We were warned … “things often proceed in different ways between China and the West”. The quote is from Chinese legal scholar, He Weifang, so the events surrounding the heavy correction of China’s stock market should come as no surprise because “proceeding differently” most definitely applies to levels of corruption and sound governance.

There was also a warning in Lead Taker in 2013, after I had taken a brief visit to Singapore and recognised the signs of a south-east Asian bubble just as the West had emerged from the shock of the financial crisis.

Anyway, when it comes to things proceeding differently in China, the World Bank’s Worldwide Governance Indicators are a good place to start – they show the country making progress in curbing corruption and in governance. However, China scores 47 for corruption and has a regulatory quality of 43, compared with the UK’s 93 and 96 respectively. The World Bank defines governance as “the traditions and institutions by which authority in a country is exercised” including “the process by which governments are selected, monitored and replaced”. So the gap between China and the West is wide indeed.   

The fall-out in terms of confidence in China’s financial system and its slowing growth will affect us all because like any ecosystem, the global economic one is constantly evolving in a process that exposes its strengths and weaknesses. Taking into account various devaluations of the yuan, Chinese imports to the UK are now cheaper, including raw materials, and UK goods exported to China are more expensive and likely to remain so, given the continued strength of sterling. It’s the ecosystem at work again – despite our outsized budget deficit, sterling continues to forge ahead on the back of the long-running crisis in the Eurozone.

Returning to China, it’s worth noting that its leaders get itchy fingers when they should be allowing a natural process of settlement. They are still thinking in terms of the planned economy of a communist state (one that works like a machine) rather than a market economy. They believe that tweaking this and oiling that plus throwing in some televised confessions from alleged wrongdoers is the answer.

Undeniably, mechanics are involved in a market economy but it does not operate like a machine – it is people that invest in markets and for that reason emotion and sentiment play their part. Cog oilers and tweakers can therefore interfere with settlement after a shock, causing further problems as they try and manage what should be a natural process.

Attempting to insert a floor under a market when it needs to be left alone and regain its footing is a mistake. It doesn’t give investors the opportunity to ask themselves what the crash was all about and make their judgments. The heavy correction of China’s stock market will certainly have exposed some significant problems but it will also have seen some investors act like lemmings heading over the cliff top. With any ecosystem, the fittest and most adaptable survive and markets will reshape themselves in time.

As with the Great Wall of China, governments can construct astonishing lines of defence but they are only as good as the communities that stand behind them. If people don’t believe the defence is up to the job, it will fail anyway.   

In the months ahead I will be following up on China’s economic reshape and its effect on the UK, particularly the manufacturing sector. Hopefully, in the meantime China’s rulers will grasp what you already know - markets fall as well as rise. Without wishing to sound too smug …. we did tell you so three years ago but obviously Lead Taker’s reach does not extend to Chinese political circles …. he, he, he.