China on the Edge

By Gordon Chang

There is something very wrong in China at the moment. China, I believe, has just passed an inflection point. Until recently, everything was going its way. Now, however, it seems all its problems are catching up with the Chinese state at the same time.

The country has entered an especially troubling phase, and we have to be concerned that Beijing-out of fundamental weakness and not out of strength-will lash out and shake the world.

So what happened in the past decade?

To understand China's new belligerent external policies, we need to look inside the country, and we might well start with the motor of its rise: its economy.

Everyone knows China's growth is slowing. Yet what is not obvious is that it is slowing so fast that the economy could fail.

The Chinese economy almost failed in June. There were extraordinary events that month including two waves of bank defaults. The Industrial and Commercial Bank of China, the country's largest bank-the world's largest bank-was obviously in distress: it even had to shut down its ATMs and online banking platforms to conserve cash. The Bank of China, the country's third-largest lender, was also on the edge of default.

There was panic in China in June, but central government technocrats were able to rescue the economy by pouring even more state money into "ghost cities" and high-speed-rail-lines-to-nowhere.

Doing so created gross domestic product-economic output-but that was the last thing Beijing should have been doing at that-or this-moment. China, at every level of government, is funding all its construction with new debt. You think America has a debt problem; China's is worse.

As one economist told us recently, every province in China is a Greece.

China, after the biggest boom in history, is heading into what could end up as the biggest debt crisis in history. This is not a coincidence.

Soon, there must be a reckoning because the flatlined economy is not able to produce sufficient growth to pay back debt. If we ignore official statistics and look at independent data-such as private surveys, corporate results, and job creation numbers-we see an economy that cannot be expanding in the high single digits as Beijing claims.

How fast is the country really growing? In 2012-the last year for which we have a full set of employment statistics-the number of jobs in China increased 0.37% over 2011. This indicates that China could not have grown by more than 2.0%

In 2013's third quarter, preliminary surveys show the number of jobs decreased 2.5% from Q3 in 2012 and 4.0% from Q2 2013. That is an indication that China's economy has already begun to contract both year-on-year and quarter-on-quarter.

And why are China's severe economic problems relevant to us? Because for more than three decades the Communist Party has primarily based its legitimacy on the continual delivery of prosperity. And without prosperity, the only remaining basis of legitimacy is nationalism.

The People's Liberation Army, which is configuring itself to fight the United States, is the embodiment of that nationalism.

China's militant nationalism is creating friction in an arc of nations from India in the south to South Korea in the north. Let us focus on the Philippines and Japan.

Nearly two years ago, Chinese vessels surrounded and seized Scarborough Shoal from the Philippines. Washington, not wanting to antagonize Beijing and hoping to avoid a confrontation, did nothing to stop the Chinese taking over the shoal despite our mutual defense treaty with Manila.

The Chinese, however, were not satisfied with their seizure. They are now pressuring Second Thomas Shoal and other Philippine territory, also in the South China Sea. Beijing claims about 80% of that critical body of international water as an internal Chinese lake.

As soon as the Chinese took Scarborough, they began to increase pressure on Japan's Senkaku Islands in the East China Sea. The barren outcroppings are claimed and administered by Japan, but Beijing, which calls them the Diaoyus, claims them as well. As a matter of international law, the claim of the People's Republic is weak-Beijing acknowledged they were Japanese until 1971, when it first asserted sovereignty over them.

Yet the weakness of the claim is not the problem. Many countries pursue weak territorial claims. The problem is China's tactics. Beijing is using forceful tactics to try to take the Senkakus, regularly sending its ships into Japanese territorial waters surrounding the islands and sometimes flying planes into Japanese airspace there.

Many people ask why the Japanese should care about eight barren outcroppings. The reason is that the Chinese are acting like classic aggressors. They were not satisfied with Scarborough, so they ramped up pressure on the Senkakus. They will not be happy with just the Senkakus. Chinese policymakers-and state media-are now arguing that Beijing should claim Okinawa and the rest of the Ryukyu chain.

And recently, Beijing expanded its Air-Defense Identification Zone to include airspace over Japan's sovereign territory, a clearly hostile act and one that can lead to conflict.

There has been a noticeable increase in the tempo of China's territorial incursions during the last year. This uptick has generally coincided with the elevation of Xi Jinping as China's new ruler in November 2012.

Of course, we all want to understand what is going on inside Beijing's political circles and what is causing this new aggressiveness.

There are two theories. First, some think Xi Jinping has quickly consolidated control and that he is really an ardent nationalist, that he is the one pushing the military to act aggressively.

There is some support for this conclusion because it has been repeatedly reported that he is personally directing Beijing's hostile campaign to take the Senkakus.

Even some in the Xi-is-strong camp acknowledge the incompleteness of the leadership transition, however. For instance, Kenneth Lieberthal of Brookings, who is one of Xi's defenders, believes that the new leader is a domestic reformer but cannot get on the wrong side of the ugly nationalism the Party has fostered in the past. Lieberthal believes Xi is allowing the military to engage in provocative behavior so that he will have the political capital to push through economic reforms at home.

Second, others, including me, believe the transition has not been completed. More than Lieberthal, I see a weak leader who does not control the military. People who share this view, which is a minority one, are concerned that flag officers are either making their own policies independently of China's civilian leaders, or essentially telling civilian leaders what policies they will adopt.

In short, I believe we should be careful speaking of "Beijing this" or "Beijing that," but should be looking instead at the factional messiness inside the Communist Party and realizing that the People's Liberation Army is now the Party's most powerful faction.

Xi Jinping has, in fact, no faction of his own. People say he heads the "Princelings," but that term merely describes sons and daughters of either former leaders or high officials.

These offspring have views that span the political spectrum and do not form a cohesive group.

Xi became China's supreme leader because he appealed to all factions, in large part because he had no faction. He was, in short, the least unacceptable candidate. And because he still has no identifiable faction, he cannot afford to offend the generals and admirals, who, in my view have been driving the bus for some time.

Some political analysts even joke that the military is now Xi Jinping's faction.

In any event, China's external policies are of deep concern. It is not just that Beijing is hostile; its foreign policy now makes little sense. In the past, Beijing threw tantrums and even started wars when it wanted to punish a neighbor. Chinese leaders were always smart enough to direct their anger at just one or two targets to make sure they got what they wanted. And many times they were successful.

Today, Beijing is taking on many others, all at the same time, especially countries to its south and its east and the United States. How many adversaries does a country need?

The Party is lashing out, and that is not a good sign. If nothing else, it betrays a lack of strategic thinking. It is not promoting worldwide revolution, as it did in the early years of the People's Republic, but it is trying to upend the existing international order, something that Mao also attempted. So we have to be prepared to face the fact that China is no longer a status quo power.

Is China really going back to its Maoist origins? On the face of it, this sounds absurd. Almost everybody believes China has left its past forever, but that belief does not accord with the facts. The Chinese political system, thanks to Xi Jinping, is now going on a bender, with his Maoist and Marxist "mass line" campaigns, one right after the other; his prolonged attack on civil society; and his new movement promoting "ideological purification."

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Gordon G. Chang is the author of The Coming Collapse of China and a columnist at Forbes.com. Follow him on Twitter @GordonGChang. Republished with permission from the Gatestone Institute.

(AP Photo)

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