Stocks rout could end with democracy in China

A rout in Chinese stocks that Beijing is desperately trying to stem has deep political ramifications for the country's Communist party, analysts say.

Tumbling stocks add one more thing to the list of grievances among China's growing middle class that threatens to undermine the ruling Communist party, Charles Robertson, global chief economist at Renaissance Capital, said on CNBC's "Squawk Box Europe."

The benchmark Shanghai Composite stock index has tumbled almost 30 percent in the past month, triggering a slew of measures to prop up a market where the vast majority of investors are from China's middle classes.

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"All non-oil exporting countries become democracies as they get richer and China is at that stage where I think it could be a democracy on a 5-10 year view," Robertson said.

"The Chinese people are unhappy with corruption, unhappy with pollution – all the sorts of issues that led Taiwan to become a democracy in the 1980s and early 90s. I think the Chinese authorities don't want another reason, even for a few million Chinese, to be disgruntled with the Communist party and out on the streets," he said, referring to the selloff.

The Chinese Securities regulator on Thursday banned shareholders from selling large stakes in listed firms, boosting the Shanghai Composite almost 6 percent and stemming the correction for now.

Xie Huanchi |Xinhua | Getty Images

Turning point

China, which has been ruled by the Communist party for more than 60 years, is at a crucial period of change, with the government trying to put the economy on a more secure long-term footing by shifting its main drivers to consumption from investment and exports.

The extreme volatility of the stock market threatens that goal as well as raising the risk of a protracted slowdown in the world's second-largest economy, analysts said.

"The reason I think there is a paranoia on stocks in Beijing is that anything that threatens below-6-percent growth threatens everything," Patrick Coveney, CEO of food firm Greencore, told CNBC. As a result, China had reacted "with massive force" and repeatedly intervened in the stock market.

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Renaissance Capital's Robertson added: "Growth is a factor in that democratisation process. If you see negative GDP it makes a political change from autocracy to democracy more likely."

China's economy grew 7 percent in the first quarter of the year – its slowest pace since 2009.

Consequences

Analysts said that either way, the political implications from the slide in Chinese stocks and Beijing's reaction should not be underestimated.

"While there are signs this morning that the rout may be abating, the reputational damage incurred by the turmoil throws into question both the authorities' commitment to liberalizing the financial sector and, more importantly, their ability to manage China's economic downturn," Nicholas Spiro, managing director at Spiro Sovereign Strategy, told CNBC.

"The big risk is that the selloff, if not quickly stemmed, could undermine the entire reform process in China if the Communist party feels it's too much of a political risk."