(This is Part One of a multi-part series. Read the intro here.)
In our series of posts looking at how China’s various internal dynamics will affect global industries, we’d be remiss if we didn’t begin by taking a gander at the political culture in China from what the Deng Dynasty meant, how it operated, to what it has engendered in China’s current leadership. Before we begin to delve into China’s demographics, economic trends or otherwise, we should create a basis on which to explore all of those factors. And that basis begins with the storied political system at work in China — at least since the 70s.
Matthew Gertken and Jennifer Richmond, writing for Stratfor Global Intelligence, recently outlined the seismic shifts under the feet of more than 1 billion citizens in the context of what former Chinese leader Deng Xiaoping envisioned and created. Essentially, although Deng and current president Hu Jintao represent different eras, they essentially operate the same. According to the article, Hu preferred to go the route of investment and exports to try and grow the economy after the 2008 debacle, which is what his predecessors did, but this only achieved limited results. Mainly, household consumption is down, further worrying the domestic administration as well as Western producers. This is vital to understand (and perhaps our sources or others currently operating in China can comment on this further), but it seems the country’s stay-the-course approach is truly at a crisis point.
Indeed, economically, inflation is China’s biggest bogeyman right now. China’s government is between a rock and a hard place, risking an overheating economy on one side and over-correction on the other, which is reflected in rather inconsistent policy-making, according to Gertken and Richmond. There’s a need to transform China’s entire economic model, and that looming threat of social unrest is the primary motive of the Communist Party to fix things before they blow up in their faces.
But essentially, this sounds like what the US had a hard time doing post-recession(s): using traditional consumption incentives to boost growth. But as we’re seeing, if purchasing power is stolen away from citizens having a hard time making ends meet in the US and in China — we have problems on our hands. So even though this means China is not immune to economic trouble either, it doesn’t necessarily bode well for the global picture.
Deng Xiaoping, as Stratfor lays out, had a hard time accelerating any true political reform, and Hu, as the last Chinese leader that Deng directly appointed, has not really had much success in this realm either (although some might say he hasn’t been trying all that hard). After all in the next Five Year Plan (2011-2015), Hu’s administration is “reemphasizing methods of traditional growth. The main method they’re using is expanding credit for big infrastructure projects and manufacturing-sector technology upgrades to keep their export-led economy afloat. Ultimately, the wealth is transferred from the depositors to state-owned firms and local governments. But, the conclusion is that reform must take place; otherwise, the population (especially the educated and upwardly mobile) will, in one form or another, revolt. Stratfor and many other sources cite that the “stark disparities in wealth and public services in China will cause watershed moments sooner rather than later:
“Arbitrary power, selective enforcement of the law, official and corporate corruption, and other ills have gnawed at public content, giving rise to more and more frequent incidents and outbursts. The social fabric has been torn, and leaders fear that it could ignite with widespread unrest. Simultaneously, rising education, incomes and new forms of social organization like non-governmental organizations and the Internet have given rise to greater demands and new means of coordination among dissidents or opposition movements.
Whether these new forms of organization, such as the Jasmine Uprisings (which we’ll delve into in an upcoming post), will cause any significant changes in how the government conducts is business remains to be seen, but if inflation continues as it has and shows no signs of abating to historical lows uprisings may just tear apart the existing “social fabric, so that it may one day be re-stitched in a new way.
Up next in the series: An in-depth look at inflation in China and what it means for the global industry, as well as a comparison between China and its large neighbor, India.