The winter of discontent

Unrest on Rise as China Booms

By TOM ORLIK

China's massive economic-stimulus program has supported near double-digit growth, but also stoked inflation, piled up debt and fueled another unwelcome development: social unrest.

In 2010, the world's second-largest economy was rocked by 180,000 protests, riots and other mass incidents—more than four times the tally from a decade earlier. That figure, reported by Sun Liping, a professor at Tsinghua University, rather than official sources, doesn't tell the whole story on China's turmoil.

But what is clear is that the level of social tension and number of protests against the government is rising. That is a sensitive subject as the ruling Communist Party prepares to mark the 62nd anniversary of the founding of the People's Republic of China on Oct. 1.

As worrying to the Communist Party as the increase in protests is the fact that many of them stem from everyday economic injustice. Unrest isn't confined to the ethnic minority areas of Tibet and Xinjiang. Most protests target land grabs by developers and abuses of power by local officials, or unpaid wages by construction firms.

Last week in Lufeng, a city in Guangdong province in southeast China, hundreds participated in violent protests over the alleged seizure of villagers' land for development. In June, migrant workers in Zengcheng, also in Guangdong, torched government offices after security personnel pushed to the ground a pregnant migrant worker who had been working as a street vendor there.

Rising prices might not figure as a direct trigger of unrest, but inflation remains a key source of discontent. In an annual survey of social attitudes published by the Chinese Academy of Social Sciences, inflation shot to the top of the list of problems in 2010, up from fifth place in 2009.

There is a reason for that move up the ranks. A sweeping monetary stimulus in 2009 and 2010—with the banks issuing 17.5 trillion yuan ($2.7 trillion) in new loans—translated into higher levels of inflation, reflected largely in food prices. In 2011, the problem has become more severe. The latest data show food prices rose 13.4% year-to-year in August. Prices for pork, China's favorite meat, rose 52.3% to a record level. The urban poor, who spend a large share of their income on food, are hardest hit by food costs.

Rapid increases in the cost of living can take a toll on social stability, as illustrated by the 1989 protests that ended bloodily in Beijing's Tiananmen Square. A yearning for political reform triggered those demonstrations, but anger over increasing food prices was a factor. Political posters on walls around the city criticized the sumptuous meals enjoyed by China's ruling elite at a time when ordinary workers were struggling to make ends meet.

More than two decades later, a lot has changed. In 1989, panic buying spurred by the transition from government-controlled prices to market ones played a part in pushing up costs of everyday essentials. The government doesn't have that to worry about this time around.

But some things have stayed the same. Murray Scot Tanner, a China security analyst at CNA, says "you won't find food riots anymore, but scratch the surface of any number of disturbances, and you will find discontent over inflation is one of the factors." The data support that analysis. For the past decade, the rise in cases of "disturbing public order" tracks with the increase in food prices, surging just as food prices spiked in 2004 and 2007.

If inflation provides the powder keg, the spark that ignites social unrest is likely to come from land grabs. A decade-long real-estate boom has made land a valuable commodity. Weak legal protections for property rights and alliances between government officials and developers mean that land often is seized without adequate compensation for residents.

Take Xianghe County in Hebei, a province bordering Beijing. Local media report that since 2008 local officials have defrauded farmers of hundreds of acres, which has been sold to developers to build luxury villas.

Mr. Li, who gave only his family name for fear of reprisals, said his parents had been kicked out of their Xianghe home with compensation of 3,000 yuan per square meter, compared with a market price above 6,000 yuan. Transactions like that add hundreds of millions of yuan to local government revenue, but only at the expense of the farmers' land and livelihood. Officials in the Xianghe government referred questions to a public-relations office, where the telephone wasn't answered.

The Xianghe case isn't an isolated incident. Yu Jianrong, an expert on civil unrest at the Chinese Academy of Social Sciences, wrote in 2010 that disputes over land were behind 65% of social disturbances in China's countryside.

That number could climb. China's local governments have spent the past three years amassing debt—10.7 trillion yuan according to a June estimate by the National Audit Office. Concerns are mounting about whether local governments can repay that debt. This month, local media reported that 85% of local-government borrowers in Liaoning, a province in North East China, didn't have sufficient revenue to make interest payments.

Why did the banks make so many loans to projects with little hope of repayment? One word: land. According to the National Audit Office, 2.5 trillion yuan of loans to local government—23% of the total—depend on sales of land for repayment. Some analysts say the real percentage is much higher.

In 2010, China's local government raised 2.9 trillion yuan in revenue from land sales. Repaying debts will mean selling almost the same amount of land over again. If town halls want to continue paying for hospitals, schools, and other services, the implication is a massive increase in land sales. Even worse, as local governments bring more land to market to pay their debts, excess supply pushes prices down, and the area of land that has to be sold increases.

Not all the farmers about to be removed from their land or residents about to be turned out of their apartments will go quietly. With land grabs already the main cause of social instability, and inflation heightening the strain, China's government may not be able to repay its financial debts without breaking the social contract.