The latest market slump has highlighted how difficult it is for policy makers to manage volatility in a transition economy where the stock market is still being reformed. Last week the Chinese authorities tried to limit the fall of the market through the use of so-called circuit breakers.

After these failed attempts to halt the decline, the authorities suspended the use of additional circuit breakers. But the unusual structure of the equities market remains unchanged. Chinese stocks remain prone to large swings in valuations. The stock market was down by nearly half in the first half of last year, which was when the big August sell-off caused global ripples.

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Now, in the first week of trading in , it is again falling and will likely remain volatile over the next few months. Indeed, the FTSE All-World Index fell 6.

Economic reforms take time, and the latest indications are that the economy continues to slow. It will require policy makers to adopt transparent and effective policies to fine-tune the economy, which will be a sea change from the diktats and administrative measures that have largely characterized policy making in the transition economy thus far.

For instance, to shore up the market, rather than banning large companies from selling shares, policy makers could use taxes to deter excessive trading. Failed policies, like the latest circuit breakers and the previous administrative interventions, instead compound the concerns around the health of the Chinese economy.

So we should continue to expect volatility in Chinese markets for a while. Linda Yueh is an Adjunct Professor of Economics at London Business School, a Fellow in Economics at St Edmund Hall, Oxford University where she also directs the China Growth Centre ; and Visiting Professor of Economics at Peking University.

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