stock-exchange
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Economics

The Chinese capitalist romance

In his new year’s speech, President Xi Jinping told the Chinese people that their nation was in the process of implementing something unprecedented. There would be challenges, he warned, but if China remained united the ultimate goal of creating ‘socialism with Chinese characteristics’ could be achieved.

It’s easy to dismiss this kind of rhetoric. After all, China’s economic reforms seem to be moving away from socialism towards capitalism at a rate never before seen. However, it’s important to understand what the country’s leaders mean when they talk about ‘socialism with Chinese characteristics’. Moreover, it helps understand the Communist Party’s response to the recent stock market crash.

To the chagrin of many free marketeers in the West, the Communist Party acted quickly to intervene and halt the freefall. The move should hardly have come as a surprise and was in keeping with the government’s ideas about economic management.

In 1992, Deng Xiaoping – in what became known as the Southern Tour – visited the four major cities at the forefront of his pro-market reforms: Guangzhou, Shenzhen, Zhuhai and Shanghai. In comments that now seem prophetic, he said:

…some people insist stock is the product of capitalism. We conducted some experiments on stocks in Shanghai and Shenzhen, and the result has proven a success. Therefore, certain aspects of capitalism can be adopted by socialism. We should not be worried about making mistakes. We can close [the stock exchange] and reopen it later. Nothing is 100 per cent perfect.

And that’s what the Communist Party effectively did this July. They stopped IPOs, increased liquidity and suspended trading on 73 per cent of mainland stocks.

What’s most surprising is that the government didn’t intervene earlier. That the market was grossly over-valued was obvious to anyone with even a rudimentary understanding of economics. Many companies have listings in both China and Hong Kong, yet rather than trading at the same price, the Chinese shares were valued at twice the equivalent of the Hong Kong ones.

But most of those trading don’t have any economic nous. 80 percent of the turnover comes from retail investors, two thirds of whom haven’t even graduated from high school. They came into the market on the back of not so subtle encouragement from the government, coupled with warnings that the housing market was overheated.

It’s remarkable how successful these messages have been and a reminder how effectively the Communist Party controls the flow of information within its borders. Everyone, it seems, is an investor now. It comes up at every dinner party, with people swapping tips and reveling in how easy it is (or was) to double or even triple one’s investment.

Even now, with many people having lost considerable sums of money, there’s a pervading sense that they’ll make it back. This isn’t, however, in keeping with the economic reality of the situation. The share market plummet is widely considered by economists to be a market correction, so it’s unlikely they’ll reach such dizzying heights again anytime soon, with many also predicting increased volatility.

But most people’s faith in the market isn’t based on this kind of economic analysis; rather, it comes from a sense that the Communist Party, not the ‘invisible hand’, determines the economy’s performance. Even in the wake of last weeks collapse the state-owned People’s Daily editorialised that ‘rainbows always appear after rains.’

All this is a far cry from Hayekian economics, yet commentators in the West continue to be dismissive of the calls for ‘socialism with Chinese characteristics’ without really understanding how laden with meaning it is. It was originally used by Mao Zedong to describe his adapted version of Marxist-Leninism. China was an agrarian society and Mao saw as the most important class not the workers, but the peasants. They were to lead his revolution.

Deng Xiaoping and Xi Jinping’s ‘socialism with Chinese characteristics’ is radically different to what Mao ever intended, but it is important in establishing a continuity between their revolutionary foundations and the present day. In a one-party, election-free state, this is where the Communist Party derives its legitimacy.

But the Deng-era reforms created another problem for the Communist Party; the shift away from socialism towards capitalism created a ‘values vacuum’. Ideas of collectivism, solidarity and a somewhat utopian idea of building a better society together were replaced with notions competitiveness, individuality and personal wealth creation.

The Communist Party, no longer able to fill this gap in many people’s lives, has lost some of its cultural capital. In recent years Xi Jinping has tried to fill this void by encouraging people to reengage in Confucianism, often quoting him in speeches.

So far this proving relatively unsuccessful and with over a decade of abnormally large growth rates, an increasing gap between the richest and poorest, widespread corruption and a deteriorating environmental situation, ordinary Chinese citizens are feeling more and more isolated and marginalised.

The domestic focus of Xi Jinping’s presidency has so far been largely concerned with restoring the people’s faith in the Communist Party and, in doing that, he’s turned back towards more socialist-inspired policies. The growth targets of over 10 per cent have been reduced to a more modest 7 per cent in an effort to grow the middle class. He has declared a ‘war on pollution’, a hugely expensive undertaking, which has inevitably slowed industrial output, but which is a direct response to the people’s fear that their air, food and water is becoming toxic. Similarly, in the short-term, his anti-corruption campaign is negatively affecting the economy as officials become increasingly weary of being swept up in the crackdown. A foreign hotel manager told me recently that the once-famous exorbitant dinners of Chinese officials that he once hosted have all but stopped. Officials are being very careful not to give off the impression that they are abusing their position.

The Communist Party’s primary goal is not to continue its charge to become the world’s largest economy; rather, it is to stay in power, and they’re willing to slow growth to ensure that. The idea that formed the cornerstone for much of the West’s analysis of China for the past two decades was that as China opened up its economy the political system would inevitably follow. But Beijing has never had any interest in implementing US-style neoliberalism. Rather than stripping away regulations that free marketeers claim impede growth, the Communist Party technocrats have always seen this as a chaotic system more likely to create social instability by unfairly advantaging a minority over the majority. And, more significantly, they fear not being able to intervene and correct what they see as undesirable outcomes.

China is unrecognisable as the Maoist socialist utopia that many leftists once dreamed of, but nor is the neoliberal economic behemoth than many in the West seems to think it will inevitably become. The failures of capitalism, so often ignored by western economists, have been watched and are understood intimately in China. It is a country born out of a suspicion for free markets and, even without constant reminders of its failings, that’s not easily lost.

 

Image: Aaron Goodman / Flickr

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