Saturday, November 22, 2008

China's Recession Crisis

While Western powers are worrying about a six-month recession and the belt-tightening it entails, the Chinese are worrying about much greater consequences. Rather than simple approval ratings declines, the Chinese are facing a crisis of legitimacy that may undermine the very fabric of the Communist Party's authority.

For decades, the Communists have been terrified of large-scale unrest and demonstration. They frequently underplay the number of local demonstrations in the country and tightly control information to prevent potential dissenters from hearing that there is momentum. When times are good, there are hundreds of large protests in China per year, according to the CIA. Even if it's significantly fewer than hundreds (only dozens), it's still more than Beijing admits, and still more than they're comfortable with.

The Chinese diaspora tends to be highly nationalistic and defensive of their nation of heritage, and many wealthy Chinese are happy to protest against the Japanese when the state tells them to. But in this very group-oriented country, the state has not managed to make itself the only source of authority, as much as it has tried to do so.

With a global economic slowdown, China is going to get hit hard. Its wealthy customers--the US, Canada, the EU, Japan, Australia, etc--are going to trim their budgets down to essentials, and many Chinese products are going to be the first to go. Exports are already falling, and factories in China are already closing their doors. Luckily, oil is cheap--otherwise, imports from China would be so expensive that production would re-localize, and that's a trend the Chinese can't afford.

The world may be impressed with China's 8% sustained growth, but Chinese economists see it as a bare minimum to sustain. Beijing's biggest worry is unemployment, and extremely rapid growth is necessary to prevent it from shooting up--as technology, supply chain efficiency, and competition from Latin America and Southeast Asia make Chinese labor obsolete, the Chinese government tries to expand its economy laterally (that is, with simply more factories) to incorporate laborers. It has kept the official rate down to 4%, but this only includes registered workers--hundreds of millions of rural farmers and migrant laborers are underemployed and unemployed, and the Chinese cannot currently afford an extensive welfare program to keep these people sated in bad times.

Worse, the Chinese have continued to rely on expanding export production to keep the economy going--it's quick-and-dirty, but inefficient, and discourages sustainable national consumption-based economies, skilled labor, etc. It also leaves the economy very vulnerable to fluctuations in spending by Westerners and oil prices--both of which have been extremely vulnerable in the past few months. Beijing has been sweating.

But news for them is getting worse. Nation-wide taxi cab driver protests have taken hold, and while they are unlikely to become a nationwide uprising, it's a sign that the Chinese are starting to lose control over the population. The official unemployment rate has gone above 4.5%, and the minimum wage has not increased in years--fine during good times, but bad when costs of living stop decreasing, as they're doing. There are a whole lot of people that might latch onto a movement by taxi cab drivers, or day laborers, or factory workers, or textile makers, or all sorts of people, if they manage to get organized. Unemployed and underpaid labor is a serious threat to the Chinese government as a potential source of mass dissent.

The Chinese Communist Party retains its legitimacy through promising economic growth and a better tomorrow for China. "Don't change horses when you're winning the race" has been a fine line to repeat since 1979, but what happens if China's unemployment goes up and its GDP growth slows too much? Dissent that starts by calling for reform may start calling for new leadership if the current leadership cannot deliver. The earthquake-Olympic honeymoon of the summer faded faster than Beijing would like, and they need to keep reform and growth chugging along to hold on.

China's economy has been zooming along a teetering precipice for years, and Chinese economists have had to manipulate with pure genius to keep its export-led plan from crashing. But if the world economic slowdown deepens, there will be nothing even they can do. To achieve sustainable, hands-off growth and economic stability, the answer is to follow the West--liberalized, privatized economies that increase efficiency with domestic consumption and comparative advantage will keep the GDP growing on its very own. But China can't easily switch into such an economic stance. Decades of kicking the economy into an export-on-steroids stance have created massive inequalities between the coast and the west, creating huge demographic pressures that would turn into chaos if Beijing took the lid off. The transition to a liberal domestic consumption economy would mean a temporary closing of many factories that are literally exporting at a loss and subsidized by the government, the temporary unemployment of those workers, and a decrease in the minimum wage to try to encourage investors to sop up the newly unemployed. It would be a mess, but Chinese state controls have set up the economy for a transitional disaster unless the transition occurs during an economic boom.

But these are not good economic times, and massive economic liberalization would likely lead to enough temporary chaos to lead to an unseating of the CPP's monopoly--if not a revolution. China faces a serious crisis if its economy gets a lot worse, and there is little Beijing can do to satiate its population. Its economic controllers have set it up for failure in this kind of market.

What this means for the US--Chinese GDP growth is not going to be sustained. The Chinese economy will not overtake the US economy in the next 20 or 30 years, as many pro-protectionist policymakers in the US suggest. Either the Chinese will successfully bounce out of this crisis and continue down the road of WTO integration (whence their GDP growth will slow into a more sustainable, free, labor-inclusive, and income-equalized market with lots of domestic consumption), or the Chinese economic controllers will falter, leading to a short chaos followed by a new regime (with a honeymoon and new mandate to make tough changes).

The former is very good for the US--Chinese domestic consumption and a lowering of import tariffs will mean that, as the Chinese grow, they will be able to afford American exports. A China of free trade and liberal policy will be one that US labor interests should encourage to grow, such that it becomes a market of high-quality US goods.

The latter is bad for everyone (besides, perhaps, the Tibetans). A collapse of the 4th-largest economy in the world will lead to a deep global depression, particularly in East Asia. The US can almost afford to live without Chinese imports (though many US manufacturers, construction firms, retailers, and financial institutions will dry up), but much of the rest of the world is likely to go down with China.

Therefore, the likely consequences of all this is that the EU and US may have to work to bail the Chinese out--they will try to crank up imports of Chinese goods with "stimulus" packages and consumer support, but hopefully in return for concessions by China to reform in the medium-term.
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