Despite having navigated an economy that has grown from a worldwide GDP of 1.8 percent in 1978 to 6 percent today and sustained an average economic growth rate of nearly 10 percent for 30 years, China is encountering daunting challenges. How well it manages those challenges and meets socio-economic commitments will affect every Chinese person's life. If not managed well, civil unrest leading to political instability will evolve.

For many Chinese and international observers, China's economic situation comes as a surprise, if not a shock given China's effusive national Olympic pride and celebration of 30 years of economic reform.

With a budget surplus that already totaled $147 billion by the end of August and nearly $2 trillion in foreign reserves, there was growing hope that the Chinese economy would pull the world out of economic malaise. On the contrary, Chinese officials' actions signal that the best way China can help the world is to help itself.

Questions first began to surface about China's economic wherewithal after last spring's earthquakes in southwest China where 68,000 died and billions of dollars in reconstruction was required. The towering need for assistance in the southwest came on top of Chinese leaders' commitment to improve the rural quality of life.

  China's phenomenal economic success has been the result of what economists call the “;East Asia Economic Model.”; This is essentially the same mode of economic development that has worked so well for Japan, South Korea and Taiwan. The EAEM is export driven, dependent on cheap labor and seeks to hold exchange rates artificially low.

One only has to see the spate of Chinese products on store shelves throughout the world to realize the model's success. However, the global economic slow-down and U.S. recession reduced Chinese exports in November 2008 by 2 percent over the November 2007 total. Guangdong Province, a key Chinese export hub responsible for 12 percent of China's GDP in 2007, by the end of November 2008 reported that its growth contracted by one-third.

  Overall, domestic and foreign investment is not as forthcoming. Even before the slowdown, the central government began to address demands of factory workers by enforcing labor legislation to improve working conditions. Particularly galling to some employers has been government insistence on forming labor unions and Chinese Communist Party cells within enterprises. To many, India, Vietnam and other investment destinations offer better profit-making opportunities.

Sloganeering plays an important role in Chinese politics. Its latest slogan, “;bao ba,”; or maintaining a growth rate of 8 percent, permeates a lot of contemporary economic thinking. China claims that it needs to maintain an annual growth rate of 8 percent to create the 7 million jobs annually it needs to create to stem the growing unemployment rate, which officially stands at 4.5 percent but is generally thought to be much higher. The World Bank estimates economic growth will be 7.5 percent while the International Monetary Fund limits growth to 5 percent.

After years of U.S. pressure, the Chinese allowed the yuan to appreciate. To date it has appreciated by 20 percent. Some Chinese economists are promoting the view that the yuan should depreciate to stimulate exports. Depreciating the yuan at this point would bring swift American rebuke given the long-term U.S. effort to encourage China to allow the yuan to appreciate. In other words, it would reverse what many observers see as a promising trend: the reduction of China's $256 billion trade surplus with the U.S. in 2007 to $223 billion in 2008.

  Similar to other countries, China launched a stimulus package worth $586 billion dedicated to such infrastructure improvements as roads, bridges, railways, rural housing, environmental protection, earthquake proofing and harbors. However, many question the actual amount, claiming that it includes monies already budgeted in the 2006-2010 five-year plan. Beijing was also trying to fund the package with local government and private business resources. Another school of thought argues that to do what China says it wants to achieve, a stimulus package of $1.2 trillion is actually needed.

To make up for a shortfall in exports, support for stimulating domestic demand has grown. However, the average Chinese household savings of 4000 yuan ($588) does not offer much reason to hope Chinese will go on a shopping frenzy. Realizing the economic downturn, Chinese families prudently want to hold on to their savings so they can pay for education-related expenses, medical bills and other, unexpected expenses. Actually, this strategy seems to offer even less hope than might be expected in that China has periodically tried unsuccessfully to stimulate domestic demand in order to deflect international criticism of China's trading successes. Owing to a lack of reliable social services, people have been impelled to save rather than to spend. Tax reductions will also likely have little effect for the same reasons.

  Party officials advocated a reduction in interest rates while the People's Bank of China wanted to continue fighting inflation. Keeping in mind the strength of China's budget surplus, the PBOC finally reduced its lending rate by 1.08 percent to 5.58 percent in late November. However, there is skepticism about how much benefit the rate reduction will bring. More crucial than the rate reduction is the question of how much the banks will lend and to whom.

Chinese officials have become fearful of social and political instability. And well they should be. The Chinese political system doesn't deal well with popular challenge. In recent years, 70,000 to 80,000 political demonstrations and riots have been reported annually, largely sparked by economic grievances. For example, 9,000 taxi drivers in Chongqing went on strike in November, damaging cars and impeding traffic until party officials agreed to address their concerns. Since that time, teachers, factory workers and other members of China's new middle class have stopped working until their demands are satisfied.

Chinese believe that the number “;8”; represents good luck. After all, it was not by chance that the Beijing Olympics started on the eighth day of the eighth month in 2008 at 8 o'clock in the evening. If there is anything to the notion, the better that party leaders “;protect eight,”; the less political turmoil China will bear.