A porcelain powerhouse

Confidence in China has survived Deng's death. But optimism may be fragile, write Paul Rodgers and Ted Plafker

The streets and alleys leading to China's booming factories were as packed as ever on the morning after the death of the former Vice Premier, Deng Xiaoping. Millions of bicycles - some of them snazzy new 18-speeds, a few in shocking neon pink - jostled for position in elaborate games of chicken with the bumper-to-bumper lines of cars. The clamour of chrome bicycle bells and rubber horns cut across the pungent mixture of exhaust fumes, cooking fats and the pervasive stench of public toilets. Workers munched on you bing, a deep-fried breakfast dough sold by street vendors, briefly discussed the "paramount leader's" demise, then trooped, in their plastic sandals and black bu xie slippers, into work.

It was a reassuringly ordinary scene repeated up and down China's 11,500- mile coastline. None of the public grief that surrounded Chairman Mao's death two decades ago could be seen. And the foreign businessmen, diplomats and self-appointed sinologists who observe the inscrutable Middle Kingdom were confident the "business as usual" attitude would continue.

A return to orthodox communism seems implausible. "Labels like left or right, liberal or conservative have become meaningless in Chinese politics. There are no major ideological battles to be fought any longer," a Western diplomat said in Peking recently. But power is not necessarily fought for only because of ideology. The vacuum at the top of China's hierarchy left by Deng's death provides more room for manoeuvring than the average bike rider gets in Guangzhou's rush-hour traffic. And the relative consequences of hesitation or miscalculation could be just as catastrophic for China's economy as it would be for the cyclist. More than that, a blunder could have spill-over effects throughout East Asia.

"The conventional wisdom is always that it will be OK," said Gerald Segal, a senior fellow and China specialist at the Institute for Strategic Studies. "There are lots of reasons not to believe the conventional wisdom. For one thing it has been wrong on every major occasion in recent Chinese history. Expect the unexpected."

A surprise policy swerve in Peking would have had little effect on its neighbours just a few years ago. Japan was the undisputed giant of the regional economy, with the Asian Tigers - South Korea, Thailand, Singapore and Hong Kong - nipping at its heels. Although still hugely important, today's Japan is struggling out of its property and banking crisis, while some of the Tigers are showing signs of slump. Singapore even fell briefly into recession last year. And while the traditional engines of growth in the region have flagged, the influence of China as an immense market and as an industrial powerhouse has grown. "The Chinese economy has been the most dominant engine of growth in the five years since Japan came to a halt," said Mr Segal.

The question is how China's new oligarchy will balance the need for economic reform against the need for political stability. One analyst at a foreign consulting firm in Peking noted that: "Maintaining stability here means things like letting the credit continue to flow to failing enterprises instead of letting them default on workers' wages. It means continuing to subsidise agriculture at irrational levels to keep consumer food prices down."

The case for optimism is strong, however. The popular argument is that the only debates left to settle among China's collective leadership are over the pace and reach of economic liberalisation, not its direction. The People's Liberation Army is a big player in the economy and would be unlikely to support turning back the clock. The same is true for millions of party members who have grown wealthy under Deng's reforms. "Over the period of Tiananmen Square, when everyone was worried about China taking a step back, the government said the politics must be separated from the economics," said Robert Rountree, managing director of Nomura Research Institute in Hong Kong. "Even if President Jiang Zemin comes under attack, it won't make any difference whatsoever to economic development."

At the very least, the leadership of Jiang and his coterie is expected to remain unchallenged through the transfer of Hong Kong to mainland rule this summer and on until the National Party Conference on 15 October. Even then, few China watchers expect to see major changes. After all, they note, Deng hadn't been seen in public for three years. For most of that time, if not longer, the levers of power had been pulled by his lieutenants, now the country's rulers.

"China's leaders know they have to maintain a high rate of economic growth if they're going to manage social and economic problems at home," said Michael Yahuda, reader in international relations at the London School of Economics. "If that growth falters it would be more difficult to handle the influx of people from the countryside to the cities or the dismantling of state-owned enterprises. I don't think they see themselves as having any alternative."

Neil Sampson, a partner in City law firm Rosenblatts, is even more enthusiastic. "Deng's death will really only have a beneficial effect," said the lawyer. "China is well-established in international business and it is in its interests to make sure relations with the world are not disrupted. The reforms will continue."

Perhaps more persuasive than the thoughts of advisers, analysts and academics is the fact that the people who put their money where their theories are - foreign investors - are just as sure of China's stability. "We believe the progress towards economic change which Deng Xiaoping instituted have been embraced by his successors and this progress will continue," said the British drugs company Zeneca, which plans to invest $100m (pounds 62m) in China.

The financial markets are equally bullish. Pundits had worried that Hong Kong's Hang Seng index would fall 500 points when Deng died. In the event, after a sharp but brief downward blip, it closed the day 300 points up. Templeton Investment Management, a UK fund manager, said it planned to continue investing because its rapid growth "has been sustained over a number of years, most of which have been dogged by uncertainty".

In an analysis of China's B share markets, where foreigners can invest in dollar-denominated Chinese stocks, Yonghao Pu, an economics lecturer at London Guildhall University, turns the equation on its head. Far from political instability hurting the economy, he says, strong growth will help support the new regime. "As long as the economy is in good shape, it supports political and social stability."

The confidence among most foreign firms may stem from the fact that they have little choice but to support the new regime. East Asian commerce is famous for its reliance on personal contact and trust rather than contract law. Any company that pulled out because the going got tough would have a much harder time re-entering the market.

The British chemicals group ICI is typical of companies that are taking a long-term view. Its decision to build its first plant in China came just a month after the Tiananmen Square massacre. "We were taking a long view of the political ups and downs," said Michael Simmons, the company's manager of Asia Pacific liaison. "ICI's investments in paint and plastics plants are not limited to China. The company has taken a similar approach throughout the region."

But Mr Segal is far less sanguine about its future: The Chinese government's record has been inconsistent. It has lurched from one extreme to another." In the past decade its inflation has oscillated between a low of 2 per cent and a high of 22 per cent.

China now faces some hard choices. How to deal with the influx of migrant workers from poorer parts of the country? How to close down the subsidy- gobbling state industries? "At a minimum, they're highly dangerous conditions," said Mr Segal.

Those dangers could be realised in at least two ways. A hard-liner could seize power and put the brakes on reform, or infighting could paralyse the collective leadership to similar effect. In either case growth could fall from 10 per cent or more to about 5 per cent. In China the social consequences could be dramatic. "You're looking at slower growth. There's the risk of civil unrest and migration outside the borders of China," said Mr Segal. "In a slowdown, there is a risk that the leadership will reach for nationalism to establish the legitimacy of its rule."

At the height of his power, Deng was a bulwark against almost all such threats to reform. "It was his great virtue that over the last couple of party struggles he said 'let's go further and faster,' " said Mr Segal. Most recently, when the Soviet Union collapsed, it was Deng who overcame his colleagues' jitters and pushed the process onwards. Mr Jiang, in contrast, is depicted by some as a member of the Wind Party; whichever way it blows, he goes.