Gerald Warner: Economic collapse could be the downfall of China's rulers

For these two diplomats are pandas, deployed to promote the continuing thaw in relations between Red China and Taiwan. This has been accelerated by the emerging capitalist identity of China and the conciliatory policies of the ruling Kuomintang Party (KMT) in Taiwan.

Historically, the Kuomintang was the nationalist party of Chiang Kai Shek, defeated in the civil war on the mainland in 1949, since when it has been confined to Taiwan, under American protection. For decades the Kuomintang was the mortal enemy of Communist China, confronting the Maoist empire across the Taiwan Straits. The heavily fortified Quemoy island contained a subterranean fortress city, complete with hospitals, designed to resist a Communist attack indefinitely.

It was Taiwan's disproportionate military establishment that enabled it to deter aggression by Beijing until the advent of more conciliatory political leaders on both sides of the Straits. Today the KMT fosters relations with Beijing; it is the Democratic Progressive Party (DPP), which lost power last May, that takes a hardline stance. So it is not only pandas that have been crossing the Straits on diplomatic missions.

Three days earlier, the KMT chairman, Wu Poh-hsiung, and the honorary chairman, Lien Chan, had arrived in Shanghai to participate in the Fourth Cross-Straits Economic, Trade and Cultural Forum. Over two days discussions covered expanding co-operation in the finance and service sectors, encouraging two-way investment and regularising economic exchanges.

The Beijing regime agreed to consider permitting Taiwanese banks and securities houses to upgrade their mainland offices to branches, to the benefit of businesses operated by 750,000 Taiwanese in Red China. Beijing also agreed to extend $19bn in financing to those firms over the next few years. It was in this atmosphere of sweetness and light that the two pandas arrived in Taipei, although the previous DPP government had rejected the blandishments of panda diplomacy some years ago.

In the dream scenario, China will, by an ill-defined process of osmosis, metamorphose into a pluralist democracy, the two economies will complement each other to mutual benefit and the pandas will breed cute cubs. The reality may be rather less edifying. Taiwan may be plugging itself into a complementary and dynamic economy; on the other hand, it may be anchoring itself to a corpse.

Recent figures show Chinese industrial firms' profits standing at 2.41 trillion yuan, a 4.9% increase on the year, but this compares with a 36.7% rise over the same period in 2007. The Chinese economy is slowing down inexorably and no matter how many hundreds of billions of dollars it holds in US bonds, that will not prevent massive unemployment and social unrest.

The complacent orthodoxy a year ago was that China could ride out a recession even over two years because of the size of its internal market. That, however, confuses demographics with markets. Entire provinces are dirt-poor: their populations do not have the disposable income to compensate for the loss of exports. The extremes of wealth are extravagant. This is a communist country in which wealth is concentrated in the hands of a small minority, while the poor remain not only impoverished but, increasingly, uprooted. The flow of hundreds of millions into cities from the countryside, often evicted by corrupt property developers in concert with party officials, is a ticking time-bomb.

Even over the past decade, regarded as a time of plenty, China was in a state of undeclared anarchy. In 1994 there were 8,700 "mass incidents" (ie riots involving thousands of people); by 2005 there were 87,000 riots, since when the government has stopped publishing the data. In 2003 alone, three million people were involved in riots. This in a one-party state that prides itself – or formerly did – on enforcing strict Leninist social control.

The grievances have ranged from the compulsory birth control policy to unemployment, from rural evictions to official corruption. Communist Party headquarters and police stations have been burned down at will. The regime has lost control of the rural areas. Any serious economic setback could bring down the entire house of cards, with urban riots as well as rural.

In default of a multi-party system, people riot as the only form of protest available to them: in China, rioting is a substitute for elections. The regime no longer has the authority to repress its people, but it refuses to surrender its monopoly of power. That is a fatal situation. Thanks to modern technology, the people of China know what has happened to communist parties elsewhere in the world. If the economy falters seriously, the party will be overthrown and the absence of an alternative government will convulse this massive nation in enduring anarchy.