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China’s Looming Crisis: Daunting Troubles Mount

China’s in deep, deep trouble, and its new leaders know it. The growth of the nation’s GDP has continued to slow every quarter since late 2010—though it did tick up slightly in the state’s latest quarterly report, published in January. But that’s just one of many problems. In the simple words of D&B Country RiskLine Reports’ year-end assessment of China, “Trend: deteriorating.”

Xi Jinping, the nation’s new Communist Party leader, assumes the presidency this March, and the country is hoping, albeit with considerable trepidation, that he will bring positive change. But China’s troubles—economic, political, social—are daunting. And as the full government transition approaches, these problems seem to be converging. One significant symptom: Money is flowing out of the state at an alarming rate, a sign that wealthy Chinese have lost faith in the country.

Of course, China does not make public any figures of this capital flight. But reliable estimates from several journalists and economists published late last year estimate that between $225 billion and $300 billion has left the country in the past year, three to four percent of China’s economic output for that period. And this has happened even though moving significant amounts out of the country is strictly illegal. The outflow is growing larger every year, just as the GDP continues to fall—not a coincidence.

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In fact, wealthy and successful Chinese aren’t just moving their money. Many are making plans to leave for the West along with their money, with America being the primary destination. Last year, the Chinese magazine Hurun Report, which chronicles the lives and foibles of the wealthy, published that finding after interviewing nine hundred people in eighteen cities.

The sample was clearly not scientific, but it was given added credibility when many thousands of people responding to the article on Weibo, China’s version of Twitter, said they would leave, too—if only they had enough money.

The wealthy who are moving to America most often use the EB-5 visa, which goes to foreigners willing to invest at least half a million dollars in a business that offers new jobs for at least ten Americans. The Chinese call that “investment migration.” And the China Merchants Bank, along with global consulting firm Bain & Company, concluded in a joint report that it’s “quickly increasing.”

The two companies said investment migration from China to the US “grew at a compounded annual rate of seventy-three percent over the past five years.” The companies also surveyed wealthy Chinese (one of several organizations to do so) and found that almost sixty percent of them “have either completed investment immigration, applied for investment immigration or are considering it.”

The Department of Homeland Security reported that seventy-eight percent of the EB-5 applicants last year were Chinese.

While the wealthy vote with their feet, the lower and middle classes are in open revolt. The Ministry of Public Security estimated that in 2011 the Chinese staged more than 128,000 “mass incidents”—large local protests over corruption, land seizures, pollution, job safety, and a dozen other social ills. The numbers are certainly approximate. But they are almost certainly increasing. In 1993, the official number was 8,709. By 2009, the ministry said the people staged about 90,000 mass incidents. Nearly all the protests are aimed at local authorities, not the national government. For many, the memory of Tiananmen Square apparently remains burned on the brain.

Not surprisingly, the Chinese government has stopped releasing statistics on mass incidents. But Xia Yeliang, an economics professor at Peking University, said the number has risen “to more than two hundred thousand a year”—more than five hundred every day. “We have our own sources in the central security office,” he said in an interview.

One of the people’s gravest grievances, the motivation for many demonstrations, is the nation’s growing income inequality. At year’s end, the China Daily reported that the state “has about one hundred and twenty-two million rural people living below the poverty line, meaning they earn less than three hundred yuan [$369] a year”—or one dollar a day. Counting urban poor, the total number of Chinese living in abject poverty reaches almost fifteen percent of the population.

The newspaper quoted Yu Jiantuo, a researcher specializing in poverty studies at the China Development Research Foundation, as acknowledging that poverty during childhood “can impede a person’s achievements in education, health, and capacity to integrate into society.” And in fact, UNICEF reports that ten percent of China’s children are growing up stunted, meaning they do not grow normally, either physically or mentally. At the same time, three percent of Chinese infants, or about forty million babies, are “wasting”—essentially starving to death.

Sanitation is a huge problem for these people, too. In fact, nearly half of China’s people do not even have access to a toilet. And “they might get to take a shower twice a month,” Xia Yeliang said.

Meanwhile, China has more billionaires and millionaires than any nation in the world except for the United States. China’s National Economic Research Foundation, a private think tank based in Beijing, concludes that when so-called hidden income—bribes and related graft—is counted, the income of the richest ten percent of Chinese is sixty-five times higher on average than that of the poorest ten percent.

 

Last year, the World Bank published a massive report concluding that the Chinese government must revamp its economy and social services if it hopes to survive.

“The case for reform is compelling,” the bank’s president, Robert Zoellick, said at a news conference in Beijing shortly before he left office. “China has reached a turning point in its development path.”

Some Chinese experts have now broken the great wall of denial to say the same things. The situation is growing so serious that Strategy and Reform, one of China’s think tanks, warned publicly last fall that the country “is confronting a perilous jump, one it can neither hide from nor avoid—no matter what. There’s a potential crisis in China’s model of economic growth.”

Wu Jinglian, a prominent economist writing in Caijing, a leading Chinese business magazine, said: “China’s economic and social contradictions seem to be nearing a threshold.”

One major threat often mentioned is the radical change in the nation’s labor pool. China has thrived primarily as a low-wage manufacturer of Western products. But as the nation has grown more prosperous, workers’ wages have risen radically—“a very serious problem,” economics professor Xia Yeliang says. India, Vietnam, Cambodia, and other poorer states are now taking away many of these jobs, one big reason the Chinese economy is not growing. A strategy China is pushing to confront this problem is based on the idea that the state should begin relying less on exports and more on domestic consumption—as stressed at a high-level government economic conference in late December. But with a slowing economy, that remains problematic.

Another big problem, China experts say, is the dominance of state-owned businesses and enterprises—one hundred and forty-five thousand of them that represent thirty-five percent of all business activity in China, according to official figures. And, by their very nature, they are overstaffed and inefficient since they face no true competition. Many are owned by government officials or their relatives, allowing entire extended families to line their pockets.

In a report to China’s legislature last fall, Wang Yong, director of the State-Owned Assets Supervision and Administration Commission, obliquely promised that “more efforts will be made to reform the power, telecommunications, oil, and petrochemical industries. Market entry into these sectors will be expanded based on the development of these industries.”

Just before leaving office late last year, President Hu Jintao acknowledged the problems China now faces by offering what appeared to be another of his disingenuous reform promises: “We should separate government administration from the management of enterprises, state assets, public institutions, and social organizations.”

 

In interviews, a variety of Chinese and China experts told me they are quite pessimistic, foreseeing little if any significant change under the new leadership. Asked about the new government’s ability to make a mid-course correction, a senior journalist with Xinhua, China’s state-run news agency, simply pursed her lips and shook her head. (Understandably, she did not want to be named.)

“Definitely not,” Professor Xia Yeliang, now a visiting fellow at Stanford University, says. “A lot of people are expecting Xi Jinping to make reforms. But he has made speeches saying he will always insist on Communist Party leadership. I think they know they have big problems. But they are still so confident that they have sufficient power to suppress the people” who protest or otherwise cause trouble.

Andrew Nathan, a China expert at Columbia University, was perhaps the most optimistic source I interviewed. He said he foresaw “change within continuity.” That means “continued reforms that have the purpose of keeping the party in power—in other words, not ‘real’ or Western-style democracy” including “gradually ramping up the attempt to control (as well as to hide) corruption.”

In foreign policy, Nathan added, “I think China now sees itself as having arrived at the level of a great power and evaluates the US and its allies as weak and hence has embarked on a period of assertiveness in its foreign policy,” particularly in the South China Sea.

That has ended up alienating almost every one of its neighbors. Even as it tries to deal with its festering internal problems, China is becoming a pariah in its region. Because of its belligerent behavior in the South China Sea, where it claims almost the entire waterway for itself, Beijing has infuriated almost every neighboring state while at the same time empowering the United States as it “pivots” to Asia.

Its only remaining true ally, in fact, is Cambodia. China has removed the stigma from its prior support of the Khmer Rouge by in effect buying the country with $8 billion in unrestricted aid over the last few years. North Korea could also be considered an ally of sorts, though really it’s closer to a resentful dependent. And Laos has at best an ambivalent relationship with Beijing. Every other country in the region considers China a competitor or opponent—if not an enemy. So does most of the world.

Watching the coronation of China’s new Politburo last fall, most commentators, Chinese and Western, noted that no known reformers were evident among the picks. Zhang Tianliang, a Chinese émigré who teaches at George Mason University, was extremely negative.

“The new lineup will completely destroy any remaining hopes that the CCP [the Chinese Communist Party] would improve itself,” he wrote in the newspaper Epoch Times. “The Eighteenth Party Congress lineup tells us that CCP, a cultish criminal organization, cannot even fake reform. The dreams of those who harbored some hope for CCP are now
completely dispelled.”

But many China experts are pessimistic about the chance for positive change for reasons different from Zhang’s. Even if Xi wants to bring change, no one can be sure that he’ll be able to pull it off. Since so many Communist Party officials are growing exceedingly wealthy under the current system, won’t they resist significant change?

After all, Bloomberg News reported that the Chinese legislature’s seventy richest members accrued vastly more wealth in 2011 than the combined net worth of all five hundred and thirty-five members of the US Congress, the president, and his Cabinet. Quoting the Hurun Report, Bloomberg said those seventy delegates now have a combined net worth of $89.8 billion, compared with $7.5 billion for the six hundred and sixty most senior people in the American government. And there was also that New York Times story in October 2012 showing that then Prime Minister Wen Jiabao’s family was worth $2.7 billion.

 

Some government actions suggest the pessimists are correct. One example is the faked official economic statistics, many of which are just bald-faced lies intended to make the state look better. How mendacious the official figures are is shown in a small way when the US Embassy in Beijing, which maintains a pollution monitoring device on its roof, puts out numbers showing how serious the city’s air pollution is—while the government has been publicizing feel-good numbers that anyone looking out the window could see were obviously wrong.

The government also claims that the income of the richest Chinese is only twenty-three times higher than the poorest—even though China’s National Economic Research Foundation study put the number at sixty-five times higher.

China also appears to be faking its GDP numbers, prominent corporate executives and Western economists told the New York Times last summer, apparently to disguise the true depths of the nation’s troubles. Significant drops in industrial electricity and coal usage, particularly, indicate a slowing economy. The economists and executives estimated that China’s gross domestic product is one or two percent lower than the officially stated rate.

What’s more, a prominent Chinese economics professor, Gan Li of Southwestern University of Finance and Economics in Chengdu, published a survey in December 2012 that showed China’s actual urban unemployment rate to be just over eight percent—double the official rate, and higher than America’s. Gan surveyed eight thousand households for the survey, which also showed that, for middle-aged people, in their fifties primarily, the unemployment rate is even higher: almost
twenty-eight percent.

 

Xi Jinping knows all this. According to reports from Chinese and Western media, senior people all around him are urging him to set out reforms. In fact, just before he took office as Communist Party chief, Xi sent a team of officials to Singapore. They looked at that city-state as a possible model. Singapore is a deeply authoritarian but prosperous state that does allow free elections for subordinate positions. Still, many social liberties, like freedom of the press and of assembly, are limited. In most experts’ view, the improvements in China from adapting such a model would be small.

Most China analysts agree that the country’s financial problems should be the government’s most significant concern. After all, for decades the Chinese have lived with a well-known but unspoken pact: The people will accept authoritarian leadership as long as the government makes it possible for them to grow ever more prosperous. Right now, it seems apparent that Beijing isn’t keeping its part of the bargain.

While the mega-billionaires, including many government officials, may not be feeling the pinch—big-diamond sales are soaring—the mere millionaires may be looking over their shoulders, given that sales of less-expensive luxury goods are falling. The Burberry coat and Hennessy cognac companies recently issued profit warnings because of
plummeting sales in China.

Sales of Swiss watches to China have fallen by almost thirty percent in recent months, and sales of ordinary jewelry are bottoming. Yum Brands, owner of the extremely popular Pizza Hut and Kentucky Fried Chicken franchises, said sales dropped four percent in the fourth quarter—compared to a jump of twenty-one percent in late 2011.

 

Despite all the pessimism, Xi has given some cryptic indications that he understands the extent of the problems. For one thing, he declared that widespread corruption will “doom the state.” And during his first weeks in office, half a dozen officials guilty of corruption so blatant that it could not be ignored lost their jobs—probably a record. Xi ordered even more arrests in the following months. He also made some symbolic changes, driving to out-of-town destinations in a minibus, not an Audi limousine; staying in modest hotels and walking around in short sleeves—not the dark-blue suit that’s practically the uniform of government bureaucrats. Trying to make a statement, he is eschewing all the pomp and circumstance that normally characterize government leaders’ trips.

More significantly, the government now says it is going to pass legislation to rein in land seizures, endemic nationwide. Over the years, local officials have accrued almost $2 trillion in debt that is not on the national government’s books. Year after year, Xia Yeliang said, local mayors grab residents’ property, sell it to developers, and use the money to make the minimum debt payments and then pocket the rest—leaving the standing debt for the next mayor, who is likely to behave the same way.

These illegal land seizures—often with no compensation—are reported to have netted $482 billion in 2011. And a report by the Chinese Academy of Social Sciences notes that land disputes are the justification for more than half of the nation’s “mass incidents” each year. There’s no indication the problem is abating. Whether the government can actually produce a meaningful law to curtail this remains to be seen.

In addition, the government is talking about setting up a pilot project in one province requiring officials to disclose their income—an important step toward corruption control. The government has raised the idea of issuing deposit insurance for individuals’ bank holdings . . . and more. But Hu Jintao also promised reform when he took office ten years ago, only to do very little.

Even the nationalist, state-owned, pro-government newspaper Global Times seems skeptical. A recent article observed that Xi’s initial changes are largely sartorial, then inserted an unveiled warning: “If top leaders cannot deliver what they promised, the public will not remain silent.”

Joel Brinkley is a professor of journalism at Stanford University and a Pulitzer Prize–winning former foreign correspondent for the New York Times.

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