Why China's latest stock market plunge is good news

PANIC is in the air as China suffered on Monday its biggest one-day stock plunge since 2007. It shouldn't be. The 8.5 per cent slide in the Shanghai Composite Index is actually a development that could leave China better off eight years from now.

I'm focusing on 8 both because it's an auspicious number in Chinese folklore (the Beijing Olympics didn't begin on 8/8/08 by accident) and Beijing's idea of nirvana. Growth returning to 8 per cent (relative to this year's 7 per cent target) would buttress President Xi Jinping's reformist bona fides. Instead, stocks fell by that much on Monday as Mr Xi's magic has lost potency. Why is that a good thing? It's at once a reminder that rationality is returning to mainland markets and a message to Mr Xi to stop putting the financial cart before the proverbial horse.

Since mid-June, when shares began sliding, Mr Xi's market-rescue squad has tried everything imaginable: from interest-rate cuts, margin-lending increases, bans on short selling, a moratorium on initial public offerings and hauling supposedly rogue traders in for a talking, to ordering state-run institutions to buy shares and halting trading in at least half of listed companies, you name it. What Mr Xi hasn't tried is upgrading the economy and financial system in such a way as to help the stock market thrive. To find out what he should do next, Mr Xi could do worse than to check in with Henry Paulson. Even though Mr Paulson might regard with scorn China's love of the number 8, it was on his watch as US Treasury secretary in 2008 that the United States had its own brush with financial collapse.