China's Bubble
China Market Turmoil Spills Over Into Politics

Even as Chinese stock markets appeared to stabilize—temporarily, at least—after weeks of precipitous losses, President Xi Jinping has begun to face sustained criticism from investors, political insiders, and the general population. The Wall Street Journal reports:

Sun Liping, a sociologist at Tsinghua University, took to his social-media account to say the stock-market crash has exposed crucial flaws in Mr. Xi’s highly centralized approach to government, including a lack of financial expertise and a pervasive instinct among subordinates to obey superiors […]

“The market selloff is definitely the largest challenge that the new administration has faced,” said Victor Shih, a China expert at the University of California, San Diego. Chief among the weaknesses exposed, Mr. Shih said, was the ineffectiveness of Mr. Xi’s pledge to limit bureaucratic interference and give markets greater scope.

As we noted earlier this week, there is a very thin line between China’s economy and China’s political system, and a crisis in one is a crisis in the other. The government’s legitimacy relies on its ability to maintain economic growth and preserve economic stability. The ongoing market turmoil is therefore not only a threat to China’s economic future—it calls Xi’s entire vision into question. Indeed, one reason the Chinese government has taken such extraordinary measures to prop up share prices is because its legitimacy depends on it.

But, as economists agree, such emergency market manipulations can only be successful in the long term if the underlying economic problems are resolved. If they aren’t, the bubbles in China’s economy and political system could very well both burst.

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