China’s Shades of Grey

China seems to call out for dramatization. In part this may be the result of its tumultuous history from the First Opium War and the Taiping Rebellion through to the Cultural Revolution and the death of Mao Zedong in 1976. In part it is a reflection of the sheer scale and speed of the country’s growth since the late 1970s. In part, it springs from the huge uncertainties surrounding the world’s most populous nation and the opaqueness of the governing system of the second largest economy on earth.

The secrecy and lack of secure mooring posts can only fan extreme judgments. So we have, on the one economic hand, the vision of coming collapse of China dating back ten years and reiterated despite the country’s stubborn refusal to implode in that period; or China is on ”treadmill to Hell”; or, at the very least, it is headed for Japanese-style lost decades. On the other hand is the argument that China will rule the world, and that its leaders can proclaim ”We are the masters now” as China owns the 21st century. George Soros, Francis Fukuyama and Thomas Friedman have all lined up on occasion to laud China as being run more efficiently than the United States, despite the major inefficiencies, imbalances, inequalities and logjams that permeate the People’s Republic. Politically, a similar divide exists between those who believe China must democratize if it is to survive and those who believe that competitive elections would bring chaos. On either side of each argument, a decisive quote about where China is heading is sure to make news, the more trenchant the better (Caixin, August 13; Foreign Policy, December 29, 2011; Wall Street Journal, November 18, 2010) [1].

At least some occupants of the various camps tend to regard anything but cut-and-dried views of the People’s Republic as wimpish cop-outs. The fact that events have not born out their forecasts does not stop them pumping away at their chosen lasts, though the historian Niall Ferguson, who envisaged President Obama seeing a ”We are the masters now” bubble over Hu Jintao’s head when they met in late 2010, did revise his view after travelling through China this year and seeing the fault lines that run through the supposed mastery. Stand up and cast your vote one way or the other is the watchword of those convinced that they have identified the keys to China’s future. That certainty grabs headlines but is quite dangerous.

China is too important and too complex to allow for snap judgments. Extrapolation is facile but not very useful—remember the soar-away forecasts by Goldman Sachs a couple of years back that China would hit 12 percent growth and then ”the sky’s the limit” [2]. The keys to the future seem to lie, rather, in the grey areas, which, by their nature, do not lend themselves to easy conclusions, but will shape the way China evolves in the decade until Xi Jinping hands over the party’s leadership to his successor in 2022. A healthy dose of agnosticism is in order, taking into account the realities on the ground rather than the pre-ordained views of observers.

Yes, Yes but No…No

Yes, China is a great power which will grow even more important in the coming years. Yes, in mega-macro terms, its economy will overtake that of the United States in size by the end of this decade. In per capita terms, China, however, will remain far behind the other great power and the crude GDP figures do not say much about how the country will evolve in political, social and human terms or in its relations with the rest of the world given the importance of its domestic preoccupations.

Yes, in micro terms, China’s electricity consumption has been falling but it is misleading to draw a straight line from that data to the economy as a whole at a time of rebalancing away from heavy industry. Yes, the banking system is holding huge amounts of non-performing loans and there has been massive over-building of property. Those loans, however, are put officially at only one percent—of course, that number depends on how they are classified and some banks have higher levels. The probability, however, is that they will be absorbed into a special government-funded vehicle if they become a threat to the system and the property bubble shows every sign of having been deflated without provoking a crash (People’s Daily, September 3; Bloomberg, August 7).

Yes, democracy would give the Chinese rights they have never enjoyed and could involve them in debates about the future of their country, but first there has to be the rule of law and accountability.  The Communist Party, however, is unlikely to accept such oversight. Yes, Bo Xilai might have come out as winner of a popular presidential election with disastrous consequences, but that does not mean China can continue with the hermetically-sealed political process of the past (“Bo Xilai’s Campaign for the Standing Committee and the Future of Chinese Politicking,” China Brief, November 11, 2011).

Yes, China’s officials are adept at producing sweeping plans, but their rate of achieving targets is rather lower. Why have the environmental measures issued in recent years had so little effect? Why has the plan to consolidate the steel industry drawn up in the mid-1990s still only been partially implemented? What effect do the repeated announcements of the need to eradicate corruption really have? Above all, have the planners been able to control the swings and roundabouts of growth as they would wish? The answer in each case is varying shades of negative.  Implementing central policies is a centuries-old problem in China colored by local and sectoral interests and corruption. Xi Jinping had to remind cadres this spring of the need to “firmly implement actions to preserve the purity of the Party.” Overall, the picture is not one of the highly-efficient bureaucracy imagined by foreign admirers (Qiushi, March 16).

The Regime

Major issues loom for the Chinese system itself. The first is the question of how the party-state is going to cope with the evolution that Deng Xiaoping launched in 1978 with the basic aim of maintaining the Communist regime. Making the party the vehicle by which China grew great was a clever political move enabling it to revive from the near-implosion of the Cultural Revolution and to claim a non-ideological source of legitimacy. The result, however, is a paradox for a regime which puts a premium on control—a point acknowledged even in party circles (Study Times, June 18).

The growth the Party needs to sustain its monopoly rule has brought greatly expanded individual liberties. Society has evolved very fast, particularly among younger urban residents whose thought and behaviour patterns develop in ways that escape central control; social media run rings round the censors and public opinion has shown a growing ability to mobilize. The key role that globalization played in China’s rapid economic growth subjects it to external influences Beijing cannot regulate.

The China Paradox

Therein lies the paradox. Like all Chinese regimes before it, the People’s Republic is based on top-down authority but the means it has chosen to buttress that authority are now sapping its foundations. The first thing to watch in seeking to chart China’s future is the interplay between such factors. Observers have, of course, very little idea of how the decision-making process of the outgoing and incoming leadership proceeds and that opacity is likely to continue under Xi Jinping. The paradox that the regime, however, has spawned means it is possible to see the effects as they play out in everything from the membership of the new Politburo Standing Committee to the handling of protests, from the impact of food scandals to the progress of environmental protection measures.

The Economic Conundrum

As regards the economy, analysts face another puzzle. The outgoing administration has made it plain that it wants to get away from saw-tooth growth movements to achieve a more steady and stable state that can be sustained through the current Five-Year Plan and the next one (Xinhua, March 16, March 5). Li Keqiang, who is likely to become premier next March, told the Boao Forum this spring that China suffered from a “serious lack of balance, coordination and sustainability in its development…and some outstanding structural problems” (Xinhua, April 3). The reforms needed to get on a more even keel, however, mean reducing the rate of GDP growth—that is, tampering with the core factor in Deng’s political power equation. The dangers are evident. Can a floor be put under the decline in the rate of growth or, in mirror image of the boom set off by the 2008 stimulus program, will it take on a momentum of its own? The truth is that nobody can know given the multiple factors and the psychologies of policymakers involved, providing yet another field of grey.

Social Materialism

Socially, China has grown far more complex in recent decades. There is a yawning gap between the sober-suited, buttoned-up leadership and young urbanites. The demographic shock looms, not just economically as China looses the dividend of a flood of young people coming into the labor force but also in human terms as it has to cope with a swelling army of old people without a decent system of pensions or welfare for them. The recurrent scandals in areas such as food and building standards on top of pervasive corruption bred a trust deficit that saps the authority the regime seeks to exercise. Since Confucianism and Communism gave way to materialism, China has become a much more difficult place to govern. Chalk one up for the naysayers.

Chinese Potential

Yet the last three decades have seen more people pulled out of poverty in a shorter space of time than ever before in human history—an accomplishment that allows the party to claim it is right for China’s historic and national circumstances (Red Flag, August 23; June 12). Given the repeated traumas and national decline of the century-and-a-half before Deng launched economic reform, this may be the best time to live in China for many of its inhabitants. For all the predictions that the China miracle is over as the country loses its edge in making and selling cheap goods, industry still has plenty of room for productivity improvements. Central state finances are strong. There are many inefficiencies in the economy—including major excess capacity, misallocations, financial repression of households and a command-and-control financial system—but the regime still has the firepower to ensure the Deng equation holds, even if throwing a mountain of cash at problems as in 2008-9 has negative consequences over the longer term (21st Century Business Herald, August 24). The social programs that have been launched—and which will grow in scope in health care, education and welfare—will produce a country that should move out of its low place in successive United Nations Human Development rankings. So chalk one up for the boosters.

What Foreign Policy?

China is a great power but its foreign policy remains muddled. It has won the friendship of poor countries through its big aid programs and cherry-picked investments round the world, but, in general, it has not converted its economic strength into global political clout. It scraps with neighbors over sovereignty claims in the East and South China Seas but also wants to build up regional economic cooperation. It uses its permanent UN Security Council seat primarily to block infringements of national sovereignty and to protect the likes of the Assad regime in Syria (Xinhua, July 19; March 2). It is big contributor of peacekeeping forces to the United Nations, but in general it plays little role in formulating global policies. It calls for reform of the global financial system but puts forward few ideas beyond the unworkable notion of expanding Special Drawing Rights (Xinhua, June 20; February 20, 2011). Some generals make hawkish statements from time to time. The People’s Liberation Army, however, is in no shape for a military confrontation with the other superpower, and Beijing knows it would be ill-advised to ape Germany before World War One, however tempting the parallel may be for commentators (“Shifting Perspectives—Assessing the PLA from the Ground Up,” China Brief, January 20).

The Agnostic Case

China has grown too far and too fast to make sense to those accustomed to judging nations by Western orthodox standards, which assume higher quality data than is routinely available on China. Deng had a much longer timeframe in mind than the helter-skelter expansion of the last three decades. His reforms are only half-completed with matters, such as land ownership, the constraints of the hukou registration system, capital markets, the legal system and pricing of water and energy, left unresolved. China remains work in progress, and it is a fair bet that even its new leaders have only a hazy idea of where they are going. Some of them, at least, appear to grasp the need for reform. Reuters last week quoted sources as reporting that Xi Jinping told reformer Hu Deping China must "seek progress and change while remaining  steady" in the face of unprecedented problems (Reuters, September 7). With the notable exception of the lame duck Wen Jiabao, they would not include politics in this agenda but focus rather on  the economy and society. Still change would be economically costly and challenging for the regime and its strong vested interests (“Storming the Castle of the Status Quo,” China Brief, April 26; Xinhua, April 3, March 14; Reuters, March 14; “The Politics and Policy of Leadership Succession,” China Brief, January 20).

So progress will be crab-like. China will move by trial and error in response to the balance of forces at central and provincial levels, the interplay of interest groups and the basic equation between political power and economic advance. Given the complexity of the factors involved, predicting a headline-catching outcome—waxing hegemon or failed state—must be a rash undertaking. It is more useful to watch how those factors move and to try to weigh them in agnostic fashion because the world is likely to find itself dealing with shades of grey in the China paradox for some time.

Notes:

1. Gordon Chang, The Coming Collapse of China, New York: Random House, 2001; Martin Jacques, When China Rules the World, New York: Penguin, 2012; Henry Kissinger, Nial Ferguson, David Daokui Li and Fareed Zakaria, Does the 21^st Century Belong to China?, Toronto: House of Anansi Press, 2011.
2. Jim O’Neill, Goldman Sachs Chief Economist, at London seminars 2010–11.