The Scary Side of China's Economic Woes

It's official: the United States is in a recession. Meanwhile, China's annual growth looks likely to fall below 9 percent this year. Given how export-dependent China's economy is, it makes sense that Beijing is worried about conditions in the United States. But the United States should be equally worried about China.

The reason is politics. In the United States, the political fallout of the crisis is already becoming clear, and has included the election of Barack Obama—who quickly appointed an experienced and respected economic team. In China, however, the consequences remain far less certain. Beijing has already proposed a stimulus package of 4 trillion yuan (almost $600 billion). But there's reason to worry about what will happen if the bailout doesn't work and annual growth falls beneath 8 percent.

Chinese citizens today no longer enjoy the old "iron rice bowl" (a guaranteed lifetime job), but in its place they've been promised golden chopsticks: a steadily rising standard of living. Should unemployment keep growing and wages stagnate, however, workers and peasants could take to the streets—as taxi drivers did in three Chinese cities last month. More instability could deter foreign investment in China, slowing the economy still further. If that happens, the Chinese government might decide to distract the population by trying to shift its attention to a foreign scapegoat, whipping up a nationalist response. That's a prospect that should worry everyone.

This scenario may seem farfetched. After all, economists debate whether 8 percent growth really is the magic number, and unemployment needn't automatically translate into unrest. Still, Beijing itself is clearly concerned. The chairman of the National Development and Reform Commission warned in late November that "excessive production cuts and closure of businesses will cause massive unemployment, which will lead to instability." And President Hu Jintao himself recently described China as "under growing tension" both from the global financial crisis and "from its large population, limited resources and environmental problems."

Remember, too, that the Chinese government is professionally paranoid, and has waved the nationalist flag in the past to distract the population from other crises. Moreover, the Chinese population often needs little coaxing. China's younger generation is proud, but also prickly. Public anger simmers close to the surface and can easily explode in violent riots, as it did after the United States accidentally bombed the Chinese Embassy in Belgrade during the Kosovo war, or after Japan's prime minister repeatedly visited a controversial World War II cemetery. Today the Chinese public is primed to respond to provocations quickly, thanks to widely circulated stories blaming the U.S. economic collapse for the closing of Chinese factories. Since the financial crisis struck, Beijing has been much more restrained about blaming the United States than some other foreign governments, especially Russia's, have been. But if conditions continue to deteriorate, China's leaders could change their tune.

To help prevent that and reduce the risk of a Chinese nationalist backlash, the U.S. government should act now to reinforce another source of Beijing's domestic legitimacy: ordinary Chinese citizens' pride in their country's growing clout and importance. The huge success of the Beijing Olympics went a long way toward easing painful Chinese memories of the "century of humiliation"—a period that began with the forcible Western opening of China in the mid-19th century and lasted till the communist revolution in 1949. But bad feelings still linger. Addressing them by encouraging Chinese to feel pride in their country's increased international role would be a smart strategy—and a much healthier antidote to a domestic downturn.

The incoming Obama administration should thus start thinking now of ways to confer a little pre-emptive prestige on China, acknowledging its increased weight in the world. In this regard, the recent shift from the G7 (which doesn't include China) to the G20 (which does) as the forum for reforming the global financial architecture was a good start. Washington should capitalize on it by pushing to grant China increased power in the IMF and the World Bank. It should also convene a climate-change workshop of the E8, the world's top emitters; help institutionalize an East Asian security mechanism based on the Six-Party Talks (which were held to address North Korea's nuclear program and included China, Japan, Russia and South Korea); and include China on the issue of U.N. reform.

The United States remains the most powerful and the most connected nation in the world. That means the political fallout from the global economic crisis will land on its doorstep, and soon. Equally to the point, the prospect of social unrest—and a surge in ugly nationalism—in China, a country of 1.3 billion, is everyone's problem. It would thus behoove the U.S. government to start thinking two steps ahead and take action now, before a scary scenario becomes an even scarier reality.