China’s New Political Class: The People

Elizabeth C. Economy, 07/27/12

Chinese 'people power' has arrived.

As China’s top officials meet in Beidaihe to finalize their selections for the country’s new leadership, they are being overshadowed by a different, and increasingly potent, political class—the Chinese people.

From Beijing to Jiangsu to Guangdong, Chinese citizens are making their voices heard on the Internet and their actions felt on the streets.

Take the terrible flooding in Beijing this past weekend. Thus far, the municipal government estimates that the flooding has caused around $1.88 billion in damages, with more than 65,000 residents evacuated from their homes and 77 dead.

The local government was clearly caught flat-footed: the early warning system failed; police officers were reportedly busy ticketing stranded cars rather than helping citizens in need; and workers at toll plazas continued to collect fees as people desperately tried to escape the rising waters. Popular criticism over the government’s handling of the crisis has been unrelenting, and even the state-supported Global Times has reported on how the government’s credibility was damaged by its weak response.

Yet in important ways, the government’s inaction has become a secondary story. Beijing residents didn’t wait for their officials to do the right thing. As China Digital Times described, Weibo came alive with offers of help: “I live near Tiantan East Gate. If anyone nearby needs to rest, you can come to my place…”; “My office is at Zuojiazhuang A2 Beijing Friendship Garden 1-6H. We have water, snacks, TV, computers, wifi, beds sofas, Sanguo Sha and hot showers! All for free!…” Hundreds of people drove to Beijing Capital Airport to try to assist the 80,000 odd passengers stranded there.

Further down China’s coast, a different form of people power has emerged, and a new generation of political activists is taking hold.

In Qidong, Jiangsu province, public health concerns have led thousands of high school students and others to organize a protest to block the construction of a new sewage treatment plant. Via the Internet, the students found inspiration in the June protest in Shifang, Sichuan Province (四川 什邡市), where tens of thousands of people (including high school students) blocked plans for a molybdenum-copper alloy factory. With the Qidong protest slated for this coming Saturday, local officials are working overtime to quash the demonstration, even calling teachers back from their vacations to pressure the students to stay home.

Further south in Foshan, Guangdong Province, Chinese villagers once again took to the streets in an attempt to obtain justice in the face of local official corruption and illegal land grabs. Here too, the Internet proved a decisive factor: local residents first learned about the illegal land sales by reading government websites.

Chinese officials are grappling with how best to navigate this growing phenomenon of Chinese people power facilitated by the Internet. Certainly, they are trying to co-opt the technology to get their own message out to the people. Many officials and government offices have Weibo accounts which they use to communicate directly with their constituents: in one county in Zhejiang Province, a Weibo writing test is now included in the promotion exam for local officials. And, while Party censors have responded in their usual heavy-handed manner to the criticism surrounding Beijing’s flood response, Beijing municipal government spokeswoman Wang Hui has used her personal account to address the concerns of the people in a relatively open and direct manner, calling the people’s discontent “very normal” and acknowledging that the government has much work to do.

Some in the Party leadership also recognize that the challenge they face in building good governance is more than good messaging.

At a recent gathering of municipal party secretaries, Li Yuanchao, who oversees personnel appointments from his perch as head of the Organization Department and is a likely candidate for the Standing Committee of the Politburo, spoke forcefully of the need for local party secretaries to “understand and comply with the will of the people.” Moreover, he emphasized officials must understand that they are basically “servants of the public” and that the satisfaction of the public is the most basic measure of the officials’ work.

Li’s message is one that has been delivered many times in recent years, apparently to little effect. It seems, however, that the country’s newest political actors—the Chinese people—have heard Li’s message and are more than willing to take to the web and to the streets to let their local officials know they are not going to forget it.

Elizabeth C. Economy is C.V. Starr Senior Fellow and Director for Asia Studies at the Council on Foreign Relations. She is an expert on Chinese domestic and foreign policy and U.S.-China relations and author of the award-winning book, 'The River Runs Black: The Environmental Challenge to China's Future.' She blogs at Asia Unbound, where this piece originally appeared.

http://thediplomat.com/china-power/chinas-new-political-class-the-people/

Scandal, economy, unrest mar China's leader change

CHRISTOPHER BODEEN, 07/22/12

BEIJING (AP) -- China's once-a-decade political transition coming this fall seems devoid of drama on the surface: It's clear who will take over, and the fight for other top spots is invisible to the public. But beneath the veneer of calm, the Communist Party is struggling to contain troubling events and mask divisions.

The world's second-largest economy is experiencing an unexpectedly sharp slowdown. Violent demonstrations percolate as people tire of corruption, land grabs and policies seen as unfair. Tensions simmer with neighboring countries and the U.S. over territorial disputes in the South China Sea. Then there's the unresolved scandal involving Bo Xilai, who was a well-connected contender for high office before he was ousted for still unexplained transgressions.

The communist grip on power isn't threatened and the lack of open elections means they require no voter approval. But the party risks eroded legitimacy and a reduced ability to impose its will, further alienating younger Chinese and encouraging critical opposition voices arguing for a democratic alternative.

As the party's unstated contract with the people exchanging one-party rule for economic growth frays, pressure for reform is likely to intensify.

"The economic downturn, human rights demands and political reform are major issues for the party," said Wu Si (吳思), editor-in-chief of the Beijing-based pro-reform journal Yanhuang Chunqiu (《炎黃春秋》). "None of the leaders know what to do about it."

Five years after he was picked as successor, Vice President Xi Jinping remains on track to take over from President Hu Jintao in the party's fall congress, where its leading members will install a new generation of leaders.

China is run by a collective leadership, and many of the other seats in the Politburo Standing Committee, decision-making's inner sanctum, are undecided, analysts and party insiders say.

Final decisions on the leadership lineup and key issues to be addressed at the congress should be hammered out in various sessions this summer, including informal meetings east of Beijing at the seaside Beidaihe resort.

None of the leading contenders -- mostly proteges of Hu or other rival party elders -- is trying to grab headlines.

Open politicking is strongly frowned upon, and while competition for posts and influence is intense, it takes place far from the public as the party seeks to display a united front, said Jiannan Zhu, a political scientist at the University of Nevada, Reno.

"The priority for the Chinese government ahead of the party congress is to make sure no major instability occurs," Zhu said.

The flamboyant Bo is one of the few Chinese politicians who did overtly campaign for a higher-level job, and that is believed to be one of the sins that led to his downfall.

His removal as party boss of the mega-city of Chongqing and suspension from the Politburo exposed divisions within the leadership. It also further convinced an already skeptical public about the greed and bare-knuckled machinations of their secretive leaders.

Bo's ouster this spring was accompanied by the announcement that his wife and a family aide were under investigation for the murder of a British businessman. Reports have said that Bo tried to quash the probe.

Trial for Bo's wife, Gu Kailai, and for his ex-police chief, Wang Lijun -- who exposed the murder when he fled briefly to a U.S. consulate -- could begin this month, according to diplomats in Beijing who spoke on condition of anonymity.

As for Bo himself, politically connected Chinese have previously said that party leaders would have address his fate before the congress to heal divisions, but the government and its media have said nothing about the case in recent weeks.

Dealing with Bo is believed to have distracted the leadership, delaying its response to the deepening slowdown that has dragged growth to a three-year low of 7.6 percent in the three months ending in June. Interest rates have been cut twice in the past month and a half in a bid to kick-start growth, but Beijing is powerless to stem the malaise in Europe and the U.S. that has slashed demand for Chinese exports.

The downturn could worsen unrest. China already sees 180,000 strikes, protests and other mass demonstrations each year, according to government data compiled by Tsinghua University sociologist Sun Liping.

In recent protests in the southwestern city of Shifang, high school students joined ordinary Chinese in demonstrating against a copper smelter. Images of police beating protesters bloody and firing tear gas sparked nationwide outrage after they circulated online.

Trying to put a lid on disturbances ahead of the congress, authorities are tightening already stringent controls on political critics and activists of all stripes. Wu Lihong, who once received a government award for his environmental campaigning, said he has been told not to travel or accept speaking engagements in coming months.

"They're using the congress as a pretext for every kind of restriction they can think of," Wu said by phone from his home near heavily polluted Lake Tai.

The need to quash unrest was underscored in a speech this week by the party's law and order chief, Zhou Yongkang, in which he ordered cadres to nip problems in the bud -- whatever the cost.

"All levels of the party and government must make maintaining stability their first responsibility," Zhou told security officials at a national teleconference Tuesday.

Authorities also are trying to keep Chinese media in line. They dismissed two editors at Shanghai's Oriental Morning Post after publication of a story calling for private industry to enjoy the same rights as state companies.

Southern Weekly, one of the country's most widely respected newspaper groups, has seen editors replaced by propaganda officials. Editors and reporters at the paper said the new leaders spiked an interview with Shifang's party boss, who was replaced soon after the riots. The party leader defended his actions and complained about the lack of outside support, the editors said.

"Everybody feels like things are getting more oppressive. It's been happening for a long time, but the party congress is making it worse," said one former Southern Weekly editor who now works for online media. He asked not to be named to avoid repercussions against his new employer.

To some Chinese, government repression is raising doubts about whether a new slate of leaders will overcome entrenched interests.

Zhang Jian of Peking University's School of Government said that even if Xi were inclined to make bold social or economic changes, he would need support from other leaders, and the government's recent heavy-handed tactics make clear there is no consensus that reforms are needed.

"I see no hope at all that Xi will be able to put in place any serious, meaningful political reform," Zhang said.

Meanwhile, economic pressure is likely to grow. China's rapidly aging society will severely restrict the labor pool, undermining China's low-cost advantage and increasing the social security burden for workers and the state.

"The world is changing rapidly around the party. Muddling through will not be feasible during Xi's rule," said Harvard China expert Tony Saich. A major crisis in coming years will either demand major reforms or severely challenge the communists' grip on power, Saich said.

http://news.yahoo.com/scandal-economy-unrest-mar-chinas-leader-change-052203631.html

As China Talks of Change, Fear Rises on the Risks

MICHAEL WINES, 07/17/12

BEIJING -- A heavyweight crowd gathered last October for a banquet in Beijing’s tallest skyscraper. The son of Mao Zedong’s immediate successor was there, as was the daughter of the country’s No. 2 military official for nearly three decades, along with the half sister of China’s president-in-waiting, and many more.

“All you had to do,” said one attendee, Zhang Lifan, “was look at the number of luxury cars and the low numbers on the plates.”

Most surprising, though, was the reason for the meeting. A small coterie of children of China’s founding elites who favor deeper political and economic change had come to debate the need for a new direction under the next generation of Communist Party leaders, who are set to take power in a once-a-decade changeover set to begin this year. Many had met the previous August, and would meet again in February.

The private gatherings are a telling indicator of how even some in the elite are worried about the course the Communist Party is charting for China’s future. And to advocates of political change, they offer hope that influential party members support the idea that tomorrow’s China should give citizens more power to choose their leaders and seek redress for grievances, two longtime complaints about the current system.

But the problem is that even as the tiny band of political reformers is attracting more influential adherents, it is splintered into factions that cannot agree on what “reform” would be, much less how to achieve it. The fundamental shifts that are crucial to their demands -- a legal system beyond Communist Party control as well as elections with real rules and real choices among candidates -- are seen even among the most radical as distant dreams, at best part of a second phase of reform.

In addition, the political winds are not blowing in their favor. The spectacular fall this spring of Bo Xilai, the Politburo member who openly espoused a populist philosophy at odds with elite leaders, offered an object lesson in the dangers of challenging the status quo. And official silence surrounding his case underscores high-level fears that any public cracks in the leadership’s facade of unity could lead its power to crumble.

As a result, few people here expect the party to willingly refashion itself anytime soon. And even those within the elite prepared to discuss deeper changes, including the second-generation “princelings,” as they are known, have a stake in protecting their own privileges.

“Compare now to 1989; in ’89, the reformers had the upper hand,” said Mr. Zhang, a historian formerly associated with the government’s Chinese Academy of Social Sciences, referring to the pro-democracy student protests that enjoyed the support of a number of important party leaders but were crushed in Tiananmen Square. “Twenty years later, the reformers have grown weaker. Now there are so many vested interests that they’ll be taken out if they touch anyone else’s interests.”

To Mr. Zhang and others, this is the conundrum of China’s rise: the autocracy that back-flipped on Marxist ideology to forge the world’s second-largest economy seems incapable of embracing political changes that actually could prolong its own survival.

Much as many Americans bemoan a gridlocked government split by a yawning partisan gap, Chinese advocates for change lament an all-powerful Communist Party they say is gridlocked by intersecting self-interests. None of the dominant players -- a wealthy and commanding elite; rich and influential state industries; a vast, entrenched bureaucracy -- stand to gain by ceding power to the broader public.

Many who identify with the reform camp see change as inevitable anyway, but only, they say, because social upheaval will force it. In that view, discontent with growing inequality, corruption, pollution and other societal ills will inevitably lead to a more democratic society -- or a sharp turn toward totalitarianism.

An overriding worry is that unless change is carefully planned and executed, China risks another Cultural Revolution-style upheaval that could set it back decades.

“The bureaucrats still don’t have this sense of a crisis,” one editor at a major Communist Party newspaper, who spoke on condition of anonymity, said in an interview this year. “They think that they can continue to muddle through.” And perhaps they can -- at least for a while longer. Most Chinese credit the party for lifting hundreds of millions of citizens from poverty and creating a huge urbanized middle class, providing a foundation of support for the status quo.

But many people are dissatisfied with an elite that retains tight political control, holds immense wealth and operates with largely unchecked authority. Scholars say the number of “mass incidents” -- a vaguely defined official measure of discontent that includes spontaneous citizen protests -- has doubled since 2005. The government stopped publicly reporting the total in 2006.

“We recognize the achievements,” said Yang Jisheng, an editor of the liberal journal Yanhuang Chunqiu. “But we worry about how to sustain them.

“The cake is extremely big, the second-biggest cake in the world. But it’s divided extremely unfairly,” Mr. Yang added. And “it’s systemic. If the system doesn’t change, it is always going to be unfair.”

Some leaders share those fears. The Communist Party’s only vocal advocate of systemic reform, Prime Minister Wen Jiabao, warned at his annual news conference in March that failing to overhaul the party’s leadership risked setting off a second Cultural Revolution. Political change is a common topic of debate in the government’s many research groups and in the party’s school that trains up-and-coming leaders.

“Neither the rulers nor the ruled are happy with the current situation,” said Mr. Zhang, the historian. “The prevailing belief is that change is coming soon, but the question is how. Change is either going to come from the top leadership, or from the grass-roots level.”

Critics complain of stagnation during President Hu Jintao’s decade in power, and note that Mr. Wen has only halfheartedly pushed for change. They say the party has focused less on addressing citizen grievances than on erecting a sophisticated security apparatus to stifle them.

Mr. Hu’s stab at loosening up the Communist apparatus has been a call for “intraparty democracy,” code for giving the party’s lower ranks more voice in setting policy and choosing higher-ups. But there is scant evidence that even those minor changes in the power equation have been seriously pressed.

Little is clear about the leanings of a new generation that will supplant Mr. Hu and most other members of the Politburo standing committee, the party’s top ruling body, in the transition starting this fall.

The political views of Xi Jinping, China’s vice president and Mr. Hu’s anointed successor, are unknown, though he has flashed brief signs in a few speeches and meetings of what sound to analysts like more progressive leanings.

Some others who seem likely to ascend to the leadership have shown glimmers of support for change. They include Li Keqiang, Mr. Wen’s expected successor as prime minister; Vice Premier Wang Qishan; Li Yuanchao, the head of the party’s powerful organization department; and Liu Yandong, a contender to become the standing committee’s only female member.

“I’m optimistic,” Zhou Zhixing, a media executive and former official at a Communist Party research organization, said of the next standing committee. “I think these people have a very good understanding of China’s current situation, and they know that people’s demands include political reform.” Mr. Zhou’s Web site, Consensus Net, has become an important forum for political debate.

If peaceful change is to occur, Mr. Zhou and many others say, it must begin inside the Communist Party; the lesson of Tiananmen Square is that the leadership will not tolerate threats to its control. Many speak of a transformation along the lines of that in Taiwan, where authoritarian rulers peacefully gave way to direct elections in 1996, and helped spawn today’s robust democracy.

But the pro-reform contingent agrees on little else: on whether China should seek Western-style democracy, a more open form of the Communists’ single-party dictatorship or something altogether different.

Populists want to remake the party to reflect Mao’s early vision, redistributing billions in government riches to the people. A so-called new democracy movement, led by a rural economist and journalist named Zhang Musheng, is gaining followers with a plan to add checks and balances to one-party rule and to significantly expand welfare benefits. But Mao-style populism is disdained by most current leaders, and Mr. Bo, perhaps its leading apostle, was felled by scandal last spring.

A second Communist camp wants to open the party to internal competition, abandoning the leadership’s facade of unity and letting rival factions take their ideas to the wider party for approval. Over the long run, they say, transparency will spawn competing parties under a Communist umbrella -- a sort of one-party democracy. But in a China where stability is the leadership’s obsessive concern, the notion of baring divisions at the pinnacle of power seems almost farcical.

Indeed, the reformers cannot even agree on their motivation. Intellectuals and dissidents see political opening-up as an article of faith. Many in the second red generation, the children of the founding warriors, are driven by anger over what they believe China has become under Mr. Hu.

“They think the Youth League has ruined the country that their fathers fought and died for,” said Mr. Zhang, the historian, referring to the Communist Youth League, which is Mr. Hu’s base of support.

The beleaguered idealists cannot afford to be too choosy, though. “We welcome them,” Mr. Zhang said. “It’s better to at least have an interest in reform, no matter why.”

But the sheer scope of the discord leads some who call for change to wonder whether they are less a movement than a debating society -- intellectuals trading theories over plates of noodles in their apartments, the second red generation trading theories over lavish hotel banquets.

“Mao used to say that ‘revolution is not a dinner party,’ ” Mr. Yang, the editor at Yanhuang Chunqiu, said sardonically. “But right now, revolution is precisely a dinner party.”

Sharon LaFraniere and Jonathan Ansfield contributed reporting. Mia Li contributed research.

http://www.nytimes.com/2012/07/18/world/asia/as-china-talks-of-change-fear-rises-on-risks.html

China's economy suffers 'sharp slowdown'

'Clearly the economy is much, much weaker than most people thought until recently ... They have a real mess on their hands'

KEITH BRADSHER, 05/25/12

XI’AN, China -- A nationwide real estate downturn, stalling exports and declining consumer confidence have produced what a Chinese cabinet adviser, quoted on the official government Web site on Thursday, characterized as a “sharp slowdown in the economy.”

Though the Chinese economy continues to expand, construction workers are losing jobs in droves and retail sales grew last month at the slowest pace in more than three years. Investments in fixed assets have increased more slowly this year than in any year since 2001.

The most striking feature of the slowdown is that it extends beyond the coastal provinces, which depend on exports and are closely linked to the global economy, to the country’s far more insular interior, including cities like Xi’an here in northwestern China.

China’s unexpected economic difficulties are starting to unnerve investors in world markets, especially commodity markets, as China is the world’s largest consumer of most raw materials and the second-largest consumer of oil.

A deepening slowdown would ripple across the world economy. Until now, China’s economy barreled ahead mostly unhindered as the main engine of global growth, even as Europe struggled with its government debt crisis and the United States limped along with a crippled housing market.

Cash squeeze

Government indexes show real estate prices are falling in more than half of the country’s top 70 urban markets, Xi’an among them. Standard & Poor’s Ratings Services and Moody’s each issued reports on Thursday warning that many of China’s real estate developers face a severe cash squeeze as apartment sales slow to a crawl. The developers still owe heavy interest payments on bank loans.

“Weak property developers in China are likely to face a test of their survival this year,” S.& P. said.

Storm clouds loom over global economy

China’s economy was 8.1 percent larger in the first quarter of this year than a year earlier, but virtually all of that growth took place last year. The economy barely grew in the first quarter compared with the fourth quarter of 2011, and the second quarter of this year is likely to show even less growth from the preceding quarter, said Diana Choyleva, a China economist in the Hong Kong office of Lombard Street Research.

The World Bank also warned on Wednesday of a slowdown.

“Clearly the economy is much, much weaker than most people thought until recently,” Ms. Choyleva said. “They have a real mess on their hands.”

China is the world’s largest importer of a long list of commodities, like iron ore and copper. It has also been a big buyer of European factory equipment and luxury goods. The United States economy is much less exposed to a slowdown in the Chinese economy, with exports of goods to China representing less than 0.7 percent of American economic output last year.

Benefiting from heavy government spending on highways and other infrastructure and voracious demand for apartments as poor laborers arrived from the countryside, China’s inland cities had continued to expand even when the rest of the world’s economy fell into serious difficulty in late 2008 and early 2009. But now the economic troubles are evident here in Xi’an, an economic cornerstone of northwestern China that serves as one of the country’s largest transportation and distribution hubs and a manufacturing center for everything from bulldozers to aircraft components.

Sun Yufang, a wholesale dealer in Xi’an in ovens, ranges and water heaters, said that residents had nearly stopped outfitting new apartments or redecorating old ones.

“We didn’t really feel the global financial crisis, but this year, we’ve really felt it -- I don’t see a solution unless people start buying,” Ms. Sun said, sitting in a spacious shop with no customers in sight.

Premier Wen Jiabao expressed concern last weekend about the economy after an inspection tour to Wuhan in east-central China. He then led a cabinet meeting on Wednesday that produced the government’s strongest statement yet.

The government should “place stabilizing growth in a more important position and carry out pre-emptive policy adjustments and fine-tuning more forcefully according to the changing situation,” the cabinet statement said.

An explanatory statement from the official Xinhua news agency drafted on Wednesday and posted on the Chinese government’s Web site on Thursday cited Zhang Liqun, a senior economist advising the cabinet, as saying that, “the sharp slowdown in the economy has aroused attention from policy makers.”

More China coverage in our Behind The Wall blog

A preliminary reading of a monthly purchasing managers index showed that manufacturing had continued to weaken in May, with the index falling to 48.7 from 49.3 in April; a figure below 50 indicates a slowing sector.

China’s Economy: Seizure or Cancer?

The sharp slowdown in China’s economy has policy makers around the world watching carefully. Will the government have the courage to change course?

Minxin Pei, 05/30/12

The unexpectedly sharp slowdown of the Chinese economy has fanned anxieties around the world. Based on the latest figures released by the Chinese government, the economy slowed more than expected in the first quarter of this year compared with the fourth quarter of last year. Is the once unstoppable Chinese economic growth engine grinding to a halt?

For the West, deteriorating growth in China is obviously bad news. With Europe sinking into recession and the United States mired in an anemic recovery, growth in emerging markets, China in particular, has been a bright spot in an otherwise bleak economic landscape. As the world’s second-largest economy, annual growth at high single digit (8 percent to 9 percent) makes China the largest contributor to global GDP growth. Now that China is faltering, many worry not only about the effects of China’s stagnant growth on the rest of the world, but also about its impact on China itself.

On the surface, the recent precipitous drop in growth in China is the result of two factors.

The first is the tightening of monetary policy adopted last year to cool the real estate market and fight inflation.

The second is the rapid decline of export orders for Chinese goods, a development closely associated with the escalating debt crisis in Europe.

Had the Chinese economy been more balanced between domestic demand and exports and between household consumption and investment, monetary tightening and falling exports would not have had such dampening effects on growth. But the Chinese economy is highly unbalanced (although compared with a few years ago, China’s internal-external imbalances have moderated significantly), thus making the country less able to cope with the knock-on effects of credit-tightening and disappearing external demands.

In the short-term, most analysts are worried about a possible “heart attack” for the Chinese economy. Under this nightmarish scenario, plunging growth will expose China’s highly leveraged local governments, real estate developers and state-owned enterprises to the risks of insolvency and default while China’s export sector, dominated by foreign companies and domestic small and medium-sized private firms, contracts and lays off workers. The nasty feed-back loop looks like this:

falling growth will greatly reduce the financial viability of the projects in which China has overinvested in the last three years. Such projects include real estate developments, heavy industries, and infrastructure (the most infamous example being the scandal-ridden high-speed rail system). Falling growth means lower demand. These projects won’t be able to charge higher enough prices to make a profit. Because they were financed with bank debt, it’s almost certain many of these projects will default.

In most other countries, such a crash would lead to a banking crisis, hence the “heart attack” scenario.

But China is different. Because the banking system is effectively owned and controlled by the state, a banking crisis won’t materialize unless the state itself is insolvent and Chinese depositors have completely lost confidence in the state’s sovereign guarantee of its banks. This unique character of the China’s state-owned financial system is the cause of the country’s inability to allocate capital efficiently. However, in the short term, this structural flaw may turn out to be an asset in averting a seizure of the financial system.

The Chinese government has already taken measures to prevent such a seizure. Last year, Beijing ordered a one-year moratorium on repayment of loans made to local governments and their highly leveraged financing platforms, thus delaying the day of reckoning. As the economy continues to struggle, one should expect the Chinese government to extend this moratorium to give local governments more time.

What about the banks? As state-owned institutions, these banks are in no position to say no to Beijing. Financially, these banks are under little pressure. Ever greening the loans by extending the repayment moratorium or rolling over the loans will technically maintain their “performing” status. Because interest rates are determined by the government, Chinese banks pay depositors nothing and have ultra-low funding costs. So carrying these effectively dud loans on their books does not cost banks real money. Ultimately, the Chinese government will have to cough up real money to bail out either local governments or help the banks write off these bad loans. But that is far away, and the Chinese state probably has enough resources (issuance of sovereign debt, sale of land and shares in huge state monopolies like the China Mobile, Petro-China, and the like) to pay for one more round of bank recapitalization.

Another short-term trick is to loosen the financial spigot. The People’s Bank of China has already lowered the reserve ratio, making more bank loans available. This measure is unlikely to work if effective demand remains weak and borrowers have no new projects to invest in. But if Beijing asks its local governments and state-owned enterprises to tap the banking system and use such “free money” to firing up short-term growth at all cost, this tactic might jump-start stalled growth.

That, however, could be disastrous for China’s long-term prospects. Despite the threat of a seizure in the near term, the greater danger to the Chinese economy is its structural inefficiency, which is deeply imbedded in a state-led development model.

In this model, the Chinese state collects an excessive amount of revenue (the current estimate puts effective aggregate taxes at nearly 35 percent of GDP), provides inadequate social services, and allocates most of the capital inefficiently through a highly politicized banking system (in which loans are made on the basis of government policy and political connections, not market principles). To use a medical metaphor, this model is the cancer that will kill China’s long-term prosperity.

By all accounts, the Chinese people have already paid a huge price for this cancer. Their share of the national income has fallen to 42 percent of GDP. That is why Chinese household consumption, at 35 percent of GDP, remains the lowest of the world’s major economies. The investments made by the Chinese state may have given the Communist Party a lot of prestige (think of the country’s modern infrastructure and ambitious high-tech plans), but delivers preciously few real benefits to its people. Chinese state-owned enterprises have thrived because of their access to practically free capital, but their efficiency remains abysmal compared with domestic private firms or their Western rivals.

In a crisis, a far-sighted government should have the courage to push through tough reforms and remove these “cancerous cells” in the Chinese economy. So today, Beijing must try a different strategy to revive its growth. Tax cuts, deregulation, privatization, and increasing funding for social services can all help raise domestic consumption and promote growth. The other option – repeating the folly of stimulating the economy through state-led investment – would make China’s economic cancer all but incurable.

http://the-diplomat.com/2012/05/30/chinas-economy-seizure-or-cancer/

(粗體字和藍色字為作者所使用；紅色字和紫色字是我用來醒目。)

China Is No Longer Predictable

Robert D. Kaplan, 05/30/12

The United States has had it easy over the past third of a century in regards to China. Washington has been able to proclaim moral superiority over the Communist Party dictatorship in Beijing, even as those very dictators provided Washington with a stable, businesslike relationship that fostered immense opportunities for American companies in China and for the American economy overall. China's rulers, ever since Deng Xiaoping consolidated power in 1978, may have been nominally communists, but they have also been professionals and technocrats who have ruled in a self-effacing, collegial style. Yes, they may oppress dissidents, but they have also been enlightened autocrats by the standards of the suffocating rulers who have governed in the Middle East.

But the purging of the pseudo populist boss of the megacity of Chongqing, Bo Xilai, may indicate that a less predictable period in Chinese politics lies ahead. Bo was something not seen in China since Mao Zedong: a leader with real charisma. Bo may indicate that the age of the technocrats will give way to the age of politicians -- and politicians, even in liberal democracies, exploit people's emotions. That could lead to more erratic, nationalistic rulers.

It is famously said that democracies don't go to war against each other. But the problem is not democracy; the problem is a vast and unruly state like China in the messy, decades long process of liberalization. The truth is that these Communist dictators in Beijing, whom the media love to hate, may turn out to have been the most benign and easy-to-deal-with Chinese leaders that Americans will see in their lifetime. President Hu Jintao is as good as it gets from the point of view of a State Department policy planner.

China's autocrats have for many years been nervously riding a domestic tiger. With communism no longer a philosophical organizing principle for the state, they have had to justify their rule by delivering double-digit annual economic growth -- or close to that -- to provide jobs for a potentially restive younger generation. Thus, even while China has amassed impressive new air and sea power, it has -- by and large -- not tried to employ that power in a particularly hostile way. China's communist rulers have had too much domestically to worry about without creating new problems for themselves by constantly challenging the United States or its allies on the high seas. While China's push to acquire air-sea power most specifically dates to 1996, when Beijing was humiliated by Washington's ability to drive two aircraft carrier strike groups through waters near the Taiwan Strait, the building of a substantial air force and navy have so far been part of the natural, organic process of a new and rising great power. At least so far, it has not been particularly destabilizing to the world or regional order, unlike Iran's push to develop a nuclear capability as part of a drive for Near Eastern leadership. China's rulers may be dictatorial, but they are not radical and messianic.

But what if future Chinese politicians who are variants of Bo Xilai dial up nationalist rhetoric? Or what if the Communist Party itself, in order to stave off such challenges in the first place, dials up nationalism on its own? Or what if the factionalism of the Party moves into higher gear, with each faction trying to outdo the other regarding its national-patriotic bona fides? It is political competition itself, in whatever form, that carries the potential to make future Chinese leaders rasher and more hot-blooded than the present ones. Of course, an utterly profound domestic crisis might have the opposite effect, shrinking China's power projection ability. But while that is certainly possible, it is still unlikely.

The point is, decentralization of power -- which counts as one form of democratization -- is likely to occur in China at some stage, given that oscillations between centralization and decentralization have long been a feature of Chinese history, as one dynasty has replaced another. And the next bout of decentralization may alter Washington's perception of Chinese military strength for the worse. Washington now sees China's air and naval rise as a cause for concern but not as an imminent danger. That could change if China's domestic politics do.

Chinese political instability could well play out for years, making the past third of a century under authoritarian rule appear from hindsight as a relatively simple and clear-cut age in terms of devising a policy toward the Middle Kingdom. Until recently, Washington's diplomacy toward Beijing was a matter of dealing with a relatively small number of top officials; while crises have involved hard and tense negotiations, the number of players was limited. But as we go forward, the number of players could expand exponentially in Beijing, and many of them will not be as smooth, professional and predictable as the likes of Hu Jintao. Witness the fraught and convoluted negotiations over the fate of the blind Chinese dissident, Chen Guangcheng, whose own emotional instability became a factor complicating the talks. That could be a harbinger of coming difficulties.

Democratization in its initial stages in any society means a diminution of the power of elites, and with the exception of totalitarian states -- which China is not anymore -- the fall of the elites may lead to more intemperate policies in the short run. Democracies are only stable when they have evolved to the point where they are run by bureaucratic and political elites -- take, for example, Europe, the United States, Japan and Singapore.

In fact, America's founders were the epitome of an aristocratic elite. And when that elite gave way to Jacksonian frontiersmen in the early 19th century, American politics became a more unruly affair, culminating in the Civil War. Finally, the late 19th and 20th centuries saw a whole new meritocratic elite take over the halls of government in Washington.

Meanwhile, the problem with authoritarian systems is that if they remain in place for decades, the only people who end up capable of running ministries and formulating policies are the authoritarian elites themselves. Thus, toppling such systems entails serious risks. The new democracies in Central and Eastern Europe were helped along the path to stability by liberal elements within the former communist power structures who actually knew how to govern. One can only hope that China's eventual transition will go as smoothly as that of Poland and the Czech Republic.

But while Poland, for example, is a uniethnic country, China is a sprawling multiethnic one. The country has significant, geographically based minorities (Tibetans, Uighur Turks, Inner Mongolians) living generally in the high plateaus and peripheries around the ethnic Han Chinese core, which inhabits the lowlands closer to the Pacific. These ethnic minorities have deep grievances against the dominant Hans, as demonstrated by acts of protest over the years. Therefore, democratization in China could lead to significant eruptions by minorities seeking some form of self-determination. China's Han core also contains divisions within it. China's Communist autocrats know all of this, and that is one reason they fear the very liberalization the West recommends.

But change should come to China, and because of the country's continental geography, which harbors a variety of subject peoples, such change will likely manifest disorder. And that disorder will test the ability of officials in Beijing to a yet unseen level, for it will be just part of a larger ferment within Chinese society.

Interpreting China, even as it becomes freer, may ironically become more difficult for the West.

http://www.stratfor.com/analysis/china-no-longer-predictable-robert-d-kaplan

China’s economic crisis

Fareed Zakaria, 05/24/12. The Washington Post

There has been much speculation about power struggles in China in the wake of the ouster of Bo Xilai, the powerful Communist Party boss of Chongqing who used populism, money and intrigue to rise to the top. Had he not been brought down this year -- by a series of mistakes, revelations and bad luck -- Bo might have rattled the technocratic-authoritarian system running the country. China might well survive its political crisis, but it faces a more immediate challenge: an economic crisis.

Every year for two decades, experts have told me that China’s economy was set to crash, felled by huge imbalances and policy errors. They would point to non-performing loans, bad banks, inefficient state-owned enterprises and real estate bubbles. Somehow, none of these has derailed China’s growth, which has averaged an astonishing 9.5 percent annually for three decades.

Ruchir Sharma, who runs Morgan Stanley’s Emerging Markets Fund, makes a different and more persuasive case in his new book, “Breakout Nations,” pointing not to China’s failures but to its successes: “China is on the verge of a natural slowdown that will change the global balance of power, from finance to politics, and take the wind out of many economies that are riding in its draft.” Evidence is accumulating to support his view.

China’s growth looks remarkable. But it isn’t unprecedented. Japan, South Korea and Taiwan all grew close to 9 percent annually for about two decades and then started to slow. Many think that China’s fate will be like that of Japan, which crashed and slowed down in the 1990s and has yet to boom again. But the more realistic scenario is Japan in the 1970s, when the original Asian tiger’s growth slowed from 9 percent to about 6 percent. Korea and Taiwan followed similar trajectories.

What caused these slowdowns? Success. In each case, the economy had produced a middle-income level. It becomes much more difficult to grow at a breakneck pace when you have a large economy and a middle-class society.

Sharma does the math: “In 1998, for China to grow its $1 trillion economy by 10 percent, it had to expand its economic activities by $100 billion and consume only 10 percent of the world’s industrial commodities -- the raw materials that include everything from oil to copper and steel. In 2011, to grow its $5 trillion economy that fast, it needed to expand by $550 billion a year and suck in more than 30 percent of global commodity production.”

All the factors that pushed China forward have begun to wither. China became an urbanized country last year, with a majority of its people living in cities. The rate of urban migration has slowed to 5 million a year. This means that soon the famous “surplus labor pool” will be exhausted. This decade, only 5 million people will join China’s core workforce, down dramatically from 90 million in the previous decade. And thanks to the one-child policy, there are few Chinese to take the place of retiring workers.

Sharma’s picture is largely shared by the Chinese government. For years the leadership in Beijing has been preparing for a slowdown. Premier Wen Jiabao argued in 2008 that China’s economy was “unbalanced, uncoordinated and unsustainable.” He sounded a similar note this week, calling for government measures to stimulate the economy.

In some ways, China still has a lot of gunpowder in its arsenal. Its central bank can lower interest rates and the government can spend money. But even its firepower has limits. Sharma argues that on paper China’s debt to gross domestic product is a modest 30 percent but that when you add up the debt of Chinese corporations, many of which are government-owned, the numbers look alarming. The government will spend more on infrastructure but will get diminishing returns for these investments. Chinese consumers are spending more but -- in a country with no safety nets and an aging population -- saving rates will remain high.

Sharma predicts trouble for countries that have been buoyed by a booming China -- from Australia to Brazil -- as its demand for raw materials drops. He even predicts a decline in oil prices, which, coming on top of the shale boom, should worry oil-producing states everywhere.

As for China, Sharma suggests that 6 percent growth should not worry the Chinese; these would be enviable rates for anyone else. The country is richer, so slower growth is more acceptable. But China’s authoritarian regime legitimizes itself by delivering high-octane growth. If that fades, China’s economic problems might turn into political ones.

comments@fareedzakaria.com

http://www.washingtonpost.com/opinions/chinas-economic-crisis/2012/05/23/gJQAB9zclU_story.html

Bear in a China Shop

It's not the booming economy that's about to burst -- it's bigger than that. Social discontent and, yes, income inequality could rip China apart at the seams.

ARTHUR KROEBER, 05/22/12

Time and again, China has defied the skeptics who claimed its unique mixed model -- an ever-more market-driven economy dominated by an authoritarian Communist Party and behemoth state-owned enterprises -- could not possibly endure. Today, those voices are louder than ever. Michael Pettis, a professor at Peking University's Guanghua School of Management and one of the most persistent and well-regarded skeptics, predicted in March that China's economic growth rate "will average not much more than 3% annually over the rest of the decade." Barry Eichengreen, an economist at the University of California, Berkeley, warned last year that China is nearing a wall hit by many high-speed economies when growth slows or stops altogether -- the so-called "middle-income trap."

No question, China has many problems. Years of one-sided investment-driven growth have created obvious excesses and overcapacity. A weaker global economy since the 2008 financial crisis and rapidly rising labor cost at home have slowed China's vaunted export machine. Meanwhile, a massive housing bubble is slowly deflating, and the latest economic data is discouraging. Real growth in GDP slowed to an annualized rate of less than 7 percent in the first quarter of 2012, and April saw a sharp slowdown in industrial output, electricity production, bank lending, and property transactions. Is China's legendary economy in serious trouble?

Not just yet. The odds are that China will navigate these shoals and continue to grow at a fairly rapid pace of around 7 percent a year for the remainder of the decade, overtaking the United States to become the world's biggest economy around 2020. That's a lot slower than the historical average of 10 percent, but still solid. Considerably less certain, however, is whether China's secretive and corrupt Communist Party can make this growth equitable, inclusive, and fair. Rather than economic collapse, it's far more likely that a decade from now China will have a strong economy but a deeply flawed and unstable society.

China's economic model, for all its odd communist trappings, closely resembles the successful strategy for "catch-up growth" pioneered by Japan, South Korea, and Taiwan after World War II. The theory behind catch-up growth is that poor countries can achieve substantial convergence with rich-country income levels by simply copying and diffusing imported technology. In the 1950s and 1960s, for instance, Japan reverse-engineered products such as cars, watches, and cameras, enabling the emergence of global firms like Toyota, Nikon, and Sony. Achieving catch-up growth requires an export-focused industrial policy, intensive investment in enabling infrastructure and basic industry, and tight control over the financial system so that it supports infrastructure, basic industries, and exporters, instead of trying to maximize its own profits.

China's catch-up phase is far from over. It has mastered the production of basic industrial materials and consumer products, but its move into sophisticated machinery and high-tech products has only just begun. In 2010, China's per capita income was only 20 percent of the U.S. level. By most measures, China's economy today is comparable to Japan's in the late 1960s and South Korea's and Taiwan's around 1980. Each of those countries subsequently experienced another decade or two of rapid growth. Given the similarity of their economic systems, there is no obvious reason China should differ.

For catch-up countries, growth is mainly about resource mobilization, not resource efficiency, which is the name of the game for lower-growth rich countries. Historically, about two-thirds of China's annual real GDP growth has come from additions of capital and labor. Mainly this means moving workers out of traditional agriculture and into the modern labor force, and increasing the amount of capital inputs (like machinery and software) per worker. Less than a third of growth in China comes from greater efficiency in resource use.

In a rich country like the United States -- which already has abundant capital resources and employs all its workers in the modern sector -- the reverse is true. About two-thirds of growth comes from efficiency improvements and only one-third from additions to labor or capital. Conditioned by their own experience to believe that economic growth is mainly about efficiency, analysts from rich countries come to China, see widespread waste and inefficiency, and conclude that growth must be unsustainable. They miss the larger picture: The system's immense success in mobilizing capital and labor resources overwhelms marginal efficiency problems.

All developing economies eventually reach the point where they have moved most of their workers into the modern sector and have installed roughly as much capital as they need. At that point, growth tends to slow sharply. In countries that fail to make the tricky transition from a mobilization to an efficiency focus (think Latin America), real growth in per capita GDP can virtually grind to a halt. Such countries also find themselves stuck with high levels of income inequality, which tends to rise during the resource mobilization period and fall during the efficiency phase. Some worry that China -- which for the last decade has had by far the highest capital spending boom in history -- is already on the edge of this precipice. But the data do not support this pessimistic view. First, much surplus agricultural labor remains. Just over one-third of China's labor force still works in agriculture; the other northeast Asian economies did not see their growth rates slow noticeably until the agricultural share of the workforce fell below 20 percent. It will take about a decade for China to reach this level.

And despite years of breakneck building, China's stock of fixed capital -- the total value of infrastructure, housing, and industrial plants -- is not all that large relative to either the economy or the population. Rich countries typically have a capital stock a bit more than three times their annual GDP. For China, the figure is about two and a half. And on a per capita basis, China has about as much fixed capital as Japan did in the late 1960s and less than a third of what the United States had as long ago as 1930. Further large-scale investments are still required. So China's economy can continue to grow in part based on capital spending, though a gradual transition to a consumer-led economy does need to begin soon.

One illustration of China's enduring capital deficit is housing. Scarred by the catastrophic U.S. housing bubble, many observers see an even scarier property bubble in China. Robert Z. Aliber, who literally wrote the book on financial manias, called China's housing boom "totally unsustainable" this January. And it's true: Since 2005, land and housing prices have rocketed, and the outskirts of many cities are dotted by blocks of vacant apartment buildings.

But China's housing situation differs dramatically from that of the United States. The U.S. bubble started with too much borrowing (mortgages issued at 95 percent or more of a house's supposed market value), which caused a rise in housing prices far beyond the well-established trend of the previous 40 years and sparked the construction of far more houses than there were families to buy them. In China, mortgage borrowing is modest; price appreciation was mainly a one-off growth spurt in an infant market, rather than a deviation from established trend; and there is a desperate shortage of decent housing.

Since 2000, the average house in China has been bought with around 60 percent cash down, according to research by my firm, GK Dragonomics, and the minimum legal down payment has been something in the range of 20 to 30 percent -- a far cry from the subprime excesses of the United States. House prices rose rapidly, but that's partly because they were artificially low before 2000, when state-owned enterprises allocated most of the housing and there was no private market. Much of the home-price appreciation of the last decade was simply a matter of the market catching up with underlying reality. And despite articles about "ghost cities" of empty apartment blocks, the bigger truth is that urban China has a housing shortage -- the opposite of what typically happens at the end of a bubble.

Nearly one-third of China's 225 million urban households live in a dwelling without its own kitchen or toilet. That's like the entire country of Indonesia living in factory dormitories, temporary shelters on construction sites, basement air-raid shelters, or shanties on city outskirts. Over the next two decades, if present trends continue, another 300 million people -- equivalent to nearly the entire population of the United States -- will move from the countryside to China's cities. To accommodate these new migrants, alleviate the present shortage, and replace dilapidated housing, China will need to build 10 million housing units a year every year from now to 2030. Actual average completions from 2000 to 2010 were just 7 million a year, so China still has a lot of building to do. The same goes for much basic infrastructure such as power plants, gas and water supplies, and air cargo facilities.

Yet the housing market also illustrates China's true problem: not that growth is unsustainable, but that it is deeply unfair. The overall housing shortage coexists with an oversupply of luxury housing, built to cater to a new elite. Although most Chinese have benefited from economic growth, the top tier have benefited obscenely -- often simply because of their government or party connections, which enable them to profit immensely from land grabs, graft on construction projects, or insider access to lucrative stock market listings. A 2010 study by Chinese economist Wang Xiaolu found that the top 2 percent of households earned a staggering 35 percent of national urban income. A handful of giant state firms, secure in monopoly positions and flush with cheap loans from state banks, has almost unlimited access to moneymaking opportunities. The state-owned banks themselves earned a staggering $165 billion in 2011. Yet private firms, which produce almost all of China's productivity and employment gains, earn thin margins and suffer pervasive discrimination.

At the root lies a political system built on a principle of unfairness. The Communist Party ultimately controls the allocation of all resources; its officials are effectively immune to legal prosecution until they first undergo an opaque internal disciplinary process. Occasionally a high official is brought down on corruption charges, like former Chongqing party secretary Bo Xilai. But such cases reflect elite power struggles, not a determined effort to end corruption. In a few years' time, China will likely surpass the United States as the world's top economy. But until it solves its fairness problem, it will remain a second-rate society.

http://www.foreignpolicy.com/articles/2012/05/22/bear_in_a_china_shop

The wobbly panda won’t fall yet

David Pilling, 05/23/12

April was a truly gripping month for Chinese politics. Bo Xilai, the nearest thing in China to a politician running for national office, was purged with a brutality reminiscent of the Mao era he had so enthusiastically invoked. But while the country, and the world, was spellbound by the unfolding political drama, something strange was happening to the economy – nothing at all.

Economic activity in China appears to be running into the ground. In the first quarter, growth slowed to 8.1 per cent as measured officially, and to about 7 per cent on an annualised basis. But in April, things took a sudden turn for the worse. Import growth stalled and this month Chinese customers sought to defer, or even default on, contracts for iron ore and thermal coal. That suggests all is not well in Chinese steel plants, on its building sites or in its factories. Other economic proxies, from electricity output to rail cargo and bank loans, also suggest a sudden screeching of economic brakes. Even official numbers – rightly held in much scepticism – have markedly slowed. Industrial production, fixed-asset investment and retail sales have disappointed one after the other.

The authorities have acknowledged the sudden change. Until recently, Beijing had been trying to damp things down, worried about high inflation (which peaked above 7 per cent) and speculation in the property market, particularly at the luxury end. But in the past few days – with the alacrity with which Scotty used to shift the Starship Enterprise from cruising speed to full thrust ahead – Beijing has cranked up the economic levers.

Last week the People’s Bank of China cut the share of deposits that banks must set aside by half a percentage point. More importantly, Wen Jiabao, the premier, sprang into rhetorical action, saying the government should now prioritise growth. That should include a “proactive fiscal policy”, he said, with more loans to big infrastructure projects, lower financing costs, tax cuts and credit for smaller businesses. Bank bosses, who take their cue from party hacks not market forces, can expect a phone call any day now.

In some ways it is autumn 2008 all over again. Then, as now, China had spent the previous several months trying to cool the economy down only to slam policy into violent reverse when economic conditions deteriorated sharply. Beijing embarked on one of the biggest fiscal stimulus packages ever implemented, worth by some reckoning about 15 per cent of gross domestic product.

Like the typical voyages of Starship Enterprise, there have been some frightening moments. Binge spending comes with side-effects. Inflation got temporarily out of control, raising the spectre of social unrest. So did parts of the property market, prompting a government clampdown. Tragically, injudicious investment in the high-speed rail network may have contributed to last year’s fatal crash in Wenzhou, which for many became a symbol of an economy hurtling along at an uncontrollable speed.

There could be more to come. The surge in credit will inevitably lead to a jump in bad debt. Off-balance sheet loans are also likely to turn sour, including money funnelled into local governments. The concern is that China is now setting off on another fiscal stimulus package – albeit almost certainly on a much smaller scale – before it has fully paid for the old one. To the growing crowd of China bears, that means doubling up on an already wayward bet.

To be sure, there are reasons to be concerned. To shore up the economy, Beijing has increased investment to about 50 per cent of GDP. That is a higher proportion than the other Asian tigers ever spent. Eswar Prasad, professor at Cornell University, says a rerun of the 2008 stimulus would come at a heavy cost – “a retreat from the goal of a consumption-driven economy, more wasteful investment spending and additional bad loans in the banking system”. He sensibly advocates spending on different things, mainly on “softer infrastructure” such as a decent social safety net. The World Bank in its twice-yearly report this week said much the same thing.

China’s economic model is indeed inefficient by almost any measure. In terms of energy input, for example, in 2010 it used 2.4bn tonnes of oil equivalent, according to BP, a little more than the US, which used 2.3bn tonnes. With that China produced just $5.88tn of gross domestic product, not much more than a third of the US, with $14.66tn. Some of China’s GDP involves digging a hole and filling it up again.

But the China bears are unlikely to be proved right just yet. China still has the firepower to engineer growth, something it badly needs in a year of fraught political transition. The budget deficit is negligible and central government debt is only 25 per cent of GDP. Even if it were to double as a result of the most recent stimulus, it remains manageable.

Nor is China’s bad-quality growth quite the liability it appears. GDP per capita is still at a fifth of US levels. That means it is still about where Japan was in the late-1960s, argues Arthur Kroeber, managing director of Dragonomics, in an article in Foreign Policy magazine. “For catch-up countries, growth is mainly about resource mobilisation, not resource efficiency,” he says. In other words, China can probably go on spending inefficiently for several more years yet. Even if it gets less bang for its buck, there is plenty of room for further growth.

The World Bank thinks China will grow at 8.2 per cent this year. Andy Rothman, China macro strategist at CLSA, thinks that when Mr Wen says 7 per cent, what he really means is at least 8 per cent. The days of warp speed for China’s Starship Enterprise may be coming to an end. But, for growth, this is most unlikely to be the final frontier.

http://www.ft.com/intl/cms/s/0/bbb3f0fe-a41e-11e1-84b1-00144feabdc0.html#axzz1vnGK2iEn

In China, Fear at the Top

RODERICK MacFARQUHAR, 05/20/12

IN the heyday of the Soviet era, Communist leaders were described by the dissident Yugoslav theorist Milovan Djilas as the “New Class,” whose power lay not in ownership of wealth but in control of it: all the property of the state was at their beck and call. There was the apocryphal but appropriate story of Brezhnev’s showing his humble mother around his historic office, his magnificent collection of foreign luxury cars and his palatial dacha with its superb meals, and asking for her impressions — to which she replied: “It’s wonderful, Leonid, but what happens if the Bolsheviks come back?”

But if even a fraction of the stories about the wealth and lifestyles of China’s “princelings” — the descendants of Mao’s revolutionary generation — are to be believed, China’s New Class wants not only control, but also ownership. Few of China’s netizens are likely to believe that Bo Xilai, the Politburo member and party boss of the mega-city of Chongqing who was ousted in March on corruption charges, was an aberration.

Why has ownership of wealth become so important for the Chinese elite? And why have so many Chinese leaders sent their children abroad for education? One answer surely is that they lack confidence about China’s future.

This may seem strange, given that the Chinese have propelled their country into the top ranks of global economic powerhouses over the past 30 years. There are those who predict a hard landing for an overheated economy — where growth has already slowed — but the acquisition of wealth is better understood not just as an economic cushion, or as pure greed, but as a political hedge.

China’s Communist leaders cling to Deng Xiaoping’s belief that their continuance in power will depend on economic progress. But even in China, a mandate based on competence can crumble in hard times. So globalizing one’s assets — transferring money and educating one’s children overseas — makes sense as a hedge against risk. (At least $120 billion has been illegally transferred abroad since the mid-1990s, according to one official estimate.)

Mao and his colleagues had a self-confidence born of many factors: triumph in civil war; a well-organized party apparatus; a Marxist-Leninist ideological framework, the road map to a socialist future; and the bulwark of the victorious People’s Liberation Army. Today, more than 60 years after the civil war, only the P.L.A. looks somewhat the same, and the self-confidence is fraying.

The denunciations of party leaders and officials by the Red Guards during the Cultural Revolution undermined the party’s authority and legitimacy. The party’s insecurity was accentuated by Deng’s rejection (in practice) of Marxism-Leninism. The cloak of ideological legitimacy was abandoned in the race for growth.

Today, the party’s 80 million members are still powerful, but most join the party for career advancement, not idealism. Every day, there are some 500 protests, demonstrations or riots against corrupt or dictatorial local party authorities, often put down by force. The harsh treatment that prompted the blind human-rights advocate Chen Guangcheng to seek American protection is only one of the most notorious cases. The volatile society unleashed against the state by Mao almost 50 years ago bubbles like a caldron. Stories about the wealth amassed by relatives of party leaders like Mr. Bo, who have used their family connections to take control of vast sectors of the economy, will persuade even loyal citizens that the rot reaches to the very top.

The Bo affair is not just about massive corruption but also succession. Mr. Bo had developed a high-profile “Chongqing model” characterized by crime busting, Maoist singalongs, cheap housing and other welfare provisions. It was a populist, and popular, attempt by a charismatic “princeling,” son of a revolutionary hero, to assert his natural right to ascend to the nine-member Politburo Standing Committee at the 18th Chinese Communist Party Congress later this year. Among the rumors circulating in China is that, once on the committee, Mr. Bo would have tried to replace the party’s incoming general secretary and president agreed to by the outgoing leadership: Xi Jinping.

Mao, who died in 1976, hand-picked his successor. Deng, who died in 1997, blessed Jiang Zemin and Hu Jintao to follow him. Mr. Hu, not being a revolutionary hero like Mao or the godfather of economic reform like Deng, did not have the prestige to appoint his successor. The low-key Mr. Xi, a princeling like Mr. Bo, emerged as a result of jostling behind closed doors. Lacking institutional legitimacy and a laying of hands by an elder, he might have looked an easy target to an ambitious Mr. Bo.

In the months ahead, party leaders will use every propaganda tool to dissipate the damage inflicted on leadership unity, party discipline and national “harmony” by the Bo debacle. They might divert criticism from Bo by depicting his allegedly murderous wife as China’s Lady Macbeth. But members of China’s New Class will still worry that the revelations about elite corruption have exposed them to the danger of the Bolsheviks coming back.

Roderick MacFarquhar, a professor of government at Harvard, is a co-author of “Mao’s Last Revolution.”

http://www.nytimes.com/2012/05/21/opinion/in-china-fear-at-the-top.html?_r=2