Part One CHINA IN THE WORLD

China's remarkable economic performance catapulted the country on to the world stage in the late 1990s and has continued to support the country's claim for world status ever since. In the first half of 2008, the year of the infamous "credit crunch", China was responsible for one-third of global GDP growth, and despite a previous high of 12 percent growth per annum, even a global downturn is likely to slow China only to a respectable 8 percent. Given the undoubted fragility of nations whose economy is fuelled by debt, and whose systems are imperiled by banks that gamble on the future in order to create virtual money for dividends in the present, China's dual role as the world's biggest saver and manufacturer very probably stands it in good stead for the next wave of capitalism.

Nor is there any doubt about China's ambitions as a world power. Not only is it a major manufacturer and, more recently, product and brand developer, but there have been significant developments in its profile in international relations. Its newest venture is in Africa, where it has invested billions in infrastructure designed to extract the continent's resources. China's involvement in Africa is experienced by the West as a challenge to its own colonial inheritance of trading pre-eminence and geo-political strategic strength. The modernization of the Chinese armed forces and the extent of China's investment in diasporic interests worldwide also contribute to a striking increase in China's national strength.

Despite some areas of tension, especially in the western border provinces of Tibet and Xinjiang, China presents a sense of national wholeness. Both people and government, at least in the main, appear confident and proud of what has been achieved to date, and what will be done in the future, if the economy and stability of the country is managed well. That is the crux perhaps of China's success, but also of its vexed relationship with western democracies, especially its largest debtor, the USA.

China has undoubtedly transformed its economy and governance structures in a relatively short space of time. Since the accession of Deng Xiaoping in 1978, the leadership has been most interested in legitimizing the Communist Party and the State, moving away from a command economy towards a semi-market system. There is little doubt that many people in China are materially better off thanks to this policy, although the gaps in income and opportunity between the new rich, the working middle classes, and the poor, and migrant underclasses increase exponentially with every leap in growth.

The second priority has been to ensure stability. The older generation of leaders had direct experience of the Cultural Revolution and its impacts on their generation were deeply scarring. One result has been the maintenance of a rigid authoritarian system of rule, with power located in Beijing, albeit including local governance reforms and some dispersal of influence amongst provincial governments. The two priorities – economic growth and strong leadership – are conjoined in China's current approach to the world: growth and investment is desirable, but anything that undermines sovereignty or stability will be dealt with extremely firmly. This suits investors, but leads to transnational disputes over emotionally charged issues such as Tibet. On the other hand, most nations in the West realize that without China's leadership and interventions in North Korea, the whole Pacific region would be significantly less stable.

TRADE 1

JUMPING INTO THE SEA

Foreign direct investment in China continues to grow and is significantly greater than that in its Asian neighbors.

Overseas companies are tempted by the large pool of available labor, the 8 percent annual rate of growth over several years, and the maturing, although still youthful, stock market. China's accession to the World Trade Organization in 2001 has enabled foreign firms to enter into partnerships with Chinese companies. Manufacturing has been dominant, although the growth of the services sector has seen foreign entries in real estate, hospitality, retail and communications. The leading sources of investment are from North America, Europe and the Asia-Pacific region. Overseas Chinese, even those living in relatively small and island economies, choose to invest in China's future.

Not all entrepreneurial ventures run smoothly. The regulatory framework around quality controls is uneven in theory and practice, which can cause problems for co-partners in certain enterprises. Piracy and copyright remain a problem for some forms of investment.

China's own direct investment overseas is of huge importance to the global economy, but has political implications, not only in Africa, but in the USA and Australia.

INVESTMENT 2

THE MASTER DOES NOT FIGHT; WERE HE TO DO SO HE WOULD WIN

China's regular armed forces number 2.1 million, and comprise 9 percent of the world's total. In addition, there is a reserve force of 800,000, and a military police force of 1.5 million.

An army of this size is impressive on paper, and reasonably cheap to run, but in modern warfare it is high-tech weaponry that counts, and China's military expenditure is a long way behind that of the USA and the total for the rest of NATO. China does have a nuclear capacity, however. While minuscule in comparison with that of Russia or the USA, it is significant in terms of China's military power within Asia and South-East Asia.

China's unannounced testing of an anti-satellite missile on an ageing weather satellite in January 2007 is also significant. Military specialists noted that it involved the successful interception of an object...