May 9 issue - Americans admire beauty, but they are truly dazzled by bigness. Think of the Grand Canyon, the California redwoods, Grand Central Terminal, Disney World, SUVs, the American armed forces, General Electric, the Double Quarter Pounder (With Cheese) and the Venti Latte. Europeans prefer complexity and nuance, the Japanese revere minuteness and minimalism. But Americans like size, preferably supersize.

That's why China hits the American imagination so hard. It is a country whose scale dwarfs the United States—1.3 billion people, four times America's population. For more than a hundred years it was dreams of this magnitude that fascinated small groups of American missionaries and businessmen—1 billion souls to save; 2 billion armpits to deodorize—but it never amounted to anything. China was very big, but very poor. All that is changing. But now the very size and scale that seemed so alluring is beginning to look ominous. And Americans are wondering whether the "China threat" is nightmarishly real.

Every businessman these days has a dazzling statistic about China, meant to stun the listener into silence. And they are an impressive set of numbers. China is now the world's largest producer of coal, steel and cement, the second largest consumer of energy and the third largest importer of oil, which is why gas prices are soaring. China's exports to the United States have grown by 1,600 percent over the past 15 years, and U.S. exports to China have grown by 415 percent.

The most astonishing example of growth is surely Shanghai. Fifteen years ago, Pudong, in east Shanghai, was undeveloped countryside. Today it is Shanghai's financial district, eight times the size of London's new financial district, Canary Wharf, in fact only slightly smaller than the city of Chicago. And speaking of Venti Lattes, last week Starbucks CEO Howard Shultz noted on CNBC that in three years the company would probably have more cafes in China than in the United States.

At the height of the Industrial Revolution, Britain was called "the workshop of the world." That title surely belongs to China today. It manufactures two thirds of the world's copiers, microwave ovens, DVD players and shoes. (And toys, my 5-year-old son would surely want me to add. All the world's toys.)

To get a sense of how completely China dominates low-cost manufacturing, consider Wal-Mart. Wal-Mart is America's—and the world's—largest corporation. Its revenues are eight times those of Microsoft, and make up 2 percent of America's GDP. It employs 1.4 million people, more than GM, Ford, GE and IBM put together. It is legendary for its efficient—some would say ruthless—efforts to get the lowest price possible for its customers. In doing this, it has used technology, managerial innovation, but, perhaps most significantly, China. Last year Wal-Mart imported $18 billion worth of goods from China. Of Wal-Mart's 6,000 suppliers, 5,000—80 percent—are in one country, and it isn't the United States.

But the statistic that wins this contest, that conveys the depth and breadth of the challenge the United States faces, is surely the one about the Intel Fair. Intel sponsors a Science and Engineering Fair, which is the world's largest precollege science competition, open to high-school students from around the world. Last year was a good one for Americans: 65,000 participated in the local fairs that are used to select finalists. In China the number was 6 million.

Yes, Chinese fairs are not as good as American fairs, the standards are different, and you can't compare apples and oranges. But still, 6 million oranges!

China's rise is no longer a prediction. It is a fact. It is already the world's fastest-growing large economy, and the second largest holder of foreign-exchange reserves, mainly dollars. It has the world's largest army (2.5 million men) and the fourth largest defense budget, which is rising by more than 10 percent annually. Whether or not it overtakes the United States economically, which looks to me like a distant prospect, it is the powerful new force on the global scene.

China's growth has obvious and amazing benefits for the world, and in particular for America. A Morgan Stanley report shows that cheap imports from China have saved American consumers more than $600 billion in the past decade. They have saved manufacturers even more. The Economist magazine notes that "it was largely thanks to China's robust growth that the world as a whole escaped recession after America's stockmarket bubble burst in 2000-01." And by buying up U.S. Treasury bills, China—along with other Asian countries—have allowed Americans and their government to keep borrowing and spending, and thus to keep the world economy going.

There have been two great shifts in global power over the past 400 years. The first was the rise of Europe, which around the 17th century became the richest, most enterprising and ambitious part of the world. The second was the rise of the United States, in the late 19th and early 20th centuries, when it became the single most powerful country in the world, the globe's decisive player in economics and politics.

For centuries, the rest of the world was a stage for the ambitions and interests of the West's great powers. China's rise, along with that of India and the continuing weight of Japan, represents the third great shift in global power—the rise of Asia.

Great powers are not born every day. The list of current ones—the United States, Britain, France, Germany, Russia—has been mostly the same for two centuries. The arrival of a new one usually produces tension if not turmoil, as the newcomer tries to fit into the established order—or overturns it to suit its purposes. Think of the rise of Germany and Japan in the early 20th century, or the decline of the Ottoman Empire in that same period, which created the modern Middle East.

Great-power conflict is something the world has not seen since the cold war. But if it were to begin, all the troubles we worry about now—terrorism, Iran, North Korea—would pale in comparison. It would mean arms races, border troubles, and perhaps more. Even without those dire scenarios, China complicates international life. Take relations between the United States and Europe. Iraq was a temporary problem. But differing attitudes on the rise of China are likely to produce permanent strains in the Western Alliance.

Inevitably, the China challenge looms largest for the United States. Historically, when the world's leading power is challenged by a rising one, the two have had a difficult relationship. And while neither side will ever admit it publicly, both China and the United States worry and plan for trouble. To say this is not to assume war or even conflict, but merely to note that there is likely to be tension between the two countries. How both sides handle it will determine their future relations—and the peace of the world.

What Does China Want?

When people talk about China today they inevitably mention its unique culture. Confucianism is said to be at the heart of the nation's psyche, and it is this tradition—of discipline, learning and devotion to elders—that explains China's extraordinary success. But Confucianism has been around for centuries, during much of which China was poor, backward and stagnant. Indeed, in the early 20th century, when the German scholar Max Weber wanted to explain China's unsuitability to capitalism, he pointed to its Confucian culture. (Cultures are complex and you can usually find in them what you want.) China began growing in the early 1980s not because of its culture, which has been relatively unchanging, but because of its policies, which went through a dramatic transformation.

When historians look back at the last decades of the 20th century, they might well point to 1979 as a watershed. That year the Soviet Union invaded Afghanistan, digging its grave as a superpower. It was also the year that China began its economic reforms. They were launched at a most unlikely gathering, the Third Plenum of the 11th Central Committee of the Communist Party of China, held in December 1978. Before the formal meetings, at a working-group session, the newly empowered party boss, Deng Xiaoping, gave a speech that turned out to be the most important one in modern Chinese history. He urged that the regime focus on development and modernization, and let facts—not ideology—guide its path. "It doesn't matter if it is a black cat or a white cat," Deng often said. "As long as it can catch mice, it's a good cat." Since then, China has done just that, pursued a modernization path that is ruthlessly pragmatic and nonideological.

The results have been astonishing. China has grown around 9 percent a year for more than 25 years, the fastest growth rate for a major economy in recorded history. In that same period it has moved 300 million people out of poverty and quadrupled the average Chinese person's income. And all this has happened, so far, without catastrophic social upheavals. The Chinese leadership has to be given credit for this historic achievement.

There are many who criticize China's economic path. They argue that the numbers are fudged, that corruption is rampant, that its banks are teetering on the edge, that regional tensions will explode, that inequality is rising dangerously and that things are coming to a head. For a decade now they have been predicting, "This cannot last, China will crash, it cannot keep this up." So far at least, none of these prognoses has come true. And while China has many problems, it also has something any Third World country would kill for—consistently high growth.

Central planning was not supposed to work. And in some sense it doesn't, even in China. The government is careful to give enormous power to the regions, to issue directives that are market-friendly, to open its economy to foreign investment and trade. It has used its membership in the World Trade Organization to force through large free-market reforms in its economy and society.

And yet, it's clear that the Chinese government deserves much credit for its ability to plan and manage the country's development. Consider the often-made comparison with India. At a microlevel, many Indian firms are far more impressive than their Chinese counterparts. They are genuine private-sector enterprises, use capital efficiently and can compete with the best in the world. Chinese companies by contrast are often partially state-owned, funded or favored. They get easy access to foreign capital and thus use it inefficiently. And many sell only in the domestic market and could not compete at the highest global level. But on the macro side, China's government pushes development far more consistently and effectively than India's.

Indian officials always point out that their Chinese counterparts don't have to worry about voters. "We have to do many things that are foolish in the long term," said a senior member of the Indian government. "But politicians need votes in the short term. China can take the long view." Of course there are many nondemocratic governments that have made catastrophic economic decisions; think of Marcos of the Philippines and Mobutu of Zaire. But that only makes the Chinese regime's performance more remarkable.

"I've dealt with governments all over the world," says a senior investment banker, "and the Chinese are probably the most impressive." Many of his colleagues in the American business community would agree with this characterization. But then what explains the recent actions of this brilliant government in the realm of politics and foreign policy?

In April, the Chinese government seemed to encourage anti-Japanese protests over history textbooks, only to find them mushroom into mob demonstrations, riots, stone-throwing at the Japanese Embassy and widespread calls to boycott Japanese goods. Last March it ushered through passage of an "anti-secession law" threatening Taiwan with military force if it dared to anger China in any way. The result, among others, was that the European Union postponed its plan to lift an arms embargo on China in June. Also in March, China warned Australia to rethink its alliance with the United States, which created a backlash among Australian officials. In July 2003, Beijing tried to effect passage of an "anti-subversion" law in Hong Kong, which produced the largest demonstrations in the city's history and created strong anti-Beijing political sentiment in a territory that was always apolitical. All these actions are making China's most powerful neighbors—Japan, Australia, India—pause. It is strengthening those in America who see China as a threat, not an opportunity. Is this so smart?

A New Kind Of Challenge

For the first decade of its development (the 1980s), China did not have a foreign policy. Or rather, its grand strategy was a growth strategy. China quietly supported (or did not oppose) U.S. policies, largely because it saw good relations with America as the cornerstone of its development push. And this nonconfrontational approach—"to hide its brightness"—still lingers. With the exception of anything related to Taiwan, even now its major foreign-policy moves are largely outgrowths of economic imperatives. These days that means a ceaseless search for continued supplies of oil and other commodities.

But things are changing. In a paper titled "The Beijing Consensus," drawing heavily on interviews with leading Chinese officials and academics, Joshua Cooper Ramo provides a fascinating picture of China's new foreign policy. "Rather than building a US-style power, bristling with arms and intolerant of others' world views," he writes, "China's emerging power is based on the example of their own model, the strength of their economic system, and their rigid defense of ... national sovereignty" (http://fpc.org. uk/publications/123).

China has followed a very different development strategy than Japan. Rather than focusing only on export-led growth to a few markets and keeping its internal market closed, China opened itself to foreign investment and trade. The result is that much of the world now relies on the China market. From the United States to Germany to Japan, exports to China are among the crucial factors propelling growth. For developing markets, China is the indispensable trading partner.

In November 2004, President George W. Bush and China's President Hu Jintao traveled through Asia. I was in the region a few weeks afterward and was struck by how almost everyone I spoke with rated Hu's visits as far more successful than Bush's. Karim Raslan, a Malaysian writer, explained: "Bush talked obsessively about terror. He sees all of us through that one prism. Yes, we worry about terror, but frankly that's not the sum of our lives. We have many other problems. We're retooling our economies, we're wondering how to deal with the rise of China, we're trying to address health, social and environmental problems. Hu talked about all this; he talked about our agenda, not just his agenda." From Indonesia to Brazil, China is winning new friends.

There are a group of Americans—chiefly neoconservatives and Pentagon officials—who have been sounding the alarms about the Chinese threat. And they speak of it largely in military terms, usually wildly exaggerating China's capabilities. But the facts simply do not support their case. China is certainly expanding its military, with a budget that rises 10 percent or more a year. But it is still spending a fraction of what America does, at most 10 percent of the Pentagon's annual bill.

The Chinese threat or challenge will not present itself in the familiar guise of another Soviet Union, straining to keep pace with America in military terms. It is more likely to be what Ramo describes as an "asymmetrical superpower." It will use its economic dominance and its political skills to achieve its objectives. China does not want to invade and occupy Taiwan; it is more likely to keep undermining the Taiwan independence movement, so that Beijing slowly accumulates advantage and wears out the opponent. "The goal for China is not conflict but the avoidance of conflict," Ramo writes. "True success in strategic issues involves manipulating a situation so effectively that the outcome is inevitably in favor of Chinese interests. This emerges from the oldest Chinese strategic thinker, Sun Zi, who argued that 'every battle is won or lost before it is ever fought'."

At least that's the plan. The trouble is that while maintaining this long-term strategy, China often lapses into short-term behavior that seems aggressive and hostile. Perhaps this is because the rational decision-making that guides its economic policy is not so easily applied in the realm of politics, where honor, history, pride and anger all play a large role. So with Taiwan, last week Beijing was playing out its long-term plan, "normalizing" relations with the island's main opposition party, and smothering it with conciliation. But last month it passed the anti-secession law, which angered most Taiwanese and alarmed Americans and Europeans.

Or take its relations with Japan. It makes little sense for Beijing to behave as aggressively as it does with Tokyo. It only ensures that China will have a hostile neighbor, one with an economy that is still four times its size. A wiser strategy might be to keep ensnaring Japan with economic ties and cooperation, achieving dominance over time.

There are grounds for reconciliation. Japanese have not behaved perfectly, but they have apologized several times for their wartime aggression. They have given China more than $34 billion in development aid (effectively reparations), something never mentioned by the Chinese. Even in this latest standoff, the Japanese moved first to break the impasse.

But for China, emotion seems to get in the way. Having abandoned communism, the Communist Party has been using nationalism as the glue that keeps China together. And modern Chinese nationalism is defined in large part by its hostility toward Japan. Mao is still a hero in China despite his many catastrophic policies because he unified the country and fought the Japanese. And as China advances economically, Chinese nationalism only gets more intense. Scratch a Shanghai Yuppie and you will find a virulent nationalist—on Taiwan, Japan and America.

Beijing assumes it can handle popular sentiments but it might well be wrong. After all, it does not have much experience in it, not being a democracy. It deals with public anger and emotions cagily, unsure whether to encourage them or clamp down for fear of where they might lead. So it does not know what to do with a group like the Patriots Alliance, an Internet-based hypernationalist group that has organized the biggest demonstrations in the country in six years.

Experts say that the Chinese Communist Party has been seriously discussing political reforms and studying dominant single parties from Sweden to Singapore, to understand how it might maintain its position in a more open political system. "The smartest people in the government are studying these issues," a well-placed Beijing resident told me. But politics is often about more than smarts. In any event, how Beijing's mandarins end up handling their own people might have much to do with how China ends up handling the world.

What America Needs to Do

How to handle China? The best guide is to listen to what French President Jacques Chirac says, and do the opposite. Chirac, the tired old dinosaur who seems increasingly uncomprehending of today's world, recently denounced China's "brutal and unacceptable invasion" of Europe. He was referring to the fact that China's textiles have swarmed into the European (and American) markets following the abolition of textile quotas. Unfortunately, Chirac's advice, to reimpose quotas in some way, may soon be taken by both Europeans and Americans. (The textile issue is putting a damper on what has been a growing love affair between Europe and China.)

It's an understandable impulse. Textile exports from China have soared since Jan. 1—a 534 percent increase in pullover-sweater sales in Europe for example—but this is largely the result of free trade, not unfair practices. More generally, tariffs and walls are not the way to prosper in the emerging global economy. It's not just China but India, Brazil, South Africa and Thailand, among others, that are all entering the global market with sophistication and skill. The answer for Western countries cannot be to shut themselves off from this new reality. After all, they benefit from the expansion of global commerce. The European Union's exports to China have risen 600 percent in the past 15 years. More broadly, countries that have tried to wall themselves off from the rest of the world in the past—to maintain their economy or culture—have stagnated. Those that have embraced change have flourished. China is simply the biggest part of a new world. You cannot switch it off.

What you can do is be better prepared. For Americans, this means a renewed focus on the core skills that have propelled the American economy so far: science and technology. The United States has been slipping badly in all global rankings of these fields. Its research facilities are dominated by foreign students and immigrants—but a growing number of them are staying home or going home. Without a massive new focus in these areas, America will find itself unable to produce the core of scientists, engineers and technicians who make up the base of an advanced industrial economy. China and India already produce many more engineers than does the United States. In five years, China will produce more Ph.D.s than the United States. They may not be as good as American Ph.D.s, but numbers do matter.

For the American government, the free ride may be coming to an end. It has run irresponsible fiscal policies, knowing that foreign governments and people would provide it with unlimited credit. But that credit comes at a price. When China holds huge reserves of dollars, it also holds the power to damage the American economy. To do so would certainly hurt China as much or more than it would America, but surely it would be better if U.S. policy were less vulnerable to such possibilities. Fiscal responsibility at home means greater freedom of action abroad.

In foreign policy, Washington will face two possibilities. The first is that China will push its weight around, anger its neighbors and frighten the world. In this case, there will be a natural balancing process by which Russia, Japan, India and the United States will come together to limit China's emerging power. But what if China is able to adhere to its asymmetrical strategy? What if it gradually expands its economic ties, acts calmly and moderately, and slowly enlarges its sphere of influence, hoping to wear out America's patience and endurance?

The United States will then have to respond in kind, also working quietly and carefully, also adopting a calibrated and nuanced policy for the long run. This is hardly beyond its capacity. America has been far more patient than most recognize. It pursued the containment of the Soviet Union for almost 50 years. American troops are still on the banks of the Rhine, along the DMZ in Korea and in Okinawa.

A world war is highly unlikely. Nuclear deterrence, economic interdependence, globalization all mitigate against it. But beneath this calm, there is probably going to be a soft war, a quiet competition for power and influence across the globe. America and China will be friends one day, rivals another, cooperate in one area, compete in another. Welcome to the 21st century.

With Melinda Liu in Beijing, Christian Caryl in Tokyo, Karen Lowry Miller in Brussels, Rukhmini Punoose in New York and John Barry in Washington, D.C.

© 2005 Newsweek, Inc.

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