Downward Pressure

An investor watches his stocks at a securities exchange in Shanghai on August 22, 2012. Chinese shares were down 0.34 percent in early trade on August 22 following losses in US stocks overnight

It’s hard to feel sorry for China’s leadership, populated as it is by autocrats and oligarchs with little regard for the liberal yearnings of its people. And while China’s economy is consolidating after a generation of double-digit growth, the fact that it has weathered four years of declining external demand is a testament to its durability.

That said, the challenges Beijing faces today are among the most formidable since the late 1960s, when the by-then deranged Mao Zedong nearly destroyed the country for the sake of a restorative “permanent revolution.” It struggles through a leadership succession that took a sordid turn with the undoing of a rising star in the Communist Party amid allegations of graft, torture and murder that vindicated popular impressions of party men as corrupt thugs.

There is more to what ails China’s than sclerotic politics, however. The free-market reforms launched in the 1980s have given away to a “re-nationalization” of sorts, in which state-owned companies, fonts of kick-backs and sweetheart deals, have re-emerged as the epicenter of Chinese industry. The banking system is primitive and risk averse; left unreformed, it will perpetuate a cash economy impervious to the cycles of interest rate cuts imposed to revive growth, while a modern financial sector would be vulnerable to viral bank runs that could infect the entire financial sector.

Prohibition on peaceful dissent has stifled innovation even as manufacturers, whose political influence exceed the value of their contribution to revenue, would sustain China’s export-driven growth model even as demand declines for its goods. The “middle income trap” could arrest Chinese modernization over the next decade just as it did Greece in the 1980s and 1990s.

Perhaps the biggest threat to China’s political and economic fortunes, however, is the one it has created: a foolishly provocative claim on vast swathes of Asian sea lanes. Regardless of the validity of such claims, the ham-fisted and menacing way in which Beijing insists on their legitimacy has played directly into the hands of its main rival. So long as Beijing went about exploiting the world’s energy resources and vital commodities by peacefully buying its way into developing countries, Washington could only stand by and fume. Once it unilaterally demanded sovereignty over much of Asia’s commercial waterways, however, it gave the US Navy the clarion call it has longed for since the collapse of the Soviet Union. It also provide Republican Party presidential contender Mitt Romney and the neoconservatives who advise him a foreign policy club to use against his incumbent rival.

Of course, the maritime writ that Beijing demands in its backyard pales in comparison to the global franchise America maintains over the world’s air corridors and land bridges, to say nothing of its sea lanes. By yielding to its nationalists instincts, as well as to its own increasingly assertive military, however, Beijing has set the stage for armed conflict with the US, its largest debtor and market for its goods.

If the narrative of China’s last three decades was about recovery, development and prosperity, the next thirty years may be about survival.

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