China’s investors fear leaders ‘cannot control’ swoon

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Amid the panic and desperation that coursed through China's stock markets on another day of losses Wednesday, a more existential thought occurred to one money-bleeding investor.

The market crash "is something Xi Dada cannot control," the person wrote on social media, using the name many Chinese call President Xi Jinping. It means "Uncle Xi" and has become shorthand for a leader who has presided over the greatest centralization of power in recent decades, by seeking to make institutions of Chinese culture and the economy into organs of the state.

But crashing stock markets have shown a stubborn unwillingness to bend to the dictates of Beijing, ignoring a series of stunning interventions meant to stem their slide. In so doing, they have fomented a crisis that goes beyond economic. China's Communist Party has historically held power under a grand bargain that left its authority uncontested so long as it provided people ever-expanding wealth. Falling share prices challenge that legitimacy.

"The current crisis is a serious threat to Zhongnanhai," the reclusive enclave for China's top leadership, said Perry Link, a China scholar at the University of California Riverside.

He pointed to the serious problems Chinese people already pin on their leadership, including pollution and the deepening gap between rich and poor. "The stock shock concentrates discontent and can be a small flame that ignites other things," he said.

Chinese share prices on Wednesday continued a fall that has now erased $3.5-trillion (U.S.) in investment value in little more than a month. In response, Beijing ordered a series of even more intensive measures, banning corporate insiders from selling shares for six months. The People's Bank of China, too, promised money for investors, in hopes they will borrow to buy stocks and stop the slide. China has also allowed embattled companies to halt trading, and more than 1,300 firms have now gone temporarily dark, taking with them roughly half the market for Chinese investors.

China had already suspended new public listings and compelled 21 major investment firms to together invest $19-billion in blue-chip stocks.

The dramatic interventions underscored the degree to which Chinese leadership fears the consequences of failing to engineer stability.

"The credibility of the party is very much caught up in them being able to save people's savings in this crisis, and to stop it from accelerating," said Charles Burton, a former diplomat to China who is now an associate professor at Brock University. He sees a potential threat to China's stability. "I am concerned that things could rapidly start to spiral out of control," he said.

It has already become clear Beijing does not wield the kind of influence over stock markets that it does over, for example, free speech, artistic expression and even broader economic performance in China.

"At this moment in time, it appears as if they've lost control of it," said Warren Gilman, the chairman of CEF Holdings Ltd. who for more than a decade led CIBC's Asia-Pacific operations.

Still, few were willing to discount the possibility that Beijing will prevail, given its vast resources and the numerous economic levers at its command. "I'm sure it will all be fixed by the end of the week," Mr. Gilman said. Besides, he said, "the market is up on the year. People have had a bad month, but if they invested in December, theoretically they're up."

Beijing also has additional tools it can employ, such as "more stock purchases via any number of different vehicles," including the central bank itself, said Andrew Wood, an analyst with BMI Research who focuses on Asia country risk. That would amount to an even more significant intrusion of government into the market.

What the stock crash has made clear, however, are the limits of Communist Party power. Spiralling markets will have a "lasting effect on investor confidence. Chinese authorities have largely been considered as omnipotent until recently," Mr. Wood said.

"Recent events have pierced not only the bubble, but also the aura of infallibility surrounding the government."

Western observers see a battle for the future of China. Fundamental to the idea of public stock markets is a freedom that stands in direct opposition to the extreme control sought by China's authoritarian government.

"So they are particularly infuriating for an entity like the party. You can't put them in jail. You can't censor them. You can't pay them off. You can't propagandize them," said Orville Schell, a prominent author and Sinologist who directs the Center on U.S.-China Relations at the Asia Society in New York.

He has long believed the two cannot co-exist in China without the kind of conflict now emerging.

"We see these two opposite parts of the system colliding right now in this strangely tectonic kind of market collapse," he said.

In China, too, he says, something more profound is at work. For millennia, Chinese emperors have ruled by the mandate of heaven, a popular perception that they lead under divine blessing. But throughout history, natural disasters, rebellions and other disturbances have taken on significance as signs of a rupture in the sanction from on high. As just one example, the devastating 1976 Tangshan earthquake, which killed more people than any other modern quake, preceded the death of Mao Zedong by only a few months.

In that context, a disruption like the stock market crash carries "huge symbolic weight," Mr. Schell said. "Any perturbations of a stable situation are read almost like omens."