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Political Risk In China:Elites, Society and the International

System

Dr. David ZweigDirector, Center on China’s Transnational Relations

Workshop Co-hosted with:Global Business Center

Michael G. Foster School of Business University of Washington

at:The Penthouse, Oriental Overseas Containers Limited

www.cctr.ust.hk20 September 2011

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Where does political risk come from?

1. Elite political conflict and succession affect public policy and resource allocations;

2. Rapid economic growth threatens stability: - Inequality, corruption and social stress

increase social activism and societal demands.

3. Political challenges to the regime, partly due to lack of channels for meaningful participation

4. Financial difficulties, housing bubble, inflation

5. Challenges from the international system

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Elite Conflicts Can Breed Instability • Leaders fight over ideology, policy, power.• In the past, intense power struggles among factions

affected policy, social stability and economic development

• 1990s saw limited elite conflict after 1992-93, except over WTO entry.

Shared Values Breed Stability• Leadership since mid-1990s composed of moderate

reformers, with limited ideological conflict, consensus on economic reform, avoid political reform.

• Today, power struggles seem much less threatening.

• At 17th Party Congress succession seemed clear but now jockeying for 18th CCP Congress in 2012.

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New Leaders Make a Difference!

Almost every leadership change in any communist country since 1917 has been followed by budgetary reallocations and policy shifts under new teams, just like elections in democracies.

• affect growth rates, regional development, consumption versus savings, attitude towards of FDI, attitude towards China’s role in the world, role of private versus public sector within China.

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Recent challenges to Foreign Investors

• James McGregor, senior counselor for APCO Worldwide,

• in over two decades in China, he had seldom seen the foreign business community "more angry and disillusioned than it is today".

• "Banquet-table chatter now dominated by swapping tales of arrogant and insolent Chinese bureaucrats and business partners.“ Complaints include:

• inconsistent and non-transparent enforcement of regulations,

• rampant intellectual-property theft, • state penetration of multinationals through union

and Communist Party organisations, • blatant market impediments through rigged product

standards and testing, • politicised courts and agencies that almost always

favour local companies, • creative and selective enforcement of WTO

requirements ...

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2. Rapid Growth brings potential for

political and socialunrest

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China Needs Rapid Growth— but Growth Breeds Risks

• To create new jobs for 7-9 million people/yr, China must maintain 8%/ yr. growth.

Major economic bottlenecks 1. Pollution – air, water2. water shortages3. energy shortages4. Traffic congestion5. resource shortages6. inefficient capital markets and allocations7. banking crisis could re-emerge8. Housing costs now beyond middle class.

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“Externalities of development”• Rapid development on so many fronts within

context of weak laws and regulations creates massive economic and social problems which bring about social mobilizationsocial mobilization

• Most rapid urbanization in world history with poorly regulated land laws massive land grabs and fights with peasants.

• Developers who do not complete their projects create animosity among apartment owners who get organized.

• Environmental degradation with no compensation and weak environmental laws RIOTS.

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Corruption and Rising Inequality

Local governments still control resource allocations, easy to engage in corruption.

Mainland economist Hu Angang – 14-16% of GDP based on corruption

Local cases in Chongqing, 800,000 RMB, and Guangzhou.

Head of Food and Drug Administration executed for corruption.

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“The Original Sin”In 2007, big debate over “original

sin”—how people got their “original pot of gold”

many billionaires got started in mid-1980s, during first round of administrative cutbacks and “dual price system” – arbitrage on planned and market prices.

SMEs privatized in 1998-2001, when managers and party secretaries became medium-sized capitalists,

“Bureaucratic capitalist class” links power and wealth.

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Urban-Rural Income Gap, 1978-2005

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Regional InequalityChina’s regional inequality among world’s highest.

Beijing controlled by pro-coastal forces after 1978 (Jiang Zemin, Zhu Rongji and Shanghai Faction)— driving pro-coast policies for 20 years.

Coastal areas (and border regions) had export-oriented economy, comparative advantage, while inland areas had “comparative disadvantage” of controlled resource prices.

“spatial deregulation” of planned economy occurred first in coastal areas which got benefits of “first mover.”

massive migrant population of 120 million people, where many move to coastal areas for work.

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Regional Inequality:Gross Value of Industrial Output

Urban Areas Only1

Region 1984 1985 1988 1989 1990 1991 1994

East 60.8 61.2 62.0 62.4 62.8 64.0 70.0 14 Coastal Cities 25.0 24.6 19.7 19.1 18.7 18.5 14.5

4 S.E.Z.s 2 0.9 1.1 1.7 1.8 2.1 2.5 2.8Central 27.5 26.8 26.9 26.4 26.0 25.1 20.9West 11.7 12.0 11.2 11.1 11.2 10.9 9.1

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Calculated from Statistical Bureau, Statistical Yearbook of China's Cities , assorted years 1. Excludes rural areas of a municipality.2. Hainan Province not included as SEZ in this data.

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Inter-personal Inequality New inequality due to growth of private sector,

urban wealthy class, weak tax system, and layoff of state workers.

Weak safety net, so CCP merciless to Falun Gong after 1999 protest.

Decline of rural public health system since end of Mao era, now being rebuilt under Hu/Wen team.

Hu Jintao and Wen Jiabao’s agenda of social justice to maintain “harmonious society.”

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Countries Gini Coefficient

Low inequality  

     Hungary (2002) 0.24

     Taiwan (2000) 0.24

     Sweden (2000) 0.25

Moderately low inequality  

     Canada (2000) 0.33

     Vietnam (2002) 0.33

     Russian Federation (2002) 0.32

     India (2000) 0.33

Moderately high inequality  

     Singapore (1998) 0.43

     Cameroon (2001) 0.45

     Costa Rica (2000) 0.45

     CHINA (2002) 0.45-0.47

     Philippines (2000) 0.46

     Malaysia (1997) 0.49

High inequality  

     Brazil (2001) 0.59

     South Africa (2000) 0.58

     Haiti (2001) 0.68

Comparative Inequality: Gini Coefficients

Source:  China:  Gustafsson, Li and Sicular, forthcoming (208).  Other countries:  World Bank World Development Report, 2006. 

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Is there a volcano?

• Whyte and Mao--Chinese citizens not as upset about size and unfairness of current inequalities as many analysts and Chinese government officials assume.

• Many Chinese see inequalities as excessive, but international comparison shows China not among highest in this concern.

• Chinese citizens more than many others see merit-based attributes as main reason people are poor or rich.

• China’s most disadvantaged citizens, farmers, are not the angriest about current patterns of inequality.

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ItemsChina2004

Russia1996

Hungary1996

Czech R.1996

U.S.1991

G. Britain1991

W. Germ.1991

Japan1991

Panel A: National Inequality Too Large

National income gap 71.7 86.3 94.9 78.6 65.2 75 70.8 72.6

Panel B: Why Some People are Poor

Lack of ability 61.3 28.0 39.5 33.5 35.2 32.8 30.1 25.7

Bad luck 26.9 28.4 30.2 21.6 15.2 22.1 23.0 24.6

Loose morals 31.2 74.0 69.3 60.0 41.7 33.4 40.3 63.1

Lack of effort 54.0 39.1 35.4 43.2 47.8 34.9 35.8 62.0

Unequal opportunity 27.5 61.2 56.4 36.1 33.4 36.0 41.1 23.1

Unfair economic system 21.0 72.6 73.6 31.9 44.9 48.1 32.0 36.2

Panel C: Why Some People are Rich

Ability and talent 69.5 48.3 53.1 59.4 59.7 53.9 64.2 65.1

Dishonesty 17.4 74.1 75.7 71.6 42.9 35.5 34.0 27.8

Hard work 61.8 38.1 37.3 50.9 66.2 60.2 57.6 48.4

Personal connections 60.0 84.1 83.5 78.8 75.0 76.3 75.1 49.3

Better oportunities 45.3 55.3 75.2 56.4 62.5 64.7 68.1 54.4

Unfair econsystem 26.0 72.7 61.6 56.2 39.4 44.5 25.1 53.0

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Hard Work Always Rewarded(strongly agree + agree (%))

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Property Bubble Underway• Very serious property bubble underway as

China is building 130 downtown London’s.• Downtown centers being knocked down and

rebuilt, but many vacancies;• Government and developers collaborate—

government moves people out;• District Party Secretary in Wuxi says that she

does not need to buy the land in town center, “It’s my land!”

• Property developers pay bribes of flats to politicians.

• NO property tax, so profit from building and bank loans, can hold empty flats a long time.

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POLITICAL ACTIVISM: Challenging the State

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Is Chinese Society Passive?• Assumption that Chinese political culture

is passive—deference to authority under Confucianism.

• Chinese accept a great deal of oppression before they react.

• But data suggest that Chinese people have democratic consciousness and Chinese society not passive.

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• Cross-National Tolerance for Speaking at

Meetings

- as education increases, the gap

among nations decreases

Source: Andrew J. Nathan and Tianjian Shi, in “Requisites of Democracy,” Daedalus.

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Question: “If villagers disagree with local policy, they have the right to petition to upper levels.”

Completely agree 41.1%

Relatively agree 40.3%

Not so agree 6.4%

Totally disagree 2.4%

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Rising “Rights Consciousness”

• Society awakening to its rights; corruption, inequality, and environmental degradation lead to extensive social unrest.

• Apartment owners form associations to fight developers.• Number of reported protests by security bureaus:

55,000 in 200374,000 in 2004 86,000 in 2005 125,000 in 2009

• One protest breaks out every 3 minutes, 250 underway at any one time!

• But China is a VERY big country.

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Protests as Major Form of Participation • Few institutions can protect interests— weak

courts protests, strikes, get attention of press is major strategy to resolve grievances.

• In one community outside Nanjing, I found three groups engaged in protest over land confiscation.

• Land as major source of unrest, where locals feel that they must make trouble if they want to get attention and some resolution.

• No elections for turning out corrupt officials.• 999/1000 petitions FAIL!• People who go to Beijing to protest get

arrested.

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“Flexible Authoritarianism”

China able to export some of its unemployed:

70,000 redundant workers from Northeast of China working illegally in Paris.

Perhaps a million Chinese working in AfricaImportant to remember that this society laid

off 35 million urban workers and 30 million rural factory workers and 2 million bureaucrats between 1995-2000 without any serious challenge to the regime. Remarkable!

widespread

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Figure 1: Laid-off and Unemployed Workers

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Registered Unemployed

Newly Laid-off During Year

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Controlling the Media

• “Best indicator of a newspaper’s quality in China is the frequency with which the editor’s get fired” -- David Zweig

• 100,00 Internet police• Ability to establish “great firewall”• Chasing out of Google, despite great

popularity of Google among post-80s generation.

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Is China a Fragile State?

Head of USAID called China a “fragile state” close to or in crisis:

• model of 75 variables shows China to be

“somewhat unstable”

• Professor who runs the model said:

“state failure remote possibility in China at present, but gradual transition to democracy necessary to safeguard stability

“At the moment, I don’t think there will be a massive outbreak of violence or a collapse of the government. But there is a sense of

fragility during this transition. It could go either way.”

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Sources of Regime Support

• Officials who privatized SOES in 1998 have become new capitalist class.

• White collar class, homeowners, car owners, enjoying life;

• 1998 housing reform created millions of property owners;

• Continued economic growth strengthens private and foreign invested sector; creates new jobs in private sector. Widespread rural protests unlikely to link up for major assault on regime—this is CCP’s greatest worry.

Without a unifying ideology, such as Falun Gong, hard to organize massive protests.

33Source: Kellee S. Tsai, Capitalism without Democracy (Cornell University Press, 2007), p. 74

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3. International Forces:

China and her Neighbours

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Trade Dependency and Risks of Global Economic Downturn

• Need to find many new jobs and turn economy inward—but overall China handled the crisis exceedingly well.

• CCP legitimacy highly dependent on economic growth.

• Investment as share of economic growth declining since 2000.

• Highly dependent on exports for economic growth since early 2002.

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Sources of Growth (Demand)

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Net Exports Investment Government Private

Source: Barbara Stallings, “China’s Economic Relations with Developing Countries,” Brown University, December 12, 2007, unpublished paper.

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Can China continue to Export?

• 85% of Chinese firms “going overseas” say main reason is search for overseas markets (World Bank).

• 41% are exporting excess domestic capacity.

• But labour unrest increasing, forcing slary increases which hurts China’s comparative advantage in exports.

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Senkaku (Diaoyutai) Islands—who owns them? – nationalists in both countries trigger crises.

Natural gas under East China Sea — Japanese Defense Agency in Dec. 2004 publicized three scenarios for war with China, one based on resource conflict in East China Sea.

Regular confrontations between Japanese Defence Force and Chinese PLAN

Japanese fear that China is drilling in its own EEZ but gas is from Japanese zone.

Tough line would be popular in Beijing among the general population, though leadership seeks better ties.

several confrontations in East China Sea between Japan and China

Sino-Japanese Competition in East China Sea

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Views of Shenzhen Students on Energy Ties with Japan

1 (Extremely cooperative)

2 3 4 5 (Very hard-line)

What position do you think China should adopt towards Japan in their discussions on the oil and gas field in East

China Sea?

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What position do you think China should adopt towards Japan in their discussions on the oil and gas field in East China Sea?

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East China Sea Dispute

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Taiwan Chance of confrontation decreased dramatically since

Ma Ying-jeou became president in May 2008.Very worrisome period for China from March 2008

election till May 2008 inauguration, as they feared that Chen Shui-bian might make trouble.

Ma seeks to sign peace treaty, as proposed by Hu Jintao, who has enlightened policy on Taiwan, compared to Jiang Zemin.

Agreed on economic cooperation agreement.Number of mainland tourists well below projected

numbers.U.S. arms sales to Taiwan necessary to protect Ma from

30% of “deep green” Taiwanese who want independence.Mainland must help him, but have not done much yet.

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Korean PeninsulaDPRK collapse threatened China’s plans for

growth more than nuclear DPRK, but China feels pressure to solve the problem and keep Korean peninsula denuclearized.

Events evolve on monthly basis, with most recent crisis being over sinking of ROK ship by DPRK.

Soft-line from ROK did not succeed in ending nuclear crisis, only in pacifying cross border conflicts.

DPRK has a bomb and may develop capability to deliver it.

DPRK has threaten to restart fuel processing.

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South China Sea• The issue that refuses to go away.• China’s parliament passed a law in 1992

claiming all of the South China Sea as Chinese territory.

• China agreed to “Code of Conduct” in 1995, and seemed to abide by it till recently.

• Most of ASEAN countries have some claims• Big problems with Vietnam and the

Philippines• China’s submarine fleet much stronger,

has asserted its position more forcefully.• Quietly, ASEAN states very worried about

China’s rising power, want US to stay engaged.

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Final Overview• Moderate Risk of Nationwide Instability• Greater Risks of financial instability• Environmental degradation major challenge• Energy and water shortages building• slowdown in the economy, could contribute

to social unrest• less hospitable environment for FDI• Local government interference persists and

great concerns in Beijing that the Central government is losing control over provinces.

• Limited movement towards democracy.• Some risks due to resource needs and

regional conflicts.