Could China’s Instability Threaten America?
By Jeff Lukens
China’s double-digit economic growth over the past
thirty years has been breathtaking. Growth has limits, however, and
China may soon be reaching them. With worldwide recession, and inflation
coming to the yuan, a slowdown in China’s growth is increasing probable.
If China experiences any let up in growth, the nation’s internal
stability becomes a concern. The modern western trait of rising
expectations has set in with the populace. By their sheer numbers, any
setback in the standard of living could ominously jeopardize the
nation’s political and economic structure -- and affect us as well.
Beijing has established, over the years, an integrated
economy with surrounding Asian nations equal in size to that of the United
States. They have the technological and financial advantages of a modern
economy, and with their huge population, the cost advantages of a developing
But China has problems too. Part of their insecurity
stems from a dependence on foreign sources for raw materials. China imports
about half its oil, for example, and the vast majority of that comes from
tankers that pass through the strategic chokepoint at Strait of Malacca near
Singapore. And to reach Africa or the Persian Gulf, they must cross a vast
Indian Ocean heavily patrolled by the U.S. and Indian warships.
And then there is the one-child policy adopted in the
1970s. The policy has resulted in an inherently unstable demographic of 125
men for every 100 women of childbearing age. Moreover, China is aging faster
than almost any country on Earth. By 2030, about the time China’s economy is
projected to surpass the U.S., their population will begin to decline.
A massive wealth disparity also exists between China’s
coastal populations and its poorer interior regions. With the vast majority
of China’s population living in the eastern-third of the country near the
coast, the other two-thirds of the country is relatively unpopulated.
About 17 million people annually migrate from the
country to the cities. Beijing is hoping to limit that flow by taxing and
shifting resources away from wealthier coastal regions and giving it to the
interior regions without meeting great resistance from either.
When economic growth inevitably slows, however,
conflicts will arise and competing factions could emerge with some calling
for a strong central government that imposes a heavy-handed order, and
others calling for a more free decentralized government. How this struggle
will play out is uncertain. In the end, China may remain formally united,
but its power could be distributed among its regions much as it was before
China’s immediate problem, however, is inflation. A
succession of wage increases has occurred this past year for factory
workers. That, along with a rise in commodity prices, could bring a
spiraling inflation where higher wages and prices feed off each other. The
threat of inflation is forcing their central bank to begin cooling the
economy. Beijing is already contemplating price controls for some consumer
staples, and particularly for food items. The Wall Street Journal recently
reported that China’s “consumer price index's spike to 4.4% on-year in
October was mostly due to a 10.1% on-year rise in food prices.”
By keeping the yuan artificially weak against other
currencies, Beijing may have allowed its economy to overheat, and has
contributed to trade imbalances and global recession. The fading value of
the euro has compounded the problem. In preventing the yuan from fully
appreciating, China has accumulated $2.6 trillion in foreign-currency
reserves, mostly in dollar-denominated assets.
Although Beijing has recently decided to allow the yuan
to strengthen, it has much further to go to reach fair value with the
dollar. Ending trade and monetary imbalances, and the global recession, is
unlikely unless the yuan is allowed to rise freely. Allowing the yuan to
rise, however, would slow China’s economy still further. Such a policy would
be mostly for the benefit of other nations, and is therefore very
History suggests that China will continue to act in its
own best interest by maintaining trade advantages. This, in turn, allows
them to keep their people employed, and to grow their economy and their
military. They have little for error. With 1.3 billion mouths to feed, and
food prices rising, no one knows when some chance incident might trigger
another Tiananmen Square type bloodletting, a Chinese selloff in the U.S.
Bond market, or a showdown over Taiwan.
We cannot assume Chinese and American interests are the
same. For policy makers in Washington, China's ravenous appetite for raw
materials and our growing indebtedness to them are worrisome. We must be
open to the possibility that our current approach is not working, and is
strengthening a regime that represses its people and threatens other
In a world of sovereign debt defaults, currency
devaluations and quantitative easing, China’s goal is to protect its
economy. In doing so, however, they could be destabilizing the world
economy, and causing an aggressive competition for resources. We too will
feel the economic effects of their actions. It is inescapable.
The United States must undoubtedly begin the difficult
process of reducing its budget and foreign trade deficits. So far, few in
Washington have shown a genuine will to address these issues. That must
change. With China’s inherent instability, a wise and measured policy
approach by Washington will be required for the good of both nations. No
easy answers exist for either country.