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Is China in Trouble?
#1
The Shanwei Shootings and China's Situation
By George Friedman

Last week, a group of Chinese villagers staged a demonstration against a wind-power project near Shanwei, a town in Guangdong province about 100 miles from Hong Kong. In the first incident, protesters blocked access to the site of the wind-power generation project. The next day, Dec. 6, demonstrators returned. According to Chinese official reports, they were led by three men -- Huang Xijun, Lin Hanru and Huang Xirang -- and were armed with knives, steel spears, sticks, dynamite and Molotov cocktails. Members of the local People's Armed Police fired tear gas at the crowd, hoping to break things up, but the three leaders rallied the crowd to continue what, depending on who was telling the story, was either a protest or attack. According to the description of events given by the Chinese government, the demonstrators started to throw explosives at the police as night fell. The police opened fire. Official reports said that three people were killed, eight wounded.

The protests in Shanwei had gone on for quite a while before coming to a head last week. The land for the power project was confiscated a few years ago. The farmers who worked the land were never compensated for their dislocation. They formally petitioned for their money in 2004 but were ignored. Public demonstrations began in August 2005, continuing intermittently. With no compensation forthcoming, the protests escalated and then exploded, with last week's incident marking the first reported shootings of demonstrators in China by official security forces since Tiananmen Square in 1989.

The shooting is new. The pattern is not. There has been intensifying unrest in China over the past year -- frequently, as in this case, over issues that have been simmering for years. This has been particularly true for peasants who have seen their land confiscated by the government for industrial projects. Money is issued to local officials by state-owned enterprises and other investment groups to cover the cost of the land. That money passes through the regional and local bureaucracies. By the time it should reach the owners, there often is nothing left; it has been stolen by officials at various levels. No one denies the farmers' claims to the land, but no one acts to compensate them. The laborers go from being small farmers to being destitute.

This is a critical process at the heart of Chinese industrialization. The purchase of land, including forced sale, is considered necessary for Chinese economic development. However, Chinese economic development is driven as much by corruption as by land. The government in Beijing has no particular desire to see the farmers dispossessed; on the contrary, the money is made available for delivery to the farmers. But the diversion of funds is hard-wired into the process. It is one of the primary means for capital formation in China.

One of the paths to entrepreneurship in China is to become a government official who can use one's public office for personal savings and networking -- accumulating enough money and useful contacts to move into business later. With massive expropriations of land over the past decade designed to facilitate economic growth, the opportunities -- and compulsion -- to steal money intended for farmers is powerful. In order to hold onto his job, a government official must maintain a system of relationships with superiors, colleagues and subordinates. These relationships are based on money. If the official doesn't find the money to hold his place in the bureaucracy, he will lose it. Therefore, the diversion of funds is built into the system.

The Chinese government wants it both ways. On the one hand, it does not want unrest among farmers. On the other hand, the Communist Party elite in Beijing live by patronage. They have risen through the system because of the web of relationships that makes Chinese industrialization possible. They can, in very specific cases, take action against cases of corruption. However, a systematic attack on the causes of corruption is impossible, without a systematic attack on their own infrastructure.

This is particularly true in rapidly developing provinces like Guangdong. The interface between the new economy and the old has become a battlefield. The old economy was land-based Mao created a peasant economy that was overlaid by attempts to industrialize. The new economy regards land as an input into the industrial machine. However, given the nature of the Chinese political system, the farmers are not simply bought out -- they are forced off the land. And that can lead to social explosions.





The recent events in Shanwei are unique only in that they resulted in gunfire and death, and because they were brought to light by the anti-Communist media. After these reports were picked up and widely circulated by the international media, the government in Beijing acknowledged what had occurred, adding details that appeared to show that the demonstrators forced the police into shooting. But later, the government announced that the head of the police unit involved had been arrested -- which seems to imply that the story as originally told by the Chinese wasn't altogether accurate. Why arrest the cop if explosives were being hurled at police?

The specifics of what happened, of course, have no geopolitical consequence. What is important is that tensions in China have been rising steadily. Thousands of demonstrations (74,000, according to figures released last year by the government) have taken place -- some reportedly violent, if not fatal. In one case earlier this year, residents protesting corruption related to land seizures took control of their town, forcing the police out. The Chinese government appeared to capitulate to the demonstrators, giving into their demands -- but weeks later, those who had participated in the rising were quietly arrested. In another incident, which also turned deadly, brute squads believed to have been hired by local officials and businesses attacked protesters. There are numerous other examples to draw from.

Beneath the surface, a number of things are taking place. The Chinese economy has been growing at a frantic pace. This is not necessarily because the economy is so healthy, nor because many of these industrial projects make economic sense. In fact, the government in Beijing has been very clear that the new projects frequently don't make a great deal of economic sense, and has been trying to curb them (though it does not necessarily command obedience in every case from provincial or local governments). On the other hand, China needs to run very hard to stay in place. Within what we will call the entrepreneurial bureaucracy -- with pyramiding, undercapitalized, highly leveraged projects being piled one on top of the other -- new investment projects are needed in order to generate cash that stabilizes older, failing projects. Slowing down and consolidating is not easy when there are bank loans coming due and when money has to be spread around in order to maintain one's position in the system.

That means that aggressive economic growth is needed. It also means that massive social dislocation -- including theft of land -- is embedded in the Chinese system. The flashpoint is the interface between the rapidly spreading industrial plants and the farmers who own the land. The bureaucratic entrepreneurs need not only the land, but also the money that legally is due to the farmers.

China is a mass of dispossessed farmers, urban workers forced into unemployment by the failure of state-owned enterprises, and party officials who are urgently working to cash in on their position. It is a country where the banking system has been saved from collapse by spinning off bad debts -- at least $600 billion worth, or nearly half the GDP of China -- into holding companies. This maneuver cleaned up the banks' books and allowed Western banks to purchase shares in them, shoring them up. But it also left a huge amount of debt that is owed internally to people who will never see the funds. Imagine the U.S. savings-and-loan scandal growing to a size that was nearly half of the national GDP. As it happened, in the United States the federal government swallowed a great deal of the S&L bad loans -- but in China, these bad loans would just about wipe out the country's currency reserves, assuming that the numbers provided by the government are valid.

Under such circumstances, it is no surprise that Chinese money is leaving the country, flowing into the safe havens of U.S. T-Bills or offshore mineral deposits. Moreover, it is not clear that China's economy is continuing to grow. China's imports of oil have topped out and, by some reports, have started to decline -- yet the Chinese are continuing to report unabated growth rates. How can the economy be growing rapidly while oil imports decline? The country lacks sufficient energy reserves to fuel such growth, nor can that level of growth be coming from service industries. At any rate, growth rates do not by themselves connote economic health. The rate of return on capital is the ultimate measure of economic success. Anyone prepared to lose money can generate rapid revenue growth. And anyone facing cash-flow crises due to debt burden knows how easy it is to slip into revenue-growth obsession. The Chinese certainly have.

There is, therefore, a tremendous tension within China's new economy. The root problem is simple Capital allocation has been driven by political and social considerations more than by economic ones. Who gets loans, and at what rates, frequently has been decided by the borrower's relation to the bureaucracy, not by the economic merits of the case. As a result, China, as a nation, has made terrible investments and is trying to make up for it with rapid growth. That is where things get difficult As before with Japan and East Asia, the economy is thrown into a frenzy of growth in efforts to stabilize the system, but that growth throws off cash that cannot easily be capitalized and therefore is invested abroad. Meanwhile, bad debts -- stemming from continued investment into nonviable or unprofitable businesses, for social or political reasons -- surge, and the government tries to come up with ways to shuffle the debt around. In other words, the origin of the problem is simple -- but the evolution of the problem becomes dizzyingly complex.

This leads to stresses within the advanced economic sector. In China's case, these manifest as competition between different political factions for access to the funds needed to maintain their enterprises. But that is nothing compared to the tension between the new economy and farmers and the unemployed. As the system tries to stabilize itself, it seeks both to grow and to become more efficient. As it grows, the farmers are forced to give up their land. And as it seeks efficiency, industrial workers lose their jobs.

This is an explosive mix in any country, but particularly so in China, which has a tradition of revolution and unrest. The idea that the farmers will simply walk away from their land or that the unemployed will just head back to the countryside is simplistic. There are massive social movements in play that combine the two most powerful forces in China workers and peasants. Mao did a lot of work with these two groups. Their interests are now converging. The decisions of the bureaucratic entrepreneurs are now causing serious pain, which is becoming evident in increasing social unrest. At Shanwei, that unrest broke into the open, complete with casualties.

The important thing to note is that both the quantity and intensity of these confrontations is increasing. While the Western media focus on the outer shell of China's economic growth -- the side that is visible in Western hotels throughout major cities -- the Chinese masses are experiencing simultaneously both the costs of industrialization and the costs of economic failure. The sum of this equation is unrest. The question is how far the unrest will go.

At the moment, there does not appear to be any national organization that speaks for the farmers or unemployed workers. The risings are local, driven by particular issues, and are not coordinated on any national scale. The one group that tried to create a national resistance, Falun Gong, has been marginalized by the Chinese government. China's security forces are capable, growing and effective. They have prevented the emergence of any nationalized opposition thus far.

At the same time, the growth and intensification of unrest is there for anyone to exploit. It won't go away, because the underlying economic processes cannot readily be brought under control. In China, as elsewhere, the leadership cadre of any mass movement has been made up of intellectuals. But between Tiananmen Square and jobs in Westernized industries, the Chinese intellectuals have been either cowed or hired. China is now working hard to keep these flashpoint issues local and to placate localities that reach the boiling point -- at least until later, when arrests can be made. That is what they are doing in Shanwei. The process is working. But as the economy continues to simultaneously grow and worsen, the social unrest will have to spread.

The discussion about China used to be about "hard" and "soft" landings -- terms that were confined to economics. The events in Shanwei raise the same question in another domain, the political. Police shooting down demonstrators is not an everyday event in China or anywhere else. But it has happened, and this event didn't just come from nowhere. The question of soft and hard landings now must be considered more literally than before.

And in China, hard landings over the past couple of centuries have been bloody affairs indeed.
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