Growth powered by political motives is unsustainable and will lead to instability, warns Arthur Waldron.

The high prices realised at the initial public offering of the Bank of China in Hong Kong in May demonstrated how much investors are willing to pay for small stakes in Chinese enterprises – even those, like the Bank of China, that are mediocre in quality by global business standards. The reason is expectations: China appears well on the road to becoming an economic superpower, and investors fear being left behind.

What they fail to grasp is just how precarious China’s economic course is now and, more importantly, how the very growth powering it forward is creating social and environmental problems that will eventually render that economic growth unsustainable.

Maintaining the Communist Party’s unchallenged control has always been the primary purpose of what outsiders often misunderstand as “economic reform” in China. Deng Xiaoping made this clear in 1978 when he first announced “opening” (at that time, he feared a return to the chaos of the just-ended Cultural Revolution), and again in 1992 when, having crushed the democracy movement and thrown the economy into a tailspin, he turned to outside investment for rescue.

Government control

The political purpose behind China’s reforms explains why it has undertaken none of the dramatic changes made, for example, by the states of eastern Europe that exited Communism successfully by auctioning off government-held assets, making their currencies convertible, fostering entrepreneurship and passing transparent laws. Instead, the government has created the current jerry-built economic system, over which it exercises powerful control. State-directed investment in the form of bank loans accounts for 40%–70% of gross domestic product (GDP) growth. Foreign trade and investment play a disproportionate role in growth compared with domestic demand.

Farmers still do not own their land. To be sure, a large private sector is growing, but the state is not fostering it. As it grows, however, this incongruous system is creating deep and intractable problems. Farmland has always been scarce in modern China but it grows scarcer by the day, owing to ecological degradation and illegal sales of land near cities for development. Water is even scarcer, with problems of shortage and pollution of surface and ground water. To supply Beijing, a vast scheme is under way to bring waters north from the Yangzi via three immense concrete canals. But even the mighty Yangzi is suffering from the diminished flow of the sort that has effectively dried up the Yellow river for much of the year, with high levels of pollution.

High waste levels

Compounding the problem is waste. China uses roughly 10 times more water per unit of production than does Japan. Energy is similarly wasted. In China, one standard unit of energy produces a little over $0.30 in ultimate value, compared with more than $0.70 in India – and well over $5 in Japan. Today’s rapid development is offset by long-term degradation that will prove difficult to remedy, and may trigger popular (and elite) dissatisfaction.

Law, constitutions and elections are abstract concepts that many Chinese understand, but of which they have had no direct experience. Confiscation of ancestral land holdings, water cut-offs and un-breathable air are, however, immediate and palpable. Such developments anger people. Clashes in which police and hired gangsters fight often thousands of farmers or workers are now a routine (if under-reported) occurrence. They will almost certainly increase in number and frequency – some estimates suggest more than 100,000 a year – and at some point may pose a threat to regime stability.

Mr Deng’s prime concern was that society be rendered stable, so that continuing party power could be assured. Ironically, the forces his policies have unleashed may prove the party’s undoing.

Arthur Waldron is the Lauder professor of international relations in the department of history at the University of Pennsylvania, and vice-president of the International Assessment and Strategy Center in Washington, DC.

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