Given the past few months, waning Chinese enthusiasm for free market forces is not hard to understand. Beijing is used to holding the whip hand over the economy, permitting liberalisation only on its own terms, not those of the untrammelled market. If the gyrations of the Shanghai Composite index are any guide to unrestricted capitalism, better the tamer version long favoured by China’s leadership.
Equally clear is how dangerous it is to cling to such an illusion. As President Xi Jinping recognised when promising a “decisive role” for market forces, China cannot haul itself out of the middle-income bracket through bureaucratic genius alone. Resources must be free to flow where they are most in demand, even if this entails short-term distress to those sectors hitherto favoured by state interference.
Market liberalisation is markedly more difficult when the markets in question are macroeconomic. In this China has learnt how it is no more immune to the “trilemma” of monetary policy than any other country. Policymakers may desire free movement of capital, control over domestic interest rates and a stable currency, but they cannot have all three. Capital will always seek out the best return, driving either interest or exchange rates to wherever they are needed for balance.