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SANDERS: Long odds for success in China

- - Monday, January 7, 2013

ANALYSIS/OPINION:

Perhaps more than Westerners, the Chinese have a gambling streak.

Even during the darkest hours of Maoist oppression and the regime's pretended puritanism, Beijing tolerated gambling on its southern flank in the Portuguese colony of Macau. Now reincorporated into China, Macau in 2012 ranked as the world's largest casino, holding the country's only legal gambling monopoly, and raked in $38 billion. December receipts set another record with 19.6 percent growth.

Next door, even old Mentor Minister Lee Kuan Yu has had to abandon Singaporean self-righteousness over casinos to compete for Chinese tourists pouring into neighboring Thailand at a rate of 1 million a year.

But the biggest gamble in Chinese history is now being placed in Beijing as the regime heads toward a new generation of Communist Party rulers. After months of soul-searching for "reforms," backed by the tightly controlled media and with the help of China watchers overseas, it's pretty clear there are going to be only cosmetic tweaks.

Basically, China's leadership is taking a gamble. Despite enormous problems, in no small measure arising out of the country's two decades of economic transformation, the Chinese Communist Party is betting its old development formula will continue working.

That script was written by Maximum Leader Deng Xiaoping, who in his dotage discovered that Marxist-Leninist-Maoist economics didn't work. Deng saw that it was only by joining the world economy and attracting foreign capital and technology that China could advance. And China has developed, becoming, as the cliche goes, the "factory to the world."

But success has brought new problems. The export markets created by foreign investors funded China's relative prosperity — feeding the deficits of huge state-owned enterprises inherited from the country's stagnant Soviet past even as a smaller, more vibrant private sector struggled. Now, export growth has been hit by the downturn in the U.S. and the European Union, by rising domestic costs overwhelming Chinese producers' narrow profit margins, and by new competitors from other low-wage countries. Some offshore manufacturing is even returning to the U.S. because of the digital revolution.

The other leg underpinning China's advance, a gigantic overexpansion of infrastructure, is facing a credit crunch. The huge "stimulus" which Beijing threw at the economy to ride out the 1997-98 world financial crisis cannot be repeated. Government banks and local governments have huge debts that threaten to engulf them.

All these and other problems have been dissected and re-dissected during the buildup to November's 18th Party Congress and the passing of the baton to a new generation in March. There seems to be some scuffling at the top: Retiring Communist Party Chairman Hu Jintao has been given short shrift. Unlike his two predecessors, he has lost his seat in the Central Military Commission. That's the heart of the party's power and the body where outgoing officials temporarily protected their followers from a new team's depredations.

But making any fundamental changes — for example, answering growing local "mass demonstrations" with more political participation or moving toward a more consumer-oriented economy — would always have been enormously difficult. What has led to the party's stand-pat attitude was a political scandal that broke on the eve of the Congress. It may be the greatest test for the regime since the 1989 student and worker rebellion that ended in the massacre in Tiananmen Square.

Gu Kailai, the wife of Bo Jilai, a rising party chieftain in the important southwestern city of Chungking, had a show trial — after her antics were advertised on the Chinese Internet, an increasingly troubling phenomenon for the rulers. She was convicted of personally murdering a British businessman and sometime intelligence agent. He and a Frenchman, who seems to be off the hook, were stashing the couple's filthy lucre overseas. The scandal broke when Mr. Bo's police chief sought asylum in an American Consulate, apparently frightened that he too might be done in by Mrs. Gu.

Mrs. Gu's husband's removal from the Politburo — and a secret trial for his police chief who had been handed back to the army by the Americans — have for the moment eclipsed the scandal. But the incident dramatizes the regime's growing fissures.

China's always-suspect official statistics show a drop in gross domestic product — a measure of all economic activity — below the 8 percent widely believed to be necessary for political stability. But the party is gambling that it can continue with rapid economic growth as the rationale for a repressive and corrupt regime, a bet with long odds.

Sol Sanders, a veteran international correspondent, writes weekly on the intersection of politics, business and economics. He can be reached at solsanders@cox.net and blogs at yeoldecrabb.wordpress.com.