China's Achilles Heel

China has now assumed, in the mind of many Americans, the role of the unstoppable leviathan about to trample the economy and sovereignty of the United States and much of the free world. The focus, not surprisingly, is almost exclusively economic. Yet the never-ending debate on the value of the Chinese currency, the overwhelming trade imbalance, and the trillions of dollars held as currency reserves obscures a more fundamental issue.

Since the ruthless crackdown, epitomized by the images in Tiananmen Square in 1989, the assumption has been that politics does not matter. But the absence of political liberalization will prove to be an Achilles heel as Chinese society becomes more affluent and fluid, and its economy more complex.

It was a basic tenet of Western belief that economic growth and quasi-capitalism in China would bring about political liberalization. However, this has not happened to date, as the Chinese middle class has been co-opted into the current system. They have little desire to see hundreds of millions of poor urban and rural citizens getting the vote to press for their piece of the economic pie.

However, as the market forces have been unleashed, administrative decision-making and the size of the state have skewed the economy. Capital and resources are inefficiently allocated. Manufactured goods and food are traded in the market, but land, labor, and capital markets are controlled. Thus, wealth disparities grow amid rising discontent at the fortunes made by those with the right connections.

Further, within the legal system, judges are told that the first priority is to strengthen the party, not to administer justice fairly. The basic party line was recently reinforced by Hu Jintao, the current president and party leader, when he said, "China must persist with the road of political development with Chinese characteristics ... [and] advance the socialist political system's self-improvement and development."

The potential pressure from the nearly one billion Chinese who are not in the middle class is nonetheless being recognized by no less a figure than Wen Jiabao, China's prime minister. Recently he said that China needs to protect the democratic and legal rights of the people; mobilize the citizens to manage state, economic, social and cultural affairs in accordance to the law; resolve the problems of a centralized power that lacks checks and balances; tackle corruption; and open channels for public monitoring and criticism of government.

The aim, he said, should be to build a fairer and more just society that upholds the rule of law while protecting the vulnerable and giving citizens a sense of security and confidence. "If we don't push forward with reform, the only road ahead is perdition."

These sentiments were quickly hailed by the reformers in China, but just as quickly, the current ruling class rallied to defend the status quo, reminding everyone that Mr. Wen is due to retire in early 2013 and his sentiments are his alone. Others speculate that these were mere words designed to placate the masses.

However, in 2012, both Mr. Wen and Mr. Hu will be handing over power to the next generation of leaders. As the economy continues to grow and unrest among the vast majority of the population of 1.4 billion people increases, they will demand their place at the table. China will be faced with a potentially devastating dilemma.

In an article on China in the Financial Times, Mr. Jonathon Fenby summarizes:

... those who benefit from the present system and those who see its preservation as their mission have the upper hand.  That may serve their purposes for the time being.  But it could be a dangerous path in blocking the evolution China needs, particularly if the regime's claim to deliver ever-increasing material well-being is hit by events such as a big drop in external demand, rising inflation or a food crisis.  The loyalty of the people may then matter a great deal.  

The United States should not look at China with fear and apprehension. While they may currently hold the upper hand in financing the U.S. debt, that issue can be mitigated by eliminating the massive deficits being run up and by growing the economy. The American worker is still the most productive in the world and can compete with the Chinese if U.S. government policy toward manufacturing, energy, and business development takes a 180-degree turn from the present course.

The ticking time bomb that is the economic and political expectations of a Chinese population that is 4.5 times larger than the United States' will detonate at some point down the road -- and that point may not be far in the future.
China has now assumed, in the mind of many Americans, the role of the unstoppable leviathan about to trample the economy and sovereignty of the United States and much of the free world. The focus, not surprisingly, is almost exclusively economic. Yet the never-ending debate on the value of the Chinese currency, the overwhelming trade imbalance, and the trillions of dollars held as currency reserves obscures a more fundamental issue.

Since the ruthless crackdown, epitomized by the images in Tiananmen Square in 1989, the assumption has been that politics does not matter. But the absence of political liberalization will prove to be an Achilles heel as Chinese society becomes more affluent and fluid, and its economy more complex.

It was a basic tenet of Western belief that economic growth and quasi-capitalism in China would bring about political liberalization. However, this has not happened to date, as the Chinese middle class has been co-opted into the current system. They have little desire to see hundreds of millions of poor urban and rural citizens getting the vote to press for their piece of the economic pie.

However, as the market forces have been unleashed, administrative decision-making and the size of the state have skewed the economy. Capital and resources are inefficiently allocated. Manufactured goods and food are traded in the market, but land, labor, and capital markets are controlled. Thus, wealth disparities grow amid rising discontent at the fortunes made by those with the right connections.

Further, within the legal system, judges are told that the first priority is to strengthen the party, not to administer justice fairly. The basic party line was recently reinforced by Hu Jintao, the current president and party leader, when he said, "China must persist with the road of political development with Chinese characteristics ... [and] advance the socialist political system's self-improvement and development."

The potential pressure from the nearly one billion Chinese who are not in the middle class is nonetheless being recognized by no less a figure than Wen Jiabao, China's prime minister. Recently he said that China needs to protect the democratic and legal rights of the people; mobilize the citizens to manage state, economic, social and cultural affairs in accordance to the law; resolve the problems of a centralized power that lacks checks and balances; tackle corruption; and open channels for public monitoring and criticism of government.

The aim, he said, should be to build a fairer and more just society that upholds the rule of law while protecting the vulnerable and giving citizens a sense of security and confidence. "If we don't push forward with reform, the only road ahead is perdition."

These sentiments were quickly hailed by the reformers in China, but just as quickly, the current ruling class rallied to defend the status quo, reminding everyone that Mr. Wen is due to retire in early 2013 and his sentiments are his alone. Others speculate that these were mere words designed to placate the masses.

However, in 2012, both Mr. Wen and Mr. Hu will be handing over power to the next generation of leaders. As the economy continues to grow and unrest among the vast majority of the population of 1.4 billion people increases, they will demand their place at the table. China will be faced with a potentially devastating dilemma.

In an article on China in the Financial Times, Mr. Jonathon Fenby summarizes:

... those who benefit from the present system and those who see its preservation as their mission have the upper hand.  That may serve their purposes for the time being.  But it could be a dangerous path in blocking the evolution China needs, particularly if the regime's claim to deliver ever-increasing material well-being is hit by events such as a big drop in external demand, rising inflation or a food crisis.  The loyalty of the people may then matter a great deal.  

The United States should not look at China with fear and apprehension. While they may currently hold the upper hand in financing the U.S. debt, that issue can be mitigated by eliminating the massive deficits being run up and by growing the economy. The American worker is still the most productive in the world and can compete with the Chinese if U.S. government policy toward manufacturing, energy, and business development takes a 180-degree turn from the present course.

The ticking time bomb that is the economic and political expectations of a Chinese population that is 4.5 times larger than the United States' will detonate at some point down the road -- and that point may not be far in the future.

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