Sunday, January 31, 2016

Chinese Communist Party - Root Cause of Global Market Turmoil?

My basic thesis is because ruling Chinese Communist Party does not have any legitimacy typically awarded by regular elections, we are facing turmoil in global capital markets. Mao' Party for sure had the legitimacy in early decades of People's Republic of China as it defeated imperialists and established people's raj. But at some point Chinese rulers needed to renew their legitimacy lease on continued basis from people's mandate. Due to dictatorial instincts of Communist Party Leaders as well as developed vested interests of party apparatus; PRC avoided democratic elections resulting in legitimacy drought of Chinese Communist Party. 

Given this state of illegitimate rule of Chinese Communist Party; lately party's leaders are pressed to run after ambitious goals to impress Chinese People by gimmicks - all just to remain in power. After Tienanmen Square, it was liberalization of Trade under Zhou Rhongji[1] for admittance to WTO. Hu Jintao chased the glory of 2008 Beijing Olympics; all to hoodwink Chinese People to push structural problems of Chinese Economy under the carpet and postpone questions about legitimacy about the Party.

With Xi Jinping - the problem is exasperated. Nowadays, there is much less demographic dividend to be had. Bills of largesse paid in terms of 2010 stimulus have to be repaid. There is no more any room for 'debt-fueled-state-company-behemoths-driven-growth' since Chinese banks are saddled with non-performing loans. Result is - Xi's chase of national glorification by muscle demonstration in South China[2], unprepared ascend to IMF reserved currency status at a great cost and grandiose dreams of modern day Silk Road by way of Asian Infrastructure Investment Bank.

All these dreams of Xi and his simultaneous attempts:
- to quell unrest which can be caused by rationalization of public sector when labor is shed in millions, 
- to stabilize stock prices which were oversold by Communist Party[3] or 
they are not working. These contradictory policy imperatives are unlikely to make job of Xi Jinping any easy. Lack of elections means relentless pressure on Chinese Communist Party Leadership to keep producing economic miracles. No wonder, the party leadership in the end runs out of ideas and corners itself by various past actions result of which could lead to a disaster.

One way for Xi Jinping to avoid this chaos is to come clean with his own people. But because Xi Jinping's own legitimacy is questionable; it is unclear whether Chinese People will trust him even if he wanted. Xi Jinping is not elected by Chinese people, he just maneuvered Party Machinery to grab the power and is simply perpetuating Communist Party tradition of committing to grandiose, over ambitious plans to keep away people's distrust of party. Also, there is no political catharsis possible as like how ruinous economic policies of previous regime are swiped aside by a new leadership with a healthy dose of new economic policies with a fresh start. When elections happen, a new leadership comes in; people's expectations are reset. There is no such luxury to Chinese People.

So long as that is the game in Beijing, periodic bouts of lack of confidence in Chinese Capital Market, and by consequence in Global Capital Markets, are unavoidable.


[1] - Zhou Rhongji has been the only competent money and economy manager Communist Party has produced in last 3 decades.

[2] - Xi's northern neighbor Vladimir Putin has been practicing 'rabid nationalism' as a substitute for governance for a while now.  

[3] - These stock prices are going down because of slowing Chinese Economy and weakening Yuan; wiping out Trillions of domestic Chinese investors who were exhorted by the party to buy stocks as some kind of patriotic duty.

No comments: