Economic Drivers of Social Instability in China
November 24, 2016
The easing of growth in China threatens to exacerbate social tensions arising from disparities in income, wealth, and opportunity. Takashi Sekiyama attempts to identify possible economic triggers for social unrest and assess the potential for conflict in the years ahead.
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China’s economy is decelerating. After a long period of double-digit growth ushered in by the economic reforms of the 1980s, the pace of expansion has fallen to 7.7% in 2013, 7.3% in 2014, and 6.9% in 2015. With the slowdown expected to continue, many China watchers have voiced concern about the potential for social unrest. In the following, I attempt to identify the key economic factors affecting China’s social stability in the years ahead and consider the possible impact of current trends in the coming years.
Identifying Key Economic Factors
A 2015 nationwide survey conducted by the Institute of Sociology of the Chinese Academy of Social Sciences asked respondents to characterize various aspects of Chinese society as either equitable or inequitable.  The two areas most frequently cited as being inequitable were income and wealth distribution and the treatment of urban and rural populations (Figure 1).
Figure 1. Perceptions of Social Equity and Inequity in China
Notwithstanding these popular perceptions, statistics released by the Chinese government suggest that the economic divide between China’s urban and rural areas, as well as overall economic inequality, has actually diminished in recent years (Figures 2 and 3).
Figure 2. Ratio of Urban to Rural Mean Income, 2000–14
Figure 3. China’s Gini Coefficient, 2000–14
The fact is that few Chinese scholars go along with the assumption that economic inequalities between rural and urban areas are destabilizing to Chinese society. They argue that the rural Chinese are more likely to use their neighbors or their own past standard of living as a yardstick than to compare themselves with people dwelling in distant cities they have never visited. Moreover, as Figure 4 suggests, living standards have been rising in urban and rural China alike, and at more or less the same pace.
Figure 4. Trends in Urban and Rural Consumer Spending
These are persuasive arguments against the notion that the rural-urban gap is a key destabilizing factor for Chinese society.
Inequality within urban and rural communities
That said, income inequality within urban communities on the one hand and rural communities on the other has definitely been on the rise. Figures 5 and 6 chart these growing disparities in urban and rural areas, respectively, as seen in the ratio of mean disposable income among the top 20% households to that among the bottom quintile.
Figure 5. Income Gap in Urban China
Figure 6. Income Gap in Rural China
Note: Ratio of mean disposable household income in top 20% to that in bottom 20%.
Contributing to the growth in economic inequality within urban and rural communities is a climate of unequal opportunity exacerbated by corruption among government officials and the discriminatory treatment of rural migrants in Chinese cities under the hukou (household registration) system. This suggests that reforms targeting such social issues, if successfully implemented, could have a major impact on social stability by halting the growth in economic inequality within China’s urban and rural districts.
Price inflation and unemployment
In terms of purely economic phenomena, increases in basic living costs disproportionately impact young people and impoverished households who live more or less hand to mouth, thus contributing to growing economic disparities in both urban and rural China. Another key economic factor driving inequality is unemployment, since economic disparities within a given region or community will naturally grow if a high percentage of the residents there lose their jobs and find themselves without income.
The destabilizing potential of these two factors can be seen in China’s own 1989 Tiananmen Square protests on the one hand and in the 2010—11 Tunisian “Jasmine” Revolution on the other. These upheavals illustrate how rapidly rising prices or soaring unemployment can cause a sharp decline in living standards among the masses, particularly young and low-income citizens, precipitating a grassroots rebellion.
Soaring consumer prices were an indirect cause of the massive nationwide protests—the largest in the history of the People’s Republic of China—that culminated in the Tiananmen Square incident of 1989. As the government lifted price controls under the second stage of economic reform, the cost of living rose sharply. The consumer price index, which had risen by only 1%–2% between 1981 and 1984, jumped 20.7% in 1988 and 16.3% in 1989 (Figure 7). The results of a 1987 survey indicated that the real income of urban households had fallen by 21%, and a 1988 survey registered a drop of 35%. A full 83% of urban residents surveyed expressed dissatisfaction over rising prices. 
Figure 7. Changes in China’s Consumer Price Index, 1978–90
For an example of unemployment as a factor driving social unrest, we can look to Tunisia, where it clearly contributed to the grassroots uprising that broke out in late 2010. Although the Tunisian economy was growing at a respectable rate of 3.8% in 2010, unemployment had been hovering between 12% and 13%, and joblessness among youth (those aged 15–24) was extremely high, averaging 30% in 2010 and jumping to about 40% in 2011.
Because of these circumstances, dissatisfaction built up among young Tunisians and others in the population who were not sharing in the benefits of economic growth. Amid this rising discontent, the self-immolation of one young man was enough to spark anti-government protests that spread nationwide, ultimately leading to the ouster of a regime that had ruled for 23 years.
Figure 8. Unemployment Rates in Tunisia
What conclusions might we draw concerning the levels at which price inflation and unemployment could trigger social unrest in China? The most recent and relevant reference points at our disposal come from China in the years leading up to the Tiananmen Square protests of 1989 and Tunisia on the eve of the 2010–11 revolution. To be sure, these movements took place in different economic, social, and political circumstances from those prevailing in China today. But with such differences in mind, I believe we can draw some useful information regarding the “safe” thresholds for inflation and unemployment.
In terms of price inflation, China in the 1980s actually offers two reference points. Student protests first broke out in 1985, when the consumer price index rose 11.9%. Four years later, after consumer prices jumped 20%, students spearheaded a series of demonstrations at Tiananmen Square in Beijing, which inspired a nationwide protest movement. Based on this experience, it would make sense for the Chinese government to be wary of inflation in excess of 10% and to consider anything approaching 20% as inside the danger zone.
In Tunisia, overall employment approaching 15% and youth unemployment in excess of 30% helped trigger a grassroots revolution. Such high levels of unemployment are unlikely in China. From the 1980s on, the nation has never once experienced double-digit unemployment—a legacy, perhaps, of a system in which the danwei , or workplace unit, was responsible for looking after its workers and their families throughout a worker’s career.
China’s official unemployment rate has been more or less stable at 4% in recent years. On the other hand, many analysts believe that those figures grossly understate the actual situation, since they count only registered urban residents who previously enrolled in unemployment insurance through the workplace, thus excluding the rural unemployed, jobless migrant workers, and others who have not officially entered the labor force.
Another reference point for urban income inequality as a trigger for social unrest might be the 2011 Occupy Wall Street protests in New York City. According to a study by New York University Professor Andrew Beveridge, the mean income of the top 20% of earners in Manhattan ($420,015) is almost 43 times as large as that of the bottom quintile ($9,681).  An urban income gap on this order was a factor behind large-scale demonstrations even in a country like the United States, where citizens have the means to protest public policy at the ballot box. In China, which offers no such democratic outlets for dissent, it seems likely that a much smaller disparity would be enough to fuel a protest movement and that such unrest might spread much more widely and rapidly.
Outlook for the Chinese Economy
With these rough reference points in mind, let us consider China’s 10-year economic outlook and see if we can assess the potential for serious social unrest driven by the kinds of economic triggers we have discussed.
Let us begin with economic growth. In its medium-term forecast “Economic Prospects in China and ASEAN4” (2015), the Japan Center for Economic Research predicts that China’s economic growth will slow each year over the next decade, declining to less than 4.5% by 2025.  The International Monetary Fund (2016) offers a more optimistic outlook, forecasting that China’s economy will expand at a rate of 6.3% in 2016 and 6.0% in 2017 and suggesting that growth could hold steady at around 6% through 2020. The Asian Development Bank (2015) forecasts average annual growth in the vicinity of 6% through 2020 and 5% from 2021 to 2025.
I am inclined to be slightly more conservative than even the JCER with regard to China’s potential for growth in the coming decade. I predict that the growth rate will decline by 0.3–0.5 points each year over the next decade, falling to 3%–4% by 2025. The shrinking labor force is the most obvious reason for pessimism, but even more important is the fact that investment, a major engine of expansion in recent years, is bound to slow as demographic aging and income redistribution force down the savings rate. At the same time, China will be hard pressed to sustain the rapid rise in total factor productivity that helped power the economy’s expansion over the past four decades. Although there is clearly some room for improvement in TFP over the next 10 years, the pace of growth is sure to decline year by year.
By sometime in the 2020s, in short, China is likely to find itself outpaced by the world economy as a whole as it enters an era of slow economic growth. The lowest growth rates China has thus far experienced since the economic reform were 4.3% in 1989 and 4.1% in 1990, following the government crackdown on the Tiananmen Square protests. In another 10 years, average annual growth can be expected to fall beneath that level, even in the absence of such external shocks as economic sanctions. Between now and 2020, an actual economic contraction seems unlikely, but it would not be surprising to see year-to-year GDP growth dip below 2% as a result of a fall in aggregate demand.
Although China currently enjoys relatively low unemployment, slower economic growth is sure to have an impact on the jobs picture. Ultimately, the aging of Chinese society will cause the working-age population to shrink, but in the years between now and 2020, millions of migrants will continue streaming from the countryside to the cities in search of work, and millions of young urbanites will reach the age of productivity. Together, they will create a need for close to 10 million new urban jobs annually over the next five years and more than 5 million new jobs between 2020 and 2025.
In recent years, China has typically created between 1 million and 1.5 million new jobs for every 1% of GDP growth. Assuming the pattern continues, the Chinese economy would need to maintain at least 6% growth between now and 2020 to meet the demand for 10 million new jobs annually, and at least 3%–4% growth in order to add 5 million jobs a year thereafter. Unless it maintains that pace, unemployment will become a pressing problem, especially among the young.
As noted previously, the one economic factor that has actually fueled social unrest in China since the market-based economic reforms took effect is rapid price inflation. From this standpoint, one of the most serious economic risks facing China in the mid-2020s and beyond is the possibility of stagflation: rising prices in the midst of stagnant growth. If a jump in oil prices, rising domestic labor costs, or a burgeoning social security burden were to push up production costs and cause prices to rise faster than demand, economic activity would slow down and unemployment rise, even as prices shot higher. In that case, the government would find itself hard pressed to deal with one problem without exacerbating the other. This is the dreaded specter of stagflation.
Many of the world’s industrially developed countries suffered from stagflation in the 1970s, when the 1973 oil embargo and subsequent energy crises created new challenges that governments were ill-prepared to address with their accustomed policy tools. In Japan, the consumer price index jumped 23% in 1974, while economic growth fell to –1.2% in the first economic contraction of the post–World War II era. This brought an abrupt end to Japan’s era of rapid economic growth.
Like Japan in the 1960s and early 1970s, China has enjoyed an extended period of rapid growth. If it should err in its response to the challenges of a new era of slow growth, it could easily find itself facing the dangerous dilemma of double-digit inflation amid economic stagnation and high unemployment.
Reform and Conflict
Of course, as mentioned previously, the risk of unrest is profoundly influenced by social and political factors as well as purely economic ones. Unless the government makes a real attempt to address economic inequality through reforms targeting the disadvantaged and vulnerable (the urban poor, farmers, the young, etc.), dissatisfaction with the government is bound to mount, threatening social stability. But reforms that could help redress those inequities tend to be inimical to China’s privileged groups and vested interests (the wealthy, party officials, state-owned enterprises, etc.). This conflict can lead to indecision and inaction, and inaction can prove dangerous.
Let us return for a moment to the situation China faced in the second half of the 1980s. This was a time when dissatisfaction was spreading rapidly among society’s disadvantaged elements owing to the economic hardship of spiraling prices and growing inequities fueled by the abuse of political power. The party leadership was split on how to see the nation through the crisis, with the conservative camp asserting the need for stronger state control and the reform camp advocating political liberalization along with further economic reforms.
Amid this political standoff, pro-democracy students in Beijing and around the country took to the streets. Meanwhile, the Tibetan independence movement was gathering momentum in the west, starting with the 1987 protests and riots in Lhasa. In the end, both movements were put down by force, signaling the victory of the hardline camp led by Deng Xiaoping. How will the Chinese government respond when faced with a similar choice in the future?
Under President Xi Jinping, the trend is clearly toward stronger state control. Perhaps Xi feels that powerful top-down leadership is needed to overcome the resistance of vested interests and push through groundbreaking reforms. In either case, this course puts the powers that be on a collision course with pro-democracy and pro-independence forces and raises the grim possibility of another armed crackdowns leading to further loss of life.
 Li Peilin, ed., 2016-nian Zhongguo shehui xingshi fenxi yu yuce (Analyses and Predictions of Social Conditions in China, 2016) (Beijing: Shehui Kexue Wenxian Chubanshe, 2016).
 Satoshi Amako, Chuka Jinmin Kyowakoku shi (History of the People’s Republic of China) (Tokyo: Iwanami Shoten, 1999), pp. 143–146