Amid much ceremony and to the cheers of traders, the deputy mayor of Shanghai unveiled Monday morning the statue of a charging bull in the city’s new Bund Financial Square.

In the evening many of those same traders went home exhausted after the Shanghai Composite Index had slumped almost 6 percent in the final hours of trading.
Seemingly everything in China these days is bigger than anywhere else. Shanghai’s red bull is twice the size of its counterpart in New York’s Wall Street, created by the same Italian sculptor. We must also hope that the sudden slide in Chinese stocks is not also twice as big as that which hit Western markets.
It is important not to look at the sharp fall in the Shanghai index in isolation. Global markets have all been highly volatile with steep declines matched by rapid gains not long afterward. This 18-month low for the Chinese exchange can easily be explained away by continuing worries over sovereign debt in Europe and, now increasingly, with the United States as well. Nevertheless for a considerable time some analysts have been waiting for “the other shoe to drop.” The belief was — and remains — that China is due for a potentially sharp economic correction. Two reasons are given. The first is the weakened world markets in which China sells its manufactured goods. The second is China’s own inflationary pressures, which have seen, for instance, property prices appreciate by almost 13 percent year on year.
China’s early reaction to the global economic turndown was to launch a domestic stimulus package, designed to take up the slack in falling international order books. It also included the classic initiation of major new state infrastructure projects, in China’s case including the world’s largest and fastest high-speed rail network and thousands of miles of major new highways. In order to stimulate domestic demand for goods and property, the dominant state-owned banking sector boosted the amount of credit it made available. The predictable result is that after faltering briefly, the Chinese economy is once again booming. There are even concerns that when world markets recover, China may no longer have sufficient manufacturing capacity to service it, so busy will it be satisfying domestic demand.
The problem is that even a country now as wealthy as China, with substantial cash reserves, cannot afford to ignore the fundamental dangers of debt levels outpacing even its spectacular ability to generate new wealth to repay borrowings. Jeremiahs have been predicting a Chinese economic collapse for more than a decade. Thanks to governmental control of most economic levers, no such collapse has occurred. There are nevertheless signs that the burgeoning private sector is running away with itself. A correction is inevitable. The pain and extent when it does happen will depend very much on the government’s ability to control a bear market and re-inject confidence into the system. So far Beijing has only really responded to the economic woes of other countries. Sorting its own imbalances could be a tougher test