The policy of Reform and Open-up, initiated by Deng Xiaoping in the late 1970s, has brought about a fundamental change in the People’s Republic of China’s foreign policy making. However, developments in 1998–2001 revealed the some fundamental dilemmas in China’s foreign policy: the lack of a global military capacity despite a fast growing economy amidst globalization. The relentless onslaught by foreign financial speculators on the Hong Kong Stock Market and Hong Kong Dollars in 1998 further convinced the Chinese leadership that China’s economy was vulnerable to external pressures and shocks as China had integrated into the global economic system. The lessons learnt from the events spurred the Chinese leaders to reassess China’s approach to the outside world, especially the policy toward the USA and its allies in the region. However, economic development has already integrated China into the existing international system.