Economic blues threaten China's internal security

The second session of the Second Plenary of the 11th National People's Congress of China, which is its Parliament, was held at Beijing from March 3 to 12. There were detailed discussions in the NPC on the state of the nation as reported by Prime Minister Wen Jiabo and other ministers. President Hu Jintao, Wen and other important members of the government and the Chinese Communist Party also availed of the presence in Beijing for the NPC session of government and party representatives from different provinces to discuss with the representatives from each province in the margins of the NPC session the state of the economy in each province. They explained to the representatives from the provinces the measures already taken by the government to deal with the decrease in exports, the closing down of many factories and the consequent increase in unemployment and gave guidance as to how the provinces should deal with the situation.

A study of the proceedings of the NPC session and of the discussions in the various interactions held by Hu, Wen and others in the margins of the NPC session indicate that the just-concluded session was largely taken up by issues relating to the economy and internal security. This was indicative of the concern of the Chinese leadership over the likely impact of the economic decline on the internal security situation due to the increase in unemployment and fall in the prices of agricultural commodities due to a decrease in the purchasing power of the people.

On a rough estimate, a little more than 50 per cent of the discussions was devoted to the state of the economy and about 20 per cent to the internal security situation, including the situation in Tibet. Only the remaining 30 per cent of the discussions was devoted to other issues. The work of the ministry of public security, which is responsible for internal security, received much greater attention than the work of other ministries.

It must be said to the credit of the Chinese leaders that they were quite transparent during the discussions in the NPC session as well as in the margins of the NPC session. They frankly admitted the difficulties faced by the economy, without any attempt to cover them up. At the same time, it was pointed out that the difficulties arose due to the US mismanagement of its financial sector, which has affected and continues to affect all global economies for no fault of their leaders. It was explained that the difficulties faced by China were not due to any mismanagement by its policy-makers. It was also highlighted that the Chinese banks and other financial institutions are in a good state of health and that China's problems are radiating from the manufacturing sector, which had become over-dependent on the external market -- particularly the US market.

While there is an understanding of the need for developing the domestic market, which was neglected till now, the Chinese policy-makers do not seem to realise that this is difficult in a time of declining purchasing power of the Chinese families and the consequent decline in demand. The decline in the purchasing power of the Chinese families is due to about 20 million Chinese, who were gainfully employed till November last, losing their jobs and another 7.1 million new entrants to the job market finding it difficult to get a job.

The Chinese policy-makers are hoping to create nine million new jobs during 2009 under their stimulus package ($585 billion) announced in November last. Even if they succeed in doing so, there will still be about 18 million unemployed left.

To transform the vast rural China into a consumer market, producers of automobiles, domestic appliances etc are being encouraged to take their accumulated stocks to the countryside and sell them to the rural people. But when people have less and less money to buy even their essential requirements, there are very few takers for such goods in the countryside.

The Chinese are juggling with two mutually contradictory objectives. Firstly, how to restructure their manufacturing sector in order to enable it to look more inwards than in the past? Secondly, how to retain China's present share of the global trade, which has enabled it over the years to earn the money for its military expansion and modernisation? For the retention of China's newly-acquired status as a global power, it is important for it not to lose its share of the global trade. They have not come out with a satisfactory policy, which could meet both these objectives.

There are two possible sources of social tensions which could have an impact on the internal security situation. The likelihood of tensions arising from the serious unemployment situation has already been noted by experts in China as well as outside. The other likelihood of tensions in the rural areas due to the income of the rural families being hit by the fall in commodity prices has not received the required attention. There has been a lot of focus on the likelihood of urban tensions, but not enough focus on likely rural tensions. A study of Chinese history would show that successful mass uprisings started from the rural areas.

The other question left un-discussed is how the decline in the flow of inputs such as fertilisers to farming would affect China's agricultural production in the short and medium terms. Job security has already become a grave issue. Can food security emerge as an equally worrisome issue?

The Chinese are gratified by the US request as conveyed by Hillary Clinton, the US Secretary of State, during her visit to Beijing from February 20 to 22 that they should continue to invest their foreign exchange reserves in US Treasury Bonds. At the same time, they have made it clear that their decision in this matter will be decided by their national requirements. If the stimulus package announced last November does not halt their economic decline, they may have to initiate another stimulus package. To fund it, they may have to dip into their foreign exchange reserves. This is not the time to divert more reserves to the US bond market. They have been making this point repeatedly even in the past weeks before Clinton's visit.

Briefing the media on the NPC session on March 13, Prime Minister Wen indicated another reason for the Chinese caution on the issue of investing more in the US bonds -- namely, their misgivings about the continued stability of the US dollar. Wen said: "We lent such huge fund to the United States and of course we're concerned about the security of our assets and, to speak truthfully, I am a little bit worried. On the foreign reserves issue, the first consideration is the national interest. But we also have to consider the stability of the overall international financial system, as the two factors are interlinked. China is indeed the largest creditor of the United States, which is the world's biggest economy. We are extremely interested in developments in the US economy. We are watching the effect of the measures taken by the US government to counter the international financial crisis."

US policy-makers have hastened to reassure Beijing about the stability of the US dollar. In a speech at the Brookings Institution in Washington, DC on March 13, immediately after Wen's press conference in Beijing, Larence Summers, Obama's top economic advisor in his capacity as the Director of the National Economic Council, said: "The US would be sound stewards of the money we invest. This is a commitment that the President has made very clear -- we need to be sound stewards of the money we invest."

Are the Chinese leaders satisfied by this assurance? One has to wait and see. They would prefer to watch for the impact of Obama's policies on the US banking sector before taking any decision on an increase in investments in the US bonds. In November last, the total value of the Chinese holdings of the US Bonds was estimated at $ 681.9 billion.

While studying the remarks of the Chinese leaders during the NPC session, one could detect an under-current of concern that the conservative anti-reform elements in the party and the government might try to exploit the current difficulties by blaming them not on the US mismanagement of its banking sector, but on the Chinese policy of economic reforms and globalisation itself. It was repeatedly stressed that there would be no going back on the reforms and that China should continue to adhere to its policy of opening up its economy.