Decision time: China today, how it got there and where it is heading
June 26, 2012
This spring in Beijing, I asked a businessman an obvious question about the risks to China of an economic crash-landing, to which I got a less obvious reply. It is impossible to travel around China without concluding that the place is in the grip of a building frenzy. In less than a decade, China has pumped around $4 trillion into property; tens of millions of houses and apartments as well as Ozymandian public buildings and factory estates – and what hits the eye is how much of it all stands empty. Across the country, uninhabited concrete blocks scab the land, not only in the megacities of the eastern seaboard but also in the sleepier southwest; from filthy mining towns in Henan, all the way to entire ghost towns in Inner Mongolia. With an estimated 65 million homes standing vacant, residential construction last year was still running at a rate of five times demand.
Dwarfing even the $2 trillion borrowed for the Railway Ministry’s high-speed networks since 2008, and the thousands of kilometres of 4–6 lane toll roads with barely a vehicle on them, China’s building binge is the most striking example of what Prime Minister Wen Jiabao famously, but impotently, denounced in 2007 as the country’s “unbalanced, unstable, uncoordinated and unsustainable” model of economic development. Now, with house prices and sales sagging in response to government restrictions aimed at deflating history’s biggest ever property bubble, and with local governments as deep in bad debt as the developers, I asked the businessman what was to prevent the bubble actually bursting, in a spectacular financial explosion?
His answer was that it wouldn’t happen. A lot of these empty apartments, he said, had been bought by Chinese families as investments, and they would patiently hang on to these speculative purchases because interest on savings was derisory. Secondly, although some developers would go to the wall, the bubble would simply not be allowed to burst for fear of public anger as well as economic chaos. China had massive reserves if need arose, he said, and would not hesitate to bundle nonperforming loans off into a state “bad bank”. Its plans to build 36 million “affordable” homes by 2015 would also help to offset faltering private sector demand. When in a hole, in other words, the Party keeps digging.
Then the businessman added: “Look, I don’t lose too much sleep over China’s economic troubles; but I do worry, tremendously, about a political explosion tearing the place apart”. The dramatic political destruction in March of Bo Xilai, one of China’s most thrustingly ambitious and charismatic regional Communist Party bosses, has set off that explosion. The shockwaves are convulsing China at a crucial political juncture.
In October, the quinquennial Party Congress is due to approve a carefully contrived transfer of power, over party, government and the military, to a new generation of leaders – the first for a decade, and only the fourth since the Communist revolution in 1949. Bo had been expected to secure one of the nine seats on the Politburo Standing Committee, which along with the Central Military Committee exercises supreme power – thus putting him in a strong position to push his neo-Maoist agenda of reinforcing the state’s powers. Ever since Deng Xiaoping set out to transform China after Mao Zedong’s death in 1976, these handovers have been meticulously choreographed to reinforce a myth of political continuity and, above all, the façade of party unity. However tense the factional jostling may be, rivalries have been kept out of sight: President Hu Jintao’s “harmonious society” reserves back-stabbing for moonless nights.
This obsession with a seamless changing of the guard is rooted in China’s bitter history of abrupt and violent change, and most immediately in the chaos, suffering and abject fear the great mass of Chinese endured under Mao Zedong. Whether or not the people are fooled by the parade of unity – and more and more Chinese know how to read between the lines – the Party Congress also serves to emphasize that the exercise of power in China is not for mere mortals. But now, with the purging of Bo, a ferocious ideological battle has very publicly been joined by those who hold power. It goes far beyond personalities. Its outcome will determine China’s future direction – whether it reverts to a more statist path, or buttresses the market with political and legal reforms.
This is one of the climacterics to which China is historically prone, comparable in intensity and importance to the ideological confrontations that Mao Zedong suppressed by launching the Great Proletarian Cultural Revolution in 1966, and the ferment after his death. It brings to a head a long-simmering conflict between two opposing visions of China, artificially yoked together in Deng Xiaoping’s formula of opening up the economy while continuing to suppress political and intellectual freedoms. The more China modernizes, the less tenable that balancing act becomes between the Maoist past and the demands of governing an increasingly sophisticated, irreverent and politically literate society.
“Opening up” without accountability and the rule of law has produced the worst excesses of crony capitalism, rampant corruption, gross misallocation of resources, outrageous inequality, with corresponding public anger, distrust and contempt. Within the Party, there is a crisis of legitimacy, reflected in an obsession with “stability” that sees a threat in every dissenting voice, a risk in every reform. China’s internal security budget is now bigger even than its military expenditure, as the Party wrestles with the upsurge of what it euphemistically terms “mass incidents”. Nearly 200,000 protests against injustice and abuses of power, some large-scale and violent, are expected this year. The Chinese air is fouled, literally by pollution and figuratively by the Party’s moral and intellectual decay…