In the early 1980s Deng Xiaoping broke with the official Communist Party line and proclaimed to the Chinese people “To get rich is glorious”. Of course party officials, Mao especially, had lived a life of luxury for decades, but Deng’s first tentative steps towards a free market system unleashed the seemingly inexorable rise of the Chinese super-economy. The achievements of ‘socialism with Chinese characteristics’ are staggering; an average economic growth rate of 9% for the last twenty-five years, a six-fold increase in per-capita incomes and 400 million people pulled out of poverty. China is seen as economic juggernaut with the potential to outmuscle America in the coming century, but serious questions are beginning to be asked; for how much longer can China continue with double figure growth rates? How is it going to deal with endemic corruption and inflation? What happens when organised labour starts to demand political rights? And why do people think that China will be a stronger economic and cultural force than America - how many Chinese brand-names can you list?

In the thirteenth century China was richer and more technologically advanced than Europe but over the next seven hundred years Europeans transformed their society whilst Chinese power stagnated and declined. By the time the Communists managed to seize power in 1949 it was difficult to know where to start in order to reform the Chinese economy; hundreds of millions of peasants eked out a living on tiny plots of land, illiteracy was endemic, industrialisation had barely begun, feudalism was still in place, violence, corruption and opium addiction were rife and the average life-expectancy for a Chinese peasant was still under forty years. The challenge facing the Communists was monumental and their first solutions weren’t exactly efficient. Though Mao may have helped lay the foundations for China’s industrial sector and though his education reforms helped to spread literacy, his strict Marxist philosophies crippled China for decades. The Great Leap Forward was an unmitigated disaster and caused the deaths of around seventy million Chinese; the Cultural Revolution plunged China into the nightmare of an Orwellian state in which free thought was punished as treason. After thirty years of Communism China’s living standards had barely increased, if at all, and 70% of Chinese still lived as peasants, growing just enough food to feed their own families.

For Mao’s successor, Deng Xiaoping, the situation was clear; Communism simply could not achieve the economic growth rates of capitalist countries; as Japan, Taiwan, South Korea and Singapore displayed all too clearly. Deng’s pro-market reforms probably saved the Communist Party from revolution and helped to transform China into a world power, but once the capitalist genie was released there was no way of putting it back in the bottle.

China’s growth since 1980 has been truly staggering but it has been built on two sets of foundations that are beginning to reach the end of their usefulness. The Chinese resurgence has been built on foreign companies using cheap Chinese labour to manufacture their products, indeed foreign companies account for around 55% of China’s exports. While this investment has been crucial in allowing China to develop, it cannot continue to increase indefinitely. For a start as Chinese wages start to increase foreign firms are attracted to countries such as Vietnam, which can offer even lower paid workers. Secondly just about every company that is likely to invest in China has already done so and it is unclear how far foreign investment will continue to increase. Critically China has failed to produce its own global-brand companies and it is increasingly at the mercy of international markets. Japan and South Korea managed to produce companies which owned the intellectual property rights to the goods they were producing; China has singularly failed to take that next step. Nor has it been able to provide a highly skilled workforce to justify the higher wage demands of its workers.

The other factor crucial to Chinese growth has been the huge rate of personal savings amongst China’s poor. Because China does not have a free health service or national pension scheme China’s peasants are forced to save a huge portion of their incomes. This has allowed the Communist Party to use money deposited in the banking system to invest in a world class infrastructure, opening the country up to international trade in the process. However the practice of state investment has outlived its usefulness and the Central Government is losing control over local Government spending, which is one factor causing the economy to overheat and inflation to spiral. Inflationary pressures are already starting to hit China’s poor and it is a point not lost on the Communists that runaway inflation led to the collapse of the Nationalist Government.

Furthermore China is still trapped between two economic systems; a situation that could have fatal consequences for the Communist Party. The state is still responsible for producing 30% of GNP and twenty of China’s biggest companies are still state owned. But this attachment to central planning is extremely damaging to the economy; state-companies are not allowed to go bankrupt and so are bailed out with public money. This means there is no incentive to take risks and productivity is still extremely low amongst the Chinese workforce. Also the standard of Chinese output is beginning to be questioned after several scandals in the U.S. and Europe involving Chinese goods. Without competitiveness and incentives for risk-taking Chinese companies will never be able to compete with their Western and Asian rivals. The banking system is also controlled by the state and as a result it is massively corrupt and poorly run. Indeed corruption is estimated to cost the economy up to 16.9% of GNP each year. China cannot hope to devop a truly world class economy until it has an independent and properly regulated banking system.

Because China is trapped between two systems it is now the world’s most economically unequal country. More than 200 million peasants are still trapped in Maoist rural poverty and there are over 100 million migrant workers searching for a better life in China’s cities. China needs to create 23 million jobs each year to ease chronic unemployment, but at present employment is only growing by 1% each year. As the Special Economic Zones become increasingly wealthy while the rest of the country continues to live in Maoist squalor, the potential for huge social unrest increases.

The political apparatus of the Chinese state remain fiercely undemocratic. Trade Unions are banned, the judiciary is controlled by the party and there is no independent oversight in any part of society. The regime still clamps down on public dissent remorselessly, but cracks are beginning to appear. Each year thousands of demonstrations are held ilegally by members of the newly created industrial working class. They have plenty to complain about; from poor working conditions and a lack of labour rights to limits on religious freedom and the apocalyptic destruction of the local environment by Chinese industry. Unlike in 1989, protestors today are armed with mobile phones, digital cameras and e-mail accounts. Who knows how another protest on the scale of Tiananmen Square would turn out today?

The pro-market reforms initiated by Deng Xiaoping have saved served China well and in all likelihood saved the Communist Party from revolution. However after two decades of growth China is now at a crossroads. The Communist Party knows that the road to a fully capitalist system eventually leads to the introduction of democracy, individual rights and an independent judiciary; the holy trinity of the capitalist societies. But that would spell the end for the Communist Party. The regime cannot undo the reforms it has already implemented, nor can it leave the status quo; the pressures already bubbling under the surface could erupt violently given time. The party has been forced to acknowledge that class warfare is now over and that the country’s future rests with the capitalists. Effectively that means there is no longer any reason for the party to stay in power and the rationale for democracy is essentially unarguable. The party has thus sought to buy itself time by distracting its citizens with nationalism; the classic trick of any Orwellian tyranny. The party has become the state and any criticism of the party is therefore treason. Old antagonisms with Japan, Taiwan and the Dalai Lama are stoked up by the Government to encourage patriotism from a Chinese public indoctrinated by thirty years of Communist brainwashing. But nationalism cannot provide the answer to all of life’s problems and without elections to channel dissent there is no way to express opinion except through protest and eventually violence. Furthermore the party cannot create an economy to rival America’s without moving to a pluralist society based on the values of the European Enlightenment. If citizens do not have property rights, if they are not protected by the rule of law, if intellectual property is not safeguarded and if they do not live in a free society then there is no incentive to take risks and as a result economic output stagnates.

The Communist Party has abandoned Communist theory because it does not work. They have tried to adapt the economics of capitalism whilst severing it from democracy and the rule of law. The Party’s only real rationale for staying in power is its trusteeship of the economy. Yet the economy may soon reach a plateau and it cannot continue to expand forever without the Communist Party relinquishing its power over society. It’s a kind of Catch-22 situation you may say.

China is now hard wired into the global economy and unrest and upheaval in the Chinese dragon would have profound effects for us all. However with each new generation of Chinese leaders the power of the party is eased ever so slightly. China today equates to England in the 1820s and a newly created working class and bourgeoisie will eventually begin to lobby ever harder for political rights and greater economic freedom. China may one day evolve into a liberal democracy; indeed it is hard to see the future leaders from my generation maintaining the status quo. The question is can the party survive that long? A nightmare scenario would see a weakened and paranoid Communist Party launching an invasion of Taiwan to regain its grip on power.

The entry of one billion citizens into the liberal democracy club would be a great day for liberty on planet earth; but if the country starts to descend into instability we could well have a difficult century ahead of us.

The same debate seems to be ranging amongst the Politburo and it is difficult to know which faction is winning. One thing we know for sure is that the Communist Party is going to find it extremely difficult to relinquish its grip on power.

At the Sixteenth Party Congress in November 2002 Chairman Mao’s former aide, Li Rui, publicly stated:

“Chinese and foreign histories prove that autocracy is the source of political turmoil. As the collapse of the Soviet Union shows, the root cause is autocracy. Modernisation is possible only through democratisation. This is the trend of the world in the twentieth century, especially since the Second World War. Those who follow this trend will thrive; those who fight against this trend will perish. This rule applies to every country – and every party.”

Let’s hope his supporters win the debate; for everyone's sake.