View: Michael Auslin: China's Party Is About to End - WSJ.com

Beijing

Twenty years ago, Deng Xiaoping made his famous "southern tour." The journey took place just a few years after the Tiananmen Square massacre, with China still internationally isolated and in a period when Deng's reform program was in increasing doubt. Thanks to Deng's tour, economic reform was pushed back on the agenda—and that's when the economy took off. In the last two decades, China grew at an average 10.4%.

For a while it seemed as if China would never look back. But it's clear now that the easy part is over and that the next 20 years will be harder for the Communist Party to manage. The country's looming problems have never looked as sharp in the past two decades, which spells not only an economic deterioration, but also a possible collapse for the Party.

The problem started late last decade, when President Hu Jintao concertedly changed tack, from privileging the private sector to the public. State-owned enterprises became more dominant than they were, while local governments became emboldened especially after a post-crisis lending spree—these entities together swallowed most of the available credit. The small- and medium-sized companies, the engines of job growth, stalled. This is part of the reason growth is slowing, the government recently revising its estimated growth for the current year down to 7.5%.

The current poor management of the economy comes on top of long-term issues that the Party has ignored. Not only have wages been rising enough to start affecting Chinese companies' competitiveness, there is a shortage of labor in the coastal belt, the heart of economic growth. The shortage is due in part to more opportunities inland, but the biggest problem is the working-age population has peaked.

The government's one-child policy is to blame. This is widely detested at a personal level, and this month the story of a woman who was forced to abort her daughter has China's young online commentators in a frenzy. On the economic front, this policy may have boosted each individual's earnings in 1979, but today it's making China a rapidly aging society that will dampen productivity.

Then there is the matter of liberalizing China's financial markets. Beijing has made waves in the past few years by suggesting it will internationalize the yuan, but that seems like an empty promise if it can't open up its capital markets. Until it does so, Chinese are right to question if their savings could be better allocated. China's resources are being used up by inefficient behemoths in the public sector. Or they're going into a $1.5 trillion property and local-government debt bubble, which many observers think is close to bursting. Meanwhile, earnest startups, like the small manufacturers in Wenzhou, risk getting strangled.

Chinese naturally worry the system is rigged to favor a few, and nothing exemplifies this disenchantment more than recent tales of corruption. The Bo Xilai case this year is perhaps the worst, as the Chongqing boss was brought down and his wife charged with murdering a British businessman. This brought out what everyone implicity knew: large parts of the system are turf for gangster-type control by officials. The Party is set to hand over power to a new generation later this year, and factional infighting at the top may well increase over larger slices of a smaller economic pie. Ordinary Chinese will be left fending for themselves if the turf wars intensify, since they have no property rights, or an independent legal system.

No wonder the middle class is now more pessimistic about the future, more cynical about government, and increasingly focused on protecting their position. Chinese I talked with last week said that the people feel more resignation than resentment towards the Party. Should that distrust grow, a political reaction like Tiananmen cannot be ruled out. A radicalized urban middle class could join forces with a rural population that is already responsible for most of the 180,000 or so mass protests that occur every year.

The Party will probably respond to this by stepping up mass repression, but that will translate into even more domestic instability. At the same time, a weakened China might lash out abroad with its modernized military, to stoke nationalist passion and divert domestic resentment. That will only find China more isolated globally. Whatever the manifestation, there could be carnage at home or abroad, posing an existential threat to the Party.

On his southern tour, Deng immortalized the phrase "to get rich is glorious." China's next leader Xi Jinping and his successors might say in turn that to stay in control is sublime.

Mr. Auslin is a scholar at the American Enterprise Institute in Washington and a columnist for wsj.com. Follow him on Twitter @michaelauslin