BREAKINGVIEWS - When China worries, investors should too

Thu Apr 7, 2011 5:22pm IST

A supporter of prominent Chinese artist Ai Weiwei holds a picture of him at Weiwei's art studio in Shanghai November 7, 2010. REUTERS/Carlos Barria/Files

A supporter of prominent Chinese artist Ai Weiwei holds a picture of him at Weiwei's art studio in Shanghai November 7, 2010.

Credit: Reuters/Carlos Barria/Files

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-- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --

By John Foley

HONG KONG (Reuters Breakingviews) - Detaining an internationally renowned artist is a bold move by China's authorities. That they have done it sends a clear message: Beijing is increasingly anxious about social stability. When the mandarins worry, investors should too.

Ai Weiwei, detained on April 3 and now being investigated for "economic crimes", is known in China for subversive artworks, some overtly political, others merely tasteless. He crossed swords with authorities over the death toll from the 2008 Sichuan earthquake. Straying even closer to the "red line", Ai recently told a Hong Kong magazine that the impetus for an uprising in China was very strong.

His arrest may just be paranoia. China's rapidly growing incomes should make it more stable than restive Middle Eastern countries. But fads travel fast in China, and numbers are large. A bizarre rumour that salt could cure radiation sickness from Japan's nuclear crisis cleared supermarket shelves in days. On April 6, the Health Ministry had to refute reports of a new disease, "Negative AIDS", in six provinces.

Investors remain gung-ho. Foreign direct investment in the first two months of 2011 grew 27 percent year-on-year, after a record haul in 2010. The benchmark stock index is up 13 percent from January's lows, while foreign investors have lapped up some 40 billion yuan of renminbi bonds in Hong Kong in the last six months, convinced that China's currency will trend upwards.

At the very least, they should be increasing their calculations of the China risk premium. If unrest really became a problem -- and Beijing is implicitly suggesting it could be -- none of the three likely outcomes would be good for foreign investors. A heavy-handed response by authorities would dent the 10 percent rate of GDP growth. An ineffectual response might see it ridden off the rails altogether.

Most likely is the third way, where stability and GDP growth hold up, but with dissidents arrested, freedoms curbed and reforms postponed. That too brings an economic cost, through less innovation, and greater reluctance by large economies like the United States to help China engage with the world financial system. So even if China isn't in line for a shake-up, investors in it might be.

CONTEXT NEWS

-- China's Foreign Ministry said that detained artist and activist Ai Weiwei was being investigated "in accordance with the law" for "suspected economic crimes". Ai, the artist behind the display of millions of porcelain sunflower seeds in London's Tate Modern gallery, was detained at Beijing airport on April 3 while attempting to travel to Hong Kong.

-- Ai has spoken publicly on censorship, and challenged China's authorities through controversial art installations including "F*** off" and "Dropping a Han Dynasty Urn". He also campaigned for authorities to investigate student deaths in the 2008 Sichuan earthquake, which led to his detention in 2009.

-- Foreign ministers from the United Kingdom and Germany expressed their displeasure with the detention on April 5. An editorial in Communist Party newspaper Global Times warned the West against "attempts to modify the value system of the Chinese people", in an editorial on April 6 entitled "Law will not concede before maverick".

(Editing by Hugo Dixon and Sarah Bailey)

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