By Franz Schurmann

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Prediction for Tuesday, March 2nd,1999

There Will be Serious Social Upheaval in China in April and May but U.S--China Trade Will Grow

• Introduction:
  High-ranking Chinese experts are predicting serious disturbances ready to erupt in the People's Republic if China. The causes are rising unemployment, the widening urban-rural income gap, worsening environmental degradation, spreading corruption. So says Professor Hu Angang, head of China's authoritative 21st Century Commission. He says we had turmoil in the late 60's, 70's, 80's and now are going to have it in the late 90's. Many in the American political class hope this time a Tiananmen II will make Communist China collapse as did the Communist USSR in 1991. They call on the Clinton Administration to apply pressure to hasten the collapse.

  But in his February 26 San Francisco speech on foreign policy President Clinton laid out his policy guidelines as: peace, prosperity, freedom. There is an implicit ranking in this formula --- peace first, prosperity second and freedom third. He specifically emphasized the global need for a stable Russia and China. It's clear that an unstable Russia with second superpower type nuclear weapons will pose cataclysmic threats to world peace. It's also clear that a chaotic China will pull down other East and Southeast Asian economies in its wake. U.S. prosperity is centrally dependent on East Asian economies, especially Japan and China. Prosperity's second ranking implies peace as a pre-condition. Freedom's third place in the rank order implies that peace and prosperity are pre-conditions.

• Prediction:
  Two Contexts and One Result: Contexts: In April and May there will be serious social upheavals in China. At the same time fiery anti-China rhetoric will rage in U.S. political and media circles. Result: U.S.-China trade will grow; U.S. stocks, especially technology and Asia-related stocks will remain strong.

• Outcome:
  

  RE-EVALUATION OF OUTCOME OF PREDICTION #3

  On March 2, 1999 I predicted:

  "There will be serious social upheaval in China in April and May but US-China trade will grow."

  In the May 25 evaluation, I said that I was more wrong than right on the first part of Prediction # 3 and more right than wrong on the second part. Now on August 3, 1999 it is clear that there is serious social upheaval in China, notably through the Fa-lun-gong "sect." So I was more right than wrong on this part of Prediction #3.

  The passage in the House of the Normal Trade Relations (NTR) with China bill last week (260 for, 170 against) means obstacles from the American side to China's admission to the WTO have substantially vanished. Furthermore with an easing of the Asian financial crises American exports to Asia, including China, have gone up somewhat. The phenomenon of full cargo ships entering west coast American ports but leaving empty has largely also vanished.

  All these facts indicate that the entire prediction was more right than wrong. Nevertheless the current Prediction #24 suggests that even if China should join the WTO there is now a good chance that US-China trade could decline. And if Prediction #24 should be correct then there could be a decline in US-China trade next year.

  So from a longer term perspective the original evaluation --- half wrong and half right (60 & 40 divided by two) --- may still be the most accurate evaluation.

An honest prediction has to involve three things: searching for and interpreting signs; an awareness of surprises; and an ability to weigh the positive and negative sets of signals against each other. In this case I have come up with two negative sets and one positive set. I do not predict any surprises in US-China relations over the next three months. But in weighing I see the one positive set weighing heavier than the two negative ones. By that I mean I see the forces for order greater than the forces for chaos.

(1) Professor Hu said "even though there won't be any across-the board political changes one can't exclude partial upheavals." I agree. I don't think there will be any collapse.

(2) There are signs that the intellectual foundations of the "China hawks" are cracking. The Asian Wall Street Journal of 22-28 September reported on a new study by Jeffrey Sachs --- the author of the Russia's ill-fated "big bang" economic reforms --- and Steven Radelet. Radelet said " a lot of good things happened in Asia before the crisis. It didn't necessarily have to happen." They finger the "inherently volatile nature of financial markets." That means the hedge-fund speculators who, last year, swarmed over Asian financial markets like armies of locusts over wheat fields.

(3) More and more global finance and trade observers are saying that the East and Southeast Asian crises --- except Japan's recession --- have bottomed out and that their markets are moving up again.

(4) The main markets for America's high-tech and food exports are in East and Southeast Asia. This is because the middle-class formation process is, by far, biggest in this region. Middle classes require exponentially growing financial, trade and administrative services. The US, more than any other country in the world, is able to provide these goods and services.

(5) While traveling on a United Airlines plane I saw a multilingual emergency message in the seat pocket. In the 1980's the language order was English, French, German, Spanish and Japanese. I have always interpreted such messages as reflecting the economic order of importance to the airline. This time the order was English, Japanese, Chinese, Korean, German, French and Japanese. There is a good chance that "the good things that occurred in Asia before the crisis" will again occur by the time Jan. 1, 2000 comes around.