The recent volatility on the share markets is symptomatic of gnawing doubts about the broader health of China's economy - and this "new normal" doesn't bode well for Australia, writes Ian Verrender.

Crisis averted. Situation normal. If only.

After a week of chaotic trading on global share markets, with days of dramatic plunges followed by huge gains that clawed back a large proportion of the stunning falls, global investors have been left substantially poorer and horribly confused.

Normal looks to have taken on an entirely new meaning.

The gyrations are symptomatic of a sudden rise in volatility that's been driven, not so much by the spectacular crash of the Shanghai and Shenzen stock exchanges, but by gnawing doubts about the broader health of China's economy.

Even more worrying, almost eight years on from the beginning of the worst financial crisis in modern times, concerns are emerging about the ability of monetary policy to generate growth in the real economy.

Could this be the beginning of the end of the reign of central bankers?

Having taken interest rates to the extreme and then well beyond, the most visible effects have been a series of asset price bubbles from property to shares and bonds, but precious little real investment in productive activity.

Late last year, China's Xi Jinping and Li Keqiang went all funky and unveiled "The New Normal"; a strategy to shift growth in the world's second biggest economy from massive state-led and debt-funded infrastructure programs to a more market oriented, consumer led model for growth.

It was a great plan on paper and the slogan was infinitely more hip than the Cultural Revolution's brutal campaign of "Thinking in New Ways".

But the implementation appears to be going off the rails.

Central to the plan was to develop the stock market, not just to encourage new entrepreneurs but to enable state owned or controlled enterprises to raise private capital in an effort to wean them off state funding.

Borrowing restrictions were lifted, an historic link forged with the Hong Kong exchange as both The People's Daily and the official Xinhua news agency published articles linking a rising market to a buoyant economy.

Ordinary citizens heeded the call as the number of regular retail investors soared to 90 million, many of them borrowing heavily to get a slice of the government endorsed action as margin loans grew to $360 billion.

By June this year, China's markets had soared 150 per cent as company valuations soared to eye-watering levels.

That's why panicked Chinese authorities reacted with such strident force to the first slump in July. Not only did the collapse undermine Beijing's authority, it threatened to derail a central plank in The New Normal and the planned shift towards a free market economy.

Stockbroking firms were forced to assemble a fighting fund, most companies were suspended from trading, selling was banned and a witch hunt for evil foreigners and others engaged in short selling. More recently, authorities amassed a $US400 billion fund to support stocks.

The market eventually "stabilised". But as the restrictions gradually were relaxed, the selling returned with a vengeance. Last week, as the avalanche gathered momentum, the authorities gave up trying to stand in the way.

As Western markets rallied late last week, a chorus of bullish brokers dismissed the Chinese market rout as "unconnected with China's real economy". There's an element of truth to that. But it fails to explain why Beijing threw so much political and financial capital at trying to stop the crash.

When it comes to China's real economy, the big question is around economic growth. Slated to be 7 per cent this year, there are concerns it may be about half that, if it grows at all.

There has always been a suspicion that China's statistics are a work of fiction. No one cared when it was clear growth was heading into orbit.

But the sudden deceleration combined with the lack of transparency and the reluctance of Chinese authorities to reassure skittish financial markets has dented confidence.

The bulls shrug all that aside. Even if growth is below 7 per cent, it is a massive economy growing at a phenomenal rate, they argue. That misses the point. It is not the aggregate that counts. It is the change that is important.

Beijing quietly has embarked upon a massive stimulus package that has taken the world by surprise and convinced many that the downturn is much greater than acknowledged.

There was the historic devaluation of the renminbi three weeks ago. Interest rates have been cut for the fifth time in nine months. Capital requirements for banks have been loosened. Several major banks have been given capital injections. A policy to rein in heavily indebted local governments has been reversed as cash once again is being extended.

On the trade front, China's position has deteriorated sharply. Exports slumped more than 8 per cent in July from a year ago. And with a slowdown in domestic activity, Chinese steel mills have been exporting vast quantities of raw steel, sending global prices plummeting.

Steelmakers globally are up in arms, with European, US and South African producers demanding trade sanctions. Australia's Bluescope last week indicated that unless it received some kind of assistance, the future of the Port Kembla blast furnace was in doubt.

China's debt rarely gets a mention, primarily because of its huge foreign currency reserves and its trade surplus. But at $US28 trillion, it stood at 282 per cent of GDP a year ago, according to the McKinsey Global Institute.

Taken as a complete picture, this doesn't bode well for emerging markets, the developed world and particularly Australia, the country most tightly bound to China's fortunes.

Treasurer Joe Hockey, however, is having none of it.

"I'm absolutely confident, absolutely confident, that the fundamentals of the Australian economy and the global economy are still good, are still good," he said last week, adding that a senior Chinese government figure "reassured us, from his lips to our ears, that China would use whatever tools it has available to make sure that it grows relatively strongly this year".

With enough fear being generated elsewhere, it is a Treasurer's job to add some soothing words, even if they are totally at odds with his campaign of terror in the lead up to the last election, when the deficit was smaller and growth more robust.

China's sudden decline has occurred at the worst possible juncture, just as Australian capital expenditure and business investment has dropped off a cliff.

Just a thought, but with wages growth at all time lows, perhaps the Treasurer's mind would be better exercised confronting Australia's challenging growth prospects instead of hyperventilating about non-existent "bracket creep".

As for global markets, September and October historically are the most unstable. Every major collapse for almost a century has occurred at this time.

There's nothing new in this normal.

Ian Verrender is the ABC's business editor.