China’s Disaster Control – 3/18/16

China’s leadership is currently facing an economic and political disaster. Premier Li Keqiang outlined plans to cut industrial overcapacity and debt burdens without destabilizing mass layoffs, all while still achieving growth targets. Li faces a Chinese economy facing over-reliance on investment, slumping growth, capital flight, currency risk, regional officials opposed to reform, nightmarish stock market falls, an aging population, and a flood of bad loans.

“We have the promise of a painless reform process with no mass bankruptcies or layoffs, and without radical liberalization of the services sector to boost growth there,” said Michael Every, head of financial markets research at Rabobank Group in Hong Kong. “You can’t have both 6.5 percent growth and painless reform, even in China.”

Reform in China was never going to be easy. Li’s predecessor Zhu Rongji eliminated 30 million jobs in state enterprises in the 90’s, but Li has been reluctant to make unpopular moves that could undermine the party. Projected job losses for steel and coal industries, the two areas worst affected by overcapacity, run to about 2 million or only a fraction of the country’s vast workforce of over 800 million. And, in the time since Zhu, state enterprises are much more influential with political leaders both provincially and in the central government.

For decades, the legitimacy of the Communist Party’s rule in China has been predicated on bringing economic prosperity. The party leaders have, for the most part, been successful; they managed to guide the economy deftly enough to make it the second biggest economy while bringing millions of people out of poverty in the process. GDP per capita kept doubling, wages tripled in the last decade. As long as the money kept flowing, government censorship and oppression were tolerated with only occasional incidents like the Tiananmen Square protests of 1989. Now that the time of easy growth and easy flowing money is over, the situation is rapidly deteriorating as workers take advantage of ubiquitous smartphones, secure messaging apps, and a variety of other privacy services to coordinate protests. Recent protests even took place in Shuangyashan during the 12-day annual session of China’s parliament, the National People’s Congress.

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