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During the BRIC and the Shanghai Cooperation Organisation (SCO) Summits at Ufa, the capital of the Russian Federation’s Republic of Bashkortostan, President Xi Jinping of China looked tired.
True, he spoke of a new international order, of a multi-polar world while asking his colleagues from the BRICS and SCO to look at their relations from a ‘strategic and long-term perspective’, but the Chinese President had certainly China’s difficult internal situation in mind, while delivering his speeches of the New Silk Road and other Chinese mega projects.
The state of affairs in the Middle Kingdom is indeed worrisome, most immediately, because of the collapse of the Chinese stock exchange. But that is not all.
On July 2, 2015, several overseas Chinese websites published an article which had appeared in the Cheng Ming Monthly magazine in Hong Kong on the possible collapse of the Chinese Communist Party (CCP).
It argued that the Party is “so corrupt that it has come to the verge of disintegration. Even top Party leaders could not avoid speaking of the possibility of the death of the Party.”
Accordingly to the same source, mid-June, the Politburo’s Standing Committee held a two-day expanded meeting to discuss the stern political and economic situation facing the Party.
Though it is difficult to confirm the information contained in the article, it appears that the Standing Committee was joined by the State Councilors (cabinet ministers), senior members of the Central Committee’s Secretariat, members of the Standing Committee of the National People's Congress and the People's Political Consultative Conference, members of powerful Central Military Commission and top bureaucrats of the Central Commission for Discipline Inspection (CCDI), responsible for the anti-corruption campaign; in other words, the cream of the Party.
Xi Jinping asserted, "We must have the courage to face, acknowledge, and accept the harsh reality that the Party has become so corrupt and degenerated that it could trigger the Party's downfall."
The same source said that a report was distributed during the meeting. The research listed six ‘crises’ in the fields of politics, economy, society, faith (religion), which could lead to the Party' collapse.
The report showed that only 25% of the senior officials of the Central Committees and local governments have successfully gone through the CCDI's review; 90% of Party committees at grass-roots or county levels have failed in the review of their performance and needed to be ‘reorganized’, whatever that means.
The next day, China Gate, a Chinese website based in the US, republished another article from Cheng Ming Monthly magazine, this time about the power struggle between different factions within the CCP.
Apparently former President Jiang Zemin and his close associate, Zeng Qinghong, will be the next target of Xi Jinping's and Wang Qishan’s anti-corruption campaign. Once Zhou Yongkang, the former Security Tsar was arrested, the unspoken rule, that no punishment could be imposed on members of the Politburo’s Standing Committee, did not exist anymore.
All this comes at the time of the worse crack in the short history of the Chinese stock exchanges. The South China Morning Post in a commentary said: ‘Future shock: China's market turmoil poses a challenge for Xi Jinping’, adding that “the market instability threatens to be a major setback for President Xi Jinping and his authority.”
The Hong Kong daily rightly argued “stock market crashes inevitably lead to unwanted consequences” and it quoted the Black Tuesday in Wall Street on October 29, 1929 which sent the US into the Great Depression and the Asian financial crisis in the late 1990s, which left deep scars on the economy of the Asian nations involved.
The SCMP asserted: “Analysts cannot accurately assess the damage that the mainland's stock market turmoil will cause while it continues to roil despite the government's rescue efforts. Yet they all agree that it will have a profound impact on the future of the nation's economy, society and politics.”
Since the stock market started crashing, the loss has been evaluated at $3 trillions; it means that some 30% was lost since June 12, when the exchange was at its peak value.
One of China’s problems is that it is not the institutional investors which hold most of the shares; the stock market is dominated by small individual investors, holding more than 80 % of shares.
The SCMP reported: “It is believed that many of the 90-million-strong investors were burned because they often increased their stakes when prices were high. …Some might well have lost their entire life savings as they used margin loans to bet on the wild market.”
This explained why Xi is a worried man; economic instability could bring along political instability, the ‘investing’ middle-class on which the leadership was banking to bring economic, political and social stability in the Middle Kingdom, may become dissatisfied with the regime; after losing most of their life-earnings in the present crash, will they invest again?
The deep-rooted corruption, the vested interests in the Party and the dissatisfaction of the masses, could make an explosive cocktail.
Today, sorting out the economy in a sustainable manner will need much more than a reform here and there: the future of the Party is indeed at stake.
The Wall Street Journal sees the crash triggering ‘rare backlash’ for President Xi: Jeremy Page explains: “Vibrant stock markets are at the center of Mr. Xi’s plans for an economic makeover, intended to help companies offload huge debts, reinvigorate state enterprises and entice more foreign investment. …Investors talked of ‘the Uncle Xi bull market.’ …the government appearing to panic in its response to the drop, some people are starting to voice doubts about Mr. Xi’s autocratic leadership style.”
And this is happening at a time when Xi faces resistance in the anti-corruption campaign and a serious slowdown of the economy.
Chinese-language news portal Aboluowang commented: “China's struggling stock market could turn into a major collapse …If China's stock market continues to nosedive, it could spark a chain reaction that may lead to a political crisis threatening the authority of the Communist Party and the stability of the country's top leadership.”
It is too early to predict what will happen in the months to come, but the situation is perilous, even if the latest news speaks of a stabilization of the markets.
A compounded element is the new draconian national security law which creates fears among foreign companies; it was openly mentioned by Michael Clauss, the German ambassador to China in a recent interview.
On July 1, the National People's Congress passed a controversial national security law defining threats to the Chinese State's power and sovereignty. For example, a vetting scheme will be introduced to scrutinize any foreign investment that posed a risk to national security’. The NPC is also debating three other laws on foreign investment, cyber security, and foreign NGOs.
Clauss explains that “foreign companies feared the laws might be used to keep certain overseas competitors out of the market. …In China the notion of national security [covers] a very wide range - from culture, technology, food safety up to religion. You can hardly find a field that is not relevant to national security concerns.”
This too does not help to create an atmosphere of trust, which China needs so desperately, if it wants to be a ‘normal’ country.
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