Relax: China's fundamentals are sound

China is in a sticky patch at present, but the fundamentals of the Chinese economy are sound and resilient enough to withstand financial shocks. There has been panic in the stock markets but the world will have to get used to some rough seas as China turns around its economy.

Investors observe the stock market at an exchange hall in Hangzhou, Zhejiang Province of China.
ChinaFotoPress | Getty Images
Investors observe the stock market at an exchange hall in Hangzhou, Zhejiang Province of China.

The stock-market crash is not unusual for most economies, but the mix of over-reaction from the market to the devaluation of the yuan and under-reaction from the Chinese created panic in the market that fed on itself.

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The Chinese economy has hit some rough weather for sure, but the government still has $4 trillion of bank deposits to play with. The fact that it has decided not to use this financial firepower is perhaps an indicator that China has finally decided to let market forces play a bigger role in deciding the value of its stock market and its currency. There is justifiable concern that aggressive interference in the market may sow the seeds for future problems -- especially credit growth, which is already high and could get out of control. Confidence is often about perception and more aggressive measures could accelerate capital flight.

China's stock-market plunge will cause some volatility around the world, but it is not a true reflection of the real economy in China. It has sparked lurid headlines and another Black Monday to add to the history books, but the Chinese economy is probably even more detached than normal ones from the stock market.

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The Chinese government has more levers than most that it can pull and, with such strong reserves, it still has the ability to rebalance its economy. Next year, I expect to see reforms and loosening of controls on the markets to deepen. Indeed, the fact that the Chinese government has not so far stepped in a second time to halt the stock market rout does hint at some softening toward reform.

Panic may have set in around the world about the future of the Chinese economy but I think this will pass. Investors just need to get used to a bumpy ride and more shocks as China steers its economy into a new course.

Commentary by Kamel Mellahi, professor of strategic management at the Warwick Business School and senior editor of the Journal of World Business.

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