The China crisis

The country’s citizens need only look around to see monuments to their leaders’ hubris

The China crisis

Of the 80 or more television shows Chinese authorities have banned in recent years, the most devoutly missed may be a soap opera called Wo Ju, whose popularity was eclipsed only by its underwear-bunching effect on Beijing’s censors. Its central plot featured a senior government official named Song, who accepts sexual favours from a property-hungry young woman while he brazenly manipulates his city’s real estate market. Song gets his mistress pregnant, is arrested for corruption and ultimately dies in a car accident. But his comeuppance wasn’t enough for China’s State Administration of Radio, Film and Television. The broadcasting gatekeeper cancelled Wo Ju, saying its “sex, dirty jokes and corruption stories” had a “serious negative influence” on society.

Dissolute behaviour among Communist Party potentates has long been a taboo subject in China. Yet these days, for sheer sensationalism, Wo Ju could scarcely compete with the evening news. For more than a month, China has been transfixed by the downfall of Bo Xilai, a once-formidable party figure whose career has crashed amid accusations of corruption, influence peddling and—most sensationally—an attempt to cover up murder. At the centre of the saga: Bo’s wife, Gu Kailai, who is under investigation in the poisoning death of a British businessman. Desperate to discredit Bo, party leaders announced they’d stripped him of his prestigious position as party chief in Chongqing, while state media dredged up long-suppressed reports of influence peddling and self-enrichment on the part of the powerful couple.

The result, says Cheng Li, a veteran China watcher with the Washington-based Brookings Institute, has been “the greatest challenge to the Communist Party since Tiananmen Square.” For decades, Chinese leaders have dealt with allegations of misconduct behind closed doors, while projecting an air of fatherly control. Now, having acknowledged murder plots and corruption at such a high level, they’ve stirred doubts about stability within the leadership of the regime, says Cheng. “There is a lot of cynicism about the party. In my view, it has lost the moral high ground.” Worse, Bo’s undoing has ignited age-old rivalries within the politburo, between reform-minded liberals represented by Premier Wen Jiabao, and a growing legion of neo-Maoist conservatives led by Bo. Prior to his spectacular downfall, the 62-year-old chieftain was seen by many as a future president of China. Since the party announced his removal on March 15, he has not been seen in public.

For Beijing, the timing could not be more inopportune. After decades of frenetic growth, the country’s economic stewards are facing a real estate bubble, a local government debt crisis and declining global demand for China’s myriad exports, from T-shirts to dishwashers. That, in turn, is stoking fears of a so-called “hard landing,” which, for China, means GDP growth of five per cent instead of 10 per cent, and unrest among the millions of low-paid Chinese still waiting for a better tomorrow.

For the West, the turmoil has laid bare the risks of its all-in bet on a booming, politically stable China. Beijing’s US$586-billion stimulus splurge in late 2008 helped to calm global financial markets. Since then, debt-laden Europe has repeatedly turned to China for emergency financial support, while America’s biggest companies have come to rely on China for their future growth plans. Canada in particular has benefited from China’s boom through surging oil and commodity prices that made this country’s economy the envy of the developed world.

So long as Beijing kept priming the stimulus pumps, it was easy to ignore the dangers that came with our reliance on Chinese largesse. But recent events have exposed the fault lines under China’s economy. When unsubstantiated rumours of a coup attempt by Bo blazed across China’s blogosphere in late March, investors panicked and markets swooned.

Business and political leaders, say experts, face a moment of truth: after years of uncritically accepting China’s happy economic narrative, the turbulent forces that lie beneath it are suddenly in plain view. A dangerous combination of political unrest and a slowdown in the Chinese economy could tip the country into a crisis. And if that happens, no one—not even Canada—will escape the pain.

The story of Bo Xilai is critical to understanding the crisis of legitimacy now confronting the Communist Party. He and his second wife, Gu Kailai, count among a rarefied group known as “princelings”—children of revolutionary heroes who are born to lives of privilege. In the early 2000s, while Bo was serving as mayor of Dalian, the pair befriended Neil Heywood, a British national living in the coastal city. Heywood was known to help Chinese business people make connections abroad, and reportedly pulled strings to get Bo’s son Guagua admitted to Harrow, a posh British boarding school.

What, if anything, went wrong between Gu and Heywood isn’t clear. But on Nov. 15, the 41-year-old Briton’s body was found at a hotel villa in Chongqing, dead of what police variously described as alcohol poisoning and a heart attack. When, in February, local police chief Wang Lijun sought refuge at the U.S. consulate in Chengdu and told American diplomats he believed Gu was behind the killing, the drama was forced into the open. The officer claimed his life was in danger, and was right to worry. Not long after he arrived, police loyal to Bo surrounded the consulate and waited for the chief to emerge. (An official from Beijing safely escorted the police chief out of the building.)

A state department official later described the events as “something out of The Bourne Supremacy,” while British diplomats demanded an investigation of Heywood’s murder. Then, last week, the Chinese government announced it had arrested Gu, 54, while launching a full-scale public attack on the power couple of Chongqing. Bo was publicly removed from his party positions, and soon after, an article surfaced in the state-run People’s Daily saying that unnamed Communist Party officials had been using their wives, children and mistresses to stow money overseas—a thinly veiled reference to Bo. Reuters, quoting sources close to the investigation, reported that Heywood was killed because he threatened to expose plans to transfer money out of the country.

It was the Chinese equivalent of a tabloid frenzy, featuring a woman dubbed China’s Jackie Kennedy, and a political star once poised to join the politburo’s all-powerful standing committee. Weibo, China’s state-monitored version of Twitter, buzzed with shock and speculation. State censors tried to dampen the mania by blocking keywords like “Bo Xilai,” with little effect. “What a lesson!” tweeted one popular microblogger, Charles Xue. “[Without political reform], who can guarantee that this kind of thing won’t happen again?”

Yet the couple’s disgrace came as no surprise to Jiang Weiping, a journalist who spent five years in jail for writing unflattering pieces about Bo and Gu’s suspect activities. Jiang, who now lives in Toronto, had written that Gu made millions as her husband’s gatekeeper, offering property developers access to him when he served as mayor of Dalian, or accepting gifts from people seeking government appointments. That Bo styled himself as a man of the people only adds to the irony, says Jiang. Known for charisma and a common touch, he had played to the 85 per cent of Chinese whose boats have not been lifted by China’s economic miracle, promising to spread the wealth. “Here is a man once widely praised in propaganda for his rectitude, and for caring for his people,” Jiang says. “Yet overnight he has become the most corrupted and unlawful person in the country. Of course the public is going to feel fooled.”

For the party, that cynicism represents both an opportunity and a calculated risk, says Elizabeth Economy, a China expert with the New York-based Council on Foreign Relations. It opens the door to reforms aimed at making party officials more accountable—including long-promised regional elections, and more open debate about party affairs in the media. Bo was widely seen as the chief roadblock to such changes, appealing instead to nostalgia for Maoist, command-and-control Communism. Yet exposing the “enormous corruption” of the political elite threatens to stoke anger that has been brewing across the country for months. “Other than protests,” says Economy, “the Chinese people have no mechanism to deal with this sort of thing. So there has to be concern. This hits at the very legitimacy of the Chinese leadership.”

The country’s citizens need only look around to see monuments to their leaders’ hubris. Soaring new bridges that are scarcely used. Vast shopping malls, built with government-backed loans, that now sit empty. Entire cities built from scratch, which house virtually no one. Christopher Pavese, an asset manager from North Carolina, was struck when he got off a train in Danyang, about 175 km northwest of Shanghai, by the emptiness of the showcase structures around him. “The parking lots are completely empty and, as far as the eye can see, there’s no one on the roads,” says Pavese, who toured the country in March. Just a short drive from the newly built, yet thoroughly empty, train terminal, he recalls, “you get these little dirt roads and see backwater towns that look like how you’d imagine China 20 years ago. You’re passing bicycles and chickens.”

Such scenes illustrate a troubling paradox. In addition to exports, China’s breakneck growth has been fuelled by foreign investment and massive public works projects, needed or not. The most glaring case is the district of Kangbashi in the city of Ordos, a gleaming urban oasis in Inner Mongolia that was built to house 300,000 people, yet today is mostly vacant. Not only are such projects ripe for corruption, but the downside to that easy money has been painful inflation, which threatens to spark unrest as prices soar out of reach in a country where 128 million people live on less than $1 a day. Vegetable prices, for example, spiked nearly 21 per cent in March from the year before. At the same time, most of the flashy new condos and apartments erected in recent years have been priced well beyond the reach of buyers. “You have all these buildings going up because you’ve got speculators buying three, four, five homes,” says Pavese. “That’s why most of them sit empty.”

In a bid to head off an epic real estate bubble, policy makers have already hiked interest rates and tightened mortgage rules, prompting panicked developers to slash prices of unsold condo units by up to 30 per cent. And yet, faced with soft demand for Chinese exports amid a weak global economy, the temptation is to fall back on further spending to maintain GDP growth, now targeted at 7.5 per cent, well below the eight per cent target in place since 2005. Government officials are now promising to build affordable housing for millions of city dwellers to alleviate the most painful aspects of the real estate bubble, a policy that also promises to keep the construction industry humming. However, there are already signs the programs are falling victim to graft. “It is really strange that having a growth rate as high as six or seven per cent would be viewed dangerous by people both inside and outside China,” says Xiaodong Zhu, an economics professor at the University of Toronto. “But this clearly reflects the fragility of China’s political regime, which relies heavily on high GDP growth to maintain social stability.”

The rumbles of discontent can be heard across the country. Earlier this year, steelworkers in Chengdu, the capital of Sichuan province, held a massive three-day strike to demand higher wages from their state-owned employer. Other labour protests—including one at a shoe factory last November in Dongguan—resulted in clashes with police. Meantime, angry condo buyers in China’s cities have taken to the streets to protest the devaluation of units purchased just a few months earlier. At one development in Anting, a suburb of Shanghai, owners burst through the ground-floor entrance and smashed the tiny models of suites on display in the sales office.

The prospect of both the nouveaux riches and blue-collar workers turning hostile has sent chills through the government, which has ordered some private employers to swallow wage increases in hopes of preventing further strikes at neighbouring factories. Few predict a Tiananmen-style uprising. But recent events suggest economic frustration could easily become fused to outrage over the sort of corruption revealed in the Bo case. Last fall, following a crash involving two bullet trains that claimed dozens of lives, authorities faced public fury when it was revealed a top railway official had funnelled nearly $3 billion into offshore accounts. In December, Wukan, a fishing village of 20,000 in Guangdong, broke into open revolt after the daughter of a village activist died while in police custody; the woman had been protesting the illegal seizure and sale of communal land by local Communist Party officials, and her death led to a 10-day standoff between residents and police. In another ominous sign of the potential extent of the unrest, Beijing recently ordered members of the military to swear an oath of loyalty to the party—evidently to dispel rumours that Bo might be capable of mounting a coup.

To Jiang, the journalist, such volatility reinforces the need for the party to press on with fixes proposed by Premier Wen Jiabao: greater transparency; respect for rule of law; more democracy within the party. The alternative, he says, is to court disaster when the next scandal emerges. “The downfall of Bo is a warning for China. It must choose between going ahead with reform or taking China back to where it was in the mid-1990s.”

The rest of the world has staked much on the outcome of that decision. Since the onset of the financial crisis, nearly 75 per cent of big multinational corporations now say China is crucial to their fortunes, according to a survey last year by the Economist Intelligence Unit. General Motors said this week it plans to open 600 new dealerships in China this year, bringing its total in the country to 3,500 (Canada has less than 500). Meanwhile, China is now Canada’s second-largest trading partner after the U.S., with two-way trade rising from $8.7 billion in 1997 to nearly $60 billion in 2010. Prime Minister Stephen Harper has already identified China as a key customer for crude from Alberta’s oil sands, while China, in return, has invested billions in Canada’s resource sector. Such lucrative relationships could be at risk if the political crisis is allowed to snowball into a full-blown economic one.

That helps explain why Harper tactfully ignored the scandal swirling around Bo when the two men met in Chongqing in February—just five days after Wang made his fateful trip to the U.S. consulate. The meeting, which had clearly been planned when Bo was considered a potential leader of China, took place behind closed doors, with no grip-and-grin moments for the press. Later in the day, Harper and his wife, Laureen, visited the Chongqing zoo to mark Beijing’s goodwill loan of two pandas for display in Canada. The PM looked comparatively relaxed posing for photos with a bear.

There are hopes the recent scandal will strengthen the hand of those leading China down the path of openness and reform. Last month, Premier Wen sounded a note of contrition, apologizing for the economic and social problems of the last decade. “There is still room for improvement in my work,” he said, before restating his intention to pursue reforms, “even with a single breath left.” But there is also fear, felt keenly among Beijing’s leaders, that the crisis could still spiral out of control. Shortly before Wen spoke, after all, party legislators passed a law allowing police to detain political dissenters for up to six months. Around the same time, six people were arrested and 16 websites shut down for allegedly spreading rumours of a Bo-led coup.

And, as ever, party bosses remain preoccupied with what’s on TV. Earlier this year, they banned another slew of shows from the air for “money worship, hedonism and extreme individualism.” The irony of this won’t be lost on fans of Wo Ju. If the presence of such frailties in the most exalted circles of Chinese society was ever a secret, it certainly is not any more. Bo Xilai made sure of that.