The current slump, while not necessarily desirable, represents a ‘natural market correction’ Andrew Sheng asserts, writing for Project Syndicate. Before its sharp falls from a June 12 peak of 5166, the Shanghai composite index had climbed 150% over the preceding 12 months.
This crash is the latest example of the instability and unsustainability of ‘highly leveraged markets’. China’s economy has succumbed to the ‘standard cycle of displacement, overtrading, monetary explanation, discredit and revulsion, all in a matter of less than 12 months’.
However, Andrew proposes that ‘allowing the stock market to develop’ was still the right move in order to address the balance within a Chinese economy relying heavily upon its debt market.
China must now use the lessons of this current ‘stress test’ to ‘drive the next phase of economic reform’.
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