Last week was an eventful one for China. First, the People's Bank of China
shocked the financial world when it cut the
yuan's reference rate against the U.S. dollar by nearly 2
percent, leading to a greater than 2 percent drop in the value of the yuan in
offshore trading.
The decline triggered a frenzy of speculation, including some
expectations that the Chinese move would trigger a race to the bottom for Asian
currencies. Beijing said the adjustment was designed to fix distortions between
the trading rate of the yuan and the rate it should have been at according to
speculation, and that subsequent large shifts were unlikely. The International
Monetary Fund, however, noted that the move could lead to a freer floating yuan
— something the IMF has asked of Beijing before the organization considers
including the yuan in its Special Drawing Rights basket of currencies.
In
comments made on the sidelines of its annual report on the Chinese economy,
released later in the week, the IMF also noted that the yuan was not
undervalued, despite the decline.
Also last week, Chinese state media issued a warning to retired officials
to stay out of politics and not misuse their former networks and prestige. The
warning followed reports in state media suggesting that the annual
unofficial gathering of current and former Party officials at Beidaihe was
canceled and would not serve as a policy-making venue in the
future. The reports noted that Party officials had already held several
additional sessions in Beijing and that decisions were being made in the open,
not in some secretive gathering of Party elders.
Other reports circulating in
Chinese media warned that former Party and military officials were involved in
real estate speculation along with other economic mismanagement and needed to
stop.
Finally, last week China dealt with one of its worst industrial accidents
in years — a series of explosions at a chemical short-term storage facility in
the busy port city of Tianjin. More than 100 people were killed in the
explosions and aftermath, prompting the government to launch an investigation
into illegal storage and improper safety procedures at that and other
facilities around the country. Citizens have begun small-scale demonstrations
in Tianjin to demand government reparations for damages as a result of the
blast. In response, Beijing stepped up its media campaign against rumors, using
state media to remind the public that the government publicly charged a
Politburo standing committee member with corruption, so the public can trust
the government to be open and not hide a conspiracy surrounding the Tianjin
blast.
If there is a common theme running through these events, it is the way
Beijing is emphasizing its openness in decision-making, in reporting and in
explaining its actions. This is not the China of the past that tried to hide
the truths of major natural or man-made disasters from its citizens. It is not
the China that operated by secret agreements made only after a consensus of
Party elders, or the China that tried to protect Party officials at the expense
of the public. Nor is it the China of tight currency controls, amid fears that
the vagaries of global markets could affect China's economic regulation.
Or at
least that is the message Beijing is trying to send. It is a message perhaps
meant more for domestic than international consumption, but one that recognizes
that neither abroad nor at home is there a lot of trust in the Chinese
Communist Party or the government to pursue a transparent policy. The taint of
corruption, collusion and nepotism remains strong and is perhaps even
reinforced by the breadth and depth of the ongoing anti-corruption campaign.
Old Systems Become Obsolete
The reality is that China is in the midst of what may be its most serious
crisis since the days of Deng Xiaoping. And the model of government and economy
Deng put in place is no longer effective at managing China, much less shifting
it in a new direction.
As China emerged from the chaos of the Maoist era, Deng initiated three
basic policies for China's future growth and development, starting around the
early 1980s. First, allow the economy more localized freedom, accepting that
some areas would grow faster than others but that in the long run the rising
tide would lift all boats. Second, prevent any single individual from truly
dominating the Chinese political system.
No longer could a figure like Mao
Zedong exert so much personal influence that the entire country could be thrown
into economic and social upheaval. Instead, China's leaders would be locked
into a consensus-driven model that limited any individual source of power and
eliminated factions in favor of widespread networks of influence that
overlapped so much they could not be truly divisive.
And finally, walk softly
internationally, be ruthless in the appearance of a non-interference policy and
avoid showing any military strength abroad. This latter point was intended to
give China time to solidify internal economic and social cohesion and strength
while avoiding distraction or inviting undue military attention from its
neighbors or the United States.
In retrospect, Deng's model worked exceptionally well for China, at least
on the surface. While the Soviet Union collapsed, the Communist Party of China
held together, even after Beijing's mismanagement of Tiananmen Square.
Although
at times slow to respond or initiate proactive change, China's leaders managed
the country's rapid economic growth in a way that avoided extreme social or
political destabilization. The Party managed not only the leadership
transitions set in motion by Deng, but also, amid intra-Party scandal, the
latest transition to Xi Jinping. China's leaders even managed the impact of the
global economic slowdown and appear capable of maintaining order even as
economic growth rates slow considerably.
But the relative calmness on the surface belies disturbing deeper currents.
The dark secret
of consensus rule was that, while appearing to provide
stability, by the late 2000s it was doing more to perpetuate underlying
structural problems that could delay or even derail actual reforms or economic
evolution.
The lack of radical shifts and turns, the avoidance of major
recessions and the ability to defer significant but potentially destabilizing
reforms made China look like an unstoppable juggernaut. China's economy climbed
past Japan's and seemed destined to surpass the U.S. economy. And if economic
strength translated into total national strength, then China was emerging as a
significant global power.
Beijing even began breaking from Deng's cautions on
overt military power and started a more
assertive foray into the East and South China seas, both because of
a perceived need to protect its increasingly important sea lanes carrying
natural resources and exports and because it was feeling more powerful and
capable and wanted to act on those strengths.
However, all economies are cyclical. As they grow through different stages,
the deadwood needs to be trimmed and funding provided for the new shoots.
Recessions, slowdowns,
bankruptcies and sectorial collapses are all part of the natural economic
process, even if they are disruptive in the short term.
As China claims to be
climbing the value chain in manufacturing and exports, it is not simultaneously
trimming away older components of the economy or effectively weaning itself
from the stability of large state companies that are disproportionately locking
up available capital compared with total employment. Parochial interests by
local and provincial governments — themselves keen to avoid any sense of
instability — have left massive redundancies intact across China's manufacturing
sectors, particularly in heavy industries, the backbone of early Chinese
economic growth. Consensus politics allowed China to grow, but not in a healthy
manner — and the global economy is no longer giving China the freedom to just
keep pouring on the fertilizer and hope no one notices the rot spreading
through the trunk and branches.
Xi's Crisis Management
The leadership transition to Xi in 2012 was also not nearly as smooth as it
first appeared. It occurred amid the Bo Xilai
scandal, in which it appeared the former Chongqing Party Secretary
was making a bid not only to reshape the direction of Chinese politics but also
to usurp Xi's rise to central Party and state leadership. What has emerged amid
the ongoing
anti-corruption campaign is that the challenge was much more
serious than it may have appeared, including an alleged assassination plot
against Xi.
The recent pronouncements regarding former Party leaders and officials
staying out of politics suggests that challenges to Xi's position are still
emerging. Xi's decision to build a national security council and economic
affairs advisory body, to which he belongs, has aroused opposition from former
officials used to playing a role in shaping policy. Publicly canceling the
unofficial Beidaihe summit was an overt strike against former officials. The
consolidation campaign continues.
While China faces some of its toughest economic challenges, and after it
has stepped out into the South China Sea and international
military affairs in a way it cannot easily pull back on, it is
also contending with internal dissent and intra-Party fighting. Xi's
consolidation drive, closely linked to the anti-corruption
campaign, is all about tightening the reins of control to allow more rapid
policy adjustments, force macro-policies on localities and accelerate the Party
and state's response time to changing circumstances. But that challenges
decades of tradition and entrenched power and interests. It also creates a
contradiction: The economic policies are moving toward liberalization, but the
political and social policies are moving toward autocracy.
To manage the next phase of China's economic opening and reform — something
that changes in the global economy and decades of internal ossification are
forcing upon Beijing — Xi is simultaneously cracking down
on media, information, social freedoms and the Party itself. The
fear is that significant economic reform without tight political control would
lead to a repeat of the Soviet experience: the collapse of the Party and
perhaps even the state.
Each event, each headline, should be assessed in the context of this
internal crisis. The currency dip — an important step in liberalizing yuan
trading, gaining a role in the Special Drawing Rights basket and continuing
China's path toward yuan globalization (freeing the country at least a little
from the dominance of the U.S. dollar) — has auxiliary risks, not least of
which is that a freer currency can move in directions far from those the
government would like to see.
The explosion in Tianjin is reinforcing the fears
of rampant mismanagement and corruption. It has sparked a new round of
conspiracy speculation and is placing the government in a position where it
must deal with protesters in a major city as well as foreign investors and
traders — again raising uncomfortable questions about safety and security in
China. The warnings against retired officials interfering in politics may be
more than just public relations attempts to highlight some newfound
transparency.
This is not to say China is on the verge of collapse, that the government
and Party is about to fracture along internecine battle lines, or that economic
reform is simply impossible in the face of entrenched interests. But none of
these are out of the question. China has entered a stage of the uncertain. The
transition to an internal demand-driven economy will not happen smoothly, nor
will it happen overnight. The reduction in exports and the drain on investment
is already under way. And with all of these issues sitting squarely on his
shoulders, Xi is preparing for his September visit to the United States, where
the litany of concerns about China expands daily.
The transitory period is the most chaotic, the most fragile, and that is
where China sits right now.
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