Chinese whispers

Sambuddha Mitra Mustafi | Updated on January 22, 2018 Published on August 28, 2015

Seeing red: The thought of millions of shareholders losing their savings in the stock market crash must be giving the Communist Party nightmares of street protests   -  Reuters

Sambuddha   -  BUSINESS LINE

Will the Shanghai stock market collapse jeopardise the Communist Party regime in Beijing?

This year the Communist Party in China entered its 66th year in power. Only two other one-party regimes — the communist parties in erstwhile Soviet Union and the current North Korean regime — have survived longer. It took 74 years before the Soviet communists wilted, while in North Korea the regime has entered its 70th year in power.

All eyes this week have been on Shanghai’s stock market, whose dramatic 30-plus per cent collapse triggered a global selloff. But there is a much larger story that could be unfolding in Beijing: an existential threat to the Communist Party regime.

As China analyst Minxin Pei has pointed out, “social science research has shown that once per capita income crosses a certain threshold (about $4,000 in purchasing power parity, or PPP), authoritarian regimes in non-oil producing states face greater risks of fall.” It happens because elite and middle-class taxpayers in such countries become unwilling to prop up a regime that does not allow participation or dissent. With per capita income at above $10,000, China is already an extreme outlier in that respect.

The Chinese top leadership is well aware that they have so far defied history and democratic gravity to stay in power. They know what keeps them in power is the elite consensus in the country, that the single-party regime has been a key driver of the impressive economic growth of the last two decades.

If the annual growth rate falls below five per cent, however — the Chinese whisper goes — dissent against the Party may spill over to the streets. In 1989, the Tiananmen Square student protests also happened in the backdrop of an economic downturn. And no one is more paranoid about losing power than the Party elite. Hence, at the slightest sign of economic trouble, the country’s central bank and policymakers go out of their way to ensure proactive measures to boost economic confidence.

Look at the alacrity with which The People’s Bank of China reacted to the market fall. This week it reduced lending and deposit interest rates by 0.25 percentage points each and its reserve requirement ratio by 0.50 percentage points. This is the fifth rate cut announced by China since November 2014. The Chinese authorities have also often been accused of fudging numbers to make their economic picture seem rosier than it actually is.

And therein lies the larger problem. Rather than let the markets determine their own prices, the government is caught in a vicious cycle of giving booster shots to the economy to ensure its own survival, creating an unsustainable credit bubble. The bubble now seems to be bursting, and could well take the Communist Party with it.

According to Bloomberg, 40 million new brokerage accounts were opened in China between June 2014 and May 2015, and many of them invested in stocks with borrowed money. The quality of shareholders is also questionable: many of them are not educated, and most do not have an investing background. The thought of millions of shareholders losing their savings in the stock market crash must be giving the Communist Party nightmares of street protests.

In one of those ‘Only in China’ moments, the Financial Times reported that students of Tsinghua University in Beijing were instructed to chant the slogan “Revive the A shares, benefit the people” at their graduation ceremony. For how long such slogans will stop them from marching to Tiananmen Square though, remains to be seen.

In a March essay for the Wall Street Journal, titled The Coming Chinese Crackup, veteran China watcher David Shambaugh made the bold prediction that President Xi Jinping could well become China’s Mikhail Gorbachev, presiding over the collapse of communist regime. Though he noted that Xi was very different from Gorbachev in his leadership style, the former’s strong-arm tactics are stalling the reforms that China needs for further growth. “Mr Xi’s wave of repression today is meant to be the opposite of Mr Gorbachev’s perestroika and glasnost,” wrote Shambaugh. “Until and unless China relaxes its draconian political controls, it will never become an innovative society and a knowledge economy… If Mr Xi and party leaders don’t relax their grip, they may be summoning precisely the fate they hope to avoid.”

While many in India and other emerging economies had looked up to the Chinese model of state-driven capitalism as an ideal during the heady decades of growth, the limitations of such a system are now becoming obvious. If an economy and society moves towards the market with competition and substitutes, the political leadership cannot remain a monopoly.

If the ordinary Chinese consumer can go out to the supermarket and have a choice of 10 different noodle soups, she will soon demand similar choices for the country’s political leadership.

Sambuddha Mitra Mustafi is the founder of The Political Indian

Follow Sambuddha on Twitter @some_buddha

Published on August 28, 2015
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