the natural resources in this area.
SONG DYNASTY RECORDS
In a concerted response from Beijing, official government spokesmen, senior diplomats and reports carried by influential state-controlled media outlets have drawn on the histories of earlier dynasties to rebut Manila's claim.
They say the records show China's sailors discovered Huangyan Island 2,000 years ago and cite extensive records of visits, mapping expeditions and habitation of the shoal from the Song Dynasty (960-1279 AD) right through to the modern period.
To back up these arguments, China has also deployed some of its most advanced paramilitary patrol vessels to the shoal in a calibrated show of strength, for now keeping its increasingly powerful navy at a distance.
A Philippines government spokesman said on Wednesday China had almost 100 Chinese vessels at the shoal, including four government patrol ships. Earlier, Manila demanded that all Chinese vessels leave the area.
China's Foreign Ministry responded on Wednesday that only 20 Chinese fishing boats were in the area, a normal number for this time of the year, and they were operating in accordance with Chinese law.
NINE-DASH LINE
Maritime lawyers note Beijing routinely outlines the scope of its claims with reference to the so-called nine-dashed line that takes in about 90 percent of the 3.5 million square kilometer South China Sea on Chinese maps.
This vague boundary was first officially published on a map by China's Nationalist government in 1947 and has been included in subsequent maps issued under Communist rule.
While Beijing has no difficulty in producing historical evidence to support its territorial links to many islands and reefs, less material is available to show how it arrived at the nine-dashed line.
In a September, 2008 U.S. diplomatic cable published by WikiLeaks, the U.S. Embassy in Beijing reported that a senior Chinese government maritime law expert, Yin Wenqiang, had "admitted" he was unaware of the historical basis for the nine dashes.
In a March, 2008 cable, the embassy reported that a senior Chinese diplomat, Zheng Zhenhua, had handed over a written statement when asked about the scope of this boundary.
"The dotted line of the South China Sea indicates the sovereignty of China over the islands in the South China Sea since ancient times and demonstrates the long-standing claims and jurisdiction practice over the waters of the South China Sea," the statement said, the embassy reported.
Scarborough Shoal falls within the nine-dashed line, as do the Paracel and Spratly Islands, the two most important disputed island groups in the South China Sea.
LAW OF THE SEA TREATY
China insists it has sovereignty over both these groups but it has yet to specify how much of the rest of the territory within the nine-dashed line it intends to claim.
One reason suggested for this lack of clarity is that China, like all of the other claimants except Taiwan, is a signatory to the 1982 United Nations Convention on the Law of the Sea (UNCLOS).
If Beijing defined its claim to conform with the provisions of this treaty, it would almost certainly reduce the scope of Chinese territory and expose the government to criticism from vocal nationalists.
Alternatively, if Beijing was to maximize the extent of its claim to include all or most of the territory within the nine-dashed line, it would be difficult to justify under international law and antagonize its neighbors.
"Neither choice leads to a promising prospect," said Sun. "Therefore sticking to the existing path is the most rational."
This means that China is likely to remain vague, experts say, particularly during the current period of heightened political sensitivity ahead of a leadership transition scheduled for later this year.
TRADITIONAL FISHING GROUNDS
However, this lack of clarity doesn't mean China's claims over South China Sea territory have less merit than other claimants, experts say.
In the case of Scarborough shoal, Beijing says the land is Chinese territory and the waters surrounding the shoal have been China's traditional fishing grounds for generations.
"This geographic proximity argument the Philippines is using is not necessarily good in international law," says Sam Bateman, a maritime security researcher at Singapore's Nanyang Technological University.
"If China can demonstrate sovereignty, its claim is as good as the Philippines'."
Under the provisions of UNCLOS, a nation with sovereignty over an island can claim a surrounding 12-nautical mile territorial sea.
UNCLOS defines an island as a natural land feature that remains above water at high tide. If the island is inhabitable, it is also entitled to an EEZ and possibly a continental shelf.
JOINT EXPLOITATION
However, Beijing has not claimed a territorial sea or an EEZ from any of the features of Scarborough Shoal.
Most maritime experts doubt China will agree to have any claims over the South China Sea heard by the United Nation's International Tribunal on the Law of the Sea (ITLOS), the body set up to rule on disputes.
Beijing's policy is to negotiate on the joint exploitation of natural resources in contested areas but rival claimants are reluctant to accept this formula because it could be seen as recognition of China's sovereignty.
Beijing is also increasingly wary about the Obama administration's military "pivot" to Asia designed to counter China's growing power," security experts say.
They suggest Vietnam and the Philippines have already shown greater willingness to challenge China since the U.S. signaled a renewed interest in the region.
"They think they have the U.S. on side," said Bateman.
China leadership rules Bo case isolated, limits purge: sources
(Reuters) - Chinese President Hu Jintao has demanded senior Communist Party officials stifle tensions over the ousting of ambitious politician Bo Xilai and show unity as they prepare for a change of leadership, sources briefed on recent meetings said.
Hu urged the party to close ranks at a meeting of about 200 officials early this month at a Beijing hotel, declaring the downfall of Bo - China's biggest political scandal in two decades - to be an "isolated case", the three sources said.
The sources' comments represent the first confirmation of speculation that Hu recently intervened to prevent a wider rift in the party and to resist pressure from some elements for a wider purge of the populist Bo's policies and supporters.
Bo, former party chief of Chongqing city, was suspended from the party's top ranks in April after his wife became a suspect in the murder of British businessman Neil Heywood. Before the scandal broke, Bo had been seen as a candidate to join China's new top leadership team to be unveiled this year.
"It's been settled that this will be dealt with as a criminal case, not a political case," said one of the sources, a retired official. "The central leadership wants to focus on ensuring a stable environment for the 18th Party Congress, so the guiding policy is to end all the rumors and contention."
The party congress, scheduled to be held late this year, will appoint a new generation of leaders. Hu and Premier Wen Jiabao will then step down from their government posts at the National People's Congress in early 2013, when Vice President Xi Jinping is likely to succeed Hu as president.
The sources, all with ties to senior party officials, spoke on condition of anonymity to avoid possible recriminations for speaking about internal party discussions.
Two of them said Hu had convened this month's meeting at the Jingxi Hotel, the party's heavily guarded conference hotel in western Beijing where leaders often hold secretive conclaves.
The meeting was part of a series of steps taken to shore up unity and advance preparations for the 18th Party Congress. Those steps included retired leaders, especially former president Jiang Zemin, giving their backing to Hu's position.
"Jiang said that if you have solid evidence that Gu Kailai committed murder and that Bo Xilai also committed major errors, then deal with it as an isolated criminal incident," said the retired official, paraphrasing a summary of Jiang's comments.
"There's already been too much instability. The overriding goal now must be a successful 18th Party Congress," the former official said, paraphrasing Jiang, 85, who a decade after he retired still exercises some influence over major decisions. One of the sources said Jiang was not at the Jingxi meeting and it was unclear where he made the remarks or how he conveyed them.
Hu's expected successor, Xi, also has stayed closely in line with the leadership's position on Bo, said the retired official.
IDEOLOGICAL RIFTS, RUMOURS
Describing Bo's downfall as a serious but isolated case of wrongdoing, Hu urged officials at the meeting to end ideological rifts and rumors ignited by the scandal, the sources added.
The domestic security chief, Zhou Yongkang, has faced accusations that he sought to protect Bo, but his career appears to have survived the controversy, despite rumors that Zhou could be sidelined.
"Zhou has been encouraged by the party leadership to make regular appearances and show he's trusted," said the retired official. He noted that Zhou and President Hu made a high-profile joint appearance before police on May 18.
Premier Wen had suggested he favored a wider reckoning in March when, a day before Bo was sacked as Chongqing party chief, the premier linked Bo's failings to the discredited radicalism of the Cultural Revolution.
But at the recent party meetings, Wen's comments were chided by some other officials, two of the sources said.
However, China's leaders could find enforcing demands for conformity from the public harder than from within the party.
Bo nurtured an ardent following among leftists who embraced what they viewed as his model of egalitarian growth, and they have continued to defend him as the victim of a plot. He had used Chongqing, a province-level municipality in southwest China, as a showcase for left-leaning populist policies.
Liberal reformers, however, want the government to look beyond Heywood's death and examine complaints about Bo's leadership, including accusations that his populist crackdown on organized crime in Chongqing involved abuses such as torture.
He was brought down after a furor erupted when his police chief, Wang Lijun, fled to a U.S. consulate for more than 24 hours in February and told American diplomats that he believed Bo's wife, Gu Kailai, was implicated in Heywood's death in November, according to later descriptions of Wang's allegations.
"The leadership won't turn this into a line struggle," independent politics researcher Chen Ziming said, using the party's jargon for an ideological purge.
Beijing-based Chen, who has sources close to the party, said there appeared to have been heated internal debate over how to handle the Bo case before deciding to contain it.
"The drama is focused on the three actors, and that's already complicated enough," Chen said, referring to Bo, his wife Gu, and the ex-police chief Wang.
"If there are more actors brought into the drama, then it will become just too complicated and troublesome."
Bo, 62, and Gu, 52, have disappeared from public view and have had no chance to respond publicly to the allegations.
OUT OF SIGHT
The make-up of the next central leadership elite will be settled over coming months through an opaque process of inspections, jockeying and balancing rival camps in the party.
In recent weeks, the party has launched informal ballots and inspections to size up potential candidates for promotion into the Central Committee, which has about 200 full members, and the Politburo, a more powerful body with about two dozen members, the three sources said.
The Politburo Standing Committee, the core decision-making body, is chosen from the Politburo. The standing committee currently has nine members.
"Now they're going from province to province to examine officials and settle on possible candidates for the next leadership," said Chen, the researcher.
In China's top-down politics, final decisions rest with a handful of leaders, but the results of these assessments can sway deliberations, he said.
The informal polls would serve as a basis for discussions when the leaders head to summer villas in coastal Beidaihe in July or August, when the new succession lineup would be firmed up, said one of the sources who spoke on condition of anonymity.
Deposed Politician’s City Lists Names for Meeting on China’s Next Leaders
BEIJING — The Communist Party branch in Chongqing, the teeming western municipality once governed by the deposed politician Bo Xilai, has named candidates for its delegation to a critical party conference in the fall at which China’s next leadership lineup is expected to be announced. The list of 50 candidates includes some officials considered allies of Mr. Bo, but excludes Mr. Bo himself.
Political experts in China are scrutinizing the lists of the candidates and those already named as delegates to the conference, the 18th Party Congress, for signs of fallout from the seismic scandal over Mr. Bo.
For example, despite his initial support of Mr. Bo, Zhou Yongkang, a member of the elite Politburo Standing Committee and overseer of China’s domestic security apparatus, was named last week to the delegate list from the Xinjiang region. Some analysts had raised doubts over whether Mr. Zhou would be invited to attend the party congress, which is to take place here in Beijing.
Huang Qifan, the mayor of Chongqing, was on the list of Chongqing candidates, which was released on Monday and reported by the official news media on Wednesday. Mr. Huang is closely associated with economic policies promoted by Mr. Bo, though Mr. Huang had already helped formulate many of those policies in his role as vice mayor before Mr. Bo arrived in December 2007. Mr. Huang became the mayor in January 2010.
The fate of Mr. Huang has been the subject of much speculation since Mr. Bo was removed in March from his position as the Chongqing party chief and suspended from the central party’s Politburo in April.
Mr. Bo is under investigation for the ways he used his power, and many people close to him have been questioned or detained. But with his appearance on the candidate list, Mr. Huang appeared to have sidestepped any serious trouble, and was seen as likely to be appointed to the party’s Central Committee at the Beijing gathering in the fall.
At the last party congress, in 2007, all party secretaries and mayors of province-level entities, which includes Chongqing, a fast-growing territory on the Yangtze River with a population of 31 million, were appointed to the Central Committee, which has about 300 members.
Another official closely associated with Mr. Bo’s policies, Yao Ning, was also named as a candidate. Ms. Yao was a prosecutor in the case of Li Zhuang, a lawyer from Beijing who defended a Chongqing businessman during a crime crackdown started by Mr. Bo. Mr. Li was convicted of suborning perjury and served 18 months in prison.
Many Chinese intellectuals rallied to Mr. Li’s cause and accused Mr. Bo and his allies in Chongqing of undermining the legal system.
Ms. Yao was one target of that criticism. This week some liberal Chinese posted messages on microblogs denouncing her being named to the list of Chongqing candidates.
Yuan Yulai, a lawyer in Zhejiang Province, wrote on his microblog that Ms. Yao “went beyond the scope of public prosecution in wantonly vilifying Li Zhuang” with “false accusations.”
Ms. Yao was not available for comment.
The list of 50 candidates will be winnowed to 41 delegates at the Chongqing Party Congress, which is scheduled to take place next month after being pushed back from May because of the recent political upheavals. The party’s central body in Beijing will appoint one delegate, making the total from Chongqing 42.
A new party secretary for Chongqing is also expected to be named at the local congress. Several political observers in Chongqing say the two favorites are Jiang Yikang, the party chief of Shandong Province, and Zhou Qiang, the party chief of Hunan Province.
The two men are on opposite sides in the two broad factions of Chinese elite politics: Mr. Zhou is associated with the Youth League faction, led by President Hu Jintao, while Mr. Jiang is said to be an ally of Jiang Zemin, Mr. Hu’s predecessor and the leader of the so-called Shanghai Gang. The party secretary of Chongqing is expected to get a seat on the 25-member Politburo.
After Mr. Bo was removed from that post, Zhang Dejiang, a vice premier and ally of Jiang Zemin, was sent to Chongqing as a caretaker party chief. He is considered a contender for the Politburo Standing Committee, which rules China by consensus.
That committee has nine members, but there is talk that the number could be cut to seven. If that were the case, five seats would be up for grabs, since two current committee members, Xi Jinping and Li Keqiang, are expected to stay on and take over the top two posts in China.
Both have been helped by the scandal, which removed Mr. Bo as a potential challenger to their hold on power.
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