When China’s financial markets began to melt down last month, we argued that the government wasn’t just facing an economic crisis—that it was facing a political crisis as well. The Chinese Communist Party, which systematically manages large swathes of the country’s economy, has staked its legitimacy and popular support on the ability to deliver white-hot economic growth, year after year. This system has worked brilliantly for decades, but when growth falters, the whole political-economic edifice is called into question. Before an economic crisis snowballs into a direct challenge to the Chinese political system, however, we would expect the heads of specific Party officials to roll. As Walter Russell Mead put it in July:
The Chinese government plays a huge role in systematically managing the country’s economy, and it has staked its legitimacy on its ability to make the economy grow. Moreover, it has taken a very clear position on the stock market crash: this shouldn’t be happening and the government will make it stop. Therefore, the government’s failure to stabilize stock prices is going to be seen as a failure of official policy. Criticism of the stock market will turn into criticism of the political leadership, and it must be said that the political leadership hasn’t demonstrated great skill in the early days of the crisis. Premier Li has allowed himself to become identified with the efforts to stabilize the stock market. If those measures succeed, he looks like a hero. But after the latest rout, a lot of people in China don’t think the policies are working.
By now it seems clear that Premier Li’s efforts have emphatically not succeeded, leaving him especially exposed to the upcoming political ramifications of the market slowdown. The Financial Times reports:
The China-led turmoil that has rocked global markets in the past two weeks has also shaken the ruling Communist party and left Li Keqiang, the prime minister, fighting for his political future, according to analysts and people familiar with the internal workings of the party.
Among party officials and politically connected people in Beijing, the hottest topic of conversation is whether Mr Li will take the fall for Beijing’s perceived mismanagement of the stock market crash and the country’s broader economic slowdown…But even if Mr Li is blamed by the party elite for his handling of the crisis, most analysts and serving officials believe his removal from power would be too damaging to party prestige and credibility and that he is almost certain to remain in office, at least until the next five-yearly party Congress in 2017.
It appears, in other words, that China’s economic crisis is beginning to spill over into the political system. The market failure is being perceived as a failure of official policy. Accordingly, official policy—or the policymakers—will have to change. The severity of this change—from a reshuffling of leadership to something more comprehensive—will depend on the extent of the economic damage. If things don’t improve, it looks like Premier Li will be one of the first to go, as we predicted last month.
Of course, it’s possible that the Chinese technocrats will figure out a way to get their economy out of this particular pickle, at least for now, and that Li’s star will consequently rise. But even if this happens, it shouldn’t obscure the broader troubles that China faces over the long term. China’s hothouse growth cannot last forever, even if the latest meltdown is not “The Big One.” When the economic bubble finally does burst, China’s entire political system will be in trouble as well.