China's troubled relationship with the social and economic structures of capitalism has a long history. Economic conflict and outright warfare punctuated the dynamic between the Middle Kingdom and the Western forces of capital and empire, beginning with the Opium Wars and continuing through the Boxer Rebellion and modern conflicts like the Korean and Vietnam wars.
In the past 40 years, however, China began tackling the economic giants of the West on their own terms. Through massive social projects - some disastrous and some murderous - China ( FXI ) industrialized on an unprecedented scale, initiated some of the largest migrations in human history and pushed its economy through several decades of astonishing growth. It now stands at a curious crossroads of centrally-planned, Communist party government and some of the most raw and unbridled market forces in the global economy.
As a result, China must now confront instability in both the political and economic arenas. Repression remains high throughout the system. The Economist reported last week on a rising tide of hardline Maoist sentiment among citizens and on online message boards, partly driven by fears of a national revolution like the one that convulsed the Arab world.
At the same time, the world's second largest economy is trying to manage its own bubble , balancing three critical points against each other: inflation, exchange rates and borrowing. Parts of coastal China and some major metropolitan areas have experienced massive speculative property booms, leaving behind forests of unoccupied skyscrapers. Labor and materials costs continue to rise, leading to a surging level of inflation.
Yet in order to maintain its competitive manufacturing advantage, China needs to keep its exchange rate artificially low, which only puts more fuel on the inflation fire.
To deal with runaway growth, China has instead turned to the process of raising interest rates and the capital requirements for its primary banks, further tightening the relationship between the financial sector and the government. Indeed, banking and lending in China are primary tools of state policy.
On its coasts and in the major cities, China appears in some ways to be a free-market paradise. Firms like Foxconn manufacture electronic goods for Apple ( AAPL ) and Hewlett-Packard (HPQ), while web firms like Baidu (BAID) mimic Google's success in digital advertising and technology. The financial markets in Hong Kong and Shanghai are robust and draw an ever-larger share of global initial public offerings.
From some perspectives, China has married the best attributes of command economies and markets: a drive towards efficiency, the search for profit margins, a stern financial steward and minimal unrest. Look from another angle, though, and you see an economy where hidden bubbles threaten to upset growth and stability, wealth is accumulated largely by an elite group of financiers and government ministers, political freedoms are nonexistent and working conditions are often atrocious.
China will have to reconcile its contradictions in some fashion, or risk being split apart by them.