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Behind The Great Wall


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BEHIND THE GREAT WALL

Take a quick gander at U.S.-China relations, and you'd say there's been a serious nosedive. In the past two months alone, points of nasty controversy between Beijing and Washington have included U.S. sanctions against China for exporting missile technology to Pakistan, a nuclear test that Beijing conducted despite U.S. pleas to refrain, and China's expulsion of a well-known dissident. China's trade surplus with the U.S., meanwhile, has ballooned to an estimated $23 billion this year. "The relationship has entered a very bad phase, worse than at any time in the past few years," says a Western diplomat in Beijing.

On the surface, anyway. Behind the scenes, the Clinton Administration quietly has been conducting a major review of its China policy. The goal: to turn the relationship around. According to Administration sources, National Security Adviser Anthony Lake in mid-September presented President Clinton with an extensive policy paper recommending improved ties with China. Now, Washington and Beijing are embarking on the highest level of political, economic, and military contacts since the massacre in Tiananmen Square in 1989. Officials hope the two countries can dramatically ease tensions. "The U.S. and China are entering an important new phase," says a Western diplomat. "Both governments are showing a willingness to engage at higher levels."

Evidence of the new dialogue is growing. Next month at the Asia Pacific Economic Cooperation (APEC) meeting in Seattle, Clinton will meet Chinese President Jiang Zemin--the first such Presidential summit since before Tiananmen. Visits by other delegations to Beijing are already happening: After a suspension of two years, talks on human rights resumed in mid-October, with a visit to the Chinese capital by State Assistant Secretary for Human Rights John Shattuck. Agriculture Secretary Mike Espy will soon follow. Also in the works are trips by Treasury Secretary Lloyd M. Bentsen and Defense Assistant Secretary Charles W. Freeman. The Chinese plan to send Deputy Foreign Minister Liu Huaqiu to Washington in early November, in part for arms-control talks aimed at lifting recent U.S. sanctions.

The intensified contacts are largely driven by the dramatic surge of U.S. business activity in China. With Chinese consumers now amassing real buying power, the country is no longer seen merely as a manufacturing platform for cheap consumer goods. Instead, it has become one of the most promising markets for American exports. "China will soon have the world's second-biggest economy," says one senior Treasury Dept. official. "The Administration has no alternative but to be constructively engaged with China."

HIGH STAKES. U.S. business has long pushed for a change in attitude. Business has been instrumental in preventing relations with China from completely deteriorating since Tiananmen. Both Bush and Clinton have renewed Beijing's most-favored nation (MFN) trade status, despite outcries from Congress about China's human-rights record. The main reason: Corporate America has made it clear that a revocation would deal a serious blow not only to China but also to U.S. companies. Lyn Edinger, chairman of the powerful American Chamber of Commerce in Hong Kong, is encouraged by the latest moves. Washington, he says, has "really begun to understand the commercial and economic stakes in China."

Corporate leaders are making sure the stakes keep growing. U.S. investment in China will jump this year to an estimated $5 billion, up from $3.1 billion in 1992. U.S. exports to China also have risen steadily (charts), though not as rapidly as China's exports to the U.S. Now, an unprecedented number of American chief executives are traveling to Beijing, looking for new business opportunities (table). In the past few months, John F. Welch Jr. of General Electric, Robert E. Allen of AT&T, Joseph L. Dionne of McGraw-Hill Inc. (parent of BUSINESS WEEK), and others all have made the trip.

SUIT CITY. The cavalcade, moreover, seems to be picking up speed: Just this month, a slew of other executives arrived in China. Among the visitors: Six top officials from United Technologies Corp., including Chief Operating Officer George David. The executives were in Beijing in mid-October to attend an air show and meet with government and business leaders. Merck & Co.'s CEO, Roy Vagelos, also flew in to open a new hepatitis-B vaccine facility in Beijing. And Anthony Hales, chairman of Allied-Lyons North America Corp.--the parent company of Baskin Robbins--came to announce the opening of China's first ice cream parlor.

The Chinese are hoping that more deals will lead to a more stable relationship with the U.S. That's especially important because Beijing is about to introduce a second wave of far-reaching economic reforms that will help overhaul its outdated financial structure. Informed sources in the Chinese capital say that the government hopes to establish a ground-breaking national tax system by yearend. By early 1994, it wants to convert the People's Bank of China, a dinosaur institution that doles out loans on political grounds, into a functioning central bank. And by March, the government will try to unify its current assortment of foreign exchange rates into a single rate.

AT EASE. With the momentum for change building, Washington is feeling pressured to act. The Administration recently eased up on the Coordinating Committee on Multilateral Export Controls' (COCOM) restrictions on sales of advanced computers and other high-tech equipment to China and former East bloc nations. And last spring, Washington authorized the Export-Import Bank to extend $72 million in credits to Beijing.

Even military relations, in the deep freeze since 1989, could improve. Military talks will focus on areas such as security and defense conversion. "People were becoming very concerned that unless we start talking to each other, each side would have a knee-jerk hostility toward the other," explains a Pentagon official. That doesn't signal a softer U.S. line on China. But the Administration has concluded that it has little chance of influencing Chinese behavior on sensitive issues such as missile sales if it continues to ignore top-level Chinese leaders.

Given their ideological differences, it's highly unlikely that the two sides will completely mend fences. But the Chinese claim they're more than willing to talk with the new Administration. Says Wu Jianmin, director of the Foreign Ministry's Information Dept: "The core of the issue is how to cope with our differences and develop our common interests." And with Russia, Bosnia, Somalia, and Haiti causing major foreign-policy headaches for Washington, China may be one of the few places where the Clinton Administration can find a fertile common ground to cultivate.RIDING THE

CHINA SHUTTLE

Since August, a parade of America's top executives has traveled to China to do

business. Here's a partial list:

ROBERT ALLEN

AT&T

Established a joint venture in August to manufacture fiber-optic cable

ECKHARD PFEIFFER

COMPAQ COMPUTER

Plans to co-produce personal computers with China's largest computer group

JOHN F. WELCH, JR.

GENERAL ELECTRIC

GE's chairman is promoting GE medical equipment, power generators, and jet

engines

ROY VAGELOS

MERCK

His company in October is opening a new hepatitis-B vaccine factory in Beijing

GEORGE DAVID

UNITED TECHNOLOGIES

Hopes to open markets for Pratt & Whitney and Otis Elevator

divisions

DATA: BUSINESS WEEK

Joyce Barnathan, with Lynne Curry, in Beijing, and Owen Ullmann in Washington


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