FREE ESSAY ON IS CHINA UNSTABLE

IS CHINA UNSTABLE

Is China Unstable? 
Foreign Policy Research Institute Wire, July 1999
By Minxin Pei
Western attitudes toward China tend to oscillate between two extremes, often with
confusing
rapidity. Not too long ago China was widely portrayed as an emerging military and
economic
threat to the West. Its total economic output was projected to surpass that of the United
States in
two decades. Its military modernization was expected to provide China the capability to
project
its power far beyond its borders (and the recent Cox report on nuclear espionage has
revived
those concerns). And its authoritarian regime was supposed to be able to retain its grip
on power
for a long time.
Nowadays, however, the speculation about China's future has generally inclined toward
pessimism. The influential British magazine The Economist openly speculated about the
break-up
of China in its last issue of 1998. Not long before that, the same publication ran a
cover editorial
opining about the imminent collapse of the Chinese economy. And in a speech delivered in
April
of this year, President Bill Clinton warned of the dangers of an unstable China which
failed to
reform.
Even within China, signs of danger and nervousness abound. Arguably, the Chinese
government
now faces the most severe challenge since the Tiananmen Square demonstrations a decade
ago.
Unemployment is rising at a frightening rate. Several key anniversary dates fraught with
symbolic
and real political dangers (such as the 50th anniversary of the People's Republic, the
10th
anniversary of the Tiananmen Square crackdown, and the 40th anniversary of the uprising
in
Tibet) have prompted the government to maintain a tight watch over the country's tiny
dissident
community lest something akin to the 1989 movement break out again.
In my judgment, the current pessimism about China's short- term prospects is as
exaggerated as
the previous optimism about its long-term economic outlook. In fact, China is likely to
retain its
short-term political stability despite many signs of potential turmoil, but will face
rising instability if
the regime fails to undertake significant political reform in the next decade.
CHINA'S CURRENT DIFFICULTIES
While parallels between the problems China faces today and those it confronted during
the
Tiananmen crisis a decade ago may be alluring, they are misleading. In 1989, the Chinese
Communist Party (CCP) faced a genuine crisis of political legitimacy, which had its
origins in
1978-79, when the leaders promised, but repeatedly failed to deliver, political reform.
By
contrast, the challenges confronting the Chinese government today are primarily
economic,
although weaknesses in the political system make potential solutions more elusive.
Specifically, China's economic difficulties today originate, externally, from the
aftermath of the
East Asian financial crisis (falling exports and foreign direct investment) and,
internally, from weak
consumer demand and severe structural problems. The internal problems are far more
daunting
than the external.
It is well known that China's two most perilous economic challenges are an insolvent
banking
system (which has total bad loans of between 25 and 30 percent of gross domestic product)
and
rising unemployment due to the restructuring and privatization of the loss-making
state-owned
enterprises (SOEs). Many analysts believe that the latter poses the clearest threat to
the Chinese
government, because any unrest by the unemployed, who are concentrated in urban areas,
would
lead to a political crisis akin to the Solidarity movement in Poland in 1981-82. Given
the sheer
numbers of unemployed and underemployed people in China, this analysis is not without
merit.
The official China Daily reports that, among urban dwellers, unemployment is about 11
percent
(or 16 million people). In addition, as many as 120 million rural laborers are
considered
underemployed.
However, unemployment alone is unlikely to generate a high level of political instability
and is
even less likely to bring down the regime. (Can you recall the last time a regime was
toppled by
unemployment?) In analyzing the political consequences and implications of economic
crises, we
must understand that not all economic crises are created equal. Although all of them are
nasty and
harmful to the societies they hit, they produce different political outcomes because
their effects
are filtered through the political system differently.
In the case of high unemployment, its impact on political instability tends to be limited
for two
reasons. First, unemployment principally affects only one segment of society, namely,
manufacturing workers. It would be difficult for these workers to find political allies
in other
sectors. In China, workers being laid off from SOEs are viewed as industrial aristocrats
who
have had it pretty good for the last fifty years at the expense of the other segments of
society.
Second, the ranks of the unemployed are relatively fluid. Many unemployed, especially the
most
able, can find alternative employment. This leaves the ranks of the unemployed without
permanent leaders and unorganized. By contrast, a full-blown banking crisis is far more
lethal,
because it triggers hyperinflation and a massive run on banks. Unlike unemployment, which
tends
to hit one segment of society especially hard, a banking crisis would hurt virtually
everyone
(except the very wealthy). Such a crisis sends out a political signal to the majority of
the
population that something is terribly wrong, thus facilitating unity and coordination
among all the
disaffected elements, from the peasantry to the unemployed to the middle-class. A broad
anti-regime coalition is therefore more likely to emerge following a banking crisis than
high
unemployment.
This reasoning leads us to question the conventional wisdom about the connection between
the
recent crackdown on dissidents and the country's economic problems. Most analysts believe
that
the government's crackdown was motivated by the fear that dissidents would form a
Solidarity-type coalition with the unemployed to challenge the Communist Party's rule.
This
analysis, while appealing, overlooks another probable explanation. The government's
crackdown
could well have been motivated, not by the fear of unemployment, but by the fear that any
signs
of political instability would shake the population's confidence in the government, and
hence in the
security of their assets. Fearing the loss of their life savings, ordinary Chinese (who
have over 80
percent of their total assets deposited in the banks) would unleash a run on banks, which
would
force the government to print more money to cover the withdrawals, in turn sparking
hyperinflation and massive popular discontent.
THE VULNERABILITIES OF THE COMMUNIST PARTY
To be sure, the current economic difficulties have caught the Communist Party in a
particularly
vulnerable state. Specifically, the ruling party faces the following structural and
institutional
weaknesses:
1. Narrower base of support. Despite the Western media's caricature of the ruling regime
as a
communist dictatorship, the nature of the Chinese regime has changed profoundly in the
last two
decades. If we may call the pre-reform Chinese regime a socialist one with a broad base
of
support among workers and peasants, pro-market reforms have seriously eroded the broad
social base of the CCP. This change has come about, ironically, precisely because of the
relative
success of the economic reform under Deng Xiaoping. For the peasantry, market-oriented
reforms have resulted not only in direct economic benefits and independence from the
state; they
have fundamentally eroded the Communist Party's political control in rural areas and left
the
regime without means of mobilizing political support there. As for urban SOE workers,
market-oriented reforms have begun to hurt their interests by making their jobs insecure
and
benefits less generous. They blame their plight on the government and have begun to
display their
discontent openly and violently.
The regime's political support today comes primarily from only four groups: the
bureaucracy, the
military, the security forces, and the rapidly increasing urban middle- class that will
have much to
lose (such as the value of their stocks and real estate) in the event of political
instability.
2. Organizational deficit. The CCP previously controlled a vast network of social
organizations,
including the official labor unions, women's associations, the youth league, and many
professional
associations, which in turn controlled most segments of the population. But that is no
longer the
case. Official organizations closely tied to the party have lost credibility, enjoy
little grassroots
support, and cannot be expected to serve as instruments of control or political support.
Other
organizations, notably, religious groups and professional associations, have become more
independent and will likely resist manipulation by the party.
3. Weak institutional channels of resolving state-society conflict. A related weakness of
the
present political system is the absence of credible institutions that would allow
individuals and
groups to articulate and pursue their own interests. In democratic systems, electoral
and
legislative processes do this, but in China, no institutions perform such functions
reliably. In their
absence, collective grievances will accumulate, leading in the long term to political
instability. In
the short term, collective grievances are increasingly expressed in violent protests. In
fact, the
government admitted there were 5,000 collective protests in 1998.
4. Absence of effective institutions to resolve conflicts within the state. China also
has no
functioning institutions that might resolve conflicts among the various components of the
state. The
absence of such institutions, which would typically be provided for by federalism, causes
cyclical
opportunism characterized by frequent policy changes by the central government and
resistance
to those policies from local governments. Consequently, the policy environment is
uncertain and
law enforcement weak. In fact, the most serious problem facing China is not that it does
not have
democracy, but that it does not have federalism. That is, it lacks a clear division of
responsibilities
between the central and regional governments.
HIDDEN STRENGTHS OF THE REGIME
I have listed a series of structural weaknesses of the party-state in China. However, it
would be
wrong to conclude from the above observations that the system is about to collapse, for
there are
several strengths that help offset these weaknesses.
Weak opposition. Domestically, the CCP faces no real threat.Because opposition to the
regime
is unorganized and dispersed, for most people there is simply no credible alternative.
This is
perhaps the most important factor working in the CCP's favor. A party song states, Only
the
CCP can save China, but it should be, Only the CCP can govern China -- at least for now.
Relative elite cohesion. Political turmoil in China in the last 50 years has always come
from
disunity and power struggles at the highest level of the regime. Today's top elite is
much more
unified than during any previous period. The political differences between top elites
today are
mainly over policy and personality, rather than over ideology.
The CCP remains a formidable force of control. Because the party maintains a relatively
effective
system of control in dealing with top-priority issues, in the short term it should be
able to confront
any challenges to its hold on power. The CCP has also learned a key lesson from the 1989
movement: never to allow a minor incident to develop into a full-blown political crisis.
That
explains why the government reacted swiftly and harshly against the leading dissidents in
the last
few months.
The Chinese are beginning to tackle their long-term problems. It is encouraging to see
that some
of the top leaders seem to have realized the long-term threats to the current system and
have
begun to take some tentative steps to address them. It seems that ideas of federalism
are
beginning to influence institutional designs in China. Among the most promising steps
taken so far
is the reform of the central bank along the lines of a Federal Reserve-style system.
Moreover, the
1994 tax reform, although far from perfect, was the first step toward fiscal federalism.
CONCLUSION
Although localized incidents of social unrest, sparked mostly by economic difficulties,
are likely to
increase, the Communist Party should be able to avert significant political turmoil in
the near
future. However, even if the Chinese government gets through 1999 without a repeat of
1989, it
must soon confront the issue of political reform more seriously, because the challenges
it poses
will only increase as time passes. If no significant institutional change is undertaken,
China will
experience rising tensions that its current political system will be incapable of
handling. Failure to
implement political institutional reforms may lead to rising instability through three
mechanisms,
either simultaneously or sequentially. First, failure to reform will reduce economic
efficiency as the
costs of insecure property rights, poor contract enforcement, and exorbitant rents become
more
baneful. This will inevitably reduce the rate of growth, which will further exacerbate
social
tensions and damage the legitimacy of the Communist Party. Second, failure to reform will
allow
corruption to worsen, inequality to rise, and poor governance to persist, eventually
causing a
massive social explosion such as occurred in Indonesia in May 1998. Third, failure to
reform will
cause rising division within the current moderate-conservative ruling coalition as the
more liberal
elements become disenchanted and frustrated with the slow pace of reform. A split within
the
elite has led to political instability before, and could easily do so again.
Indeed, although China is unlikely to become another Indonesia today, it is very likely
to become
one in ten years' time if its leaders are lulled into complacency.