China’s middle class and its growing dilemma

China is stronger, but also weaker than it was a decade ago. These weaknesses can make the difference in the China-America confrontation.

Many things have changed since 2001, when China and the US came close to clashing with the EP-3 incident, in which an American surveillance plane crash-landed on the Chinese island of Hainan after colliding with a Chinese fighter midair.

While the new Trump administration is saber-rattling all around China and threatens trade retaliation against China, each country has its own weaknesses.

The possibility of a World War III has become immediately more real, not only for the threats of the Republican hawks; even the more level-minded democrats are calling to check China’s ambition, as Robert Kagan did recently on Foreign Policy.

But we are just at the beginning of the Trump presidency and many perceptions could be wrong. For instance, problems with abandoning the free trade agreement in Asia (TPP) could be exaggerated.

The US can in theory negotiate bilateral trade agreements where each part would feel privileged with its own access to Washington. This could in turn offset the lures of a competitive multilateral trade agreement coming from Beijing.

Beijing has little reason to feel too confident right now. The country is stronger, but also weaker than it was 16 years ago. These weaknesses are extremely important because they can heavily condition the confrontation with the US in the following months.

China is obviously stronger because it has a much larger GDP, about eight times that of 2001. It is also weaker because it has a much larger middle class that is disenfranchised from politics and committed to stability, but not necessarily to the present government or its structure.

This middle class, now possibly about one-third of the total population, mostly don’t receive benefits for healthcare, education, or retirement from the state. And it doesn’t vote. Therefore, it’s increasingly taxed indirectly via an expensive healthcare system, education, and the fact that there are almost no retirement benefits.

That is, this middle class has to look after itself, but these services could be provided by China or by other countries, to which many try to migrate. And the price-quality ratio is actually better abroad — for the same price, one can receive better healthcare or education than in China.

In other countries, these services are provided by the state and paid for by the state. The state providing services establishes a strong link between itself and individuals. If people have to pay individually for everything, the link between state and citizens becomes looser, and the latter feel free to look for benefits wherever they can find them.

In other countries, the state doesn’t provide these services, but citizens are entitled to vote, thus giving them a voice in changing the taxation system. What in China is preventing pressure for representation from the middle class is the fact that the economy is still growing and people feel they can still hope to improve their income. This in part makes them not fully conscious of their situation.

However, foreign pressures and shrinking business opportunities may hasten the process of giving the middle class a new consciousness. This is not just about indirect taxes, but also about acquired welfare.

Property rights are unclear, which is the second cause of complaints to mayors, after pollution. Pollution, in turn, pits the middle class (who have the means to take care of their health) against the new proletariat (whose daily livelihood depends on dirty jobs).

But the issue of property rights might be easier to solve, because it pits large capitalists and junior officials (owners de jure or de facto of buildings or land) against the middle class, owners of one or more apartments. The state could easily intervene in favor of the small owners. Recently, Donald Clarke pointed out that if even property of one’s own apartment is disputable, then there is huge potential for social fissures in China, now that over 80% of people “own” their homes.

Many common people feel that only members of the slither-thin elite class can feel assured of their future, and thus they look for some safety by buying an apartment abroad or sending their children away to study.

Members of the elite, conversely, feel insecure because they sense the popular resentment and fear they could be overthrown. After all, they are children of the 1949 Communist revolution and went through the Cultural Revolution: they experienced firsthand the ups and downs of politics and history.

Moreover, the global situation is changing rapidly. The growing robotization of industrial production cuts the benefits of delocalization, and the race for cheaper manufacturing sites has moved millions of jobs from China to places like Bangladesh or Ethiopia.

China’s great assets are its potential consumer market, the nimbleness of its entrepreneurs, and its potential to be the center of a vast Asia-Pacific platform. That is, there is little or no future for China as a production and export powerhouse with a closed market, but there is a great potential in developing its domestic market, open it to foreign investments, and becoming more inclusive.

This could offset its weaknesses in a possible confrontation. But most importantly, it could put the country on a very positive and different trajectory.

This story was first published in Limes, the Italian-based on-line magazine providing political analysis of global events.