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The print edition of The Economist: A crisis of faith

Mr Xi’s style of rule. Photo: Matt Herring

Published in the print edition of The Economist, 16 January 2016. In their response to wobbly markets, China’s leaders reveal their fears. There should be something comforting, during uncertain times, in the sight of the boss solidly seated behind his desk, working away at the business of the day. And that was the image China’s official state media presented when broadcasting Xi Jinping’s annual new-year message to the Chinese people on December 31st—though it has to be said, if that impressive expanse of wood really is the presidential desk, Mr Xi must find it hard to reach his impressively red but implausibly far-off telephones.

From this confidence-inspiring position Mr Xi told his audience that 2016 was going to mark “the beginning of the decisive phase” of the country’s efforts to build a “moderately prosperous society”, a goal that the Communist Party says it hopes to reach by the end of the decade. Not mentioning that the economy’s rate of growth was at a quarter-century low, he maintained that the country’s future prospects were “encouraging”.

Recent events, however, suggest that Mr Xi’s managerial confidence is not widely shared. Jitters emanating from China’s equity and currency markets have exposed widespread fears that the way ahead will be rocky indeed—and that Mr Xi and his colleagues are ill-equipped to navigate it. Evidence from their handling of a broad range of political and economic policy suggests that the worriers may prove right.

Four days after Mr Xi’s broadcast, the Shanghai stockmarket reopened after a new-year break. With 90 minutes to go before the close of business, transactions were halted for the rest of the day: the index had fallen by 7% and a newly introduced “circuit-breaker” kicked in. The sell-off has deepened since then: the index is now down by about 15% so far in 2016, its worst-ever start to a new year. At the same time, China’s once-placid currency has turned stormy. The central bank believed it could nudge the yuan down, offering a little help to weary exporters without grave repercussions. Instead, it has triggered an exodus of capital and alarmed investors around the world, who braced themselves for bigger falls. As fears of a meltdown in China rippled across global markets, the government scrapped the ill-conceived circuit-breaker, and scrambled to shore up the yuan and the markets by telling its banks and brokers to buy.

Panic about China’s ability to maintain steady growth is unwarranted. True, its debt is worrisome: government and private debt was about 160% of GDP eight years ago and now stands at more than 240% (about $25 trillion). But the government still expects the economy to grow by an average of 6.5% a year for the rest of the decade. That may be difficult, and it could entail a lot more wasteful investment. But it should be achievable.

The problem is thus not an economic one, per se. It is that a government once widely thought of as all-powerful—even over markets—may be losing its grip. The recent ructions, after all, are not the first mess of this sort; the markets went haywire last August (see chart 1). China’s leaders are now grappling with hugely complex reforms of their financial system, their currency policy and of their state-owned enterprises and, apparently uncertain how to proceed, they are thrashing around and making mistakes. At home and abroad, people risk losing faith in them; such a loss would be felt well beyond the markets.

Mr Xi and his colleagues appear frightened of losing their grip on the economic levers that they have used to help keep the party in power. Party bosses like state-owned banks: they can be relied on to direct lending to favoured companies and loyal officials’ projects. They worry about loosening the party’s grip on the state-owned industries that control vital areas of the economy such as energy, transport and telecommunications—can anyone but party loyalists be trusted to run them?

If the party drags its feet on reform, though, China will fall back on unsustainable stimulus measures, and may eventually slide into economic stagnation, as Japan did in the 1990s. That would bring with it the risk of social and political turbulence. A full-blown economic crisis cannot be ruled out. Once admired by authoritarian governments elsewhere, not to mention some commentators in the West, for its canny balancing of free markets and party control, China’s style of leadership may be about to lose its shine.

Though he may lack a sophisticated understanding of how to handle stockmarkets, Mr Xi was quick to grasp the dangers facing China when he took over in 2012. Some foreign commentators were still, even then, mesmerised by what they regarded as a winning combination of a technocratic government with a good sense of the country’s needs and how to fulfil them, and a disdain for the endless debates that can bog down good policy in democracies. But Mr Xi and his colleagues realised that the foundations of the model that the late Deng Xiaoping began to develop in the late 1970s, and that in the 1990s came into its own, was in need of an overhaul.

Trouble at the top

The model’s surge of success had been sustained by two forces: the rapid spread of prosperity and, since the bloody suppression of the Tiananmen Square protests in 1989, an unusually protracted truce among the often fractious party elite. Consistent growth underlay both, providing fabulous dividends for the elite as well as prosperity for hundreds of millions of people. But in 2012 China’s GDP was growing at its slowest pace in 13 years (see chart 2). To make matters worse, Mr Xi’s assumption of power occurred amid the most vicious struggle within the leadership that China had seen since Tiananmen. Not content with enriching his family to a phenomenal degree, Bo Xilai, the party boss of Chongqing, a south-western region, also made a bid for a job at the very top. Mr Xi resented this; other powerful politicians backed it. Mr Bo is now serving a life sentence for corruption and abuse of power.

Although economic growth and peace at the pinnacle of the party kept the country stable, they did not keep it static. Under Mr Xi’s predecessor, Hu Jintao, the middle class grew phenomenally (see chart 3). And its desire for a stable environment in which to get ever better off was a vital bulwark of party rule. But some of its members were increasingly fed up with the party’s caprices and its manifest corruption. What was more, this middle class had a powerful new weapon: information.

The rapid spread of the internet opened up a nationwide forum for dissent. Sina Weibo—China’s equivalent of Twitter—was founded just three years before Mr Xi took office; but by that time it had 46m daily users. Social media allowed the party to monitor public opinion and identify problems before they became threats to the party’s grip on power. But they also spurred the development of a civil society: NGOs, house churches and independent legal firms ready to take up the cases of the downtrodden and dispossessed in their battles with officialdom all made extensive use of social media. Groups independent of party control—albeit small and scattered—sprang up everywhere.

Events abroad seemed to underscore the instability of authoritarian states. The Arab spring began unfolding in 2011, a year before Mr Xi took over, and though it hardly amounted to a democratic breakthrough—far from it—it showed that authoritarian governments could prove unexpectedly brittle. The police in China worked hard to prevent any copycat unrest. At the same time, the Tibetan plateau and Xinjiang, which cover about 40% of China’s land area, were seething with anti-party sentiment following the government’s ruthless response to unrest in 2008 and 2009.

A demographic crisis was also beginning to loom. Plunging birth rates were stripping China of the surplus of working-age people that had constituted its “demographic dividend”: it was fast growing old. Young people were beginning to worry about a future weighed down by the burden of caring for the elderly—not to mention sky-high property prices and, among graduates, rising unemployment. To cap it all an environmental catastrophe was unfolding: the industrialisation that had brought growth was choking cities with smog; one-fifth of rivers were too toxic for human contact, let alone to drink from. Even party leaders had taken to describing China’s economic model as “unstable, unbalanced, unco-ordinated and ultimately unsustainable”.

Faced with a need to reshape, or even fundamentally restructure, China’s economic and political model, Mr Xi has tried to present himself as a reformer in the mould of Deng Xiaoping. He has acquired more power than any leader since Deng, putting himself in charge of all the most important portfolios and abandoning the system of “collective leadership” Deng brought in. Indeed in many ways Mr Xi’s grip on the country’s mechanisms of control appears stronger than Deng’s was, and second only to that of Mao Zedong.

Thus empowered Mr Xi talks of reform that goes yet further than Deng’s did—as when, in 2013, he asked a meeting of the party’s 370-member Central Committee to endorse his call for market forces to be given a “decisive” role in the economy. (It did.) Recently Mr Xi has taken to calling for “supply-side reform”, implying that structural changes in the economy, rather than massive state-led investment, are to be the new order of the day. The party’s main mouthpiece, the People’s Daily, calls these reforms the “China Model 2.0 Edition”.

A crucial aim of this approach is to ensure that the middle class remains on side, even as what Mr Xi likes to call a “new normal” of slower growth sets in. Hence his signature exhortations to build the “Chinese dream”. It is an ambiguous term, partly designed to evoke thoughts of American-style middle-class prosperity, and of a life unfettered by interfering government. But the slogan was also designed to foster patriotic pride, including a “dream of a strong army”. Mr Xi’s revamped China model leans even more heavily on nationalism than earlier models did.

Constitutionally inept

Mr Xi’s style of rule, though, has proved an impediment to his ambitions. His anti-corruption campaign—the longest and most far-reaching of its kind since the party seized control in 1949—has been welcomed not just by the middle class but also among those less well off, who feel that China’s economic miracle has unfairly rewarded the powerful. But along with specific injunctions not to question party policy the anti-graft drive has made officials even more afraid than usual to take the risks needed to carry out reform.

In the political realm Mr Xi talks of making the legal system fairer and more effective. Just a month after he took over, he took up a cause that had long been dear to liberal intellectuals: that of giving the constitution more clout. “No organisation or individual has the privilege to overstep the constitution and the law,” he said. He was trying to instil some discipline into the authoritarian model, reining in abuses of power and privilege within the party that had enraged the middle class and people aspiring to join it.

Those who saw this as licence to push for deep reform, though, were quickly disabused. When a party-controlled newspaper in Guangdong province, Southern Weekend, tried to argue the case for constitutional government in an editorial titled “The Chinese Dream: A Dream of Constitutionalism”, the censors shut it down. Journalists at the paper went on strike; dissidents gathered outside its offices in Guangzhou. Tolerated for a couple of days, the sight of crowds on big-city streets listening to speeches calling for freedom of the press and even a multiparty system proved too much. The police rounded up the dissident orators. Late last year three of them were sentenced to terms of between two-and-a-half and six years in jail. The episode ushered in a crackdown on civil society of greater duration and intensity than any since the dark days that followed the Tiananmen protests.

Mr Xi still talks up the constitution. At a meeting in 2014 the party’s Central Committee decided to make officials swear loyalty to it, ordered schools to teach students about it and decreed that December 4th would be celebrated henceforth as Constitution Day. But Mr Xi’s talk of constitutionalism rings hollow to liberals, just as his talk of reform fails to calm markets. And its impact within the party remains unclear.

One way Mr Xi hopes to prolong the party’s life is by proving that it can govern effectively. His anti-corruption chief, Wang Qishan, raised eyebrows in September when he said that “the legitimacy of the ruling party” rested partly on “the mandate of the people”. It was the first public use of the word legitimacy by a Chinese leader in connection with the party’s rule, and seemed to imply a recognition that the party could not take it for granted.

Mr Xi has built on a system, developed by his post-Deng predecessors, of grading officials according to their fulfilment of “responsibility targets”. In the past the targets that mattered most were those seen as maintaining social stability and promoting economic growth. Now the environment is getting a much higher billing. In 2012 the government made the reduction of PM2.5 air particles, the worst kind, a “hard target” in Beijing and other heavily polluted cities. State media have reported that the mayor of Beijing, Wang Anshun, has been ordered—metaphorically—to “submit his head” if he fails to meet this target.

Sensing that China’s development has entered uncharted territory, China’s leaders are turning to foreign gurus. In November Mr Xi met Francis Fukuyama, an American political scientist whose claim to fame is a thesis that would seem to run against everything Mr Xi wants to protect: that the march to liberal democracy is an unstoppable one. Mr Fukuyama has tweaked this “end of history” line somewhat since first espousing it, emphasising that, even in the absence of democracy, a state’s ability to enforce laws and provide basic services such as education, health and infrastructure can matter a lot.

Harder tasks

Can Mr Xi’s model—with all the flaws in its implementation—continue to keep the end of the party’s history at bay? David Shambaugh of George Washington University, a career-long observer of China, was an early champion of the idea that the party had learned useful lessons from the collapse of the Soviet Union and changed its methods of ruling accordingly. It had, for example, allowed the development of NGOs that could help fill in the cracks of an overstretched welfare system. It had recruited more businesspeople into its ranks and experimented on a small scale with elections for party posts.

But in a forthcoming book, Mr Shambaugh says he has changed his mind; he thinks the reforms of which he spoke have run their course and a new era of “hard authoritarianism” has begun. And he points out that there has been no example of an authoritarian country making the transition to high-income status that Mr Xi seeks without at least a partial democratisation.

The 100th anniversary of the party’s founding will come in 2021, just before Mr Xi’s years in power are due, if he follows the example of his predecessors, to come to an end. If China’s reforms continue to disappoint over the next few years, it is unlikely to be the joyous celebration Mr Xi must be hoping for. Nationalist chest-thumping may help to rally some support for the party. But it comes with risks—China’s history since the 19th century is studded with examples of nationalist fervour turning against the government because of leaders’ perceived failings.

Mr Xi may feel inclined to step up economic pressure on Taiwan, which is likely to elect an independence-leaning president on January 16th after eight years of rule by one who favoured closer ties with China. But there is little sign of public appetite for a return to the military tensions of the mid-1990s, when China lobbed unarmed missiles close to the island.

There is every reason, therefore, for Mr Xi to worry. Job losses in manufacturing will stoke tensions among blue-collar workers, which is why the party has started rounding up labour activists (see article). The loyalty of the middle class, long accustomed to unremitting growth, will become increasingly difficult to secure as growth slackens further. Both the middle class and the equally large cohort of rural migrants that dreams of joining it are vital to the country’s economic success, and both are capable of mobilising regime-threatening opposition. Mr Xi talks a good reform, but has yet to follow through, and has shown that his preferred way of dealing with any threat is to resort to time-honoured tactics of cracking down ever harder. Chinese authoritarianism has been at times surprisingly deft. Just now, it does not look so.

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