Echoes of 1989 are bad news not just for China’s markets but the world

China faces a crucial choice between the competing priorities of political control and economic liberalisation. This summer the first tremors have already been felt.

The gyrations of the Shanghai stock market — down almost a third from its mid-June high — and the exchanges in Shenzhen may seem disconnected from the real economy, since only a small proportion of Chinese and even fewer foreigners invest in them. But the market turbulence and the authorities’ res­ponse raise a fundamental question. Will the world’s second-biggest economy shift to a course that will sustain not only its own growth but also global prosperity as a whole? Or will it instead be stuck in an outmoded model in which meaningful reform is deferred because of the ruling elite’s determination to retain control? Much depends on the final decision of the Chinese Communist party, which has until now bolstered its rule with the fruits of rapid economic expansion. The significance of its choice goes far beyond China’s borders.


Some 20 months ago the party launched an ambitious programme of change, including in the financial sector. It sought to “harness the dynamism of the market” to propel China into a new stage of economic evolution, 35 years after Deng Xiaoping connected the People’s Republic with the world. But reform is not always an unalloyed blessing, especially in its early stages. It can reduce growth and cause tensions and upsets — as was the case in 1980s China.

Deng’s vision was that, after the disasters of the Mao era, growth fuelled by partial market liberalisation could make China a world power again and legitimise the unelected party leadership. That policy worked in many ways but also produced runaway inflation and corruption. It swelled criticism of the regime, leading Deng and his colleagues to send in the tanks to squash the Beijing protests of 1989. Defending party rule and maintaining its control was paramount then. So it remains.

The current leadership recognises the need for widespread economic reform. President Xi Jinping, the party’s general secretary, was the first signatory to the 60-point programme of change set out at the end of 2013. Many of the party’s elite accept it is necessary to modernise the economy, moving beyond the outdated combination of cheap labour, cheap capital and a strong export market — if only because labour and capital are no longer so cheap and foreign demand is not what it used to be.

But conservative opponents of reform can now point to this year’s turbulence in the markets as a terrible warning of the dangers of altering the system.

Meanwhile the basic political equation remains the one Deng set out in 1989: material growth in return for a political straitjacket. Mr Xi has doubled down on political control, deploying an anti-corruption campaign that has caught up many of his rivals and detaining human rights activists this summer. By contrast, he has been relatively absent from the debate on the stock market turmoil, despite his extraordinary accumulation of power, which involves him in all policy areas.

Such caution does not engender confidence that China’s most senior leader will fight hard for structural changes such as reforming the state-owned enterprises that are a source of political power. That could be bad news for Li Keqiang, the reformist prime minister and the potential fall guy for a crash.

It is a fair bet that Mr Xi would like, when he steps down in 2022, to be hailed as the leader under whom the economy reached a new cruising altitude of slower but more sustainable growth, involving higher value-added manufacturing, an expanded service sector, a switch from fixed asset investment to consumption as the main driver of the economy and reduced reliance on debt to drive expansion.

Against this rosy picture must be set the danger of being remembered as the man behind reforms that lost the party the control it has exercised sinc e 1949.

As it is, crude manipulative measures, such as pouring funds from state utilities into the markets and cracking down on share-selling, have done the rulers’ reputation no good. As in the 1980s, mandarins have had real problems in dealing with the animal spirits unleashed by liberalisation.

Today, some big international investors are taking a more leery view. Volatility has made the opening of China’s capital account look even further off. The portents are not good for Beijing’s efforts to join the International Monetary Fund’s special drawing rights currency basket, which would help make the renminbi more widely accepted. Inclusion of Chinese markets in the MSCI global index, which would be a fillip for the country’s stock exchanges, also seems problematic.

Still, such considerations will not be allowed to affect the basic calculation that reform can be pursued only so long as it does not affect the political power structure. It has to be kept under control and used, as the 2013 reform agenda put it, to strengthen the party state — not a free market.

Convulsions and official manipulation are likely to continue in Shanghai and Shenzhen. But China faces a deeper challenge in trying to reconcile the reform needed for its economy and the political control so prized by its rulers.



Jonathan Fenby is China director at Trusted Sources, a research service, and author of ‘Will China Dominate the 21st Century?’



Fonte: FT