China: A dream too big to fail

Whatever it takes, the Communist Party will not let Chinese capitalism fall

Published on Backbench on 20th July 2015.

‘Socialism with Chinese characteristics’ was how Deng Xiaoping, the leader who reformed and opened up China’s economy, described his vision for the country.

Earlier this month, with the stock market in meltdown, China’s economy was closer to capitalism with socialist characteristics. With trillions of dollars down the drain, the government fisted its very visible hand at the market violently. Over 50% of stocks were suspended, as state-owned companies were barred from selling their shares. The Communist Party was fighting to save capitalism.

Some have compared today’s China to the Wall Street Crash in 1929. I believe Chinese investors will seek comfort in an example of successful state intervention closer to its historic and geographical proximity – Hong Kong during the 1997 Asian Financial Crisis – when the government there took decisive action and protected its currency from speculators led by George Soros, who ‘broke the Bank of England’ with currency speculation just five years before.

For sure, China’s heavy handed approach has deviated from its expected direction of travel towards a more liberal economy. However, as the Chinese Communist Party legitimises itself by performance, the political incentive to intervene always overrides the economics. With more stock traders than Communist Party members now in China, the Party cannot afford to upset a market that only expects gains, irrational as it may be, for the sake of its survival.

When I visited China just over a month ago, it was a different world. The China Dream was going global, with the establishment of the Asian Infrastructure Investment Bank (AIIB), and the emergence of ‘One Belt, One Road’. We were told about the ‘great rejuvenation of the Chinese nation’ as we were greeted by officials. 2015 was destined to be China’s year.

In particular, the establishment of the AIIB itself was a resounding political win for Beijing. Britain’s determined entry to the AIIB, against the wishes of Washington, was the game changer, as only then did other western countries follow suit. This is a personal achievement no smaller for Chancellor George Osborne than his landmark Budget last week.

By contrast, last week’s intervention by the Chinese government will damage confidence in the nation, and cast doubt over President Xi Jinping’s ability and seriousness about carrying out essential economic reforms, the building block of his China Dream. In a recent report published earlier this month, the World Bank warned China over its ‘distorted incentives’ in the financial market, and highlighted that 95% of high-level bank assets were owned by the government.

Pundits hostile to China have long expected an economic meltdown, followed by a political upheaval marking the collapse of the Communist Party. David Shambaugh, an authoritative academic on Chinese affairs, boldly claimed in January, that ‘the endgame of Chinese Communist rule has now begun… its (the Communist Party’s) demise is likely to be protracted, messy and violent.’

While I have criticised Beijing on a range of issues, from democracy in Hong Kong to the Tiananmen Massacre, I shall not jump on the apocalyptic bandwagon, as tempting as it may be.

The China Dream is too big to fail, and the authorities in Beijing know that their fate depends on it. A slump in the stock market will not kill the Communist Party, but a lack of reform in response to its deep rooted problems might do. The future of the Chinese Communist Party future will depend on which way it turns at this crossroads.

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