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China's Uncertain Path

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.

The most salient factor in this slowing growth is China’s size. Unlike other nations that have experienced breakneck growth and then slowed—like Japan or Germany—China’s uniquely large population presents obvious difficulties. Germany’s population of around eighty million is roughly equivalent to the population of Sichuan Province, China’s fourth largest. All normal indicators must be adjusted for China’s vastness. As a result, even if China’s growth slows to 6 percent a year—still an enviable figure in any absolute sense—it would have the effect of creating a functional recession for a population long engorged on 10 percent growth and a skyrocketing standard of living.

The Chinese challenge is best summed up in a telling anecdote from Decision Points, the memoir of President George W. Bush, who recounted asking Chinese president Hu Jintao “what keeps him awake at night.” The Communist Party chairman did not need to think very hard. “Creating 25 million jobs a year,” he replied.

If Chinese economic growth cannot produce those jobs for the next generation, it will undermine the central argument for the Communist Party’s continued existence. The shotgun social contract—economic growth in exchange for one-party rule—could become untenable. Slowing global demand, slowing direct investment, a deflating housing bubble, immature financial instruments and bloated public spending are only the most apparent drags that the new Chinese leadership will have to ameliorate or accommodate going forward.

The Devil in Demography

U.S. policy makers look to the soon-to-be-retiring baby-boomer generation with nothing short of terror. Now on the cusp of an entitlement windfall, they are well on track to overwhelm the entire federal budget unless those programs are reformed. Yet as bleak as our situation is, the Chinese soon will confront the same problem on a scale of biblical proportions.

China’s one-child policy by some estimates may have prevented up to four hundred million births, but it has also brought the long-term fertility rate to historic lows. Today it is roughly 1.56, well below the rate of replacement of about 2.1, the size required to keep the population relatively constant. This has generated a vicious phenomenon known as 4:2:1—one child, two parents, four grandparents. Even with thirty years of supersonic growth, China is not wealthy enough to offset the effect of the avalanche of pensions and insurance claims that are on the horizon. As The Economist succinctly put it, China will become old before it becomes rich. For the youth, who are culturally enjoined to tend to their elders, it will be an enormous and lasting burden.

Much was made recently when China surpassed Japan to become the world’s second-largest economy as measured by overall GDP. Given China’s size, this milestone was inevitable, just as it is equally inevitable that China will one day surpass the United States by this metric. Lost in the weeds, however, was the real number that matters, GDP per capita. Here China is losing big. According to the CIA World Factbook, the United States and Japan, both of whom face rapidly aging societies, have GDPs per capita of $49,000 and $35,200. China, by contrast, languishes at $8,500. This translates to an individual living standard comparable to Bosnia or East Timor. In other words, Japan, despite its perennial hangover from the lost decade and its being on track to become the oldest society the world has ever known, will be more than capable of managing its aged, as will the United States. For China, this is far from certain.

Since Deng Xiaoping’s opening up and reform, the Chinese government and people have been consumed with two missions, undoing the damage wrought by Mao Zedong and making money. But as new generations emerge that have no firsthand recollection of Mao’s deprivations, this will not be enough. As Abraham Maslow famously posited in his “Hierarchy of Needs,” after food, water, shelter and basic physiological necessities are met, humans will demand more. Things such as safety, clean water and property rights begin to come to the fore. On top of mitigating all of the above challenges, Xi Jinping and his cadres will have to raise quality of life for their people as well, and in ways that are increasingly complicated and intangible.

China’s Communists face another long march—and this time it may be one they do not finish.

Jonathan Levine is a lecturer of American Studies and English at Tsinghua University in Beijing and a contributing analyst at Wikistrat, a geostrategic consulting group. You can follow him on Twitter at @LevineJonathan.