China’s in deep, deep trouble, and its new leaders know it.
The growth of the nation’s GDP has continued to slow every quarter since late
2010—though it did tick up slightly in the state’s latest quarterly report,
published in January. But that’s just one of many problems. In the simple words
of D&B Country RiskLine Reports’ year-end assessment of China, “Trend:
deteriorating.”
Xi Jinping, the nation’s new Communist Party leader, assumes
the presidency this March, and the country is hoping, albeit with considerable
trepidation, that he will bring positive change. But China’s troubles—economic,
political, social—are daunting. And as the full government transition
approaches, these problems seem to be converging. One significant symptom:
Money is flowing out of the state at an alarming rate, a sign that wealthy
Chinese have lost faith in the country.
Of course, China does not make public any figures of this
capital flight. But reliable estimates from several journalists and economists
published late last year estimate that between $225 billion and $300 billion
has left the country in the past year, three to four percent of China’s
economic output for that period. And this has happened even though moving
significant amounts out of the country is strictly illegal. The outflow is
growing larger every year, just as the GDP continues to fall—not a
coincidence.
Russia and China—either (or both) could collapse soon. Yet
neither the president nor his challenger seem alert to, or prepared for, such a
possibility.
In fact, wealthy and successful Chinese aren’t just moving
their money. Many are making plans to leave for the West along with their
money, with America being the primary destination. Last year, the Chinese
magazine Hurun Report, which chronicles the lives and foibles of the wealthy,
published that finding after interviewing nine hundred people in eighteen
cities.
The sample was clearly not scientific, but it was given
added credibility when many thousands of people responding to the article on
Weibo, China’s version of Twitter, said they would leave, too—if only they had
enough money.
The wealthy who are moving to America most often use the
EB-5 visa, which goes to foreigners willing to invest at least half a million
dollars in a business that offers new jobs for at least ten Americans. The
Chinese call that “investment migration.” And the China Merchants Bank, along
with global consulting firm Bain & Company, concluded in a joint report
that it’s “quickly increasing.”
The two companies said investment migration from China to
the US “grew at a compounded annual rate of seventy-three percent over the past
five years.” The companies also surveyed wealthy Chinese (one of several
organizations to do so) and found that almost sixty percent of them “have
either completed investment immigration, applied for investment immigration or
are considering it.”
The Department of Homeland Security reported that
seventy-eight percent of the EB-5 applicants last year were Chinese.
While the wealthy vote with their feet, the lower and middle
classes are in open revolt. The Ministry of Public Security estimated that in
2011 the Chinese staged more than 128,000 “mass incidents”—large local protests
over corruption, land seizures, pollution, job safety, and a dozen other social
ills. The numbers are certainly approximate. But they are almost certainly
increasing. In 1993, the official number was 8,709. By 2009, the ministry said
the people staged about 90,000 mass incidents. Nearly all the protests are
aimed at local authorities, not the national government. For many, the memory
of Tiananmen Square apparently remains burned on the brain.
Not surprisingly, the Chinese government has stopped
releasing statistics on mass incidents. But Xia Yeliang, an economics professor
at Peking University, said the number has risen “to more than two hundred
thousand a year”—more than five hundred every day. “We have our own sources in
the central security office,” he said in an interview.
One of the people’s gravest grievances, the motivation for
many demonstrations, is the nation’s growing income inequality. At year’s end,
the China Daily reported that the state “has about one hundred and twenty-two
million rural people living below the poverty line, meaning they earn less than
three hundred yuan [$369] a year”—or one dollar a day. Counting urban poor, the
total number of Chinese living in abject poverty reaches almost fifteen percent
of the population.
The newspaper quoted Yu Jiantuo, a researcher specializing
in poverty studies at the China Development Research Foundation, as
acknowledging that poverty during childhood “can impede a person’s achievements
in education, health, and capacity to integrate into society.” And in fact,
UNICEF reports that ten percent of China’s children are growing up stunted,
meaning they do not grow normally, either physically or mentally. At the same
time, three percent of Chinese infants, or about forty million babies, are
“wasting”—essentially starving to death.
Sanitation is a huge problem for these people, too. In fact,
nearly half of China’s people do not even have access to a toilet. And “they
might get to take a shower twice a month,” Xia Yeliang said.
Meanwhile, China has more billionaires and millionaires than
any nation in the world except for the United States. China’s National Economic
Research Foundation, a private think tank based in Beijing, concludes that when
so-called hidden income—bribes and related graft—is counted, the income of the
richest ten percent of Chinese is sixty-five times higher on average than that
of the poorest ten percent.
Last year, the World Bank published a massive report
concluding that the Chinese government must revamp its economy and social
services if it hopes to survive.
“The case for reform is compelling,” the bank’s president,
Robert Zoellick, said at a news conference in Beijing shortly before he left
office. “China has reached a turning point in its development path.”
Some Chinese experts have now broken the great wall of
denial to say the same things. The situation is growing so serious that
Strategy and Reform, one of China’s think tanks, warned publicly last fall that
the country “is confronting a perilous jump, one it can neither hide from nor
avoid—no matter what. There’s a potential crisis in China’s model of economic
growth.”
Wu Jinglian, a prominent economist writing in Caijing, a
leading Chinese business magazine, said: “China’s economic and social
contradictions seem to be nearing a threshold.”
One major threat often mentioned is the radical change in
the nation’s labor pool. China has thrived primarily as a low-wage manufacturer
of Western products. But as the nation has grown more prosperous, workers’
wages have risen radically—“a very serious problem,” economics professor Xia
Yeliang says. India, Vietnam, Cambodia, and other poorer states are now taking
away many of these jobs, one big reason the Chinese economy is not growing. A
strategy China is pushing to confront this problem is based on the idea that
the state should begin relying less on exports and more on domestic
consumption—as stressed at a high-level government economic conference in late
December. But with a slowing economy, that remains problematic.
Another big problem, China experts say, is the dominance of
state-owned businesses and enterprises—one hundred and forty-five thousand of
them that represent thirty-five percent of all business activity in China,
according to official figures. And, by their very nature, they are overstaffed
and inefficient since they face no true competition. Many are owned by
government officials or their relatives, allowing entire extended families to
line their pockets.
In a report to China’s legislature last fall, Wang Yong,
director of the State-Owned Assets Supervision and Administration Commission, obliquely
promised that “more efforts will be made to reform the power,
telecommunications, oil, and petrochemical industries. Market entry into these
sectors will be expanded based on the development of these industries.”
Just before leaving office late last year, President Hu
Jintao acknowledged the problems China now faces by offering what appeared to
be another of his disingenuous reform promises: “We should separate government
administration from the management of enterprises, state assets, public institutions,
and social organizations.”
In interviews, a variety of Chinese and China experts told
me they are quite pessimistic, foreseeing little if any significant change
under the new leadership. Asked about the new government’s ability to make a
mid-course correction, a senior journalist with Xinhua, China’s state-run news
agency, simply pursed her lips and shook her head. (Understandably, she did not
want to be named.)
“Definitely not,” Professor Xia Yeliang, now a visiting
fellow at Stanford University, says. “A lot of people are expecting Xi Jinping
to make reforms. But he has made speeches saying he will always insist on
Communist Party leadership. I think they know they have big problems. But they
are still so confident that they have sufficient power to suppress the people”
who protest or otherwise cause trouble.
Andrew Nathan, a China expert at Columbia University, was
perhaps the most optimistic source I interviewed. He said he foresaw “change
within continuity.” That means “continued reforms that have the purpose of
keeping the party in power—in other words, not ‘real’ or Western-style
democracy” including “gradually ramping up the attempt to control (as well as
to hide) corruption.”
In foreign policy, Nathan added, “I think China now sees
itself as having arrived at the level of a great power and evaluates the US and
its allies as weak and hence has embarked on a period of assertiveness in its
foreign policy,” particularly in the South China Sea.
That has ended up alienating almost every one of its
neighbors. Even as it tries to deal with its festering internal problems, China
is becoming a pariah in its region. Because of its belligerent behavior in the
South China Sea, where it claims almost the entire waterway for itself, Beijing
has infuriated almost every neighboring state while at the same time empowering
the United States as it “pivots” to Asia.
Its only remaining true ally, in fact, is Cambodia. China
has removed the stigma from its prior support of the Khmer Rouge by in effect buying
the country with $8 billion in unrestricted aid over the last few years. North
Korea could also be considered an ally of sorts, though really it’s closer to a
resentful dependent. And Laos has at best an ambivalent relationship with
Beijing. Every other country in the region considers China a competitor or
opponent—if not an enemy. So does most of the world.
Watching the coronation of China’s new Politburo last fall,
most commentators, Chinese and Western, noted that no known reformers were
evident among the picks. Zhang Tianliang, a Chinese émigré who teaches at
George Mason University, was extremely negative.
“The new lineup will completely destroy any remaining hopes
that the CCP [the Chinese Communist Party] would improve itself,” he wrote in the
newspaper Epoch Times. “The Eighteenth Party Congress lineup tells us that CCP,
a cultish criminal organization, cannot even fake reform. The dreams of those
who harbored some hope for CCP are now completely dispelled.”
But many China experts are pessimistic about the chance for
positive change for reasons different from Zhang’s. Even if Xi wants to bring
change, no one can be sure that he’ll be able to pull it off. Since so many
Communist Party officials are growing exceedingly wealthy under the current
system, won’t they resist significant change?
After all, Bloomberg News reported that the Chinese
legislature’s seventy richest members accrued vastly more wealth in 2011 than
the combined net worth of all five hundred and thirty-five members of the US
Congress, the president, and his Cabinet. Quoting the Hurun Report, Bloomberg
said those seventy delegates now have a combined net worth of $89.8 billion,
compared with $7.5 billion for the six hundred and sixty most senior people in
the American government. And there was also that New York Times story in
October 2012 showing that then Prime Minister Wen Jiabao’s family was worth
$2.7 billion.
Some government actions suggest the pessimists are correct.
One example is the faked official economic statistics, many of which are just
bald-faced lies intended to make the state look better. How mendacious the
official figures are is shown in a small way when the US Embassy in Beijing,
which maintains a pollution monitoring device on its roof, puts out numbers
showing how serious the city’s air pollution is—while the government has been
publicizing feel-good numbers that anyone looking out the window could see were
obviously wrong.
The government also claims that the income of the richest
Chinese is only twenty-three times higher than the poorest—even though China’s
National Economic Research Foundation study put the number at sixty-five times
higher.
China also appears to be faking its GDP numbers, prominent
corporate executives and Western economists told the New York Times last
summer, apparently to disguise the true depths of the nation’s troubles.
Significant drops in industrial electricity and coal usage, particularly,
indicate a slowing economy. The economists and executives estimated that China’s
gross domestic product is one or two percent lower than the officially stated
rate.
What’s more, a prominent Chinese economics professor, Gan Li
of Southwestern University of Finance and Economics in Chengdu, published a
survey in December 2012 that showed China’s actual urban unemployment rate to
be just over eight percent—double the official rate, and higher than America’s.
Gan surveyed eight thousand households for the survey, which also showed that,
for middle-aged people, in their fifties primarily, the unemployment rate is
even higher: almost twenty-eight percent.
Xi Jinping knows all this. According to reports from Chinese
and Western media, senior people all around him are urging him to set out
reforms. In fact, just before he took office as Communist Party chief, Xi sent
a team of officials to Singapore. They looked at that city-state as a possible
model. Singapore is a deeply authoritarian but prosperous state that does allow
free elections for subordinate positions. Still, many social liberties, like
freedom of the press and of assembly, are limited. In most experts’ view, the
improvements in China from adapting such a model would be small.
Most China analysts agree that the country’s financial
problems should be the government’s most significant concern. After all, for
decades the Chinese have lived with a well-known but unspoken pact: The people
will accept authoritarian leadership as long as the government makes it
possible for them to grow ever more prosperous. Right now, it seems apparent that
Beijing isn’t keeping its part of the bargain.
While the mega-billionaires, including many government
officials, may not be feeling the pinch—big-diamond sales are soaring—the mere
millionaires may be looking over their shoulders, given that sales of
less-expensive luxury goods are falling. The Burberry coat and Hennessy cognac
companies recently issued profit warnings because of plummeting sales in China.
Sales of Swiss watches to China have fallen by almost thirty
percent in recent months, and sales of ordinary jewelry are bottoming. Yum
Brands, owner of the extremely popular Pizza Hut and Kentucky Fried Chicken
franchises, said sales dropped four percent in the fourth quarter—compared to a
jump of twenty-one percent in late 2011.
Despite all the pessimism, Xi has given some cryptic
indications that he understands the extent of the problems. For one thing, he
declared that widespread corruption will “doom the state.” And during his first
weeks in office, half a dozen officials guilty of corruption so blatant that it
could not be ignored lost their jobs—probably a record. Xi ordered even more
arrests in the following months. He also made some symbolic changes, driving to
out-of-town destinations in a minibus, not an Audi limousine; staying in modest
hotels and walking around in short sleeves—not the dark-blue suit that’s
practically the uniform of government bureaucrats. Trying to make a statement,
he is eschewing all the pomp and circumstance that normally characterize
government leaders’ trips.
More significantly, the government now says it is going to
pass legislation to rein in land seizures, endemic nationwide. Over the years,
local officials have accrued almost $2 trillion in debt that is not on the
national government’s books. Year after year, Xia Yeliang said, local mayors
grab residents’ property, sell it to developers, and use the money to make the
minimum debt payments and then pocket the rest—leaving the standing debt for
the next mayor, who is likely to behave the same way.
These illegal land seizures—often with no compensation—are
reported to have netted $482 billion in 2011. And a report by the Chinese
Academy of Social Sciences notes that land disputes are the justification for
more than half of the nation’s “mass incidents” each year. There’s no
indication the problem is abating. Whether the government can actually produce
a meaningful law to curtail this remains to be seen.
In addition, the government is talking about setting up a
pilot project in one province requiring officials to disclose their income—an
important step toward corruption control. The government has raised the idea of
issuing deposit insurance for individuals’ bank holdings . . . and more. But Hu
Jintao also promised reform when he took office ten years ago, only to do very
little.
Even the nationalist, state-owned, pro-government newspaper
Global Times seems skeptical. A recent article observed that Xi’s initial
changes are largely sartorial, then inserted an unveiled warning: “If top
leaders cannot deliver what they promised, the public will not remain
silent.”
Joel Brinkley is a professor of journalism at Stanford
University and a Pulitzer Prize–winning former foreign correspondent for the
New York Times.
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