Turning Point for China

A top Politburo member’s dismissal and suspended death sentence for his wife for murder highlight the malaise in China. Combined with a gathering economic crisis, recent events have radically altered the perception of China as among the world’s stablest economic engines.

China, once considered the embodiment of poverty and misery, a victim of colonial globalization, emerged as an economic superpower in the early 21st century with tectonic global effect. Despite much-publicized commissioning of China’s first aircraft carrier, China appears shakier underneath, marking yet another reversal that could hold unexpected consequences.

A historical overview shows China’s profound, rapid and radical global metamorphosis. In the early 15th century, several decades before Vasco da Gama and Ferdinand Magellan, the legendary Chinese Admiral Zheng He undertook extensive pioneering voyages around Asia and down the coast of Africa. Portugal and Spain set out to sea to establish empires, soon followed by the Dutch and British, ultimately leading Europe to dominate the planet.

In contrast, the last voyage for the Ming Emperors was completed in 1433, and China turned inward. From then until 1979, when China’s market opening economic reforms were launched under the leadership of Deng Xiaoping, China rejected globalization, seeking to shut itself off from the rest of the world – unsuccessfully during the 19th and first half of the 20th centuries when it was brutally brought under the Western and Japanese imperialist orbits.

China’s decline was the most precipitate the world has seen. During that period, the terms “Chinese” and “poor” were almost synonymous. Mao Zedong led a revolution, trying to restore sovereignty and dignity to China, though during near three decades of his regime, China was off the global economic map.

Hence, the tectonic paradigm shift, within China and in global stature. A few illustrations: In 2000 China was Brazil’s 12th export destination; by 2008 it was first and has remained so. Similar patterns apply across Latin America over the same period, notably with Colombia, China moved from 35th to fourth, with Venezuela 37th to third, with Costa Rica 26th to second, and Mexico 25th to fifth. China’s trade with Africa has increased six-fold during the last decade, making it the continent’s largest trading partner. During the last three years, China has provided more loans to Africa than the World Bank. The Chinese engine has allowed many developing economies to avoid damaging effects of recession in the West and Japan.

China’s impact is by no means limited to the developing world. It is Australia’s major trade partner and engine of growth. It represents Germany’s fastest growing market in key sectors such as machine tools, precision instruments and automotive. For all of Europe, the US and East Asia, notably Hong Kong, Chinese overseas tourism is a big source of revenue.

French protectionist lamentations vis-à-vis China notwithstanding, the nation is the biggest market for Bordeaux wines and Cognac. Russia’s announced tilt to the Pacific, illustrated in its recent hosting of the Asia-Pacific Economic Cooperation summit in Vladivostok, reflects growing trade with China – which has surpassed Russian trade with both Germany and the US – and the view expressed by Putin the country is where Russia’s future opportunities lie. As for the US, China is not only a major trading partner, but more importantly, its banker with over a third of its $3.2 trillion in foreign exchange reserves invested in US treasury bonds.

China’s global clout has grown exponentially since the beginning of this century, but all the more so since the onset of the great financial recession. With the erstwhile traditional engines of the world economy – EU, Japan and US – stalled, China’s has been the major show in the global market. The world depends on China.

However, China appears to be facing multiple crises, each exacerbating the other. China could have its turn at instigating global recession. The rest of the globe should expect turbulence and uncertainty.

There is a political crisis arising from the fact that the leadership transition is clearly not going as smoothly as planned: The party appears riddled with acute factionalism, heads are falling, but opacity remains. The dramatic fall of the powerful princeling Bo Xilai and his wife and their sordid scandal eroded the party’s legitimacy. The unexplained disappearance of the presumed incumbent to the presidency before his sudden reappearance two weeks later raised serious questions about the secretive party’s mode of operation.

The most profound crisis, one that lies at the heart of all the other crises, is the social crisis. In discussions with Chinese intellectuals in recent weeks, the word that keeps emerging is “anger.” People are angry at inequality, injustice, corruption, pollution, flagrant abuse of privilege, exorbitant prices of real estate driven by speculation. Social unrest is expressed through increasing number of demonstrations over quality-of-life issues, for example recently in Dalian, over a toxic chemical plant, and by a hyperactive blogosphere.

China’s environmental crisis, with the world’s highest levels of pollution and permanent urban smog, fuels the social crisis. The economic crisis arises not so much because of a 2 percent, or more, fall in the growth rate, but in a surprisingly widespread pessimism in respect to the future. The state is too bullying, the financial system is byzantine, the education system fails to provide needed quality, and the goals of innovation and higher value-added set out in the 12th Five Year Plan appear unattainable because of the party’s refusal or incapacity to carry out reforms.

The social and economic crises are rendered more acute by China’s looming demographic crisis as the population rapidly ages and the proportion remaining active in the labor market diminishes.

In some respects perhaps the most dangerous of all the crises is the geopolitical. Needless to say, it’s exacerbated by the simultaneous economic, social and political crises. China is currently in a state of territorial conflict with at least three neighbors – Japan, Vietnam and the Philippines – while relations with a number of major powers, notably India, Russia and the US, are tense. These are further fueled by increasingly strident rising nationalism, now being ramped up with anti-Japanese demonstrations and display of military might. Though war still seems a reasonably remote possibility, by no means can it be ruled out totally.

The world should take notice. A more optimistic scenario is that the social, political and geopolitical turbulence will not degenerate into chaos, that somehow transitions are managed, even if anxious uncertainty lingers for the next few years. The China economic boom will cease; developing countries should anticipate a possibly steep decline in demand for commodities.

China will likely become more protectionist, reflecting the paralytic state of the global trade agenda and retaliation for likely protectionist measures from others, notably the US. But trade war may be averted. Overall, the locomotive will probably still be there, slower and prone to unscheduled swerves and stops. Once this difficult transition period is completed, China may resume its “peaceful global rise.”

There are far more pessimistic scenarios, including violent social unrest, economic collapse, extreme environmental degradation, political chaos and military confrontations.

The outcome depends on the answers to two fundamental questions: Is the leadership capable of implementing needed radical reforms? How will China’s relations with its neighbors and with the rest of the world affect its internal development and the global economic and geopolitical environment? Answers to these questions should influence the fate of the world.

(Jean-Pierre Lehmann is Emeritus Professor of International Political Economy, IMD, Switzerland, founder of The Evian Group, Senior Fellow at the Fung Global Institute in Hong Kong, and visiting professor at Hong Kong University. This is reprinted with permission from the Yale Center for the Study of Globalization.)