Even after a quarter-century, the date June 4 and memories of the 1989 Tiananmen Square crackdown remain delicate matters in China, as they underline the fragile legitimacy of the ruling Communist Party.
For all the transformational economic progress of the intervening years, China’s one-party political system remains its Achilles’ heel. What’s more, the contradictions and strains of this authoritarian model — which create this fragility — will only intensify as the party confronts a choice between slower growth and real reform.
When, 25 years ago Wednesday, Beijing recoiled from democratic reform and killed untold numbers of student protestors, it ensured the party would hold on to power. This was by no means certain in a period when the Berlin Wall was about to fall after nearly three decades, followed shortly by the disintegrations of the Eastern bloc and the Soviet Union. In 1990 the South African government removed its repressive apartheid regime.
Few investors really expect the Communist Party will similarly call time on its 64 years in power. But the vast apparatus Beijing deploys to quell dissent, from Internet censors to security forces, is a daily reminder that, even with the passing of time, demand for an accountable government has not weakened. In fact, if anything, the party today faces a more formidable challenge to justify its legitimacy as the economy confronts a generational economic slowdown.
China’s model of growth through fixed-asset investment and exports is now past its sell-by date as it becomes clear the days of double-digit growth are over. There is also an increasing awareness of the downside of authoritarian state capitalism — from environmental degradation to rampant corruption to huge levels of debt and worsening income equality. There is anecdotal evidence, too, that this system is fundamentally inflationary, making Chinese pay too much for everything from phone services to bacon.
The demand is not just for growth but for more efficient and equitable growth to spread the fruits of prosperity wider than the 80 million or so members of the party.
At this juncture, reform poses a fundamental dilemma for the party and its continued existence. The reforms needed to revitalize the economy, such as allowing more private investment and market pricing, requires the party to step back and loosen its grip on the economy. Without reform, however, commentators warn the party risks losing power altogether.
This vulnerability exists despite some undoubted economic successes.
In recent years Beijing has developed a highly sophisticated form of state capitalism, which enables the economy to be controlled despite the appearance of market reform. Moves to float state companies on international stock exchanges and entry into the World Trade Organization a decade ago have coincided with the Communist Party’s actually tightening its grip. In a variety of industries the party maintains control with a system of shadow boards and the appointment of party members as top executives.
This has allowed China to create dominant flagship companies, which are some of the largest in the world. It also can point to various technological successes such as building a high-speed rail network and becoming only the third country in the world to land on the moon.
Yet there is inevitably a strain between what is good for China and its ruling party and what would benefit the wider population.
This fundamental lack of accountability was highlighted during the 2006 Olympics in Beijing. Unfortunately, rather than the Games showcasing China’s arrival as a modern and technologically advanced state, the lasting legacy for much of the population was that its government could not be trusted.
It was revealed the state conspired to cover up an incident involving poisoned baby milk powder to avoid bad publicity during the Games. Milk produced by Chinese dairy giant Sanlu was contaminated with melamine, and it was estimated that as many as 300,000 babies had become ill.
This incident illustrates the corrupting structure that exists where a government can control the media, justice and business. The criticism made by Will Hutton in “The Writing on the Wall” rings loudly here that China will fail to reach its potential because it lacks the necessary institutions, laws and public processes for accountable government.
And we can expect these contradictions to come under further strain if China continues on a stated reform path to allow its people, companies and even its currency to increasingly circulate overseas. Reform to open up its closed capital account promises to be particularly contentious in a one-party state. China’s people may not get a vote, but they will have a proxy when they decide where to put their capital.
Domestic equity investors have already given their verdict on a stock market where, according to a Merrill Lynch calculation, 75% of listed companies are state-owned. The benchmark Shanghai Composite Index SHCOMP, +0.01% has been in decline for seven straight years.
Like the Tiananmen anniversary, China’s equity markets are a reminder that the party is not all-powerful.
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