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China's potential weakness now worries West more than its strength

For all the hand-wringing over China's growing assertiveness, the risk of its economic and social destabilisation worries the West more

PUBLISHED : Friday, 04 July, 2014, 4:35am
UPDATED : Friday, 04 July, 2014, 4:35am

China is tailgating Japanese warplanes, playing chicken with Vietnamese ships and questioning America's toughness. Yet it isn't Chinese strength that most worries US President Barack Obama. It's Chinese fragility.

As China's economy grows at its slowest pace in 24 years, the country's domestic strains are drawing increased attention. While Americans stew over the prospect of being eclipsed by a new superpower, their president frets about instability in the world's second-largest economy.

"We welcome China's peaceful rise," Obama said in a recent radio interview. "In many ways, it would be a bigger national security problem for us if China started falling apart at the seams."

Though no one expects that to happen any time soon, if ever, President Xi Jinping confronts an array of potential triggers for unrest. After more than three decades of growth that has raised per capita income to more than 17 times its 1978 level, China's breakneck pace of change is speeding up.

"China is undertaking massive transformations that are necessary for modern society, but in every case are socially destabilising," said Kenneth Lieberthal, who handled Asian affairs in Bill Clinton's White House. "And they're doing every one of them at a pace, scope and scale no country has ever tried before."

The United States has a great deal riding on the outcome. China is the single largest holder of US debt with US$1.3 trillion in Treasury securities, and Sino-US trade last year topped US$562 billion, up 38 per cent from five years earlier. In an extreme scenario, major turmoil could spark massive refugee flows or even endanger control of China's estimated 250 nuclear warheads, said Lieberthal, a senior fellow at the Brookings Institution.

"That's not a future you want to contemplate," he said.

Most analysts don't anticipate China facing such a situation. The country's power and prosperity seem to expand by the day and are at relative heights last witnessed two centuries ago.

Awareness of China's weak spots nonetheless shapes US policy, said Ely Ratner, former lead political officer on the State Department's China desk. The US cooperates with China on developing clean energy, equipping a sometimes-rival to meet its domestic goals. And while the US irritates Chinese leaders by talking about human rights, Washington does not back direct challenges to Communist Party rule.

"The US very much wants to support China's stability and economic growth," said Ratner, with the Centre for a New American Security. "We don't engage in certain activities that would undermine their economic and political stability, in part because it wouldn't be in our interest."

The cooperative dimension of the relationship will be on display on July 9 and 10 during the next session of the strategic and economic dialogue. US Treasury Secretary Jack Lew, Secretary of State John Kerry, Vice- Premier Wang Yang and State Councillor Yang Jiechi will be co-chairmen.

As US officials arrive in Beijing for the talks, forces unleashed by China's pell-mell modernisation present new challenges. More than one million people each month are migrating from farms to cities, leaving behind everything they know for an uncertain future.

Since 2004, China's urban population has grown by 200 million, akin to the population of Brazil, and the government plans to shift more people to the cities. By 2030, China will have 1 billion city-dwellers, up from 731 million today, according to the World Bank.

While the movement from rural to urban areas generally increases income, it's socially destabilising and alienating, Lieberthal said .

Since the 1989 Tiananmen Square protests, China's Communist Party has preserved social stability with a mixture of economic growth and authoritarian muscle. The foundation of public order is an implicit bargain: The party retains its monopoly on power in return for providing an ever-better standard of living.

That bargain is now under pressure. Environmental damage - air pollution that a government adviser this year labeled unbearable, along with water shortages - undercuts the notion that life is improving. In the eastern city of Zhongtai, 60 people were arrested last month after protests against a proposed waste incinerator turned violent with police and private cars overturned, according to state-run People's Daily.

The government is engaged in a transition to a new economic model, which will require a downshift to slower, more sustainable growth than the 10 per cent annual average between 2005 and 2011.

"A lot of the stability in China is growth-dependent, so the Communist Party's legitimacy base is rather narrow," said Yasheng Huang, founder of the China Lab at the Massachusetts Institute of Technology, a bi-national business education endeavour. "The probability of instability increases fairly substantially when growth slows down."

In the first quarter, the economy eased to a 7.4 per cent annual growth pace en route to 5 per cent by 2026, according to the State Council's Development Research Centre and the World Bank. That comes after a three-decade expansion that lifted some boats higher than others: China's wealth gap is wider than in the US, according to a recent University of Michigan study.

Economic reforms aimed at giving market forces a decisive role in allocating resources will make losers of individuals and institutions that have profited from the current system. Allowing prices of labour, capital and energy to rise may "challenge the commitment of top leaders to the reform process," wrote economist Barry Naughton, a China specialist at the University of California, San Diego.

It would be a bigger ... security problem for us if China started falling apart at the seams
US President Barack Obama

The task is complicated by the need to wean the economy from its dependence on credit. Since the 2008 financial crisis, China's debt has risen to 245 per cent of gross domestic product, according to a June 12 report by Standard Chartered Bank.

China's leaders have their own worries. Xi has unleashed an anti-corruption drive targeting high-ranking party and military officials in what may be the broadest crackdown in the party's history.

Among recent victims of the corruption purge is Liu Tienan , former deputy director of the economic planning ministry, whom prosecutors said would be tried on charges of accepting bribes. Liu, 59, accepted what prosecutors said were "extremely large" payments.

Still, the party has managed to hold together a country of 1.3 billion people journeying from deprivation to prosperity. Martin Whyte, a Harvard University sociologist, compared survey data on Chinese attitudes in 2009 and 2004 and found no evidence of what he called the "social volcano" view.

"Popular acceptance of current inequalities remains widespread, despite continuing increases in China's income gaps," he concluded.

China's wealth has translated into a stronger military and more assertive regional posture. Chinese fighter jets have buzzed Japanese surveillance planes over disputed East China Sea islands while Chinese naval vessels have jostled Vietnamese boats in waters that both sides claim in the South China Sea.

In late May, Chinese bravado bubbled over at a regional security conference in Singapore. Major General Zhu Chenghu, a professor at China's National Defence University, warned US allies in Asia not to count on a strong American presence in the region, likening the US response to the Ukraine crisis to "erectile dysfunction".

Rather than indicating genuine concern over China's stability, Obama's comments may reflect an effort to soothe Chinese leaders' suspicions about his decision to devote more attention to Asia, said Andrew Nathan, a China specialist at Columbia University in New York.

Chinese leaders see Obama's so-called "rebalance" as a sign he wants to prevent the emergence of a rival superpower. By underscoring the American stake in a unified, prosperous China, Obama may be trying to ease such worries.

China's leaders are aware of their vulnerabilities. Though the government stopped releasing official protest tallies in 2005, it's clear that public disturbances happen daily. Sun Liping, a professor at Tsinghua University, estimated that there had been 180,000 protests, strikes, riots and other "mass incidents" in 2010, twice as many as in 2006.

"They face some very serious social order challenges," said Murray Scot Tanner, senior research scientist in the China studies division of CNA Corp., a research group in the US state of Virginia. "And some of them appear to be getting worse."

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This article is now closed to comments

I Gandhi
China's weakness "worries" the US. China's strength also "worries" the US. Even Obama resents China for it's economic progress as told by Australian PM Tony Abbott who rebuked Obama for his unfair views about China. Same old story from the fanatical religious right in the US who have been pining and praying for the collapse of China for decades. But as the Yiddish sayings goes "Man made plans and God laughs", American hopes may be just that.
baysidedweller
Unlike before, we are now all connected at the hip.
West is worried that economic and political uncertainty in China will affect their own economic growth.
China's foremost worry (IMO) is US trying to contain China's rise.
I think the best solution is for US to tone down it's alliance with Japan militarily so China can feel less threatened.
Then everyone can concentrate on economic growth so that it will be win win for all.
raymondspchu
Full of BS!
Sifu_628
US is most indebted fiscally to China, but the Chinese government depends heavily on the American and European markets for their exports as well as innovations. Nevertheless, history tells us that mutually dependent nations are most likely to compete and potentially-war with one another. It makes good sense as both China and the US compete for access to scarce resources and geopolitical dominance. Domestically, Chinese rulers face enormous difficulties in managing an increasing vocal and activist population - middle class of roughly 280 millions and growing who are dissatisfied with endemic corruption, ecological destruction and spiritual repression + an exploited mass of roughly 1 billion living at or near the subsistence level. CCPC's strategy to maintain stability within its borders is to create a fictitious external threat (ie: Japan and/or US) to deflect the people's anger and frustration towards a foreign enemy. Ultra-nationalism like Islamic radicalism seen now in Iraq and Sierra is violent and wasteful but effective for those who advocate an extremist ideology. Free thinking individuals must take heed against such developments.
lucifer
Every dollar of China's foreign reserves represents 1 dollar of domestic debt. How do you think those dollars end up in the coffers of the PBoC? When merchants trade, they receive the dollars and then most must be exchanged with the PBoC for RMB. The PBoC prints the RMB to buy the dollars. Normally printing this much money would cause inflation. However, the Chinese government issues bonds to suck up all that printed money and keep it out of the system. The bonds are mostly bought by state banks.
Too often the scenario described is something akin to the wealthy Chinese government, whose dollars apparently flow right from the merchant to the PboC would imply the merchant keeps nothing? But it does not work that way. Furthermore, giant ministries, like the ministry of Railways, who paid for and built the high speed rail network did so mostly with debt, which is not counted as national debt. Neither is the debt of state companies to which the Chinese government apparently guarantees their solvency. China is also an incredibly indebted nation, only the pyramid of Chinese economics and the opacity of the government hides the reality of the situation.
req
...what? Did that guy with no balls have something to say?
lib_prc

The Chinese (unruly and valueless as they are) are very easy to govern. Mr. Xi only needs to promote team sports and make all of them play football, rugby, basketball etc. He and Mrs. Xi should also show up to watch grassroots team sports events. This will help fundamentally transform the Chinese society...like it never has in the past 700 years.

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