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China Scream

19 August 2016 By Peter Thal Larsen

Predictions of China’s demise are as old as the People’s Republic itself. Ever since Mao Zedong proclaimed the founding of the new nation in 1949, foreign observers have projected that the Communist Party would soon lose its grip on power. So far, they have been wrong. Nevertheless, the forecasts keep coming.

“China’s Future” by David Shambaugh is one of the more thoughtful recent attempts to gaze into the crystal ball. The author, a veteran China scholar and professor at George Washington University, meticulously lists the many challenges: a corrupt and paranoid political elite, a distorted and debt-ridden economy, anxious citizens, and a polluted environment.

This short book expands on an argument Shambaugh set out in a widely-circulated article in the Wall Street Journal last year. The title of the piece – “The Coming Chinese Crackup” echoed Gordon Chang’s doom-laden “The Coming Collapse of China”, which was first published in 2001. That book is now mostly referred to as a reminder of the dangers of making overly specific forecasts about the country’s future.

Chang and other bears tend to focus on the fragile economy. Shambaugh is more concerned about political shortcomings. Though he does not ignore China’s financial frailties, he argues that its inability to address economic problems reflects a rigid political structure overseen by divided rulers.

Shambaugh describes a Communist Party split between conservatives and political reformers. Their objective is the same: to retain the party’s grip on power, and avoid the kind of collapse suffered by the Soviet Union after 1989. Yet there are deep disagreements between the two sides about what caused the Union of Soviet Socialist Republics to decline, and what policies are necessary to prevent Chinese communism from suffering a similar fate.

The appointment of Xi Jinping as president in 2012 appears to have given the conservative faction the upper hand. Xi’s tenure has been marked by a clampdown on corruption, new restrictions on flows of information and on foreign organisations, and an increasingly belligerent attitude to the rest of the world. Promised economic reforms – such as plans to make state-owned enterprises more efficient – have so far disappointed.

In Shambaugh’s view China has returned to what he describes as the “hard authoritarianism” of the mid-1990s, which contrasts with the softer form of control that China embraced towards the end of that decade. The loosening-up ended in 2008 when planners took a firmer grip on the economy in an attempt to maintain growth after the global financial crisis. Meanwhile, fear of populist uprisings such as the ones that swept across the Arab world and parts of the former Soviet Union prompted a renewed political crackdown.

“Protracted decline”

Xi is often described as the most powerful Chinese leader since Mao. But he sits atop a system with many weaknesses. Entrenched factions are resisting economic reforms. Meanwhile, increased state control is hard to reconcile with fostering the innovation that China needs to achieve the next stage of its development. Authoritarianism is also unappealing to the country’s elites, who are increasingly voting with their feet and their wallets. Two-thirds of Chinese who win places to study abroad do not return.

Shambaugh makes a compelling case that this state of affairs cannot continue indefinitely. And “China’s Future” is a welcome antidote to the view, still often repeated in the West, that the country’s rise is inevitable. Shambaugh insists he is not predicting an outright collapse but “the protracted decline of the regime.” The state could escape this downward spiral by gradually relaxing its grip and possibly even giving citizens some semblance of choice over who rules them: the Singapore model applied to a country of 1.4 billion people.

Right now this seems a faint hope. Slowing growth is more likely to prompt the Party to take new precautions to prevent economic unrest from spilling over into political protest. For many observers, this would challenge the belief that countries cannot become rich unless they embrace greater political freedom.

Understanding what is going on in China at any given moment is hard enough. Divining its future is even more difficult. Yet there could scarcely be a more important question for the world’s political leaders or indeed, for global investors.

Some kind of financial crisis would not be surprising – after all, the growth of neighbours like Japan, South Korea and Taiwan was punctuated by economic setbacks. But trying to pinpoint the moment when the Party loses control seems futile: specific forecasts are likely to be wrong, while broad predictions have limited value. It would be more useful to try to anticipate the steps that the leadership will take to try to retain their grip on power. Yet as long as the Party is in charge, the temptation of predicting China’s demise will remain hard to resist.


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