Friday, March 11, 2011

The Road to Revolution in Beijing Runs Through Riyadh

Egypt is not Tunisia. Bahrain is not Eygpt. Saudi Arabia is not Bahrain. Such has been the tragicomic refrain from besieged capitals across the Arab world, as protests have put a lie to the illusion of stability that had seemingly prevailed (the same, of course, applies to the PIIGS and the Euro sovereign debt/banking crisis). These hollow protestations certainly belie the reality in the streets, but there is at least a hint of truth here: these are economically disparate societies. Yet none have been spared from unrest; not the rich (Oman and Bahrain), nor the poor (Yemen and Mauritania) nor the middle class (Tunisia and Egypt). Rather, the propaganda of the deed, swarms of unemployed youths, and -- yes -- food inflation have conspired to kindle revolutionary fervor across rich and poor country alike throughout the Arab world. But now the question becomes, will unrest spread beyond the Middle East or will this solely be remembered as the Arab 1989 (or 1848, depending on one's historical perspective)?

Which brings us to China. For the past twenty years, there's been something of a Western cottage industry endlessly predicting the imminent doom of the Chinese regime. And for twenty years, the reports of the CCP's demise have been greatly exaggerated. But at risk of succumbing to the same folly, this time really might be different. Indeed, the Chinese economy seems near a de Tocquevillian moment: doing (very) well, but not well enough. Thirty years of staggering growth have lifted untold millions out of poverty, but, as you would imagine, have also dramatically increased future expectations. And now there are legitimate concerns about a coming economic slowdown -- which Chinese authorities are keenly aware could prove fatal to their rule. 

 The Chinese government aggressively responded to the loss of export demand due to the financial crisis with a stimulus package that dwarfed any seen in the West, on a GDP-adjusted basis. This credit-driven growth, however, seems to have mainly contributed to an unsustainable property bubble. Ghost towns, empty office buildings, and off-balance sheet local government debt - it's all enough to make contrarian hedge funders perk up. To its credit, the Chinese government has tried both to gently deflate the bubble with higher reserve requirements and interest rate hikes, and to ameliorate the squeeze ordinary Chinese are feeling with an increased commitment to building affordable housing -- although none of these measures have yet been much effective.

Of course, the Chinese government is nothing if not vigilant when it comes to threats to its "harmonious" society. With soaring food inflation fueling simmering discontent over endemic corruption and abuses of power, the state was quick to shut down the copycat "Jasmine Revolution" Chinese web activists tried to organize several weeks ago. For Westerners quick to pounce on any evidence of discord in the Middle Kingdom -- including US ambassador Jon Huntsman, who conspicuously showed up at the pre-arranged protest site in Beijing -- the abortive demonstrations were certainly disappointing. The, perhaps unsatisfying, reality seems to be that there simply isn't widespread support for Tunisia-style protests in China. After a century of nearly unfathomable hardship, the Chinese people are loathe to force out a regime that, while undeniably corrupt, has delivered near miraculous growth and improvements in living standards. Put simply: despite indignation about abuses of authority, few are willing to risk killing the golden goose.

But that calculus changes with $200-a-barrel oil. The perturbations in the oil market due to the nascent civil war in Libya disrupting its supply reveals just how little spare capacity exists today. Libya only accounts for approximately two per cent of global production, but even asking the Saudis to dip into their (questioned) spare capacity to meet that shortfall stretches the market thin. Of course, Libya (and possibly Algeria) are only a sideshow to what a full-fledged revolution in Saudi Arabia would mean for oil prices. While it's certainly unclear whether protests will materialize in either Riyadh or Jeddah on the Saudis' scheduled "Day of Rage", it seems much more likely that its Eastern province will erupt. Like neighboring Bahrain, which itself has been gripped by demonstrations, Saudi Arabia's Eastern Province is home to an aggrieved, restive Shia majority -- and just so happens to be where its largest oil fields are located. Indeed, Saudi security forces have already clashed with protesters in the eastern city of Qatif, firing on them with rubber bullets a day ahead of the "Day of Rage". Prolonged unrest in the Eastern Province clearly has the potential to send oil prices parabolic, which in turn would torpedo the global economy.

The Chinese government would hardly be alone in being vulnerable to an unexpectedly bad economy due to an oil shock. The not-so-dirty secret of the Great Recession is that everywhere it has left in its wake the social preconditions for revolution: un-and-underemployed young men (in China, these are the so-called "ant tribe"). Regimes from Azerbaijan to Vietnam could very well be on the proverbial chopping block. Oil would be the revolutionary transmission mechanism, giving an economic push to already combustible milieux across the globe. The usual caveat that protests certainly do not guarantee a revolution is worth remembering; the shadow of Tiananmen and the simple truth that all revolutions come down to whether the army will fire on protesters casts a pall over any such discussion. Still, don't be surprised if a new line comes out of Beijing during the coming months: China is not Saudi Arabia.

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