The Economist

December 14, 1990, p. 74

China on the Shelf

By Emily MacFarquhar

China is entering 1991 like a country under anesthesia. The reform impulse that powered 10 years of high-speed growth and the freest intellectual climate since 1949 has been all but stilled. Centralized command and control have been reimposed on the most productive sectors of the economy. Old Maoist models of robotic obedience have been exhumed and old methods of thought-reform revived. The crusading spirit of spring 1989 has been replaced by a mood of sullen alienation. Boom has given way to the slowest growth, the highest unemployment and the lowest inflation for more than a decade. The one-time object of Sinomania sits ostracized and isolated on the sidelines of world events.

The rulers who are presiding over this transformation of China from reformist vanguard to backward-looking backwater are Communists without a compass. Their props of ideology and Marxist strategy have been knocked away. Their only aim, apart from maintaining order and holding the line on inflation, is political survival. The central question for China in 1991 is how much longer the Communist regime can carry on as the domino that didn't fall. The immediate issue is whether a set of unloved and insecure leaders can begin to throw off the incubus of the 1989 upheavals.

Foreigners are proving more forgiving than the Chinese people. Indeed, gestures of reconciliation in 1990lifting martial law and releasing batches of Tiananmen prisonerswere directed more at appeasing foreign critics than at defusing domestic discontent.

International sanctions, which mainly affect long-term lending, are still on the books. But Japan has broken ranks and unfrozen a $5-billion loan package, the World Bank has resumed lending in a small way and the United States has held back from stripping China of its lucrative most- favoured-nation status.

None of this signifies normalization of relations, though there were diplomatic breakthroughs. Indonesia has reopened its embassy in Beijing after a gap of 25 years and Saudi Arabia and Singapore have sent envoys. Anti-China sanctions are unlikely to survive into 1992.

Western investors and tourists have been slow to return to China, though the investment lull has more to do with China's credit crunch than with sanctions or moral reservations. China fever is a thing of the past. In future, traders and bankers will be far more cold-eyed about making long-term commitments to this costly and difficult market. But overseas Chinese investors, undeterred by the events of 1989, will continue to make up for no-show North Americans and Europeans. Taiwan will become China's second-largest investor after Hong Kong.

The economic downturn is only indirectly a product of Tiananmen. An austerity program was already under way before the post-massacre purge reinforced the power of reform skeptics in the leadership. Their answer to inflation and resource-wasting growth was to tighten curbs on credit and reimpose state micromanagement over large parts of China's $340-billion economy. Six months later, negative growth and rising unemployment jolted the leaders into tentative reflation. But freed-up credits went mainly to money-guzzling state factories while job-creating local industry, which had been growing at more than 30%, was starved of capital and raw materials. Consumer demand is flat and the economy is sputtering along with a growth of under 2%, compared with 8.9% in the boom years.

The regime will be under strong pressure, from provincial bosses and from a strapped population, to revive growth by turning the credit tap on again. But a leadership dominated by nostalgic central planners will be reluctant to cede any new space to market forces.

If 86-year-old Deng Xiaoping lives to fight another day, he may well try to save his damaged reputation and his discredited party by dropping the hard-line Prime Minister, Li Peng, and shifting policy back on to a reform track. The task would be easier if Li's conservative patron, 85- year-old Chen Yun, dies first. Deng's death is bound to precipitate a king-sized power struggle. But it might be submerged for some time if another octogenarian, China's 83-year-old President Yang Shangkun, survives to set up a transitional regime, backed by relatives in high military places. Army support will be vital for any pretender to the Deng throne.

Chinese history suggests two ways by which China might shuffle off its Communist coil. A local act of resistance could set off a nationwide uprising, just as a revolt by troops in Wuhan in 1911 provoked the overthrow of the Qing dynasty. Or a coalition of politicians and soldiers at the centre could mount a coup against another faction, in the same way that the Gang of Four was ousted, a month after Mao Zedong died, in 1976. In both cases the preconditions for change were the death of an autocrat and widespread popular disaffection.

In 1991, the 80th anniversary of the 1911 revolution, China's Communist system will have been withering away for 25 years, since the start of Mao's cultural revolution. It may preserve itself for a few years longer by restoring reformist prosperity and allowing elements of democracy and decentralization. Or it could end, as the Marxist era in Eastern Europe did, with an anti-Communist bang.