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.
Julian Lindley-French
