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What’s really at stake in the Chinese economic turmoil

REUTERS/Jason Lee
Despite pressure from the economy, Chinese President Xi Jinping has been heading in the opposite direction of democratization.

Okay, the financial markets may have stabilized, and despite all the panic we’ve seen this week about China’s economy, the world as we know it isn’t coming to an end just yet.

But as hard as Chinese officials make it to figure out what exactly is going on in their country, it’s amply clear that the decline in China’s growth rate and the volatility in its stock market have real consequences — inside the country and out. Who’s at risk? Who gets hurt? How badly?

Officially, China is aiming to grow its economy by 7% this year, but there are widespread doubts about its official statistics. So some analysts (by no means everyone) concluded that the sudden devaluation of its currency this month was a sign that the economy was in much worse shape than anyone was letting on.

America: It’s not about you

The pain has been apparent outside China’s borders for some time.  And despite the attention that Americans — in the world’s largest economy — have been paying to China — the next-largest economy — the real action is elsewhere. Think Brazil. Chile. Australia. Japan. South Korea.

In order to flood the world with consumer goods, China needs all manner of machinery and raw materials. It moved aggressively into global markets to lock up supplies, casting its attention from Afghanistan to Zambia.

High demand drove up global commodity prices. But demand — and prices — have been dropping, hurting countries that supply machinery (like Japan and South Korea), copper (like Chile), agricultural products (like Brazil), oil, and many other products to China.

According to this excellent chart put together by The Guardian, China’s imports dropped almost 15% in the first half of this year. Australia, which has had a booming business exporting coal, iron ore and other commodities to China, already has lost about 1% of GDP.

Then, there is the effect on oil prices. While China burns a tremendous amount of coal, it also the world’s leading importer of oil. Global oversupply, in part the result of increased U.S. production, has helped drive down prices. Lessening demand in China exacerbates the trend, making matter worse for countries that are heavily dependent on oil exports: Venezuela, Nigeria, Russia to name a few.

Internal migrants

Inside China, the stakes are extremely high. For hundreds of millions of people, it’s about a chance at a decent life. For the political elite, it’s about stability and control. It’s almost impossible to overstate how important that is.

This recent article by Damien Ma in Foreign Affairs focuses on one very big piece of the problem: China’s internal migrants. There are more than a quarter-billion of them – enough that if they made up their own country, Ma calculates, it would be the fourth-largest in the world.

They have moved en masse from the countryside to the cities in recent decades, providing much of the muscle for China’s impressive growth. But because of longstanding policies aimed at social control, they don’t have official permission to live there. Therefore, they often don’t qualify for the same benefits as urbanites, and may earn less as well.

This is important for two reasons. First, putting more money in their pockets would be a big way of turning China’s economy into one driven by consumer spending rather than investment and exports. The government acknowledges it needs to do that because the old model is running out of steam. On the flip side, if all the paths for advancement are cut off, these millions could easily become disruptive.

Resisting democracy

That brings us back to the hidden world of Communist Party politics, the leadership’s worries about stability and control, and murky signs of internal discord.

No one has succeeded in doing what the Chinese are attempting: loosening controls on a major economy, allowing it to become one of the world’s most prosperous, while maintaining tight political control.

A former World Bank and U.S. Treasury Department expert quoted here says this is the stage at which countries that made the transition started to democratize. That’s not what the Chinese leadership has in mind. President Xi Jinping has been heading in the opposite direction.

Despite a façade of normalcy, this excellent analysis by the BBC’s China editor, Carrie Gracie, teases out signs of internal discord: a declaration that time for reform is running out; and strategically placed warnings about factionalism and retired officials meddling in policy.

In addition, Xi’s anti-corruption campaign, aimed at attacking one big threat to the party’s legitimacy, appears to have turned internal politics into a blood sport. Freeing up the economy further threatens the business interests of the elites.

Very powerful people stand to get hurt.

“When the economy was growing fast, there were no hard choices between core economic and political objectives,” Gracie says. “But now that growth is slowing, the conflict is stark between the economic imperative of freeing up markets for the sake of China's future and the political imperative of iron control for Party survival.”

The party wants economic reform. But there is a very good chance it wants political control even more.

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Comments (2)

Cogent Summary

A very tidy summary of this multi-level and somewhat obtuse subject. Few Americans know how extensive is the worldwide Chinese control of and rights to raw material sources. They control most African minerals, rights to extensive South American deposits, the new Mexican oil leases and far more.

We generally think of China as our trade partner/adversary, taking American jobs from Ohio and returning flawed products to us. People should better understand the extensive Chinese worldwide economic power as the "Domino Theory" of this century.

Thanks.

Yes, and how do they do it ??

They come into your struggling country, offer to build the infrastructure and provide the expertise in development of an extraction industry, finance it, train your people to run it themselves, then offer to be your #1 customer for the next several decades, guaranteeing profits, employment for your people, and in general, success.

Such a deal !!

I'm afraid our offers of partnership don't compare so well, but I'm not sure I understand exactly why. Perhaps it's because we have a history of taking over or abusing the governments of our less powerful partners - i.e., we actually threaten their security.

What can we learn from these Chinese successes ? Maybe one thing we could realize is that they are seen as more trustworthy than the U.S.