What does the recent Chinese stock market fall reveal?

Andrew Sheng, Distinguished Fellow, Fung Global Institute and Xiao Geng Director of Research, Fung Global Institute highlight that the recent volatility represents a natural market correction. The article argues that highly leveraged markets are unstable and unsustainable and that, “In China’s case, the government interventionist approach is exacerbating the problem. Market intervention may limit the scope of losses in the short term, it undermines markets’ ability to self-correct”. "Allowing the stock market to develop was not the wrong move. At the end of 2013, when the Shanghai index was 2,116, the Chinese debt market amounted to 256% of GDP, and stock-market capitalization was 36% of GDP, implying an unsustainable crude leverage ratio of 7.2:1. When the stock market rose to its peak of 100% of GDP, the leverage ratio fell to 2.6:1, closer to the ratio of 2.2:1 in the United States." China’s economy has succeeded through trial and error, and the lessons of its current stress test should be viewed as part of that process, to be used to drive the next phase of economic reform. (VIEW LINK)


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