China Sings the Blues, We Might End up Singing Along

This post is the first in a series examining the effects and possible repercussions of the global economic slowdown on developing nations.  A look at the effects of declining oil prices on Latin populist governments is up next.

Despite being an intensely totalitarian country China boasts one of the world’s most dynamic and fastest growing economies.  China’s hybrid communist/capitalist structure has given it some very enviable economic advantages; however in this time of global recession this unique position makes it the country with the most to lose.  A prolonged recession in China will bring to the forefront three major problems with the potential to cause severe internal strife: a huge population of single unemployed men, a crisis of moral leadership in the Communist party, and insufficient cash reserves to provide for a huge unemployed urban population.  These problems individually would pose serious problems for China’s leadership but as a trio the results are catastrophic for China and for the rest of us as well.

Strict enforcement of the one child policy in China has led to the creation of a huge surplus of men hundreds of million strong.  Since there are no women for these men to marry, nor any other meaningful social or economic ties these men have been and will continue to be a destabilizing force in China.  In the past leaders dealt with their population surpluses by conscripting armies and fighting wars.  The modern world no longer allows war as a means of disposing of excess population for both moral and technological reasons.  If China’s leadership cannot find a way to integrate these men into society it may find itself dealing with a revolution fought by young men with nothing to lose; the worst kind of revolutionary.  Rapidly rising unemployment will only exacerbate the problem by swelling the ranks and increasing dissatisfaction.

Frustration felt by the marginalized elements of Chinese society is worsened by the fact that every level of the Communist party leadership in China is corrupt.  In the wake of China’s unbridled pursuit of capitalism corruption in government has become endemic.  The result is a breakdown in government credibility and stability that will only add fuel to the fire of discontent as China’s economic situation crumbles.

The easiest solution for China to economic problems would be an increase in benefits across the board for the unemployed coupled with government ownership of key industries.  This action would soften the blow for consumers and limit popular unrest.  Unfortunately this remedy requires large cash reserves, something China does not currently have; all its cash is tied up in U.S. securities.  By investing in U.S. Treasury Bills China pursued a financial path designed to provide for future security and stability, not the pressing current crisis.  The lack of liquidity and domestic spending power will severely hamper China’s ability to buy its way out of a recession.

The current problems facing China are severe and could lead to increased popular unrest; if the government responds in the typical tank and machine gun fashion it may lose control of the situation.  The time is now for China to make deep changes in the way it functions, namely in the adoption of governmental transparency and accountability (a fundamental shift in governance practices), a change in population control policies, and an investment of resources domestically rather than abroad.  These changes should be both endorsed and aggressively promoted by the U.S. government because if China fails, it could and probably would take the rest of the world down with it.