Learning from China's Equity Bubble

Eventually the current equity bubble will evaporate and given the relatively minor role equities play in China's financial system, its economic impact will be limited. The more important issue is whether China's leadership has learned the right lessons.

China's economy is becoming more normal in the sense that market forces now have a greater impact in shaping trends and its financial system is increasingly linked with global markets. But while market driven economic systems have the potential to generate more efficiency than centrally-controlled systems, they are inherently more unstable. The lesson from this equity bubble is that markets cannot be based on the unwarranted faith in the power of government intentions. If they are to become credible they need appropriate regulatory agencies to protect the public.