As China Flexes Muscle, Obama Frets Over Rival’s Weakness

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Passengers walk along a platform to board a China Railways high speed train at the Beijing South Railway Station in Beijing.

China is tailgating Japanese warplanes, playing chicken with Vietnamese ships and questioning America’s toughness. Yet it isn’t Chinese strength that most worries President Barack Obama, it’s Chinese fragility.

As China’s economy grows at its slowest pace in 24 years, the country’s domestic strains are drawing increased attention. While Americans stew over the prospect of being eclipsed by a new superpower, their president frets about instability in the world’s second-largest economy.

“We welcome China’s peaceful rise,” Obama said in a recent NPR interview. “In many ways, it would be a bigger national security problem for us if China started falling apart at the seams.”

Treating China's Achy Economy

Though no one expects that to happen any time soon -- if ever -- Chinese President Xi Jinping confronts an array of potential triggers for unrest. After more than three decades of growth that has raised per capita income to more than 17 times its 1978 level, China’s breakneck change is only intensifying.

“China is undertaking massive transformations that are necessary for modern society, but in every case are socially destabilizing,” said Kenneth Lieberthal, who handled Asian affairs in President Bill Clinton’s White House. “And they’re doing every one of them at a pace, scope and scale no country has ever tried before.”

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A banner that reads "We love Vietnam, protect your bowl of rice," hangs in front of a vandalized Mega Step Electronics (Vietnam) Co. factory following anti-China protests at the Vietnam-Singapore Industrial Park in Thuan An, Binh Duong province, Vietnam. Close

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A banner that reads "We love Vietnam, protect your bowl of rice," hangs in front of a vandalized Mega Step Electronics (Vietnam) Co. factory following anti-China protests at the Vietnam-Singapore Industrial Park in Thuan An, Binh Duong province, Vietnam.

High Stakes

The U.S. has a great deal riding on the outcome. China is the single largest holder of U.S. debt with $1.3 trillion in Treasury securities, and Sino-U.S. trade last year topped $562 billion, up 38 percent from five years earlier. In an extreme scenario, major turmoil could spark massive refugee flows or even endanger control of China’s estimated 250 nuclear warheads, said Lieberthal, a senior fellow at the Brookings Institution.

“That’s not a future you want to contemplate,” he said.

Most analysts don’t anticipate China facing such a situation. The country’s power and prosperity seem to expand by the day and are at relative heights last witnessed perhaps two centuries ago.

Awareness of China’s weak spots nonetheless shapes U.S. policy, said, said Ely Ratner, former lead political officer on the State Department’s China desk. The U.S. cooperates with China on developing clean energy, equipping a sometimes-rival to meet its domestic goals. And while irritating Chinese leaders by talking about human rights, the U.S. stops short of backing direct challenges to Communist Party rule.

Photographer: Brent Lewin/Bloomberg

China’s property industry, which Societe Generale SA calls the biggest downside risk to the nation’s economy, faces a surplus of empty units amid falling prices. Close

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China’s property industry, which Societe Generale SA calls the biggest downside risk to the nation’s economy, faces a surplus of empty units amid falling prices.

“The U.S. very much wants to support China’s stability and economic growth,” said Ratner, a senior fellow at the Center for a New American Security. “We don’t engage in certain activities that would undermine their economic and political stability, in part because it wouldn’t be in our interest.”

U.S.-China Meeting

The cooperative dimension of the relationship will be on display July 9-10 during the next meeting of the Strategic & Economic Dialogue. U.S. Treasury Secretary Jacob Lew and Secretary of State John Kerry and Chinese Vice Premier Wang Yang and State Councilor Yang Jiechi will be co-chairmen.

As U.S. officials arrive in Beijing for the talks, forces unleashed by China’s pell-mell modernization present new challenges. More than 1 million people each month are migrating from farms to cities, leaving behind everything they know for an uncertain future.

Since 2004, China’s urban numbers have grown by 200 million people, akin to the population of Brazil, and the government plans to shift more people to the cities. By 2030, China will have 1 billion city-dwellers, up from 731 million today, according to the World Bank.

Implicit Bargain

While the movement from rural to urban areas generally increases income, it’s socially destabilizing and alienating, said Lieberthal.

Since the 1989 Tiananmen Square protests, China’s Communist Party has preserved social stability with a mixture of economic growth and authoritarian muscle. The foundation of public order is an implicit bargain: The party retains its monopoly on power in return for providing an ever-better standard of living.

That bargain is now under pressure. Environmental damage -- air pollution that a government adviser this year labeled “unbearable” along with water shortages -- undercuts the notion that life is improving. In the eastern city of Zhongtai, 60 people were arrested last month after protests against a proposed waste incinerator turned violent with police and private cars overturned, according to state-run People’s Daily.

The government is engaged in a transition to a new economic model, which will require a downshift to slower, more sustainable growth than the 10 percent annual average between 2005 and 2011.

Slowing Growth

“A lot of the stability in China is growth-dependent, so the Communist Party’s legitimacy base is rather narrow,” said Yasheng Huang, founder of the China Lab at the Massachusetts Institute of Technology. “The probability of instability increases fairly substantially when growth slows down.”

In the first quarter, the economy eased to a 7.4 percent annual growth pace en route to 5 percent by 2026, according to the State Council’s Development Research Center and the World Bank. That comes after a three-decade expansion that lifted some boats higher than others: China’s rich-poor gap is wider than in the U.S., according to a recent University of Michigan study.

Economic reforms aimed at giving market forces a decisive role in allocating resources will make losers of individuals and institutions that have profited from the current system. Allowing prices of labor, capital and energy to rise may “challenge the commitment of top leaders to the reform process,” wrote economist Barry Naughton, a China specialist at the University of California, San Diego.

Credit Dependence

The task is complicated by the need to wean the economy from its dependence on credit. Since the 2008 financial crisis, China’s debt has risen to 245 percent of gross domestic product, according to a June 12 report by Standard Chartered Bank.

China’s leaders have their own worries. Xi has unleashed an anti-corruption drive targeting high-ranking party and military officials in what may be the broadest crackdown in the party’s history.

The latest victim of the corruption purge is Liu Tienan, former deputy director of the economic planning ministry, whom prosecutors said will be tried on charges of accepting bribes. Liu, 59, accepted what prosecutors said were “extremely large” payments.

Still, the party has managed to hold together a country of 1.3 billion people journeying from deprivation to prosperity. Martin Whyte, a Harvard University sociologist, compared survey data on Chinese attitudes in 2009 and 2004 and found no evidence of what he called the “social volcano” view.

Dismissing U.S.

“Popular acceptance of current inequalities remains widespread, despite continuing increases in China’s income gaps,” he concluded.

China’s wealth has translated into a stronger military and more assertive regional posture. Chinese fighter jets have buzzed Japanese surveillance planes over disputed East China Sea islands while Chinese naval vessels have jostled Vietnamese boats in waters that both sides claim in the South China Sea.

Earlier this month, Chinese bravado bubbled over at a regional security conference in Singapore. Major General Zhu Chenghu, a professor at China’s National Defense University, warned U.S. allies in Asia not to count on a strong American presence in the region, likening the U.S. response to the Ukraine crisis to “erectile dysfunction.”

Soothing Suspicions

Rather than indicating genuine concern over China’s stability, Obama’s comments may reflect an effort to soothe Chinese leaders’ suspicions about the president’s decision to devote more attention to Asia, said Andrew Nathan, a China specialist at Columbia University in New York.

Chinese leaders view Obama’s so-called “rebalance” as a sign he wants to prevent the emergence of a rival superpower. By underscoring the American stake in a unified, prosperous China, Obama may be trying to ease such worries.

China’s leaders are aware of their vulnerabilities. Though the government stopped releasing official protest tallies in 2005, it’s clear that public disturbances happen daily. Sun Liping, a professor at Tsinghua University, estimated three years ago that there had been 180,000 protests, strikes, riots and other “mass incidents” in 2010, twice as many as in 2006.

“They face some very serious social order challenges,” said Murray Scot Tanner, senior research scientist in the China Studies Division of CNA Corp., a research group in Arlington, Virginia. “And some of them appear to be getting worse.”

To contact the reporter on this story: David J. Lynch in Washington at dlynch27@bloomberg.net

To contact the editors responsible for this story: Steven Komarow at skomarow1@bloomberg.net Mark McQuillan

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