China should be letting a hundred defaults bloom

THIS week, Kaisa, a former poster child of China's booming real estate market, made history by becoming the first Chinese developer to renege on dollar loans. The immediate causes of Kaisa's default are clear enough: Plunging property values left it with excessive debt. But it's still too early to know what Kaisa's failure will mean for China. Chinese President Xi Jinping must decide whether he is more interested in stoking short-term growth, or curbing the excesses that imperil the country's future.

On the one hand, Mr Xi's government claims "market forces" will play a "decisive" role as it shifts to a growth model more reliant on domestic demand than exports and investment. Even Deng Xiaoping, China's first Communist leader to embrace free markets, never went so far in his rhetoric. And Mr Xi's handling of major economic players such as Kaisa and state-owned power- transformer manufacturer Baoding Tianwei Group, which defaulted this week on an onshore bond, has signalled his seriousness.

But for all of Mr Xi's talk about market forces, he has also allowed the state to get even more deeply involved in the economy. Many observers see this week's move by the People's Bank of China to cut bank reserve requirements by one percentage point as a sign that the government's top priority is to prop up GDP (gross domestic product). That's on top of the help that local governments recently received in refinancing debt, which essentially amounted to a stealth bailout from Beijing.