Two years ago it was hard to find anyone who believed that annual GDP growth in China would ever fall below 8 per cent. Today, as the market fixates on various domestic bubbles, it is becoming almost as hard to find anyone who does not worry that China may be on the verge of collapse.

But while there should be little doubt that China has a very difficult economic adjustment ahead – with Beijing policymakers increasingly aware of the challenge – today’s panic may be no more justified than yesterday’s euphoria. If the adjustment is well managed the Chinese financial system will not collapse and the social cost will be minimal. It will, however, require Beijing to become serious about transferring wealth from the state to the household sector.

Why is wealth transfer necessary? Because for several years rapid growth in China has been driven by increasingly wasted investment and, with it, an unsustainable increase in debt, and this has come at the expense of households. Rapidly rising debt meant that only extremely low lending rates funded by hapless household depositors could keep debt servicing costs manageable.