A model of Chongquing built from coins. Photo: STR/AFP/Getty Images
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The wild ride on China’s stock-market rollercoaster is far from over

China's admirers like to compare its Communist leadership to a meritocratic mandarin caste whose governance skills outstrip anything on offer in the west. But with £2trn wiped off the mainland exchanges in July, the picture is more complicated.

The scale and speed of China’s growth make it easy to overlook the way in which the country is still feeling its way forward. It may have become the world’s second-biggest economy, with 7 per cent growth officially reported for the second quarter of the year this past week, but it is still plagued by problems of expansion, from disparities in wealth to a huge environmental fallout. Recent weeks have thrown up another example of the dangers that can arise from insufficiently considered leaps into the future.

Admirers of China like to compare its Communist leadership to a meritocratic mandarin caste whose governance skills outstrip anything on offer from the fumbling administrations of western democracies. Yet the convulsions of the mainland stock markets over the past month – in which £2trn ($3.2trn) was wiped off the mainland exchanges before prices stabilised towards the end of the first week in July – show the authorities in a rather different light.

One might ask why Beijing was so intent on developing the country’s stock markets on the back of individual retail investors, many of them lacking experience in such techniques as margin trading, in which you buy shares using money borrowed from a broker. It might have been better from the start to have mobilised big institutional players, such as pension funds. The government, however, decided to encourage the growth of the largely retail markets in Shanghai and Shenzhen, in the hope that companies would raise capital there rather than seeking bank loans.

This was considered to be part of the modernisation of the financial system at the heart of the ambitious reform plan laid out by the Communist Party at the end of 2013. The programme claimed “the dynamism of the market” would be harnessed to move China towards a new economic paradigm, replacing its outdated reliance on the cheap labour, cheap credit and booming export markets that have fuelled growth for the past 37 years. The stock market was viewed as a way of achieving a more efficient allocation of capital and of mobilising household savings into corporate funding.

As it happened, there was a lot of cash looking for a home as a result of the downturn in the property market, historically a magnet for middle-class savings, and a squeeze on high-risk financial products outside the mainstream banking system. On top of that, the relaxation of rules on margin trading acted as an incentive to buy shares.

The result was a runaway bull market from 2014 onwards, with the number of individual investors increasing from 70 million to 90 million and the volume of officially sanctioned margin trading rising from £40bn to £220bn. Once the boom was under way, the government moved in with the second part of its strategy to develop China’s stock markets, introducing measures that facilitated the initial public offerings (IPOs) of 25 companies. Given that prices of newly floated firms often double on the first day of trading, the IPOs are hugely oversubscribed.

There were two snags. The first was that the boom assumed bubble proportions on the back of margin trading. The second was that so much cash was tied up in these IPOs that there was little left over to sustain demand for other shares. For short sellers, who make money by betting that prices will drop, it was a clear signal to act. Once they did and share prices fell, the remorseless logic of margin trading kicked in, with investors forced to sell their shares to repay brokers’ loans. The result was a 32 per cent drop in prices on the Shanghai Composite Index in less than a month.

The government moved in with supportive measures, including buying by state institutions, but these were initially unable to stop the slide. Only after increased support and adjusted margin requirements and with half of the quoted shares suspended did the market find a bottom and start to rise.

The impact of the gyrations can be overstated. Of the 90 million account holders, 30 million are estimated to hold only one or two stocks and to trade infrequently. The size of the stock markets is still quite small compared to the overall economy; the two are usually not co-related, so the broader impact of a downturn is limited. In addition, the Shanghai market is dominated by shares of state-backed companies that are less affected by stock movements than private firms. Even in the depths of the early-July decline, the Shanghai Composite Index was 70 per cent above its level a year earlier. Fears of a firestorm that would cause a crash in China and affect other economies were overblown.

Still, the turbulence that resulted in day-to-day swings up to the permitted limit of 10 per cent is likely to continue in short, sharp bursts. What is more important is the impact on the government’s broader economic policies. These face a great deal of opposition from vested interests that have done well out of the old economy and are facing not merely the challenge of change, but also the unrelenting anti-corruption campaign launched by Xi Jinping. They are likely to seize on events on the exchanges to point to the dangers of relaxing controls in the last major Leninist state on earth. Indeed, conspiracy theories on Chinese websites suggest that they may have been behind the short selling.

That will put the reformers on the back foot. Xi is a leader who ranks the preservation of the Communist Party first; if reform seems to present problems with maintaining authority and ensuring social stability, it will take second berth. That would have long-term effects on China’s evolution and may well be the most important aspect of this summer’s market roller coaster.

Jonathan Fenby’s book “Will China Dominate the 21st Century?” is published by Polity. He tweets as: @JonathanFenby

This article first appeared in the 16 July 2015 issue of the New Statesman, The Motherhood Trap

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Labour's establishment suspects a Momentum conspiracy - they're right

Bernie Sanders-style organisers are determined to rewire the party's machine.  

If you wanted to understand the basic dynamics of this year’s Labour leadership contest, Brighton and Hove District Labour Party is a good microcosm. On Saturday 9 July, a day before Angela Eagle was to announce her leadership bid, hundreds of members flooded into its AGM. Despite the room having a capacity of over 250, the meeting had to be held in three batches, with members forming an orderly queue. The result of the massive turnout was clear in political terms – pro-Corbyn candidates won every position on the local executive committee. 

Many in the room hailed the turnout and the result. But others claimed that some in the crowd had engaged in abuse and harassment.The national party decided that, rather than first investigate individuals, it would suspend Brighton and Hove. Add this to the national ban on local meetings and events during the leadership election, and it is easy to see why Labour seems to have an uneasy relationship with mass politics. To put it a less neutral way, the party machine is in a state of open warfare against Corbyn and his supporters.

Brighton and Hove illustrates how local activists have continued to organise – in an even more innovative and effective way than before. On Thursday 21 July, the week following the CLP’s suspension, the local Momentum group organised a mass meeting. More than 200 people showed up, with the mood defiant and pumped up.  Rather than listen to speeches, the room then became a road test for a new "campaign meetup", a more modestly titled version of the "barnstorms" used by the Bernie Sanders campaign. Activists broke up into small groups to discuss the strategy of the campaign and then even smaller groups to organise action on a very local level. By the end of the night, 20 phonebanking sessions had been planned at a branch level over the following week. 

In the past, organising inside the Labour Party was seen as a slightly cloak and dagger affair. When the Labour Party bureaucracy expelled leftwing activists in past decades, many on went further underground, organising in semi-secrecy. Now, Momentum is doing the exact opposite. 

The emphasis of the Corbyn campaign is on making its strategy, volunteer hubs and events listings as open and accessible as possible. Interactive maps will allow local activists to advertise hundreds of events, and then contact people in their area. When they gather to phonebank in they will be using a custom-built web app which will enable tens of thousands of callers to ring hundreds of thousands of numbers, from wherever they are.

As Momentum has learned to its cost, there is a trade-off between a campaign’s openness and its ability to stage manage events. But in the new politics of the Labour party, in which both the numbers of interested people and the capacity to connect with them directly are increasing exponentially, there is simply no contest. In order to win the next general election, Labour will have to master these tactics on a much bigger scale. The leadership election is the road test. 

Even many moderates seem to accept that the days of simply triangulating towards the centre and getting cozy with the Murdoch press are over. Labour needs to reach people and communities directly with an ambitious digital strategy and an army of self-organising activists. It is this kind of mass politics that delivered a "no" vote in Greece’s referendum on the terms of the Eurozone bailout last summer – defying pretty much the whole of the media, business and political establishment. 

The problem for Corbyn's challenger, Owen Smith, is that many of his backers have an open problem with this type of mass politics. Rather than investigate allegations of abuse, they have supported the suspension of CLPs. Rather than seeing the heightened emotions that come with mass mobilisations as side-effects which needs to be controlled, they have sought to joins unconnected acts of harassment, in order to smear Jeremy Corbyn. The MP Ben Bradshaw has even seemed to accuse Momentum of organising a conspiracy to physically attack Labour MPs.

The real conspiracy is much bigger than that. Hundreds of thousands of people are arriving, enthusiastic and determined, into the Labour party. These people, and their ability to convince the communities of which they are a part, threaten Britain’s political equilibrium, both the Conservatives and the Labour establishment. When the greatest hope for Labour becomes your greatest nightmare, you have good call to feel alarmed.