FINANCIAL TIMES 28-8-15

We should worry about China’s politics not the economics

Bill Emmott

In all the noise and debate, the stock market crash raises three big questions

The debate about China’s economy, amid all the noise and drama coming from the bursting of its stock market bubble, is essentially about whether its annual economic growth rate might really be 5 per cent rather than the official 7 per cent, or — shock, horror — could actually be as low as 4 per cent, which cannot qualify as a catastrophe. Or it might mean nothing much at all, given that the Chinese stock market is essentially a gambling den that is only weakly connected to the wider economy. So pardon me for failing to get very excited about it. The real reasons to be interested, and even worried, lie in politics, not economics.

Chinese events raise three big political questions. The first has more than a touch of Schadenfreude, admittedly.

For years, we have been told that one of China’s great advantages is that its authoritarian government is better able to make and implement decisions and steer economic change than our feeble, navel-gazing democracies. What we are watching is a test of whether there is any truth in this claim beyond simply the ability to sweep people out of the way when new high-speed railway lines or airports are to be built.

It is eight years since Wen Jiabao, then prime minister, made a much-noted and admired speech at the National People’s Congress saying that Chinese growth was “unstable, unbalanced, unco-ordinated and unsustainable”. Supposedly this, and associated initiatives to clean up the country’s environment, was to herald a new phase of reform, a new transition away from investment-intensive, dirty growth towards a cleaner, more high-tech and consumer-led variety.

Yet precious little has happened. Chinese air and water are dirtier than ever, and if anyone thought environmental controls had been tightened at all, the explosions of hazardous chemicals earlier this month in the centre of Tianjin, claiming more than 120 lives, should have disabused them. In the economy, investment has indeed been fading away as a motor for growth, which means that arithmetically consumption looks more important than it did. but this is just a statistical artefact: other sources of growth have not been emerging to take investment’s place.

Such transitions are difficult. But, as Chinese leaders know very well, the one that Mr Wen was calling for in 2007 is hardly unprecedented. Exactly the same sort of transition took place in Japan during the 1970s and in South Korea in the 1990s.

During such transitions, reforms need to be made that hurt some powerful interest groups and may cause a rise in unemployment, so political leaders need to mediate between such interests while maintaining public trust and social cohesion.

In Japan, this was handled by a democracy. In China, it is being handled by a Communist party that for the past two years has also been trying to tighten its political control of the country. So far, the verdict would have to be that an authoritarian regime is faring badly at achieving these economic reforms or, to put it another way, at reconciling its own often competing objectives.

The second big political question arises from this. If the stock market crash does have any real domestic consequence, it will come from the anger of retail investors at their losses. That may prove a minor factor, but add it to anger at man-made disasters such as that in Tianjin, and quite possibly at rising unemployment, and you have the potential for a considerable public backlash of the sort that Communist party leaders have always worried about.

So the issue will be one of how big such a backlash becomes, and how the party responds if it does become serious. As well as the power of state-owned enterprises and local governments to block change, one explanation of China’s failure to deal with Mr Wen’s “four Uns” has been the party’s hypersensitivity to public disorder and a desire to avoid it at all costs.

Now such disorder may be unavoidable. Which means it will have to be managed, in some way. And we all remember how it was managed in June 1989 in the streets around Tiananmen Square in Beijing, and in other Chinese cities that were convulsed by protests about the economic crisis that was occurring at that time.

We can’t answer this question in advance. The same applies to the third big political question, which is about how economic stress might affect China’s behaviour towards its neighbours in east and Southeast Asia.

This may well be the biggest reason to worry. Asian countries that have done well out of trade with China in the past 20 years are already suffering from a decline in that trade. There may be other sources of financial and economic contagion to come, as there were during the east Asian financial crisis of 1997-98. But the worst contagion would be if in response to economic stress the Chinese government, or perhaps just the Chinese military, were to ratchet up nationalism and escalate the territorial disputes the country has with Japan, Vietnam, the Philippines and others, in the East China Sea and South China Sea.

If that were to happen, it would make a stock market crash look like a lot of fuss about nothing.