Three things cannot be hidden– the Sun, the Moon and the Truth: Confucius
- China faces mismatch between society and economy
- Beijing’s worst challenge in how to wed tradition and technology
- May go the USSR way if it fails to embrace democracy.
Seventy-four years after it came into existence (1917), the Union of Soviet Socialist Republics (USSR) collapsed in 1991. And 70 years after the Dragon resuscitated as the People’s Republic of China (PRC) in 1949, it may be facing the worst crisis of its existence: beginning with ongoing unrest in Hong Kong, which houses the world’s sixth largest stock exchange with a market capitalization of nearly US$4 trillion, China now stares at a possible meltdown.
Peking (Beijing) regained control of Hong Kong in 1997 after 156 years of British rule and made it a Special Administrative Region (HKSAR) of the PRC. China had hoped that it would gradually ‘process’ Hong Kong and merge it into the Communist culture. The reverse happened, however: it is the minnow Hong Kong which has ignited a spark which threatens to roast a far bigger Dragon into barbecue, the way David sent Goliath back into Stone Age.
Civil engineers acknowledge that the Reinforced Cement Concrete (RCC) used in the construction of an edifice has a limited lifespan of around 70 years. Is China, too, like its one-time mentor USSR, cracking up the same way? Outwardly, it appears a hard nut to crack, like coconut; but once cracked, it could dry up soon, repeating earlier instances of its over three millennia-long history. The Dragon is not immortal.
Mikhail Gorbachev discovered to a great cost that Glasnost (Openness) and Perestroika (Reconstruction) are inseparable; they cannot be selectively embraced. One of them inevitably leads to another. Moscow introduced glasnost without any idea of or investment in perestroika. But the intelligent and aspirational masses got the message: grab whatever is available now—for the rest will come as its fruit! In Russia, the aspiration for perestroika bled glasnost white.
Drawing a lesson from its one-time mentor, post-Mao China adopted a reverse growth-path in 1977 when its top leader Deng Xiaoping launched his ambitious Four-Pronged Modernization drive in agriculture, industry, defense and science and technology, effectively shedding the antiquated Communist Party’s proletarian mask. In the next four decades, China sped ahead—but it introduced only perestroika, not glasnost!
As Confucius taught China, Truth cannot be hidden.
Now glasnost is bleeding perestroika yellow, via Hong Kong whose laissez faire policies run contrary to all that China stands for: official control of all aspects of life.
The USSR died of obesity, bankruptcy and its Jurassic era technology which, together, sapped the ideals of Communism. China is struggling against endemic corruption, prosperity and a mismatch between high technology and low democratic coefficient. The Communist Party’s regime had commenced with the promise to end the role of the State; it has ended up expanding the rule of the State instead! It has centralized everything for the fear that its ungovernable and unwieldy provinces could breakaway if they ever got democracy. It failed to realize that perestroika sans glasnost does not exist.
Contrary to its ‘rule’ against factionalism, the Communist Party is now studded with factions-within-factions. In a multi-level-marketing (MLM) marketing model, the Chinese network with each other to form a huge cobweb only experienced spiders could use carefully and survive. These factions form the core of Chinese culture and protect corrupt officials. Corruption, against which the government periodically re-launches high-sounding campaigns, has emerged as China’s most critical internal enemy. Even President Xi Jinping had once to admit that “corruption could lead to the collapse of the Party and the downfall of the State.” The only thing – the Communist Party believes – that can beat the Party, is the Party itself.
Where are the roots of this all-pervading corruption in China?
It mainly comes from the unfairness of incomes and a lack of opportunity to a majority of those who deserve but are forced to make do with whatever they get. The Communist Party’s state machinery was designed to keep the people ‘in their places’, against which there has been a long-simmering dissent across China.
The country has had a traditional hukou household registration system which identifies and determines the ‘rightful’ home of each individual, the place where they would get state education and medical services and where they have no choice but to accept the decision. Very few, however, manage to cross those confined areas to big cities like Beijing, Shanghai, Guangzhou or Shenzhen. Despite unprecedented urbanization and migration of millions of people to the cities, most people have to make do in their registered areas which they cannot cross over to another place.
Until the 1990s it was difficult for them to even get a job outside their registered home area. Even now, despite all the material and technological progress, the system is still discriminatory. For instance, it is extremely difficult for the children of rural migrants to graduate from an elite urban school and almost impossible for outsiders to access subsidized government housing.
These restrictions have kept wages in China low and, as a result, consumption levels are still meager. The hukou system led to a long history of wage suppression in China. Unlike its Asian neighbours, wages in China remained much lower than they should have been at the same level of GDP.
Due to these socio-economic-educational restrictions, people were not free to move to places which offered the best jobs and were forced; they were forced to accept whatever the Party offered them. The huge state-promoted corporations in their hometowns did provide free education and medical services to many. These enterprises, however, did not have to compete for the best workers or pay the best wages. Rural incomes were generally 40% of urban incomes across most of China. This urban-rural divide enhanced as the nation progressed in the last few years.
This wage suppression of a vast number of ‘bonded labourers’ proved a boon to the growing Chinese economy since it created huge investable funds as the poor creators of wealth did not have matching purchasing power and, therefore, were low-level consumers. By 2016, China was consuming 20% less than Japan and 30% less than South Korea; clearly, consumption as a share of GDP between China and other Asian Tigers had a huge mismatch at the same level of development.
As China struggles with excess capacities in sectors like construction and steel and finds that fixed-asset investments can no longer drive GDP, it is trying to move towards a consumption-based economy. That requires incomes to rise, which, in turn, mean inflated prices, which requires to loosen up the hukou tradition, which in turn would weaken the hold of the State, and the Party, which, again, would mean increased demand for democracy, and breaking away of restive provinces…China may enter this vicious circle.
Another problem is China’s continued dependence on imported technology and lack of English-speaking people which restricts its networking globally. Also China is unable to convince other countries about Beijing’s ambitious One Border One Road (OBOR) project and related Belt and Road Initiative (BRI), which may revive the ancient Silk Route and its concomitant, the Chinese Empire (Middle Kingdom). Already, senators in Pakistan’s National Assembly have doubted the efficacy of the US$ 60 billion China-Pakistan Economic Corridor (CPEC), which passes mainly through the restive Balochistan, and termed Beijing’s ‘colonial’ initiative as a new version of the British East India Company.
Even among the Mandarin officialdom, wages are low. In 2015, President Xi Jinping’s annual salary was only $22,000 per annum, which itself was a 60% increase on the previous year. Clearly, due to low domestic consumption and high production, China is dependent on exports, for which it would have to create captive markets, a la OBOR and BRI. In other words, China cannot retain its domestic peace in the long run without its expansionist foreign policy which, in turn, has led to many potentially-fleeced countries joining hands against it and encircling it.
Just to cite an example of how China is dealing with the problem of urban housing. House prices in Beijing and Shanghai rose seven-fold from 2003 to 2019. The incredible rise in housing prices has made living conditions much worse than suppressed incomes alone could have done. In Beijing and Shanghai, educated migrants are forced to share rental flats to survive as they are unable to pay huge rents on their own and are often unable to buy an urban house. The average price of a house in Shanghai is nearly 50 times the average total annual income.
These bright, white collar migrants bring the highest risk of major corruption for a multinational company in what is seen as their attempts to get accustomed to the new environment they find trapped in and want to get rid of their chains, come what may. Some Chinese workers, sent overseas on projects, refused to return home, choosing to marry and settle down in their host countries instead; many, who went abroad for studies, have refused to return for similar reasons. As a result, China is woefully short of fresh innovations in technology, which is the driving engine of progress in our era. Together with ongoing trade war with the USA, and similar wars with other countries in the offing, China may find hamstrung even in export markets—which could doom its export-based economy.
In Donald Trump’s America, many fear that China is fleecing them; and so do many others in many other countries, including Pakistan, Malaysia, Sri Lanka etc which have had second thoughts about Chinese investments apparently taking control of their respective economies.
Yet Beijing cannot be a true competitor to the US until it allows merit and innovation to allocate capital and rewards. An economy built on wage suppression and state investment can be large, but it cannot be competitive in the long-term. Denial of democracy, itself, has a short shelf-life and can become a force-multiplier whenever another Tiananmen Square protests (1989) get repeated elsewhere, as they are currently in Hong Kong.
But even faster meltdown is that of Pakistan–and China may be left to handle this huge liability its ‘client’ is creating for Beijing!