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Understanding the implications of China’s stock market upheaval

China’s recent stock market meltdown has been one of the biggest economic stories in the recent days. Given the deepening integration of China with the global economy and the impact it exerts on the global scale, the dramatic decline in the markets has generated widespread debate among the media, scholars, experts and public at large, not only about the causes of the crash but also about how it relates to the wider economic model and what it tells us about the future of the country. Views about an impending crisis in the Chinese economy have been prevalent for some time, and some see the current meltdown as the end of the China miracle story.  
Even those who don’t believe that the market collapse points to a crisis in the economy think it is not a good sign of things to come. Some blamed the government for intervening too late. And after the government did intervene, investors didn’t respond to the measures and the slide continuing, raising questions about the government’s ability, others thought the policy makers might have overestimated their ability to manage the markets, after the markets failed to respond to the government measures initially.
However, seen from a broader perspective, the market meltdown isn’t necessarily a reflection of a sudden weaknesses or malaise in the economy or a policy failure on the part of the government. It is important to note that the current slump was preceded by an equally steep rise. There may be a number of factors at play behind an abnormal movement of the markets either in positive or negative direction, and socio-economic and cultural factors might have played an equally important role.  
A prolonged rally starting in October last year had pushed the Shanghai Composite Index by more that 100 percent by early June 12, when the great fall began. But where the market stands today is still much higher than where it was before the abnormal ascent began last year. In that sense, the recent fall was nothing more than a drastic correction.
So why has it attracted so much attention? Though not a true reflection of the real economy, the market turmoil does point to a number of important socio-economic and political trends. After tightly controlling the markets, just like other sectors of the economy since their launch, the Chinese state does seem to allow market forces to play a bigger role in shaping the course of the events, in line with the goal of the current round of economic reforms and restructuring. The government’s late intervention, though surprising, could be a signal of its intent to reduce its role. It could also indicate that, having seen the negative effects of the large stimulus of the 2008 to deal with the global financial crisis, the government might be exercising caution in pumping money into the economy just to keep the sectors afloat. In fact, some of the measures taken, which shift the risks from individual investors to institutions, failed to have an immediate impact, though the slide eventually halted. It gave some critics reason to question government’s governance credentials, for example The Economist doubted ‘if the eminently capable technocrats are in control’ of the markets.
Another issue is perception of and sentiment toward China among international investors and business community, whose confidence in future prospects of the country is crucial for the success of many of the country’s programs and initiatives. Over the years the China success story has created both awe and inspiration throughout the world. The market decline came at a time when the GDP growth is sliding after years of rapid expansion, raising doubts over the viability of a hitherto much-vaunted growth model that turned a relatively backward China into the world’s second-largest economy and largest trader in less than three decades. Rising costs and slowing economic expansion have already forced many multinationals to rethink their China strategies, and perhaps look elsewhere. Major economic shocks like the current one are bound to add to the growing negative sentiment. At the very least, such events reinforce the view that China is, after all, not immune to crises, after it had earned much admiration of its apt handling of the global financial crisis.
But the biggest impact is going to be felt domestically, not the least because individual investors had been encouraged to participate in the economic restructuring and the stock markets, and they are the ones that will feel the pinch most. A series of scandals and monopolistic behavior, not to mention rampant corruption, have already undermined the confidence of the individuals in the management of the economy.
A fundamental dilemma in China’s development is that people are too used to the notion of ‘getting rich quickly’. When the wealth management products became popular, some analysts also warned of the risks involved and the investor’s lack of risk awareness. Few paid attention. And when the markets were on an abnormal rise, everyone seemed to be happy. Everything that grows fast is good – continues to be the dominant mindset, though the economic conditions of today, and of tomorrow’s, are very different than they were in the time of Deng Xiaoping. Hopefully, the current market correction and the enormous attention it has generated will provide a reason for rethink.

The author is a PHD candidate at the School of International Studies, Renmin University of China

(Opinions expressed in the article don't represent those of the

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