Although President Xi Jinping’s position at the head of the CCP is secure, the potential for possible political instability was highlighted when the country’s stock market lost roughly one-third of its value in June and July. The government intervened strongly to help stop the slide, cutting interest rates and transaction fees, suspending IPOs, and authorizing the national pension fund to buy stocks.

Those actions appear to have averted a larger crisis. And the negative impact on broader economic performance, which has exceeded expectations of late, is not expected to be significant.

However, the market volatility and the government’s readiness to intervene highlight the fact that an ongoing transition from an economic development model that emphasizes export-promotion and state-financed investment in infrastructure to one that leans more heavily on private-sector investment and domestic consumption will not be smooth. And, to the extent that rough patches heighten the risk of a hard landing for the economy, they represent a threat to the CCP’s stranglehold on power.

On the international front, the launch of the Asian Infrastructure Investment Bank (AIIB) in June has been hailed by Chinese officials as a vehicle for promoting regional cooperation. The U.S. has characterized the venture as a tool to increase China’s political and economic influence.

But even some close allies of the U.S., including Australia, the UK, and South Korea, were satisfied enough with the regulatory framework to participate in the bank, which was launched with a startup fund of $100 billion.

China’s interest in cooperation does not extend to territorial disputes that have emerged as a result of Beijing’s assertiveness in the South China Sea. Contested areas claimed by China were added to the country’s list of “core interests” (along with Taiwan, Tibet, and Xinjiang) in a new national security law approved in July, a move that portends continued tensions with regional neighbors.

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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.




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