Shanghai, Xi also projected a steely determination to overhaul China’s economy, which began to show signs of vulnerability. One of Xi’s major pronouncements was the ruling regime’s new commitment to ensure market forces will begin to play a more ‘decisive role’ in China’s economy. This was a major policy shift on the part of the ruling Communist Party.
Throughout its first three decades of rapid expansion, China’s economy relied heavily on public finances and infrastructure spending, state-owned enterprises, and unbridled exports anchored by cheap migrant labour. Xi internalised the imperative to reorient China’s economy towards a more consumer-based, private-capital-driven, and innovation-centred economy.
It did not take long before Xi – and his deputy, Premier Li Keqiang – began to encourage frugal Chinese citizens to take some risks and start investing in stocks. The aim was to raise new sources of capital, enhance the role of the private sector in corporate expansion and employment generation, and boost consumer confidence in the overall economy.
The state-controlled media constantly bombarded the aspiring middle class to pour its money into the booming stock markets, creating an investment frenzy that eerily resembled the run-up to the multiple financial crises that gripped the United States a few years ago.
Since the end of Mao Zedong’s reign, China’s communist regime has sought to reconcile its Marxist ideology with capitalism by introducing a so-called ‘capitalism with Chinese characteristics’. It is a hybrid system that heavily draws on the experiences of Meiji Japan and post-war South Korea, Taiwan, and Singapore, where autocratic regimes successfully played a leading role in establishing the foundations of modern capitalism.
Xi’s reforms, however, pushed the Chinese economy closer to the Anglo-American model of capitalism, where overweening financial markets began to precariously play a critical role in determining the ebbs and flows of fortune. Suddenly, China was in the midst of its own financial mayhem. But unlike in the West where institutional investors – like the Lehman Brothers – were at the forefront of the 2008 Great Recession, China instead saw the evisceration of the dreams of millions of middle class citizens and urban dwellers who invested the bulk of their wealth in casino-like stock markets.
Many feel that the regulators failed to prevent a bubble in equity markets, probably because they were too eager to ride on, or unwilling to rein in, the euphoria. Worried about the political ramifications of the ensuing massive economic dislocation, the government employed a heavy-handed approach, imposing caps on short-selling, introducing temporary suspension in public offerings, encouraging pension funds to buy more stocks, and pushing the Central Bank to increase liquidity and cut interest rates.
Talk of an impending Chinese collapse, however, are unfounded. Despite the crash, the Chinese stock markets are still 80 percent higher than last year, while the role of financial markets in China is relatively minimal compared to the West. The state’s heavy intervention to arrest the free fall, however, belied its professed commitment to allow markets to play a ‘decisive role’, reducing investors’ confidence in market reforms.
Confidence in the Xi administration has also taken a hit, with many people complaining about the Chinese top leaders’ conspicuous silence throughout the crash. In fact, Xi instead chose to attend a summit in Russia.
Many wonder how the ruling regime would respond to a more serious economic crisis in the future. Xi will face an uphill battle in reselling his “China Dream” vision to a sceptical, if not apoplectic, urban middle class.
Excerpted from: ‘China’s great crash: signs of trouble?’. Courtesy: Aljazeera.com