It is back to reality with a vengeance in China. The effects of a new era of global financial turmoil, and a local scandal over tainted milk-powder, have begun to consign the Beijing Olympics to history. A stream of political and economic challenges awaits the country's political leadership. Perhaps most fundamentally, an extraordinary year of crisis and achievement enters its closing stages with fresh questions arising over the future of China's much-vaunted manufacturing model itself.

A backward look 

True, the late-summer events in China's capital city will not - as has so much else in China's modern history - be allowed to disappear down the memory-hole. President Hu Jintao is not an expressive man; but even his ever-present enigmatic smile seemed to acquire a sincere glow at the closing ceremony of the Beijing Olympics on 24 August 2008. No wonder: China's expenditure of $44 billion had its reward in the table-topping fifty-one gold medals China claimed. The sporting excitement of sixteen days of competition, and that of the life-affirming Paralympic games of 6-17 September which followed, made the problems of a difficult year - from Tibet to air pollution, social protest to corruption - seem distant (even if the unrest in Xinjiang, the most problematic of all China's restive regions, was felt even during the games).

Kerry Brown is an associate fellow on the Asia programme, Chatham House, and director of Strategic China Ltd. His most recent books is Struggling Giant: China in the 21st Century (Anthem Press, 2007)

Also by Kerry Brown on openDemocracy:

"China's top fifty: the China power list" (2 April 2007)

"China goes global" (2 August 2007)

"China's party congress: getting serious" (5 October 2007)

"Shanghai: Formula One's last ride" (15 October 2007)

"Beijing's political tightrope-walk" (12 March 2008)

"Taiwan and China: an electoral prelude" (4 April 2008)

"China's Olympics: after the storm" (6 May 2008)

"China on Olympic eve: a globalisation of sentiment" (10 July 2008)

"The Olympics countdown: Beijing to Shanghai" (6 August 2008)

"China changes itself: an Olympics report" (20 August 2008)

The Chinese people themselves seemed to rise to the occasion in appreciating the wonderful diversions of sport (see Li Datong, "The Beijing Olympics: the last award", 29 August 2008). But now, for government and citizens alike, it is back to reality - as the global financial troubles and the escalating milk-powder scandal reveal all too plainly.

Yet even amidst these new economic and social tests, the members of China's politburo will be obliged when they next meet to make an assessment of the whole Olympics exercise. They cannot fairly be denied a few moments of self-congratulation at the state's hosting of what was indeed an extraordinary event. Perhaps they will pause for a few moments too to mark the passing during the games of the man in charge of China when the reform-process started in 1978.

Hua Guofeng - the forgotten man of Chinese politics, even though he was Mao Zedong's personally chosen successor - died on 20 August 2008 at the age of 87. To his political rival Deng Xiaoping goes all the glory for what happened during the initial liberalisations in the 1980s; but Hua deserves credit for the quick challenge to the radical leadership of the "gang of four" and for helping to make the transition to the reformist era as smooth as eventually it was. It is easy now to forget how potentially unstable China was in those dark early years following the death of the "great helmsman". It didn't happen, but perhaps the Olympics should have stopped for just a minute to mark the passing of a man who was such a faithful servant of the party. 

In any case, the shape of the party's and state's new hurdles are already becoming apparent now that the games are over. The World Expo in Shanghai in 2010 - the next "big event" - will generate great excitement and pride, but it isn't quite in the league of the world's greatest sporting event. Many Chinese people already feel as if they've woken up with something of a hangover, which the milk-powder controversy - which has claimed both lives and political casualties - will only intensify. Moreover, the economic woes consuming much of the world are blasting a chill wind onto the Chinese economic powerhouse. In these circumstances, the politburo's room for quiet satisfaction will - insofar as it exists at all - be short.

The price of reform

This is where there is a problem, for which the Olympics with its wall-to-wall commercialism is a great, symbolic finale. James Kynge, the former Financial Times correspondent in Beijing and author of China Shakes the World (Orion, 2007), outlined the leadership's predicament in stark terms in a fine recent analysis. 

The rest of the world has for ten years been enjoying the benefits of China's export of deflation. China's exports, built on cheap labour and manufacturing costs, have brought the prices of consumer goods tumbling down. Much of the world cooks on barbecue-grills that cost less than the price of meat prepared on them. But as James Kynge points out, there is a great pretence about all of this: for the prices of all the Chinese elements involved in the process - land, capital, labour costs, transport - have all been set by the state, and kept well below the proper market price.

Now, however, the free market is creeping into almost every area of China's economy, from utilities to employment. The result is a price-correction in which markets set the rates. Local governments are thinking of new ways to sell or rent so-called state land in ways that can make them money; water is being sold in some areas of China, leading to sharp price increases; and labour shortages are beginning to be seen in a market that was until recently thought to offer a limitless supply of cheap workers. A new contract law introduced in January 2008 gives employees even greater rights and benefits (see Han Dongfang, "Collective Bargaining and the New Labour Contract Law", China Labour Bulletin, 26 February 2008). For WalMart, Tesco and the like, this means the price of their exports is going to go up, and up again.

In short, the era of "made in China" looks like it is drawing to a close. It will be a lengthy process; but suddenly, manufacturing in Vietnam or Cambodia, or even Laos, looks like it will become more straightforward and profitable than in China. 

Among openDemocracy's articles on China in 2008:

Susan Brownell, "The Olympics' ‘civilising' legacy: St Louis to Beijing" (23 May 2008)

Li Datong, "China and the earthquake" (2 June 2008)

Emily Lau, "Tiananmen, 1989-2008" (4 June 2008)

Jeffrey N Wasserstrom, "Tiananamen's shifting legacy" (26 June 2008)

Li Datong, "China's leaders, the media, and the internet" (4 July 2008)
Another new era

The politburo may well look upon this as a mixed blessing. The manufacturing model they have adopted over the last three decades has ruined China's environment, and depleted most of its natural resources. It also increasingly fails to meet the needs of those who service it; the aspirations of hundreds of thousands of Chinese migrant-workers searching for employment in the cities are no longer satisfied by the prospect of manufacturing Barbie dolls for a few cents an hour. They have become more aware of their rights, more aware of what they want, and less willing to make sacrifices to get it (see Alexandra Harney, The China Price: The True Cost of Chinese Competitive Advantage, Penguin 2008).  

So the politburo will only be able to give themselves a few moments to celebrate the "most successful games ever". They will then need to move on to the more pressing business of where to direct the economy in the months and years ahead. Their foreign-investment strategy is at a critical juncture (see "China goes global", 2 August 2007). Chinese banks are looking to spread themselves abroad more and more widely. For their part, there are signs that Coca-Cola and other multinationals now want to acquire - with full guarantees - assets and companies in China.

The fifty-one gold medals China's sportsmen and sportswomen achieved was an amazing achievement; the impact of the games on China's popular consciousness is less measurable though perhaps even more significant (see "China changes itself: an Olympics report", 20 August 2008). But the Chinese leadership will need every particle of ingenuity and intelligence it has to manage the potential mess that could lie just a few steps ahead. Something it dreads is about to happen: it is starting to live in very interesting times, of which even the enormous convulsions on the world's financial markets are just one aspect. Hu Jintao and his colleagues may one day look back with nostalgia on the period when the only thing it had to worry about was the success of the Beijing Olympics. From here, they are in uncharted territory.