Wednesday, February 28, 2007

China and Its Securities Markets

The question of the hierarchy of power has served as a central concern of the Chinese Communist Party since the successful conclusion of its Revolution and Civil Wart in 1949. Officially, the political community has been accorded primacy in the power hierarchies of China, and within that community, the Chinese Communist Party has served as the superior institution of power over the apparatus of state power, the National People’s Congress and its institutions. Economic power has always been deemed a dependent source of authority. Indeed, the imperatives of Marxist-Leninist-MaoZedong Theory make clear that economic power is not merely subordinate but is an instrumental expression of political power. Even as China moved to a market economy with socialist characteristics from the time of the leadership of Deng Xiao Ping, the ruling ideology made clear that economic power was personal, private, incidental and instrumental—a means for the development of the nation as a whole as it moved forward through the stages of the dictatorship of the proletariat to an advanced stage of socialist development. Though the theory has some peculiar echoes to the economic theories of American conservatives like Ronald Reagan (the rising tide lifts all boats theory of economic development), the basis of Chinese economic theory in the imperatives and value of a command economy framework continues to distinguish it from most other economies in the West.

It should come as something of a surprise, and not a pleasant one for the Chinese Communist Party and its state apparatus, that economic power in China has assumed an autonomy and power great enough, even at this stage of its development, to publicly, effectively and quickly affect state policy. On February 27, 2007, the “benchmark Shanghai Composite Index fell nearly 9%, its worst daily performance since February 1997.” Share Sale Knock Chinese Market, BBC News (Feb. 27, 2007) There were many causes for the drop. For my purposes, the most interesting were those tied to rumors of certain government action: the imposition of a capital gains tax to siphon off the wealth generated through trading, the dismissal of a senior management official at the Shanghai Exchange, and “rumours of a crackdown on illegal share offerings and trading, as well as fears about accelerating inflation.” Id.

By the 28th of February, the Western press was reporting that the Chinese government had issued a notice on the front pages of important news sources that it had no intention of taxing gains, the Shanghai stock exchange official appeared not to be leaving his post, official was forced to report, and that there would be no crackdown on markets. The government had little choice it seems: “The BBC's Quentin Sommerville in Shanghai said investing in shares had become increasingly popular at all levels of Chinese society and the government was worried that it would be blamed should the market suffer a prolonged slump.” Id.

What ought to worry the political authorities more is that this expression of power is not necessarily coordinated or controlled. It is popular power—in a sense the economic equivalent of a local riot. The Chinese authorities were wise to quickly correct the “misperceptions” that led to the sell off. It would be even wiser to coop the emerging leaders of the economic sectors. From the Communist Party’s perspective, the wisdom of Jiang Zemin’s Three Represents theory becomes even more evident now. Among its elements was the notion that Party Membership ought to be open to members of the market sector. See Larry Catá Backer, The Rule of Law, the Chinese Communist Party, and Ideological Campaigns: Sange Daibiao (the 'Three Represents'), Socialist Rule of Law, and Modern Chinese Constitutionalism, Journal of Transnational Law and Contemporary Problems, Vol. 16, No. 1, 2006 and my prior post on the Three Represents. Opening the membership of the Party to the leaders of the economic sector, effectively giving them a voice within important Party circles, in return for conformity to the basic political and social norms represented by the Party might be the best way to handle the problem. The greater the distance between the Party and the economic sector, the more difficult it will be for power to be effectively bounded within the institution of the Party. From Western perspectives this would be a good thing. From the perspective of stability in China, as it continues to undergo a very uneven development, the results, at this stage of its development, might not be so good.

Thus, the great moral of the Shanghai Market drop—Incorporate the economic elements!

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