Note: Today is the second in a series of posts that detail Eurasia Group's Top Risks for 2013.

As their people grow bolder in their quest for information, China's leaders will only tighten the restrictions they place on cyberspace. China is, in fact, embarking on a worrying experiment: It is the only major power that is attempting to preserve an authoritarian system in the information age. This gigantic task will demand a great deal of leaders' attention, raise tensions among the Chinese people, and reverberate outside of China's borders through the country's foreign policy.

China's Great Firewall and unpredictable censorship regime have more or less enabled its leaders to manipulate the information accessible to its citizens. But these tools are fast becoming insufficient, a fact made clear by strikes at a major Chinese newspaper this week. China's internet users stand at more than half a billion and counting. Growing demands for transparency and information leaks that embarrass the government are inevitable, as evidenced by the public's growing awareness of high-level corruption scandals.

The Communist Party appears poised to implement a new phase of information control that is part reactive and part proactive. On the reactive side, the government has begun to disrupt virtual private networks used by many foreigners, and even some Chinese, to circumvent the country's firewall. The government will proactively attempt to capitalize on technological tools by using the internet and social media such as Weibo (China's version of Twitter) to convey its own messaging.

The friction between the government's attempts at self-preservation and the population's desire for more transparency will be the greatest political challenge for China in 2013. While the stability of the government is unlikely to be shaken in 2013, this internal conflict will distract leaders and encourage them to deflect public anger outward. Finding foreign scapegoats is a time-honored tactic that the Communist Party is likely to repeat this year.

There are plenty of foreign targets to turn to. Territorial tensions are high and are only exacerbated by the U.S. pivot to Asia, which has emboldened countries such as the Philippines to more aggressively push their interests. The largest risk is an increase in nationalism from China toward Japan, especially given the growing tension surrounding outstanding territorial disputes between the two countries.

Ultimately, though, China's attempts to limit information run counter to its stated desire to develop an innovative economy. How can China's handful of vibrant IT firms and internet giants become global competitors while operating under a regime that restricts online information? How can China become a dominant player in the global economy if it is disconnected from the global information society? These are inherent contradictions that the new Communist Party leadership will have to resolve.

On Monday, we'll profile Risk #3: Arab Summer.

By Michal Meidan and Carsten Nickel

There are many reasons why China's economy has begun to cool, but the dramatic slowdown within the European Union, China's largest trade partner, is among the most important. Fears for Europe's growth and stability weigh heavily in Beijing, and China's risk-averse leaders are willing to invest in Europe's recovery.

But Beijing won't risk throwing good money after bad with substantial bailouts for risky peripherals like Spain, Italy or Greece. That would play badly inside China, where public perception that government is bailing out wealthy Europeans during a slowdown at home wouldn't play well. Greek haircuts earlier this year left Chinese investors with huge losses, and to invest in the European Financial Stability Facility (Europe's current bailout fund) is to form closer ties with meddlesome bureaucrats in Brussels.

Instead, China is increasing its direct investment in Germany, still Europe's economic engine, and, by extension, in Berlin's ability to manage crises and restore the continent's growth. That's good news for German Chancellor Angela Merkel, who sees the strategic importance of improving relations with the world's other leading manufacturing-dependent surplus economy. China has become Germany's third-largest export market behind France and the United States, and with demand among Germany's neighbors unlikely to increase anytime soon, German manufacturers will grow increasingly dependent on China and its markets.

Economic ties between China and Germany began to tighten following the onset of the financial crisis in 2008 as demand generated by the Chinese stimulus plan became an important source of Germany's recovery. Closer ties with German automakers and producers of renewable energy help Chinese firms develop new technologies and climb the value chain.

There is a downside for Germany. Expanded commercial ties will force Merkel's government to contend with domestic concerns that China's labor practices fall far short of acceptable standards and that German companies doing new business in China will have their intellectual property stolen. But Chinese purchases of German Bunds will help Merkel ease domestic fears that German support for Eurozone weaklings will sap the country's strength. That's why Merkel's once vocal criticism of China's human rights record has all but disappeared -- and why Berlin, unlike European institutions in Brussels, has yet to demand equal access to Chinese markets.

That's crucial for China. Beijing will continue to pay lip service to its ties with EU institutions, but growing ties between Beijing and Berlin will complicate Brussels' efforts to develop a common foreign and trade policy toward China, increasing Beijing's bargaining power with individual European partners.

Today, when China's leaders look toward Europe's core, they see a weakened France, a marginalized Britain, and a rising Germany. By betting on Berlin, China is hoping that Germany will use its increasingly decisive role in EU decision-making to provide China with market economy status, and the commercial advantages that come with it, and even to help lift Europe's arms embargo on Beijing. For its part, Germany is hoping ties with China can boost growth at a moment when it's badly needed.

For the moment, it's an increasingly profitable partnership.

Michal Meidan is an analyst in Eurasia Group's Asia practice. Carsten Nickel is an analyst in the firm's Europe practice. 

By Scott Seaman and Stephen Majors

Many Japan watchers -- and the market -- are hoping for a breakthrough in Prime Minister Yoshihiko Noda's efforts to secure passage of a consumption tax increase. The general expectation is that raising the tax from 5 percent to 8 percent in April 2014, and then again to 10 percent in October 2015, wouldn't just be a solid step forward in addressing Japan's ballooning public debt, which is projected to reach 239 percent of GDP by year's end. It would also demonstrate that Japan's political parties are able to work through their differences to tackle tough problems in a country that has had seven prime ministers in the past six years.

But this view wrongly focuses on a narrow, short-term outcome rather than on the broader political malaise such a victory could prolong -- which, in Japan's case, is the most salient factor for long-term reforms. The passage of the tax hike is not necessarily a good sign for the country's ability to tackle its many pressing problems unless it leads to snap elections and a major realignment of Japan's sclerotic party system. The best outcome would be the failure of the tax hike measure, followed by Noda's call for a snap election; or the passage of the hike based on Noda's agreement with the opposition Liberal Democratic Party (LDP) that he would call an election in return for their cooperation. Outside of these two scenarios, the party realignment that is necessary for Japan to make deep economic reforms and boost competitiveness is very unlikely to happen.

Without major party system realignment, political gridlock on most reforms would persist, undermining medium- to long-term prospects for deeper economic restructuring. A core problem of Japan's political system is that the ruling Democratic Party of Japan (DPJ) and the LDP are both characterized by deep internal schisms over greater openness to economic competition and trade, as well as on fiscal and social welfare reform. Such internal cleavages have blurred distinctions between these parties and made maintaining party discipline and cohesion almost impossible. In addition, a "twisted" Diet (Japan's parliament) in which the DPJ controls the lower house, but lacks a majority in the upper house, allows opposition parties to block legislation with ease. The policy gridlock that often results has contributed to a loss of public support for parties of every stripe and a general sense that Japan's politics is essentially dysfunctional.

Noda has set a deadline to bring legislation for the tax hike to a vote in the lower house of the Diet before the end of the current session on 21 June. Strong opposition outside -- and inside -- the DPJ keeps the odds of enacting legislation for the hike during the current Diet session low. Despite the challenges, Noda may still find a way through threats and horse-trading to pass the increase. Numerous members of the DPJ, LDP, and other parties feel electorally vulnerable and would prefer to avoid a near-term snap election, strengthening their desire to pursue inter- and intra-party compromises. If Noda's government passes the hike without a snap election, markets will likely view this positively based on the argument that any success reduces the risk of a rise in Japanese bond yields and provides a signal that Japan's prospects for better fiscal management have improved.

But focusing on the short-term market spike in such a scenario would risk overlooking the larger implications of successful passage of the hike. Beneath it would lay the perpetuation of a largely dysfunctional status quo. Party system breakdown would be traumatic, and any realignment that follows would be fraught with uncertainty. But if it sets the stage for reform-minded politicians from the DPJ, LDP, and other parties to coalesce into a single party with a majority in both houses of the Diet, the outlook for future reform efforts would be brighter.

Scott Seaman is an analyst in Eurasia Group's Asia practice. Stephen Majors is an editor with Eurasia Group.

By Roberto Herrera-Lim

Cast as "China-lite," Asia's next major export tiger, Vietnam plays the part with gusto. Its bureaucrats look north to learn China's way of growth. And at first glance Vietnam seems perfect for the role -- affordable labor and plenty of both public and private investment (foreign and domestic) in everything from office buildings and new industrial zones to oil refineries and deepwater ports.

But when Hanoi decided in August to devalue Vietnam's currency, it demonstrated that following China's path to prosperity just isn't that easy. Investors are now taking a step back to watch carefully as Vietnam wrestles with inflation, large trade and balance of payment deficits, and a frothy urban real estate market. They also worry over longer-term problems like official corruption, bureaucratic confusion, shortages of skilled workers, and large gaps in infrastructure investment.

Maybe China is the wrong model. Beijing is wrestling with some of these same problems and makes plenty of mistakes along the way, but China's enormous economy and its access to capital provide advantages that little Vietnam -- and maybe a lot of other small frontier economies -- can't match. China's size and advantages of scale have so far helped Beijing absorb many a self-inflicted blow over the past two decades.

Read on

Striking workers in many parts of China have made international headlines in recent weeks by demanding higher wages -- and getting them. As more of them get what they want, others will be encouraged to go the same route. Is the world's factory about to go out of business? Not quite yet, but China's government has a complicated new management problem.

The surge in worker anger and a wave of wage hikes in companies ranging from
electronics giant Foxconn to fast-food icon Kentucky Fried Chicken have generated talk about the end of cheap labor in China and the birth of an independent labor movement. That's overstated-or at least premature. Higher labor costs are an inevitable result of rising living standards and expectations, a long-term trend that can't be blamed on one Honda plant. An ageing population (in part the result of the one-child policy), the urbanization of huge numbers of workers, as well as Beijing's long-term policy plans to boost the declining share of income in China's GDP had set the stage for a gradual rise in labor costs long before the recent wave of strikes. With wages stagnant for most of the economic crisis, many local governments have introduced minimum wage hikes ranging from 5 percent to 20 percent in recent months. But the trend toward country-wide wage increases will be gradual. For now, there are still enough workers looking for jobs along the coast and in the countryside to keep labor costs manageable for many producers. 

The more interesting part of the labor dispute story comes from the changing
nature of China's workforce. The country's economic boom has gradually raised expectations among Chinese workers for a better life. Opportunities to get an education (or provide one for their children), to buy a home, and to afford once unobtainable consumer goods have changed the way that millions of Chinese workers imagine their future. On an unprecedented scale, savvy workers are using the Internet and cell phones to find out what's happening in other factories and towns. They are increasingly aware of their rights and of the existing legislation designed to protect them. They're becoming much more assertive in demanding that their rights be protected.

So far, Beijing has tolerated these worker movements. Premier Wen Jiabao, known to many as "Grandpa Wen," recently spoke in support of the migrant workers who make up the bulk of China's unskilled labor. He insisted that they deserved to be "cared for, protected and respected." As long as labor disputes don't take on an overtly political tone, Beijing will leave it to local governments to deal with them. But one of the Honda strikes came dangerously close to testing the limits when, according to some accounts, workers demanded the right to form independent labor unions.

Here's where things could become more confrontational. China's formal trade union, the All China Federation of Trade Unions (ACFTU), is the only union that the government tolerates. But ACFTU doesn't inspire much confidence in the workers it was created to represent. Its main goal is to unionize most, if not all, of China's foreign-invested firms, and it tends to limit its role to mediating disputes between management and workers. Since its operation are approved by management -- and often staffed with managers -- workers tend to stake their claims independently of it. Some workers are even looking for something a bit more genuinely independent to represent their interests and protect their rights.

How will Beijing respond to these new pressures? First, it will likely keep the pressure on local governments to manage labor problems effectively, whether by brokering concessions, intimidating those who make the most aggressive demands, or both. Second, it could seek to empower ACFTU to play a more assertive role in representing workers interests, a goal that some ACFTU
representatives share. Beijing would rather ensure that its trade union can play its role more effectively than to allow for the creation of labor unions it can't completely control.

For the moment, the world's factory will continue humming along, though with
a few more jolts and bursts. But this is a story worth following as the Chinese leadership adapts to the challenges of navigating an increasingly complex political landscape.

Michal Meidan is an analyst in Eurasia Group's Asia practice.

Thus far, the Obama administration isn't making much of a showing. Undersecretary of State Bob Hormats did a strong job on yesterday's U.S.-China panel. But there's little coordination and not much of a message. If Secretary of State Clinton is too busy, why not send Vice President Biden? Combined with perfunctory foreign policy mention in the State of the Union, I'd suspect it's a feeling that anything but domestic issues isn't going to play well politically. That's not the strategy I'd be going with.

So for the American delegation, it's the U.S. private sector that's leading the charge here. And the omnipresent Barney Frank -- who yesterday told a private industry group to stop listening to what congress says, and look at actual policies ... do they have anything to complain about? Heads nod reasonably sagely.   

Meanwhile, criticism of imminent political explosion grows as the nights wear on. Rogue economist/historian/documentarian Niall Ferguson, distinctly unshaven (proffered excuse--he forgot his razor on his flight from Delhi), wagered me $100 that the United States would have a new Secretary of Treasury by June 1st this year. Wager accepted. Howard Lutnick of Cantor Fitzgerald said he'd go $100 for Sept. 1. The bankers are always pushing it. 

Ian Bremmer will be blogging from Davos this week sending reports and commentary from inside the World Economic Forum.