Rigging the weather was the easy part for the CCP
The “Black Monday” of China’s Shanghai Stock Exchange Composite Index has sent shockwaves throughout global markets. But the plunge of over 30 percent of share prices in two months at China’s main exchange is the least of Beijing’s problems.
First of all, the dramatic drop in the past two months followed an equally dramatic surge in Shanghai share prices over the past year. The Shanghai Composite Index now hovers at around 2,900 points, down from the June 12 peak of 5,166. Yet a year ago, the index was at around 2,200 points. The recent crash is fundamentally a bursting of a bubble that started to inflate when the mainland Chinese government openly encouraged its people to invest in the stock market. Investors from inside and outside of China simply came to terms with their unrealistic hope that China can defy the laws of physics economically and continue its surge endlessly.
Secondly, while the crash has been devastating for individual Chinese investors, especially mom-and-pop first-time investors, the real damage is limited. Currently Chinese households invested less than 15 percent of their financial assets in the stock market. If anything, mainland China’s central bank’s decision to depreciate the yuan has hurt the Chinese public even more.
The real problem for Beijing, on the other hand, is to maintain its facade of strength in dealing with a force that cannot be contained. In late 2013, mainland Chinese leader Xi Jinping rolled out his master plan for the country of 1.3 billion, promising to let market forces play a “decisive role” in allocating resources. To help the transition of the exportheavy Chinese economy to a more domestic consumptionoriented one, the Chinese government encouraged people to invest in the stock market. Trusting the government’s ability to manage the economy, Chinese investors obliged and triggered a fanatic rush to the stock market over the past year despite the fact that the mainland stock market is far from mature, with less seasoned investors. The frenzy had reached such a level that some companies managed to send their stock prices skyrocketing simply by changing their names to more niche-related ones (anything to do with e-commerce or green industry).
By highlighting the market, the Chinese government exposes itself to forces it cannot control. Since the 1989 Tiananmen Massacre, the Chinese Communist Party (CCP) has made a unwritten pact with the Chinese people. The CCP will deliver prosperity, stability and prestige to the Chinese people in return for their tolerance of its one-party rule. To reinforce its image as the “benevolent” Big Brother, Beijing goes to great lengths to show its ability in controlling all parts of life of the Chinese people, often through brute force. It literally controlled the weather during the 2008 Beijing Olympics, clearing the sky by closing pollution-creating factories. It built China into the world’s biggest home of high-speed trains. It created economic miracles, such as transforming Macau into the world’s gambling capital surpassing Las Vegas, apparently simply by willing so.
Yet, as shown in this botched attempt to stop the stock market plunge in early July, Beijing has found that its party apparatus, its tight grip on the people and its economy might be of no use in controlling the direction of the stock market. It appeared powerless in stemming investors’ fears or containing their anger. In this case, the CCP fell victim to the false image of omnipotence it created. Accustomed to all-encompassing government control, the Chinese investors naturally blame the CCP for the plunge, which is something the Chinese government has at best limited control over.
The recent market shock presented the CCP a political challenge instead of an economic one. The people’s tolerance of Beijing’s authoritarian rule relies on its ability to keep its side of the post-1989 bargain. Yet as China moves past the era of rapid growth and enters the “deep water zone,” the CCP will realize that rigging the weather was the easy part. In the stock market crash, global investors realized the limitation of an authoritarian government once hyped to be the model of efficiency. The biggest fear for the CCP, however, is that the Chinese people might one day come to the same conclusion.