Just like Japan in the 90s, China's success story is over

China is unlikely to completely collapse. Yet the Chinese success story of the past quarter-century is over, just like the Japanese miracle ended abruptly in the 1990s. And as the economy slows, domestic oppression instensifies

President Xi Jinping
Michael Auslin
On 17 September 2015 12:26

During the financial crisis of 2008, China lauded itself for escaping contagion by the American financial meltdown. Now, however, China’s recent stock market collapse is infecting global equity markets, ushering in a period of almost unprecedented volatility.

But while the world focuses on the effects on Wall Street, the real story of the summer of 2015 is that China’s troubles are just beginning. The spillover effects likely will spread beyond China’s economy, even affecting politics and security -- that should be the main topic of conversation when Chinese president Xi Jinping visits President Obama in Washington this month.

It is easy for a political contender such as Donald Trump to score points by claiming that Beijing is “ripping us” by stealing US jobs and cheating through currency manipulation, and that “China would be in trouble” were he elected. But as in so much else, The Donald misses a much bigger story: We have hit “peak China.”

China is unlikely to completely collapse. Yet the Chinese success story of the past quarter-century is over, just like the Japanese miracle ended abruptly in the 1990s. Due simply to its size, China will remain one of the world’s largest economies for decades to come, and it will still be an indispensable part of the global supply chain and trading network.

But from political, diplomatic and economic perspectives, China faces risks that will test the skills of President Xi Jinping and his co-leaders, possibly threatening their political authority.

It is easy to focus on the precipitous drop in China’s stock markets since early summer, including that 11 percent drop in the Shanghai Composite index, leading to the Dow’s recent plunge. But even with the stock markets barely recovering, the bigger story is the dramatic slowdown in the Chinese overall economy -- from factory activity to export and import orders.

Economic growth supposedly rang in at 7 percent last year, but few experts believe the official numbers are accurate. Western business, such as automakers, are scaling back their production and sales in China. In response, Beijing has both reduced interest rates and pumped money into the economy, yet both tactics have failed to stem the financial drop or ignite growth.

The world needs to prepare for a China that grows far more slowly, thereby affecting everything from consumer goods to investment.

But in China, everything is political. A slowing economy is dangerous for the Communist Party, which is already in the midst of a steady and growing domestic crackdown on dissent, liberal forces, non-governmental organizations and lawyers. Xi’s anti-corruption campaign is widely seen as a tool to eliminate potential Party rivals, thus heightening tensions inside ruling circles.

Public dissatisfaction with the government spiked again in August after the massive chemical explosion in Tianjian. China’s repressive leadership stays in power in part because of its image as a competent technocracy. Should it lose legitimacy due to economic decline, China’s always-present domestic unrest could boil over, leading to even greater domestic repression, and an ever worsening security crisis at home.

The risk for the United States? An economically stagnant or politically unstable China will prove to be an unlikely cooperative partner abroad. Beijing has spent the past 20 years building its military, and is increasingly comfortable threatening and coercing its neighbors over territorial disputes.

In particular, it has hardened its position on contested island territory in the East and South China Seas. China has built nearly 3,000 acres of new islands in the South China Sea which, according to US sources, it is militarizing.

Is America prepared to deal with a China that may decide to divert attention from its failings at home by creating a regional crisis, or one that feels its future security is threatened thanks to its growing weakness, and chooses to lash out while it can?

America’s Asian security alliances and partnerships will demand a US response, but deterring Chinese aggression before it takes place is the only successful policy. Yet US policymakers have yet to consider how a weakened China might disrupt stability in Asia, thereby risking armed conflict and further economic instability.

President Obama needs to bring these issues to the forefront in his discussions with President Xi this month. The great threat the world faces is not a temporary stock market decline. It is that the world’s second-largest economy and militarily powerful nation is faltering, and no one is prepared for the effects.

Michael Auslin is a resident scholar and the director of Japan Studies at the American Enterprise Institute (AEI), where he specializes in Asian regional security and political issues. Before joining AEI, Auslin was an associate professor of history at Yale University. His articles can be read here

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