The crackdown on high-level corruption that has characterized Xi Jinping’s presidency has continued as the ruling CCP takes steps to address a major contributor to popular discontent, while also providing Xi with an opportunity to purge rivals and consolidate his position. Both objectives have taken on added urgency as the latest growth figures and evidence of strains in the financial system raise question marks about China’s economic stability.

But the crackdown carries a risk of sowing factional antagoniss. And this could trigger a power struggle within the top reaches of the political hierarchy in Beijing.

Xi’s campaign has not only reached high, but has also been surprisingly broad in its scope, with many thousands of officers in the People’s Liberation Army (PLA) and managers of state-owned enterprises getting caught in the anti-corruption dragnet. In that regard, the recent publication of a commentary on the website of the PLA Daily reminding all members of the military that it is their duty to carry out the orders of the president would seem to suggest that the crackdown is having a negative effect on morale. There is also the potential for the anti-corruption crusade to sow discord among local authorities and personnel throughout the state bureaucracy.

Even if concerns about the potential for outbreaks of social unrest are not borne out, the government will still face troublesome domestic security issues

A more significant immediate threat than the risk that foreign investors could become caught in the middle of a power struggle at the top or institutional turf wars within the bureaucracy is the danger that social disquiet tied to the slowing of economic growth and accompanying debt-related stresses might encourage moves by the government to place foreign businesses under closer scrutiny as officials attempt to deflect the blame. On that score, firms involved in joint ventures and/or in sectors or industries with strategic value (such as finance and telecoms) or in the social sphere (education and healthcare) could face tighter regulation that increases the operations risk.

Even if concerns about the potential for outbreaks of generalized social unrest are not borne out, the government will still face troublesome domestic security issues in the near term. Protests in support of civil rights and environmental protection, periodic localized eruptions of rioting in response to a diverse array of grievances against local officials, and sometimes violent strikes triggered by the mistreatment of workers serve as a frequent reminder of the potential for a dangerous build-up of social pressure that will only become more pronounced as the economic tide rises at a slower pace. The risks are heightened by the increased difficulty of managing public expectations with the spread of social media testing the state’s ability to restrict the freedom of the population to share ideas and publicly express dissent.

In The Spotlight

Stresses in the financial sector tied to local government lending to the property market and the opaque nature of China’s shadow banking practices were highlighted at the start of 2015, when Kaisa, a mainland China real estate developer listed in Hong Kong, defaulted on its US-dollar bond and loan payments. Some observers see the problems at Kaisa as a one-off event, but considering the bloated nature of the market in China, which is ripe for consolidation as the economy slows from a prolonged period of breakneck growth, it is quite reasonable to expect more to follow.

Credit has been growing at a faster pace than nominal GDP for several years. And China’s property boom has contributed to some $65 billion in borrowing on the bond and syndicated loan markets, much of which has been issued offshore.

The complexity of the deal structures is reminiscent of the exotic (and toxic) assets that fueled the global financial crisis in 2008, and the lack of transparency only adds to the risks. Many are betting on implicit government guarantees, including at the local level, to restore confidence, but with the economy slowing, there is reason to question whether the assumption that the government will backstop troubled borrowers rests on a solid foundation.


The PRS Group
About The Author The PRS Group
The PRS Group is a leading global provider of political and country risk analysis and forecasts, covering 140 countries. Based on proprietary, quantitative risk models, the firm's clientele includes financial institutions, multilateral agencies, and trans-national firms.

Talkback (1)

  • Guest (ramiz)


    Another name of Business is Risk who fear from risk can not become a business man. I think Chinese business man and economists did good homework. Therefore, Chinese Risks Will Increase as Economy Slows and now China lead business industry which is big proof of their great planing and strategies. However, I'm finding best online paper writing service but i'm student of economics's study and such articles are good for me.

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