Stock market crisis: A political challenge for China’s leadership?

How much is what we see on stock markets also a political challenge for Chinese government? Should the regime be worried in your opinion? Read few comments.

Michael Pettis, Professor of Finance, Guanghua School of Management, Peking University in Beijing

In itself I do not think the stock market crash presents a serious political problem for Beijing, but if it erodes the credibility of the regulators it will become much harder for Beijing to address debt concerns. The stock market panic also shows that China’s rebalancing is going to be much harder and much more disruptive than most economists had assumed. There have been many investment-driven growth “miracles” in the past 60-70 years and every single one of them has ended with a surprisingly difficult adjustment, either with one or two “lost decades” of very low growth and soaring debt, like Japan after 1990, or a brutal debt crisis, like Brazil in the early 1980s. From the historical precedents it should be clear that resolving the over-reliance on debt must be the key focus of the economic policymakers, and the stock market crash shows just how rigid and vulnerable the country’s financial sector really is.

Steve Tsang, Professor of Contemporary Chinese Studies, Head of School of Contemporary Chinese Studies, University of Nottingham

It is a very serious challenge to the Chinese Government and in particular the top leadership of the Communist Party. The legitimacy of the Party as the government rests on the undertaking that it will continue to deliver a better standard of living to the people of China. The stock market crash and the associated problems with the economy, as well as the Government’s so far unsuccessful attempts to contain the problem is putting the legitimacy of the regime to test. It is too early to tell if it will fail to pass the test. It is early days. But if the current financial and economic trouble should persist for a year or two, it may well become an issue that can potentially put the continuation of the party rule as we know it at risk. We are not near that point yet – not by some distance.

Colin Mackerras, Emeritus Professor, Griffith University

I think the stock market must be a political challenge to the Chinese government, but not a serious one. In essence I think they should be worried, but not seriously so.

My reasons are as follows:

Any fall in the stock market affects some people enjoying new prosperity who go into the stock market. They seem to trust the government, but will have this trust dented by these events. The fall for the year so far is substantial but hardly catastrophic, unlike some before.

The stock market does not affect the overall economy. Although growth rates are down this year on previous years, they are still respectable by world standards and, to some extent, may have been planned. GDP growth is still strong, housing prices are coming back in the cities, consumer demand is up. There is absolutely no feeling of serious crisis here in Beijing.

A major financial crisis in Indonesia in 1997 was one of the leading factors leading to the overthrow of the Suharto government the next year. The present situation in China is totally different, and I don’t expect any major political fallout to the current stock market falls or the devaluation of the yuan.

Ramon Pacheco PardoLecturer, King’s College London

In my opinion the current correction of the stock exchange is not necessarily a political challenge to the Chinese government. The government has been publicly and privately indicating for several years now that it wants to liberalise the financial sector and move towards a more market-oriented economy. It has also signalled that it is willing to let market forces have a greater influence on the Chinese economy. Thus, the government has so far refrained from introducing measures that would reverse the liberalisation process, such as introducing strict capital controls or cancelling the licenses of foreign qualified investors. The measures implemented so far can help to slow down the correction in the stock market, but not to reverse it. To me, this suggests that the government is not uncomfortable with the current correction. Certainly it is not panicking like many investors who did not expect this behaviour from the Chinese government are. Taking this into consideration, I don’t think that the government should be worried, since its intention is to carry on with the liberalisation process.

George Tzogopoulos, Research Fellow, ELIAMEP, Founder of Chinaandgreece.com

China finds itself in a phase of transition in changing its growth model. This transition period is anyway not easy but certainly the current turmoil goes beyond planning. In my view the Chinese government should not be worried in the medium and long-term but has to take necessary measures to deal with the situation in the short-term. Otherwise, confidence will collapse and the image of China as a rising power will suffer a serious blow. In the end, Beijing will make it thanks to its foreign reserves and huge liquidity.

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