The writer is director of research on Chinese markets at the Rhodium Group

China’s crackdown on the real estate industry and its tech giants rocked financial markets, sparking debate over whether China is still “investable.”

Longer-term bullish investors argue that Beijing’s commitments to economic growth and market liberalization remain unchanged. They maintain recent actions such as stricter rules on developer debt are efforts to reduce the foam in the sector. The necessary credit risk pricing adjustments will improve the functioning of Chinese financial markets over time.

In contrast, bearish investors argue that under Xi Jinping, China’s fundamental political goals have changed and that sustaining growth and liberalizing capital markets are now less important to the country’s leadership than goals related to “Common prosperity”. They say this summer’s campaigns, including attacks on tech companies and education and tutoring companies, imply that China is increasingly dangerous for investors.

As interesting as this debate may be, it is not the right one. The most important question facing markets today is about Beijing’s policymaking process, rather than political goals – the means rather than the ends.

Tackling the contagion of woes from Evergrande and other real estate developers spreading through the economy at large requires an effective counter-cyclical policy response. But that response has not come so far, and the reasons for Beijing’s inaction are unclear. Are Chinese technocrats holding back because the current turmoil in the real estate market is part of a controlled effort to reduce risk? Or have new political factors prevented Chinese technocrats from acting?

Despite unprecedented credit expansion for more than a decade, China has not faced a debilitating financial crisis or a marked slowdown in growth (aside from the slump associated with last year’s pandemic).

Stability is not easily explained by macroeconomic factors such as China’s high savings rate or the internal nature of its debt, nor by political factors such as the administrative tools of the state or the lack of Beijing legal constraints.

Rather, Beijing’s obsession with political stability has generated a long history of authorities believed to credibly respond to even minor episodes of financial stress in order to calm markets.

But the credibility of this expectation depends on how the policy-making process works as in the past. At some point, waiting too long to react to the current turmoil in the real estate market will generate too much contagion and several factors will weaken the Chinese economy and financial system. They include the effects of falling house prices on household consumption, the impact of falling land sales on local government finances and the use of property as collateral for loans.

Beijing’s long-term goals won’t matter if the tools for short-term economic adjustment falter. Most economic analysts argue that Beijing will be forced to drop controls targeting the real estate sector, given its importance to the economy.

But political analysts argue that it’s increasingly clear that policymakers’ campaigns to reshape the economy are limiting the countercyclical responses markets are accustomed to.

As the tools of economic policy are newly imbued with political significance, technocrats face new challenges in turning the tide or balancing the messages of rulers. Likewise, these analysts argue that the centralization of authority has weakened some of the balancing forces within the party-state system that could correct political mistakes along the way. As a result, while the outcome of this debate is still uncertain, overstepping policy has become a far greater risk.

In 2013, the Chinese central bank attempted to curb speculation in the interbank market by remaining silent in the face of a sudden default. The banking system almost shut down in response, with short-term rates hitting 20 to 30 percent. The central bank was forced to give in and inject liquidity, a precedent that facilitated the rapid expansion of the shadow banking system.

Beijing’s goals were understandable, but the methods used created the opposite effect to what was intended. Given the political importance of China’s campaign against the real estate sector, a similar about-face is hardly conceivable. But how and when Beijing reacts to market contagion is now more important than the leaders’ original goals and will determine how much China remains invested.