Rig­ging the weather was the easy part for the CCP

The China Post - - COMMENTARY -

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.

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