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China is currently experiencing the beginnings of two possibly very destabilizing events: the political scandal surrounding Bo Xilai, and the mounting indications that China’s high growth rates are starting to slow. Because of the unique mixed economico-political model run by the Chinese Communist Party these events hold the possibility to unleash a mutually reinforcing spiral of instability.

Minxin Pei argues that Bo Xilai is not the exception to the Communist Party’s organization, but rather the norm. China’s “princelings” have gamed the system to amass huge personal fortunes through combinations of corruption, patronage, and manipulation. Most countries can point to insiders who profit from political positions, but the Chinese case is particularly troubling given that the Communist Party’s implicit agreement with the Chinese people holds that the Communist Party will select highly qualified people to run the economy in a more or less technocratic fashion to deliver widespread economic growth. If there are really as many super-rich princelings as David Barboza and Sharon Lafraniere claim there may be (hundreds of thousands), then the game is up in Beijing. The spoils system, they argue, “poses a fundamental challenge to the legitimacy of the Communist Party.”

But at the same time, there are growing indications that the model may be falling apart already. At the onset of the Great Recession, economists were pretty rosy about growth prospects in emerging markets even with weak demand from developed markets (“decoupling”). But China analysts were also quick to point out that even if China avoided recession, its economy needed at least 8% annual growth to keep pace with urbanization, and quell the political aspirations of the new middle class. Based on a 2011 working paper by Barry Eichengreen, Donghyun Park and Kwanho Shin, China’s economy stands a good chance of slowing to around 6% annual growth (down from the 10% of recent decades) by 2015 when its per capita income level reaches $17,000, when 23% of its workforce is employed in manufacturing, and its ratio of retirees rises. Michael Pettis thinks growth will be even lower, at around 3% for the rest of the decade. But there’s reason to expect slower growth is already here. Gordon Chang notes that electricity output has fallen to about 0.7% growth implying that the economy isn’t growing, and may be contracting already. The WSJ reports that China’s manufacturing index recorded its 7th straight fall in April. Combined with a European recession, and slow business orders and economic growth in the US, a synchronized global slowdown could sweep across China, Europe, and the US in the coming months. If you add to this the looming threat of a Chinese housing bubble and nonperforming loans, then China’s growth prospects seems pretty grim.

The Chinese political system stands on the twin pillars of effective economic management and strong economic growth. Communist Party officials promised to govern technocratically and that their expertise would deliver high growth rates and widespread prosperity. The Bo Xilai scandal is particularly damaging because it highlights that economic growth has been siphoned off and concentrated in the hands of manipulative political elites. If growth begins to falter in the coming months, the Bo scandal and political turmoil risks compounding the enormous pressures the Communist Party will face. Developing…

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