Xi Jinping Rao Aimin/ZumaPress

What Should China Do?

China’s government has a lot on its plate as it attempts to ease the short-term effects of an economic slowdown while implementing reforms aimed at smoothing the shift to a new growth model. The main danger, glimpsed in the authorities' ham-fisted response to the recent fall in equity prices, is a reversion to greater state control.

STANFORD – The Chinese government’s heavy-handed efforts to contain recent stock-market volatility – the latest move prohibits short selling and sales by major shareholders – have seriously damaged its credibility. But China’s policy failures should come as no surprise. Policymakers there are far from the first to mismanage financial markets, currencies, and trade. Many European governments, for example, suffered humiliating losses defending currencies that were misaligned in the early 1990s.

Still, China’s economy remains a source of significant uncertainty. Indeed, although the performance of China’s stock market and that of its real economy has not been closely correlated, a major slowdown is underway. That is a serious concern, occupying finance ministries, central banks, trading desks, and importers and exporters worldwide.

China’s government believed that it could engineer a soft landing in the transition from torrid double-digit economic growth, fueled by exports and investments, to steady and balanced growth underpinned by domestic consumption, especially of services. And, in fact, it enacted some sensible policies and reforms.

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