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"I believe that to meet the challenges of our times, human beings will have to develop a greater sense of universal responsibility. It is the foundation for world peace."

China: Crash and Burn

November 21, 2008

How the global economic crisis could bring down the Chinese government
by Joshua Kurlantzick
The New Republic
November 20, 2008

Normally, the Pearl River Delta, a manufacturing hub in southern
China, whirs with the sound of commerce. Alongside massive new
highways, clusters of factories churn out toys, electronics, and
other consumer products for the world; in Pearl River cities like
Guangzhou, nouveau riche businesspeople cut deals at swank hotels.

But in recent months, the Delta has started to seem more like
Allentown, circa 1980s. As the global financial crisis hits Western
consumers' wallets, orders for the Delta's products have dried up.
And angry factory workers, many owed back pay, have taken to the
streets. In one recent incident, some 300 suppliers and creditors
"descended on the River Dragon complex [a factory where the owners
vanished] looting warehouses in the hopes of salvaging something," As
USA Today reported.

This unrest is likely to spiral. As the Chinese economy sours for the
first time in years, the government this week announced a $586
billion stimulus package. But in some ways, much more is at stake:
While, in the U.S., a financial failure would simply mean another
dent in George W. Bush's reputation, in China it could mean the
breakdown of the entire political order.

For years, the Beijing regime has stayed in power using a basic
bargain with its citizens: Tolerate our authoritarian rule and we'll
make you rich. And for years, this seemed to work, leading many
China-watchers (myself included) to conclude that Beijing was rising
into great-power status. But as the financial crisis shows, that
bargain rests on weak foundations. And if Beijing breaks its end of
the deal, its people, already holding rising numbers of protests, may
well break theirs.

Despite its reputation, Beijing's autocracy is anything but absolute.
The government long ago abandoned real communist ideology, and its
current leader, Hu Jintao, a cipher with a background as a rural
bureaucrat, has about as much revolutionary charisma as Bob Dole. And
while China's security apparatus is sophisticated, the country is too
large, with too many educated, Internet-savvy people, for Beijing to
brainwash its citizens the way Kim Jong-il has in North Korea. Most
urban Chinese I've met are knowledgeable about their leaders'
strengths and flaws, and certainly don't see them as some kind of
gods, the way Mao was viewed in the 1950s and 1960s.

So, since the late 1970s, when China's leaders began opening its
economy, they have placed their bets on their ability to deliver
continued economic growth. "At the time of the Tiananmen protests in
1989"--a time of economic downturn--"China's urban educated populace
had good reason to be angry," notes China expert Jonathan Unger, in a
study of China's middle class. "Their salaries were low, and sour
jokes circulated about private barbers earning more with their razors
than hospital surgeons with their scalpels." But as China's economy
has grown at explosive rates in recent years, he writes, "there has
been a deliberate government policy to favor [this urban population]
through their pay slips and perks." China's leaders channeled foreign
investment to the urban east coast, created social welfare policies
that favored the cities, and, for years, prevented rural people from
migrating to the cities, thus keeping the job market open for young
urbanites. Deng Xiaoping himself, the author of China's economic
reforms, made clear the strategy of favoring the middle class and
making growth equal stability. "Let some people get rich first," Deng
famously declared.

For the most part, their gamble succeeded. For three decades, China
has posted annual growth rates of over 10 percent, and this nominally
communist country now seems more capitalist than Wall Street. Even in
small provincial cities like Lanzhou, where I visited last year,
massive malls, open-air markets, and new skyscrapers dot the downtown.

Since the 1989 Tiananmen crackdown, China's urban middle classes have
bought into this growth--and the regime. In one Pew poll, over 80
percent of Chinese said they were satisfied with conditions in their
country, almost three times the percentage of Americans who were
satisfied with conditions in the U.S. (To be sure, this figure relied
primarily on surveys from urban, eastern China, where satisfaction is
higher than in poorer, rural areas.) Indeed, when I have interviewed
young Chinese professionals in cities like Shanghai, I've found
little interest in political change. "There's no point in talking
about [politics] or getting involved," one yuppie Chinese told Time
magazine for an article entitled "China's Me Generation" last year.

Now, that bargain is breaking down. Exports constitute nearly 40
percent of China's GDP--far too high a figure. (By comparison, in the
U.S., exports account for about 10 percent of GDP most years.) And
the global financial slowdown is already taking a terrible toll. Some
10,000 factories in southern China's Pearl River Delta area had
closed by the summer of 2008. Gordon Chang, a leading China analyst,
estimates that 20,000 more will shutter by the end of this year. In
the third quarter of 2008, Beijing also reported its fifth
consecutive quarterly drop in growth, and several private research
firms expect a sharper slowdown next year. Additionally, unemployment
is skyrocketing; in Wenzhou, one of the main exporting cities, about
20 percent of workers have lost their jobs, Reuters recently reported.

As growth slows, the banking sector could be hit, and the stock
markets, driven by retail investors who know little about markets,
could fall even farther; already, the Shanghai stock market has
dropped from 6,000 points to just over 1,800 in the past year. (A
drop of that size on Wall Street would put the U.S. in a second Great
Depression.) With the state still holding major stakes in financial
institutions, too, no one has any real idea of the scope of Chinese
banks' non-performing loans, though most estimates believe the
country has some $1 trillion in bad loans.

As the economy turns sour, protest is rising. Many young Chinese have
never even lived through an economic downturn. In the Pearl River
Delta, months of layoffs are sparking street protests by blue-collar
workers fearing they'll never see back pay owed to them and creditors
furious at factory owners who shut their doors and vanish. These
demonstrations are turning violent, and ultimately could provoke a
violent response, since Chinese factory owners increasingly hire
thugs to hit back at demonstrators. Overall, demonstrations are
spreading, according to Radio Free Asia, which closely follows the
Pearl River Delta. Though China has in recent years weathered
thousands of protests, they tended to be clustered in poor, rural
areas, not the prosperous Delta or other middle-class regions of the country.

Even worse for the regime, the economic downturn is hitting Chinese
home prices and urban jobs, too. Those urban middle classes, the key
base of support for Beijing, now find their only asset, their first
home, is collapsing in value, while their sons and daughters cannot
find jobs right out of college. In several major cities, home prices
have dropped by more than 50 percent in just the past year. Perhaps
unsurprisingly, urban middle class protests over land prices and land
evictions are rising in cities like Shanghai too. "These types of
protests, with urban people, this is what the government is really
worried about," one longtime real estate expert told me in Shanghai.
"These are bankers, doctors, professors, people with real clout."

For the first time since 1989, Beijing seems scared. The massive
stimulus package, a bold move by a government known for taking very
cautious actions, is a key sign of worry. (According to the
Economist, the government raced forward with this rescue in the face
of a deteriorating economy, even before it had a clear plan for how
the money would be spent.) To forestall protest--just in the past
month there have been dozens of labor protests, according to the
Washington Post--China's national and local governments are also
starting to hand out emergency payments in the Pearl River Delta and
other places of unrest, where factory owners are closing up shop
without handing out owed wages.

Beijing can afford a $580 billion stimulus package because it has
nearly $2 trillion in reserves. But for all its cash, China's actions
may not be enough. A redux of Beijing's 1989 Tiananmen crackdown is
not a good option: Two decades ago, the number of educated protestors
was far smaller, and China had less interest in protecting its global
reputation. At the same time, China has granted enough freedoms that
average Chinese now demand wages, fair housing, and other rights. So,
unless Beijing can get its economy going again, they are likely to
face the first sustained wave of protests in decades. Thus far, China
has kept the labor protests separate from one another, preventing
them from developing a common theme or a common leader. But if
China's downturn turns into an outright recession, the country could
face its first serious threat to the regime.

The writer is a special correspondent for The New Republic.
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