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Magazine / CHINA

China's Problems Will Outlast Olympic Games

After the Olympic flame flickers out, China will wake up to major challenges in its economy, in energy supplies, in the environment, and in diplomacy.

August 2, 2008

BEIJING--The students who packed a seminar room at China Foreign Affairs University, the training ground for the country's next generation of diplomats, were exceedingly bright, disarmingly articulate in English, and refreshingly outspoken. Eschewing small talk, they pressed visiting foreign journalists about Western news coverage of events in Tibet, and they complained that news photographs were being doctored because of anti-Chinese bias abroad.

Challenged about her nationalistic sentiments, one young woman shot back: "It's not nationalism, it's patriotism."

 

Chinese pride in the country's accomplishments and its future prospects is likely to be on full display in mid-August as Beijing hosts the 2008 Summer Olympics. But such patriotic sentiment is not simply a byproduct of Olympic euphoria. In the run-up to the Games, the Chinese government has stoked nationalism to shift public attention from Beijing's mishandling of the Sichuan earthquake, distract people from the slowing economy, and help rally China's burgeoning middle class to the ruling Communist Party.

"For much of the last half-century," observed Jeffrey Bader, director of the China Center at the Brookings Institution in Washington, "Chinese nationalism has been a defensive, wounded phenomenon. Somewhere in the last decade, nationalism has transformed itself into a much more self-confident, aggressive nationalism. One hears less about the century of humiliation and more that 'We are ready to take our place in the world.' It's a different kind of nationalism."

How a rising China deals with its changing role in the world--including defining what it means for China to be a responsible stakeholder in the global system and understanding the disconnect between the Chinese people's view of themselves and the world's view of China--is but one of the four major challenges that Beijing faces once the Olympic flame flickers out. The economy is next; it has slowed sharply in recent months, and China's meteoric growth over the past decade has left troubling economic distortions. The political system is No. 3 on the list; it is profoundly corrupt, is increasingly dysfunctional, and faces mounting public unrest. And finally, society faces energy and environmental constraints of unprecedented proportions.

These are not just Beijing's problems. They will also be Washington's. After years on the Bush administration's backburner, China and the challenges it faces will be one of the principal foreign-policy tests of the next U.S. president.

A Slowing Economy

After five years of economic growth that exceeded 10 percent annually and led to a near-doubling of per capita income, the Chinese people could not be happier with their economy. Eight in 10 Chinese expressed satisfaction with their country's direction, according to the 2008 Pew Global Attitudes survey. Among the 24 nations that Pew surveyed, the Chinese were the most satisfied with the way things were going in their country.

Nevertheless, signs of public unease are emerging, and Beijing may have some good reasons to fret about the nation's economic future. Inflation is a "very big" problem for a whopping 72 percent of the Chinese population, according to Pew. And 41 percent of Chinese think that economic inequality is a "very big" problem. Moreover, public expectations seem out of touch with economic prospects: 32 percent of those surveyed thought that economic conditions in China would "improve a lot" over the next year.

Such hopes could be dashed as the economy's widespread problems likely worsen in the months ahead. Economic growth has slowed from a high of 11.9 percent in the second quarter of 2007 to 10.1 percent in the second quarter of 2008. Standard Chartered Bank in Shanghai projects 9.9 percent growth this year and only 8.6 percent growth next year.

Most governments would ransom their national heritage for such economic performance. But for China's Communist Party leadership, whose legitimacy has become inextricably linked with the economy's good fortune, any slowdown is unnerving.

"If you are sitting in Beijing," said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington, "you have to be worried that the global slowdown has not been that bad yet and we still have lost 2 percentage points of growth. They have to be asking themselves, 'How vulnerable are we going to be if the slowdown is deeper and longer?' "

According to Douglas Paal, vice president for studies at the Carnegie Endowment for International Peace in Washington, Beijing is worried about a financial bust after the Olympics, once infrastructure spending for the Games ends and property speculation driven by Olympic enthusiasm cools. The stock market has already fallen precipitously, and further declines could undermine consumer confidence and spending.

In the long term, despite its recent phenomenal strength, the Chinese economy faces profound structural problems. The country's current-account surplus, which includes merchandise trade receipts and capital inflows, equaled 11.1 percent of gross domestic product last year, up dramatically from 1.7 percent in 2000. Americans, frustrated by a seemingly intractable trade deficit, might find such success enviable, but for the Chinese this unprecedented economic imbalance is a headache.

All of this foreign money flooding into the Chinese market stokes the country's inflation rate, now running at 7.9 percent. To soak up the cash, the government sells bonds. As a result, foreign-exchange reserves, much of it in U.S. dollars, have now more than doubled in the past four years. And with the dollar's weakening, Beijing is losing money. To ease the current-account surplus and cool inflation, China has let its currency, the renminbi, appreciate about 15 percent across the board. But even greater appreciation is needed to correct the imbalance.

That, however, would threaten to price some Chinese exports out of world markets. Already, export growth has slowed. This contraction translates into less job creation and risks political discontent in a society that has become accustomed to creating 30,000 jobs per day.

Despite China's economic success and press reports of rising wages, satisfaction with household income has improved only modestly in recent years, according to the Pew survey. This frustration reflects the fact that, as a proportion of the entire economy, household incomes in China are actually declining. Consumption as a portion of GDP is well below the average for the past three decades and is significantly less than the recent experience of other Asian countries.

If economic growth is to remain robust, economists contend that more Chinese must benefit from the country's success, that market-oriented reforms are needed to encourage a wider availability of consumer services, and that the government must boost spending on health care and pensions to reassure the people that they don't have to save so much. (The current household savings rate exceeds 20 percent.)

Public dissatisfaction with household income is political dynamite. "Peace in the cities is maintained by the belief that upward mobility is happening," said Kenneth Lieberthal, a professor at the University of Michigan. "If this is lost, there could be a social explosion."

Pollution Problems

Growing environmental and energy problems are clouding China's prospects for continued economic growth. "They have missed an opportunity to jump-start their environmental effort via the Olympics," said Liz Economy, director of Asian studies at the Council on Foreign Relations in New York City. "When they exhale after the Games, they will be facing the same range of problems."

The immediate challenges are air and water pollution and local water shortages. Sixteen of the world's 20 most polluted cities are in China, with particulate and sulfur dioxide levels among the highest anywhere. Finding clean water is an even greater challenge. Of China's 640 largest urban areas, at least 100 face severe water scarcity. The water table under the north China plain is falling rapidly, and a number of rivers are being pumped dry. China spends $100 billion a year to treat dirty water and find clean water, a capital expenditure second only to real estate investment. This is costly to both the economy and human health.

The good news for Beijing is that eight in 10 Chinese now agree that the government should make environmental protection a priority, even if it leads to slower economic growth and some job losses, according to the Pew survey.

The bad news is the inherent difficulty in getting the Chinese political system to curb pollution. At the township and village levels, the performance evaluation criteria for local leaders, their likelihood for promotion, and their opportunities for kickbacks have long depended on promoting economic growth. These officials receive few rewards for curbing pollution. So a wastewater treatment plant may get built, because that shows up as local investment and job creation. But it may never be used, because day-to-day operations cost money.

Moreover, while environmentalists in China tout their newfound ability to sue polluters or government officials who have not enforced environmental regulations, activists acknowledge that they seldom win such cases and, if they do, the judgments never seem to get enforced.

Resource Constraints

China's economic boom has also created an almost insatiable thirst for energy. In the 1980s and '90s, the nation's energy use grew at less than half the rate of economic growth, but in this decade consumption has grown faster than the economy, outstripping domestic energy supplies. Once a net exporter of coal, China is now a net importer. Its oil imports grew 12.7 percent in the first five months of this year, and China now imports more than 47 percent of the petroleum it consumes.

This growing dependence on foreign oil has led Beijing farther and farther afield in search of secure supplies. By the British government's count, China has 32 agreements with oil-producing countries. Beijing is slowly realizing that the interests of the Chinese state oil companies may clash with national foreign-policy concerns. This scramble for resources threatens to enmesh the Chinese in even more political quagmires than the ones in which they already find themselves, most notably in Sudan but also in Angola, Nigeria, and Venezuela. In 2007, nine Chinese oil workers were killed in southern Ethiopia. Such dangers will only grow in the years ahead, and the Chinese public's demands that Beijing defend the country's workers and interests overseas will not be far behind.

"They are obsessed with having equity stakes in resources so that the international market cannot cut them off," said Harry Harding, a professor of international affairs at George Washington University. "And they are blind to the risk they run in the eyes of the world by seeming to support odious regimes."

Curbing energy use will require swallowing some bitter economic medicine. China shields consumers from the full brunt of oil costs by controlling retail energy prices. That subsidy could equal about 1.2 percent of China's GDP this year, or more than $70 billion. Allowing prices to rise would encourage more-efficient energy use, and some observers think that Beijing may be ready to make that move, assuming that the Olympics go well. Taking that money out of consumers' pockets, however, could depress their spending in the short run, further slowing the economy.

Beijing is also facing growing pressure to curb its emissions of carbon dioxide, the principal global-warming gas. China generates more CO2 than any other country and accounted for more than three-fifths of the growth in such emissions worldwide between 2001 and 2007. Both the European Union and the United States have threatened to penalize imports of carbon-intensive Chinese products if Beijing does not reduce such emissions. But with 70 percent of its carbon dioxide emissions released by industry, compared with less than 25 percent in the United States, reducing CO2 could curtail Chinese economic growth.

"This is an issue that is fraught with peril," said Trevor Houser, a partner in the Rhodium Group, an international consulting firm. And corrective action has little support from the Chinese public, only 24 percent of whom think that global warming is a very serious problem, the lowest level of such concern in the world, according to the Pew survey.

Political Legitimacy

"We are in the sixth inning of Hu Jintao's administration, and he has yet to hit a home run," said Minxin Pei, a senior associate at the Carnegie Endowment for International Peace in Washington. "People will soon be asking, 'What is his legacy?' And the Olympics will not do it."

Government spending has increased under Hu, but public expectations have grown even faster. "Their entire political structure rests on the fact that next year will be better for my family than this year, and that requires 8 to 10 percent growth rates to achieve," said Charles Freeman, who holds the Freeman chair in China studies at the Center for Strategic and International Studies in Washington. "If you can't deliver on those growth rates, that undermines the legitimacy of the government."

In the Pew survey, only 28 percent of those Chinese questioned opposed recent government-led economic reforms. People in that minority are disgruntled, however, and they have lukewarm views about the job that Beijing is doing on the issues that matter most to them. They are more likely than others to voice worries about unemployment, conditions for workers, education, and health care. Overall, 39 percent of all Chinese consider current levels of corruption a "very big" problem.

Increasingly, this disgruntlement has spilled over into the streets. The central government acknowledges that the number of "mass incidents"--everything from neighborhood rallies to pitched battles with police--skyrocketed from 8,700 in 1993 to 74,000 in 2004.

These disturbances have largely occurred in small towns and rural areas, enabling Beijing to contain the unrest, so far. But recent demonstrations in Chengdu against the building of a chemical plant and in Shanghai opposing a high-speed train suggest that "an educated, rising middle-class elite are pushing for a larger voice in the political process," said Liz Economy of the Council on Foreign Relations.

With the chaos that led to millions of deaths during the Great Leap Forward and the Cultural Revolution still fresh in their minds, China's new middle class deeply fears instability and the loss of what it has so recently secured. So, "it will take the Chinese middle class longer to get politically involved," predicted David Lampton, director of the China studies program at the School of Advanced International Studies at Johns Hopkins University in Washington. "But it's a question of timing rather than it not happening."

Steps toward democratization in China's rural areas were supposed to release the buildup in this political pressure cooker. Instead, the village and township elections instituted in some parts of China in 1988 have been halted because of corruption. In their place, the government is experimenting with what it calls consultative or deliberative democracy: public hearings to identify issues of local concern and the choice of lower-level party leaders through public opinion polls.

"The Communist Party has been pretty adroit at reinventing itself since 1990," said the Brookings Institution's Bader, "and it will continue to do so in a way that is more transparent and accountable." The Chinese public's profound aversion to instability affords the government time to build a democracy with Chinese characteristics. But that time horizon may be finite.

The Stakeholder Disconnect

The next U.S. president is likely to discover that his greatest difficulties with China stem from Beijing's struggle to find its place in the world.

A profound disconnect exists between how the Chinese see themselves and their role in the world, and how the world views them. Three in four Chinese think that people in other countries have a favorable opinion of China. In fact, according to the Pew survey, majorities in only seven of 23 countries have a positive opinion of China. And, in the 21 nations where trends from last year are available, China's favorability rating has actually declined in nine and increased in only two. It stayed the same in the 10 others.

Overwhelming majorities in 15 of the 23 countries that Pew surveyed also see China's growing military power as a bad thing. Although a majority of Chinese say that their economy's impact on other countries is positive, majorities or pluralities in 10 of the nations polled by Pew, including some of China's major trading partners, think that China's might is harmful to other economies.

In a sign that Chinese behavior abroad is also engendering the kind of resentment once only generated by American foreign policy, majorities in 14 of the 23 nations believe that China acts unilaterally on the world stage. The Chinese, however, see it otherwise: Eight in 10 say that their country takes into account the interests of other nations when making foreign-policy decisions.

In 2005, then-Deputy U.S. Secretary of State Robert Zoellick called on the Chinese to become what he termed "responsible stakeholders" in the international system. This term has stuck; the problem is in getting the Chinese and the rest of the world to agree on exactly how China's interests can be accommodated without it running rampant over the interests of other major global stakeholders.

"The original formulation of the 'responsible stakeholder' concept was silent on the question of which Chinese interests were legitimate and deserving of respect," notes Phillip Saunders, a senior research fellow at the National Defense University in Washington. "The United States will not be able to ignore this question forever."

The University of Michigan's Lieberthal agreed. "[Barack] Obama or [John] McCain will confront a China that sees the value of the current system and wants to play a significant role as a developer of the rules," he said. "That is very much in the U.S. interest. But China's values are not our values."

Whether Beijing's perception of responsible behavior corresponds to or clashes with Washington's could be made painfully clear very soon over Taiwan. Beijing and the new Taipei government have recently made great strides in improving ties. But the Bush administration is about to make a long-delayed decision on arms sales to Taiwan. The timing of that move, which military technologies are included in that package, and how the mainland responds will set the context for the ever-volatile Taiwan issue in the next U.S. administration.

"This is a short-term decision that has lots of knock-on results that will either facilitate or make more difficult China getting more international cooperation on a range of issues," Lampton said.

Chinese nationalism is also a wild card in the country's future relations with the rest of the world. "The Chinese have a precarious sense of self-confidence that can be easily offended and provoked into anger," warned Carnegie's Paal. As a result, his Carnegie colleague Pei said, "the Chinese government has to appeal to an assertive, vocal domestic audience by projecting a foreign policy that defends national pride at the same time it is trying to show the world that it is a responsible stakeholder. This is increasingly difficult."

The Olympics have preoccupied the Chinese and their leadership for the past few years, and over the next few weeks the Games will crowd out all other news on China. How the Olympics play out--whether they are the rousing triumph and entry of the new China onto the world stage that Beijing hopes, or whether they are marred by shortcomings and embarrassing demonstrations--will obviously set the tone both domestically and internationally for China for some time to come. Once the athletes march out of the Olympic stadium, the fundamental challenges that China faces--economically, environmentally, politically, and diplomatically--will be the same difficulties that China faced when the Olympic teams trooped in. How Beijing copes with these problems will determine how big an agenda item China becomes on the next U.S. president's calendar.

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