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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.

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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 …

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