Another Indonesia?

A distinguished Sinologist wonders if Asia's financial crisis could turn China into another Indonesia.

By Orville Schell

The most important problems confronting China today center around the economic crisis in Asia. Until recently, China has remained almost miraculously untouched by this financial implosion. But with most of Asia in serious economic disassembly, how can China be expected to survive alone and untouched? Especially after what happened in Indonesia last month, one can't help but wonder about the People's Republic. If Indonesia's "New Order" could evanesce so suddenly, why not Beijing's vaunted "socialism with Chinese characteristics"? And if former president Suharto could be forced to step down by popular pressure, why not legislative leader Li Peng, who declared martial law in 1989, or possibly even President Jiang Zemin?

With a Deng Xiaoping portrait hanging on the wall and the TV showing the U.S. movie, "Top Gun," a villager cleans her house, built before Deng's economic reforms. (Vincent Yu/AP)

After all, China's political and economic systems share many of the characteristics that led Indonesia over the edge. It has experienced the same kind of go-go development that created the Indonesian "economic miracle." It is ruled by an autocracy that regularly violates its people's rights. Its economic system is opaque, nepotistic and steeped in cronyism and corruption. Its working class is dirt poor and plagued by rising unemployment. And its banking system and financial markets are poorly developed, inadequately regulated and wantonly manipulated by the elite.

Until now, one of the world's very largest economies has managed to elude the Asian maelstrom because it has enjoyed a basically strong economic position in relation to the rest of the world. Enough of China's old closed Maoist system has remained intact to insulate it from the kinds of unpredictable and dangerous flows of global capital that have created booms and busts elsewhere. Instead of being seduced like other Asian nations into borrowing large amounts of short-term capital from overseas banks, China has more prudently sought direct long-term investment. As a result, it has not been subject to the kinds of repayment crunches now facing its neighbors. And because China's financial markets are still small and poorly developed, large amounts of foreign capital have not been able to move quickly in and out of the country via publicly traded equities. Thus, panicked foreign (and domestic) investors who have been fleeing other Asian markets have not had the same destabilizing effect on China. What is more, because China's currency, the renminbi, has not yet been made convertible, international speculators have not been able to "attack" it as they have in Indonesia, Malaysia and Thailand. Finally, China's top leadership now appears to be relatively stable, and on the verge of gaining new legitimacy in the eyes of its people as a result of Bill Clinton's visit.

But this is not to say that all is well. Wariness about Asia's economic future has started to dry up foreign investment in China. This, in turn, has begun to squeeze China's growth rate, from 8.8 percent in 1997 to around 7 percent now. With other Asian currencies in sharp decline, it is becoming ever more difficult for Chinese exports--an important engine not only of growth, but of technology transfer--to continue competing overseas. Exports fell last month for the first time in two years. If this trend continues, Beijing's leaders will feel increasing pressure to devalue. That, in turn, could trigger a new round of competitive devaluations with dire global results. This raises the question of whether Clinton should be lavishing all of his nine days in the region on one country. Other nations, notably Japan and South Korea, desperately need to be rallied.

Should the Asian crisis continue to drive down growth rates, it will be more difficult for China to provide jobs for the growing ranks of its unemployed. At 6.5 percent, the official unemployment rate is at its highest since 1949. This figure does not account for the 12 million to 15 million Chinese who enter the job market each year, the millions of state workers who have already been "sidelined" at reduced salaries or the "floating population" of more than 100 million peasants who have left their villages to seek jobs in the cities. If this underclass becomes disenfranchised, it could easily become an almost inexhaustible wellspring of lumpen protest, examples of which have already begun to erupt across China.

There's more. Tens of millions of older workers are slated to lose their jobs over the next few years as money-losing state-owned enterprises are closed by the government. Only if the state-owned banks continue to be used as giant cash registers can these antiquated and unproductive industries be kept solvent and angry workers kept off the streets. This profligate and unproductive "loan" program has put China's banks in peril. If ordinary depositors lose confidence and begin withdrawing their savings as they did in Indonesia, China could face chaos. Already, angry workers protesting in Manchuria and peasants in Sichuan are causing officials to worry about the future.

The Indonesian example suggests that people will tolerate many indignities from an autocratic state as long as the economy is expanding. Remaining apolitical seems a reasonable price to pay for prosperity. But when growth begins to falter, things have a way of rapidly getting political. Leaders who have been around a long time suddenly seem dispensable. And political structures that once seemed to be fixed parts of the landscape can collapse with breathtaking speed.

— Schell, a longtime observer of China, is dean of the Graduate School of Journalism at the University of California, Berkeley.