Wednesday, February 29, 2012

Watching China: Finding Economic, Political Weakness

How can you predict a crisis for China? A nation-civilization that moved from one disaster to another for 14 decades, 1839 to 1979, has since then strung together the three-plus most spectacular decades of economic growth in world history. You want now to find Chinese progress in jeopardy? Not me.

Still, China may now be looking at two big problems, one economic and one political.

1. Economy: too much government.

Listen to Michael Schuman, writing in TIME:
it is very difficult to tell what’s really going on in the Chinese economy. Data is sparse or unreliable. And China is in certain ways unique in economic terms — has history ever witnessed a giant of such massive proportions ascend so quickly in the global economy? . . But the more time I spend in China, the more convinced I am that its current economic system is unsustainable. . .

China has adopted a form of the Asian development model, invented by Japan. . . the pieces of a crisis [are] misguided investment, including a giant property boom, propelled on by debt and the decisions of government bureaucrats. . . The economy needs to rebalance away from investment and exports to a more consumption-driven growth model with a primary focus on quality of growth, not high rates at any cost. That’s not happening. . . the World Bank [has] issued a report. . . warning that China could face an economic crisis if it doesn’t reform.
And hear from Yao Yang, Director of Peking University’s China Center for Economic Research:
government must face the problems created by its pervasive role in the economy. A new World Bank report singles out lack of reform of state-owned enterprises as the most important impediment to the country’s economic growth. But that is only a symptom of a deeper problem: the government’s dominant role in economic affairs. . . In recent years, more than one-third of total bank lending has gone to infrastructure, most of which has been built by government entities. . .

government over-investment [continues] in numerous industrial parks and high-tech zones. . . China’s investment frenzy reminds many people of Japan in the 1980’s. . . Infrastructure investment [runs] up against the law of diminishing marginal returns, but consumption growth does not have a limit. Suppressing consumption thus suffocates future growth, and the share of household consumption in GDP has declined from 67% in the mid-1990’s to below 50% in recent years, with most of the decline reflecting . . . government policies.
Schuman, Yao, and the World Bank seem to agree that China is following Japan’s development path—price distortions resulting from government over-emphasis on investment at the expense of free market consumption. “Big foot” government instead of where China should be going: “customer as queen.” Politicians and their friends prevailing over the consumer.

2. Politics: evidence of struggle.

What are the possibilities for political change that benefits the consumer? We have the strongest evidence since the 1989 Tiananmen Massacre of real dissension among China’s top leadership. To me, struggle is good, for struggle could mean at least one faction reaches for wider popular support.

John Garnaut, writing in the Sydney Morning Herald, has the fix on China’s leftist opposition, conservatives who want to reach back toward the Maoist era. They are the “Children of Yenan,” the largest and most organized group of revolutionary hero children. They are using their hereditary privileges to sound the alarm about what they see as a party crisis.

In February, they convened 1,200 high cadre children at Beijing's Heaven and Earth Theater, where they heard a speech from Hu Muying, the daughter of Hu Qiaomu, Mao’s secretary who was an outspoken opponent of the reformists crushed at Tiananmen. Hu told her fellow “princelings” that China’s
brilliant achievements were followed by class polarization, rampant corruption, a public spiritual vacuum, chaotic thinking, moral decline, prostitution, drugs, triads and so on. . . We expect the new leadership can recognize the crisis and correct the wayward course. Without this there will be no future. We, the children of veteran party members, keep thinking: “Is this the New China our fathers sacrificed their blood to fight for and establish?”

How come those who have been overthrown and exterminated have returned today?
Heavy stuff. And Hu even drew support from Hu Dehua, the son of late party chief Hu Yaobang, who stood on the opposite side from Hu’s father Hu Qiaomu in the late 1980s. Hu Dehua liked Hu Muying's diagnosis of China's crisis, though he is more liberal-democratic. Politics creates strange bedfellows.

Hu’s indirect criticism of China’s current leadership especially stands out in the aftermath of the crisis that has befallen Chongqing special municipality boss Bo Xilai. After Bo announced the sacking of his right-hand man, the city's police chief Wang Lijun, on February 2, Wang fled Chongqing and spectacularly took refuge in the US consulate in Chengdu. From there, he was spirited away to Beijing, where he is likely spilling to Bo’s opponents all he knows about the Chongqing leader.

Last year, Bo was China’s “great red hope,” poised for promotion onto the Chinese politburo's standing committee as part of this year's wholesale leadership change. As Garnaut writes, Bo had “captivated and polarized the nation by waging war against corruption and breathing new life into the spirit of Mao.” And, as Rosemary Righter, associate editor at The Times (London) informs us, under Bo Chongqing not only posted some of China’s highest growth rates, but also made massive provision of housing and health care for workers in a country where social safety nets barely exist.

Yet Bo’s police chief Wang, Righter writes, had himself become “China’s most celebrated cop, a folk hero for his no-holds-barred campaign against organized criminals and their alleged protectors.” This Bo-Wang mess, involving two heroes, seems evidence of real trouble at the top.

On one side, then, we have Hu Muying, the “Children of Yenan,” and the allies of Bo Xilai. Righter calls the opposing camp the party’s "modernizers." They are led by Wang Yang, party secretary of Guangdong, China's next-to-Hong Kong industrial powerhouse. Wang advocates “free thinking and mind liberation,” relaxation of bureaucratic and party controls that hinder development, strengthening the rule of law, and addressing the causes of swelling discontent in Chinese society. Intervening after a violent uprising against land-grabbing public officials, Wang promoted the leader of the protests and—in what Righter calls a “practically unprecedented move”—ordered villagers be allowed to choose their own representatives in free elections.

China’s future boss Xi Jinping has yet to line up with the modernizers even though his father, Xi Zhongxun, personified “reform and opening up” as Deng Xiaoping’s man in the 1979 Guangdong test lab of Shenzhen. In any battle between Guangdong reformers on one side and Beijing-Chongqing Maoists on the other, it’s Shanghai (where Xi was once party boss) that’s likely to come out on top.

As for the people. . .

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