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The political implications of China's stock market crisis

- August 26, 2015

Graph based on data from” http://www.quandl.com/data/YAHOO/INDEX_SSEC-Shanghai-Composite-Index-China
The Chinese stock market has captured headlines over the past month for two reasons: its dramatic collapse and the efforts of the Chinese government to prop it up. The former isn’t much of a problem, while the latter is.
Pessimists looking at this five-year chart of the Shanghai Composite Index will focus on the cliff dive that it has taken over the past three months. But optimists might take some comfort from the 52 week return — over 35 percent — which would make even the most aggressive hedgefunder or university endowment manager happy. The ultimate importance of this run-up and decline in paper value is what it signals about China’s changing economy and politics. On the economic side, it’s unclear how much the collapse will bleed over into the real economy. Many of those losing out borrowed to put money into the market when it was hitting its peak and will suffer serious losses. But the most important effects of this episode are political.
Authoritarian regimes like China’s do not persist on repression and violence alone. They craft messages that induce “quasi-voluntary compliance” out of their citizens. The Chinese Communist Party (CCP) came to power through a revolution fueled by peasants excited by the prospect of taking the land that they tilled from the landlords that owned it; an excitement generated by Communist Party rhetoric. Obviously, the CCP has changed its tune on capitalism. Yet, it still maintains a large propaganda and censorship apparatus that controls the information environment.
Huang Haifeng’s recent article in Comparative Politics, “Propaganda as Signaling,” points to one of the reasons that the party continues to send out propaganda messages: It signals the government’s strength, even if no one believes in the rhetoric. That is, propaganda can serve a purpose even without any successful “indoctrination.” A government might have incentive to spend the resources to flood the airwaves with propaganda as a way to separate itself from a weak government that couldn’t spare the resources on propaganda. Using survey responses of Chinese students who are forced to take propaganda-filled political education classes, the paper finds that:

 Chinese college students with more exposure to state propaganda in the form of ideological and political education do not have a more positive view of China’s government and political system, but they are more likely to believe that the regime is strong in maintaining political order and social stability, and less willing to participate in political dissent.

While the signaling value of propaganda that Huang highlights is surely there, that doesn’t mean that no one believes the messages of the Chinese government. The propaganda apparatus does continue to push out messages of an ever more convoluted socialism with Chinese characteristics. But the main message that the Chinese government sends to its citizens and the world is that it is competent. Officials ordering companies and employees to buy their own stocks to prop them up only to have their market collapse further undermines this narrative.
The Chinese government has for decades relied on trumpeting statistics to send positive signals. Economic growth statistics, kilometers of high-speed railway lines, tons of trade shipments, trillions of foreign currency reserves and subsidized housing units all point in one direction: Growth! Success! The implicit message is that the Chinese Communist Party-led government must be competent to produce such growth.
The internal governance of the party-state was also determined by the numbers, with local officials promotions based on these metrics. Even if there are questions about the veracity of these statistics (especially of gross domestic product, as I’ve written about previously), the droning on and on of metric after metric that has improved, jumped, sky-rocketed or increased creates a sense in which this government must know what it is doing. Thus, the rank incompetence of the government’s efforts to prop up its equities markets was damaging to that image. As Paul Krugman put it in a column entitled “China’s Naked Emperors” (which the New York Times helpfully translated into Chinese):

This is the context in which you need to understand the strange goings-on in China’s stock market. In and of itself, the price of Chinese equities shouldn’t matter all that much. But the authorities have chosen to put their credibility on the line by trying to control that market — and are in the process of demonstrating that, China’s remarkable success over the past 25 years notwithstanding, the nation’s rulers have no idea what they’re doing.

So, what are they doing? In a working paper, “The New Normal: Reform, Information, and China’s Anti-Corruption Crusade in Context,” I argue that the government’s leaders are trying to fix the status quo as well as hedging against their inability to do so.
First, the government is centralizing authority. Whereas the center had a limited vision into local officials behavior focusing on a few performance indicators such as GDP and fiscal revenue, the party is expanding its role in monitoring local agents, as can be seen with the increased presence and power of the Central Commission for Discipline Inspection–the party’s investigation arm.
Second, the government is moving away from the depoliticized, quantified rhetoric of the past few decades with increased use of Chinese classical thought such as Legalism and Confucianism that focuses on morality and process rather than outcomes. Using an analysis of the targets of the current anti-corruption crusade, the paper finds that the goal of these actions is to reduce the corruption that is now pervasive and to shift the basis of the regime’s justification away from performance in a moment when the performance looks likely to slow down.
Exploding bubbles make loud sounds that force us to pay attention. But in this case, the problematic stock market intervention is more troubling than the collapse because it signals that with increased central authority mistakes can happen faster and be larger than ever. Mistakes can continue to be made when they are not diagnosed and not discussed due to a constrained information atmosphere, such as China creates with its propaganda and censorship.
Jeremy Wallace is an associate professor of government at Cornell University, specializing in Chinese and authoritarian politics.