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The Red Dragon:
Rising or Falling?

by
Forerunner, "WorldWatch," December 2005

Recently, the media—intentionally or not—have sketched an image of China as a bold, tenacious contender in the present uni-polar world. Its roaring market economy is growing at double-digit rates. The current high price of oil is due in large part to the increased demand from developing nations such as China and India, which seek larger pieces of the petroleum pie. U.S. officials have publicly noted the advances in China's armed services, particularly its reported plans to build its own aircraft carrier. China also boasts of developing a manned lunar program, a technological feat that would set it apart from every nation but the U.S. and the Soviet Union. Finally, ubiquitous "Made in China" labels bear out the impact of this manufacturing giant.

However, all is not well beneath this dragon's formidable scales.

Where it was once conventional wisdom that China's population was undergoing a boom, the current reality shows an opposite trend. China now has a sub-replacement fertility rate: By 2025, there will be a 1-to-1 ratio between senior citizen and worker. Without a national pension system, senior citizens will either have to be supported by their child(ren), or else join the growing class of low-paid, part-time laborers to survive.

In addition, the gender imbalance caused by its "one child policy," in effect since 1979, is currently about 120 boys for every 100 girls—and growing. Analysts suggest that this imbalance will affect the Chinese family: 10-15% of Chinese men will be monogamously unmarriageable, and this phenomenon will cause social tensions in China—and perhaps social turbulence.

Even as long-range indicators point to instability on various fronts, current events in China suggest trouble may break out sooner rather than later.

In early December 2005, a demonstration in Shanwei in Guandong province (about 100 miles from Hong Kong) occurred over farmland confiscated by the government to develop a power plant. While protests are nothing new in China—74,000 mass demonstrations were reported last year, up from "only" 10,000 a decade ago—this one was significant because it involved the police killing a number of armed protestors. Officially, three died and eight were wounded, but some journalists say 20 died—and one report even claims 50 deaths. These are the first deaths of demonstrators in China since 1989, when pro-democracy protests were held in Beijing's Tiananmen Square.

While the shooting was unusual, the underlying tensions have been simmering for years. Due to the booming economy, the Chinese government is confiscating more farmland for use in government-sponsored industrial projects. While Beijing allocates money to compensate the displaced small farmers, they frequently never see the money. George Friedman explains:

Money is issued to local officials by state-owned enterprises and other investment groups to cover the cost of the land. That money passes through the regional and local bureaucracies. By the time it should reach the owners, there often is nothing left; it has been stolen by officials at various levels. No one denies the farmers' claims to the land, but no one acts to compensate them. The laborers go from being small farmers to being destitute. This is a critical process at the heart of Chinese industrialization. The purchase of land, including forced sale, is considered necessary for Chinese economic development. However, Chinese economic development is driven as much by corruption as by land. . . . But the diversion of funds is hard-wired into the process. It is one of the primary means for capital formation in China. ("The Shanwei Shootings and China's Situation," Stratfor Geopolitical Intelligence Report, December 13, 2005)

He further describes a common method for Chinese entrepreneurs: become a government official who can leverage his public position for personal financial gain, as well as making useful contacts. To hold onto his job, a public official must maintain a system of relationships—based on money—with superiors, colleagues, and subordinates. Land-compensation programs provide the capital for bureaucrats to maintain their positions, and the farmers end up with little more than growing rage.

In addition, much of China's industrialization is financed through debt that will almost certainly never be repaid. This is creating a bubble that will not burst quietly. Friedman explains:

China . . . is a country where the banking system has been saved from collapse by spinning off bad debts—at least $600 billion worth, or nearly half the GDP of China—into holding companies. This maneuver cleaned up the banks' books and allowed Western banks to purchase shares in them, shoring them up. But it also left a huge amount of debt that is owed internally to people who will never see the funds.

In sum, China is growing militarily and technologically; it is producing a generation of young men with uncertain family futures and thus inherent instability; its economy will be undermined as its population ages; its economic growth, rather than being driven by "market forces," is spurred by officials and institutions who need growth to maintain their positions, and who are more than willing to use bad debt and sacrifice the working class for "progress." Economically, socially, and politically, China is experiencing great tension. While it may not be on the verge of complete meltdown, the dragon is becoming increasingly volatile—with the potential to affect many nations, businesses, and people as its disorders converge.




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