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Instability and Unpredictability in China: The “New Normal”?

Sep 18 , 2012

A string of unpredictable recent events in China have left China Watchers worldwide wondering what is going on? For a state that prides itself in maintaining “stability” (wei wen) at all costs, the nation seems increasingly unstable and unpredictable. After twenty years of managed leadership successions, steady economic growth, basic social stability, and a generally positive foreign policy—we have recently witnessed unpredictable instability in all these spheres. China watchers ask:  Is this the “new normal” in China? If so, policymakers worldwide should start hedging their policies and relationships with China in order to protect their interests and guard against potential fallout.

In the political realm, a raft of events has transpired in recent months that collectively indicate that all is not well in the body politic. Most recently, China’s heir-apparent, Xi Jinping, disappeared from public view for two weeks—with no explanation offered to the Chinese public or the world for his absence. Although Mr. Xi has now resurfaced, the totally secretive manner in which the Chinese Communist Party (CCP) dealt with the disappearance flies in the face of its pretensions (under Hu Jintao) to increase “transparency”  in party and state affairs. 

The total silence about the fate of deposed Chongqing party chief and Politburo leader Bo Xilai is also symptomatic of an insecure state. Bo’s wife has been convicted of murder and his former police chief is now on trial for attempting to defect to the United States (and other charges)—but Bo himself still sits incommunicado.  While we anticipate charges being publicly levied against him by the CCP’s Central Discipline Inspection Commission in any day now (probably once his ex-police chief is found guilty), the fact that Bo’s case has dragged on for months with no news is another indication that the political system has frozen up.

Personalities aside, the CCP’s much-anticipated 18th Party Congress remains in abeyance. While it should be a carefully-scripted and stage-managed event, it has been anything but that. Dates for the Congress, long anticipated for September or October, have not even been announced. Nor has the required prerequisite party plenum taken place.  Reports of vicious and protracted factional infighting abound, and speculation of who will be promoted to the inner sanctum of power continues unabated. Something is clearly wrong. This is not the way the CCP normally does business. China’s public and social media are increasingly skeptical of the whole system, and they are more vocally saying so on the vibrant social media networks.

Meanwhile, the political uncertainties are compounded by economic uncertainties. The national economy is facing a severe slowdown. Whether 7%, 5%, or possibly even lower GDP growth—the Chinese economy is experiencing its most profound contraction since 1989-1992. The problem is that statistics in China are distorted by the state (at lower as well as higher levels) and nobody really knows the real severity of the downturn. Markets do not like uncertainty, and money is flowing out of the country in significant amounts while foreign investment inflows have also dropped off.  Inventories of goods are piling up, as export markets dry up and factories operate at overcapacity. Non-performing loans and bank debts are again building to a serious extent. Local government finances are particularly fraught—estimated by the central government at 11 trillion RMB—or one-quarter of China’s output . Disguised debt makes the problem even bigger.

The government has tried stimulus measures ($160 bn. recently announced), but more infrastructure spending is not what China needs. Spending on software, not hardware, is what China needs: social services, financial services, the service sector, and the knowledge economy.

In some ways  the downturn offers a golden opportunity to undertake the “rebalancing” the government has long talked about, to free up all the pent-up personal savings—but people won’t spend because they are afraid of their futures and hedge against personal uncertainties. Those with excess funds—the middle class—are parking it offshore out of the country in property and foreign bank accounts (a clear indication of the fragility of the CCP and political system).

Uncertainties and instabilities are also gripping society. Inflation and unemployment are both on the rise. With the export sector hurting, China’s 120 million migrant labor pool faces fewer opportunities on the coast and are now again “floating” around the interior looking for work. Crime has spiked in several cities. Tibet and Xinjiang remain ethnically restive. And the yawning gap in social equity widens by the day. This adds up to a combustible and unpredictable social situation.

Finally, China faces many new uncertainties externally. Its relations with the United States have shown various signs of strain for months. Its relations with Japan have deteriorated sharply over the disputed islands in the East China Sea. Its relationships in Southeast Asia have also been badly battered by its excessive territorial claims in the South China Sea. Ties with Australia and India reveal frictions and mistrust. Public opinion polls elsewhere in the world—in Europe, Africa, and Latin America—all indicate mixed perceptions of China. China’s foreign policy thus faces considerable uncertainties as well.

Taken together, this set of Chinese uncertainties adds up to a considerable volatility in the nation’s domestic and global position. After growing accustomed over the past two decades to considerable stability and predictability in and with China, the world had now better be more prepared for greater instabilities and unpredictability. It may be the “new normal.”

The author is Professor and Director of the China Policy Program at George Washington University, and a nonresident Senior Fellow in the Foreign Policy Studies Program at the Brookings Institution in Washington, D.C.

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