China’s future: status quo, reform, or chaos?

The Communist Party had a deal with the Chinese people: "We let you make money, and you let us rule.” But now it is falling apart

March 26, 2016
A man walks past a building covered in portraits of Chinese President Xi Jinping in Shanghai, Saturday, March 26, 2016. According to neighbors, the building's owners have been involved in a long-running dispute with government officials over the fate of t
A man walks past a building covered in portraits of Chinese President Xi Jinping in Shanghai, Saturday, March 26, 2016. According to neighbors, the building's owners have been involved in a long-running dispute with government officials over the fate of t
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An open letter, posted on a news website in China in mid-March, which called on President Xi Jinping to resign, went viral before it was hurriedly taken down. Ten days later, 20 people were detained apparently in relation to the posting. This open letter, purportedly signed by “loyal Communist Party members,” was the most brazen act of defiance of the regime since Nobel Peace Prize laureate Liu Xiaobo signed a democracy manifesto in 2008. It was the latest in a rash of bold actions which indicate that people are beginning to lose their fear of confronting the regime.

Earlier this month, a journalist at China’s state-owned news agency Xinhua changed one character in a two-character combination, and instead of referring to President Xi Jinping as “the highest leader” called him “the last leader.” That was no accidental “typo”; no one substitutes for by mistake. It was a deliberate act of lèse-majesté. Days later, protesting miners in North China forced their provincial Governor to make a public retraction of a lie he had just uttered at the National People’s Congress, and accept their demands for back pay, a remarkable victory for a few hundred workers on the streets of a provincial town. These two unrelated incidents are signs of the times.

For more than three decades, from the start of the “Reform Era” in 1979 until now, China has been governed by an unspoken deal between its Communist Party and the people: “We let you make money, and you let us rule.” Now that deal is falling apart. After the longest period of rapid growth achieved by any people in modern history, the economy is making a hard landing: millions of workers are being laid off or going unpaid for months at a time, capital has been fleeing the country at an alarming rate, and international bankers and investors no longer believe what the Government tells them about the growth rate. “They are lying to us,” one told me recently, “GDP growth is not 6.5 per cent. It is half that, or less.”

The true costs of the strategy adopted from 2008 to support growth are becoming ever more clear: misallocation of investment into redundant infrastructure and industrial capacity, already serious, has assumed huge proportions. Total debt in the economy has reached a level that has led to financial crashes elsewhere; the return on assets in state-owned enterprises is in serious, long-term decline, while savings from the more efficient private sector are forcibly transferred to subsidise the state sector. China’s currency was devalued in 2015, and international markets expect another devaluation before long, while the Party cannot decide whether to prop up the stock market or let it fall. Domestic banks have been rolling over non-performing loans for many years for fear of causing mass unemployment and uncontainable social unrest. They are now preparing to swap them for equity, replacing bad loans with bad equity, in an attempt to further postpone the day of reckoning.

Redundancies are happening anyway, and they are happening at time when prospects for the economy are worse than at any time for a quarter of a century. Those with power and wealth are reacting by exporting their capital by legal and illegal means; the workers are reacting by protesting in the street.

Hard times in the economy might be weathered if that was the only problem, but a whole array of long-term negative trends in other areas have resulted from the model of economic reform without political reform, and they have become acute. The most notorious are corruption and pollution. Here is a short list of others.
  • Social inequality is great, growing, and on daily display.
  • A spiritual and moral vacuum lies at the heart of the regime, so that allegiance to the Party rests on self-interest and fear, not loyalty to a doctrine or set of values.
  • Dictatorship is stifling the forces of creation and innovation that are essential if China is to escape from the middle-income trap.
  • Denial of free expression is colliding with the revolution in communications and information technology which have produced a people who are better informed, more educated, and more able to communicate with each other, despite a vast army of censors, than any generation before them.
  • China’s foreign policy is antagonising its two most important partners in trade and investment, the US and Japan, and all its neighbours in South-East Asia.
  • Distrust abroad is matched by distrust at home. Spending on internal security now exceeds that on the military.
The Party faces a fundamental contradiction between the one-party dictatorship and the reforms that are essential to tackle its social and economic problems. The liberalisation of thought and expression needed to stimulate creativity and innovation conflicts with ideological control by the one-party state. Further liberalisation of the economy, allowing market forces to allocate resources and take control of the commanding heights of the economy, would undermine the Party’s grip on the economic life of the nation (which the one-party state system rests on).

Only democratic political reform could persuade the people to accept the short-term pain and uncertainty inherent in letting market forces replace political expediency, at a time when the economy is making a hard landing. But President Xi Jinping has categorically rejected political reform: instead he has reinforced censorship, and intensified oppression. However, other high-ranking leaders may regard his strategy as counter-productive and see in political reform the ONLY chance of salvation for themselves and the nation. They could find allies among the powerful enemies he has made through his anti-corruption campaign. Any attempt by a reformist faction to force Xi into premature retirement would be extremely hazardous but Beijing is buzzing with speculation about dissent within the top leadership. That is why some journalist dared to change “the highest” into “the last.” That is why the most politically astute and well-connected editor in the country, Hu Shuli of Caixin magazine, dared to publish an attack on censorship at the same time.

To succeed, democratic reform from above would need to be swift and radical. Circumstances would not permit a gradual transition such as occurred in Taiwan.

The present model of governance for China—the status quo of my title—cannot cope with the conjuncture of a hard landing for the economy and the other problems I have outlined. If there is no political reform, then the risk of chaos will grow. Rising unemployment could lead to social unrest on a major scale; investor confidence, already diminished, could erode much further; capital flight could accelerate, and the shadow-banking system could suffer a wave of defaults. If the authority of the Party’s inner circle were to diminish much further, censors would cease censoring, policemen would disobey orders to suppress unrest, competing power bases would emerge, while some regions would bid for autonomy. The impact on the world economy would be severe.

In these circumstances, those much-quoted words of WB Yeats, “things fall apart, the centre cannot hold,” would ring in our ears once more.

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