Alphen, Netherlands. 28 July. The People’s Bank of China has already pumped some $7.8bn in the Chinese stock market over the past three weeks in an effort to stop the free-fall in Chinese equities. However, the market fell yesterday by a further 8% and today by 3%. The cause of such market turbulence is an equities and asset bubble driven up by investors betting that the Chinese Government would take whatever action necessary to maintain the value of shares. This is because the political settlement put in place after the 1989 Tiananmen Square massacre is dependent on a ‘contract’ between the Chinese Communist Party and China’s burgeoning middle classes; the former will enrich the latter in return for the latter accepting Party control. Therefore, what is at stake is far more than a ‘market correction’ of China’s hybrid, partially open stock market. A power struggle is underway between the Party and its command economy and casino capitalism. It is also a struggle between economic nationalism, globalisation and ultra-rich money lords that has profound implications for China, Asia-Pacific, and the wider world.
The domestic implications for China are profound. When Hong Kong returned to Chinese rule I suggested that far from Communist Beijing taking over 1 July, 1997 marked the beginning of a struggle for China that would one day see uber-capitalist Hong Kong and Shanghai take over Beijing. That struggle is indeed implicit in the current market turbulence. This is because when Deng Xiaoping set China on the road to what he called ‘reform’ back in the post Mao late-1970s the Party deliberately left ambiguous the relationship between the command economy and China’s emerging market economy.
By 1989 the steady growth of a middle class fuelled by the new market had begun to challenge the control of the Party. The inherent tension was expressed by students during the 1989 pro-democracy demonstrations. However, the brutal suppression of those demonstrations was in parallel with the establishment of the ‘contract’ between the Party and the middle classes which enabled the Party to retain political control. It is that contract that is now under duress as middle class savings and investments are threatened by the stock market crash and with it China’s political stability.
There are also profound implications for China’s neighbours and indeed the wider Asia-Pacific region. The Party has clearly moved to exploit Chinese nationalism in the wake of the 2008 global financial and economic crash as a buttress against renewed domestic dissent. Indeed, China’s extra-territorial claims in the East and South China Seas and the development of an increasingly expeditionary-capable military seem to match the relative decline in China’s economic performance in the wake of the 2008 global financial and economic crash.
Many years ago when I lived in Hong Kong I saw the power of Chinese nationalism. For many years the Party kept a lid on such passions by offering ideology as an alternative to nationalism. However, nationalism run deeps in the majority Han Chinese population, as does the sense of grievance many Chinese feel towards the West and its past treatment of China. Critically, with year-on-year economic growth in double-digits for many years many Chinese had never had life so good. There was no need thus to challenge a national or a world order that was beneficial to China. That may be about to change.
The implications for the wider world economy should China retrench both politically and economically are profound. China has used its extensive sovereign wealth funds to make investment in assets the world over. These asset purchases have been particularly important in Europe where such investments have helped stave off bankruptcy both of major corporations and indeed states. They have also helped to fuel the ability of Western consumers to buy Chinese goods which in turn has helped maintain China’s export-led growth. Should those ‘investments’ now be turned inwards to maintain Chinese shares at an artificially high price then the implications for a fragile world economy are profound to say the least.
At its extremes the struggle for China could go one of two ways. The Party could re-impose a command economy and effectively close China’s economy to foreign investment in the name of Communist dogma. However, such a move would hasten China’s decline and impact negatively on powerful vested interests, not least the People’s Liberation Army which is a major player in the Chinese markets. Alternatively, the Party could lose political control in which case it is far more likely that extreme nationalism would raise its ugly head. China has no experience of the kind of social-democratic, free market balance that has evolved (and I stress evolved) in North America and Western Europe.
Therefore, the non-Chinese world should have no illusions as to the strategic stakes implicit in the current travails of the Chinese stock markets. Huge forces are being unleashed and huge forces are under stress which without very careful management could see China’s stability and that of the wider world threatened. Therefore, not only is it vital China engineers a soft landing to this crisis, it is also vital China develops institutions that ensure more balance in the relationship between the Chinese state and its stock markets.