Implications of a Crash

An interesting and different article by Minxin Pei and Wayne Chen at Financial Times, "A crash is China’s chance for reforms". Most of the articles out there on China's stock markets examine the likelihood of a crash in China, or the probability of a lack of serious economic impact of a crash in China. The past two days have seen serious drops in the Chinese markets (see China financial markets for the details), and the question now seems to be not whether a crash is coming, but what the implications of the crash will be. Pei and Chen argue that a crash should be the impetus for the reform of the market by the central government in an effort to improve corporate governance.

Immediate suggested responses:

• Resist bailing out investors
• Punish companies and individuals for illegal dealings by seizing "ill-gotten gains"
• Place seizures in fund to compensate legit investors
• Make this process transparent

Long-term suggested responses:

• Allow autonomy in China Securities Regulatory Commission
• Decouple from Communist Party
• Appoint qualified and distinguished individuals, "including foreigners experienced in financial regulations," rather than making political appointments
• Curb protectionism in domestic financial securities
• State-owned brokerage firms dominate, and have previously been beset by corruption
• Allow foreign firms to enter as independents rather than as JVs
• Purpose: to restore stability and "create conditions for a future boom in equity investing"
• Increase financial products
• Expand institutional investing

This sounds like a combination of adversity breeds strength, and you've gotta break a few eggs if you want cake. They are good arguments. Now, I hope someone can tell us why America's impending recession will be good for us.