China risk: Political stability risk
8 March 2006
Economist Intelligence Unit - Risk Briefing

COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT

RISK RATINGS
Overall assessment
Current Rating: C, Current Score: 47
Political stability risk
Current Rating: D, Current Score: 65
Note: E=most risky; 100=most risky.

SUMMARY

The Chinese Communist Party (CCP) will remain in power for the foreseeable future, with officials continuing to stamp out all forms of organised opposition. However, the next five years will be a difficult period for the CCP. Popular discontent has been on the rise in recent years, fuelled by low rural incomes, high urban unemployment, land seizures and widespread corruption. Nevertheless, fourth-generation leaders are gaining in authority following their assumption of key positions in the party and the state in 2002-04. China's president, Hu Jintao, is comfortably in control of the government, working closely with the premier, Wen Jiabao, but factional divisions within the ruling party will emerge from time to time. Mr Hu will attempt to promote key allies during the CCP's 17th Party Congress due in 2007.

SCENARIOS

Mishandling of protests in Hong Kong destabilises the Chinese leadership (Low Risk)

The Chinese government accepted the resignation of Hong Kong’s chief executive, Tung Chee-hwa, in March 2005. Mr Tung’s unsuccessful attempts to force through unpopular national security legislation in 2003 had prompted demonstrations attended by several hundred thousand. The appointment of a new chief executive, Donald Tsang, previously a leading civil servant, eased tensions, and pro-government parties did well in September 2004 elections for the Legislative Council (Legco). However, Mr Tsang’s plans for electoral reform were voted down in December 2005 by pro-democracy parties, who wished to see a faster move towards universal suffrage. The Chinese government has ruled out early moves towards full democracy, and there are fears that clashes between China and Hong Kong politicians over democracy in the territory could have repercussions for political stability in China as China’s leadership struggles to reassert its authority. Nevertheless, Mr Tsang’s position is much stronger than Mr Tung’s, and the relationship between the government and democracy advocates in Legco is likely to be less confrontational than under the former chief executive, despite the differences of opinion.

Local protests broaden into a wider movement (Moderate Risk)

Local protests will continue to be sparked by a number of issues including lay-offs, failure to pay workers, environmental pollution, corruption and illegal seizures of land. The local government's failure to properly compensate peasants for seized land was, for example, the cause of recent protests in Shanwei, in Guangdong province, in which several demonstrators were shot dead by police. To date the government has faced down such protests by addressing some of the complaints raised and arresting most of the leaders, but this tactic may not be so successful in the future. The size and number of protests appears to be growing, and the spread of mobile phones has made organisation of demonstrations easier. Moreover, although the government works hard to ensure that the media do not give publicity to any protests that do occur, the CCP is not omnipresent as it once was, and news of large protests tends to spread. This could encourage unrest elsewhere. The development of a large regional or even nationwide protest movement would clearly present officials with a major challenge. Foreigners would not be the targets of such a movement, although they might become involved if, as has repeatedly happened in Chinese history, the regime were to choose to divert popular anger, giving it an anti-foreign direction. Alternatively, foreign companies in China seeking to lay off large numbers of workers, for example, from a recently acquired local unit, may arouse the anger of organised labour. More serious risks could emerge if a sharp crackdown on protestors prompted international criticism or sanctions, as in 1989 following the Tiananmen Square demonstrations.

The continuing political transition results in a struggle for power or policy paralysis (Low Risk)

At the November 2002 national CCP congress the third-generation leadership, headed by Jiang Zemin, began to retire in favour of a fourth-generation group led by Hu Jintao. But although Mr Hu became general secretary of the CCP in 2002 and state president the following March, he did not inherit Mr Jiang's third position, chairman of the CCP’s Central Military Commission (CMC), until September 2004. Mr Jiang’s final position, as chairman of the state CMC, was surrendered to Mr Hu in March 2005. Since then, Mr Hu has moved quickly to reshuffle the provincial bureaucracy and appears to be widely accepted as China’s leader. The Chinese leadership sees its interest in presenting a united front to the Chinese public, but jostling within the leadership will continue during the forecast period. Major shifts in the balance of power are unlikely, and would only occur in the context of a specific controversy (for example, the mishandling of a major health crisis or a collapse in growth could prompt a realignment of power). While most factions within the CCP seem to support the current policy stance, businesses should be aware that the emphasis of policy could change if such a shift occurred.

Further disease outbreaks occur, creating public anger and leadership disunity (Moderate Risk)

The growing risk posed by bird flu has been recognised as one of the key threats to China’s strong economic growth rates. The World Health Organisation (WHO) has noted that bird flu appears to be widespread among the country’s poultry population, and outbreaks have occurred in numerous provinces in 2004-05, both among wild birds and among birds raised domestically and commercially. If these outbreaks spread they could devastate the country’s poultry and egg industries, which are among the largest in the world. Human cases of bird flu have caused even more concern, especially given the devastating impact of Severe Acute Respiratory Syndrome (SARS) in China in early 2003. A total of eight people had died of bird flu as of February 24th 2005. Bird flu is only the latest in a series of disease outbreaks that has been linked to close contact between humans and animals in the villages of southern China, and further viral outbreaks of a similar nature may occur in the years ahead. In addition to bird flu, a pig disease killed around 40 humans in Sichuan province in 2005, though its spread was limited by a strong and swift government response. Official efforts to counter disease epidemics have improved following the SARS crisis, but concerns remain over the government’s willingness (particularly at the local level) to disclose all facts relating to outbreaks. In addition, co-operation between ministries can be poor, and public health systems in some rural areas are still weak, hindering effective response. This category of risk is also increased by the partisan nature of the press, which can be relied upon to suppress facts deemed unhelpful to the party leadership. Companies should consider establishing contingency plans to cope with a potential health crisis that could render a large proportion of employees ill or disrupt logistics systems.