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Capital Markets

China's leaders hit the panic button

Look beyond the gyrations of its stock markets, and you can see one thing clearly in China: equivocation. The regime of Xi Jinping is fundamentally flawed because of its public espousal of the markets, but private refusal to cede any real control. Optimists hope the latest crisis could be the impetus for real reform. Most experts warn investors hoping for a recovery in their stock purchases not to hold their breath

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After enduring a torrid summer that included two dramatic stock collapses, a double devaluation of its currency, and a fifth cut in interest rates in nine months in an attempt to boost flagging growth, China is facing a key moment in its modern history. Do the country’s authoritarian political leaders have the appetite – and the intellectual and ideological flexibility – to push through a slew of risky and painful financial and economic reforms? Or will they take a pass and hope they can muddle through, creating the services- and consumption-driven economy they so desperately need, almost by osmosis?

The most immediately pressing challenge will lie in reforming the country’s capital markets. This is not because China’s equity markets are integral to the wider economy. “There is little inherent connection between the two,” notes Thomas Byrne, head of Moody’s Asia-Pacific sovereign risk group. Fewer than one in 30 mainland citizens owns a listed security, reckons London-based Capital Economics.

Yet Beijing’s political leaders need to begin transforming their economy somewhere, and of all the hideous and manifold challenges they face – streamlining, merging or shuttering state-owned enterprises (SOEs); reducing the power of government-run lenders; and weaning the country off its dangerous addiction to eye-watering rates of economic growth — reforming the country’s stock markets should, in theory, prove a relatively simple task.

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