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Could China’s Instability Threaten America?

by: jeff lukens | published: 12 03, 2010

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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 one.

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 Mao.

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 improbable.

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 nations.

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.     

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