Will Hutton: China is a bubble about to burst

The ceremony was exemplary.

The chairman of the Nobel judges, Thorbjorn Jagland, left the prize on the empty chair that should have been occupied by the imprisoned human rights activist Liu Xiaobo, had the Chinese authorities allowed him - or his wife - to travel to Norway to accept it.

An audience offered a standing ovation. There was a haunting violin recital of Chinese music. The same could not be said of China's behaviour. It was stung into a diplomatic and propaganda campaign against the Nobel committee that has reached new heights of ham-fistedness.

The regime must be fearful indeed about the potential of the society on which it sits to erupt - and the surprisingly lively pro-democracy movement to go viral - for it to mobilise against one solitary activist to such an extent. China's anti-peace prize campaign is born of deep apprehension of its own vulnerability and lack of legitimacy.

China improbably claimed that the award was to a criminal, and thus mocked the Chinese legal system that had convicted him to 11 years' imprisonment. It campaigned to persuade countries not to attend the ceremony. Pakistan, Saudi Arabia and Russia duly obliged. It has cracked down on its domestic dissidents with even more force and paranoia than usual.

And it launched its own rival Confucius peace prize as a symbol of Asian values and priorities, to reinforce the idea that there is a new global centre of economic and cultural power anchored in non-Western values based in China in particular.

But the Confucius peace prize was awarded to a Beijing stooge, the former Taiwanese vice-president, Lien Chan.

He did not turn up to accept it, so the organisers turned to the trusty notion of asking a garishly lipsticked 6-year-old girl to accept the prize as symbol of innocence.

Today, in its name, the Chinese state can set up an alternative peace prize and award the alleged honour to whom it pleases in a completely opaque process. If this represents Asian values, the world should shiver.

The party has a long record of exploiting Confucianism to shore up its appeal. Liu Shaoqi, in the 1940s one of the five-strong leadership group around Mao, argued that the essence of becoming an effective communist was the same as becoming a good Confucian - inner steel, self-criticism and self-discipline. Yet even while he wrote, the same party could damn Confucianism for trapping China in hidebound pre-modern traditions, corruption and suffocating poverty.

Part of the overreaction to Liu Xiaobo is that the party leadership knows that regime change in the Confucian Imperial era always came through revolt from below - and that when Liu Xiaobo dismisses President Hu Jintao as leader of "the communist mafia" he combines effective and highly personal attacks on the new communist mandarinate with principled adherence to human rights and constitutional democracy.

If the strains in the economy were less acute, the party could be more relaxed. But China escaped the full force of the world recession only by resorting to a reckless credit-driven expansion; state-owned banks have near doubled their lending in just three years. Today's Chinese banking system has trillions of dollars of non-performing debts. The world economy cannot absorb the volume of Chinese exports; there is not the demand. The gravely unbalanced Chinese economy is a bubble about to pop. It needs reforms that go to the foundations of communist rule. But without economic growth the regime has no prop on which to rely; if it cannot provide jobs and the prospect of prosperity, its only rationale is that it alone can hold the vast country together.

It was the conjuncture of economic difficulties and legitimacy that ignited Tiananmen in 1989 - and many senior officials, including the likely next Chinese president Xi Jinping's father, were sympathetic to the protesters' demands because one way or another China had to find its way to legitimate government.

Xi Jinping is the leading candidate of the fifth generation of China's leaders to succeed Hu. But party conservatives do not know whether to trust Xi Jinping; he could be, given his father's views, China's Gorbachev - ready to bust open the political system.

Xi Jinping cannot take the succession, which could yet be bloody, for granted. This is how to understand the mobilisation by the world's second biggest economic power against one human rights activist. The big political actors in China have not spoken out, leaving the statements and explanations to minor foreign office spokespeople. They want to keep their powder dry for bigger battles.

It is lonely arguing that China is in deep economic and political trouble. But what has happened over Liu Xiaobo suggests that there are some in agreement - the men at the top of the Chinese Communist party.

- Observer