China’s Economic Slide And Its Political Repercussions The stock market fall may be an indication of more bad news to come

WASHINGTON – The big 7% Shanghai stock market loss right at the start of the new year is surprising. It should not have happened. Indeed, we know that last year the Chinese government spent a small fortune (about $ 138 billion) in a major and highly publicized effort aimed at propping up share prices.

Major intervention 

After a mid summer major sell-off, Chinese brokerage houses were forced by Beijing to buy and hold stocks. Short selling was stopped. Other market-supporting measures were taken. And, sure enough, thanks to this massive state-sponsored intervention, the Shanghai stock market stabilized and regained some altitude.

Of course, this “recovery” is preposterous, for it has nothing to do with market fundamentals. But, after these well publicized large interventions, at least some investors kept their stocks with the confidence that the government somehow would keep prices stable. (And we call this a market economy?)

Why the sell off? 

Well, given all that, then why the New Year’s 7% sell off? With all the protections and props put in place last year, this was not supposed to happen.

Well, chances are that many in China are beginning to understand that the national economy, while not in crisis, is probably in far worse shape than advertised.

Chinese officials talk confidently of a progressive, smooth transformation from capital investments and exports to services and stronger domestic consumption. They tell China and the world that they are expertly leading this transition that will result in a better economy, with stronger foundations.

Manufacturing slow down, or crisis? 

Well, it appears instead that the manufacturing sector is not just being “reorganized’. It is in fact in truly bad shape. There is massive, in fact colossal over capacity in almost all industries that was created by the stimulus launched to fend off the impact of the 2008 global financial crisis. In a real capitalistic economy, over capacity would be eliminated by painful but necessary plant closings, and massive lay-offs.

But this is China. Closing thousands of factories would be an admission of real problems, perhaps failure. Not to mention the social unrest that could be created by massive unemployment. Therefore, it cannot be done.

Money losing (many of them state-owned) industries will keep going. But this means extending cheap credit to them via state-owned banks. And this means a lot of bad debt piling up, while the state-owned enterprises keep losing money without any prospects of any turn around.

Decline, not a crisis

It is hard to gauge the depth of this industrial decline. But it is serious. On the plus side, we know that China has trillions of dollars in reserves. Therefore there will be no “China collapse”. Holes, even big ones, will be plugged.

But it looks as if China has lost altitude, probably for good. This means that the actual rate of GDP growth is closer to 5% or less, rather than 6.9% that the government claims.

Just an ordinary rate of growth 

This means that after its incredible thirty year ride, China’s rejoins the ranks of middle of the road, middle-income countries. True, hundreds of millions are now out of poverty. And this is a real achievement.

However, it came at a very heavy price, as the positively toxic air in many large northern Chinese cities demonstrates. The environmental damage caused by unchecked development is colossal. The negative public health implications enormous.

Political impact? 

But there is more. If China’s economic performance, once phenomenal, goes down to average, what does all this mean for the prestige of its leaders? The Chinese Communist Party claims to have the right to lead because it can deliver high rates of growth. Well, when growth becomes unremarkable, and most people begin to understand that this is the new trend, what happens to this leadership claim?

Restless middle class 

Is it possible that the newly minted Chinese middle class will become restless? We already see tens of thousands of unauthorized public demonstration in China, mostly focusing on environmental crises affecting local communities.

A new era? 

Here is the question. Can these local protests morph into something bigger? Well, not now. Indeed, any thought of an organized Chinese political opposition is just a fantasy, at this stage. But later on? Who knows?

Much depends on the economy. If the slide is bigger than anybody imagined, we may enter a new era in Chinese domestic politics.

Stay tuned.


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