The China Stock Market Crash Threatens Xi's Survival

Investors talk on July 6 as they watch a board showing stock prices at a brokerage office in Beijing. Kim Kyung-Hoon/Reuters

Despite its recent rebound, a host of problems are connected with the current volatility of the Shanghai Stock Exchange, which lost up to $4 trillion in stock values, almost a fifth of its value, in the space of three weeks. But most significant is how this could undermine the credibility of the Communist Party in the eyes of the aspiring and emerging middle class of China.

The stock market matters to them, because it is, broadly, a theater of aspiration. About 40 million people are probably invested in the market. (There are 90 million accounts, but individuals can have multiple portfolios.)

While a small number of them are the new superrich, who are simply gambling on stock rises and can probably take the impact of the fall without too much pain, plenty more are the less well-off, who have invested their hard-earned cash in the hope that it will give them decent returns. For this group, seeing their wealth ebb away hurts them profoundly and creates antipathy toward a government that needs their support.

Growing Political Power

Only since 1978 has China started to have an extensive urban working class, a precursor to today's middle class. These people were the foot soldiers in achieving economic successes, working in the myriad factories spread mostly across coastal and southern China and making the country an export powerhouse.

The rewards given to this class, however, have been meager, at least until recently. These people have often worked in conditions of Victorian severity, received low wages, been unable to organize themselves into anything except the official trade union and had whatever they saved in effect re-taxed by being hoarded in state banks with low interest rates set by the government.

Such a system meant that, as a proportion of gross domestic product (GDP), household income constituted much less than state enterprises. The state, through its enterprises, has always come out on top in terms of access to profits and resources, not the working people.

For several years, there has been an understanding that this bad deal for the workers of China needs to be addressed as they become more extensive and fit more broadly into a property-owning, service-sector, middle-class segment of the population. It started to happen as the central government realized a new economic model was needed that relied more on raising domestic consumption rather than exporting to fickle foreign markets that started to shrink from the global economic crisis.

The Xi Jinping administration has made this a more urgent priority. Many of its proposed reforms are about giving the urban middle class a better deal: more secure property rights, more diverse investment opportunities and an indigenous finance sector that offers the sorts of products those in developed countries enjoy.

Security and predictability in the system, where members of the middle class have more space to be economic agents whose fate is increasingly in their own hands, is central to this, especially in the face of falling GDP growth.

Weakened Confidence

The most toxic aspect of the stock market issue is that it threatens to expose the current party elite on two fronts: economic competence and political authority.

For all the reformist rhetoric of Xi and his officials, allowing the Shanghai Stock Exchange to be so volatile will raise questions about whether they really do know what they are doing economically. Emergency interventions have, apparently, staved the current slide and restored some value. But this will have sowed suspicions in people's minds, particularly the emerging urban middle class, that the same biases in favor of state industries and vested interests run things, despite all the populist froth of the anti-corruption campaign and other measures that, on the surface at least, look as if they are being undertaken to support the middle class.

A crisis like this makes or breaks politicians. If the Xi administration can come out looking as if they rode the storm and defended the interests of the small investors who make up the stock- holding class of China, their position will be strengthened and show that they truly are on the side of the new middle class.

If they fail here, the growing perception will be that for all their preaching about reform, underneath, nothing has changed. If the middle class believes that, it could be deadly for the party.

Kerry Brown is associate fellow, Asia Program, at Chatham House, the Royal Institute of International Affairs, on whose site this article first appeared. He is a professor of Chinese politics and director of the China Studies Centre at the University of Sydney. He was previously head of the Asia Program at Chatham House and a member of the British Diplomatic Service from 1998 to 2005.

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