China’s Slowing Economy and Threats to Social Stability
In the face of ominous signs that China’s economy is slowing dramatically due to the world economic downturn, Premier Wen Jiabao, citing “unprecedented difficulties and challenges,” announced an ambitious plan to stimulate domestic spending through infrastructure projects and investment during the recently completed 11th National Peoples Congress. (For the full text of Premier Wen’s Work Report, click here). In frank terms, Mr. Wen laid out plans to invest heavily in infrastructure, health care and job retraining programs to reinvigorate China’s suddenly lethargic economy hit hard by a steep decline in global import demand. It was not made explicit whether the plan would be a part of the $585 Billion stimulus package passed last November. Wen also hinted at plans to adjust China’s long-term economic strategy by encouraging citizens to spend and consume more at home, a model advanced by many Western economies.
Recent figures do not bode well for China’s current economic forecast. Unemployment has risen dramatically over the last few months, with an estimated 20 million of China’s 130 million migrant workers unable to find work. Textile factories are closing by the thousands leaving large swaths of China’s textile workers unemployed. The World Bank on Wednesday lowered its economic growth forecast for China this year to 6.5 percent, down from 7.5 percent at the end of last November, after huge falls in exports and shrinking private sector investment.
As a large country with an unusually high degree of openness to the world economy, China depends on other countries, notably the United States, for its domestic prosperity and stability. Thus China is highly vulnerable to shocks from the international economy. The latest figures show foreign trade accounts for 75% of China’s GDP - an astounding figure when put in perspective. Western economists have been urging China to move towards a more domestic-driven growth model to stave off potential economic crisis in the event of a global economic downturn. It seems as though the recent financial crisis is forcing China to take seriously this adjustment to their economic model to guard against its vulnerability to global import demand.
Beijing considers rapid economic growth a political imperative because it is the only way to prevent massive unemployment and labor unrest. For more than two decades, the government has based its economic policies on a predetermined algorithm derived from its priority on stability. The economy must grow at an annual rate of 7 percent or more in order to create a certain number of jobs - estimated to be around 10 million per year - to keep unemployment rates at levels that will prevent widespread labor unrest. This 7 percent growth target rate has become the unambiguous fixture among upper level Party members when determining domestic policies.
China does not have to be reminded of its vulnerabilities at the hands of an unruly populace. Chinese history textbooks teach that dynasties fall when they are overwhelmed by the twin threats of internal unrest and foreign aggression (内乱外患). The Qing dynasty collapsed because of a weakened administration beset by corruption and encroachment on Chinese sovereignty by Western powers. The Taiping and Boxer rebellions were grassroots campaigns stoked by anti-foreign nationalistic peasants angry over the failings of a weak Chinese state. The Chinese civil war was won by the ability of the Communists to rein in and inspire the power of the peasants.
The worst nightmare of China’s leaders is a national protest movement of discontented groups - unemployed workers, hard-pressed farmers, and students - united against the regime by the shared fervor of nationalism. The horror of 1989 is no doubt everpresent in the minds of Communist officials, and its safe to say the current Hu and Wen administration is fearful that the PRC could meet the same fate. Thus staying ahead of the wave of popular nationalism and discontent that is constantly under the surface is the name of the game for China’s leaders.
Consequently, since 1989, the term “social stability” became a fixture of CCP rhetoric. Stripped down to essence however, this is merely a euphemism to convince the Chinese public that Communist Party rule is essential for maintaining order and prosperity, and without it, a country as large as China could descend into civil war and chaos. In their speeches, the leaders make no secret of their anxieties and social unrest, frequently using the catchphrase ”维护社会安全“ or “maintaining social order” as the overarching principle of Chinese development.
To be sure, it is easy to see why CCP leaders are obsessed with preserving social order. There are signs all around them of burgeoning social unrest that Beijing is acutely aware of. Official statistics indicate that there were 58,000 “incidences of social unrest” in 2003, 74,000 in 2004, and 87,000 in 2005. Scanning the horizon from Zhongnanhai, the government epicenter in Beijing, CCP leaders see nothing but the spector of inchoate social unrest threatening the legitimacy Communist Party rule.
In his address, Premier Wen said that the central government would significantly increase spending on schools, hospitals and clinics, low-income housing, environmental programs and other projects aimed at improving people’s lives, which he sees as the source of China’s long-term economic woes. He also reaffirmed plans to raise subsidies to farmers, old-age pensions and income grants to China’s poorest citizens, and said spending on “social safety net” programs would increase 17.6 percent, or about $6.4 billion.
Persuading conservative Chinese consumers to spend and abandon longstanding savings habits may be a difficult task. China’s consumers are notorious savers, often putting away 30% of their paychecks for unexpected expenditures like a sickness in the family or for more long-term costs like college tuition or retirement. As long as China’s social safety net remains frail, the incentive to save is still very strong among China’s consumers.