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China: The coming crisis
Screens at a restaurant show Chinese President Xi Jinping during a broadcast of the Beijing 2022 Winter Olympics opening ceremony, in Beijing, China, on Friday. REUTERS
What we are seeing is that the totalitarian system cannot solve the very problems which it has itself created. Indeed, in some cases it can only intensify them.
LONDON: The regime that rules China is not an authoritarian regime, as is usually said: it is totalitarian. That difference is crucial. Historian Robert Conquest defined a totalitarian state as one that recognises no limits to its authority in any sphere of public or private life and extends that authority to whatever length feasible. China’s regime fits that definition.China’s Constitution puts the Communist Party above the law and recognises no limits to its authority. The Party acts as the supreme arbiter of truth and falsehood, right and wrong. It tolerates no dissent or difference. By disregarding international law in the South China Sea, tearing up an international treaty in order to extinguish political freedom in Hong Kong, and committing cultural genocide in Xinjiang, the regime has demonstrated beyond a shred of doubt that it extends its authority to whatever length feasible.
The regime excels at projecting an image of itself as all-powerful, omniscient and supremely competent. But the truth is very different. I will look this in more detail later, but consider this story of just one man.
In 2018, he was head of one of four companies set up in 1999 to help clean up bad debt that was choking China’s banking system. The company later expanded into investment, loan and property businesses. He had joined the company fifteen years earlier. Before that he had worked in senior positions for China’s central bank and its banking regulator. So throughout his whole career he had served in positions of trust at the heart of China’s huge financial system, which has the largest banking sector in the world.
In 2018, when he was arrested, this man, Lai Xiaomin, was not only Chairman of China Huarong Asset Management Company but also a senior banking regulator. The major crime of which he was found guilty was that of soliciting bribes equivalent to a total of US$280 million, over a period of ten years. In one apartment he owned were a hoard of bank notes weighing three metric tonnes, presumably some of the bribes he had received. He was executed in January 2021.
This story tells us much about the regime that rules China, but the point I wish to stress here is that despite his very prominent position in the Party-State hierarchy, and his positions of responsibility in the financial system, he saw no need to be discreet: at the time of his arrest, he owned 100 houses and apartments, in which he had installed 100 mistresses. Moreover, the court judgement pointed out that most of his bribery had taken place after Xi Jinping launched the most energetic anti-corruption campaign in the nation’s history, in 2012. This tells us that the authority of the Party leader is far from complete, and that highly placed insiders like Lai believe they can defy it. A five-part series now being broadcast nationwide by China Central Television shows that corruption is a continuing problem, despite the exposure and execution of Lai. The Party is not all-powerful, omniscient, or supremely competent.
The regime has some great achievements to its credit. The economic reforms begun in 1978 have liberated the energies and enterprise of the Chinese people, resulting in the emergence of a dynamic private sector, a large class of property-owners and spectacular economic growth. But the strategy of the Reform Era has been based on a contradiction. Economic reform has not been accompanied by political reform. The Party has always been determined to retain its monopoly of political power. For the Party, economic reform has never been more than a stratagem for prolonging its grip on power.
It has made an unspoken deal with the Chinese people: we let you make money and you let us rule. You can build a business with a market capitalisation of hundreds of billions of US dollars, but you may not vote to elect or dismiss your rulers.
This system is based on control, not on trust. The rulers are more powerful than their subjects, but their power is naked power, and is not legitimised in any way. This totalitarian regime makes prisoners of everyone: not even the highest leaders have freedom of expression, or association, or religion, any more than their subjects do. At no level do even Party officials have the right to vote freely for the election or dismissal of their leaders, any more than those outside the Party do. In a totalitarian state everyone is a political slave.
It worked well for a long time, and in some ways it still does. The regime is very skilled at organising and applying power, and its capacity for mobilising administrative forces on a huge scale is breath-taking, as we have seen during the Covid-19 pandemic.
It produced the wealth and skills needed:
• to buy tolerance for the Party’s rule,
• to develop the most sophisticated systems of internal control the world has ever seen,
• to modernise China’s armed forces,
• and to project its power abroad through economic diplomacy.
Is it not absurd to suppose that this regime is heading for a crisis?
But there is much evidence that the contradiction inherent in the deal struck with the Chinese people—economic reform without political reform—has resulted in a whole range of deep-seated and long-term problems, and now some of those problems are making themselves felt. Chickens are coming home to roost. This regime is outwardly strong but inwardly weak.
What we are seeing is that the totalitarian system cannot solve the very problems which it has itself created. Indeed, in some cases it can only intensify them.
What are these problems?
First, the debt mountain. For the past decade, the impressively high rate of economic growth has increasingly depended on pumping credit into the economy until corporate debt has reached a level that is dangerous to China and a risk to the world economy.
More and more of the credit has gone to finance activities that are financially unprofitable, such as building bridges that lead nowhere and residential housing that stands empty. No nation with such a debt mountain has ever substantially reduced it without either inflation or recession. The regime shrinks from a deliberate, time-limited recession because it fears the widespread defaults and large-scale unemployment that would occur. Lacking the legitimacy conferred by democratic elections, it is afraid of the political consequences of the action it knows is essential to renew the health of the economy. This is a direct result of the totalitarian system.
The public sector is sclerotic and loss-making, but the regime will not allow the dynamic and profitable private sector to take over loss-making state-owned enterprises because it fears that would undermine its political monopoly. To protect unprofitable state-owned enterprises, the state retains ownership of the major banks so that it can force them to prop up those enterprises.
Largely deprived of finance from state-owned banks, private companies have recourse to shadow banking, which lacks transparency and creates risks hidden from regulators. The vulnerabilities in the financial system are a second consequence of the totalitarian system.
Faced with these problems Xi Jinping has not resumed the transition to the market economy. Instead, to protect the Party’s political monopoly, he has doubled down on the totalitarian system, and reasserted the authority of the Party over the private sector.
Indeed, he is back-tracking on the strategy of economic reform and opening to the world which brought great benefits to China. He is giving greater preference to the state sector, imposing arbitrary restrictions on the private sector, and in some ways cutting China off from the world.
But the consequences of the totalitarian system go far beyond the economy.
For instance, there is an officially recognised moral crisis, which can be summed up in four words: no trust, no truth. That is a simplistic summary, but it conveys the essential truth. At its heart lies corruption, but this is not the accidental by-product of bad government: it is a deliberate political strategy. In 1989, when the regime faced the biggest democracy movement in history, it chose to reject the calls for democracy and the rule of law and lost whatever moral authority it had by crushing the movement through military force. Thereafter, to win the loyalty of those who rule in its name, who enforce the will of an unelected regime, it chose to allow party officials and their friends in business to grow rich through corruption.
Mr Xi’s anti-corruption drive has tackled the symptoms, not the causes, because the causes are systemic, and can only be rooted out by systemic reform, such as establishing an independent judiciary and a free press, which are incompatible with a totalitarian system.
The regime itself bemoans the widespread hedonism and materialism that prevail in today’s China. It cannot impose a new morality. But we observe that since 1978 there has been a great spontaneous explosion of religious faith and practice. People testify that material prosperity is not satisfying them, they are looking for true meaning in life, and many are seeking it in religion.
All the major religions officially recognised in China have shared in this, until scholars reckon that 350 million are practising some form of religion.
The political significance of this growth of religion is fundamental: the Party asserts itself as the ultimate authority in every sphere of human life, but those with a religious faith insist there is a higher authority. Who rules: God or the Party? Very few of the religiously active give political expression to their beliefs, but they constitute a large and deep reservoir of dissent.
Another intractable problem for the government of China is the ecological catastrophe, which is well documented. The regime recognises the gravity of the problem, but the political system prevents the regime from solving the problem.
Why is that? First, its very survival depends on maintaining a high level of economic growth, so it gives economic growth higher priority than controlling pollution.
Second, corrupt officials tolerate pollution by the companies controlled by their cronies in business.
Third, for political reasons, the regime will not allow environmental NGOs to play the essential role they play in democracies of holding governments and industry to account.
The result is not only that China emits more CO2 than any other nation, and accounts for two-thirds of global emissions, but is actually increasing its emissions each year by more than the advanced economies are reducing theirs.
Because of this, we are on course to global ecological disaster, with no prospect of avoiding it, unless there is a change of political system in China.
The problems generated by the totalitarian system are not all domestic. The cover-up of Covid-19 in the early stages and the blocking of an independent, international investigation into the origins of the coronavirus have greatly damaged China’s international standing, as measured by respected public opinion surveys. Cyber theft of intellectual property on an industrial scale, rampant espionage, and those actions I mentioned above in the South China Sea, Hong Kong and Xinjiang, have also contributed to a sea-change in international attitudes towards the Communist regime in China.
This sea-change is being expressed in actions by governments, led by the US. I will cite just two. First, sanctions imposed on Huawei by the US and its allies have inflicted very severe damage on one of China’s greatest hi-tech national champions. Second, in December 2020, the United States enacted a law which stipulates that if the Chinese government does not permit Chinese companies listed on US stock exchanges to make the full financial disclosure required by US law all of those companies—some 248 of them then valued at 2 trillion dollars—will all be suspended from listing and trading on US exchanges. That will come into effect in 2024. That prospect has already knocked 30% off their market value.
I began this litany of problems by describing the debt mountain. The consequences of unrestrained reliance on debt are now wreaking damage on the property sector, which accounts for 30% of the Chinese economy. The damage is very severe. It will affect every sector of the Chinese economy and will be long-lasting. One Chinese property developer, Evergrande, is the most indebted property developer in the world. It is now facing collapse, and others are going into default.
It is in property rather than bank deposits or stock markets that China’s middle class has been investing most of its savings. The sale of land to developers has been a major source of revenue for local governments. Now property prices and sales and land sales, are all declining, with especially damaging consequences for savers, local governments, financial institutions, suppliers to the building trade, and for employment in the property development sector.
It is not just foreign observers who see these and other problems. Chinese leaders know them better than we do, and many of them see the connection with China’s political system. The most high-level defector from China to the US since 1949, who taught political ideology to senior Party officials for fifteen years, says that 60% to 70% of those senior officials consider constitutional democracy to be superior to the system China now has.
These senior officials are alarmed at the direction in which China is heading, at home and abroad. They are alarmed at the damage it is now doing to the national interests, and they see growing risks to their own wealth and power.
A combination of internal and external dynamics is developing which could provoke a crisis that goes beyond economics, because the body politic of China is terminally ill and only systemic change can save it.
Historically, liberal democracy has come into being due to the combined pressure of intellectuals, property-owners and private businesses for the freedoms and protection afforded by the rule of law, an independent judiciary, and other institutions of constitutional democracy.
As soon as Xi Jinping came to power, the Communist Party issued a directive prohibiting any mention of such ideas. Even before that, as long ago as 2008, the Party had stopped the transition to the market economy because it feared that a strong private sector would pose a political threat to its monopoly of power. Recent actions by Xi Jinping show that he fears that private sector has nonetheless grown too strong. He has taken steps to reassert the authority of the Party over it, to curb its freedom of action, and increase the role of the state sector. He is also moving to selectively decouple China’s economy from the outside world.
All these moves are prompted by a political objective, to reassert the Party’s authority, disregarding the damage they will do to China’s economy. This is the greatest reversal of strategy since the launch of the Reform Era in 1978.
By these and other actions the Party has shown that it recognises that its dictatorship is threatened by the same forces that gave birth to liberal democracy. The question now is how and when will the situation in China give those forces a chance to act to bring systemic change?
For this regime, fear of internal unrest is nothing new: every year since 2011, the regime’s budget for internal security has exceeded that for the military. Apparently, the regime fears domestic opposition more than its foreign enemies, but that fear is now being exacerbated by the property crisis. The regime has proclaimed “stability” its top priority for the coming year precisely because it fears unrest at the grassroots.
Given the relative inefficiency of domestically produced vaccines against Covid-19, and the Party’s refusal to import foreign ones, the zero-Covid strategy has driven China into a position of near-isolation with no exit. This is a political time-bomb.
The suspension from listing and trading of Chinese companies in the US, due to take effect in 2024, will be the biggest reversal in opening of the Chinese economy to the world since 1978. It will damage the interests of and cause resentment among the most dynamic forces in China’s economy.
This Sino-American confrontation may cause problems on China’s own financial markets. Xi Jinping, having centralised authority in his own hands to a degree not seen since Mao, will own the crisis. A financial crisis could then become a political crisis.
Some combination of these circumstances will convince the members of power elite who understand the gravity of the problems China faces, who are alarmed by the direction in which China is heading, and who recognise the need for systemic change, that the moment has come to strike.
What strategy should the US and its friends and allies adopt towards the China? First, we must always make very clear our opponent is not the Chinese people but the Communist Party.
Secondly, we have no wish to see authority in China collapse and the country descend into chaos.
Thirdly, we cannot dictate how China is governed. But we can and must use our power, which is still very great, to help those Chinese who want a free China to achieve it. The continued growth of the Chinese economy depends crucially upon continued access to the world’s reserve currencies, the international banking system, its deepest capital markets, its biggest pools of capital, and the greatest centres of scientific and technological discovery, all of which are controlled by the liberal democracies. We must exploit this power in a graduated way that incentivizes change and imposes a price on the present course.
If we do so successfully, the benefits of a free China to itself and to the world will far surpass anything we can now imagine.
Roger Garside is a China expert and an associate fellow of The Henry Jackson Society. As a British diplomat, he studied Mandarin Chinese and served twice in Beijing. His latest book is “China Coup: The Great Leap to Freedom”.
China: The coming crisis - The Sunday Guardian Live
What we are seeing is that the totalitarian system cannot solve the very problems which it has itself created. Indeed, in some cases it can only intensify them. LONDON: The regime that rules China is not an authoritarian regime, as is usually said: it is totalitarian. That difference is crucial...
www.sundayguardianlive.com
