The risk to the US of social meltdown in China

I've been watching the Chinese economy closely for the past year or two. It's a great export-driven engine, the continued growth of which is essential to social stability in that country, so the drop in demand for Chinese products as a result of the global economic slowdown has had a measurable impact on the nation's society. Furthermore, the Chinese banking system has for long been known as monumentally unstable, treated by the State as an instrument of policy-making at the expense of sound economic decision-making. It's sitting upon billions and billions of dollars of unsustainable loans, a Chinese equivalent of the mortgage crisis affecting US banks, except that their creditors aren't private citizens, but State-owned and private businesses.

The valuable China Reader blog recently covered the problem of China's economy and social stability. An excerpt:

Beijing considers rapid economic growth a political imperative because it is the only way to prevent massive unemployment and labor unrest. For more than two decades, the government has based its economic policies on a predetermined algorithm derived from its priority on stability. The economy must grow at an annual rate of 7 percent or more in order to create a certain number of jobs - estimated to be around 10 million per year - to keep unemployment rates at levels that will prevent widespread labor unrest. This 7 percent growth target rate has become the unambiguous fixture among upper level Party members when determining domestic policies.

China does not have to be reminded of its vulnerabilities at the hands of an unruly populace. Chinese history textbooks teach that dynasties fall when they are overwhelmed by the twin threats of internal unrest and foreign aggression.

. . .

The worst nightmare of China’s leaders is a national protest movement of discontented groups - unemployed workers, hard-pressed farmers, and students - united against the regime by the shared fervor of nationalism. ... Consequently, since 1989, the term “social stability” became a fixture of CCP rhetoric. Stripped down to essence however, this is merely a euphemism to convince the Chinese public that Communist Party rule is essential for maintaining order and prosperity, and without it, a country as large as China could descend into civil war and chaos. In their speeches, the leaders make no secret of their anxieties and social unrest, frequently using the catchphrase “maintaining social order” as the overarching principle of Chinese development.

There's more at the link.

The China Reader's perspective is borne out by a news report today:

URUMQI, China (AP) - Thousands of Chinese troops flooded into this city Wednesday to separate feuding ethnic groups after three days of communal violence left 156 people dead, and a senior Communist Party official vowed to execute those guilty of murder in the rioting in western China.

Long convoys of armored cars and green troop trucks with riot police rumbled through Urumqi, a city of 2.3 million people. Other security forces carrying automatic rifles with bayonets formed cordons to defend Muslim neighborhoods from marauding groups of vigilantes with sticks.

Military helicopters buzzed over Xinjiang's regional capital, dropping pamphlets urging people to stay in their homes and stop fighting. Special police from other provinces were called in to patrol the city.

The crisis was so severe that President Hu Jintao cut short a trip to Italy, where he was to participate in a Group of Eight summit. It was an embarrassing move for a leader who wants to show that China has a harmonious society as it prepares to celebrate the 60th anniversary of Communist rule.

The heightened security came amid the worst spasm of ethnic violence in decades in Xinjiang—a sprawling, oil-rich territory that borders Pakistan, Afghanistan and other Central Asian countries. The region is home to the Uighur ethnic minority, who rioted Sunday and attacked the Han Chinese—the nation's biggest ethnic group—after holding a protest that was ended by police.

Again, there's more at the link.

It's worth watching China carefully right now. The nation's on the brink of several potential outcomes, all of which may affect US interests concerning Japan, Taiwan and the Koreas. Chinese economic and social stability are more important to us than many would like to believe.

Peter