Sunday, April 20, 2014

Gordon G. Chang - China on the Edge

NB - This article is written from a geo-strategic perspective; and carries what military-minded people refer to as a 'realist' approach. I don't agree with such an approach, nor with the theory of deterrence. Nonetheless it is well written and thought- provoking - DS

why are China's severe economic problems relevant to us? Because for more than three decades the Communist Party has primarily based its legitimacy on the continual delivery of prosperity. And without prosperity, the only remaining basis of legitimacy is nationalism. The People's Liberation Army, which is configuring itself to fight the United States, is the embodiment of that nationalism. China's militant nationalism is creating friction in an arc of nations from India in the south to South Korea in the north

China's external policies are of deep concern. It is not just that Beijing is hostile; its foreign policy now makes little sense. In the past, Beijing threw tantrums and even started wars when it wanted to punish a neighbor. Chinese leaders were always smart enough to direct their anger at just one or two targets to make sure they got what they wanted. And many times they were successful. Today, Beijing is taking on many others, all at the same time, especially countries to its south and its east and the United States. How many adversaries does a country need? The Party is lashing out, and that is not a good sign. If nothing else, it betrays a lack of strategic thinking. It is not promoting worldwide revolution, as it did in the early years of the People's Republic, but it is trying to upend the existing international order, something that Mao also attempted. So we have to be prepared to face the fact that China is no longer a status quo power.

There is something very wrong in China at the moment. China, I believe, has just passed an inflection point. Until recently, everything was going its way. Now, however, it seems all its problems are catching up with the Chinese state at the same time. The country has entered an especially troubling phase, and we have to be concerned that Beijing—out of fundamental weakness and not out of strength—will lash out and shake the world. So what happened in the past decade?

To understand China's new belligerent external policies, we need to look inside the country, and we might well start with the motor of its rise: its economy. Everyone knows China's growth is slowing. Yet what is not obvious is that it is slowing so fast that the economy could fail. The Chinese economy almost failed in June. There were extraordinary events that month including two waves of bank defaults. The Industrial and Commercial Bank of China, the country's largest bank—the world's largest bank—was obviously in distress: it even had to shut down its ATMs and online banking platforms to conserve cash. The Bank of China, the country's third-largest lender, was also on the edge of default.

There was panic in China in June, but central government technocrats were able to rescue the economy by pouring even more state money into "ghost cities" and high-speed-rail-lines-to-nowhere. Doing so created gross domestic product—economic output—but that was the last thing Beijing should have been doing at that—or this—moment. China, at every level of government, is funding all its construction with new debt. You think America has a debt problem; China's is worse. As one economist told us recently, every province in China is a Greece. China, after the biggest boom in history, is heading into what could end up as the biggest debt crisis in history. This is not a coincidence.

Soon, there must be a reckoning because the flatlined economy is not able to produce sufficient growth to pay back debt. If we ignore official statistics and look at independent data—such as private surveys, corporate results, and job creation numbers—we see an economy that cannot be expanding in the high single digits as Beijing claims. How fast is the country really growing? In 2012—the last year for which we have a full set of employment statistics—the number of jobs in China increased 0.37% over 2011. This indicates that China could not have grown by more than 2.0% In 2013's third quarter, preliminary surveys show the number of jobs decreased 2.5% from Q3 in 2012 and 4.0% from Q2 2013. That is an indication that China's economy has already begun to contract both year-on-year and quarter-on-quarter.

And why are China's severe economic problems relevant to us? Because for more than three decades the Communist Party has primarily based its legitimacy on the continual delivery of prosperity. And without prosperity, the only remaining basis of legitimacy is nationalism... Read more:

See also
The Crises of Party Culture: by Yang Guang
The crises of Party culture become clear with a single glance. The CPC is called the ruling party, yet it operates according to secret party rules: this is an identity crisis. Its formal ceremonies and slogans are like those of an extremist church, and it has long lost its utopian doctrine that stirred the passion of the people: this is an ideological crisis. It tells beautiful lies while accepting bribes and keeping mistresses: this is a moral crisis. The totalitarian system is in the process of collapsing, yet political reform is not in the foreseeable future: this is a political crisis. It has corrupted traditional values and also rejected universal values, rendering Party members and government officials at a spiritual loss: this is a crisis of values.