Articles:
The real worry in China is politics, not economics

The debate about China’s economy, amid all the noise and drama coming
from the bursting of its stock market bubble, is essentially about whether its
annual economic growth rate might really be 5 per cent rather than the official
7 per cent, or — shock, horror — could actually be as low as 4 per cent, which
cannot qualify as a catastrophe. Or it might mean nothing much at all, given
that the Chinese stock market is essentially a gambling den that is only weakly
connected to the wider economy. So pardon me for failing to get very excited
about it. The real reasons to be interested, and even worried, lie in politics,
not economics.

Chinese events raise three big political questions.
The first has more than a touch of Schadenfreude, admittedly.

For years, we have been told that one of China’s
great advantages is that its authoritarian government is better able to make
and implement decisions and steer economic change than our feeble, navel-gazing
democracies. What we are watching is a test of whether there is any truth in
this claim beyond simply the ability to sweep people out of the way when new
high-speed railway lines or airports are to be built.

It is eight years since Wen Jiabao, then prime
minister, made a much-noted and admired speech at the National People’s
Congress saying that Chinese growth was “unstable, unbalanced, unco-ordinated
and unsustainable”. Supposedly this, and associated initiatives to clean up the
country’s environment, was to herald a new phase of reform, a new transition away
from investment-intensive, dirty growth towards a cleaner, more high-tech and
consumer-led variety.

Yet precious little has happened. Chinese air and water are dirtier than
ever, and if anyone thought environmental controls had been tightened at all, the
explosions of hazardous chemicals earlier this month in the centre of Tianjin,
claiming more than 120 lives, should have disabused them. In the economy,
investment has indeed been fading away as a motor for growth, which means that
arithmetically consumption looks more important than it did. But this is just a
statistical artefact: other sources of growth have not emerged to take
investment’s place.

Such transitions are difficult. But, as Chinese
leaders know very well, the one that Mr Wen was calling for in 2007 is hardly
unprecedented. Exactly the same sort of transition took place in Japan during
the 1970s and in South Korea in the 1990s.

During such transitions, reforms need to be made
that hurt some powerful interest groups and may cause a rise in unemployment,
so political leaders need to mediate between such interests while maintaining
public trust and social cohesion.

In Japan, this was handled by a democracy. In
China, it is being handled by a Communist party that for the past two years has
also been trying to tighten its political control of the country. So far, the
verdict would have to be that an authoritarian regime is faring badly at
achieving these economic reforms or, to put it another way, at reconciling its
own often competing objectives.

The second big political question arises from this. If the stock market
crash does have any real domestic  consequence, it will come from the anger
of retail investors at their losses. That may prove a minor factor, but add it
to anger at man-made disasters such as that in Tianjin, and quite possibly at
rising unemployment, and you have the potential for a considerable public
backlash of the sort that Communist party leaders have always worried about.

So the issue will be one of how big such a backlash
becomes, and how the party responds if it does become serious. As well as the
power of state-owned enterprises and local governments to block change, one
explanation of China’s failure to deal with Mr Wen’s “four Uns” has been the
party’s hypersensitivity to public disorder and a desire to avoid it at all
costs.

Now such disorder may be unavoidable. Which means it will have to be
managed, in some way. And we all remember how it was managed in June 1989 in
the streets around Tiananmen Square in Beijing, and in other Chinese cities
that were convulsed by protests about the economic crisis that was occurring at
that time.

We can’t answer this question in advance. The same
applies to the third big political question, which is about how economic stress
might affect China’s behaviour towards its neighbours in east and Southeast
Asia.

This may well be the biggest reason to worry. Asian
countries that have done well out of trade with China in the past 20 years are
already suffering from a decline in that trade. There may be other sources of
financial and economic contagion to come, as there were during the east Asian
financial crisis of 1997-98. But the worst contagion would be if in response to
economic stress the Chinese government, or perhaps just the Chinese military,
were to ratchet up nationalism and escalate the territorial disputes the
country has with Japan, Vietnam, the Philippines and others, in the East China
Sea and South China Sea.

If that were to happen, it would make a stock
market crash look like a lot of fuss about nothing.