Over the past few months, the Chinese stock market, rather than its real economy, has been making headlines. The index rose almost 50% between March and mid-June before coming back to the March level over the next four weeks, when the authorities took several steps to halt the slump. These moves—like reducing interest rates, restricting margin trading, getting some state-controlled organizations to buy equities or provide margin money, suspension of trading in a number of shares, etc—are standard measures which all policymakers, including those in Anglo-Saxon economies, take when a bubble in asset prices bursts.
Market euphoria and gloom are recurring features of all financial, or asset, markets, and exaggerated when leveraged, or margin, trading is preponderant. To recall a few examples from the supposedly deep and “mature” US financial markets: the October 1987 crash of the stock market; the “rescue” of Long-Term Capital Management, a hedge fund, by the Fed “persuading” several banks to take it over; the bursting of the dotcom bubble in 2000; and the 2007-08 crisis in the mortgage securities market. The US Federal Reserve is famous for writing a “Greenspan put” option in favour of markets.
More important in the long term is the way China has been fostering the internationalization of the yuan. A few years ago, Arvind Subramanian, now India’s chief economic adviser, wrote a book titled Eclipse: Living in the Shadow of China’s Economic Dominance. His argument is that, given the size of China’s economy (the world’s largest in purchasing power parity terms) and trade, and the fact that China is the world’s largest creditor nation while the US is a very large debtor, China is likely to become the dominant financial/economic power in the near future.