Kerry Brown
Associate Fellow, Asia Programme
The Chinese leadership’s response to the market volatility will determine whether they retain the confidence of the increasingly important middle class.
An investor looks at a board showing stock market movements at a securities company in Beijing on 10 July 2015. Photo by Getty Images.An investor looks at a board showing stock market movements at a securities company in Beijing on 10 July 2015. Photo by Getty Images.

Despite the recent rebound there are a host of problems connected with the current volatility of the Shanghai Stock Exchange, which lost up to $4 trillion from stock values, almost a fifth of its value, in the space of three weeks. But the most significant is how it could undermine the credibility of the Communist Party in the eyes of the aspiring, emerging middle class of China.

The stock market matters to them, because it is, broadly, a theatre of aspiration. There are probably about 40 million people invested in the market. (There are 90 million accounts, but individuals can have multiple portfolios). While a small part of them are the new super rich simply gambling on stock rises, who can probably take the impact of the fall without too much pain, there are plenty more less well-off who have invested their hard-earned cash in the hope that it will give them decent returns. For this group, seeing their wealth ebb away hurts them profoundly, and creates antipathy towards a government that needs their support.  

Growing political power

Only since 1978 has China started to have an extensive urban working class, precursors to today’s middle class. They were the foot soldiers in achieving economic successes, working in the myriad of factories spread mostly across coastal and southern China and making the country an export powerhouse. The rewards given to it however have been meager, at least until recently. They have often worked in conditions of Victorian severity, received low wages, been unable to organize themselves into anything except the official trade union and had whatever they saved in effect re-taxed by being hoarded in state banks with low interest rates set by the government. Such a system meant that household income constituted much less than state enterprises as a proportion of GDP. The state, through its enterprises, has always come out on top in terms of access to profits and resources, not the working people.

For several years, there has been an understanding that this bad deal for the workers of China needs to be addressed as they become more extensive, and fit more broadly into a property-owning, service-sector, middle-class segment of the population.  It started to happen as the central government realized a new economic model was needed which relied more on raising domestic consumption, rather than exporting to fickle foreign markets that started to shrink from the global economic crisis.

The Xi Jinping leadership has made this a more urgent priority. Many of its proposed reforms are about giving the urban middle class a better deal – more secure property rights, more diverse investment opportunities and an indigenous finance sector that offers the sorts of products those in developed countries enjoy. Security and predictability in the system, where the middle class have more space to be economic agents whose fate is increasingly in their own hands, is core to this, especially in the face of falling GDP growth.

Weakened confidence

So the most toxic aspect of the stock market issue is that it threatens to expose the current Party elite on two fronts – economic competence and political authority. For all the reformist rhetoric of the Xi leadership, allowing the Shanghai Stock Exchange to be so volatile will raise questions about whether they really do know what they are doing economically. Emergency interventions have, apparently, staved the current slide and restored some value. But this will have sowed suspicions in people’s minds, particularly the emerging urban middle class, that the same biases towards state industries and vested interest run things, despite all the populist froth of the anti-corruption campaign and other measures which, on the surface at least, look like they are being undertaken to support them.

A crisis like this makes or breaks politicians. If the Xi leadership can come out looking like they rode the storm and defended the interests of the small investors who make up the stock holder class of China, then their position will be strengthened and show that they truly are on the side of the new middle class. If they fail here, then the growing perception would be that, for all their preaching about reform, underneath nothing has changed. If the middle class believes that, it could be deadly for the Party.

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