DATONG, SHANXI PROVINCE, CHINA – 2015/10/14: For rebuilding the citygate, the Datong Musuem from Mao’s times was moved over 200 meters to the left. Tatong, once an important coal-mining city for its significant reserves, now for the reason of environmental and resource sustainability, is rebuilding the citygate, citywall and other ancient relics to transform as a tourist city. It had been the capital of Northern Wei from 398 AD until 494 AD. (Photo by Zhang Peng/LightRocket via Getty Images)
The renewed turbulence in China’s stock markets—on Monday, the Shanghai exchange closed down more than five per cent—highlights the dual challenges facing the government in Beijing. The first task is restoring some stability to the country’s notoriously volatile markets. The second challenge, which is of much greater importance, is fixing the Chinese economy, which, for a couple of years now, has been looking a bit like Wile E. Coyote—stepping off a cliff and hovering in the air for a while, legs pumping furiously to defy gravity.
From the rest of the world’s perspective, this is the key issue. China’s stock market is still relatively small, and even if it were to crash again, the spillovers wouldn’t be very great. But the Chinese economy is now the world’s second largest, and its recent troubles have already caused a lot of turbulence, especially in the commodity markets. A full-on slump in China would have huge global ramifications.
To some extent, the gyrations in the markets reflect policy errors that can be rectified. When it decided to divide responsibility for overseeing the stock market and the currency markets between two different institutions, the China Securities Regulatory Commission and the People’s Bank of China, the government in Beijing was following Western best practices. Over the past week, however, the two overseers have sent conflicting signals to investors, undermining confidence, and, possibly, creating a negative feedback loop between the two markets.