China’s Xi Rushes to Boost Market Before Fall Loosens Party Grip

July 6, 2015

Beijing-China (July 6)  For Chinese President Xi Jinping, mission No. 1 has been preserving Communist Party rule. That now means stabilizing the stock market.

Xi’s government rushed out an unprecedented series of measures in recent days to halt a sell-off that wiped out $3.2 trillion in market value in three weeks. Expect more stimulus efforts as the leadership under Xi seeks to keep the collapse from devouring the savings of tens of millions of Chinese investors -- a constituency larger than the ruling party -- and from setting off broader social unrest.

“This is a real testing moment for the leadership,” said Zhao Xijun, deputy dean of Renmin University’s School of Finance. “They must rescue the market with all their means. The ’what if’ scenario cannot be allowed. The evaporation of fortunes of more than 80 million individual investors would pose unthinkable social problems for the country.”

The market rout poses one of Xi’s thorniest challenges since he took power more than two years ago and gave himself control of China’s economic reform agenda. Overcoming it will require something more than the strongman approach he’s so far employed to consolidate power. He’ll have to restore confidence in the world’s most volatile stock market, months after cheerleading by state-run media helped spark the rally.

At stake is a decades-long economic boom that stands as the party’s crowning achievement, with growth on track this year for the slowest pace in a quarter century. Failure to stabilize the market would risk derailing the administration’s effort to rebalance the economy and give any dormant party foes an opening to criticize Xi’s policies.

“China’s economic story and political stability are now very much at stake,” security analysts Gabe Collins and Andrew Erickson wrote in a report published on their China Signpost website. “Stock market down-drafts on the heels of euphoric upswings can be devastating to far more than pocketbooks. They sow fear and destroy confidence -- the lifeblood of both economic growth and political stability.”

Security Fears

The benchmark Shanghai Composite Index snapped a three-day losing streak Monday, rising 2.4 percent to 3775.91. Over the weekend, the State Council under Premier Li Keqiang suspended initial public offerings while brokerages pledged to buy shares and the central bank pledged liquidity for margin trading.

The market slump comes at a time of heightened anxiety for the party. Parliament last week approved a sweeping national security law that cited the Internet, culture and outer space as potential areas of concern and outlined the government’s aim to “protect the political power of the people’s democratic dictatorship.”

Xi is overseeing the law as head of a new national security commission and as leader has shown little tolerance for dissent. His crackdown on corruption has seen him amass the most power of any recent Chinese leader, though social discord set off by a protracted market slide could damage the party’s control.

‘More Precious’

Top state media outlets and securities journals on Monday issued editorials calling for faith in the market and the government’s response. “Confidence is more precious than gold. That’s what Chinese investors need at this very moment: confidence, not panic,” the party-run People’s Daily said.

Authorities have moved to curtail Internet discussion about the fallout. Beijing police detained a 29-year-old technology company employee on suspicion of spreading online rumors about a person leaping to his death due to market losses, the official Xinhua News Agency said Sunday.

While China has weathered stock price declines before, they’ve tended to reflect broader economic turmoil rather than market dynamics. The recent boom has drawn in a much wider swath of the population, as the market added an unprecedented $6.8 trillion in the 12 months through its peak June 12. The 152 percent rally in the Shanghai Composite Index was the biggest worldwide during the period.

Individual Investors

Unlike in the U.S. and Europe, China’s market is dominated by individual rather than institutional investors. More than one-third are under 30 years of age and almost four-fifths lack college education, the China Business News reported in January.

“The demographic composition of China’s stock market gives it a decidedly irrational quality,” Zhao said. “That in turn greatly increases the government’s responsibilities and the potential risks.”

The government under Xi may continue to act, having already dusted off the party playbook and unleashed a number of state interventions. Authorities still have tools including cutting the 4.85 percent benchmark lending rate and lowering the amount of deposits that banks need to lock away from the current level of about 18 percent. Such moves risk further inflating the country’s already-high debt levels.

Hong Hao, chief China strategist at Bocom International Holdings Co. in Hong Kong, said more measures were necessary to avoid a market failure, though for Xi and Li the lesson is the market should “be left to its own devices” in the long run.

“Systemic risk is a clear and present danger and must be dealt with,” Hong said, and “it’s difficult to manage such a gigantic ecosystem like the stock market. The government is learning the raw forces of the market the hard way.”

Source: Bloomberg

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