Politics and Economics in China

Trend: China and India will need more and more commodities to feed the economic engines that will provide jobs for the poor and job security for government officials.

Jim Jubak presents some little known information about the political climate in China and how it might affect the rest of us.

Source: MSN Money - Global growth means a risky 2006 - Jubak's Journal.

...both China and India are being pushed toward higher growth next year. That, of course, raises the odds that the global economy will overheat, that commodity prices in general will climb and that oil prices, in particular, will spike again.

China is in the midst of a terrifying political crisis. It's terrifying to the ruling Communist party, that is, because the crisis is close to growing from a local to a national one, and because the regime has really only two tools to "fix" the crisis. Repression, the preferred tool, doesn't seem to be working very well. If repression fails, the central government will have to fall back on economic bribery on a massive scale.

The most recent highlight of the crisis occurred on Dec. 6 in the farming and fishing village of Dongzhou, when peasants evicted from their land to make way for a power plant staged a nonviolent protest that was met by a massive show of force. According to the Beijing government, three peasants were killed by gunfire from security forces. The peasants put the death toll at somewhere near 20. The violent suppression of the demonstration was followed by a reign of terror in the area, which was sealed off from outside contact, as security forces searched house to house and took away an estimated 50 alleged ringleaders.

According to official government numbers, this is just one of a rising tide of protests in China. Last year, the number of such protests topped 74,000.

Even more than the sheer number of protests, it's what links them that makes this such a dangerous crisis.

First, like many of the protests, this one took place in a rural area left behind by China's rapid economic growth.

Second, like many of the protests, this one was rooted in rampant corruption in the government and within the party.

So guess how far the villagers got when they attempted to petition the local government? A group of villagers delegated to complain to the local officials was arrested in July. The regular security forces that broke up the villagers' sit-in on Dec. 6 were joined by thugs from local organized crime groups hired by local officials and party members.

That corruption limits the central government's authority and its ability to apply repression -- unless it's willing to risk a national outbreak of violence that could shake the entire Chinese economy.

On the local level, China's government often operates as a kleptocracy, driven only by its greed to appropriate public property for private profits.

The central government is well aware that a national policy of repressing protest, enforced by local officials (who see nothing wrong in hiring armed thugs), could result in an epidemic of violence.

So when it comes to solutions, the Beijing government has only one option: provide a rising tide that will lift all boats. To stay even, China will have to create 300 million new jobs. To make a dent in rural poverty, it will have to do even better than that. And to stem the protests, these jobs will have to provide enough pay to raise income for the 700 million people in China earnings less than $2 a day.

Think the Chinese government has a vested interest in economic growth? The Beijing government will undoubtedly fudge the numbers to show that growth isn't out of control in order to reassure the international capital markets. But every act of domestic violence in China is one more argument for more growth now and worry about the consequences later.

China isn't alone in this problem. India will add 71 million workers to its population in the next five years. The country already counts 38 million official unemployed. Tens of millions more are underemployed. Vietnam is even poorer and younger than China and India.

And all that's bad news for bullish investors who are counting on a combination of not-too-high-and-not-too-low growth with steady or declining commodity prices to deliver their own tide that will lift all stocks in 2006.