Foreign Policy Research Institute Wire, July 1999
By Minxin Pei
Western attitudes toward China tend to oscillate between two extremes, often with confusing
rapidity. Not too long ago China was widely portrayed as an emerging military and economic
threat to the West. Its total economic output was projected to surpass that of the United States in
two decades. Its military modernization was expected to provide China the capability to project
its power far beyond its borders (and the recent Cox report on nuclear espionage has revived
And its authoritarian regime was supposed to be able to retain its grip on power
Nowadays, however, the speculation about China’s future has generally inclined toward
pessimism. The influential British magazine The Economist openly speculated about the break-up
of China in its last issue of 1998. Not long before that, the same publication ran a cover editorial
opining about the imminent collapse of the Chinese economy. And in a speech delivered in April
of this year, President Bill Clinton warned of the dangers of an unstable China which failed to
Even within China, signs of danger and nervousness abound.
Arguably, the Chinese government
now faces the most severe challenge since the Tiananmen Square demonstrations a decade ago.
Unemployment is rising at a frightening rate. Several key anniversary dates fraught with symbolic
and real political dangers (such as the 50th anniversary of the People’s Republic, the 10th
anniversary of the Tiananmen Square crackdown, and the 40th anniversary of the uprising in
Tibet) have prompted the government to maintain a tight watch over the country’s tiny dissident
community lest something akin to the 1989 movement break out again.
In my judgment, the current pessimism about China’s short- term prospects is as exaggerated as
the previous optimism about its long-term economic outlook. In fact, China is likely to retain its
short-term political stability despite many signs of potential turmoil, but will face rising instability if
the regime fails to undertake significant political reform in the next decade.
CHINA’S CURRENT DIFFICULTIES
While parallels between the problems China faces today and those it confronted during the
Tiananmen crisis a decade ago may be alluring, they are misleading. In 1989, the Chinese
Communist Party (CCP) faced a genuine crisis of political legitimacy, which had its origins in
1978-79, when the leaders promised, but repeatedly failed to deliver, political reform. By
contrast, the challenges confronting the Chinese government today are primarily economic,
although weaknesses in the political system make potential solutions more elusive.
Specifically, China’s economic difficulties today originate, externally, from the aftermath of the
East Asian financial crisis (falling exports and foreign direct investment) and, internally, from weak
consumer demand and severe structural problems. The internal problems are far more daunting
It is well known that China’s two most perilous economic challenges are an insolvent banking
system (which has total bad loans of between 25 and 30 percent of gross domestic product) and
rising unemployment due to the restructuring and privatization of the loss-making state-owned
enterprises (SOEs). Many analysts believe that the latter poses the clearest threat to the Chinese
government, because any unrest by the unemployed, who are concentrated in urban areas, would
lead to a political crisis akin to the Solidarity movement in Poland in 1981-82. Given the sheer
numbers of unemployed and underemployed people in China, this analysis is not without merit.
The official China Daily reports that, among urban dwellers, unemployment is about 11 percent
(or 16 million people). In addition, as many as 120 million rural laborers are considered
However, unemployment alone is unlikely to generate a high level of political instability and is
even less likely to bring down the regime. (Can you recall the last time a regime was toppled by
unemployment?) In analyzing the political consequences and implications of economic crises, we
must understand that not all economic crises are created equal. Although all of them are nasty and
harmful to the societies they hit, they produce different political outcomes because their effects
are filtered through the political system differently.
In the case of high unemployment, its impact on political instability tends to be limited for two
reasons. First, unemployment principally affects only one segment of society, namely,
manufacturing workers. It would be difficult for these workers to find political allies in other
sectors. In China, workers being laid off from SOEs are viewed as industrial aristocrats who
have had it pretty good for the last fifty years at the expense of the other segments of society.
Second, the ranks of the unemployed are relatively fluid. Many unemployed, especially the most
able, can find alternative employment. This leaves the ranks of the unemployed without
permanent leaders and unorganized. By contrast, a full-blown banking crisis is far more lethal,
because it triggers hyperinflation and a massive run on banks. Unlike unemployment, which tends
to hit one segment of society especially hard, a banking crisis would hurt virtually everyone
(except the very wealthy). Such a crisis sends out a political signal to the majority of the
population that something is terribly wrong, thus facilitating unity and coordination among all the
disaffected elements, from the peasantry to the unemployed to the middle-class. A broad
anti-regime coalition is therefore more likely to emerge following a banking crisis than high
This reasoning leads us to question the conventional wisdom about the connection between the
recent crackdown on dissidents and the country’s economic problems. Most analysts believe that
the government’s crackdown was motivated by the fear that dissidents would form a
Solidarity-type coalition with the unemployed to challenge the Communist Party’s rule. This
analysis, while appealing, overlooks another probable explanation. The government’s crackdown
could well have been motivated, not by the fear of unemployment, but by the fear that any signs
of political instability would shake the population’s confidence in the government, and hence in the
security of their assets. Fearing the loss of their life savings, ordinary Chinese (who have over 80
percent of their total assets deposited in the banks) would unleash a run on banks, which would
force the government to print more money to cover the withdrawals, in turn sparking
hyperinflation and massive popular discontent.
THE VULNERABILITIES OF THE COMMUNIST PARTY
To be sure, the current economic difficulties have caught the Communist Party in a particularly
vulnerable state. Specifically, the ruling party faces the following structural and institutional
1. Narrower base of support. Despite the Western media’s caricature of the ruling regime as a
communist dictatorship, the nature of the Chinese regime has changed profoundly in the last two
decades. If we may call the pre-reform Chinese regime a socialist one with a broad base of
support among workers and peasants, pro-market reforms have seriously eroded the broad
social base of the CCP. This change has come about, ironically, precisely because of the relative
success of the economic reform under Deng Xiaoping. For the peasantry, market-oriented
reforms have resulted not only in direct economic benefits and independence from the state; they
have fundamentally eroded the Communist Party’s political control in rural areas and left the
regime without means of mobilizing political support there. As for urban SOE workers,
market-oriented reforms have begun to hurt their interests by making their jobs insecure and
benefits less generous. They blame their plight on the government and have begun to display their
discontent openly and violently.
The regime’s political support today comes primarily from only four groups: the bureaucracy, the
military, the security forces, and the rapidly increasing urban middle- class that will have much to
lose (such as the value of their stocks and real estate) in the event of political instability.
2. Organizational deficit. The CCP previously controlled a vast network of social organizations,
including the official labor unions, women’s associations, the youth league, and many professional
associations, which in turn controlled most segments of the population. But that is no longer the
case. Official organizations closely tied to the party have lost credibility, enjoy little grassroots
support, and cannot be expected to serve as instruments of control or political support. Other
organizations, notably, religious groups and professional associations, have become more
independent and will likely resist manipulation by the party.
3. Weak institutional channels of resolving state-society conflict. A related weakness of the
present political system is the absence of credible institutions that would allow individuals and
groups to articulate and pursue their own interests. In democratic systems, electoral and
legislative processes do this, but in China, no institutions perform such functions reliably. In their
absence, collective grievances will accumulate, leading in the long term to political instability. In
the short term, collective grievances are increasingly expressed in violent protests. In fact, the
government admitted there were 5,000 collective protests in 1998.
4. Absence of effective institutions to resolve conflicts within the state. China also has no
functioning institutions that might resolve conflicts among the various components of the state. The
absence of such institutions, which would typically be provided for by federalism, causes cyclical
opportunism characterized by frequent policy changes by the central government and resistance
to those policies from local governments. Consequently, the policy environment is uncertain and
law enforcement weak. In fact, the most serious problem facing China is not that it does not have
democracy, but that it does not have federalism. That is, it lacks a clear division of responsibilities
between the central and regional governments.
HIDDEN STRENGTHS OF THE REGIME
I have listed a series of structural weaknesses of the party-state in China. However, it would be
wrong to conclude from the above observations that the system is about to collapse, for there are
several strengths that help offset these weaknesses.
Weak opposition. Domestically, the CCP faces no real threat.Because opposition to the regime
is unorganized and dispersed, for most people there is simply no credible alternative. This is
perhaps the most important factor working in the CCP’s favor. A party song states, “Only the
CCP can save China,” but it should be, “Only the CCP can govern China” — at least for now.
Relative elite cohesion. Political turmoil in China in the last 50 years has always come from
disunity and power struggles at the highest level of the regime. Today’s top elite is much more
unified than during any previous period. The political differences between top elites today are
mainly over policy and personality, rather than over ideology.
The CCP remains a formidable force of control. Because the party maintains a relatively effective
system of control in dealing with top-priority issues, in the short term it should be able to confront
any challenges to its hold on power. The CCP has also learned a key lesson from the 1989
movement: never to allow a minor incident to develop into a full-blown political crisis. That
explains why the government reacted swiftly and harshly against the leading dissidents in the last
The Chinese are beginning to tackle their long-term problems. It is encouraging to see that some
of the top leaders seem to have realized the long-term threats to the current system and have
begun to take some tentative steps to address them. It seems that ideas of federalism are
beginning to influence institutional designs in China. Among the most promising steps taken so far
is the reform of the central bank along the lines of a Federal Reserve-style system. Moreover, the
1994 tax reform, although far from perfect, was the first step toward fiscal federalism.
Although localized incidents of social unrest, sparked mostly by economic difficulties, are likely to
increase, the Communist Party should be able to avert significant political turmoil in the near
future. However, even if the Chinese government gets through 1999 without a repeat of 1989, it
must soon confront the issue of political reform more seriously, because the challenges it poses
will only increase as time passes. If no significant institutional change is undertaken, China will
experience rising tensions that its current political system will be incapable of handling. Failure to
implement political institutional reforms may lead to rising instability through three mechanisms,
either simultaneously or sequentially. First, failure to reform will reduce economic efficiency as the
costs of insecure property rights, poor contract enforcement, and exorbitant rents become more
baneful. This will inevitably reduce the rate of growth, which will further exacerbate social
tensions and damage the legitimacy of the Communist Party. Second, failure to reform will allow
corruption to worsen, inequality to rise, and poor governance to persist, eventually causing a
massive social explosion such as occurred in Indonesia in May 1998. Third, failure to reform will
cause rising division within the current moderate-conservative ruling coalition as the more liberal
elements become disenchanted and frustrated with the slow pace of reform. A split within the
elite has led to political instability before, and could easily do so again.
Indeed, although China is unlikely to become another Indonesia today, it is very likely to become
one in ten years’ time if its leaders are lulled into complacency.
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