The shudder on world stock markets this week following China’s devaluation of its currency has exposed a deeper fear: that its political leaders will not be able to manage the transition from an investment-led and export-dependent economy to one which grows less rapidly but relies much more on consumption to sustain its buoyancy – and the leaders’ legitimacy.
China's remarkable growth over the last generation has made it the second largest economy in the world after the United States. It is the fastest and largest transition from a predominantly agricultural and rural economy to an urban and industrial one in world history. The 200 million workers who flocked to its new manufacturing cities since the 1980s expect higher living standards, as does China's huge new middle class. Many of those who fall within this category have lost savings in its recent equity boom and bust.
The problem for China’s communist leadership and its 56 million party members is to maintain the growth while shifting its focus and preserving its monopoly of power. This is as much a political as an economic challenge. China’s vast size means the communist party is not as powerful as that monopoly implies. The model of state capitalism it has pursued additionally involves decentralises decision-making. And however strong and cohesive are its party cadres and state apparatus, they are unable to stifle the social protests and critical media thrown up by a much more sophisticated society.
This greater diversity and pluralism is further reinforced by demands that the ecological and social costs of such rapid change be more sustainably and equitably borne. The leadership’s commitment to tackle global climate change issues, reflected in its agreement to act jointly with the US, is driven by its public’s concerns over pollution and environmental degradation. Those millions of rural workers now demand full citizenship rights where they work rather than the second-class migrant status they have. And the extensive campaign against high-level corruption reflects President Xi Jinping’s conviction that its legitimacy will be undermined if the issue is not tackled head-on.
Public opinion
He speaks frankly of these problems, insisting that the leadership responds to public opinion and recognises the need for a legitimacy of outputs and outcomes. He makes the point that while
China
may look like a colossus to outsiders, its development is in fact highly uneven and on average its income remains a fraction of that in the more developed world.
A party ideology of patriotism in the face of these difficulties is fanned by state and other media. It reflects a fear that a loss of party control would usher in disintegration. Only the party can guarantee social and moral order and contain the excesses of capitalism, they proclaim.
Such injunctions sit uneasily with the wild speculative excesses of the last year’s stock market boom, as 20 million more middle class investors joined in this spring. While it is true that only 15 per cent of Chinese household savings are so invested, the splurge looks like a classic bubble, created by property speculation and excess capacity.
The immense surge of public investment since the global financial crisis of 2007-8 insulated China from its effects; but it has created a large pile of debt, an estimated 280 per cent of GDP. And while reserves arising from the long period of high growth are far larger than this, they may not be available to prevent the debt pile exploding.
China therefore faces major conjunctural problems as it tackles the transition from its existing model of export-led growth dominated by global markets to a more developed and sustainable one dominated by domestic consumption, services and innovatory productivity.
Much international commentary assumes that can only be accomplished by freeing up international capital investment in its economy, by privatisations and legal freedoms to protect such property rights. This would change the state capitalist model into a more privately dominated one. Implicit or explicit in these analyses is a political assumption it would make authoritarian and monopolist communist control redundant.
That would combine an economic and political transition of such major proportions as to constitute revolutionary change – and possibly war with Asian or US antagonists. This is certainly not what the ruling party wants or anticipates. It seeks to preserve its power by redirecting the internal economic imperatives. Externally it is mobilising Asian and central Asian partners into an immense network of transport and infrastructure investment, creating a more integrated region reminiscent of former Chinese spheres of influence – and tributary relations.
Much of the world’s future will depend on how this transition happens and how it is organised. pegillespie@gmail.com