China is hurtling toward a crisis of the regime. It is too early to know whether the Communist leadership, so astute in the past, will be able to untangle a cats cradle of issues.
The worldwide headlines, and nervous reaction of other markets, to the Shanghai stock markets rollercoaster is the least of Beijing’s worries. But it is, of course, symptomatic of deeper concerns.
With all the appearances of western exchanges the Shanghai market is profoundly different. It is not a primary collector of capital for investment. Capital and savings distribution in the Chinese system is largely through three government banks funded by the government – a top-down process Beijing’s wants to move toward market-oriented distribution. For while a private sector exists and disproportionately accounts for Chinese success, it is pitted against huge inefficient but politically connected government monopolies.
Communist leadership recently encouraged investors to get into the stock market, a part of trying to move toward more consumption and away from central planning which committed 50% of government funds to investment, with the inevitable waste. It had so taken after its Soviet model that whole ghost cities have been built without residents. But with the Chinese’ notorious gambling streak, stockmarket speculation skyrocketed until more adroit larger speculators pulled the rug.
Stuck with a propaganda disaster, Communist leadership – beginning in June – threw everything they had at the Shanghai market, including the central bank buying up equities. But the market kept collapsing and in the latest round, the powers that be apparently have given up, letting the investors, big and small, take their hit. With less than 20-20 insight, that is what they should have done in the first place instead of demonstrating increasing inability to direct a planned economy without a plan. [Shades of Mao Tse-tung’s Great Leap Forward which cost at least 30 million lives in famine!]
Even more important to the Communist Party’s power monopoly is the growing decline in overall growth. Having given up Marxist-Leninism-Maoism in all but name, rapid economic growth has become the regime’s raison d’etre. While the government claims 7.6%, well behind the remarkable claim of an average annual 10% growth over two decades, the always suspicious official figures look even more suspect. Many students of the numbers say it is closer to 5%. Again, although conventional wisdom held that 8% annual growth of the gross national product – all economic activity – was needed to preserve stability, what has been more worrying for Beijing is the speed of the decline.
Numbers are not the Communists’ only problem. Unlike his immediate two predecessors, Xi Jinping, China’s hefty holding all three slots – secretary of the Party, head of government, and chief of state – has abandoned any pretense of collegiality.. His grab for power has included a massive anti-corruption campaign, reaching into the highest echelons of the Party. With almost everyone with his fingers in the pot, frequent anti-corruption drives are a disguise for eliminating Party rivals.
Xi has gone after several politburo members at the top of the Communist heap, including head of the secret police and intelligence, Zhou Yongkang. Zhou was accused of everything from womanizing [including Jia Xiaoye, 43, niece of former president Jiang Zemin, who became Zhou’s second wife after his first wife died in a somewhat mysterious car accident] to his family hoarding $14.5 billion from bribery and embezzlement.
Zhou’s sentencing to life imprisonment in a secret trial is not likely to end the affair with so many Party officials his protégés. Xi, like his predecessor, has appointed large number of senior generals, most with no military experience, but it remains to be seen whether a rapidly expanding force with new technocratic elements, can be neutralized if Party divisions grow. There are, for example, unconfirmed reports Xi has put his immediate predecessor, Jiang Xemin, with a still strong following in the Party and among his military appointees, under house arrest.