China at Crossroad

China is at a political and economic crossroad that few in America or the West fully appreciate. For the first time since China embarked on its economic reforms in 1978 and lifted hundreds of millions of people out of poverty, China’s political leadership is faced with its greatest test of political survival. President Hu Jintao has gone so far as to say that turning the challenges posed by the global credit and economic crisis into opportunities will be a test of the Communist Party’s capacity to continue to govern. China recognizes it needs to stand on its own two feet and not rely on exports.

The task is daunting. Household consumption in 2007 made up just 35.3 percent of China’s gross domestic product, a record low for a major country in peacetime. In the 1980s, it was over 50 percent. By comparison, household consumption in the U.S. in 2007 made up 72 percent of GDP.

China must make radical spending changes from infrastructure to social investments which requires giving people more disposable income. More household subsidies, especially in the areas of health care and education, is what is needed. The problem, believe it or not, is that China does not have the bureaucratic infrastructure in place to minimize waste and corruption.

The other reality is that returning money to the people through lower taxes or spending on social programs is not a high priority in China because its leaders do not have to run for re-election. In China, officials are held accountable to their superiors, not voters. Hence most officials are afraid to make a mistake and take the same bureaucratic road as their counterparts in America. They just want to make it to retirement without taking any risks that could cost them their job.

Thus, Chinese citizens who are unable to vote out their leaders or collect compensation from the courts express their rising anger in protests, riots, strikes and political demonstrations that are unnerving the Communist Party leadership. One must keep in mind that public demonstrations are not permitted in China. So when people do take to the streets at great personal risk, they do so because they want their leaders to notice and do something about it, or lose their “mandate from heaven.”

Millions of laid-off workers and Chinese investors in the local stock market who lost trillions of yuan ─ Shanghai was the worst performing market in 2008 ─ across China are protesting, smashing windows, offices, overturning police cars and scuffling with police. Even police have gotten into the act. Auxiliary officers in Hunan Province surrounded a Communist Party office in December 2008 to demand higher wages. Chinese investors in China’s collapsed market are also demanding an American-style bailout.