Can you have a free market, with Chinese characteristics?

As stock markets opened on Monday for the first time in 2016 the Shanghai composite index plunged, leading to a circuit breaker coming into effect. It was down 6.9% at the close, while the Shenzhen composite ended 8.2% down, bringing markets down in the rest of the world. The fear is that if the Chinese economy slows all the countries that sell commodities, like Brazil and Australia, will suffer. However, most analysts are optimistic that China's economy will continue to grow, although not in double digits, and manufacturing will pick up in the latter part of the year. China's manufacturing Purchasing Managers Index came in at 48.2 in December, contracting for the tenth month, although the official index was 49.7. Anything below 50 shows contraction. The official services PMI grew to 54.4 in December, from 53.6 in November. The Chinese say that this is because the government is restructuring the economy away from investment towards consumption as the country becomes more wealthy. So, we can all relax? Not so, say some economists who think that growth in China will be much slower leading to the global economy shrinking by 5% this year. If everything was as the government planned it would not trying to stimulate sections of the economy to increase the rate of growth. This will lead to asset price bubbles in those sectors. Countries which sell commodities to China are also big buyers of Chinese made goods so, if their economies become weaker they will buy less from China. The other way to stimulate manufacturing is by making its currency, the renminbi or the yuan, weaker. China devalued the yuan by 2% in August which was said to be an adjustment to bring it into line with the market. This is because China desperately wants the yuan to be part of the IMF's Special Drawing Rights, which are constituted by the dollar, the euro, pound sterling and the Japanese yen at present. This will give it prestige and will prevent fluctuations in its value, as countries make it part of their foreign currency reserves. However, when China devalued the yuan there was a sharp outflow of capital as investors became worried about further devaluations so the Peoples Bank resorted to selling US treasuries to support the yuan. Therein lies the problem. The IMF has approved the yuan becoming part of its SDRs but the government has to stop interfering in the market, which it seems unable to do. If the yuan falls too much other countries will also devalue their currencies to counter the advantage. This is what worries our Reserve Bank governor, Raghuram Rajan. To stop capital flight China has started to fine banks for aggressive currency trading so that some banks are refusing such trades. Once you become used to the stick it is very difficult to put it away. We pray that the stick will soon break and China will break apart. Happy thought.