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Many observers are predicting that this will be an extremely difficult year for China, both politically and economically. The 19th National Congress of the Communist Party of China (NPC) will be held in the second half of the year and almost certainly anoint Xi Jinping as the leader of the party, and by extension the state, for a second term.

But a majority of the members of the Politburo Standing Committee, the party’s hub of power, are expected to retire, opening the door to an influx of leaders from a new generation.

At this time of transition, questions abound. Can the regime maintain political stability, for example, and can the economy successfully reinvent itself as Chinese leaders hope?

Not surprisingly, the answers to those questions have implications for Taiwan. About 40 percent of Taiwan’s exports go to China while only 18 percent are sold to Southeast Asian countries. So no matter how vigorously Taiwan’s government promotes its “New Southbound Policy” – directed at bolstering ties with ASEAN and South Asian countries – if China’s economy falters, Taiwan will be hard-pressed to make up the gap.

CommonWealth Magazine sent a team of reporters to China in the second half of March to size up where it stands and found that it is currently facing a series of challenges best described as one “bubble,” two “tigers,” three “swords” and four “seas of angst.”

Should China stumble in addressing any one of these challenges, it would undermine the ability of Xi’s administration to maintain political stability and could even imperil Taiwan’s existing security.

Three Swords Hanging over Xi’s Head

“What is most envied in China right now is not an ‘official’ or ‘affluent’ second-generation, but a ‘dismantled’ second-generation,” says a deputy party secretary at the prefecture level in Jiangsu province. He was referring first to children of government officials or the nouveau riche and then to children of families whose homes have been dismantled to make way for new developments in exchange for cash or new homes.

Pointing to a subordinate across the room who’s busy eating, the official continues: “Don’t be fooled by how young he is. If he resells the new home he was allotted after his old home was demolished, he will make 2 to 3 million renminbi.”

This type of story permeates Chinese society at a time when the country faces a huge property bubble.

As China’s economic structure changes tracks and its development model gets a facelift, the property market remains the only economic engine that still has momentum. Real estate sales grew 35 percent in 2016 to over 11.7 trillion renminbi (roughly US$1.7 trillion, NT$52 trillion), the equivalent of more than three times Taiwan’s GDP. The conflict and resistance triggered by the dismantling policy has been cast aside in favor of an obsession over the growing heap of property assets.

The Dalian Wanda Group is building the world’s biggest cinema and film production complex – Qingdao Oriental Movie Metropolis – on a landfill on the city’s western coast.

CommonWealth reporters ran into people of all generations – young, middle-aged and old – in Beijing’s subway system, while renting a car in Qingdao and in a Nanjing restaurant, and the one topic that resonated across the generations was housing prices.

Xi enjoys citing the Greek parable “the Sword of Damocles” as an analogy for the swords hanging over China’s wealth and affluence that could come down at any time.

In fact, there are at least three such swords hanging precariously over China, and if any one of them were to be unleashed, it would trigger political, economic and social turmoil internally and destroy the tightly interwoven economic relations and fragile political relations that exist across the Taiwan Strait.

Sword No. 1

The Property Bubble: Too Big to Burst

Jianguomen Outer Street is bustling as always, and through the gray haze one can spot faintly visible white plum blossoms. A doorman wearing a navy blue tailcoat at a nearby four-star hotel paces around the lobby, his hands behind his back.

“The Chinese economy is like a dried-out turnip; you can’t squeeze any more juice out of it. Right now, only the property market still has some juice, but it’s more like a flood,” says the 50-something doorman in the standard Beijing dialect, with plenty to say on housing prices just like everybody else in the country.

Underlying the talk is the sense that the huge property market bubble is so big, it cannot be allowed to burst.

China is a country that is constantly dividing cells and then replicating them. Go to any first-tier city, and you’ll see the same thing – buildings, buildings, and more buildings seemingly extending into the horizon. They are snapped up by consumers the moment they go on the market and hoarded, but they are all empty.

Aside from 12 cities with GDPs of more than 1 trillion renminbi, China also has 19 national-level “new areas,” more than 3,500 new towns, and more than 10,000 industrial parks. They all started out as grand strategic development initiatives, but have ended up as nothing more than opportunities for new large-scale housing developments.

“Our property bubble is really scary,” says Tao Ran, a professor in Renmin University of China’s School of Economics. An expert on economic transformation, Tao believes the problem results from a serious imbalance in the property market. In most of China’s more than 300 prefecture-level cities, he says, there are more housing units than people, depressing housing prices. But in first- and second-tier cities that people are flocking into, the supply of housing is inadequate, and “hunger marketing” policies have resulted in housing prices that only go up.

Inside Beijing’s 3rd Ring Road, which encircles the center of the city, housing prices soared from about 8,000 renminbi per square meter 10 years ago to 70,000 renminbi three years ago. They then took a quantum jump to 130,000 renminbi today and don’t show any sign of letting up.

Even Wang Jianlin, chairman of China’s biggest real estate developer, the Dalian Wanda Group, was moved to publicly declare last year that China’s real estate bubble is the biggest the world has ever seen.

Real estate currently accounts for 70 percent of the assets of Chinese households, and over 40 percent of local government revenues depend on the sale and acquisition of land.

“Who dares allow this big of a bubble to burst? That would be tantamount to looting the assets of the people and local governments,” says an economist who taught at the Communist Party’s Central Party School for 15 years. Because of that philosophy, any attempt by the government to keep property prices in check ends up being seen as “a signal to snatch up property,” the economist says.

Last year, authorities in Shanghai tried to rein in skyrocketing real estate prices by requiring first-time property buyers to put up at least 35 percent of the cost, but the move boomeranged and fueled a property buying spree. A Taiwanese businessman who works in Shanghai bought a home in the city’s Jing’an district amid the frenzy, and then resold it for a 1 million renminbi profit.

Not Buying Property Means Regrets

The problem has not gone unnoticed by the Beijing authorities.

Over the past half year, 45 cities have initiated over 140 policies to rein in the market, and the China Banking Regulatory Commission has recently directed financial institutions to develop risk monitoring mechanisms for real estate.

In mid-March, the Beijing municipal authorities issued nine directives to control the property market in 10 days, with an eye to freezing housing prices. But less than two weeks later, the central government unveiled plans to create a “Xiongan New Area” around 50 kilometers south of Beijing to disperse the capital city’s exploding population. To be located at the nexus of Rongcheng, Xiongxian and Anxin counties, the new area has been hyped as one day becoming as important as the Shenzhen Special Economic Zone, set up in 1980, and the Pudong New Area in Shanghai, launched in 1992.

Not surprisingly, the announcement of the new project triggered a new wave of property speculation.

(Top) Real estate is the one engine of China’s economy that still has some juice, but fears of a bubble are mounting. (Below) Reforms and social conflict are racing each other, and the one that wins will decide China’s fate.

Six months ago, historian Hong Zhenkuai visited the sparsely populated region where the new area will sprout up and saw little more than clusters of reeds. “I didn’t see what there was to it,” he recalls, completely skeptical that it will turn into Pudong or Shenzhen one day.

But no sooner had the Xiongan New Area been announced than property speculators from around China moved in, driving a run on train tickets to Xiongan. A poor area with average per capita income of only 2,100 renminbi had became hot overnight, and China’s government responded with an emergency decree that barred any property transactions or marriage registrations in the Xiongan region.

“Wherever there’s the greatest potential for rising property prices will be the Jerusalem of China in the 21st century,” wrote Qin Shuo, vice president of Shanghai Media Group, in a text to his friends on WeChat. He described the great “Go to Xiongan!, Go to Xiongan!” migration as the “great chaos” in a time of peace and said of the people around him: “If they are not on the property-grabbing road to Xiongan, they are on the road of emotional distress and regret.”

Another factor blowing the property bubble bigger has been the vast amount of liquidity from loose monetary policy pouring into the property market.

Issaku Haruda, who writes for leading Japanese economic media Nikkei, argued in a March article that while China’s economy seems prosperous on the surface, that prosperity has been built on Beijing’s “ultra-easy monetary policy.” China’s government may have announced a real growth rate of 6.7 percent in 2016, Harada wrote, but growth was actually only 1.3 percent when measured in dollar-denominated nominal GDP.

In 2008 when the global financial crisis ravaged the U.S. and European economies, China became the savior of the global economy, but the Chinese economy also faced major difficulties, and Beijing has kept the monetary tap running in the absence of concrete and effective solutions.

Economist Zhao Xiao, who worked in economic research under the State-owned Assets Supervision and Administration Commission, says that in 2012, China’s M2 money supply (which covers cash and highly liquid assets such as savings deposits) was the highest in the world and accounted for nearly a quarter of the total global money supply. By last year, China’s M2 had reached 160 trillion renminbi, twice China’s GDP. (By comparison, M2 in the United States was only 70 percent of GDP.)

“This is a case of deliberately pumping water until the tap runs dry. If nothing happens, great. But if things go wrong, it will be a disaster,” Renmin University’s Tao says.

Sword No. 2

Reforms vs. Social Contradictions

The money games involving property have created a big group that financial writer Wu Xiaobo calls the “rentier class,” composed of people who have become wealthy on gains from financial assets rather than from professional endeavors.

Wu observes that wealth is quickly becoming concentrated in the hands of these rentiers, widening a rich-poor divide that has become the greatest potential source of upheaval in Chinese society and accelerated class stratification.

This is the second sword hanging over China’s head.

The “Wellbeing Development Report of China 2016,” published in early 2017 by Princeton University professor sociologist Xie Yu, noted that the wealthiest 1 percent of Chinese households hold a third of China’s total wealth, while the bottom 25 percent own only 1 percent of the country’s wealth.

At the same time, China’s Gini coefficient, a measure of income inequality, has climbed as high as 0.7, compared with 0.4 in the United States and 0.34 in Taiwan. A Gini coefficient of 0.4 is already considered a warning level for dangerous levels of inequality.

Thirty-three-year-old Liu Yiqiang believes that breaking out of poverty in China is becoming increasingly difficult.

Liu worked at Beijing’s top law firm for three years, during which he went to Cambodia to serve as a defense lawyer in the Extraordinary Chambers in the Courts of Cambodia and participate in international relief efforts. He later set up a nongovernmental organization called the “Chinese Initiative on International Law.”

Liu quit his enviable job with the law firm to work with the less well-off in society and quickly felt the anxiety simmering throughout civil society.

On the one hand, all of society’s resources are being sucked away by big cities. “Rural children have nothing; 60 million children left behind, they have all lost,” Liu observes.

On the other hand, young people crowding into big cities for work cannot afford to buy a house, leaving them feeling powerless and vulnerable to being driven out.

“This situation has become more entrenched and will soon become handed down from one generation to another,” Liu says with a frown.

Economist Jia Kang, a member of the National Development Planning Experts Committee for the 11th, 12th and 13th five-year plans, has described China’s predicament as “two tigers racing each other.” One of them is “reform,” and the other is “social contradictions,” and “which tiger runs faster will decide the fate of Chinese society,” Jia argued.

Sword No. 3

Sabotaging Anti-Corruption Plans

The 19th NPC will serve as a gauge of whether Xi’s government can solve those problems. It’s ironic, however, that the third “Sword of Damocles” hanging over China’s head is official corruption and the lack of action in addressing it.

In an October 2013 story on “Dual-Faced China,” CommonWealth revealed after Xi’s first year in power that the policies of China’s government were to the left politically and to the right economically.

“It has moved farther to the left politically and farther to the right economically. Political and social controls have become tighter and economic reforms have not delivered results,” says a source who was interviewed for the 2013 article looking back over the past years. He acknowledged that China’s social contradictions are becoming increasingly difficult to solve.

Amid this difficult environment, Hunan Satellite TV drama series “In the Name of the People” has caught on with viewers, emerging as the top ranked show in China. Billed as the biggest anti-corruption drama ever, the show not only describes political infighting and closely reflects public grievances, it also highlights anti-corruption achievements during Xi’s first term.

It’s just that anti-corruption measures have had several side effects.

An economist who once worked at the Communist Party’s Central Party School says bluntly that Xi’s anti-corruption campaign has led to bureaucratic inertia, with officials shirking their administrative responsibilities and blocking reforms. Central government leaders have strongly criticized public officials’ passive attitudes as “pretending to be sick when they’re not, and turning minor ailments into major illnesses.”

The proof is in the statistics. Provincial-level officials take an average of 31 days of leave a year, prefectural officials take 52 days of leave a year and county-level officials take 45 days of leave a year beyond standard vacation time.

The economist predicts that the two urgent issues to be tackled at the 19th NPC will be choosing somebody to succeed Xi in 2022 and solve official inertia.

Xi has already proposed several measures to light a fire under the lethargic officials.

At the beginning of this year, every official was required to visit an average of more than 30 grassroots households to explain the government’s policies and understand people’s needs. They were asked to immediately solve the problems they were capable of solving, and report the ones they couldn’t solve to their superiors. They also had to file a report on their findings and make policy recommendations and then follow up six months later.

In another initiative, the Chinese government also stepped up training of more than 2,000 secretaries of county-level Communist Party committees.

“Aside from not having any military or diplomatic responsibilities, [the secretary] directly faces the grassroots and essentially runs a small country,” a Jiangsu province official told CommonWealth. To get each committee’s chief secretary and other officials to more actively take responsibility, files on all major public projects are to be preserved forever so that if a problem occurs in the future, “anybody who has signed off on the project will assume life-long responsibility.”

The Rise of a Superpower Causing Anxiety

The property bubble, social contradictions, and governance all represent major internal challenges for China, but unpredictable geopolitical shifts represent external threats.

“Nobody would have thought that 2017 would get started with this kind of violence,” says Zheng Jiyong, the director of the Center for Korean Studies at Fudan University. Counting the incidents on his fingers, he was referring to the assassination of Kim Jong-nam, the half-brother of North Korean ruler Kim Jong-un, in February; South Korea’s move to deploy the Thaad anti-missile system in March and China’s subsequent boycott of Seoul; and the holding of the biggest ever U.S.-South Korea war games, also in March.

Zheng has studied the Korean Peninsula for more than 20 years, and he never imagined the peninsula would emerge as China’s thorniest diplomatic headache.

Renmin University professor Shi Yinhong, a well-known expert on international relations, describes the international predicament China is facing as: “the Yellow Sea, South China Sea, East China Sea and Taiwan Strait – none of these four seas are calm. Relations in this circle in the Western Pacific are all bad. It really is a major headache,” says Shi, shaking his head as he draws a circle in the air with his right hand.

He is concerned that all of China’s short-term achievements, such as the “One Belt, One Road” initiative, cannot make up for the structural deterioration of Beijing’s strategy on its periphery.

The Strength of China’s Private Sector

Donald Trump became president of the United States determined to “make America great again.” It’s a message destined to collide with Xi Jinping’s “China dream.”

“The collision of values will be a lot more impactful than the collision of interests,” contends a former manager at a state-run media outlet and observer of Chinese politics, adding that China’s many internal and external threats are bound to spell trouble for China, Taiwan and even the world.

When Xi Jinping’s “China dream” collides with U.S. President Donald Trump’s vision of America, it will be a collision of different values. That has created challenges for China’s diplomatic strategy.

Walk into Nanjing University’s Gulou Campus and one sees a sea of lavender surrounding an old red-brick building. In the office of Zhu Feng, director of the university’s Institute of International Studies, shelves, tables and even the floor are overrun with books and research papers.

Zhu left Peking University last year to become director of the Collaborative Innovation Center of South China Sea Studies at the university – a unit under the direct jurisdiction of the central government. He leads a team of 18 scholars in researching military, diplomatic and trade issues related to the South China Sea.

Zhu contends that China is currently facing the problems typical of when big countries grow.

“China is like an elephant. On its periphery are all small and medium-sized countries that cannot separate themselves from you but at the same time are always wary of you,” Zhu says.

He worries that nationalistic bluster in China has gone overboard, and the frequent verbal intimidation only deepens international resentment of China.

“China’s biggest challenge at present is to learn how to become more polished,” he says.

In Need of an Overhaul

The engine of reform and development that China has relied on for nearly 40 years is in need of an overhaul, but the question is how that will happen.

China has faced similar questions before. During those 40 years of development, Beijing authorities have survived several predictions of “imminent collapse,” demonstrating each time a capacity for self-repair.

Lin Chufang, the former vice president of China’s largest media platform “Today’s Headlines” (toutiao.com), often needs to go abroad for extended periods, and “every time I return to China, I find I’m behind the times again.” A media veteran, Lin has grown accustomed to China’s constant change, but the dizzying speed of change and incredible vitality of the private sector surprise even him.

Mark Han, the executive director and chairman of DaChan Food (Asia) Limited, agrees, saying that China’s ability to adjust cannot be underestimated.

“Exaggerating China’s strength is at least as big a risk as underestimating its potential. Either can lead to irrational responses and mistakes in the way we [the U.S.] deal with China,”

“The private sector’s creativity is so strong. Enterprises quickly fall by the wayside, and the deck is reshuffled every year. One dominant player emerges each year, and everybody wants to beat it out,” Han says.

It’s an environment that forces everybody out of their comfort zones.

Former U.S. Treasury Secretary Hank Paulson, who has dealt with Chinese officials for nearly 25 years and visited China more than 100 times, offered his observations on that interaction in his book “Dealing with China: An Insider Unmasks the New Economic Superpower.”

Paulson writes that China is not an unstoppable powerhouse; it has an economic system “sorely in need of a major overhaul” and that has few imitators.

“Exaggerating China’s strength is at least as big a risk as underestimating its potential. Either can lead to irrational responses and mistakes in the way we [the U.S.] deal with China,” Paulson writes.

Could not the same be said for Taiwan?

Translated from the Chinese by Luke Sabatier