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China’s Third Era: The End of Reform, Growth, and Stability

The history of the People’s Republic, according to the dominant narrative, falls into two broad sections: the turbulent decades dominated by Mao Zedong, the founder of “New China,” and the time of “reform and opening up” started by his successor, Deng Xiaoping. Now, however, the Chinese state has passed important political and economic inflection points. As a result, the third era of the People’s Republic—an era of crisis and instability—has already begun.

In another time of instability and crisis, Mao Zedong began the first era on October 1, 1949. After defeating the Nationalist forces of Chiang Kai-shek, he moved the country’s capital from Nanjing and began twenty-seven turbulent years of overturning and remaking Chinese society.

Mao began his reign by telling the people that they had “stood up,” but it was he who defined the period. He confiscated property, enslaved peasants, enforced conformity, repudiated culture. He embarked on horrific campaigns, most notably the Anti-Rightist Movement, the Great Leap Forward, and the Great Proletarian Cultural Revolution. He set back China decades with zany doctrines of “permanent revolution” and the like. Tens of millions died as he created his new state.

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Mao’s death, in September 1976, brought relief to an exhausted people. Hua Guofeng, his chosen successor, publicly pledged to resolutely follow Mao’s policies, but most everyone knew there had to be fundamental change. Deng Xiaoping, twice purged in the Maoist era, was the one who was able, by cunning and charisma, to grab political control from Hua, defeat remnant Maoists, and push China in better directions, thereby beginning the second era of the People’s Republic.

Deng steered the political system away from what was essentially one-man rule. At moments he acted like a strongman, but as time passed he encouraged a consensus-driven arrangement to take shape. As a result of this and other factors, the period of his two successors, Jiang Zemin and Hu Jintao, was characterized by what many China watchers regarded as a rules-driven and meritocratic politics.

Political evolution in the second era of the People’s Republic was significant, but the real motor of change was economic. History has called Deng an economic reformer, but it was actually the Chinese people who should get most of the credit. Deng, who belonged to the first generation of Chinese Communist revolutionaries, began by pursuing orthodox policies, yet early failure to meet goals contained in the ten-year economic plan forced him to permit individual initiative.

To his credit, he began relaxing collectivist rules by allowing peasants to form “work groups” to tend designated plots. Although central policies specifically prohibited these groupings from including just one family, families started to till their own land and pragmatic local officials condoned the clear violation of the rules. The same dynamic occurred in cities. Private industry was strictly prohibited, but savvy entrepreneurs operated their businesses under the guise of state ownership, wearing the “red hat,” as lip service to official dogma was then termed. Deng’s reforms succeeded because the Chinese people ignored boundaries.

Mao’s successor did not so much debate, plan, and decree change—as he is given credit for—as get out of its way. And essentially the same thing happened in the wake of the Tiananmen tragedy, which initially appeared as if it would result in a permanent reversal of economic reform. Deng’s “Southern Tour” of early 1992, however, signaled the leadership might again back liberalization of the economy.

The Chinese people did not need an invitation to begin acting on their own. Like a “swarm of bees,” people in the city of Kunming took matters in their own hands, overnight stringing up white lights along roadsides and selling trinkets from card tables to passersby. What happened there, in the capital of Yunnan Province, took place across the country as a whole as people once again felt confident to go into business for themselves. The Chinese took responsibility for their lives, pushing the mighty state to the side. As a result, China enjoyed a half-decade boom largely because desperate peasants and frustrated bureaucrats openly made themselves into bold entrepreneurs.

When growth stalled at the end of the 1990s, Premier Zhu Rongji, the hard-nosed economic czar working under supremo Jiang Zemin, looked to the market, sponsoring China’s push to join the World Trade Organization. Accession in late 2001 allowed private investment and trade to create another spurt—this one lasting a decade—of fast-paced growth. During the first decade of this century, private enterprise accounted for more than half of the country’s gross domestic product.

 

This sweet spot of reform, however, did not last long. Apart from changes required by WTO membership, liberalization stagnated under Hu Jintao, China’s ruler from 2002 to 2012. The last half of Hu’s rule was even marked, on balance, by the reversal of reform as two unfortunate trends coincided. First, Hu, a weak leader, gave in to state enterprises, which had become politically powerful, and began in earnest to close off opportunities for foreign business in China. Characteristic of this effort were the notorious “indigenous innovation product accreditation” rules, which symbolized Beijing’s push to grab, for the benefit of state business, the technology of multinationals.

The second unfortunate trend was the massive increase of state investment initiated by Premier Wen Jiabao, Zhu’s successor, in November 2008. To prevent the global downturn from affecting China, Wen sponsored a $486 billion stimulus plan, which morphed into a much larger effort as state banks opened up the lending taps to local governments and state enterprises. Among other consequences, the plan resulted in a redirection of credit away from private business. State enterprises, powerful before, became even more influential in Beijing political circles, and they used their enhanced clout to partially renationalize the economy. The Communist Party, as the Chinese said during the time, had become the economy.

The party decreed growth. Local governments took essentially free money from state banks and built useless projects, such as the now famous “ghost cities.” A year ago, my wife and I went to my dad’s hometown, Rugao, a small city in Jiangsu Province just a couple of hours by bus northwest of Shanghai, across the Yangtze River. For centuries, it was a dusty town, but in the space of just five years it had been transformed, with a little Manhattan of office towers, an uncountable number of twenty-story apartment blocks, a stadium almost big enough for an NFL franchise, and wide boulevards densely lined with streetlights. “I don’t know where all the people will come from,” an elderly Rugao resident told my wife.

There are not enough people even in the world’s most populous nation for all the roads, airports, and buildings that Beijing has constructed in the past half-decade. China’s current investment-led growth, therefore, is not sustainable, a fact evident in a sharp falloff in the efficacy of state spending. In 2007, China created eighty-three cents of output for every dollar of investment. That figure had fallen to seventeen cents at the beginning of 2013, and now it is probably no more than a dime. This has resulted in sharply lower growth rates. China was last in double-digit territory in 2010, when the economy expanded 10.4 percent, according to official estimates. The National Bureau of Statistics reported 7.7 percent growth for last year, but some suspect—probably correctly—that the real figure was actually in the low single digits.

Whatever the real rate is, Premier Wen incurred indebtedness at unprecedented speed, perhaps as fast as twenty-five percent a year. As a result, the country has been accumulating obligations two to seven times faster than its economy has been expanding, putting itself in an impossible situation. Today, total country debt is probably more than three hundred percent of gross domestic product, dangerous territory.

Virtually everyone agrees that China must soon transition from investment-led growth to growth driven by consumption. Yet since 2008 the economy has been headed in the opposite direction because of the massive state stimulus program. Chinese leaders talk about reform these days as if it were urgent, but then act as if it isn’t. They are implementing only minor changes and are not willing to tolerate a significant decline in growth rates that the investment-to-consumption transition would initially cause. Every time there appears to be a slight downturn in growth—as occurred at various times this year, for instance—Beijing spends more government money, making the economy even more state-oriented.

Chinese leaders, unfortunately for them, are trapped, unable to implement structural reform. The resulting continual need for stimulus is a sure sign the economy has reached the limit of what it can accomplish within the confines of the existing political system.

This inability to move forward means that China’s third era is at hand and that a crisis is on the way. At the moment, only a minority of analysts see a sharp downward adjustment—a crash, in common parlance—as virtually inevitable. Yet those considered “optimistic” and who think Beijing can engineer a “soft landing” understand that the price for avoiding a disaster now is years or decades of stagnation, a la Japan’s post-bubble period.

In either case, China is transitioning from a high-growth period to a low- or no-growth one, and the resulting political consequences look severe because for more than three decades the primary basis of the Communist Party’s legitimacy has been the continual delivery of prosperity. Without prosperity, the only remaining basis of legitimacy is nationalism.

Many pollsters report high popular support for the Communist Party and say, in particular, that the “Chinese Dream” campaign of Xi Jinping, Hu’s successor and current ruler, resonates with the populace. The Chinese people naturally support the general notion of national rejuvenation, the central concept behind the Chinese Dream imagery, but it is less clear that they also buy into the idea of a model that calls for a strong state leading a weak society, which is also an essential part of Xi’s thinking.

In any event, it appears that most Chinese people do not believe a one-party state is appropriate for a modernizing China. In spring 2008, my wife and I went to China to survey attitudes toward the then-upcoming Beijing Olympics. To our surprise—and contrary to what public opinion surveys were showing—there appeared to be widespread indifference. We heard the refrain, both in Shanghai and in rural areas, that the extravaganza was the “government’s Games” and to be ignored.

People then were much more interested in the election campaign in the United States. In Rugao, several well-to-do couples quizzed us on how the concept of balance of power worked and whether John McCain or Barack Obama would win in November. This inquisitiveness has consequences. From the top to the bottom of the Chinese political order, there is a desire—and often a demand—for fundamental liberalization. As Xu Youyu, retired from the prestigious Chinese Academy of Social Sciences, notes, “No matter how hard the authorities want to suppress, they can’t just do what they want anymore because there is consensus in society on constitutional rule and the protection of free speech.”

 

Many analysts say the Chinese people do not want democracy or are not ready for it, yet in fact they are not so different from other inhabitants of our planet. They want to have a say in their lives, resent being infantilized, chafe under restrictions, hate abuse of privilege. They are outraged by today’s corruption, likely the worst in Chinese history. And they are generally aware that people live more rewarding—or at least freer—lives elsewhere. Nobody knows how many protests there are today, but there are probably around two hundred thousand a year, up from sixty thousand a decade ago. Yet it is not only the increasing number of disturbances that is of concern. Protests now are often large and violent. Two tectonic plates are shifting, as the Chinese people move one way and the Communist Party continues in the other direction.

Nationalism, in short, does not look like the social cement that Chinese leaders obviously hope it is. Political scientists may say that their polling shows a high degree of support for the regime, but that conclusion seems inconsistent with the party’s increasing repression. Popular governments are not afraid of their own people. They do not, like Beijing, employ tens of thousands to monitor postings and text messages or spend more on internal security than external defense. China in important respects is less free today than it was a quarter-century ago.

The current cycle of repression did not begin under current ruler Xi Jinping but under predecessor Hu Jintao. Still, the party has become much more coercive under Xi. Moreover, it has taken a sharp ideological turn backward. Chinese leaders have always made rhetorical bows to Mao, but Xi has been doing so with apparent conviction.

He went all out last year to commemorate, on the day after Christmas, the one hundred and twentieth anniversary of Mao’s birth, and in the preceding months visited locations Mao made famous, repeated his iconic sayings, and reinforced Maoist education and indoctrination across the country. Borrowing Mao’s language and tactics, in June of last year he launched “rectification” and “mass line” campaigns. In August, Xi sounded like the Great Helmsman himself when he called for “ideological purification.” His continued promotion of Mao themes is just one sign of the party’s dangerous flirtation with extremist positions in its effort to establish legitimacy.

In Xi’s eyes, one of the great crimes is “historical nihilism,” Beijing code for criticism of communism’s past. The practice is so forbidden that last year it was included as one of the Seven Don’t Mentions, topics not to be discussed. Nihilist criticisms are targeted by what is now known as Document No. 9, issued in April 2013 by an organ of the party’s Central Committee with Xi’s apparent blessing. And in his ideologically dense “Two Non-Negatables,” he orders cadres not to use the historic period after gaige kaifang—Deng Xiaoping’s policy of reform and opening up—to negate the historic period before gaige kaifang, in other words, the time of Mao’s rule. In short, Xi has thrown a dark cloak over the disasters of the Maoist era, and by putting criticism out of bounds, he has reversed a decade of attempts by Chinese intellectuals to reassess an anomalous, and at times horrific, span in the party’s history.

Celebrations of Mao fit right in with a period of enforced orthodoxy. Xi Jinping’s efforts to recreate a past, therefore, reveal an ambition lacking in recent Chinese leaders. Until he took over, it was said that each leader of the People’s Republic had been weaker than his predecessor. Many analysts have viewed this as progress, and in many ways it was. Yet Xi, cut from different cloth than his two immediate predecessors, has reversed the process. “I have sensed from the start that he has the kind of ambition that makes other people worry,” says Arthur Waldron, a University of Pennsylvania historian. “I feel that he is reaching for more power than any of his immediate predecessors had and that he is also seeking to lift himself up above the group of people who would otherwise seem to be very similar to him.” That is exactly what Mao did, seizing control of the Communist Party by force of personality, guile, and ruthlessness. As Waldron tells us, Xi’s power grab “is eliciting a great deal of disquietude.”

Disquietude indeed. Few Chinese really want another Mao, but that is not deterring Xi, who obviously believes he should have Mao-sized powers. After all, one of his diagnoses of the Soviet collapse—that there was no “real man” to stop it—suggests he believes he should accumulate power for the good of the party-state.

And Xi is employing harsh tactics to do so. He is now engaged in an almost unprecedented prosecution of former internal security czar Zhou Yongkang and his associates and family members, the core of what is sometimes referred to as the party’s “petroleum faction.” The prosecution, just one of the relentless attacks on the patronage networks of other leading figures in the party, is upending the political system and likely ending the period of stability that permitted China to recover after Mao.

After all, the move against the unpopular Zhou violates one of the most sacred rules of Chinese communist politics: no member or former member of the Politburo Standing Committee may be investigated for misdeeds. The prohibition, an important element in restoring calm after Mao’s decade-long Cultural Revolution, was premised on the notion that if leaders knew they would not be hunted down, as they were by Mao, they would be willing to withdraw quietly after losing political struggles. In other words, the immunity from prosecution reduced the incentive for political figures to fight and possibly wound the party itself.

Xi Jinping, however, is reversing the process and upping the stakes, something evident in his criminal prosecutions. The probe of Zhou and other figures is a sign that China is returning to a period that many thought was long past. Xi, a strongman in the making, appears capable of resurrecting the Communist Party’s ugly history. China’s new supremo is willing to break conventions in his quest to bolster his personal political position—and possibly trigger a long descent into turmoil as his targets, seeing no other choice, strike back. It was not coincidental that shortly before Xi took power, then Premier Wen Jiabao publicly warned that China could descend into another Cultural Revolution.

Most China watchers believe that Xi has quickly consolidated political control after his elevation, yet a sure sign of the weakness of a leader is a purge, and under Xi there has been one purge after another, both of civilian leaders and military officers, the strongest indication that China’s political system is in distress.

The intense infighting after Mao died convinced Deng that, if the Communist Party were to survive, he had to assure continuity of leadership. To do that, he first chose his successor, Jiang Zemin. Then, in an extraordinary move, he picked Jiang’s successor, Hu Jintao, as well. Both leadership transitions went according to Deng’s plan. Deng, however, was in no position to pick the person to follow Hu. The party tried to put in place rules to guide this succession, and many have labeled the transition a success. Yet the praise is premature. There have been, in connection with Xi Jinping’s accession, persistent rumors of coup and assassination attempts as well as stories of unusual troop movements in Beijing. And, whether or not the lurid tales are true, Xi’s political purges—conducted under the guise of an “anticorruption” campaign—are meeting stiff resistance. In a Politburo meeting in late June, he admitted there was a “stalemate” between himself and his foes. How far and how fast his efforts go is yet to be discovered, but this much is clear: decades of relative political stability in China have ended.

And so has the phase of Beijing’s relatively benign external relations. Mao wanted to upend the international system. Deng and his two successors joined the world as it was. Xi has now embarked on a new phase that is Mao-like in its ambition. He has been creating friction to China’s south and east, seizing reefs from the Philippines, sending troops deep into Indian-controlled land, and ordering vessels into Japan’s territorial waters. Chinese ships have been harassing the US Navy in international waters. In May of this year, a state oil company, executing political orders, placed a large rig just off Vietnam’s coast, in that country’s Exclusive Economic Zone, and more drilling platforms are on the way to the South China Sea. Beijing’s state media last October bragged about the ability to kill tens of millions of Americans with nuclear warheads launched by submarines, naming US cities China could incinerate and quantifying deaths from radiation. We can only guess the causes of Chinese hostility, but all signs point to a country in turmoil led by an ardent nationalist who has read too much Mao.

Events are still unfolding, but we don’t have to wait for history to tell us what’s happening in China today. Three decades of stability and progress have come to an end. Deng’s China is now in the past, and the third era of the People’s Republic, which bears a chilling resemblance to the first one, has just begun.

Gordon G. Chang is the author of The Coming Collapse of China and a blogger at World Affairs. Follow him on Twitter: @GordonGChang.

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