A
crisis of faith
In
their response to wobbly markets, China’s leaders reveal their
fears
Jan 16th 2016 | From
the print edition / The Economist
Timekeeper
THERE should be
something comforting, during uncertain times, in the sight of the
boss solidly seated behind his desk, working away at the business of
the day. And that was the image China’s official state media
presented when broadcasting Xi Jinping’s annual new-year message to
the Chinese people on December 31st—though it has to be said, if
that impressive expanse of wood really is the presidential desk, Mr
Xi must find it hard to reach his impressively red but implausibly
far-off telephones.
From this
confidence-inspiring position Mr Xi told his audience that 2016 was
going to mark “the beginning of the decisive phase” of the
country’s efforts to build a “moderately prosperous society”, a
goal that the Communist Party says it hopes to reach by the end of
the decade. Not mentioning that the economy’s rate of growth was at
a quarter-century low, he maintained that the country’s future
prospects were “encouraging”.
Recent events,
however, suggest that Mr Xi’s managerial confidence is not widely
shared. Jitters emanating from China’s equity and currency markets
have exposed widespread fears that the way ahead will be rocky
indeed—and that Mr Xi and his colleagues are ill-equipped to
navigate it. Evidence from their handling of a broad range of
political and economic policy suggests that the worriers may prove
right.
Four days after Mr
Xi’s broadcast, the Shanghai stockmarket reopened after a new-year
break. With 90 minutes to go before the close of business,
transactions were halted for the rest of the day: the index had
fallen by 7% and a newly introduced “circuit-breaker” kicked in.
The sell-off has deepened since then: the index is now down by about
15% so far in 2016, its worst-ever start to a new year. At the same
time, China’s once-placid currency has turned stormy. The central
bank believed it could nudge the yuan down, offering a little help to
weary exporters without grave repercussions. Instead, it has
triggered an exodus of capital and alarmed investors around the
world, who braced themselves for bigger falls. As fears of a meltdown
in China rippled across global markets, the government scrapped the
ill-conceived circuit-breaker, and scrambled to shore up the yuan and
the markets by telling its banks and brokers to buy.
Panic about China’s
ability to maintain steady growth is unwarranted. True, its debt is
worrisome: government and private debt was about 160% of GDP eight
years ago and now stands at more than 240% (about $25 trillion). But
the government still expects the economy to grow by an average of
6.5% a year for the rest of the decade. That may be difficult, and it
could entail a lot more wasteful investment. But it should be
achievable.
The problem is thus
not an economic one, per se. It is that a government once widely
thought of as all-powerful—even over markets—may be losing its
grip. The recent ructions, after all, are not the first mess of this
sort; the markets went haywire last August (see chart 1). China’s
leaders are now grappling with hugely complex reforms of their
financial system, their currency policy and of their state-owned
enterprises and, apparently uncertain how to proceed, they are
thrashing around and making mistakes. At home and abroad, people risk
losing faith in them; such a loss would be felt well beyond the
markets.
Mr Xi and his
colleagues appear frightened of losing their grip on the economic
levers that they have used to help keep the party in power. Party
bosses like state-owned banks: they can be relied on to direct
lending to favoured companies and loyal officials’ projects. They
worry about loosening the party’s grip on the state-owned
industries that control vital areas of the economy such as energy,
transport and telecommunications—can anyone but party loyalists be
trusted to run them?
If the party drags
its feet on reform, though, China will fall back on unsustainable
stimulus measures, and may eventually slide into economic stagnation,
as Japan did in the 1990s. That would bring with it the risk of
social and political turbulence. A full-blown economic crisis cannot
be ruled out. Once admired by authoritarian governments elsewhere,
not to mention some commentators in the West, for its canny balancing
of free markets and party control, China’s style of leadership may
be about to lose its shine.
Though he may lack a
sophisticated understanding of how to handle stockmarkets, Mr Xi was
quick to grasp the dangers facing China when he took over in 2012.
Some foreign commentators were still, even then, mesmerised by what
they regarded as a winning combination of a technocratic government
with a good sense of the country’s needs and how to fulfil them,
and a disdain for the endless debates that can bog down good policy
in democracies. But Mr Xi and his colleagues realised that the
foundations of the model that the late Deng Xiaoping began to develop
in the late 1970s, and that in the 1990s came into its own, was in
need of an overhaul.
Trouble at the top
The model’s surge
of success had been sustained by two forces: the rapid spread of
prosperity and, since the bloody suppression of the Tiananmen Square
protests in 1989, an unusually protracted truce among the often
fractious party elite. Consistent growth underlay both, providing
fabulous dividends for the elite as well as prosperity for hundreds
of millions of people. But in 2012 China’s GDP was growing at its
slowest pace in 13 years (see chart 2). To make matters worse, Mr
Xi’s assumption of power occurred amid the most vicious struggle
within the leadership that China had seen since Tiananmen. Not
content with enriching his family to a phenomenal degree, Bo Xilai,
the party boss of Chongqing, a south-western region, also made a bid
for a job at the very top. Mr Xi resented this; other powerful
politicians backed it. Mr Bo is now serving a life sentence for
corruption and abuse of power.
Although economic
growth and peace at the pinnacle of the party kept the country
stable, they did not keep it static. Under Mr Xi’s predecessor, Hu
Jintao, the middle class grew phenomenally (see chart 3). And its
desire for a stable environment in which to get ever better off was a
vital bulwark of party rule. But some of its members were
increasingly fed up with the party’s caprices and its manifest
corruption. What was more, this middle class had a powerful new
weapon: information.
The rapid spread of
the internet opened up a nationwide forum for dissent. Sina
Weibo—China’s equivalent of Twitter—was founded just three
years before Mr Xi took office; but by that time it had 46m daily
users. Social media allowed the party to monitor public opinion and
identify problems before they became threats to the party’s grip on
power. But they also spurred the development of a civil society:
NGOs, house churches and independent legal firms ready to take up the
cases of the downtrodden and dispossessed in their battles with
officialdom all made extensive use of social media. Groups
independent of party control—albeit small and scattered—sprang up
everywhere.
Events abroad seemed
to underscore the instability of authoritarian states. The Arab
spring began unfolding in 2011, a year before Mr Xi took over, and
though it hardly amounted to a democratic breakthrough—far from
it—it showed that authoritarian governments could prove
unexpectedly brittle. The police in China worked hard to prevent any
copycat unrest. At the same time, the Tibetan plateau and Xinjiang,
which cover about 40% of China’s land area, were seething with
anti-party sentiment following the government’s ruthless response
to unrest in 2008 and 2009.
A demographic crisis
was also beginning to loom. Plunging birth rates were stripping China
of the surplus of working-age people that had constituted its
“demographic dividend”: it was fast growing old. Young people
were beginning to worry about a future weighed down by the burden of
caring for the elderly—not to mention sky-high property prices and,
among graduates, rising unemployment. To cap it all an environmental
catastrophe was unfolding: the industrialisation that had brought
growth was choking cities with smog; one-fifth of rivers were too
toxic for human contact, let alone to drink from. Even party leaders
had taken to describing China’s economic model as “unstable,
unbalanced, unco-ordinated and ultimately unsustainable”.
Faced with a need to
reshape, or even fundamentally restructure, China’s economic and
political model, Mr Xi has tried to present himself as a reformer in
the mould of Deng Xiaoping. He has acquired more power than any
leader since Deng, putting himself in charge of all the most
important portfolios and abandoning the system of “collective
leadership” Deng brought in. Indeed in many ways Mr Xi’s grip on
the country’s mechanisms of control appears stronger than Deng’s
was, and second only to that of Mao Zedong.
Thus empowered Mr Xi
talks of reform that goes yet further than Deng’s did—as when, in
2013, he asked a meeting of the party’s 370-member Central
Committee to endorse his call for market forces to be given a
“decisive” role in the economy. (It did.) Recently Mr Xi has
taken to calling for “supply-side reform”, implying that
structural changes in the economy, rather than massive state-led
investment, are to be the new order of the day. The party’s main
mouthpiece, the People’s Daily, calls these reforms the “China
Model 2.0 Edition”.
A crucial aim of
this approach is to ensure that the middle class remains on side,
even as what Mr Xi likes to call a “new normal” of slower growth
sets in. Hence his signature exhortations to build the “Chinese
dream”. It is an ambiguous term, partly designed to evoke thoughts
of American-style middle-class prosperity, and of a life unfettered
by interfering government. But the slogan was also designed to foster
patriotic pride, including a “dream of a strong army”. Mr Xi’s
revamped China model leans even more heavily on nationalism than
earlier models did.
Constitutionally
inept
Mr Xi’s style of
rule, though, has proved an impediment to his ambitions. His
anti-corruption campaign—the longest and most far-reaching of its
kind since the party seized control in 1949—has been welcomed not
just by the middle class but also among those less well off, who feel
that China’s economic miracle has unfairly rewarded the powerful.
But along with specific injunctions not to question party policy the
anti-graft drive has made officials even more afraid than usual to
take the risks needed to carry out reform.
In the political
realm Mr Xi talks of making the legal system fairer and more
effective. Just a month after he took over, he took up a cause that
had long been dear to liberal intellectuals: that of giving the
constitution more clout. “No organisation or individual has the
privilege to overstep the constitution and the law,” he said. He
was trying to instil some discipline into the authoritarian model,
reining in abuses of power and privilege within the party that had
enraged the middle class and people aspiring to join it.
Those who saw this
as licence to push for deep reform, though, were quickly disabused.
When a party-controlled newspaper in Guangdong province, Southern
Weekend, tried to argue the case for constitutional government in an
editorial titled “The Chinese Dream: A Dream of Constitutionalism”,
the censors shut it down. Journalists at the paper went on strike;
dissidents gathered outside its offices in Guangzhou. Tolerated for a
couple of days, the sight of crowds on big-city streets listening to
speeches calling for freedom of the press and even a multiparty
system proved too much. The police rounded up the dissident orators.
Late last year three of them were sentenced to terms of between
two-and-a-half and six years in jail. The episode ushered in a
crackdown on civil society of greater duration and intensity than any
since the dark days that followed the Tiananmen protests.
Mr Xi still talks up
the constitution. At a meeting in 2014 the party’s Central
Committee decided to make officials swear loyalty to it, ordered
schools to teach students about it and decreed that December 4th
would be celebrated henceforth as Constitution Day. But Mr Xi’s
talk of constitutionalism rings hollow to liberals, just as his talk
of reform fails to calm markets. And its impact within the party
remains unclear.
One way Mr Xi hopes
to prolong the party’s life is by proving that it can govern
effectively. His anti-corruption chief, Wang Qishan, raised eyebrows
in September when he said that “the legitimacy of the ruling party”
rested partly on “the mandate of the people”. It was the first
public use of the word legitimacy by a Chinese leader in connection
with the party’s rule, and seemed to imply a recognition that the
party could not take it for granted.
Mr Xi has built on a
system, developed by his post-Deng predecessors, of grading officials
according to their fulfilment of “responsibility targets”. In the
past the targets that mattered most were those seen as maintaining
social stability and promoting economic growth. Now the environment
is getting a much higher billing. In 2012 the government made the
reduction of PM2.5 air particles, the worst kind, a “hard target”
in Beijing and other heavily polluted cities. State media have
reported that the mayor of Beijing, Wang Anshun, has been
ordered—metaphorically—to “submit his head” if he fails to
meet this target.
Sensing that China’s
development has entered uncharted territory, China’s leaders are
turning to foreign gurus. In November Mr Xi met Francis Fukuyama, an
American political scientist whose claim to fame is a thesis that
would seem to run against everything Mr Xi wants to protect: that the
march to liberal democracy is an unstoppable one. Mr Fukuyama has
tweaked this “end of history” line somewhat since first espousing
it, emphasising that, even in the absence of democracy, a state’s
ability to enforce laws and provide basic services such as education,
health and infrastructure can matter a lot.
Harder tasks
Can Mr Xi’s
model—with all the flaws in its implementation—continue to keep
the end of the party’s history at bay? David Shambaugh of George
Washington University, a career-long observer of China, was an early
champion of the idea that the party had learned useful lessons from
the collapse of the Soviet Union and changed its methods of ruling
accordingly. It had, for example, allowed the development of NGOs
that could help fill in the cracks of an overstretched welfare
system. It had recruited more businesspeople into its ranks and
experimented on a small scale with elections for party posts.
But in a forthcoming
book, Mr Shambaugh says he has changed his mind; he thinks the
reforms of which he spoke have run their course and a new era of
“hard authoritarianism” has begun. And he points out that there
has been no example of an authoritarian country making the transition
to high-income status that Mr Xi seeks without at least a partial
democratisation.
The 100th
anniversary of the party’s founding will come in 2021, just before
Mr Xi’s years in power are due, if he follows the example of his
predecessors, to come to an end. If China’s reforms continue to
disappoint over the next few years, it is unlikely to be the joyous
celebration Mr Xi must be hoping for. Nationalist chest-thumping may
help to rally some support for the party. But it comes with
risks—China’s history since the 19th century is studded with
examples of nationalist fervour turning against the government
because of leaders’ perceived failings.
Mr Xi may feel
inclined to step up economic pressure on Taiwan, which is likely to
elect an independence-leaning president on January 16th after eight
years of rule by one who favoured closer ties with China. But there
is little sign of public appetite for a return to the military
tensions of the mid-1990s, when China lobbed unarmed missiles close
to the island.
There is every
reason, therefore, for Mr Xi to worry. Job losses in manufacturing
will stoke tensions among blue-collar workers, which is why the party
has started rounding up labour activists (see article). The loyalty
of the middle class, long accustomed to unremitting growth, will
become increasingly difficult to secure as growth slackens further.
Both the middle class and the equally large cohort of rural migrants
that dreams of joining it are vital to the country’s economic
success, and both are capable of mobilising regime-threatening
opposition. Mr Xi talks a good reform, but has yet to follow through,
and has shown that his preferred way of dealing with any threat is to
resort to time-honoured tactics of cracking down ever harder. Chinese
authoritarianism has been at times surprisingly deft. Just now, it
does not look so.
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