That China has leaped forward is plain. Communist poverty has been replaced by capitalist ambition. The world is acquiring a second superpower. Yet, politically, little has changed. The Communist Party remains the same. And in this mix of extraordinary economic vigour and political stasis lies danger.
The five-yearly congress of the Communist Party, now being held in Beijing, is demonstrating that stasis all too well. The men in grey suits yawn their way through speeches about greater democracy and President Hu Jintao’s pet notion, “the scientific theory of development”. The lively business will be behind the curtain as the rivals to succeed Hu five years from now court favour.
For investors, the question is whether this ideologically bankrupt and obsessively secretive organization can manage a modernizing economy. It is certainly trying, in an old-fashioned autocratic way.
A crackdown on dissidents preceded the congress. The award of a medal to the Dalai Lama was sharply criticized. Invasion of Taiwan is a possibility. The party sees Taiwan’s plans for United Nations membership as a declaration of independence.
The party’s firm hand seems to be at a loss when it comes to managing the currency. While economic growth roars ahead, the under-valued renminbi has ensured huge trade surpluses. Foreign exchange reserves climbed to $1.4 trillion in September, up 45% in the past year. The rise in reserves feeds excess monetary growth. A lending boom has created a major stock market bubble and helped push the Chinese retail inflation rate up to 6.2%.
All this could end badly. At home, a popped bubble and unchecked inflation might spawn political discontent. Abroad, the slow revaluation of the renminbi against the dollar has managed to unify the European Union and the US into an anti-China front. Trade restrictions look unlikely at present, but that could change quickly if economic growth slips badly.
Day by day, China becomes stronger and more influential. Unfortunately, the party looks ever less capable of managing that strength wisely.