How vulnerable is China?

S P SETH

China’s stock market has been very volatile lately, affecting adversely the fortunes of its small investors who number in the millions. We will come to that later but first let us see how Xi Jinping is faring since taking over as president and secretary general of the Communist Party of China (CPC), late 2012. Since then, President Xi Jinping has been busy consolidating his power internally and projecting it externally. Internally, he moved fast to get rid of Bo Xilai, the powerful Communist Party Secretary of Chongqing, who reportedly had his own political ambitions. Bo’s wife, Gu Kailai, testified against her husband and that was enough to seal his fate. It took a little longer for another powerful political foe, Zhou Yongkang, a former security chief and member of the Party Standing Committee to be put on trial and convicted for life. In Zhou’s case, his wife and son testified against him. According to reports circulating at the time, both Bo and Zoe were considered fellow conspirators, though their trials and convictions were on corruption and related charges. Convicting on the basis of the testimony of close relatives is a bit over the top but that is how Bo and Zhou ended up. They both accepted the justice so delivered. Xi’s power is now virtually unchallenged.

Simultaneously, he is unapologetically entrenching the CPC’s monopoly power under his leadership. And he has no time for western notions of democratic elections, free speech and human rights. A leaked party document cautioned against such subversive notions and activities designed to undercut the CPC’s power. In other words, China’s model of one party rule is a legitimate alternative. Indeed, it is considered necessary and effective for economic growth and social stability and enabling China to uphold and protect its “core interests”. And these “interests” include its territorial sovereignty and integrity as projected into South China Sea and East China Sea, where China has contested sovereign claims over a bunch of island/islets/reefs. It has simultaneously been creating artificial islands out of the sea and creating a network of military facilities that is bringing the US and some of the regional countries together to counter-balance China.  For instance, Japan participated, for the first time, in joint military exercises here in Australia,that included US, Australia and New Zealand and reportedly involved 30,000 troops. The Japanese government is also pushing ahead to ditch its pacifist constitution, enabling it to be part of collective defence with the US. All this is happening against the backdrop of China’s projection of power in the region.

At the same time, China is also committed to pursue its economic growth. In the absence of any demonstrable index of popular approval, like periodic elections and a free press, the validity and durability of China’s political system depends essentially on a healthy growth rate of its economy, providing employment and a modicum of economic prosperity for its people. Which China has achieved, though there are pockets of economic deprivation here and there. There is a fairly broad sense of dissatisfaction and resentment, though, with widening income disparities between rich and poor and between rural and urban sectors. And such resentment is fortified and accentuated with widespread corruption at all levels of the party hierarchy and administration. Which Xi Jinping is seeking to deal with, though it has a strong whiff, at times, of settling some old political scores.

All in all, China’s economic growth since the eighties has been remarkable, though it is starting to slow down. But, at 7 per cent, it is still impressive. The Communist Party under Xi Jinping’s leadership not only intends to keep it this way but improve on it by liberalizing and broadening the economy. In the midst of such self-assurance on economy, the recent volatility of the stock market must have come as a rude shock. In a few turbulent weeks, the market lost over $3 trillion, about one-third of its total valuation. And this is despite all the measures the authorities took to stop the rout. In its efforts to broaden the Chinese economy, the government had encouraged China’s middle classes to invest in the stock market. And they took to it with great passion at playing the market. With very low returns on bank deposits, the stock market seemed the ultimate casino which promised easy way to riches. And that was mostly true as China’s stock markets reached dizzying heights till recently.

As the markets fell, China’s nearly 90 million middle class stock market players had to reckon with margin calls for failing stocks. Which further increased the pressure to sell. With the authorities doing all they could to stop the fall, but with limited success at that point of time, the all-powerful image of the CPC took a bit of a hit. Some small investors, who lost heavily, were critical of the government for not doing enough. They reckoned they were simply following what their government had encouraged them to do. Indeed, the authorities had even encouraged investors to play the market by using their property as collateral. The stock market volatility, therefore, affects the economy in all sorts of way.

First and the foremost, it is the fading of the wealth effect. And once that takes on, it might affect consumer spending across the board. At a time when China is transitioning to a consumer-driven economy, rather than lopsided emphasis on investment in construction, infrastructure and export sector, any loss of consumer confidence from a falling or static stock market is not helpful. Its knock on damaging effect on property market would be another worry. The authorities have been doing everything possible to stabilize the situation. They suspended trading in almost half the stocks. They have injected liquidity. They have extended a hefty credit line to the country’s major brokerages to buy up shares. And they have cut interest rates. Which has helped but doesn’t rule out another bout of volatility.

Even though the government has lost some shine to its virtually omnipotent image, some analysts believe that the stock market turbulence will settle down, at least in the short period. Even though the stock market lost over $3 trillions, nearly one-third of its value in a short period, it comes after a much steeper rise over the past 12 months. In other words, the diminishing wealth effect might be more psychological than real. But psychological effect does feel real to many people. It is this image of things going wrong that would need to be tackled. As one analyst commented, “A failure to stabilize the market (indeed to achieve a notable recovery from current levels) could lead to a crisis of confidence in the heretofore infallible state apparatus.”

Note: This article was first published in the Daily Times.

Contact: sushilpseth@yahoo.com.au