Is China Edging Towards Political and Economic Uncertainty?

By R S Kalha
March 20, 2012

While most politicians in India are quick to point fingers at the UPA government for economic policy paralysis, the situation across the border in neighbouring China is not exactly a bed of roses either. Premier Wen Jiabao recently informed the National People’s Congress [NPC] that China’s GDP growth is likely to come down to between an estimated 7.5 and 8 per cent. This revelation highlighted the fact that for the first time in recent memory, the February 2012 figures for exports from China showed a dramatic fall. It is possible that this may be due to the Chinese New Year, which falls in February and during when factories traditionally close down for the holidays. As China’s development story is based mainly on export-led growth, the February export figures are indeed a cause for concern.

The reasons for China’s declining exports are not far to seek. China’s main export markets are the US, the EU and Japan. The problem is that these economies are stagnating with no upsurge in sight and therefore can no longer be expected to be counted as reliable and sustainable sources of external demand. As a Bank of China economist, Zhen Feng, admitted, ‘Chinese exports face huge pressure and growth will slow down next year’. At the same time there is idle capacity, weak consumption, higher prices for essential raw materials, coupled with rising food prices and wages. It is estimated that unsold inventories in Chinese factories amount to nearly US$50 billion. Some of these maladies can be attributed to the stupendous state spending when the stimulus package of $585 billion was authorised in November 2008 to tide over the financial crisis that hit mainly the capitalist west. On a recent visit to Beijing, even the IMF Chief Lagarde highlighted the fact that China needs to take a second look and move from concentrating on exports to reviving domestic demand.

However, the Chinese property market is suffering a down turn too. There has been a sharp drop of 20 per cent in residential property prices and the retail and car sales figures are disappointing as well. The good news is that inflation figures are still low and this has given the authorities the leeway to cut interest rates in order to stimulate demand. As China’s export opportunities reduce, the authorities will have to think in terms of stimulating domestic demand. The Chinese leadership is aware of this anomaly and have publicly spoken about undertaking serious reforms, but the question is whether they are united behind such economic measures?

Increasing economic woes are having an effect on China’s domestic stability. Already one of the leading contenders for the leadership in the future Bo Xilai, the Party Chief of Chongqing, has been sacked and replaced. This will undoubtedly have repercussions on the forthcoming 18th Party Congress to be held later this year, where leadership changes are expected to be announced. It is a moot point whether this is the first shot fired in the power struggle that is bound to happen. Bo was known for advocating hard-line positions and is reported to have called for a ‘red revival’. Bo, a genuinely charismatic leader probably the first since Deng, would certainly have been a candidate for membership of the Politbureau. His sacking ushered about 1.7 million hits on the Chinese social network Weibo, thereby indicating his popularity. Bo is also a ‘princeling’; his father Bo Yibo was one of China’s outstanding politicians who was purged by Mao during the Cultural Revolution. Significantly, Bo could only be safely replaced by another ‘princeling’ Zhang Dejiang, whose father was a former PLA general.

In recent days there have been reports of significant internal unrest. Uighars in Xinjiang [Sinkiang] are in ferment. Apart from the rising number of self immolations undertaken by Tibetans that is likely to inflame Han-Minority relations, there have also been an increasing number of riots as corrupt officials try to seize valuable land from farmers particularly in the fast growing coastal areas. Most of the land thus taken is for development of shopping malls and high-end residential buildings in which profits for local officials are enormous. Those who lose their land are paid a pittance in compensation. In addition there are also about 200 million internal migrants eking out a living in metropolitan towns. Most of them are denied health care benefits as well as educational facilities at par with those who are the original inhabitants. Corruption is an issue in China and no matter how harsh the repression it refuses to die down.

Thus as China heads towards leadership changes which would take place after the 18th Party Congress, there is uncertainty both as regards economic policy as well as internal dissidence. What policy China will eventually follow would only be known later, but the fierce political power struggles and economic policy clashes that will take place would occur behind the facade of the Communist Party of China. Its deliberations are routinely secret, but sufficient leaks do take place that indicate how the ‘struggle’ went. The ‘bamboo curtain’ is sometimes surprisingly leaky. As China is the world’s second largest economy, the world watches with bated breath the final outcome.

source:IDSA Comment