Wall Street has stopped believing in the most important idea holding China together

Copper mao chinaReutersShaoshan, Hunan province.

Wall Street has stopped believing in the Chinese government’s ability to successfully plan and manage the country’s economy.

China recently announced its quarterly GDP number — 7%, right on target. Like it always is. This time, though, no one on Wall Street believed the number was real. The country’s economy is slowing, and its nearby trading partners are already feeling the strain.

This time, the chorus of investors responding with disbelief was louder than ever.

“…What I’m struck by is how people have so much faith in this authoritarian type of regime that they can just push a button and get growth back up above 7% or 8%,” Jeff Gundlach, CEO of bond firm DoubleLine Capital, told a packed house at CNBC’s Delivering Alpha conference on Wednesday.

“To which I say if that’s really true, why are all of us wandering around extolling the virtues of free market capitalism? Why don’t we get an authoritarian government in there and get this baby moving.”

Over the last several decades of explosive growth, China’s government has been very clear about the exchange it’s made with its people and those investing in its economy.

It’s something like this: You let us handle this country our way (with a repression of civil liberties, authoritarian rule, etc.) and we’ll steer this economy to greatness.

Problem is, people are starting to wonder if the government can hold up its end of the bargain. They’re wondering if the country’s “capitalism with Chinese characteristics,” as the government calls it, can actually work.

The country’s in a particularly tough spot right now.

China is trying to transition from an economy based on foreign investment to one based on domestic consumption. Wages have increased, making it less attractive to investors, but they haven’t increased enough for Chinese domestic demand to power the economy. Until that imbalance evens out, there’s a lot less money floating around the economy.

For the past year or so, the government was encouraging its people to put their savings to work in the stock market. As a result, Chinese indices screamed higher — the Shanghai Composite went up around 150%. Then, on June 12th, it started sliding.

It fell 30% before the government measures — banning stock sales, going after short sellers, throwing cash at the problem — stopped the bleeding.

So that didn’t work so well.

Shanghai composite Yahoo Finance, Business InsiderThe Shanghai Composite has erased all but 8% of its gains year to date.

The stock market became another reason for Wall Street to question the government’s ability to manage. That’s why, right now, Chinese leaders are super defensive about Wall Street’s general disbelief in its growth numbers. State media outlet The Global Times published a scathing editorial demanding Western media “set the record straight” on its economy now.

“The questioning does not display logic and is even frivolous. It is disappointing to learn that the Western media’s displeasure with the GDP figures reveals the wish for slow growth in China,” it said.

The editorial continues: “It is alluring to have economic statistics made on the government’s will, which perhaps exists widely, but the Chinese government can resist this temptation. As it is illegal to fake NBS data, the assumption that the Chinese government can easily exert its will on the NBS actually misrepresents the government’s operation model.”

It added that the Chinese people had become accustomed to lower growth, and could handle that and worse.

So bring it on.

NOW WATCH: Anyone who uses Excel will love this shortcut that keeps spreadsheets in order

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.