Washington Post



Beijing rules, but it's got a host of problems

By Robert A. Manning
Sunday, July 15, 2001

At first glance, awarding the 2008 Olympics to China appears to be yet another sign of that country's emergence as a major power. It's the latest in a series of Olympic selections (Tokyo for 1964, Seoul for 1988) that signaled Asia's coming of age. China's $475 billion annual global trade and pending accession to the World Trade Organization (WTO) show its heft as a trading power, even as we keep a nervous eye on its military buildup and larger regional ambitions.

China may indeed be a major power by 2008. But the most immediate danger, largely overlooked, may be its economic and political weaknesses along the way. That's the China we should worry about between now and the opening of the Games.

Even as Beijing basked in national pride in anticipation of its Olympic status, some 700 miles way in Jilin province, China's underside was starkly displayed. Thousands of miners and their families blocked a main railway line to demand paychecks, owed in some cases for two years or more. It was but the latest of hundreds of incidents of popular outrage across the country in recent years -- a result of massive corruption and the dislocation resulting from rapid economic and social change.

Rather than the unstoppable juggernaut often perceived in the West, in many respects China is a fragile reed. Its export-dependent economy has been slowedby the world downturn; in June, Chinese exports fell for the first time in two years. Its partly transformed society is burdened by its socialist legacy and caught between the demands of globalization and the needs of 1.3 billion people. And its leaders -- amid a political succession struggle -- feel besieged, as if with all their fingers always in the dike. If its economy sputters, a weak and chaotic China could pose a danger to itself and the world.

The hardest part of China's unprecedented transformation lies ahead. It has barely begun to move from a guanxi society, in which advancement is based on personal relations, to one that is based on the rule of law. To be sure, China's successes have been impressive in the 22 years since it implemented its reform and opening policies -- lifting some 250 million out of absolute poverty and more than quintupling per capita GDP. But every step forward in its transformation has generated a new wave of problems.

Unlike the former Soviet Union, which instituted political reform early on, China made the easy changes first. By scrapping collective agriculture, allowing small industry in rural areas to flourish and opening to foreign investment, China produced eye-popping, double-digit economic growth every year for more than a decade, beginning in the mid-'80s. Those gains have run their course. What remains is the hard part -- dismantling the dinosaurs of heavy state-owned industry and services. Beijing claims the nation's economy is growing at a rate of 7 to 8 percent, which is funny, given that the economies to which China is tied, such as Taiwan's and Hong Kong's, have slowed and its major export markets -- Japan and the United States -- are flat. The official rate is the inflated result of creative accounting; a number of studies suggest the real growth rate may be 2 to 3 percentage points lower.

Beijing's leaders have bet the country's future on the global economy, and over the past several years they have accelerated the privatizing of state-owned enterprises, with some success. But since the 1950s, those enterprises have been responsible for cradle-to-grave welfare (health care, education, pensions, etc.). This has meant China has had to simultaneously move its halfway house economy in the direction of markets while creating an alternate social safety net. Over the past several years, millions of workers have lost jobs or been unable to find them.

To cope with these dilemmas, China embarked on a wave of deficit spending and "political" lending -- meaning its state-owned banks often make loans for political, rather than economic, reasons. This has exacerbated its world-class banking problem, and by some estimates, bad loans may comprise 40 percent of the portfolios of its four major state banks. This has beenpapered over by something of a shell game -- transferring some of the bad loans to "asset management companies," which rely on government-backed bonds. To make matters worse, much of the dislocation from modernization -- not to mention rising expectations -- will be magnified when China joins the WTO next year and the clock for all companies (including banks) to become competitive really starts ticking.

The depth of China's internal problems was confirmed in a remarkably candid report published last month by a group under the Communist Party's Central Committee. It details mounting and increasingly confrontational "collective protests and group incidents," on a greater scale than had otherwise been reported. It cites corruption as "the main fuse exacerbating conflicts between officials and the masses" and adds that those involved "are expanding from farmers and retired workers to include workers still on the job, individual business owners, decommissioned soldiers and even officials, teachers and students."

These realities help explain the troubling response of an already nervous and insecure collective political leadership obsessed with stability -- crackdown, repression, muzzling the media -- and some of its bluster toward the U.S. There is a general intolerance of any independent social or political organization outside the control of the Communist Party. The unrelenting repression of the seemingly apolitical Falun Gong sect, and of unofficial Christian churches, is a prime example, as is the jailing of a number of U.S. citizens and green card holders of ethnic Chinese background.

But the very forces that led to the mood of repressive intolerance were precisely those unleashed by economic reform. As reform has generated more prosperity and a fledgling middle class -- as well as losers, for the near term -- both the winners and the losers have interests that increasingly lie outside the domain of the party. The experience in other East Asian societies over the past generation -- including in Taiwan -- has been that as rapid economic growth produces a substantial middle class, those new social forces demand more accountable government. In the Philippines, South Korea, Taiwan and Thailand, this has led to political pluralism. Not so in China. There, relatively freewheeling books, periodicals, talk radio and the Internetuntil recently regularly aired China's problems. But the line was drawn on political expression.

No less a source than the Central Committee report itself argued, "If there are no channels for letting off steam, the repressed discontent of individuals could well up into large-scale social instability." But fearing social instability, Beijing has clamped down, preventing the rise of independent social or political organizations rather than tolerating a more active civil society. And all these tendencies will worsen over the next year as the political succession to be decided at the 16th Party Congress next year plays out.

For more evidence of the coming turbulence, consider the mind-boggling contortions of President Jiang Zemin in a major speech earlier this month marking the 80th anniversary of the Chinese Communist Party. Jiang sought to recast and legitimize the party as representing not just workers and peasants, but broad Chinese interests. He argued that reform has created new "social strata" of entrepreneurs and technical personnel and the self-employed in the "non-public sector" (God forbid he should say "private sector"), and that these elements "are also working for building socialism with Chinese characteristics." That's news to China's budding capitalists. Cutting through the double speak, if the future is capitalism, then who needs a Communist Party?

Since 1978, the Chinese Communist Party's perceived legitimacy has rested on performance. The public tacitly accepted a new social bargain of increased wealth, economic freedom and less state intrusion into personal lives in exchange for eschewing politics. But both the successes and shortcomings of reform have clearly begun to overtake that bargain. This has led to a weak, defensive and reactive leadership trying to rationalize its monopoly of political power.

What's more, accession to the WTO will initially create greater unemployment, more rural-urban migration and a larger middle class faster. That shift underscores that the very things required for success in a globalized economy -- transparency, openness, rule of law -- undermine the sorts of controls Beijing has sought to use in response to its predicament.

Political weakness can surface in various ways. Onediversion is the nationalist temptation to reinforce its sense of legitimacy. A Chinese sense of historic grievance makes it easy for Beijing to stir nationalist sentiment -- over Japan's past wrongs, or over the accidental U.S. bombing of its Belgrade embassy or, most temptingly, over Taiwan. But, once unleashed, such sentiments can get dangerously out of control, given the frustrations underlying popular emotions. Beijing's edgy collective leadership has also made for a passive, reactive posture in its dealing with the United States.

There is a tendency for the world to discount China's present for its future. Yet an economically and politically vulnerable China is the story now. This weakness can pose dangers not only to American national interests, but to China itself. In any case, whether by 2008 or 2028, China will indeed be an economic and military power with which the United States will have to contend. Whatever policy toward China is pursued, it should be informed by this internal predicament as much as by China's burgeoning military capabilities, which are already a serious security concern.

Robert Manning is a senior fellow and director of Asian Studies at the Council on Foreign Relations.