http://www.wsj.com/articles/SB119255831046560796

Shoring Up The Wall
Communists Move to Adapt Their Rule to a Richer China
Ways to Air Complaints Ease Pressure on Rulers; Democracy: Not in Sight

By ANDREW BATSON and JASON DEAN
Updated Oct. 17, 2007 12:01 a.m. ET

BEIJING — China is the only one of the world’s 10 largest economies that isn’t a multiparty democracy. As the Chinese Communist Party gathers this week for a key meeting, the leadership is fine-tuning its rule to make sure things stay that way.

Over the past 30 years, the party’s historic wager — that delivering stability and economic growth would ensure acceptance of its authoritarian rule — has largely paid off. But China is now a more complex nation, of homeowners and entrepreneurs protective of their new prosperity and in closer touch with the rest of the world. And a widening wealth gap, crumbling social services and environmental degradation have fueled public frustration, especially among the rural majority.

The secretive group of about two dozen people that runs China, the Communist Party’s Politburo, is responding by taking steps to make its rule more accountable to the public. It has also adopted a more-populist approach to government policy, expanding education and health-care programs while still pushing for fast economic growth. At the same time, the Politburo is toughening controls on outright political dissent.
That strategy of gradual adaptation is on display this week at the party’s 17th National Congress, which began Monday. The congress will ratify a platform of policies for the coming five years that emphasizes more-balanced economic growth and cautious institutional reform.

The party will also endorse a reshuffling of the Politburo (short for “Political Bureau”) and of its smaller but supremely powerful Standing Committee, which currently has eight members. In 2012, one of the committee’s new members will probably succeed the current party chief, President Hu Jintao.

The changes in how the party governs aren’t meant to prepare the way for multiparty democracy. On the contrary, they are intended to secure the position of Mr. Hu and his successors as the unchallenged rulers of China. “All this will enable the party to remain a ruling, Marxist party,” Mr. Hu said in a speech this week as he outlined his policies.

If the Communists fail to adapt quickly enough, party officials say, their hold on power could weaken. That could mean more political freedom for China’s 1.3 billion people, or it could lead to greater instability in what will soon be the world’s third-biggest economy after the U.S. and Japan.

Reinforcing the Structure
“They are trying to reinforce the structure, to make the authorities at each level of government more responsive,” says Jing Huang, a scholar at the Brookings Institution. “But they are afraid of uncontrollable consequences if they start to change. So, their ideal is to change little by little.”

If the party succeeds in maintaining its power monopoly, it could defy the post-Cold War conventional wisdom in the West that modern economies need the flexibility of democratic decision-making to ensure long-term success. In Russia, President Vladimir Putin is already testing that view by rebuilding authoritarian rule.

One change afoot in China involves the way laws are made. Until a few years ago, almost every new law was adopted in secret and presented as a fait accompli. Now, many are published in draft form, and some are revised after input from people outside government. This year, a new law on employment was revised after public pressure to include tougher provisions against discrimination in hiring.

Victor Yuan has seen another facet of the party’s adjustments. A former Ministry of Justice official, he founded China’s best-known polling firm in 1992. Much of its initial business was market research for companies. In recent years, the firm, Horizon Group, has been hired by local governments in China to gauge public support for their policies.

“I see this administration as trying to work out some mechanisms for more openness,” the pollster says. “It’s a practical response. There is very real pressure from society.”

Even as its socialist ideology has collapsed, the Communist Party has found ways to stay relevant, such as by expanding membership to include businesspeople. Today the party has some 73 million members, roughly one in 18 Chinese. New party members have to be “introduced,” or nominated, by two existing members.

China has changed remarkably since 13 people, the Politburo’s predecessors, convened the Communist Party’s first National Congress in Shanghai in 1921. The collectivism and economic isolation that began when Mao Zedong led the party to power in 1949 was junked starting in 1978, two years after his death. The party’s secretive centralized rule has changed far less.

Behind Closed Doors
Regional officials have gained some autonomy, but the Politburo makes all big political and economic decisions, from appointing provincial officials to setting exchange-rate policy. Most decisions are made behind closed doors, often in the massive walled Zhongnanhai compound next to the Forbidden City in Beijing. Few outsiders get in.

Still, Politburo members have come to recognize that their power hinges on public support. “The party’s ruling position is not inherent, and is not permanent,” top officials wrote in a 2004 document outlining plans to improve the party’s “ability to govern.”
How best to do that is the subject of heated debate. Liberal Chinese scholars have urged substantive changes, such as expanded elections for local government posts.

Such ideas have gained little traction, reflecting the leadership’s deep-rooted fears of unleashing unrest. A push for political reform in the late 1980s, led by then-party chief Zhao Ziyang, ended after pro-democracy demonstrations in 1989 sparked the brutal Tiananmen Square crackdown. Leaders have consistently defended the killing of demonstrators.

At the same time, Mr. Hu’s administration has resisted turning the clock back to the deeply repressive methods of the Mao era. It has defended economic change from left-leaning scholars and retired officials who vocally complain that capitalism has gone too far. Mr. Hu has allowed some discussion of political change, too. The party “will continue to expand citizens’ orderly participation in politics,” he said in a speech in June.

Much remains off-limits. Pollsters aren’t allowed to gauge support for Mr. Hu. But the party is paying more attention to what the public thinks of other leaders. In 2003, it issued rules requiring that polls be used in evaluating officials for promotion, says Mr. Yuan of Horizon Group.

Often those poll results are kept confidential. But in 2005, the mayor of Zhengzhou, capital of the central province of Henan, told Horizon to publish the results of polls to pressure city government officials to perform better, Mr. Yuan says. One poll finding was widespread public frustration with bribe taking by city officials.

Mr. Yuan says his polls generally show that “people believe this government is good at doing business work, but not good at social services.”

The government has also begun inviting public suggestions and limited criticism of official policy, such as on Web sites set up for the annual session of the legislature that took place in March. “We must create the conditions for the people to supervise and criticize the government,” Premier Wen Jiabao, the party’s No. 3 official, said then.

Consider the way China makes laws. Since the first time it published draft legislation for public consideration, in 1998, growing numbers of new laws have been made with public input. The government controls the final outcome and sets limits on debate, but the input can make a difference. Laws that are particularly contentious are often held up and revised.

In the case of the Employment Promotion Law, authorities published a draft in March, just as local media attention was focusing on lawsuits filed by carriers of the hepatitis B virus saying they had been unfairly denied jobs. Around 120 million Chinese people, nearly 10% of the population, are believed to carry the virus, which can damage the liver and raise the risk of liver cancer. Though the virus can’t be spread through casual contact, it is poorly understood here and many Chinese say they are uncomfortable working with carriers.

Nonprofit organizations lobbying for hepatitis B carriers swung into action, publishing surveys and reports documenting widespread discrimination. In July, officials held an online discussion forum about the problem, and their Web site was flooded with complaints. One labor ministry official said she was “disturbed” by the accounts of discrimination and that the government would try to safeguard the rights of virus carriers.

In the end, a chapter aimed at preventing different kinds of job discrimination was added to the law. It said an employer “may not refuse to employ someone on the grounds that he or she is a carrier of an infectious disease.” The law was passed in August but has not yet taken effect.

The government, under legislation passed in 2000, allows challenges from citizens who believe a law or regulation violates China’s constitution. Such complaints are usually ignored. But the government has occasionally changed position after filings gathered media coverage. In one example, standards for compensating accident victims were adjusted recently.

“It’s a tightly controlled process, but it is a valve to release some pressure, and is also a way for officials to gather information about possible conflicts,” says Keith Hand, a Yale University legal scholar in Beijing who has studied the system.

Informal Rules
The Politburo has established informal rules, including term limits and retirement ages, that govern appointments to top jobs, helping restrain power struggles among senior leaders. Those norms have put pressure on Mr. Hu to prepare for an orderly succession.

China watchers seeking to spot the next supreme leader are focused on two men. One is Xi Jinping, now the top party official in Shanghai. The other is Li Keqiang, party chief of Liaoning province in China’s northeast, who is seen by many as President Hu’s protege.

Both men are younger than Mr. Hu by more than a decade and are seen as more international-minded than many of the current Standing Committee members. But as loyal party operators, they are likely to hew to the established line on political reform. The new roster of the Standing Committee likely won’t be announced until next week.

Official responses to public complaints of corruption remain very rare. The government operates a traditional system of xinfang, or “letters and visits,” which handles about 12 million petitions and complaints from citizens each year. Scholars estimate that only two of every thousand cases are resolved.

The opening to limited public discussion of policy has been accompanied by tighter restraints on those who try to push the boundaries. The party still ruthlessly suppresses dissent. Under President Hu, the government has arrested several lawyers who have attempted to use the legal system to challenge the government over alleged human-rights violations and other issues. In one of the most notorious examples, a Chinese court last year issued a prison sentence of more than four years to a blind rural activist who had used his self-taught knowledge of the law to help women who had been forced to have late-term abortions.

Since 1999, China has put more journalists in prison than any other country, according to the Committee to Protect Journalists, a nonprofit group based in New York. And the government has worked hard to curb free expression on the Internet and to block access to Web sites it finds politically objectionable. Such limits are regularly tightened further around the time of important political events such as the party congress.

Transforming the System
Some within the party want to open up more. Last month, Li Rui, a party elder and gadfly who once served as Mao’s secretary, published an open letter to Mr. Hu in a Beijing journal arguing for much greater change. “The autocratic system must be transformed so that constitutional democracy can be implemented,” he wrote.

Senior leaders repeatedly say they will not “copy” such Western political models. But senior leaders’ new willingness to talk openly about political reform could also strengthen popular expectations for change. In his speech to the party congress this week, Mr. Hu mentioned “democracy” more than 60 times, though mostly in reference to internal party procedures.

In other public remarks this year, Mr. Wen, the premier, said democratic political change is a necessary complement to the market-based economic overhaul China has already undertaken. “Without political reform, economic reform will not succeed,” the premier said in a speech to domestic and foreign businesspeople in August.

http://www.wsj.com/articles/SB118669865619393552

China Tightens Local Oversight
Crackdown Aims to Enforce Safety, Environmental, Labor Rules

By ANDREW BATSON
Updated Aug. 10, 2007 12:01 a.m. ET

BEIJING — President Hu Jintao’s administration, suffering from a string of embarrassing scandals, is moving to take authority away from China’s powerful local governments.

Provincial and city governments in China have for decades had broad freedom to run their own affairs, as long as they delivered economic expansion and kept social conflict in check. They have often proved entrepreneurial, business-friendly and flexible — and especially adept at drawing investment to create jobs and increase the nation’s more-than-10% annual-expansion rates.

Yet too often, critics say, that focus on growth has led local authorities to turn a blind eye to violations of safety, labor and environmental standards. Local governments are blamed for the downsides of China’s rapid economic expansion, such as rising inequality, a disintegrating social safety net and pollution.

Now, the pendulum is starting to swing the other way, as Mr. Hu and Premier Wen Jiabao try to enforce greater uniformity across their vast and often chaotic nation.

The drive to rein in local governments has been given extra impetus this year by scandals that have outraged the Chinese public. Local officials in Henan and Shanxi provinces were found to be in cahoots with the owners of brick kilns and coal mines who kidnapped hundreds of children and adults and forced them to work in harsh conditions.

Lax local enforcement of safety regulations has also been blamed for permitting numerous shoddy and unsafe products to reach Chinese and overseas consumers. Mr. Wen has called ensuring food safety and product quality a top priority of the government, and headed a State Council meeting last month that passed rules making local officials accountable for product-safety failures. Repeated problems will be grounds for demotion or dismissal, the rules say.

The central government is focusing its efforts on a number of areas, including land use, environmental controls, agriculture and social services. Having made sweeping public commitments to China’s 1.3 billion people to improve living standards and equality, the government needs to make sure it can keep its word.

“This is a major test of our strength and credibility,” said Xu Shaoshi, China’s minister of land and resources. “It is imperative that enforcement of land regulations be tougher and stricter.”

Mr. Xu also holds the new post of state land inspector general, in which he runs a network of regional agencies that oversee local governments’ land-use policies. His top priority: reducing seizures of agricultural land for commercial development that have led to a surge in protests by farmers and renewed concerns about food security.

Many cities have disregarded land regulations, and seized land for development of new industrial parks, housing projects and office towers. Such deals increased local government revenue and enriched many well-connected developers, but the sheer magnitude of land seizures has made them a focus of concerns about corruption and social unrest.

Some analysts credit the stronger backing for planning rules, including a requirement that sales be done through public auctions, with curbing the once-rapid pace of land sales.

The shift to stronger central authority is one that many inside and outside China endorse, seeing it as a way to bridge the enormous gap between the prosperous cities and often desperately poor rural areas. “On health, on education, on many other things, the central government has to play a larger role,” Khalid Malik, head of the United Nations Development Program in China, said in a recent speech.

Support for the changes also comes from the widespread public perception that the top leadership is basically honest and well-meaning. Local officials, by contrast, are regularly blamed for forced relocations, deaths in illegal coal mines and other abuses.

The new approach comes as Messrs. Hu and Wen prepare to start their second and likely final five-year terms next year, following a major Communist Party conclave this autumn. In preparation for that gathering, hundreds of provincial and local government officials have been reassigned, promoted or fired — a reshuffling intended in part, analysts say, to ensure the new local leaders will be more attentive to orders from Beijing.

But the central government is also reworking the power structure to ensure its edicts have more force, as it has with the new system for supervising land use. Local authorities have long been lax in enforcing environmental rules because they frequently have close ties to polluting enterprises. So the central government has created new agencies to monitor enforcement. There are now six regional “inspection centers” scattered across the country, and crucially, they answer to the central government rather than to local authorities.

“Enforcement is the chief issue in solving China’s environmental problems, and the local level is the most important,” says Zhang Shaomin, a deputy director general at the State Environmental Protection Administration who helped organize the new system. “There are some local governments who, because of their one-sided pursuit of GDP [gross domestic product], use their administrative power to block strict environmental enforcement.” GDP is the total value of goods and services produced in a nation.

Though most of the centers have been up and running for a year or less, Mr. Zhang credits the inspectors with ferreting out factories that had dumped their waste with impunity, and with speeding up local responses to environmental disasters.

The accumulation of such rules, requirements and supervising agencies leaves local governments less room to maneuver. China’s local authorities have generally had the freedom to do what they see fit to develop their economies, but most of that power is theirs by default, not by right. China isn’t a federal country like the U.S. or Australia, so localities have only as much power as the central government allows them.

“Where there is no legal framework to govern them, local governments have lots of power. In the gray areas they can be the main player. But as things become more formalized, local government authority is reduced,” says Wang Yongjun, a professor at the Central University of Finance and Economics in Beijing.

That is especially true as the central government also starts to take a bigger role in what has been the main job of local governments: running basic social services such as schools and hospitals. The central government is now using its control of tax revenue, which has been increasing rapidly, to create and fund popular new initiatives directly — without relying on local governments as intermediaries.

The central government also abolished an ancient agricultural tax, saving farmers 125 billion yuan, or about $16.50 billion, in 2006 tax payments. That both pleased farmers and yanked away a source of local-government revenue — one that regional officials often abused. And when public-health authorities in Beijing decided they needed to beef up inoculation against infectious diseases, they bypassed the locals and paid for a new system of clinics themselves.

Not everyone thinks greater centralization is the answer to China’s problems. Many scholars argue that local governments need more responsibility and power, not less, if they are to deal with the demands and conflicts of China’s complex and wealthy society. By taking on more responsibility, the central government also has left itself open to more public criticism if it fails to deliver on its promises.

“Right now you have this sense that the central government is good, and it is the local government hooligans who mess things up. Whenever there is a problem, Beijing tries to shift the blame to local leaders,” says Jing Huang, a political scientist at the Brookings Institution. “People will eventually ask the real question, which is ‘Why do we have this kind of system?’ Eventually the blame will go upwards, to the central government.”

http://www.wsj.com/articles/SB117018697369892678

China Reconsiders Fairness Of ‘Transplant Tourism’
Foreigners Pay More For Scarce Organs; Israelis Debate Reform

By ANDREW BATSON and SHAI OSTER
Updated April 6, 2007 12:01 a.m. ET

A year ago, Avraham Abelson was No. 127 on Israel’s waiting list for a heart transplant. Doctors told the 65-year-old retired diamond dealer he’d probably die years before his number came up.

So Mr. Abelson, whose heart was damaged by a major heart attack, went to China. Today, inside his chest beats the heart of a 21-year-old Chinese man.

Mr. Abelson’s trip probably saved his life. It also thrust him into the middle of an international debate over “transplant tourism” — the lucrative business in China and elsewhere of providing organ transplants to wealthy foreigners. A Shanghai hospital charged Mr. Abelson about $150,000 to implant his new heart, and his insurance company paid up.

Rising demand for organ transplants in developed countries, coupled with the spread of transplant technology to the developing world, is fueling a global commerce in body parts between the rich and the poor. Israel is one of the only nations where insurance companies cover the cost of foreign transplants, and several companies there have built businesses around helping people like Mr. Abelson to arrange organ transplants in China. Plenty of people are willing to pay out of their own pockets, and transplant patients have also been streaming into China from the U.S., Germany, the Middle East, Japan, South Korea and Singapore. (In the U.S., insurance companies generally won’t pay for such procedures.)

In recent months, however, controversy over the ethical issues surrounding the practice has come to a head in China, Israel and elsewhere in the global medical community. China’s Ministry of Health recently instructed hospitals to stop performing transplants for foreigners, arguing that patients from wealthy foreign countries shouldn’t be getting organs when not enough are available for Chinese citizens who need them. But it’s not yet clear how rigorously the new rule will be enforced.

Doctors and human-rights groups around the world have decried China’s practice of harvesting organs from prisoners condemned to death. Concerned that lucrative foreign transplants create an incentive for China to execute more prisoners, critics in Israel are pushing for legislative restrictions. Last week, in part due to what it called the growing problem of transplant tourism, the World Health Organization proposed that countries around the world establish common practices on organ transplants.

Foreign transplant patients have become a cash cow for China’s hospitals, which are desperate for funds after a collapse of state funding for medical care. China’s medical sector is chaotic and loosely regulated, and many foreigners can pay far more than Chinese citizens can for organ transplants. The money at stake is so great that doctors and others involved in the transplant industry say transplant tourism will be hard to stamp out.

Israel has long struggled with an organ shortage because of religious objections to donations. Some rabbis oppose all organ harvesting; others want rabbis to be involved in decision-making. Israelis used to be able to get transplants in Europe. But over the past decade, one European country after another has either stopped performing transplants on foreign patients or sharply reduced the practice.

Dr. Jacob Lavee, who heads a heart-transplant unit at Sheba Medical Center near Tel Aviv, estimates that 10 of the 30 or so heart transplants performed on Israelis each year are done in China, and that 200 Israelis have received kidney transplants in China during the past five years. Dr. Lavee, who questions the ethics of harvesting organs from executed prisoners, advocates a ban in Israel on health insurers paying for transplants in China, and has debated the issue with Mr. Abelson on Israeli television.

Such ethical concerns are secondary to many patients. “If someone in your family was sick, would you ask where the organ came from?” asks Itzhak Yaron, director general of Medikt, the Tel Aviv company that helped arrange for Mr. Abelson’s heart transplant. “In life, you don’t get a second chance.”

Medikt is one of several Israeli companies that help patients locate and navigate foreign transplant hospitals. Mr. Abelson found out about Medikt, a private company, on the Internet.

China isn’t the only option for transplant patients, who also arrange for operations in Brazil, South Africa and India. When Mr. Yaron joined Medikt two years ago, the company was sending Israeli patients to Colombia and South Africa. But the longer waiting periods for organs there was discouraging. In China, the wait was a month or less, Mr. Yaron says. China does more transplants each year than any country except the U.S., in part because of the sheer size of its population.

Over the past year and a half, Medikt has sent some 150 patients to China for heart, liver and kidney transplants. Mr. Yaron, a former salesman, says Medikt accepts only transplant candidates referred by Israeli doctors. “I’m not a medical doctor,” he notes. “I’m only contacting between patients, the health insurance and the hospitals.”

Mr. Yaron says he hired someone in China to help him line up transplant hospitals to take Israelis. He vetted the hospitals, he says, to make sure they met the standards of Israeli insurers. Medikt arranges for translators to accompany patients to China, where a local Medikt representative guides them through the transplant process.

Under Israel’s medical system, health insurers must pay for operations overseas if they aren’t available domestically, although insurers have a say on the location. At first, Mr. Abelson’s insurer resisted paying for a Chinese transplant. Mr. Abelson successfully sued to force payment.

Last spring, he flew to Shanghai. An Israeli doctor who accompanied him inspected the facilities at the Zhongshan Hospital before his operation. Mr. Abelson asked his transplant doctor where his new heart had come from. The doctor responded that all he could say was that it had come from a 21-year-old man.

“The truth is, I don’t care where the heart comes from,” says Mr. Abelson. “The treatment, without exaggeration, was great.”

Officials at Zhongshan Hospital declined to comment on Mr. Abelson’s treatment. One official said that because of limited organ supplies, the hospital has stopped accepting foreign patients for now.

Organ transplants are high-risk procedures, and ordinarily hospitals are highly selective when deciding which patients are suitable candidates. Patients given the highest chances of survival usually get priority. Some doctors, both inside and outside of China, say these criteria are often bent in China for rich patients, which leads in turn to high failure rates for the operations.

Israeli embassy officials in Beijing say they’ve had to send back the bodies of dozens of citizens who died after transplants. Dr. Lavee says that, in late January, one of his patients ignored his medical advice, went to China for a heart transplant, and died a few days later.

In China, only a few doctors have publicly criticized the practice of choosing organ recipients based on their ability to pay. That practice, they say, favors foreigners and reduces the organs available for Chinese patients.

Chen Zhonghua, a Cambridge-educated transplant surgeon who works in Wuhan in central China, has pushed for reform. “Foreigners shouldn’t be coming to China to do this,” he says. “They should do this in their home countries.” The money foreign patients are bringing into China is further complicating an already corrupt system, he says.

Even prior to the recent ban, Dr. Chen insisted that the transplant clinic where he works accept foreigners only in exceptional cases. He has tried to reduce the commercialization of organ transplants by urging patients to use living relatives as donors for organs such as kidneys.

In a recent article in an international journal, Liver Transplantation, Huang Jiefu, a vice minister of health, wrote that China does about 10,000 organ transplants a year, and that most of the organs are donated by prisoners condemned to death. Yet even with that ready supply, there is a shortage. As many as 1.5 million Chinese patients are in need of transplants, Dr. Huang wrote.

Many Chinese are uncomfortable with the notion of donating the organs of deceased family members, in part because of traditional taboos against disturbing their bodies. The government has yet to set up a national organ-donation system: There are no donor cards, registries or waiting lists. Official efforts to encourage donation have been scattershot. Critics say reliance on the prison system has stunted progress.

International medical groups have assailed the prison collection practices, arguing that because condemned prisoners are not free, they cannot make truly voluntary donations. Chinese officials have said such donations are both legal and ethical. “If some criminals become aware that they have done a disservice to society and want to atone by donating their organs after death, this is something that should be encouraged, not opposed,” Dr. Huang, the Chinese vice minister, said in November.

In Israel, press coverage of the overseas transplant business and China’s harvesting of organs from executed prisoners has stirred controversy. In November, a subcommittee of the Israeli legislature opened hearings on a proposed new transplant law. Among other things, it would forbid health insurers to fund transplants in nations where there is reason to believe that organs are collected in an unethical way.

In China, amid broad debate about the failures of the health-care system, momentum has been building to reform transplant practices. In March 2006, China’s Ministry of Health published temporary rules for organ transplants. The rules, intended to apply until China’s State Council, or cabinet, weighs in, require hospitals to set up medical and ethics committees to review each transplant candidate and each operation. The rules also create a new licensing system. The ministry has been sending inspection teams around the country to review the qualifications of the 600 or so hospitals that had been performing transplants. It intends to limit organ transplants to a smaller number of reputable hospitals that can be more easily monitored.

The health ministry convened a national conference of organ-transplant practitioners in November and set out a new code of conduct for them. The code stipulates that Chinese citizens be given priority for all organ transplants. It bans transplant tourism outright, but allows for “special circumstances,” which officials said meant that foreigners who live and work in China can apply to receive transplants.

Shortly thereafter, Mr. Yaron got word in Israel that China was changing its policy on transplants for foreigners. Nothing happened for awhile, he says. A few weeks ago, he says, he was told that the operations would have to stop. He says he hopes to find a way to resume his China business soon.

China’s health ministry is now working to line up support from other agencies for permanent rules governing organ transplants that would have the backing of the full government. On March 21, the State Council approved a draft of the proposed new rules, a signal that final regulations are on the way soon.

Deng Haihua, a spokesman for the Ministry of Health, says the rules will aim to create a “fair, open, and just” system. “It can’t just be that because I have money, I get to have an organ transplant,” he says. There are no indications that China intends to reduce its reliance on organs from executed prisoners.

China’s move to limit the number of facilities performing transplants could have the unintended effect of making it even more difficult for some Chinese citizens to get transplants. Dr. Maurice Slapak, who founded the World Transplant Games Federation to publicize the benefits of organ donation, has been lobbying China to reform. He says Chinese doctors estimate that because of the temporary rules passed last year, about 2,000 fewer transplants were performed in 2006. The Ministry of Health says it doesn’t keep statistics on transplants.

The government’s regulatory push is facing resistance from hospitals and doctors who profit from transplants. It’s not yet clear whether the changes will permanently shift China’s transplant system closer to international norms.

“The Chinese have enough regulatory power to do so,” Dr. Slapak says. “The question is: What are the next steps that they’re going to take?”

Dr. Chen, the Chinese transplant surgeon, has long pushed to gain legal and medical recognition in China for the concept of brain death. Chinese hospitals declare death only when the heart stops beating — a point at which organs quickly become useless. That’s been a barrier to getting more donations. But proposed brain-death legislation is controversial, and there has been little momentum on it in recent years.

Mr. Yaron, the Israeli middleman, says he’s not concerned by the increased scrutiny of transplant tourism or by the ethical questions about China’s harvesting practices.

“The government doesn’t take people to kill just for their organs,” he says. “They’re taken from people who were punished for a crime. If that person has agreed, why not take it?”

—Nancy Shekter-Porat contributed to this article.

http://www.wsj.com/articles/SB117018697369892678

As China’s Bishops Die Off, Clash Looms With Vatican
Pope and Communists Vie to Name Successors; Liu Jingshan’s Trials

By ANDREW BATSON in Yinchuan, China, and STACY MEICHTRY in Vatican City
Updated Jan. 31, 2007 12:01 a.m. ET

As Beijing and the Vatican escalate their battle for control of the Roman Catholic Church in China, people like Bishop Liu Jingshan are caught painfully in the middle.

The head of a diocese in the dusty plains of western China, the 93-year-old bishop is one of the church’s last living links with a pre-Communist China, when Catholics could freely profess their allegiance to the pope. Bishop Liu also serves in the compromised present-day world of Catholicism in this country, in a government-approved church which the Vatican and many Catholics view as illegitimate.

For more than two decades, Bishop Liu and many other Chinese Catholics have discreetly divided their loyalties between two masters, gently nudging both toward a hoped-for rapprochement. But as Bishop Liu’s generation ages, the bridge between Beijing and Rome is wearing thin, worsening tensions on both sides.

Each seat of authority claims the right to appoint Catholic bishops, and neither will talk to the other. So every time a Chinese bishop dies or retires, there is the potential for a conflict to erupt over his successor. The average age of a bishop in China is now 74, and at least 18 bishops are known to have died in the past two years.

More than two dozen of the 138 dioceses in China are now without their own bishops. Bishop Liu, already 18 years past the normal retirement age for a bishop, knows only too well his time to step down is coming.

“I know I am old. The priests who were my classmates are all gone,” he says.

Last year, the Chinese Catholic Patriotic Association, the official body which oversees local Catholics, appointed three bishops who had not been approved by the pope. That reversed years of quiet progress toward accommodation, which had included signals that the Vatican was willing to switch diplomatic recognition to China from rival Taiwan.

Anger over the consecrations has prompted the Vatican to re-evaluate its effort to restore ties with Beijing. Pope Benedict XVI earlier this month summoned religious leaders from Hong Kong, Macau and Taiwan — where the church is free of Chinese government influence — for a two-day meeting with his top foreign policy advisers. Pope Benedict now plans to issue a letter addressed to the estimated 12 million Catholics living in China, according to a Vatican statement. In two statements last year, the Vatican warned that any bishops appointed without papal approval could be excommunicated.

The struggle over who will lead Chinese Catholics is frequently opaque, revealed only in the nuanced signals that are a hallmark of both the Vatican and the Chinese Communist party. Still, the stakes for the church are enormous. China represents an unparalleled opportunity to increase the Catholic faith at a moment when its traditional stronghold of Europe is weakening. The conflicts within the Chinese church have left it lagging behind energetic Protestant sects in preaching to the Chinese.

“It would be a great sorrow to me if, as China develops more and more into one of the most important forces in the world, it does not know the grace and wonder of Christ and his church,” says Cardinal Theodore E. McCarrick, the former Archbishop of Washington, D.C., who has frequently traveled to China as an unofficial envoy for Rome.

A Test
The tensions over the Catholic Church are also turning into a test of just how much freedom China’s government is willing to allow religious organizations in a materialist society whose people are increasingly hungry for spirituality. The difficulty is made more acute for Catholics by the central role of the pope and the religious bureaucracy he heads, which the Communist Party sees as a rival for political authority.

In the years following the 1949 revolution, Catholics were denounced as agents of an imperialist power. Foreign priests and missionaries were expelled, and many Chinese priests, including Bishop Liu, were imprisoned. Later, during the chaos of the Cultural Revolution, the church essentially vanished from public life, as mobs hounded believers and tore down many cathedrals.

Today’s China is somewhat more welcoming. The country officially recognizes five religions, including Catholicism, but still keeps tabs on their leaders through a government bureaucracy and a collection of five “patriotic” organizations. Catholics, in particular, have long been viewed with suspicion as possible political activists with loyalties to a foreign power in Rome.

“The Chinese government and the Chinese people are afraid of the church turning and playing the role that it did in Poland,” says Liu Bainian, vice chairman of the official Chinese Catholic Patriotic Association, referring to the church’s influence in the uprising against Poland’s Communist rulers in the late 1980s that paved the way for free elections.

On the other side, many Catholics feel the Patriotic Association has traded the true faith for allegiance to the Communist Party.

“The official church in China is not obedient to the pope. They are obedient to the Chinese government. By definition they are not Roman Catholic,” says Joseph Kung, who runs the U.S.-based Cardinal Kung Foundation and is an advocate for China’s “underground” church — the semi-secret group of priests and bishops who don’t register with the patriotic association and are often harassed and imprisoned. In recent years, at least 17 underground bishops and numerous priests have disappeared, been arrested or detained in isolation, according to Asia News, a Vatican-affiliated news agency that monitors Church affairs in China. Some have died in prison.

Building Up Ties
Even so, traditionalists within the open church have spent decades quietly building up ties with the Vatican. While participating in an organization that has openly called for the Chinese church’s “independence” from the pope, they have privately sought his blessing and tried to increase exchanges between Chinese Catholics and those abroad.

“Even though I spent 19 years in prison, I do love my country. But do you think I only love my country? I also love my church,” says Bishop Liu.

Born in 1913 to a Catholic family in Inner Mongolia, he studied at a seminary there run by Belgian and Dutch missionaries. After being made a priest, he served as a local pastor and, later, the head of his old seminary.

Bishop Liu was just 38 years old when he was first imprisoned, in the chaos and antiforeign frenzy that followed the Communist revolution. Even after his sentence ended, in 1970, he was a suspect individual. He supported himself by laboring in the fields while the Cultural Revolution engulfed society. It was only after Mao Zedong’s death in 1976 that religion was slowly allowed back into the open.

In the late 1970s, as China’s new leaders began easing government controls “the churches all opened. We could practice our religion,” recalls Bishop Liu. “We didn’t have any books or vestments, but we started to preach again.”

But the Communist Party’s opening to religion came with a stark choice: cooperate with the government, and be allowed to preach openly, or continue in hiding. Bishop Liu wanted to work in the open.

The government in Inner Mongolia, where Bishop Liu had served much of his sentence, still saw him as a political criminal. So, in 1983 he left and went to Yinchuan, capital of the western province of Ningxia. It was there that, at the age of 70, he truly began his life’s work.

“I still had something to do for the Lord: find a way to build up the church,” Bishop Liu says, holding forth in his room, next to Yinchuan’s church, which holds a desk, some chairs for visitors, a spartan cot and a toilet.

Yinchuan has a harsh, dry climate and a heavily Muslim population. Yet it proved fertile ground for the Catholic missionaries who first arrived in 1879. By 1950, Catholic records showed about 35,000 believers in Ningxia.

But when Bishop Liu — then just an ordinary priest — arrived in 1983, Catholicism had been driven almost completely from public life. His first task was to make contact with those believers who were left. He traveled around its many isolated mountain villages, reconnecting with Catholics who had gone into hiding. He also scrounged together land, money and material to rebuild Yinchuan’s crumbling cathedral.

The government was prepared to give the church and the land back to local Catholics. Bishop Liu still had to find the resources to rebuild the church and keep it running. In 1984, he cut a deal, giving up part of the church’s land to a government real-estate company in exchange for money to build a new church. The building, finished in 1987, still stands.

Building up the human base of the diocese proved just as challenging. A half-dozen nuns had survived, but they were even older than Bishop Liu. So he roamed around northwest China to recruit. Today, Bishop Liu has 11 priests by his side and 20 or so nuns and has also set up 14 churches outside Yinchuan.

His church is still struggling. “Our biggest difficulty here is that the congregation isn’t big enough,” says Bishop Liu. He estimates he looks after seven or eight thousand Catholics — many more than in 1983, but just a tiny fraction of the province’s roughly six million people.

In 1993, he was named bishop of Ningxia by the Patriotic Association. He squared that with his faith by seeking, and receiving, a blessing from Pope John Paul II. Having a recognized official status has been a help: Bishop Liu has used his government contacts to get some money sent from a seminary in wealthy Shanghai.

Jeroom Heyndrickx, a Belgian priest who has known the bishop for more than 20 years, says Catholics critical of the official church should still respect his accomplishments. “He is in my view a great man, a courageous man,” says Father Heyndrickx. “These old priests and bishops have done a tremendous job to rebuild the church, and have been misunderstood for it.”

Search for a Successor
While Bishop Liu has found a way to practice in the open church without breaking ties with Rome, he must now find a successor who can do the same. Three years ago, a bishop in a neighboring province recommended a priest who has become his preferred candidate: Li Jing, a German-trained theologian who is now vice-rector at the government-supported National Seminary in Beijing. Father Li, 38, says he feels too young and inexperienced to take up the post, but will not contest the judgment of his elders in the church.

Father Li hasn’t been formally appointed yet. To become a bishop in China’s open church he must be elected by the diocese, in a meeting that usually includes the local priests and some nuns and prominent laypeople. They will then seek approval for the choice from the patriotic association.

In recent years, the process has often included some kind of informal approach to the pope, where the candidate will write to ask for his blessing, as Bishop Liu did. (Though direct communication is technically not permitted, word can be passed through Catholics in Hong Kong and Taiwan.) The Vatican has tried to bring the open church into the fold, noting in its recent statement that “almost all of the bishops and priests are in communion with the Supreme Pontiff.”

The Vatican has maintained hopes that such informal coordination could eventually serve as the basis of a more formal agreement that would end the conflict over the church’s status in China, of the sort it has reached with other Communist nations like Vietnam. Just last week, Vietnam’s prime minister met with Pope Benedict in the Vatican — a historic first that Vatican officials believe could eventually lead to a restoration of diplomatic ties.

Mixed Signals
In China, though, the Patriotic Association has been sending mixed signals. Of the five new Chinese bishops consecrated in the official church in 2006, two of them were consensus appointments, with both papal and government approval. However, the other three, who now head the dioceses of Kunming in the southwest and Anhui and Xuzhou in the east, did not receive papal approval.

The Vatican doesn’t publicly discuss the selection process, but church observers say the priests who didn’t receive the pope’s blessing were seen by some as too close to the government and unlikely to stand up for church interests.

One of the priests, Liu Xinhong, the new bishop of Anhui, had asked for the pope’s approval. Although he didn’t receive it, he took the post anyway. He acknowledged in an interview with state-run media that his decision caused the priests and nuns in his diocese much “internal turmoil.”

The Vatican called his appointment and others “a grave wound to the unity of the church.” A senior church official who has advised the pope on the issue said the consecrations have revived fears that China’s leadership will reverse some of the accommodation of recent years and try to consolidate the open church’s independence from Rome. That could mean a schism in the church, creating a rival version of the Catholic faith in the world’s most populous country.

Bishop Liu, whose few remaining wisps of hair float out from his skullcap, knows he may not have enough time to see his ultimate hope realized.

“We are with the pope,” he says. “We want to bring the churches together.”

http://www.wsj.com/articles/SB11605879510428956

For Chinese Tycoon, Solar Power Fuels Overnight Wealth
Shi Zhengrong Studied Abroad, Then Founded Suntech In Partnership With State

By ANDREW BATSON
Updated Oct. 12, 2006 12:01 a.m. ET

WUXI, China — When he arrived in Australia 18 years ago as a physics student, Shi Zhengrong scraped by on a meager stipend from the Chinese government that he supplemented by working at a restaurant.

A doctorate, several patents, two solar-power companies and a $455 million initial public offering later, Dr. Shi is now one of the richest people in China.

Suntech Power Holdings Co., the company he founded in 2001 in the flat, green lands of the Yangtze River Delta, has quickly become one of the world’s largest producers of photovoltaic equipment, which converts sunlight into electricity. The company’s combination of first-world technology and developing-world prices has helped it gain market share from more-established, and expensive, producers.

Dr. Shi’s wealth, made up almost entirely of his holdings of Suntech stock, has fluctuated in value along with company’s volatile share price, from a low of about $1.3 billion to a peak of just over $3 billion; his stake currently is valued at around $1.7 billion. It is, by some estimates, the largest private fortune of anyone living in mainland China.

The story of his journey from China to Australia and back shows how important China’s growing openness has become to its people. Nearly three decades after market reforms began, the network of personal, educational and financial ties between China and the rest of the world is reaching a new level. And the Chinese government’s willingness to underwrite both advanced education abroad and technology startups at home is starting to pay dividends.

Close to 800,000 Chinese students have gone abroad since the government first started sponsoring them for overseas study in 1978. Drawn by job opportunities overseas, less than a third have come back so far, but the rate at which they are arriving is accelerating. Last year, about 35,000 students returned, three times the amount in 2000, according to official statistics that almost surely underestimate the real number.

Many of those returnees, armed with cutting-edge technical and managerial skills, have helped kick-start new technology businesses. At the same time, foreign venture capitalists are flooding the country with unprecedented amounts of money, and Chinese companies are finding they can raise money from stock offerings abroad. Combined with the heady opportunities from an economy expanding at 10% annually, the result has been the creation of private wealth on an unprecedented scale.

There are now probably 320,000 U.S.-dollar millionaires in China, according to estimates by Merrill Lynch and CapGemini, and many of them are newly minted. On a list of the 500 richest people in China, compiled by the Chinese-language New Fortune magazine, nearly one-quarter appeared on the list for first time this year — including Dr. Shi. He debuted this year at No. 1.

Good Timing
A small, intense man with a round face, Dr. Shi admits to having no real hobbies and speaks often of the importance of focus and hard work. Yet he credits good timing for many of the changes that have brought him so far from his childhood on a Chinese farm.

“I got into the solar industry, in the beginning, by accident,” says Dr. Shi. The 43-year-old came of age in China at a time when the government controlled where people worked and lived. “In our generation we didn’t have the freedom to choose. We just accept whatever we are given. So it’s hard to plan,” he says.

Yet Dr. Shi has also shown a knack for challenging the status quo. His plan to start a solar-power company in China drew skepticism from colleagues, but he managed to obtain government funding. Though trained as a scientist, he put aside technical perfection to find cheaper manufacturing techniques. Despite many years of absence from China, he has shown surprising savvy in local politics, convincing his original government backers to sell out before the IPO that made him a rich man.

Suntech’s success has come from its ability to tap into the global boom in solar power, not from the Chinese market, which remains small. Industry executives estimate that about 90% of the solar equipment produced in China is sold elsewhere, usually to countries such as Germany and Japan that offer generous incentives for solar use.

Suntech faces competition from deep-pocketed large firms such as Japan’s Sharp Corp. and Kyocera Corp., and the solar division of oil-and-gas giant BP PLC. Suntech is bulking up quickly to try to ride out any industry consolidation, and building global connections.

Dr. Shi, who switches easily between Chinese and English, keeps close ties to Australia. He sits on the international advisory board of the New York Stock Exchange, where Suntech’s stock trades.

He is living once again in his birth province of Jiangsu, on China’s prosperous eastern seaboard. His home, and Suntech’s base, is not far from his birthplace on an island in the Yangtze River called Yangzhong. As the oldest of four children, Dr. Shi was the focus of his parents’ hopes for a better life through education. Though mainly agricultural, Yangzhong was blessed with a good school system.

He headed to college in 1979, shortly after the universities had reopened after the chaos of the Cultural Revolution, and as a new leader named Deng Xiaoping had begun to break down China’s isolation. His high scores in math and physics got him slotted into the optical-science department at Jilin University, in China’s chilly northeast.

He found working in a lab preferable to working in the fields. He focused on improving his English so he could read scientific materials. He would study while standing in line at the school cafeteria, memorizing vocabulary scribbled in a notebook.

After graduating in 1983, he entered a master’s program at the Shanghai Institute of Optics and Fine Mechanics. The institute had access to a small quota of coveted government-sponsored spots for overseas study. Although he was told he could go to the U.S., that turned out to be a bureaucratic mix-up. He wound up in Australia instead. In 1988 he enrolled in the physics department of the University of New South Wales, in Sydney.

At the end of his one-year program, Dr. Shi realized he didn’t want to return to China. The year 1989 was a dark time, as the Chinese government brutally put down the demonstrations in Beijing’s Tiananmen Square. A classmate suggested he head to the engineering department, where Martin Green, a prize-winning specialist in solar power, was looking for students with a background in optics.

Though he had no experience in solar-cell research, Dr. Shi talked his way into getting funding to do a doctorate under Dr. Green. And in his first six months, Dr. Shi made some breakthroughs, often working alone well into the night. Finishing his Ph.D. in 1992, he ultimately became research director in a company founded to market some of the lab’s technologies. He gained citizenship and bought three houses with savings from a generous salary. Mr. Shi, his Chinese wife and his two Australia-born sons settled into a comfortable life — but he felt he could do more.

Then, over dim sum one day at a restaurant in a Sydney suburb, he heard of opportunity from an unexpected quarter. Samuel Yang, a businessman from his hometown of Yangzhong who regularly traveled to Australia, told Dr. Shi that the gray, regimented China he remembered had changed. It was booming, attracting billions of dollars of foreign investment, and recruiting overseas Chinese with technical skills to come back home.

In April 2000, Dr. Shi went to China to see for himself. He came back to Australia afire with ideas for a China-based solar-power company, and sat down and put together a 200-page business plan. It was the first thing he had written in Chinese for years. “That conversation was at the right time,” Dr. Shi says. “If that conversation had occurred two years or three years earlier, I don’t think it would have happened.”

Dr. Shi shopped his proposal to several Chinese cities with ambitions to attract high-tech businesses. Wuxi, a fast-growing city near Shanghai, offered $6 million as a start-up investment. Government funds and state companies would own 75% of the company, and a local official would serve as chairman. Dr. Shi would put in the technology he owned and $400,000 of his own money for a 25% stake, and get a free hand to run the company. He agreed, and Wuxi Suntech Power Co., as it was then called, was registered on Jan. 21, 2001. The company’s Chinese name, “shang de,” is a reference to a traditional saying meaning “upholding virtue.”

Tackling New Problems
Dr. Shi now found himself tackling problems outside of science: making payroll and occasionally browbeating suppliers into accepting late payments. His biggest puzzle was finding ways to grow on a shoestring budget. The company started producing in September 2002, but by April 2003, it had sold its entire inventory and needed to expand further.

It was under these pressures that Dr. Shi came up with his signature innovation, which he likes to call simply “low-cost expansion.” After having used mainly expensive imported parts to build Suntech’s first production line, he couldn’t afford to buy another one off the shelf. The only way out was to come up with a cheaper design.

“Coming from a scientist background, I always pursued high efficiency, as high as possible,” he says. Instead, Dr. Shi reorganized the manufacturing process to reduce automation, taking some processes from machines and putting them into the hands of workers, who in China were cheaper. He cobbled together parts from different suppliers, including little-known Chinese companies. He bought used gear from an Italian laboratory and new equipment from a Japanese startup.

The new line was ready in December 2003, just in time to catch a boom in the global solar-power market. Suntech’s revenue zoomed to $226 million last year, from just $14 million in 2003. First-half revenue this year was $218 million. Suntech’s cost advantages have endured: It is now selling its solar modules for $3.78 per watt, well below the average global market price of $4.30 estimated by Photon Consulting.

“His timing has worked out perfectly,” says Dr. Green, Dr. Shi’s former academic adviser.

By 2004, Suntech’s government owners had also taken note of Suntech’s improving fortunes, and wanted a more active role in the company. That put chairman Li Yanren, the government’s representative, into conflict with Dr. Shi. The internal strife consumed several months, but eventually the board threw its backing to Dr. Shi, making him chairman as well as chief executive. Mr. Li, who received a compensation package upon leaving, declined to comment.

That was a turning point. It had become clear that Suntech’s combination of government capital and private management was no longer ideal. “The Chinese shareholders couldn’t provide a lot of support. They were just having meetings,” says Zhang Weiguo, a Suntech director who previously ran a Wuxi government venture-capital fund.

Dr. Shi wanted new backers from overseas who could put Suntech on the road to becoming a public company, but it wasn’t easy to explain this to the founding shareholders. Mr. Zhang says it’s not hard to see why: “I have helped you through so many difficulties, and now that you are starting to make money you push me out?”

Dr. Shi argued that getting the state shareholders out of the company would allow Suntech to grow faster, hire more people and pay more taxes. That swayed city government officials, who helped Dr. Shi work on convincing the corporate shareholders. Here, Dr. Shi’s willingness to offer generous terms helped. Mr. Zhang says his old fund made a return of 20 times its initial investment.

After six months of negotiations, the shareholders, which included appliance maker Jiangsu Little Swan Group Co. and pharmaceutical firm Wuxi Shanhe Group, agreed to take their money and step aside. In May 2005, an $80 million sale of shares to venture capitalists, including Goldman Sachs Group Inc., financed their exit.

Once again, Dr. Shi’s timing was good. With oil prices hitting new highs and solar-panel sales booming, the buzz in the financial community over alternative energy was becoming a roar.

Suntech’s investors saw their enthusiasm for solar power validated with the October IPO of Q-Cells AG, a Suntech competitor in Germany. The rapturous market reception convinced Suntech’s bankers, Credit Suisse Group and Morgan Stanley, to rapidly push through an IPO. On Dec. 14, 2005, Suntech debuted on the New York Stock Exchange. The company was valued at more than $5 billion at its peak stock price, though that has since come down substantially.

Dr. Shi hasn’t left his academic past behind. His office is piled with technical papers and decorated, if that’s the word, with photographs of silicon crystals. He can still unconsciously switch to a professor’s chalkboard style when he has to explain technical concepts.

He has already started giving his money away, an unusual move in a country where private philanthropy is largely undeveloped. Recently his family trust gave donations to a nursing home and a school in Shanghai. For now, however, his main focus remains on the business. Having just bought a company in Japan, Dr. Shi says his goal is to turn Suntech into a true multinational.

“The time is right, the soil is rich,” he says. “Now, there’s already a lot of Chinese dreams being realized. And I think there are a lot more to come.”

—Kersten Zhang in Beijing contributed to this article.

http://www.wsj.com/articles/SB115439653395623010

China’s Rise as Auto-Parts Power Reflects New Manufacturing Edge

By ANDREW BATSON
Updated Aug. 1, 2006 12:01 a.m. ET

BEIJING — Raising the bar for competitors around the world, China is shifting its manufacturing resources to increasingly sophisticated goods, as shown by its rapid emergence as a global powerhouse in the auto-parts industry.

Just a few years ago, Chinese-made automotive components were plagued by a reputation for poor quality, and often cost more than U.S. or German parts. Detractors said the precision engineering required for the best parts was beyond the reach of inexperienced Chinese companies and their low-cost workers.

Last year, however, China for the first time exported more parts than its fast-growing auto industry purchased from abroad. Quality has improved so much that major Western auto makers like Volkswagen AG and DaimlerChrysler AG say they plan in coming years to buy billions of dollars of Chinese-made components — such as brakes, fuel pumps, wheels and steering systems.

Those gains show how China continues to evolve as a manufacturer, posing new challenges for rivals in the U.S., Europe and Japan. After earning its stripes as a maker of simple consumer goods, such as furniture and textiles, China has branched out, quickly coming to dominate more labor-intensive parts of the consumer-electronics business, such as computer assembly, and moving into a broader range of industries.

The country’s production of machinery and transportation equipment has surged, and export of those goods — which range from auto parts to forklifts to vacuum cleaners — totaled $352 billion last year, a fourfold increase from 2000.

Meanwhile, motor-vehicle production here has nearly tripled, and China is on pace to overtake Germany as the world’s third-biggest auto maker. It has become the world’s second-largest car market in terms of sales as millions of Chinese buy cars for the first time. Millions more are expected to do so as their incomes rise and car prices fall.

Now, “China competes in the entire range of products from telecom equipment to textiles,” says Hafiz Pasha, director of the United Nations Development Program’s Asia bureau.

The transition comes at a sensitive time for the U.S. and Europe, which have been finding it harder to hold on to high-paying manufacturing jobs. Employment in the U.S. auto-parts industry fell to about 644,000 in 2004 from about 721,000 in 2002, according to government figures.

More job losses could be on the way: Some major U.S. parts makers — including Delphi Corp., which has plants in China — have sought bankruptcy-court protection. And small and midsize suppliers, which often don’t have the resources to set up lower-cost operations abroad, are facing growing pressure.

“In the past two years, Chinese bids for auto-parts orders have driven customer price targets to a level below our costs on some products,” said Larry Denton, chairman and chief executive of Rochester Hills, Mich., parts maker Dura Automotive Systems Inc., at a recent government hearing in the U.S.

U.S. parts makers have also raised concerns about their access to the huge Chinese market. Earlier this year, the U.S. joined the European Union in asking the World Trade Organization to overturn a Chinese tariff policy that the two trading partners say discourages imports of auto parts.

China says the policy, introduced in 2005, is designed to prevent tariff fraud. It imposes additional tariffs on auto parts that exceed certain thresholds in terms of value or number of components. China says the idea is to discourage anyone who might seek to circumvent its auto tariffs by importing dismantled vehicles at the lower tariff rate that applies to parts and reassembling them in China.

The growth of the Chinese parts industry comes as manufacturers here increasingly grapple with rising wages and higher energy and raw-materials costs. In China’s booming coastal areas, where many factories are located, land and labor are no longer as cheap and abundant as they once were, says Lü Tie, a scholar at the Institute of Industrial Economics in Beijing. Those areas “are now pretty close to the level of middle-income countries. Their comparative advantage is changing,” he says.

With local wages on the rise, Chinese manufacturers are seeking to improve their efficiency and reduce their reliance on low-cost labor. They are increasingly churning out higher-value products such as auto parts and shifting away from traditional exports such as textiles and toys.

Some Western companies are reaping the benefits of China’s quest for greater productivity. Rockwell Automation Inc., a Milwaukee maker of high-end equipment and software to run factories, said it has seen its China business grow by more than 30% a year since 2003.

“There is a misperception” about China, says Scott Summerville, Rockwell’s president for Asia Pacific. While China still has a lot of labor-intensive manufacturing, he says, “there’s a big push right now to make Chinese companies globally competitive. You can’t do that just with cheap labor.”

Rockwell is part of an influx of foreign money and expertise that has contributed to the improving quality of Chinese-made auto parts and other products. The world’s biggest auto companies are also bulking up in China, looking for growth that is increasingly hard to come by in mature markets. They, in turn, often demand that their parts makers be able to supply them directly in China.

In recent months, such major Western auto-parts suppliers as Robert Bosch GmbH, of Stuttgart, Germany, and ArvinMeritor Inc., Troy, Mich., have made significant investments in Chinese factories that can make parts for the local market as well as for export.

The higher standards that global companies have introduced, combined with the international growth of local auto-parts makers like Wanxiang Group, has spurred innovation. To gain access to more customers and better technology, Wanxiang has bought several U.S. companies and has expressed interest in buying some assets from Delphi. It says its sales have been growing an average of 26% a year and reached 25.2 billion yuan, or about $3.15 billion, in 2005.

Smaller Chinese companies are also climbing the technology ladder. Huaxiang Group, based in the coastal city of Ningbo, started out in 1982 making plastic caps for medicine bottles. Now it makes molded plastics for auto interiors. Though it has been supplying VW’s China operations, about 20% of its 2005 revenue of 2.25 million yuan came from exports, says Xu Peiqi, who runs the office of the board of directors. Huaxiang opened an office in May in VW’s hometown of Wolfsburg, Germany.

“The companies are very focused on exports,” says Huang Xiaohua, secretary general of the Auto Parts Industry Association of Ningbo. “Products are going up-market,” as local manufacturers are increasingly becoming first-tier and second-tier suppliers for the major auto makers, he says.

“When we started exporting in 1997, people argued that you couldn’t make” auto parts cheaper in China, says Jack Perkowski, chief executive of Beijing-based parts maker Asimco Technologies Ltd. “People also argued that China would never be a large car market.”

Now, he says, “the conventional wisdom is that China can copy but not create. That’s going to go too.”

—Jason Dean, Gordon Fairclough and Ellen Zhu contributed to this article.

My first-ever byline in The Wall Street Journal, and my first big scoop as a reporter.

http://www.wsj.com/articles/SB991071314314176662

Rivals of China’s Postal Service Claim Unfair Competitive Practices
By ANDREW BATSON and CHARLES HUTZLER

Updated May 29, 2001 12:01 a.m. ET

BEIJING — China’s postal service is trying to force domestic and foreign competitors out of lucrative express-delivery services, in an apparent attempt to bolster its position ahead of the more open market that China’s entry to the World Trade Organization promises to bring.

China Post, through its local branches, has prodded police and licensing authorities to investigate 200 express-delivery companies, said a spokesman for the State Postal Bureau, the government body that runs the country’s postal service. Among those investigated so far are foreign companies who dominate international express services: FedEx Corp., United Parcel Service Inc. and DHL Worldwide Express Ltd., a unit of Deutsche Post AG.

The investigations are already having an impact on business. According to company executives, Chinese officials are reviewing the license of FedEx’s local partner in the southern boomtown of Dongguan; they confiscated but later returned two envelope shipments from the Shandong office of UPS’s local agent, Sinotrans; and they have investigated the offices of DHL-Sinotrans in the western cities of Chengdu and Xian. “It’s disrupted our normal business operations,” DHL-Sinotrans Managing Director Charles Chia said in a written statement to questions submitted by Dow Jones Newswires.

At stake is China Post’s share of the market for fast delivery of business letters and cargo, which has grown rapidly in step with a dynamic economy and its integration with the global market. Although none of the major foreign players is willing to provide an estimate of the market’s value, UPS, which inaugurated its first direct flights between the U.S. and China last month, has said its six weekly services should generate $300 million in revenue next year. China Post expects its own domestic and international express-delivery service, EMS, to bring in income worth $600 million this year.

While China Post has publicly welcomed the competition, foreign executives say privately the postal service is using its domestic clout to strengthen its position ahead of China’s expected entry to the WTO. After its accession to the global trade body, China is expected to do away with a rule that currently restricts foreign companies to 50% ownership in joint ventures with local firms.

China Post “looks like it’s trying to protect EMS,” said an executive at one foreign express-delivery company. Its actions also come as the government continues to pursue a drive to break up monopolies in industries from telecommunications to power generation, hoping to foster greater competition and better services for consumers.

In this case, the maneuvering has centered on competing interpretations of the law. Under the 15-year-old postal law, the postal service is granted monopoly rights to deliver letters and packages, except when China’s cabinet, the State Council, provides otherwise. China Post, which is run by the Ministry of Information Industries, is arguing that the first half of that clause should be observed. The foreign companies say their legal rights lie in business licenses issued beginning in the mid-1980s by the country’s Ministry of Foreign Trade and Economic Cooperation.