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Posted on 12/18/2001 3:00:34 PM PST by batter

HONG KONG Behind the high walls of the Beijing leadership compound in a conference room sealed with soundproof padding, China's prime minister briefed an elite team of economists, bureaucrats and intellectuals about his greatest anxiety. "The government can control an impoverished China," Zhao Ziyang, then the prime minister, told the 20 specialists assembled at the square conference table in 1986. "But we must determine how the government can maintain stability while growing China into a world power."

His underlying fear: Will China collapse?

Wu Guoguang, an academic who was present, still recalls the stern warning that followed: "Never tell foreign reporters what we discuss here in this room." Mr. Wu has broken that confidence, first in a Chinese-language book and now to a broader audience, in an attempt to prompt discussion of a topic that is counter to much current thinking on China. The Zhao committee met more than a dozen times to talk about tinderbox issues as China entered an era of spontaneous protests and unrest that culminated in the Tiananmen Square uprising in 1989. As the committee anticipated, the instability arose in the years after the supreme leader, Deng Xiaoping, unleashed market forces with the exhortation that "to get rich is glorious." Now, as the motors of capitalism accelerate with the country's official entry into the World Trade Organization, Mr. Wu and others again are expressing fears for China's stability. "The situation is now worse than ever," said Mr. Wu, an associate professor at the Chinese University of Hong Kong. "We only lack an igniting spark. That spark may come soon, or not at all."

The government already estimates unemployment at 120 million of its approximately 1.3 billion people - and it expects that number to increase by more than 40 percent as China faces heightened competition within the trade organization. Added to this dislocation, China's 350 million farmers are losing longstanding protective price controls on rice, wheat, corn and cotton as global commodities markets determine crop value. These are not the only problems. Rising and rampant corruption, questionable military loyalties and the internal stability of domestic leadership already challenge the government, not to mention the country's dangerously dysfunctional financial system and increasingly bold internal critics.

"The mood reminds me of 1989, when high expectations hid deep and dangerous discontent," Mr. Wu said. On the positive side, China's economy appears to be the envy of the world. Growth prospects already top 7 percent this year, according to official figures, and have been bolstered further with the investment inspired by trade organization membership. The Beijing government's climb back from international pariah status, a legacy of the violent suppression of the Tiananmen protests, has been capped with a successful bid for the 2008 Olympics and the joy of having a soccer team qualify for the World Cup next year. Yet amid the glory, a number of observers say the emperor has no clothes. One recent book, "The Coming Collapse of China" by Gordon Chang, predicts the government's demise by violent uprisings within five years. The Chinese Communist Party's own research department published a report in June warning of imminent in-stability brought on by modernization, while a book of essays by prominent scholars published in the United States asks starkly: "Is China Stable?"

These analysts do not foresee China's demise as a nation-state, but almost all envision widespread social unrest accompanied by political crisis and economic breakdown. Such pessimistic outlooks are tempered by the favorable contrast between today's relative serenity and the social upheavals of the last century, including the destruction of Imperial China, the Communist revolution and Chairman Mao's Cultural Revolution. "Things seem calm relative to the vicious civil war and bloody foreign invasion" of the last century, said Jonathan Spence, a Yale professor and author of more than a dozen books on China. Moreover, Mr. Spence added, when turmoil strikes, China historically has been able to right itself. "For all the problems China has faced, there do seem to be forces that balance the country," he said. "But the country's own vastness makes it very difficult to understand what is actually happening now and impossible to predict the future." China's future has tremendous implications for global stability. At stake are the lives and welfare of the largest population on earth. In addition, the nation borders 14 other countries. China's central bank has the second-largest holding of foreign currency reserves in the world. And China's nuclear-enabled military now speaks of a space program. The risk of internal turmoil became an explicit issue in the WTO negotiations. "We were dealing with stability of the world's most populous nation here, not just trade," said Mike Moore, director-general of the trade organization. "The size, scale and history of China make its entry to the world trading regime a unique event for China and the rest of the world."

China's Communist government finally bet on stability by capitalist means. One result may be a flood of foreign investment, but it would be accompanied by the government's loss of traditional levers of support and control for restive sectors of society. The Communist Party of China recognizes that it will lose ground. "Our country's entry into the WTO may bring growing dangers and pressures," a report from the party's central committee warned recently. "In the ensuing period the number of group incidents may jump, severely harming social stability." The fear is that an Eastern-bloc style evaporation of China's Communist Party would leave a rudderless nation with little rule of law. The party, however, already has a blueprint for the future: Abandoning communism, the membership will morph into a self-supporting, clubbish nexis of influence. For all the changes wrought by trade organization membership, Mr. Wu reckons that questions of China's stability still run along familiar fault lines first identified during his committee's discussions with Prime Minister Zhao.

Economics remains the bedrock upon which all else stands. The government gambled on growth through globalization, so it must fine-tune the economy for ever-increasing prosperity. One problem is that the official economy is almost entirely fictional. Years of exaggeration to please Communist central planners have burdened the nation with mythical statistical measures that do not accurately describe even the broadest measures of economic output. The National Bureau of Statistics as much as admitted this problem in recent months, dispatching thousands of researchers to collect entirely new price and income data across the country.

The government's claim to 7 percent growth this year, for example, is disputed by many economists, some of whom say the economy is expanding at less than half that pace. Slowing growth could have disastrous impact on companies and banks. "Odd as it may sound, China's future will be determined partly by its weak banks," said Philippe Delhaise, president of Capital Information Services. "Although improving, they are the weakest economic link and crucial for development and stability." Many Chinese companies have debt levels higher than those of the conglomerates of South Korea before its 1997 financial crisis. Some estimates are that more than a third of bank loans in China are not being repaid - double the level of nonperforming loans that triggered systemic banking crises through the 1980s. The government has long covered losses to ensure high levels of employment, but the entry of efficient foreign banks "could put the stability of the domestic banking system at risk," the Asian Development Bank warned with uncharacteristic bluntness last month. Nonetheless, China weathered Asia's financial crisis in the last decade thanks to factors that continue to add stability: a nonconvertible currency, high savings rates, large central bank reserves and relatively little foreign debt. But even if it is financially stable, the government will need to keep urban unrest in check as unemployment rises. An estimated 11 million people lose their jobs each year because of the conversion to a market-based economy while many more experience the growing income gap between China's urban rich and the rural poor. Reforms have lifted 270 million people from poverty since 1978, but the benefits have been heavily skewed to a small elite, according to a World Bank study. The average income of China's wealthiest grew nearly four times faster than that of the country's poorest through the 1990s. Spending by farmers actually dropped in 1998, the first known such decline since capitalism - shorthand for the capitalist reforms that began in 1978 - came to China. This has led to visions of apocalyptic social dislocations. One, evoked by a respected economist, He Qinglian, has armies of exploited workers, restive peasants and criminals clashing with the country's new hereditary elite, the so-called princelings. These princelings include the son of President Jiang Zemin, a telecom executive; the son of Prime Minister Zhu Rongji, an investment banker, and the son of the chairman of the National People's Congress, Li Peng, an energy company executive. Such are rumors of this elite's lifestyle that Li Peng's wife this month made an almost unprecedented public denial of rumors that she had abused her husband's power to profit from stock trades and real estate deals. One story said she never wore the same outfit twice. Unity among the leadership class appears strong but its support is brittle, according to Ms. He. The support structure of deferential intellectuals, an uncritical media and self-enriching policy decisions is expected to undermine itself. The question most often asked about social unrest is not when, but how much and whether it will cause national instability. Isolated protests and periodic bomb blasts already strike cities across China on a regular basis. The impact of most anti-government acts quickly fades, but occasionally protest has spread to towns throughout a single province. The most dangerous linkup feared by Beijing's leadership, according to Mr. Wu, would be angry urban elites aligned with peasants. This would combine the intellectuals who can lead political movements with the farmers, who have a proven capacity for collective action. (The harsh crackdown on the Falun Gong demonstrates China's fear of organized mass movements.) A further factor for unity is China's homogeneous culture built during several thousand years as a single political entity. This contrasts with the stark cultural and ethnic divides that splintered the Soviet Union.

Highly capable but alienated intellectuals, some of whom led the protests in Tiananmen Square, may form an opposition force. For now, however, their impact has been diminished by Beijing's tactics of harsh punishment - including retribution against entire families - alternating with tolerance for some expression of critical views. This gray line between critique and illegal act is most blurred around the explosive issue of corruption. Stupendous cases of self-enrichment have ended with execution of some high officials, but the lifestyles of wealthy children of party leaders have left the general public cynical about the leadership's true stance. "China's political structure encourages a very small group of people who have power, strength and rank to steal the wealth of society," Ms. He said. "It is a simple transfer of state assets into private wealth." Ms. He's own story - an internal critic turned dissident in exile - illustrates the government's love-hate relationship with those exposing corruption. Her best-selling book, "The Pitfalls of Modernization." showed clear links between poverty and corruption. Sponsored by the government and initially extolled as a "masterpiece" by a key adviser to President Jiang, the book led to Ms. He's flight to the United States last July. Relatively immune to similar retribution, Mr. Wu and the prime minister's committee concluded that China's continuing stability required urgent political and economic reforms.

Their key policy recommendations, which included sweeping legal reforms, democratization and cleaving the Communist Party from government, were pushed through the Party Congress by the prime minister. Bureaucrats scuttled the plans, however, dashing hopes for change and inspiring pro-democracy students to launch their protests in Tiananmen Square. "The anger that brought millions into Tiananmen Square could boil up again," Mr. Wu said. "No country can stand such pressures, not even China."

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