China embraces the markets

China embraces the markets

FOR nearly two years, hopes of economic reform in China have rested on the faintest of rhetorical shifts. At a conclave in late 2013 the Communist Party declared that it would let market forces play a “decisive role” in allocating resources; previously, their influence had been just “basic”. A slender reed perhaps, but it supported a great expectation: that the state would ease its grip on business, trade and finance.

These hopes have been dealt a blow this week by China’s stockmarket crash. By the end of July 7th trading in over 90% of the 2,774 shares listed on Chinese exchanges was suspended or halted. Shares have fallen by a third in less than a month, wiping out some $3.5 trillion in wealth, more than the total value of India’s stockmarket. It is not the plunge in share prices, however, nor the implications for the Chinese economy that are worrying, so much as the government’s frenzied attempts to bring the sell-off to a stop.

The market mayhem is the first grave economic blemish on Xi Jinping and Li Keqiang, China’s leaders. Officials’ botched attempts to repair the damage have only made a bad situation worse. The danger now is that the party draws the wrong conclusions—leaving China more vulnerable to instability.

Red flag

The first mistake—often made by China pessimists—is to think that the market crash presages an economic collapse. That is most unlikely. True, the stockmarket is down by a third in a few weeks, but it has fallen back only to March levels; it is still up by 75% in a year.

Source: China embraces the markets | The Economist