China's short-term economic growth outlook is mediocre at best, and another year or two of deceleration is all but unavoidable. Does President Xi have the single-mindedness to bring it back on track?
The week started badly, and the epicentre of bad news was China. On Mon-day the Shanghai Composite Index lost 8.5 per cent, its second worst day ever, erasing virtually all of the gains from the previous two weeks of all-out government support.
Commodity markets, which had been sickly anyway, followed suit, as did various other China-linked assets, such as mining stocks and the Brazilian real.
It's worth stepping back from the turbulence of the moment to assess the three distinct issues of market moves, short-term growth and the long-term trajectory.
The stock market: It is clear that China has just experienced a leverage-driven bubble disconnected from the realities of economic activity and corporate earnings, and that the government has severely damaged its credibility first by encouraging retail investors to join the party and then by its mind-boggling interventions to stem the rout.
Yet it is also clear that forecasts of contagion from the bear market in stocks to the real economy via a negative wealth effect among individual investors are wide of the mark.
Only about seven per cent of China's population is active in the stock market and household balance sheets are dominated by property, bank deposits and wealth management products.
Equity losses will pinch household wealth, but not undermine it.
Other potential economic knock-on effects are comparably modest. Equity financing is a minor funding contributor to corporations, which rely mainly on retained earnings and bank loans.
Contagion to the financial system would be a worry if brokers started going bust as a result of reckless margin lending, but this is not happening.
Chinese brokers are not dangerously leveraged; they are cash rich. Shanghai volumes are actually higher now (60 billion shares a day in July) than they were back in May (54 billion).
Given the continued vitality of trading activity, value added in financial services - which boosted gross domestic product a bit during the bull run - does not look to drop that much.
Short-term growth: China's short-term economic growth outlook is mediocre at best, and another year or two of deceleration is all but unavoidable.
Our Beijing team's core scenario is that real growth will come in at 6.5-7 per cent this year and will fall closer to six per cent in 2016. Nominal growth will stay steady at around seven per cent, as falling real growth is offset by the end of the short-term deflationary impact from the last 12 months of commodity price falls.
Growth in the second half of this year will be cushioned by three factors: the impact of the People's Bank of China's four interest rate cuts since last November will kick in fully; the property market is improving, with sales up in the past three months and construction volumes stabilising; and the Chinese renminbi 3 trn in local government bond swaps scheduled for this year will ease fiscal constraints and enable localities to support solid growth in infrastructure spending.
All these positives will produce at best temporary stability; but they should be enough to prevent the government from juicing growth with a currency devaluation.
Long-term growth and reform: The really vexing question is whether the government has the intention and the political clout to get the economy back on a sustainable track.
At several crucial points since it began economic reforms in the late 1970s, the Communist Party has tactically surrendered direct instruments of control (prices, production and supply quotas, state assets) to enable more vibrant growth.
Xi Jinping's Third Plenum reform document of 2013 seemed initially to call for another trade-off of this type: less direct state control, a more market-driven and efficient economy, and enhanced prestige for the Communist Party down the road.
Two years on, it is plain that Xi's top objectives are strengthening of the party's political mechanisms of control, and carving out a bigger role for China in global affairs.
As the economy inexorably grinds slower over the next 18 months, the thing to watch will be whether top party leaders signal a shift in emphasis away from political goals and towards economic ones. The author is founding partner and head of research, GaveKal Dragonomics