China's Xi staying the course despite sliding economy

BEIJING - What does China's leadership lose politically as a result of the country's precipitous stock market decline? A bit of international swagger, but probably not much else — for now.

Despite growing anger among retail investors and a strong sense of economic decline, a major shakeup is unlikely, given the rigidity of the political system, the leadership's need to exude calm and the idea that changes could be perceived as signs of weakness or error.

Having accumulated more power than any Chinese leader in 20 years, President Xi Jinping is expected to stay the course in hopes that the market will correct itself and the economy returns to an even keel. The longer that takes, the greater the risks for the Communist Party, which has managed to keep a tight grip on power in part because of its ability to deliver economic growth.

Xi's position on the global stage is suddenly a far cry from last year, when he appeared ascendant. His star seemed to hit its zenith as he hosted US President Barack Obama and other world leaders at a global summit in Beijing and launched the Asian Infrastructure Investment Bank as China's alternative to Western-dominated institutions such as the World Bank and International Monetary Fund.

Now, with the economy slowing and roughly 40 percent of the value of stocks erased since June 12, the leadership's preferred mix of market economics and strict one-party communist rule is under severe strain.

"The China miracle might just be coming to an end," said Willy Lam, an expert on elite politics at the Chinese University of Hong Kong. "The magic formula is running out."

A raft of emergency measures seems to have done little to stem the current crisis. After giving brokerages money to buy stocks and forbidding share sales by major investors, the government suspended new listings, slashed interest rates to a record low and launched an assault on illegal short-selling.

Even so, the main Shanghai Composite Index slumped 7.6 percent on Tuesday and another 1.3 percent yesterday, on top of an 8.5 percent loss Monday. Losses on the smaller Shenzhen Composite have been even more dramatic.

With the emergency measures failing, the government appears reconciled to allowing the chips to fall where they may, despite bubbling public anger and eroding faith in the system, analysts say.

"The fact that the party-state has had great difficulty stabilizing the markets and propping them up has dented public trust in the central authorities," said Dali Yang, a Chinese politics expert at the University of Chicago.

The damage could be even greater because those betting on stocks firmly believed the government would support the market and minimize their losses, Yang said, a throwback to the years of the command economy that has been largely abandoned. Along with the fall in markets, exports are shrinking and both economic growth and job creation look likely to miss their official targets for the year.

Factories are shedding millions of jobs, threatening to inflame social tensions as recent graduates see opportunities drying up. New industries including e-commerce are growing but still are too small to offset job losses in traditional businesses.

Adding to the economic foment, China's currency, the yuan or renminbi as it is also known, has lost 3 percent of its value against the US dollar over recent weeks. That move came as a shock to most traders and reflects the sharp decline in trade as China seeks to make its exports more competitive.

Most visibly, the economic turmoil is altering the dynamics for Xi's state visit to the US next month, a trip that will also see him deliver a major address at the United Nations. Whereas China's economic strength has lent it increasing diplomatic clout, its recent stumbles put Xi in a diminished position as he seeks to defend China's increasingly assertive foreign policies.

"The dramatic fall of the Chinese stock markets and the weakness in the Chinese economy are a humbling experience for China's leaders and that will shape the atmosphere for Xi's visit to the US," Yang said.

US National Security Adviser Susan Rice is currently in China to help lay the groundwork for Xi's trip.

The faltering economy threatens to upset the social and political fundamentals underpinning the Communist state. Over three decades of economic reforms, China's leaders have counted on sustained growth and improving living standards to shore up their credibility, even as they suppress all attempts at political opening and independent social organizing.

A slowing economy may now compel them to seek non-economic sources of party-state legitimacy, said Kellee Tsai, chair professor of political science at The Hong Kong University of Science and Technology. While Tsai offered no alternatives, that potentially raises the possibility of even greater levels of nationalism and xenophobia, tendencies percolating in Chinese society that break out into periodic spasms of violence and rage, especially directed toward traditional antagonist Japan.

"Xi may be expected to be defensive if things continue this way," Tsai said.

An extended crisis could prompt Xi to pin the responsibility on Premier Li Keqiang, who is formally in charge of the economy and originates from a rival political faction.

That's not a step Xi would take lightly, however, given that it would signal to the rest of the country and the world that the ruling party has "made a mess in handling the financial and economic challenges," said Steve Tsang, senior fellow at the University of Nottingham's China Policy Institute.

While the crisis at home may generate some negative media attention, Xi is too confident and risk-adverse to embark on major changes, Tsang said.

"My bet is that the (US) visit will go ahead, with some embarrassing coverage outside of China but no diplomatic unpleasantness," Tsang said.

While Xi may bet on staying the course, many of the tens of millions of retail stock investors who lost money in the market drop are still expecting a bailout. They represent the growing middle class that Beijing is relying on to shift the economy into one based on consumption rather than government-led investment. Getting burned on stock investments is sure to dent their confidence in the government's ability to shepherd that transition.

Zheng Xuchu, 28, a high school teacher from Shanghai, and his mother lost 170,000 yuan ($26,500) in just five days of trading in August and is hoping the government will compensate them for their losses.

"The government should be clear about its functions and responsibilities, rescue investors and make this a fair marketplace," Zheng said.