First of all, let me send out congratulations to all the Chinese athletes at the London Olympics. There have been many outstanding accomplishments, gold and non-gold, for a truly great team.
And much has been made about the gold rush. Over at CDT is a roundup of various stories that look into the PRC's "Olympic fetish for first." Take this op-ed from the Party-managed Global Times :
There are people who blame institutional problems for China's gold medal obsession.
They argue that the existing system purely pushes athletes to get the gold medals and the public should never worry about gold medals that much.
There are certainly problems here. But that's no excuse for giving up the pursuit of the top.
It identifies the problem - "gold medal obsession" - and begins to think through the reasons it exists. The title of that same op-ed, "Historical weakness creates China's gold medal fixation," suggests a longer-term dynamic at work, as do these lines:
China was known as "the sick man of Asia," torn by war and poverty. Liu Changchun, who was the first Chinese to participate in the Olympic Games in 1932, was sponsored by the warlord Chang Hsueh-liang as the first representative of war-torn China.
Liu arrived only three days before the opening ceremony, after a nearly month-long journey from Shanghai to Los Angeles. Finally, he was eliminated in the preliminary round.
China didn't win its first Olympic medal until 1984. It is understandable that China puts such weight on gold medals.
But notice: there is a rather significant stretch of time between 1932 and 1984. A lot happened in China then, including the revolutionary victory and political domination of Maoism. The op-ed alludes only indirectly to the "Red sun that never sets:"
During the Cultural Revolution (1966-76), China deliberately lost games or conceded points to other countries in international competitions as part of a diplomatic sports policy of "friendship first, competition second."
This approach actually showed no respect for athletes from other countries. It was a perverted notion of sportsmanship.
There is much more to be said here. Indeed, an argument came be made that the destruction wrought by Maoism on China from 1958-1976 is the primary determinant in the PRC government's current obsession with winning Olympic gold now.
Mao actually supported sports and physical culture. What might be the first article he published was on the importance of physical exercise in strengthening the nation. So, it was not too surprising when the newly established PRC sent athletes to the 1952 Summer Olympics in Helsinki. But it seems that the division with Taiwan created a "two Chinas" problem that caused the PRC to stay away for the 1956 games in Melbourne and thereafter until 1980 Winter Games in Lake Placid.
In the interim Mao and Maoism had metastasized into a political movement hell-bent on destroying counter-revolutionaries and those taking the "capitalist road." The Great Leap Forward devastated the country. Millions died. Administrative structures were destroyed. While sport may have been the least of the losses, it, too, was fundamentally damaged. How could an effective national sports system be maintained when people were starving? In an article (pdf!), "Sport, Maoism and the Beijing Olympics," Dong-Jhy Hwang and Li-Ke Chang point out that the GLF was a "...considerable setback for sport
and physical education...". And they go on to analyze the damage wrought by the Cultural Revolution:
Following on the heels of the Great Leap Forward, the developmentof sports in the early stage of the Cultural Revolutionwas affected by disruption of competitive sports, the dismantling of the training system, the closure of sports schools, the discontinued participation of Chinese teams in overseas competitions, and the condemnation and persecution of outstanding athletes as offspring of the bourgeoisie.
In short, Maoism devastated sports in China.
Essentially, then, due to political decisions at the highest levels of power in the PRC, China was cut off from the Olympics for thirty years, a time period of significant improvement in sporting technologies and efforts around the world. What had held China back was not that it had been, in the previous century, the "sick man of Asia," but that Mao and the Party leadership denied the country systematic development of sports infrastructure and competition.
The current PRC government is running to catch up and surpass the "West" in Olympic competition, not simply as pay-back for 19th century imperialism, but also to further bury the destruction of the Maoist period. Indeed, my sense is that it really has more to do with the latter than the former, because the latter is the thing that animates so much of post-1979 PRC but is also the thing that cannot be fully confronted.
Every time a PRC athelete kisses a gold medal, he or she is proclaiming to the world that Mao Zedong was wrong. They have succeed in something Mao rejected - not sport in and of itself, but "bourgeois, Western" sports competition. They have rejected the old "friendship first, competition second" dictum, and embraced the competitive and materialist culture that Mao struggled against.
But, of course, you can't say that in the PRC today, when Mao's mausoleum is being put forward for "World Heritage" status....

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