China's Uncertain Path

Presumptive incoming president Xi Jinping will enter office with a very full plate.

With the announcement that November 8 will mark the official Chinese leadership transition, the country brings to a close what has at times been a painful process. The decennial communist ritual has been marred this year by a series of embarrassing scandals, including Bo Xilai’s fall from grace and the dismissal of a corrupt railways chief.

While China’s current lame-duck cadres do their best to mop things up before the big day, their woes of the last few months are only dress rehearsals for the far more consequential difficulties that will face the incoming leadership of president-“elect” Xi Jinping and Premier Li Keqiang. Over the next decade, China will have to grapple with a number of structural dilemmas, and the potential solutions go well beyond the current reforms. Whether the new leadership is up to the task remains an open question, but no one can deny that Mr. Xi will enter office next year with a very full plate.

Islands of Instability

In 1831, the underwater volcano Empedocles erupted off the coast of Sicily and resulted in the emergence of new island, Ferdinandea. But before the lava had even cooled, England, France, Spain and the Kingdom of Sicily had laid claim to the simmering rock, stoking waves of popular nationalism in the press. Conflict was only averted when erosion caused the fiery island to sink back into the sea. It is doubtful that China and its Asian neighbors will be so lucky in their island disputes.

As I have written before, China’s international actions over various disputed islands have caused a balancing coalition to form, which seems likely to become a long-term geopolitical headache for leaders in Beijing. But the islands’ effect on China’s domestic landscape may prove a much more profound predicament.

As popular protests convulsed the capital and major cities last month, the world saw firsthand one of China’s great demons: nationalism. The force of popular anger has toppled more than one government in China’s past. Today, rather than being an organic outgrowth, it has been harnessed by the Communist Party as a tool of statecraft, a straw man on an international scale. If the people’s rage can be kept simmering at Japan, the United States or Taiwan, it is less likely to be directed at the Communist Party—and its excesses.

However, nationalism is at best a double-edged sword and at worst puts the party in a straightjacket. China-Japan trade is an extensive $345 billion enterprise and recently the two nations marked (quietly) the fortieth anniversary of normalized relations. In short, heeding the angry calls of nationalists for economic boycott and worse would be catastrophic for China, especially as mounting evidence of economic slowdown has begun to emerge.

By creating nationalism and then ignoring it, leaders in Beijing open themselves up to charges of weakness. Mao and Deng, secure in their own command, could brush it off, but Beijing’s new technocrats are far less secure within China’s immature civil-military institutions. They are more vulnerable to the anger of the mob if they seek compromise. The end result is a Faustian choice where the only thing worse than ignoring the mob would be obeisance to it. Xi Jinping will have to navigate through this dilemma if he hopes to name his successor in 2022.

The End of the Miracle

Doomsayers have been predicting the end of China almost since the beginning of China as we know it in the late 1970s. They have been wrong for over thirty years, and those still predicting the elusive “hard landing” and subsequent collapse probably are still mistaken. However, that does not mean China’s growth will not slow down, perhaps considerably in the coming years. The last thirty years in China have been described as an economic miracle, and anyone on the ground can attest that this is no exaggeration. Yet it is very likely that we are at the end of the miracle, and that future Chinese growth, like that in all developing countries, will slow to lower and more sustainable levels.