Monday, July 20, 2015

China’s impossible dream: A capitalist stock market without large losses


JULY 20, 2015

The recent dizzying plunge in the Shanghai and Shenzhen stock exchanges has posed a unique test for China’s Communist rulers. So long as the markets were rising, the paradox of vigorous capitalist development overseen by the world’s largest and strongest Communist party confounded only academics and old-school Marxists. As the Chinese Communist Party (CCP) elite and their relatives, foreign financial institutions and some Chinese small investors (enabled by margin lending) made money on stocks, no one bothered to comprehend the mutant creature they were milking.

But now, as the realisation sinks in that Chinese stock prices will not keep rising indefinitely, the CCP is taking desperate, if clumsy, measures to control the correction. All new initial public offerings have been halted and much trading has been curtailed; the central bank has been asked to help the China Securities Finance Corporation induce investors to buy shares and thus stabilise the market. Indeed, even the country’s sovereign wealth fund has gotten in on the act.

But, unlike in other capitalist economies, money is not the only tool at the authorities’ disposal. If your brokers in China advise you to sell shares, they must be careful not to appear to be rumour-mongers, subject to official punishment. And there are reports that the sales of large holdings may trigger investigations by the authorities. Causing public disorder or financial instability can be a serious offence in China, where conspiracy theories about foreigners’ efforts to undermine the economy abound.

What Chinese officials desire is a capitalist stock market without the possibility of large losses that can shake confidence in the CCP’s credibility and control. But that is a market that no one has yet invented.


The spectacle of a Communist regime trying to jack up a casino-like capitalist market is only one of the many contradictions that have been accumulating in almost every corner of China’s economy and politics. And now, their weight is perhaps becoming too heavy for the party hierarchy to bear.

Indeed, the composition of the CCP is itself a contradiction. The revolutionary party of peasants and workers is now dominated by businessmen, university students and professionals. One-third of the people listed in the Hurun Report, the Shanghai-based monitor of China’s wealthiest people, are party members.

The average wealth of the richest 70 members of the National People’s Congress, China’s Parliament, far exceeds US$1 billion (S$1.37 billion). (The richest 70 members of India’s Parliament or even the United States Congress, both now controlled by right-wing political parties, are substantially less wealthy.)

Of course, President Xi Jinping’s recent drive against corruption high and low has made many Communist Party plutocrats jittery. But questions abound as to whether the corruption charges being brought against the so-called “tigers” are a fig leaf for an old-fashioned purge of Mr Xi’s rivals in the party and the military.

Ordinary Chinese generally support the anti-corruption drive; it is they who usually initiate protests and point fingers at dishonest officials. But, if such protests attract too much attention, it is more likely that they will be quashed and their leaders repressed than the corruption will be stopped. In 2008, for example, following the Sichuan earthquake, thousands of children died when their shoddily built schools collapsed. For a while, tales of corruption in the schools’ construction dominated even the official news. In the end, however, it was the protesting parents and teachers of the dead children who were detained and harassed by the state.

What the CCP refuses to recognise is that corruption cannot be rooted out as long as the party maintains its monopoly on political power; with no organised opposition or functioning civil-society institutions, officials will continue to use their positions of public authority as a vehicle to generate personal wealth. The Third Plenum of the 18th Party Congress gave primacy to the principle of market competition; but, as a senior Chinese banker commented in a related context some years back: “It’s quite hard to compete when you’re playing against the referee.”

That observation extends to the rule of law and constitutionalism. Under Mr Xi, the CCP has repeatedly insisted that the rule of law is a “core socialist value” and has pledged to promote the authority of the Constitution. However, the rule of law in the party’s eyes is a law that it dictates, interprets and enforces. Chinese citizens’ references to the Constitution (especially Article 35, which guarantees freedom of speech, press, assembly and association) and constitutionalism in general are routinely censored, and lawyers who cite the Constitution in court are frequently detained.

Mao famously speculated on the nature of contradictions in a 1937 essay: “The law of contradiction in things, that is, the law of the unity of opposites, is the fundamental law of nature and society.” One wonders, though, if even he could have grasped, much less managed, the contradictions of Communist capitalism.



Pranab Bardhan is a professor at the University of California, Berkeley. His most recent books are Globalization, Democracy And Corruption: An Indian Perspective and Awakening Giants, Feet Of Clay: Assessing The Economic Rise Of China And India.

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