Earlier this month President Musharraf visited Beijing after trumpeting that he expected equal treatment for Pakistan and India from the US. If denied that, he said, he would seek nuclear energy from China. But in China he apparently drew a blank. In the days to come South Asian governments and groups patronized by Beijing in the past might well start receiving polite but cooler treatment from China. If that happened there would be good reason for it. China is presently preoccupied with a domestic crisis. It may not like to get embroiled in foreign situations that might complicate instead of defuse its internal crisis. China's internal crisis is very quiet but very deadly. It needs understanding. Only then can India derive maximum advantage from talks with Beijing.

China's crisis is threefold: economic, social and political. The three facets are interconnected. The Chinese government is busy defusing the crisis. But positive results are unlikely to come quick.

Consider first the economic crisis

China's economic miracle is legendary. But, more than chinks, there are now gaping holes visible in its armor. Chinese banks have given huge loans on the basis of political instead of business reasons. These loans were given to state owned enterprises running at continuing loss. But the loans could not be stopped because sixty per cent of China's urban employment depended on these enterprises. If these units closed down it would have caused widespread unemployment, threatening social stability. These bank loans became therefore actually grants. Repayment of loans was ruled out. Instead of closing down the state owned enterprise or writing off a loan, the banks continued to advance more loans to the business so that it might repay old debts. This maintained the fiction that the loans were viable. The bank loans were often misused by corrupt officials and diverted for private gain. This continued for years. Its cumulative impact is now beginning to hurt.

For the first time, starting May this year, the West has begun to take a close, hard look at China's banking problem. Noted financial analysts have started officially to note the huge gap between the popular perception of Chinese economy and its disturbing reality. Reputed analysts like Ernst & Young, Price Waterhouse Coopers (PWC), McKinsey Global Institute, and Fitch have commented on the problem. Each has said that Chinese banks have unmanageable non-performing loans on their books. Each has acknowledged that this signifies a serious issue. These analysts have estimated that irrecoverable loans in the books of China's banks equal some $673 billion, probably more. This tends to cancel out the bulk of China's foreign reserves, which are around $819 billion. In short, the Chinese banking system has created an overall crisis for the Chinese economy.

China's economy is already growing at over 9 per cent. It cannot significantly grow faster. What keeps China's growth alive is not domestic consumption but cheap exports. Expanding exports is crucial for China. These alone produce the cash to keep alive China's financial system. In other words China must run faster and faster to stay in the same place. There is a popular belief that China owns over $800 billion in US Treasury securities, holding the US hostage thereby. The truth is different. If China shifted its dollar holdings to other currencies it could rock US economy but would not deliver a knockout blow. Japan holds an equal amount in US securities. On the other hand China's annual trade of $ 250 billion with the US is its lifeline. To divert US exports to other markets would be a long-drawn and crippling enterprise for China.

President Hu therefore has reason to worry. He has to rectify the huge banking mess of China. That could create unmanageable social unrest. If China's banks are run professionally the livelihoods of 60 per cent of its urban population would be threatened. Employment in state owned enterprises is dependent on the flow of bad loans from these banks. If loans are stopped, the enterprises would have to close down. Could Chinese society endure such upheaval? Already the disparity between the prosperous coastal regions of China and its comparatively poor interior has caused 84,000 public demonstrations against authorities in one year, sometimes resulting in violent clashes with the police. These are official government figures. President Hu's problem is, how to reform the economy and at the same time crack down on dissent.

That highlights China's political problem. Foreign multinational capitalism and one party dictatorship make an unnatural alliance. Corrupt party officials in many regions confiscate peasant land, offer no compensation and tie up with multinationals to set up businesses having a share in the profits. This is playing havoc with the livelihood of peasants. Consequently peasant protest has grown alarmingly. If President Hu pulls up party officials he risks serious political dissent within the government. If he represses the peasants he risks serious civil unrest. That is the dilemma facing the Chinese government.

Broadly there are two courses open to the Chinese government. It can attempt gradual democratic and economic reform, however slow and painstaking. Or it can push through policy changes and crush dissent. Chances are that China will adopt the first option. Its leaders are smart. Enlightened self-interest is likely to prevail. In the event, China would avoid international tension, and focus on domestic reform. This may be the right time therefore for India to settle differences with China. Its domestic concerns may impel China to be less hegemonic and more reasonable. Indeed, India should formulate its own vision document of the future world order. The Chinese leaders might be in a mood to listen. They know India and China comprise one-third of humankind.