This article was first published in the September 2015 Asia Pacific edition of Accounting and Business magazine

After soaring by 150% over the past 12 months, Chinese stocks crashed spectacularly towards the end of June. Only after a flurry of vigorous policy measures did the markets steady and recover some ground. So, confidence has returned, but will this last and what are the consequences for China’s economy and the rest of the world? A plethora of policy measures has convinced investors that the government will do whatever it takes to support the market. New initial public offerings were suspended, rules on margin loans eased, and pension funds were allowed to buy equities for the first time ever. Regulators even permitted retail investors to pledge property as collateral to buy stocks.

Other policy measures, however, were more controversial. Regulators banned substantial shareholders holding stakes of more than 5% from selling for six months. A crackdown has been announced on alleged short-sellers. At one stage, regulators had suspended trading in more than half the market. Still, while such heavy-handed measures could hurt investor confidence in the long term, the near-term effect has been salutary.

If the financial markets can be stabilised, what are the remaining risks in China?

China’s economy has been slowing for several quarters, dragged down by a deflating property sector, huge industrial overcapacity, slumping global demand and reduced consumption resulting from President Xi Jinping’s anti-corruption crackdown. First quarter economic growth was just 7% compared with 7.3% in the final quarter of 2014. Forecasts suggest that this year’s growth will be even slower than in 2014 – already the lowest in 30 years.

In response, China’s economic managers have been easing policy, cutting interest rates and banks’ reserve requirements and spending massively on infrastructure and social housing. Restrictions on the property market have been eased. Consequently, the housing market has steadied, with transaction volumes in the bigger cities picking up. Industrial production, fixed asset investment and retail sales grew a tad faster in May compared to April. In June, export growth regained some momentum, raising hopes that global demand could soon reinforce this tentative recovery.

Can this rebound last? There are two concerns here. First, does official data truly reflect the state of the economy? The numbers for power consumption and container freight do not seem to tally with the slight improvement witnessed in May, for example. While the changing structure of China’s economy, including the shift to services rather than manufacturing, could explain part of this disconnect, it cannot explain most of it. The suspicion is that the economy is weaker than the government’s statistics show.

Second, the underlying headwinds are strong. Investment accounts for almost half of the economy yet there is diminishing appetite to invest as overcapacity squeezes profit margins and expected returns. As margins fall, heavily indebted firms are struggling to repay debts. Not surprisingly, non-performing loans have rebounded, albeit off a very low base.

This leaves policy response as the key. Despite the increasing market-orientation of China’s economy, the government has considerably more steering tools than in a conventional economy. It owns the major banks and can increase credit aggressively should the economy lose momentum. It has huge fiscal firepower after years of conservative spending. Reserve requirements on banks are still much too high and can be cut to release liquidity into the system on a huge scale.

Thus, the most likely scenario is for the Chinese economy to experience some hiccups from time to time but to eventually settle down to a new equilibrium of lower but steady growth, helped by a substantial dose of policy support. For the rest of the world economy, this means that Chinese demand growth will not be as exciting as before but it will still be a positive driver.

Manu Bhaskaran is CEO, Centennial Asia Advisors, Singapore