Source: Carnegie

Originally published as a Foreign Policy Institute WIRE Report, Volume 7, Number 8, July 1999

Western attitudes toward China tend to oscillate between two extremes, often with confusing rapidity. Not too long ago China was widely portrayed as an emerging military and economic threat to the West. Its total economic output was projected to surpass that of the United States in two decades. Its military modernization was expected to provide China the capability to project its power far beyond its borders (and the recent Cox report on nuclear espionage has revived those concerns). And its authoritarian regime was supposed to be able to retain its grip on power for a long time.

Nowadays, however, the speculation about China's future has generally inclined toward pessimism. The influential British magazine The Economist openly speculated about the break-up of China in its last issue of 1998. Not long before that, the same publication ran a cover editorial opining about the imminent collapse of the Chinese economy. And in a speech delivered in April of this year, President Bill Clinton warned of the dangers of an unstable China which failed to reform.

Even within China, signs of danger and nervousness abound. Arguably, the Chinese government now faces the most severe challenge since the Tiananmen Square demonstrations a decade ago. Unemployment is rising at a frightening rate. Several key anniversary dates fraught with symbolic and real political dangers (such as the 50^th anniversary of the People's Republic, the 10th anniversary of the Tiananmen Square crackdown, and the 40th anniversary of the uprising in Tibet) have prompted the government to maintain a tight watch over the country's tiny dissident community lest something akin to the 1989 movement break out again.

In my judgment, the current pessimism about China's short-term prospects is as exaggerated as the previous optimism about its long-term economic outlook. In fact, China is likely to retain its short-term political stability despite many signs of potential turmoil, but will face rising instability if the regime fails to undertake significant political reform in the next decade.

China's Current Difficulties

While parallels between the problems China faces today and those it confronted during the Tiananmen crisis a decade ago may be alluring, they are misleading. In 1989, the Chinese Communist Party (CCP) faced a genuine crisis of political legitimacy, which had its origins in 1978-79, when the leaders promised, but repeatedly failed to deliver, political reform. By contrast, the challenges confronting the Chinese government today are primarily economic, although weaknesses in the political system make potential solutions more elusive.

Specifically, China's economic difficulties today originate, externally, from the aftermath of the East Asian financial crisis (falling exports and foreign direct investment) and, internally, from weak consumer demand and severe structural problems. The internal problems are far more daunting than the external.

It is well known that China's two most perilous economic challenges are an insolvent banking system (which has total bad loans of between 25 and 30 percent of gross domestic product) and rising unemployment due to the restructuring and privatization of the loss-making state-owned enterprises (SOEs). Many analysts believe that the latter poses the clearest threat to the Chinese government, because any unrest by the unemployed, who are concentrated in urban areas, would lead to a political crisis akin to the Solidarity movement in Poland in 1981-82. Given the sheer numbers of unemployed and underemployed people in China, this analysis is not without merit. The official China Daily reports that, among urban dwellers, unemployment is about 11 percent (or 16 million people). In addition, as many as 120 million rural laborers are considered underemployed.

However, unemployment alone is unlikely to generate a high level of political instability and is even less likely to bring down the regime. (Can you recall the last time a regime was toppled by unemployment?) In analyzing the political consequences and implications of economic crises, we must understand that not all economic crises are created equal. Although all of them are nasty and harmful to the societies they hit, they produce different political outcomes because their effects are filtered through the political system differently.

In the case of high unemployment, its impact on political instability tends to be limited for two reasons. First, unemployment principally affects only one segment of society, namely, manufacturing workers. It would be difficult for these workers to find political allies in other sectors. In China, workers being laid off from SOEs are viewed as industrial aristocrats who have had it pretty good for the last fifty years at the expense of the other segments of society. Second, the ranks of the unemployed are relatively fluid. Many unemployed, especially the most able, can find alternative employment. This leaves the ranks of the unemployed without permanent leaders and unorganized. By contrast, a full-blown banking crisis is far more lethal, because it triggers hyperinflation and a massive run on banks. Unlike unemployment, which tends to hit one segment of society especially hard, a banking crisis would hurt virtually everyone (except the very wealthy). Such a crisis sends out a political signal to the majority of the population that something is terribly wrong, thus facilitating unity and coordination among all the disaffected elements, from the peasantry to the unemployed to the middle-class. A broad anti-regime coalition is therefore more likely to emerge following a banking crisis than high unemployment.

This reasoning leads us to question the conventional wisdom about the connection between the recent crackdown on dissidents and the country's economic problems. Most analysts believe that the government's crackdown was motivated by the fear that dissidents would form a Solidarity-type coalition with the unemployed to challenge the Communist Party's rule. This analysis, while appealing, overlooks another probable explanation. The government's crackdown could well have been motivated, not by the fear of unemployment, but by the fear that any signs of political instability would shake the population's confidence in the government, and hence in the security of their assets. Fearing the loss of their life savings, ordinary Chinese (who have over 80 percent of their total assets deposited in the banks) would unleash a run on banks, which would force the government to print more money to cover the withdrawals, in turn sparking hyperinflation and massive popular discontent.

The Vulnerabilities of the Communist Party

To be sure, the current economic difficulties have caught the Communist Party in a particularly vulnerable state. Specifically, the ruling party faces the following structural and institutional weaknesses:

Narrower base of support. Despite the Western media's caricature of the ruling regime as a communist dictatorship, the nature of the Chinese regime has changed profoundly in the last two decades. If we may call the pre-reform Chinese regime a socialist one with a broad base of support among workers and peasants, pro-market reforms have seriously eroded the broad social base of the CCP. This change has come about, ironically, precisely because of the relative success of the economic reform under Deng Xiaoping. For the peasantry, market-oriented reforms have resulted not only in direct economic benefits and independence from the state; they have fundamentally eroded the Communist Party's political control in rural areas and left the regime without means of mobilizing political support there. As for urban SOE workers, market-oriented reforms have begun to hurt their interests by making their jobs insecure and benefits less generous. They blame their plight on the government and have begun to display their discontent openly and violently. The regime's political support today comes primarily from only four groups: the bureaucracy, the military, the security forces, and the rapidly increasing urban middle-class that will have much to lose (such as the value of their stocks and real estate) in the event of political instability.

Organizational deficit. The CCP previously controlled a vast network of social organizations, including the official labor unions, women's associations, the youth league, and many professional associations, which in turn controlled most segments of the population. But that is no longer the case. Official organizations closely tied to the party have lost credibility, enjoy little grassroots support, and cannot be expected to serve as instruments of control or political support. Other organizations, notably, religious groups and professional associations, have become more independent and will likely resist manipulation by the party.

Weak institutional channels of resolving state-society conflict. A related weakness of the present political system is the absence of credible institutions that would allow individuals and groups to articulate and pursue their own interests. In democratic systems, electoral and legislative processes do this, but in China, no institutions perform such functions reliably. In their absence, collective grievances will accumulate, leading in the long term to political instability. In the short term, collective grievances are increasingly expressed in violent protests. In fact, the government admitted there were 5,000 collective protests in 1998.

Absence of effective institutions to resolve conflicts within the state. China also has no functioning institutions that might resolve conflicts among the various components of the state. The absence of such institutions, which would typically be provided for by federalism, causes cyclical opportunism characterized by frequent policy changes by the central government and resistance to those policies from local governments. Consequently, the policy environment is uncertain and law enforcement weak. In fact, the most serious problem facing China is not that it does not have democracy, but that it does not have federalism. That is, it lacks a clear division of responsibilities between the central and regional governments.

Hidden Strengths of the Regime

I have listed a series of structural weaknesses of the party-state in China. However, it would be wrong to conclude from the above observations that the system is about to collapse, for there are several strengths that help offset these weaknesses.

Weak opposition. Domestically, the CCP faces no real threat. Because opposition to the regime is unorganized and dispersed, for most people there is simply no credible alternative. This is perhaps the most important factor working in the CCP?s favor. A party song states, "Only the CCP can save China," but it should be, "Only the CCP can govern China" -- at least for now.

Relative elite cohesion. Political turmoil in China in the last 50 years has always come from disunity and power struggles at the highest level of the regime. Today's top elite is much more unified than during any previous period. The political differences between top elites today are mainly over policy and personality, rather than over ideology.

The CCP remains a formidable force of control. Because the party maintains a relatively effective system of control in dealing with top-priority issues, in the short term it should be able to confront any challenges to its hold on power. The CCP has also learned a key lesson from the 1989 movement: never to allow a minor incident to develop into a full-blown political crisis. That explains why the government reacted swiftly and harshly against the leading dissidents in the last few months.

The Chinese are beginning to tackle their long-term problems. It is encouraging to see that some of the top leaders seem to have realized the long-term threats to the current system and have begun to take some tentative steps to address them. It seems that ideas of federalism are beginning to influence institutional designs in China. Among the most promising steps taken so far is the reform of the central bank along the lines of a Federal Reserve-style system. Moreover, the 1994 tax reform, although far from perfect, was the first step toward fiscal federalism.

Conclusion

Although localized incidents of social unrest, sparked mostly by economic difficulties, are likely to increase, the Communist Party should be able to avert significant political turmoil in the near future. However, even if the Chinese government gets through 1999 without a repeat of 1989, it must soon confront the issue of political reform more seriously, because the challenges it poses will only increase as time passes. If no significant institutional change is undertaken, China will experience rising tensions that its current political system will be incapable of handling. Failure to implement political institutional reforms may lead to rising instability through three mechanisms, either simultaneously or sequentially. First, failure to reform will reduce economic efficiency as the costs of insecure property rights, poor contract enforcement, and exorbitant rents become more baneful. This will inevitably reduce the rate of growth, which will further exacerbate social tensions and damage the legitimacy of the Communist Party. Second, failure to reform will allow corruption to worsen, inequality to rise, and poor governance to persist, eventually causing a massive social explosion such as occurred in Indonesia in May 1998. Third, failure to reform will cause rising division within the current moderate-conservative ruling coalition as the more liberal elements become disenchanted and frustrated with the slow pace of reform. A split within the elite has led to political instability before, and could easily do so again.

Indeed, although China is unlikely to become another Indonesia today, it is very likely to become one in ten years' time if its leaders are lulled into complacency.

Minxin Pei is a Senior Associate at the Carnegie Endowment for International Peace.