China's Endgame

By Gordon G. Chang
World Affairs, March/April 2010

Edited by Andy Ross

On October 1, 2009, China's Communist Party celebrated the country's National Day, marking the sixtieth anniversary of the founding of the People's Republic. As they did ten years before, senior leaders put on a military parade of immense proportions in Beijing.

China has just about reached high tide, and will soon begin a long painful process of falling back. The most recent period of China's fast growth began in early 1992. This was the beginning of an era of globalization and tremendous wealth generation. The Chinese central government accumulated foreign currency reserves of $2.4 trillion. No country has a bigger stash. Analysts believe that China has now acquired unstoppable momentum.

But the analysts are wrong. China's economic model is ill suited to current global conditions. About 38 percent of the country's economy is attributable to exports but China's exports fell 16 percent in 2009. China's economy fell to negative growth at the end of 2008. Beijing stopped the precipitous decline with a $586 billion stimulus program that favors large state enterprises over small and midsize private firms.

Government-mandated lending pushed unneeded funds into the Chinese stock markets. Beijing's plan might trigger the biggest wave of corruption in Chinese history. Forced lending will create a mountain of bad loans. The stimulus plan targets infrastructure and aims to boost industrial capacity even further. Consumption has been sliding from its historical average of about 60 percent to about 30 percent today. That's the lowest rate in the world.

So the Chinese economy is now headed on a downward trajectory. China faces a number of problems, including banks with bad loans on their books, trade friction arising from mercantilist policies, a pandemic of defective products and poisonous foods, a grossly underfunded and inadequate social security system, a society that is rapidly aging as a result of the brutally enforced one-child policy, a rising tide of violent crime, a monumental environmental crisis, ever-worsening corruption, and failing social services.

The Communist Party faces the dilemma of all reform-minded authoritarians: the economic progress that legitimates their leadership endangers their continued control. The political system is having increasing difficulty channeling discontent as the Chinese people wrestle for control of their future. The Communist Party made the continual delivery of prosperity its primary basis of legitimacy.

Middle-class Chinese now behave like activists whenever they think their rights are threatened. The party can censor and imprison, but it does so at the risk of creating even more enemies, both internal and external, and further delegitimizing itself. No other country has more cell phone subscribers (703 million) or Internet users (384 million, at last count). Political dissent is sizzling on the Web. Beijing has created a Big Brother style Internet but it will never be able to claim final victory.

The strength of the Communist Party has been eroded. It's doubtful the party even commands the loyalty of its own members. Many cadres are opportunistic careerists. The change in attitude has even affected the People's Liberation Army. The country's prosperity has changed its people.

AR  I think this may be too pessimistic, but I guess the collapse of the CPC could be as fast as the fall of the CP in the Soviet Union. In that case, I guess we'll have to wait at least ten years for the economic situation to deteriorate. I don't see China collapsing faster than that.