Newsweek International 2005-10-24 00:31:50A senior U.S. security official on a visit to Beijing last year was having drinks with Chinese counterparts when the talk turned to rising social strife. The American assumed China's poor western provinces, plagued by ethnic and religious tensions, were the most restive. Not so, said his hosts. "Their biggest nightmare is Manchuria," says the official, who requested anonymity because he deals frequently with China. "That's where all the state-owned industries are being sold and that's where the unions are the most organized. They're in a race against time." Manchuria is reasserting itself as China's epicenter of unrest. According to official figures, one in 12 major demonstrations in China last year occurred in Liaoning province, which along with Jilin and Heilongjiang provinces make up the industrialized northeast region of Manchuria. That ratio is down from one in six back in 1999—a reflection of rising protest elsewhere, not less unrest in Manchuria. "Liaoning has by far the highest number of protests in China," says Murray Scot Tanner, a senior China analyst at the RAND Corporation. "And we've actually seen an increase over the last couple of years." Nationwide, economic restructuring has eliminated some 50 million jobs since the late 1990s. The cuts devastated Manchuria, long a vortex of rebellion and intrigue. The Manchus swept out of the area to conquer China in the 17th century, and ruled until 1911. For much of the early 20th century, great powers struggled for influence over the region's oil and gas, key ports and railways. As part of a former industrial powerhouse, Manchurians combine a knack for organization with a growing anger that their fortunes are falling as others, particularly along the southern coast, thrive. The northeast, home to 10 percent of China's state-owned enterprises and 13 percent of their work force, has seen its share of industrial output slide from 16.5 percent in 1978 to 8.6 percent in 2002. (During the past decade, the number of state-owned companies nationwide has declined by half, and they now generate about 40 percent of non-farm GDP.) State largesse, once regarded as a tonic for Manchuria, has turned out to be slow poison, says economist Chi Hung Kwan, because it drags out the death of state enterprises. With its nest of militant trade unions, the region is notorious for the kind of organized protests that so rattle Beijing. While union chieftains all over China are approved by and traditionally loyal to the state, they are becoming more responsive to angry workers for fear of losing their relevance. Already this year, more than 10,000 laid-off workers have demonstrated for higher unemployment payments at Anshan Iron and Steel, one of China's largest mills. Tens of thousands of workers went on strike over pay disputes, housing and dining-hall issues in the port of Dalian, where local authorities had also blocked anti-Japan rallies before the anniversary of Tokyo's surrender in World War II, fearing the protests might turn against the local government. Paramilitary police were called in to quell protests after 212 coal miners died in a gas explosion near the city of Fuxin. Trouble also looms from North Korea, just over Manchuria's southern border. Last year Beijing replaced a militia policing the border with units of the regular Army—a measure, U.S. security officials say, of the government's fear that starving North Koreans could raise tensions by taking local jobs. The impact of a North Korean collapse on Manchuria, says Tanner, "is a major and underestimated reason why Beijing doesn't want to put the screws on Pyongyang" over its nuclear arms program. Geography works against Manchuria in other ways. Its industrial base was founded by Japanese occupiers in the 1930s, built on by Mao in the '50s, and then largely forgotten when China opened its economy in the late '70s. It was the coastal cities, not the cold, remote northeast, that attracted foreign investment. Manchuria never got the investment needed to wean itself from state help. Visiting Liaoning in June 2003, Prime Minister Wen Jiabao made the development of the northeast and the west a top national priority, effectively equating once proud Manchuria with China's most impoverished region. "Location is probably Manchuria's biggest liability," says Albert Keidel, a China expert at the Carnegie Endowment for International Peace. "It's simply no longer a core area of the economy." In recent years, Minxin Pei and other top China analysts have warned that regions like Manchuria, left out of the boom, are in danger of becoming "failed" states or worse: failing "predator states." As Beijing transfers responsibility for projects and services to the provinces without extra financing, larceny has become a common means of public funding. When the government launched its sweeping restructuring plan in the late 1990s, it was party-connected factory bosses (not foreign multinationals) who gained control. The process in Manchuria was so corrupt, Beijing felt compelled in several cases to replace local regimes, not just individual officials. The proletariat was furious. As factories failed in Manchuria, 9,000 protests broke out between 2000 and 2002 alone. At the Shenyang Molding Co., where Cheng Youzhi worked for 32 years until 2001, the company was declared bankrupt, relieved of its work force, and sold to its old director for one quai, or about eight cents. "The new owners are now rich," says Cheng, who would speak only under a pseudonym for fear of retaliation. "All the employees were sent home and then they sold the company, bit by bit." That sense of alienation helps explain why the region, which is relatively wealthy, is China's most volatile. Although per capita income in Liaoning, at $2,037 in 2004, is well above the national average of $1,272, its middle class is bitterly nostalgic for state-guaranteed jobs and benefits. Skilled engineers, welders and line managers who once held prestigious jobs are now driving cabs, hawking fruit and working on construction sites. They have no medical benefits and, in many cases, no pensions. Today, analysts say, Manchuria has all the ingredients for a widespread, violent backlash. For Beijing, time may well be running out.